It's The Smart Move

"Now listen, whoever comes to you with this Barzini meeting, he's the traitor. Don't forget that."

"Mike, can I have a minute? Barzini wants to arrange a meeting. He says we can straighten any of our problems out. I can arrange security."

"I always thought it would be Clemenza."
"It's the smart move. Tessio was always smarter."

"Tell Mike it was only business. I always liked him."

No one starts off intending to be a traitor like Tessio. No one starts off intending to run a Ponzi scheme like Madoff or SBF. No one starts off intending to falsify test results like Elizabeth Holmes. No one starts off intending to double-pledge collateral like Tricolor. No one starts off intending to purchase/repurchase their own inventories through a massive web of special purpose off-balance sheet entities funded by first lien, second lien and asset-based loans across dozens of senior and subordinated lenders, none of whom were aware of the full extent of the lending web, like First Brands.

I mean, these are the simplified org charts and financing schematics of the First Brand web. Here's the full picture.

No, you don't start off intending to be a fraud. You start off with good intentions, a simple org chart and a foolproof idea. You start off with loyalty, gratitude and transparency towards your partners, funders and clients. But then you hit a bump in the road. A bad bump in the road. Maybe your idea wasn't as proof against fools as you thought. Maybe you just caught a bad break, something that 'no one could have seen coming'. Luckily you see a way out, a way to make it as if the bad bump never happened, a way to avoid making some very difficult phone calls to those partners, funders and clients who were with you from the start. Maybe it's not technically 'legal' to do what you need to do, but you tell yourself that it's only a temporary measure, that you'll be able to make it all good soon enough, to make it as though it never happened. Most of all you tell yourself that it's only this one time. You promise yourself that if this works out you will never ever ever do this thing again. And it does work out! You're able to get the financing or make the sale or land the deal or the market bails you out or whatever you need to happen ... happens ... and without anyone being the wiser for what you did. Your life is better than it has ever been. Your partners, funders and clients all tell you what a wonderful job you are doing, and internally you repledge your loyalty, gratitude and transparency to them.

And then you hit another bump in the road.

This time, though, as you start to do again whatever it was that you promised yourself you would never do again, you tell yourself a different story. You tell yourself that you are on your way to greatness (after all, everyone says so!) and all of the greats have had to cut corners and do these necessary things on their way to greatness. You tell yourself that your partners, funders and clients are all big boys and girls, that they can take care of themselves, that it's not your fault if your lawyers and accountants are more clever than their lawyers and accountants. You tell yourself that they would do the same thing if they were in your shoes. You tell yourself (still!) that there's a Big Deal on the horizon and if you can just get there then everyone will make so much money and the people who lose will be forgotten and it will all be fine in the end.

You tell yourself, like Tessio did, that it's only business.

You tell yourself that it's the smart move.

Until you are found out. Because you are always found out. There is always another bump in the road, another event that 'no one could have seen coming', like massive tariffs on auto parts if you're an auto parts supplier like First Brands, a huge financial blow that forces you to spend more than $200 million in cash you don't have to build inventory. Or like mass deportations and loss of income for undocumented aliens if you're a used car dealer like Tricolor that specializes in giving loans to 'credit invisible' borrowers, i.e. undocumented aliens.

But this time you can't find the new source of funding that's always bailed you out in the past. If you're First Brands you can't complete the big refinancing deal you were counting on this summer. If you're Tricolor you can't get your warehouse lender comfortable with the new batch of VIN numbers that look suspiciously like VIN numbers they've seen before. And so you miss a payment. And so a creditor declares a default. And so you are found out.

Both First Brands and Tricolor are now under federal investigation for, among other 'irregularities', pledging the same receivables to multiple lenders as collateral (First Brands) and pledging the same cars to multiple lenders as collateral (Tricolor). But what is freaking out Wall Street is less the specific mechanisms of fraud (because there are a million specific ways to do fraud) as the non-fraudulent but insanely opaque and complex structures and practices that a) allowed the fraud-exposed debt to get so big (about $10 billion in debt for Tricolor and about $12 billion for First Brands) and b) allowed so much leverage and adverse selection to be hidden within the system of Tricolor and First Brands even as the leverage and adverse selection within individual debt offerings seemed manageable.

This is a problem because those same non-fraudulent but insanely opaque and complex structures and practices are EVERYWHERE in the private credit world, which means that -- hypothetically, mind you -- there is a potentially staggering amount of hidden leverage and adverse selection and fraud-exposed debt in the private credit world.

IF THAT'S TRUE the only thing that stands between us and a financial crisis-inducing number of future Tricolors and First Brands is the hope that there aren't a lot of smart-guy it's-only-business Tessios out there.

Good luck with that!

And that's why Wall Street is freaking out right now.

What do I mean by non-fraudulent but insanely opaque and complex structures and practices? I mean funding practices like this:

And I mean securitization and marketing practices like this: