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“Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).”
― Mark Twain
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The US Consumer Is Not Well
The recent bankruptcies of subprime auto lender Tricolor Holdings and auto parts maker First Brands have sparked concerns about rising instability in the private credit market. Tricolor’s collapse was quickly followed by First Brands’ financial unraveling, despite carrying nearly $10 billion in debt. The speed of its decline, driven in part by off-balance-sheet financing tactics like factoring and reverse factoring, shocked investors.
These back-to-back failures point to deeper systemic risks. Both companies relied heavily on private credit, a growing but loosely regulated sector increasingly linked to major banks through indirect lending. Despite safeguards introduced after the 2008 crisis, this shadow financing system has expanded rapidly and now poses a potential threat to financial stability.
Reports from Moody’s, the SEC, and the Federal Reserve warn that private credit could become a “locus of contagion” in the next financial crisis. As banks and private credit funds become more entangled, and lending to risky, highly leveraged firms continues unchecked, the broader financial system becomes more vulnerable to shocks.
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