The recent collapse of First Brands, a major U.S. car parts manufacturer, has sent shockwaves through Wall Street and raised fresh concerns about the stability of the global financial system.
The company filed for bankruptcy protection on September 29, revealing billions in undisclosed private debt and exposing deeper risks that have quietly built up in the shadow banking sector.
This isn’t just an isolated bankruptcy. It’s a potential warning sign of a much larger issue brewing beneath the surface of the financial system, one that regulators and central bankers are now openly comparing to the 2008 subprime mortgage crisis.
First Brands: a company drowned in hidden debt
First Brands grew rapidly in recent years through aggressive acquisitions and leveraged financing. Instead of relying solely on traditional bank loans, the company tapped into the booming private credit market, a loosely regulated part of the financial world where institutional investors like private equity firms, hedge funds, pension funds and asset managers lend directly to companies.
One of the ways First Brands raised money was through factoring, a practice where companies sell unpaid customer invoices to investors in exchange for quick cash. But First Brands went further: it sold the same invoices to multiple buyers, creating a tangled web of obligations.
When everything was going well, this off-balance-sheet financing fueled fast growth. But once confidence disappeared, it turned into a house of cards.
The Domino Effect
The crisis came to light when Apollo Global Management, one of the world’s largest asset managers, began betting against First Brands using credit default swaps (CDS), financial instruments that rise in value when a company defaults on its debt.
When Apollo’s bearish bet became public, First Brands’ bonds plunged by 80% in a single day. That collapse made it clear to everyone that the market had completely underestimated the company’s financial distress. After that, no one wanted to lend to First Brands anymore.
According to documents filed in court, First Brands owes more than $10 billion in combined bank loans and private credit. Worse, much of the collateral, the assets pledged to secure those loans, had been reused or “rehypothecated” across multiple lenders. In other words, the same assets were used to back several different loans.
When the company collapsed, that collateral was worth only a fraction of the outstanding debt, leaving shadow banks and private credit funds with enormous losses.
Another Shock: Tricolor Fails
Adding fuel to the fire, Tricolor, a U.S. auto lender, also went bankrupt in early September. Tricolor specialized in subprime car loans, lending to borrowers with poor credit or even to undocumented immigrants.
The company then packaged these risky loans into bonds and sold them to institutional investors, a process known as securitization. Since 2022, Tricolor reportedly sold over $2 billion worth of such repackaged loans.
Big banks like Barclays and J.P. Morgan also extended financing to Tricolor to keep its lending pipeline running until the loans could be sold off to investors. But when President Donald Trump announced new crackdowns on undocumented immigrants, investors panicked. They feared massive defaults among Tricolor’s customer base and the company’s financing dried up almost overnight.
“Where There’s One Cockroach…”
The back-to-back collapses of First Brands and Tricolor have alarmed financial institutions around the world. J.P. Morgan CEO Jamie Dimon compared the situation to spotting a cockroach: “Where you see one, there are usually many more hiding in the dark.”
In other words, these two bankruptcies might just be the first signs of a much deeper problem.
The private credit market has exploded over the past decade, growing from to more than $3 trillion in 2025. As interest rates rose and banks tightened their lending standards, companies increasingly turned to these non-bank lenders, often at higher interest rates but with fewer regulatory requirements.
This booming shadow lending industry now plays a crucial role in corporate financing. However, because it operates largely outside the banking system, it’s much less transparent and less supervised. No one really knows how much hidden leverage exists or how interconnected these lenders are.
Regulators Sound the Alarm
The International Monetary Fund (IMF) recently warned that the line between private credit funds and traditional banks is becoming dangerously blurred. Many large banks are now indirectly exposed to private credit through loans, investments or structured products.
Andrew Bailey, Governor of the Bank of England, drew direct parallels with 2008. “Back then, many claimed the subprime mortgage market was too small to cause systemic risk,” Bailey said. “They were wrong. The collapse spread through the entire global financial system.”
He called for a thorough investigation into whether First Brands and Tricolor are isolated incidents or the “canaries in the coal mine” or early warning signs of broader instability.
Why It Matters
This isn’t just about two companies failing. It’s about the systemic fragility of modern finance.
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Private credit has grown too big to ignore, yet it remains largely unregulated.
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Collateral reuse (rehypothecation) creates hidden chains of risk.
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Shadow banks and asset managers are now taking on risks that traditional banks once carried, but without the same oversight or capital requirements.
If more companies start defaulting, the resulting chain reaction could ripple through pension funds, hedge funds and even the traditional banking sector.
As Bailey and Dimon both warned, the danger isn’t just financial losses. It’s the loss of confidence that can follow. In a highly leveraged, interconnected system, that’s often what turns a few isolated failures into a full-blown crisis.
A Warning from History
In 2008, few believed that a handful of risky U.S. mortgages could bring down global giants like Lehman Brothers. Yet that’s exactly what happened.
Today, the same pattern is repeating: easy credit, hidden leverage and opaque markets that thrive in the shadows of regulation.
The collapse of First Brands and Tricolor should serve as a wake-up call. The question is whether regulators, investors, and lenders will heed the warning or once again ignore the cracks forming beneath the surface until the entire system starts to crumble.
