Systemic risk assessment: Tricolor's bankruptcy, double collateral allegations, and "Three consecutive Black Monday" precursor framework

Executive Summary (ES)

Conclusion: The bankruptcy of the leading US subprime auto loan company Tricolor Holdings and the accompanying double-pledge allegations, as well as the launch of the US Department of Justice (DOJ), is currently a serious "confession shock" limited to certain sectors, and is not a direct result of a systemic financial crisis. However, because the fraud schemes undermin the reliability of warehouse loans, which are the foundation of the financial system, the risk of spreading to the entire subprime securitization market is high, and it contains a moderate possibility that if a particular trigger is drawn, it will escalate into a wider systemic event. This case should not be seen as a one-off credit event, but as an example of the lack of governance in financial infrastructure.

Quantitative impact: In a direct loss, Fifth Third Bancorp, which provided warehouse loans, announced an impairment loss of up to $200 million. JPMorgan Chase and Barclays are also reportedly preparing for a joint loss of hundreds of millions of dollars. Indirect effects, investors are facing serious valuation losses in the ABS (asset-backed securities) market issued by Tricolor, which has seen subordinated tranches fall to 20-30 cents at face value. In response to this phenomenon, spreads have been expanding across the subprime automotive loan ABS market, and the new issuance market is expected to be temporarily stagnated.

Timeline Prediction: In the short term (up to three weeks), major risks include worsening cash flow due to disruption in the transfer of servicers due to bankruptcy proceedings, leaking new negative information as the Department of Justice's investigation progress, and intensifying legal battles over asset recovery between creditors. In the medium term (1-3 months), the financial supervisory authorities are expected to tighten warehouse lending and servicing audits, and tighten credit standards across the industry as a result of this incident.

"Three consecutive Black Monday" review: At the time of submission of this report, although the conditions for the BM-1 (worst incident on weekends → simultaneous risk-off on three markets on Monday) have been partially met, the impact remains on certain segments of the credit market, and the full-scale chain risk-off involving stock and interest rate markets has not been reached. The system evaluates to be in an "orange (critical)" state, which indicates a high level of vigilance.

Part 1: Facts confirmed – Tricolor's collapse

This section establishes the objective facts of this matter based on primary information such as a court's bankruptcy filing, documents with the Securities and Exchange Commission (SEC) and reports from rating companies.

A. Bankruptcy proceedings: planned liquidation

Appeal details: Tricolor Holdings, LLC and its numerous affiliates, including Tricolor Auto Acceptance, LLC, Tricolor Auto Receivables 2 LLC, filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Law for the Northern District of Texas on September 10, 2025. Unlike Chapter 11, which aims to rebuild the business, this is intended to settle the business, sell assets, and distribute it to creditors. The main case number is the parent company Tricolor Holdings, LLC.

3:25-bk-33487, and other subsidiaries have also been given numbers as related cases. The filing states that both assets and liabilities range between $1 billion and $10 billion, with more than 25,000 creditors.

Trustees and main schedule: As this case is an application under Chapter 7, the court will appoint a trustee from the Bankruptcy Trustees Panel for the Northern District of Texas to oversee the management, sale and distribution of assets. The next important step in the procedural is to hold a § 341 Meeting of Creditors under Section 341 of the US Bankruptcy Code. This is an opportunity for creditors to ask the debtor (in this case, the management of Tricolor) about assets and liabilities under oath, and is expected to take place between October and November 2025, based on a normal timeline.

Creditor structure: Key security creditors mentioned in the bankruptcy filing include JPMorgan Chase, Fifth Third Bank, Barclays, Triumph Bank, Origin Bank, and asset management company Alliance Bernstein. This list provides an initial map of direct counterparty risks.

The fact that we chose to settle immediate settlement (Chapter 7) rather than business reconstruction (Chapter 11) is a crucial signal. Typically, companies that have suffered a deterioration in management due to poor management or business cycles will restructure their debts under Chapter 11 and aim to continue their business. However, the case of applying for Chapter 7 directly, such as in this case, suggests that the capital structure has been irreparably destroyed, or that the main stakeholders who have discovered the fraud (in this case, the security-held warehouse lending banks) have completely lost trust in the viability of their management and business. Such "sudden death" is a typical pattern of fraud-driven collapse in which all liquidity is immediately and completely removed, rather than a gradual deterioration in performance. This rapidity and finality are important inputs for the "Three Consecutive Black Monday" framework, which assumes unexpected sudden shocks.

