September was a busy month for Wall Street as it saw billion-dollar deals play out among tech giants as OpenAI inked separate deals with Oracle (ORCL), Nvidia (NVDA), and CoreWeave (CRVW). In fact, this dealmaking activity went on well into October with OpenAI signing deals with AMD (AMD) and Broadcom (AVGO).

But while this dealmaking bonanza went on, Wall Street lenders were hit with a pair of bankruptcies that have resulted in industry-wide concern and criticism. 

First to collapse was Tricolor, which filed for Chapter 7 bankruptcy on September 10. The subprime auto lender, which is also the third-biggest used auto retailer in Texas and California, has over $1 billion in both assets and liabilities with more than 25,000 creditors.

Tricolor raised its funds through the asset-backed securities market and it relied on credit lines issued by JPMorgan, Fifth Third, and Barclays to enable it to package subprime car loans into bonds.

Fifth Third could lose as much as $200 million due to the bankruptcy while JPMorgan wrote off $170 million following Tricolor’s collapse.

Next was First Brands—an auto parts company—which filed for Chapter 11 bankruptcy on September 28.

Prior to its collapse, the company had been attempting to refinance $6 billion of corporate debt after lenders sought more details about its earnings and factoring agreements. 

Before its filing, concerns about First Brands heightened when Apollo Global Management took a position against it through the purchase of credit default swaps on its debt. Lenders were also informed that the firm may have had more obligations than its underlying accounts receivable, which amounted to nearly $2 billion.

Following the collapses, leaders in the financial sector have voiced concerns over lending standards, and the private credit market as a whole.

JPMorgan, in the wake of Tricolor’s collapse, expressed that it would review its controls and processes while its CEO, Jamie Dimon, acknowledged that the bankruptcies in the auto market are a sign that lending standards have loosened in the past decade.

Meanwhile, the International Monetary Fund (“IMF”) has expressed concerns about the exposure of traditional banks to the private credit industry and the broader non-bank financial intermediaries (“NBFIs”) sector.

The IMF has warned that adverse developments in the NBFI sector could ripple across the financial system and has advocated for stricter regulation.

It remains to be seen whether these bankruptcies will culminate in stricter lending standards and tighter monitoring of the private credit market and the NBFI sector. 

However, what’s clear is that accounting standards such as Generally Accepted Accounting Principles (“GAAP”) have shortcomings that inadvertently hide the true financial health of a company. And this is why Uniform Accounting exists to help correct the defects inherent in as-reported financials.

If investors truly want to assess the true profitability and health of a company, they shouldn’t rely on as-reported financials as distorted metrics can obfuscate underlying issues that could potentially lead to a firm’s collapse.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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