It's The Smart Move
October 14, 2025·26 comments
"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.
Source: court filings, Bondoro
I mean, these are the simplified org charts and financing schematics of the First Brand web. Here's the full picture.
Source: court filings, Bondoro
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:
Source: Financial Times - The niche debt tool at the heart of Apollo’s private credit machine (Sept. 15, 2025)
And I mean securitization and marketing practices like this:
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Comments
My reaction to Jeffries disclosing they had three quarters of a billion dollars of exposure to First Brands:
Once in a while this time really is different, and this may be that time. If things fall apart it won’t be ‘nobody saw this coming’, it’ll be ‘no shit, this was a ticking time bomb that people have been openly discussing for at least three years’. I’m an idiot who knows nothing, but when I noticed that I was getting five emails a week (up from a few a year back in say 2019) from funds telling me about the virtues of private credit that my clients should really be aware of it was sort of obvious what was happening. Private credit was getting shoehorned into every conversation with every single income fund manager who called on us. And every call was the same. And I mean every. Single. Call. It would start out with the sales guy (and it was always a guy) telling me that “the PM has time next Tuesday to answer any specific questions you guys have” and then a volley of emails over the following days confirming the meeting, and for good measure a few attachments that were not even close to client approved, showing me just how delightful their (annually mark-to-market) returns have been.
“Non-performing loans make up less than 1% of the portfolio” was a phrase that was uttered on every call, though only if I actually asked about that. Given how easy it has been to avoid default by extend-and-pretend financing I’m shocked that they had any non-performing loans at all. (Imagine the total catastrophe that you had to be in order to not get bailed out by some sister fund)
Ultimately we avoided this whole (potential) mess by just saying no and buying stuff that wasn’t opaque, thinly traded, and priced based on what looked like a mix of astrology and vibes. I’m afraid many investors are going to learn an old lesson from whatever happens next.
One word. Masterclass.
I was waiting for a deep dive on First Trust….thank you. The wonders of deception keep amazing me. Well done - to keep the debt and myriad of org entities that large and that hidden in this day/age/info society is really spectacular!
To this novice, this is a significant data point/occurrence and have decided to move some of the crumbs around in our small pie.
What will the next exotic name be for the next risk on game to keep the “fuel flowing”….CLO, CMO, AAA Tranche, Private Credit…so clever and mysterious. Perhaps we can get past the cute names and just call it - Killer Fucking Lending
Pure gold. Thanks.
I recently discovered the WRESBAL series at Fred (yes, late to the party).
I was absolutely gobsmacked when I finally understood what happened in 2008 - when we started the progression from $20B in reserves at the Fed to peaking at over $4T - a 200x increase. Now today we sit at $3T in reserves and we are debating whether $3T is “abundant” or “ample.”
It sure seems to me that what we’re seeing in the private sector today was pioneered between the Fed and Treasury 17 years ago and we’re all just living in this fiscal engineering / moral hazard world now with privatized gains and socialized losses.
Thoughts?
I’m a big hippie, but even so there’s a P.J. O’Rourke quote that I often think of:
“There is a simple rule here, a rule of legislation, a rule of business, a rule of life: beyond a certain point, complexity is fraud. You can apply that rule to left-wing social programs, but you can also apply that rule to credit derivatives, hedge funds, all the rest of it.”
P. J. O’Rourke
[Tangent, but I’ve worked for both left wing social programs and financial services companies, and the financial services stuff is way more complex! Let’s not pretend this is the same thing. Job Corps is no “tranches of AAA-rated mortgages.” But I digress.]
If we’re teetering on a (maybe) collapse of one of the hundreds of houses of cards…where is the safe place to ride this out? Given that the dollar is also, currently, one of those teetering houses? I mean, gold yes but…anything else?
Not an economist or background in Finance so:
Canada made an interesting bet by creating bonds denominated in the USD. Essentially they’ll pay back the interest in USD. This could be a hedge, but is a very smart way to bet against the future strength of the dollar while using it’s current stability as far as I can decode the intention there.
Argentina is borrowing a lot of money denominated in the USD and has a very friendly relationship with US government while possibly managing to pivot from it’s current fiscal situation.
I’m not sure it answers your question, but I think some manner of this safe haven will be able to leverage the current geopolitical/political climate while shorting the future in some manner and being insulated from the consequences of those actions. Canada probably won’t escape harm, Argentina won’t either because of corruption, but I think there are pieces here I haven’t been able to crack just yet.
Insta-retweet on my part!
So does the FED come in and buy up private credit after letting some smaller unknown private credit shops go under and the liquidity/system is frozen but before Blackstone goes under?
Apollo was offered the First Brands deal. After their due diligence they declined to participate and promptly bet on First Brands future default. I’m not saying that the top players are all walking around with clean balance sheets, but it does seem like they had at least some measure of discretion when obvious garbage was being offered to them. A future wipeout may end up being confined to the Blue Owls of the world. (50/50 chance I’m wishcasting here)
A friend of mine who has done ok, but not wealthy, told me his advisor was recommending he put a bunch of his money into private credit. He doesn’t belong in it and told the advisor as such,
I told him he ought to consider firing his advisor.
Is this a tell that private equity/credit is paying greater fees to advisors for more money sent their way? I suspect so.
Continue the discussion at the Epsilon Theory Forum...