B. Structure of fraud allegations: double collateral mechanism

The core of the doubt: The loan banking group is investigating whether Tricolor has given the same car loan credit pool as collateral to multiple warehouse lending banks simultaneously (double collateral). This is the core of the allegations of fraud. The allegations are strongly supported by Fifth Third Bank CEO Tim Spence saying "it appears to be material fraud in the collateral filed to support the borrowing base of all warehouse lending facilities and the company's audited financial statements."

Technical vulnerabilities: This type of fraud can be achieved by exploiting vulnerabilities in the security rights establishment (Perfection) process. A robust system relies on the following factors, but it is likely that they did not work in this case:

1. UCC-1 Filing: Registration of security rights under the Unified Commercial Code (UCC). This will announce the lender's security interest on the particular assets. Insufficient lien investigations and ambiguity in the statements of collateral assets may have created gaps in misuse.

2. Managing Loan Files: The core assets are electronic files (loan tapes) that make up the claims. If no exclusive management is carried out by an independent third-party custodian (administrator), and the originator, Tricolor, maintains the right to manage the file and can submit copies of the same file to multiple lenders, double collateral can be easily implemented.

3. Chain of Title and Transfer Notice: The legal transfer of property ownership and security interests of assets must be perfectly documented. If there is a disconnect in this chain, there will be ambiguity that can be exploited. The involvement of several major financial institutions suggests that there was a chain of defects in these management mechanisms.

Department of Justice (DOJ) intervention: There have been reports that the US Department of Justice has launched an investigation, increasing the possibility that the case could develop from merely a civil default into a criminal case. This significantly increased the severity of the situation, and increased the possibility that even greater damage will be revealed during the investigation. In past subprime-related fraud cases, interventions from the Department of Justice and the SEC have often led to extensive investigations throughout the industry.

The key point of this fraud allegations were targeted not by the ultimate ABS investor, but by the warehouse lending banks, which are more systemically vulnerable. The stakes lie in the wholesale financing mechanism before the loans were securitized as ABS rather than fabricating individual car loans themselves (although CEO Spence says that "collateral data was corrupted"). Warehouse lending is the lifeblood of non-bank lenders and is equivalent to the cardiovascular system of the financial system. Defeating trust at this level is far more dangerous than merely a deterioration in loan performance. This is because if a bank becomes unable to trust the collateral offered by a particular originator, it could uniformly tighten credit standards for all non-bank lenders in the sector, raise costs, or withdraw the lending framework itself. This is the very contagion mechanism in which individual fraud cases directly spread to sector-wide credit contractions.

C. Direct exposure and loss quantification

Fifth Third Bank (FITB): He is the most transparent victim. The bank filed Form 8-K with the SEC on September 9, 2025, revealing it has discovered "external misconduct allegations" and is expected to record pre-tax impairment losses of between $170 million and $200 million in the third quarter of 2025 on related asset-backed securities loans. This loan was a warehouse loan facility to Tricolor.

JPMorgan Chase (JPM) & Barclays (BCS): Both banks are part of Tricolor's warehouse lending banking group and were also involved in the most recent ABS issue in June 2025. The banks have not made any specific losses, but according to reports cited people familiar with the matter, they are said to be preparing for a "co-loss of hundreds of millions of dollars." JPMorgan's exposure is estimated to be around $200 million.

ABS Investors: Since 2022, Tricolor has issued nearly $2 billion in ABS through at least seven rated deals (TAST series). Holders of these securities include major asset managers such as Angel Oak and Janus Henderson, as well as insurance companies such as Mass Mutual and Nationwide. The direct impact is a serious market value loss. In the secondary market, bid prices for the most recent TAST deal's subordinated tranches (classes 'D', 'E', 'F') have plummeted to 20-30 cents at face value, while senior class 'A' notes trade between 80-90 cents, indicating that the market is taking into account significant or near total losses for subordinated debt holders.

