Easy Money Breeds Fraud: The Cases of Tricolor and First Brands

 For the last 30 years, the U. S. economy has experienced cycles of asset bubbles fueled by practices from the Federal Reserve. The recent bankruptcies of Tricolor Holdings and First Brands highlight problems such as fraud and poor business practices echoing these trends.

1. Asset Bubbles and Fraud: The U. S. economy often sees hidden malfeasance as bubbles grow, leading participants to commit fraud when they fail to achieve expected riches.

2. Complex Financial Transactions: Transactions in the financialized economy are convoluted, making it difficult to understand the true source of funds. For example, mortgage loans are often not funded directly by lenders but rather through a complex network, including government agencies like Fannie Mae and Freddie Mac.

3. Tricolor Holdings Case:

• Tricolor loans were primarily given to subprime borrowers, including many illegal immigrants.

• A reported 68% of Tricolor’s borrowers had no credit scores, while those with scores averaged just 614.

• Tricolor was financed by reputable wholesale lenders, including JP Morgan Chase.

• A federal investigation revealed potential fraud, including allegations of double-pledging collateral against loans.

4. First Brands Case:

• This company sold car parts and borrowed heavily to acquire other companies.

• It obscured debt through off-balance-sheet methods, claiming assets based on expected future payments from clients.

• Its financial mismanagement became apparent during a restructuring, leading to bankruptcy.

5. Role of Major Banks: Analysts questioned how leading banks were misled by poor business practices. The rush of easy credit often overlooks fundamental business prospects, focusing instead on financial engineering.

6. Impact of Central Bank Policies: The Federal Reserve's artificial credit expansion creates an environment where the risks increase, leading investors to take greater risks for returns. This cycle results in the emergence of unviable companies sustained by easy money and leading to waste and fraud.

The bankruptcies of Tricolor Holdings and First Brands exemplify serious flaws within a financialized economy. Such collapses are symptomatic of broader issues tied to artificial credit expansion, lack of due diligence, and the prevalence of substandard business practices. These cases reveal the dangers of current economic practices and suggest that they are part of a larger pattern of waste and fraud hidden beneath complicated financial structures.

https://mises.org/mises-wire/easy-money-breeds-fraud-cases-tricolor-and-first-brands