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When Collateral Isn’t Real: The $2 Billion Tricolor Auto Loan Scandal

• Nearly half of Tricolor’s loans were backed by duplicate vehicles, revealing how a $2 billion subprime lender built its growth on collateral that may never have existed.
  
  
• The scandal exposes how years of easy credit and investor complacency let weak underwriting and leverage spread far beyond one lender.

What you need to know: Nearly half of Tricolor’s loans - the recently insolvent auto lender - may have been backed by the same vehicles, raising questions about how much of the collateral behind its bank financing and asset-backed securities ever existed¹.  

Why it matters: This is another example of how credit can build faster than oversight. Tricolor relied on warehouse financing from JPMorgan, Barclays, and Fifth Third to fund its lending. Those loans were cut up, packaged, and sold to investors. The model worked as long as funding was easy and confidence stayed high. But when defaults rose and investigators looked closer, the numbers didn’t add up. Fifth Third warned of losses up to $200 million. Other banks and bondholders are now reviewing their exposure. This story fits into a broader pattern. For years, subprime auto lenders expanded as investors chased yield. With rates higher and liquidity tighter, weak underwriting and leverage are being exposed. 

Now the Deep Dive: Tricolor was one of the largest subprime auto lenders in the country, serving low-income and undocumented borrowers across Texas, California, and Nevada.

Its growth took off during the pandemic as both used car demand and immigration soared. And by 2024, lending had reached nearly $1 billion – 5x higher than in 2020. Then, last month, it collapsed almost overnight, catching much of the financial media off guard.

Now, I’ve been wary of subprime auto lending for some time - but the scale of what happened here is remarkable.

According to insiders, Tricolor’s records show duplicate VINs across tens of thousands of loans.

A VIN is a car’s fingerprint. No two should ever match. So if two loans share a VIN, that means the same car was pledged more than once - or VINs were straight up fabricated.

• It’s the equivalent of two banks claiming the same gold bar sits in their vault.

These loans backed Tricolor’s warehouse lines and bond deals. Now, banks and asset-backed securities (ABS) investors are trying to determine what they actually own (Tricolor had tapped over $2 billion in financing across the last two years).

More ironic is that rating agencies had recently graded its latest bond issue, with S&P Global Ratings assigning an AA rating to the top tranche - its second-highest².

Sure, at first glance, it looks like fraud. But this also reflects easy money, speculation, and complacency. Said another way, Tricolor stayed afloat because no one wanted to stop the flow. And duplicate loans made the balance sheet look strong because everyone assumed the collateral was real.

But Tricolor isn’t alone.

Just weeks ago, First Brands Group - the auto-parts maker behind FRAM and TRICO - also filed for bankruptcy. Investigators found billions in receivables financed multiple times after the company built up $2.3 billion in factoring liabilities³.

The collapse rippled quickly. A network of suppliers, distributors, and lenders - including major Wall Street institutions like Jefferies, UBS, and Millennium - are now exposed to more than $10 billion in combined obligations. One of its financing partners, Raistone, has since called for an independent probe - alleging that a large portion of those receivables had “simply vanished.”

It’s times like these I remember what economist John Kenneth Galbraith called the “Bezzle” - the gap between what people think they own and what they actually do.

Banks and investors believed their ABS holdings were solid - that each loan was backed by an actual car. But much of that collateral may never have existed or was duplicated. Those same securities were then likely used for more borrowing - a loop of leverage built on hope instead of proof.

Now investors across structured credit markets are asking a simple question: “Are the loans we bought even backed by anything?”

The lessons are clear:

1. Fast growth is often unbalanced growth. When something expands too quickly, it’s usually too good to be true and comes at a big cost later.
   
   
2. Beware the Bezzle. What you think you own - and what it’s actually worth - can differ sharply. And that gap closes fast when confidence breaks.

Figure 1: Bloomberg, September 2025

Rising SOFR–EFFR Spread Signals Hidden Liquidity Strain in the Banking System

• The widening gap between SOFR and EFFR shows that short-term funding is getting tighter even as policy rates drift lower - a subtle sign of stress in funding markets.
  
  
• As bank reserves fall and “safe” overnight funding grows more expensive, banks are starting to price in real liquidity risk - the first step in any tightening cycle.

What you need to know: The gap between the Secured Overnight Financing Rate (SOFR) and the Effective Federal Funds Rate (EFFR) has been quietly widening - even as the Fed cuts. The 5-day moving average now sits near its widest of the year - signaling that liquidity across the banking system is thinning quickly⁴. 

Why it matters: The spread between SOFR and EFFR is like a pressure gauge for money markets. When it rises, cash is getting harder to find, and banks grow more cautious lending to each other. Despite calm headlines, reserves are falling as the Fed’s balance sheet runoff continues, and “safe” overnight funding is costing more. 

Now the Deep Dive: I don’t want to bore you with financial plumbing or seem overly technical - but this one really matters.

Just to recap – I wrote to you last week about how falling bank reserves are draining liquidity from the system, and this week’s data adds another warning sign.

The SOFR–EFFR spread - a key measure of short-term funding stress - has widened noticeably through 2025. And especially so since July.

• SOFR (Secured Overnight Financing Rate) = the rate banks and investors pay to borrow cash overnight using U.S. Treasuries as collateral.
  