Part 2: Market Contagion and Systemic Linkage

This section analyzes the pathways that shocks generated by Tricolor's individual events will propagate into a wider market.

A. Stress on the securitization pipeline: From individual bankruptcy to sector-wide cooling

Rating Company Action: The response of the rating company was prompt and comprehensive. On September 10, 2025, Kroll Bond Rating Agency (KBRA) has targeted a total of 34 previously established ratings from seven Tricolor ABS Trusts (TAST) under a "watch downgrade" (reviewed in the downgrade direction). On the same day, Moody's also targeted 25 class notes in five TAST deals to be reviewed in a downgrade direction. S&P Global Ratings only just rated Tricolor's deal for the first time in June 2025, but the tranche is also under severe stress. Although Fitch Ratings does not appear to have rated Tricolor's deals, its analysis of rising late rates across the subprime market provides important background information.

Secondary market turmoil: The price crash of Tricolor's bonds has the effect of instantly cooling market sentiment. Other unrelated subprime automotive loan ABS investors will now demand a higher "governance premium" to incorporate the newly exposed fraud risk. In other words, if you don't want a wider spread, you won't be able to accept your investment. This repricing will be the most serious in relatively small, short-standing issuers that do not have long-term track record like major companies.

Paralysis of the new issuing market: The market for new subprime automotive loan ABS is expected to be in a freeze in the short term. Investment banks will be reluctant to underwrite new cases until the full extent of Tricolor's fraud is revealed and convince investors that their due diligence process can prevent similar situations. This creates a serious financing crisis for other subprime lenders who rely on the securitization market for business capital.

This case exposed the vulnerability of the label "social bond" in securitization, based on the theme of ESG (environmental, social and governance), in which it could act as an agent that masks potential risks. Tricolor has put its role as a US Treasury-certified Regional Development Financial Institution (CDFI) to the forefront, and actively marketed its ABS to support communities with poor financial services by selling its ABS under the framework of a "social bond." This "haul" of ESG may have attracted a particular investor group and, as a result, dulled deeper scrutiny of operational and governance risks. The subsequent discovery of allegations of fraud fundamentally overturns this story. This case will intensify skepticism about the ESG label in structured finance and will encourage investors to recognize the fact that a social mission does not guarantee sound governance or risk management.

B. Operational risks in transferring servicers

Taking over business: Tricolor was the servicer (debt collection manager) for its ABS deal. The company's bankruptcy falls under the contractual "reasons for dismissal of the servicer." The backup servicer specified in the agreement is Vervent Inc. The supervision of this transfer of operations is the responsibility of the Wilmington Trust, the trustee.

Running risk: Transferring servicing operations for subprime loan portfolios is extremely complicated and involves many risks, especially in the context of hostile liquidation procedures. The main risks are as follows:

1. Data Integrity: The CEO of Fifth Third Bank has already stated that the collateral data is "corrupted." This makes it extremely difficult for backup servicer Vervent to accurately import loan information into its own system, verify balances, and manage collection operations.

2. Payment confusion: Debtors (car buyers) may become confused over where they will repay, and the delinquency may temporarily increase sharply.

3. Retrieval blank period: During the "receipt verification period" during the transfer of operations, collection activities may be suspended, which directly adversely affects cash flow to the ABS trust.

The economic incentives of backup servicers are not consistent with those of subordinated debt holders and could further increase the losses. The primary obligation of a backup servicer is to the trust as a whole, which means prioritizing actions that protect senior debt holders. Their compensation is usually paid at a fixed ratio to the remaining principal. Therefore, after the senior tranche's principal and interest payments are secured, there is little incentive to spend special costs or time to maximize the recovery value from a loan that has fallen into serious arrears. This means it is more reasonable to amortize (charge off) your default loan earlier than to make costly workouts (redebt conditions) and foreclosure efforts that are essential to creating recovery value for subordinated debt and equity investors. This structural incentive discrepancy suggests that even competent backup servicers may have a significantly worse final recovery than the original servicers, making the losses for subordinated debt investors definitive.

