It's The Smart Move
October 14, 2025·26 comments·Money
The structures that generated billions in private credit returns are perfectly legal. So is hiding leverage across dozens of lenders through special entities that no single investor can see. When First Brands and Tricolor collapsed, Wall Street discovered it wasn't the fraud that was shocking. It was realizing how standard those structures are across the entire system.
• No one intends to become a fraud. They start with good intentions, hit a bump, find a temporary workaround that works, and then rationalize doing it again. By the second time, they're already telling themselves a different story about why it's justified.
• The opacity that enabled their fraud is standard across private credit. Multiple lenders fund the same companies through deliberately opaque structures, none seeing the full picture. Each piece is legal. The system is designed this way.
• Apollo reviewed First Brands' financials, declined to fund them, and shorted their bonds. If even the most immersed players in this system barely see the danger, what about everyone else funding these companies?
• Private credit machines work by moving capital quickly through origination, structuring, funding, and securitization while keeping minimal risk on the originator's books. But this requires constant fuel: fresh capital. The moment funders get spooked, the entire machine can halt.
• This happened before. In July 2007, Bear Stearns' mortgage funds collapsed. Within months, the financial sector lost 40%. The question: Are First Brands and Tricolor that moment for private credit, or is the system robust enough to absorb the hit?
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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.
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