  
• EFFR (Effective Federal Funds Rate) = the average rate banks charge each other for overnight loans held at the Fed without collateral (it’s also the main rate the Fed adjusts when making hikes/cuts).

Normally, these two rates move almost in sync. But when the spread between them rises (like today), it signals that cash is getting harder to find - or that banks are becoming more cautious lending to one another.

• Put simply, the banking system is starting to price a small premium for liquidity risk.

“SOFR? EFFR? This all sounds like a lot.”

It is. But every time something breaks in the banking system, the early signs were usually there - for anyone paying attention.

Here’s the main takeaway.

Think of the banking system like a large water network. The Fed is the main reservoir, and banks are the pipes that circulate money. Thus, when reserves decline, there’s less water in the pipes (and vice versa).

The SOFR–EFFR spread is like a pressure gauge. And when it rises, it means there’s less water pressure. Money still flows - but it costs more to keep it moving. It’s not a crisis, but it’s a drought warning.

And if reserves keep falling (I believe they will) while the Treasury issues more debt and excess cash is soaked up, that pressure will likely build.

This is how tightening usually begins - slowly in funding markets before it shows up elsewhere.

So even if policy rates stay flat or drift lower, the real story is that liquidity is quietly drying up in the well - and this chart is one of the few places you can see it happening in real time.

Because of this, I believe the Fed will end its quantitative tightening (QT – sucking money out of banking system) sooner than later.

Just something to keep in mind.

Figure 2:  New York Federal Reserve Bank, Dunham, October 2025

Gold Overtakes U.S. Treasuries in Global Reserves for the First Time Since 1996 

• Central banks now hold more gold than U.S. Treasuries for the first time since 1996 - a historic shift signaling waning confidence in dollar assets.
  
  
• Driven by rising U.S. debt, geopolitical risk, and limited new gold supply, this trend marks a return of gold as a core pillar of global reserves - rooted in sovereignty and trust, not promises.

What you need to know: For the first time since 1996, gold has overtaken U.S. Treasuries in foreign central bank reserves - with global holdings now around 36,700 tonnes valued at roughly ~$4.7 trillion, compared to ~$3.5 trillion in Treasuries⁵. 

Why it matters: For decades, Treasuries were the bedrock of the global financial system - liquid, trusted, and backed by the world’s reserve currency. But that trust is starting to erode. A mix of rising U.S. deficits, geopolitical tensions, and sanctions risk has pushed central banks toward something more neutral. Gold can’t be frozen, defaulted on, or have any counterparty risk. Because of this, surveys show that 70% of central banks now plan to reduce their dollar exposure and further increase gold holdings - marking one of the largest reserve realignments in modern history⁶. 

Now the Deep Dive: Gold’s comeback has been remarkable.

At current market prices, U.S. gold reserves (the largest in the world) alone are worth more than $1 trillion - even though Washington still values them at just $42.22 an ounce (the “official” price set in 1973. Meaning that on paper, the Treasury still lists its holdings at only $11 billion).

Meanwhile, global central banks have been steadily rebuilding their gold stockpiles. The buyers include both emerging markets and large economies like China, India, Poland, Turkey are all looking to diversify away from dollar-denominated debt.

Why? Because owning a bond or a reserve currency means trusting the debtor - that they’ll keep paying interest or that they won’t inflate their money away. But governments can miss payments, print too much, or simply renege (we’ve seen all three happen more than enough times).

Gold doesn’t depend on any of that. It can’t default, and it can’t be devalued by decree.

Meanwhile, as I’ve written before in “The Capital Cycle: Do Supply Trends Drive Markets More Than Demand?” - gold’s strength isn’t just about central bank buying. The fundamentals are also turning in its favor.

• Fewer high-quality gold deposits are being discovered = future supply is limited.
• Global deficits keep growing = too much debt paired with slowing growth.

Together, all three trends amplify the long-term case for gold.

Now, this rebalancing doesn’t dethrone the dollar - far from it - but it does chip away at the view of U.S. Treasuries as the unquestioned “risk-free asset.”

But in reality, global central banks are simply diversifying into something that isn’t tied to any single government.

• And here’s the key link most overlook - each time the S. runs a trade deficit, foreign nations accumulate dollars. Those dollars are then recycled into U.S. assets – buying treasuries, stocks, real estate, and increasingly gold (you need dollars first before you buy something, right?)

Thus, even if global demand for Treasuries stays the same or the U.S. trade deficit remains high, just a modest change - say, 10% of that flow moving toward gold - would represent a massive change in reserve composition over time.

The point is, gold’s role today isn’t just about inflation. It’s about sovereignty, diversification, and trust - and that’s why it’s back at the center of the global system.

I expect this trend to continue - but as always, time will tell. 

Figure 3: Reuters, October 2025

Anyway, who knows how this will all play out?

This is just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

1. Tricolor Records Show Same Cars Tied to Thousands of Loans - Bloomberg
2. U.S. Banks Missed Warning Signs on Tricolor. Now, Their Losses Are Adding Up. - Barron's
3. First Brands faces investigation into double financing of receivables, inventory | Global Trade Review (GTR)
4. Secured Overnight Financing Rate Data - FEDERAL RESERVE BANK of NEW YORK
5. US Gold Reserves Hit $1 Trillion in Value After Record Rally - Bloomberg
6. Central Banks Now Hold More Gold Than U.S. Treasuries 

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