C. Mapping of communication paths to macro finance

Credit spread (IG/HY OAS): As of September 11, 2025, the ICE BofA US Corporate Bond Index (Investment Grade) had an OAS (optional Adjusted Spread) of 78 basis points (bp), and the US High Yield Index had an OAS of 278 bp. These are the baselines. If a significant spread expansion exceeds the threshold shown in the DR request (+25 bp for IG and +75 bp for HY within two weeks), it will be a signal that Tricolor's event contributes to risk-off psychology across the corporate bond market.

Funding Stress (alternative indicators for FRA-OIS spreads): Traditional LIBOR-based FRA-OIS spreads are no longer the norm on the market. A comparable indicator in modern times is the spread between SOFR (Solved Overnight Procurement Interest Rate)-based interest rate forward contracts (FRAs) and effective federal fund (FF)-based OIS. More accessible alternative indicators include the three-month Term SOFR and the three-month short-term government bond (T-Bill) yield spread. As of early September 2025, the 3-month Term SOFR was around 4.06% and the 3-month T-Bill yield was around 3.9-4.0%, with extremely small spreads. The threshold value set by the DR request form is greater than 40 bp, which indicates an extreme stress state. Continuously monitor this alternative indicator.

Volatility (MOVE index): The MOVE index, which shows the implied volatility (estimated volatility) of the US Treasury market, was 79.58 as of September 10, 2025. This is higher than the historic lows, but it is far from a critical level. The threshold of over 150 set by the DR request means that extreme fear and uncertainty have spread to the government bond market, the core of the financial system.

Part 3: Precursor Analysis – "Three Consecutive Black Monday" Framework

This section directly applies the unique crisis model specified in the DR request to assess whether Tricolor events meet the conditions for a chained market shock.

A. Systemic shock conditions: Defining a specified framework

Definition of BM-1: The disadvantageous material was leaked or published from the end of the market on Friday until the weekend, and on Monday the three markets - credit, interest rates and stocks - were simultaneously risk-off.

Definition of BM-2: On the following Monday, additional bad news was announced by the rating company, supervisor or bank, causing the three markets to be risk-off at the same time.

Definition of BM-3: On the third Monday, the funding environment became apparent (such as poor bidding in government bonds, widening basis swaps, and sudden rise in FRA-OIS spreads), making liquidity receding visible.

B. KPI Dashboard: Comparison of current status and thresholds

This section is centered around a central management table that embodies the monitoring framework specified in the DR request form.

C. The Unstable Trinity: Gold (XAU), Crude Oil (WTI), Dollar (DXY)

Analysis premise: The DR request identifies simultaneous rises in gold, crude oil and dollar indexes as extremely dangerous signals. This is a compound index that is not sophisticated and non-trivial.

interpretation:

• Gold (XAU)↑: It indicates a hedge against escape to safe assets, aversion to geopolitical risks, or diluted currency values. The current price of gold is around $3,642/oz, and is on a strong upward trend.

• Crude Oil (WTI)↑: It usually indicates inflationary pressures and geopolitical supply shocks. Current oil prices are around $63/bbl, and are on a downward trend.

• Dollar Index (DXY)↑: It marks a global dollar shortage, namely, a "escape to cash" in which global investors seek US dollars to raise funds and ensure security even if they sell other assets. The current DXY range is in the range of approximately 97-98.

Current status evaluation: The condition is "Gold↑ x Crude Oil↑ x DXY↑"Not satisfied at this time. Gold is rising, but crude oil is weak, and DXY remains in the range market. This suggests that current market stress is localized in certain sectors of the credit market, and that the global macroeconomic cascade crisis is yet to be reached, as DR requests wary. The lack of triggering of this compound condition is one of the main reasons why the overall status remains "orange" rather than "red".

D. Narrative shock and regulatory outlook

Investor Psychology: The narrative of "securitization, an internal fraud within financial engineering," is extremely corrosive. This reminds us of the 2008 mortgage crisis, where asset health and reliability of the rating process were fundamentally shaking. This event damages the "animal spirits" of both investors who become more risk-averse and issuers who fear market closures.

Regulatory response: The Department of Justice's criminal investigation, which involves huge losses from major banks, will almost certainly ensure regulators' responses. A joint review of warehouse financing practices is expected by the Monetary Supervisory Board (OCC), the Federal Reserve (Fed) and the Securities and Exchange Commission (SEC), with the focus being on collateral verification and management regimes at non-bank financial institutions in particular. This is likely to lead to more rigorous guidance and testing, similar to past inter-ministerial joint statements on subprime financing. This tightening of regulations will act as a structural headwind for the entire subprime lending sector over the coming months and years.

Part 4: Risk Assessment and Operational Orders

This section provides the final, viable output to the Risk Committee. This corresponds directly to sections 8, 9, and 6 of the DR request form.

A. Integrated Risk Heat Map

• Severity: M (medium) The direct losses are hundreds of millions of dollars rather than billions, but the impact is large because the nature of fraud attacks the reliability of the securitization process itself. It is not a systemic event (H), but it goes far beyond just a single company's bankruptcy (L).

• Probability: H (High >60%) The chances are that the initial assessment of this as a serious credibility event that will lead to sector-wide repricing and regulatory scrutiny is very high. Known facts support this assessment.

• Timeline: Short (2-3 weeks) The coming weeks, when the markets digest the facts of fraud, servicer transfers may be implemented, and new information may be brought about from the Department of Justice investigation, will be a critical period of contagion and escalation.

This M/H/Short rating is based on the conclusion that the core risk is not a credit performance, but a rapid crisis of trust in governance and market structure, with a high probability of causing significant disruption across the sector in the near future.

B. E-MAD Protocol Status and Escalation Trigger

• Current Status: Orange (critical) The system is under severe stress, with key leading indicators (specific ABS spreads, rating company actions) exceeding the threshold. However, this stress has not yet reached full-scale, cross-asset transmission that meets the "red" requirement in the E-MAD protocol.

• Automatic migration trigger to "Red": The E-MAD system automatically shifts the status to "Red" if any of the conditions defined in the DR request form below are met:

  1. Verification of widespread fraud: If a court filing by the bankruptcy trustee, or a statement from the Department of Justice, confirms that double collateral is an organizational practice rather than a one-off malpractice, and also extends to the collateral of multiple other ABS trusts currently in functioning properly.

  2. Market shutdown: If the market for new issuance of subprime automotive loan ABS is closed for more than two weeks in a row, and a major rating company undergoes a major downgrade (two notches or more) across multiple TAST vintages at once.

  3. Contagion to macros confirmed: On the "Three Consecutive Black Monday" KPI Dashboard, at least three of the four indicators have "ALERT" status at the same time for two consecutive weeks: HY OAS, FRA-OIS alternative indicator, MOVE index, and US Treasury bids (tails above 2.5bp and low bid rate).

C. Designated Communication Templates

• [Communication template for internal stakeholders]

  • subject: Tricolor Holdings Facts Report on Bankruptcy

  • Main text: "We have now confirmed the following facts based on primary sources: 1) Tricolor Holdings, LLC filed for liquidation under Chapter 7 of the Federal Bankruptcy Code on September 10, 2025 (Case number 3:25-bk-33487, Northern District of Texas). 2) This application follows Fifth Third Bank's disclosure of impairment potential of $170-200 million on 8-K dated September 9, 2025 due to allegations of fraud in a business partner identified as Tricolor. 3) The centrality of the allegations is the possibility of double collateral in the warehouse lending facility. 4) Rating companies KBRA and Moody's are reviewing all existing ABS issued by Tricolor in an effort to downgrade. Our direct exposure is [described level]. We are monitoring indicators that show transmission to the entire market. We will continue to report on the facts as soon as the facts are confirmed based on official disclosures."

appendix

A. Ops-KPI Data Feed

CSV format

Code Snippets

date_utc,metric,value,unit,threshold,status,source_url,note
2025-09-12T21:00:00Z,ABS_SUBAUTO_BBB_SPR,N/A,bp,>=450,WATCH,"https://www.globalcapital.com/securitization/article/2fbeje0o3m6vmzwquc9a8/securitization/abs-us/tricolor-auto-abs-fiasco-puts-market-systems-on-trial","TAST D/E/F tranches collapsed to 20-30 cents on the dollar"
2025-09-12T21:00:00Z,TRACE_VOLUME_SUBAUTO,N/A,%,>=50,WATCH,"https://www.globalcapital.com/securitization/article/2fbeje0o3m6vmzwquc9a8/securitization/abs-us/tricolor-auto-abs-fiasco-puts-market-systems-on-trial","Heavy selling reported in TAST securities"
2025-09-12T21:00:00Z,FRA_OIS_3M_PROXY,6,bp,>40,NORMAL,"https://en.macromicro.me/charts/115044/us-overnight-indexed-swaps","3M Term SOFR (~4.06%) vs 3M T-Bill (~4.0%). Stable."
2025-09-12T21:00:00Z,MOVE_INDEX,79.58,index,>150,NORMAL,"https://en.macromicro.me/charts/35584/us-treasury-move-index","Value as of 2025-09-10. Contained."
2025-09-12T21:00:00Z,IG_OAS,78,bp,>=+25,NORMAL,"https://fred.stlouisfed.org/series/BAMLC0A0CM","Value as of 2025-09-11. Stable."
2025-09-12T21:00:00Z,HY_OAS,278,bp,>=+75,NORMAL,"https://fred.stlouisfed.org/series/BAMLH0A0HYM2","Value as of 2025-09-11. Stable."
2025-09-02T17:00:00Z,UST_AUCTION_TAIL_2Y,3.2,bp,>=2.5,WATCH,"https://treasurydirect.gov/auctions/announcements-data-results/","High yield 3.641% vs WI 3.609%. Tail of 3.2bp. BTC 2.58x, slightly weak."
2025-09-12T20:00:00Z,GOLD_PRICE,3642,USD,N/A,WATCH,"https://tradingeconomics.com/commodity/gold","Uptrend intact, flight to safety."
2025-09-12T20:00:00Z,WTI_PRICE,63.16,USD,N/A,NORMAL,"https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart","Downtrend, reflecting growth concerns."
2025-09-12T20:00:00Z,DXY_INDEX,97.5,index,N/A,NORMAL,"https://www.marketpulse.com/markets/dollar-index-dxy-faces-a-key-test-from-upcoming-ppi-and-cpi-potential-reactions","Range-bound, no signs of dollar funding stress."

JSON format

JSON

{
  "ts_utc": "2025-09-12T21:00:00Z",
  "kpi": "ABS_SUBAUTO_BBB_SPR",
  "value": null,
  "unit": "bp",
  "threshold": ">=450",
  "level": "WATCH",
  "provenance": {"url": "https://www.globalcapital.com/securitization/article/2fbeje0o3m6vmzwquc9a8/securitization/abs-us/tricolor-auto-abs-fiasco-puts-market-systems-on-trial", "hash": "<sha256_placeholder>"},
  "annotation": "TAST D/E/F tranches collapsed to 20-30 cents on the dollar, indicating massive spread widening for distressed names."
}

JSON

{
  "ts_utc": "2025-09-12T21:00:00Z",
  "kpi": "FRA_OIS_3M_PROXY",
  "value": 6,
  "unit": "bp",
  "threshold": ">40",
  "level": "NORMAL",
  "provenance": {"url": "https://en.macromicro.me/charts/115044/us-overnight-indexed-swaps", "hash": "<sha256_placeholder>"},
  "annotation": "Proxy calculated as 3M Term SOFR (~4.06%) minus 3M T-Bill yield (~4.0%). Interbank funding stress remains low."
}

JSON

{
  "ts_utc": "2025-09-02T17:00:00Z",
  "kpi": "UST_AUCTION_TAIL_2Y",
  "value": 3.2,
  "unit": "bp",
  "threshold": ">=2.5",
  "level": "WATCH",
  "provenance": {"url": "https://treasurydirect.gov/auctions/announcements-data-results/", "hash": "<sha256_placeholder>"},
  "annotation": "2-year note auction on 9/2 showed a 3.2bp tail with a Bid-to-Cover ratio of 2.58x, indicating slightly soft demand."
}

B. Primary Source Dosier