The Used Car Market Is Imploding
Huge bankruptcies for used car firms have exposed Wall Street’s entanglement with the sector. Far from derisking after the Great Recession, banks rebuilt the economy on obscure financial intermediaries that are now sinking.
Tricolor Holdings, a large subprime auto lender and used car dealer, has filed for bankruptcy. (Ash Ponders / Bloomberg via Getty Images)
What’s going on with the used car market? To answer this question, we first need to know that it’s about more than secondhand motors.
Tricolor Holdings, a large subprime auto lender and used car dealer, filed for Chapter 7 bankruptcy on September 10. First Brands, a major auto parts supplier, followed suit on September 29, filing for Chapter 11 bankruptcy.
These firms’ financial intertwinement with Wall Street is exposing something structural, beyond the decline of two companies. UBS holds over $500 million in debt exposure to First Brands, while investment bank Jefferies last week revealed its $715 million involvement with the company’s invoice-financing scheme. JP Morgan, BlackRock, and Fifth Third Bank all stand to lose hundreds of millions in the collapse of Tricolor, a company once hailed as a progressive, ESG-certified (environmental, social, and governance) investment.
The Tricolor bankruptcy proceedings estimated total liabilities between $1 and $10 billion — though the real number remains hard to pin down, due to the extent of the firm’s off-balance-sheet alchemy.
Two stories can be told here. One concerns the fourfold increase in NDFIs, or non-depository financial institutions, like Tricolor, with funding from commercial banks, which now totals $1.7 trillion according to Barron’s. This story tracks the movement of finance capital out of big banks and into deregulated corners of the market, following the 2010 Dodd-Frank regime, which forced them to undergo intensive stress-testing.
The second story feels like a flashback to the foreclosure crisis. Tranches of AAA-rated asset-backed securities (ABS) are going belly-up after vulnerable consumers — including an outsize share of low-income Hispanic and undocumented communities — were extended credit.
In both stories, what can be observed is an economy built, or rebuilt, on a house of cards. Banks did not derisk following the recession but shifted risk from their own balance sheets to obscure financial intermediaries around the country. Decisively, these NDFIs are not subjected to the same regulatory statutes that the banks who finance their activities are.
Labyrinths of Loans
What this new system has constructed, instead, is a web of “warehouse financing” whereby companies like Tricolor use bank loans to extend credit and pay the loan down by the sale of securitized car loans. Financing NDFIs now accounts for over 30 percent of big banks’ commercial and industrial activity, according to JP Morgan.
On the other side of the warehousing coin is what First Brands was practicing: invoice factoring. Companies use unpaid invoices as loan collateral and build out a system where lenders — the banks — bypass suppliers, like First Brands, and accept payments directly from sellers, like Walmart and AutoZone. The outcome is “off-the-books” financing. Currently, First Brands is missing about $2 billion in these payments.
So what’s the problem? First Brands’ lenders, like Jefferies and UBS, are owed money from the sellers, not the newly bankrupt supplier. The issue is that First Brands likely used the same customer invoices, and thus the same loan collateral, to access multiple streams of financing. The repayments would be some orders of magnitude smaller than the outstanding loans.
In the wake of the financial crisis, much of what was formerly made public is now private. Private credit, after all, was supposed to be more stable than private equity. Pension funds, university endowments, and clearly the big banks, are all enamored with it. Just weeks before liquidation, Tricolor’s debt was selling at or above par, meaning that investors were willing to pay a premium.
No one is advocating for empathy for Tricolor or First Brands’ creditors. Yet, once again, Wall Street has retreated to byzantine methods of turning a profit that leave the public largely unable to scrutinize what’s going on. Government regulation of financiers cannot itself solve the crisis of financialization; quasi-financial institutions like auto-loan lenders, payday shops, and pawn stores all need scrutiny as they operate in the vast gray zone between the working class and the oligopolistic creditor class.
Auto Loan Debt and the Working Class
Behind the crisis arising in the webs of auto financialization are the working-class people struggling to keep up on car payments.
The country just crossed over a critical threshold last month: 5.1 percent of car owners are at least ninety days delinquent on their loans. This is almost touching the record high of 5.3 percent, reached during the nadir of the Great Recession in 2010. Young people are unsurprisingly hardest hit, with 7.5 percent of car-owning Gen Zers delinquent. The trend for all is upward for the past eight quarters — and expected to continue.
Auto insurance rates are up 56 percent in the past five years; car repossessions are also at post-Recession highs, at 1.73 million so far this year; and car repair costs popped 32 percent in the past two years alone, exacerbated by Donald Trump’s new tariffs. In 2023, a Federal Reserve Bank survey found that car repairs won out over rent, mortgage, health care, and food as the cost that Americans were most concerned about.
Consumers have responded to all this pressure by extending the terms of their loans to decrease their average monthly payments. Yet interest rates have kept rising. The average American is forking over between $550 and $750 a month on their car note, a number that used to be a monthly rent a decade prior. Today 20 percent of all newly originated car notes are over $1,000 a month, and you’d be mistaken to think that only the top income quintile is represented in that number.
Suffice to say: the numbers aren’t looking too good, and our collective experience with cars should back that up. My last conventional oil change was well into three-digits, and I’m uncomfortable even discussing what a standard headlight change ran me.
No one can say for sure where we are headed from here. But the concept of a split-screen, or “K-Shaped,” economy has maybe never been more relevant. Following COVID-19, what felt, legislatively, like a joint recovery quickly devolved into a sinister game of musical chairs: interest rates were low and credit was pushed out everywhere, the stimulus checks were in, and “quiet quitting” was the big fad. But the music stopped a while ago now, and we’re holding on to whatever jobs we have — picking between credit card accounts, car loans, and buy-now-pay-later groceries month to month.
What remains to be seen is whether Wall Street can retain its bull-market returns with or without Main Street. In 2008, the answer was no; but that doesn’t mean this time won’t be different. Never before, it seems, has sentiment and optimistic ideology so thoroughly run roughshod over economic measurables.
The auto-loan industry doesn’t have the same penetration into global financial circuits as did the mortgage industry, but it’s still a multitrillion-dollar sector with widespread and unknown entanglements. Every time Tesla misses a shipments target but increases its stock price, the feeling is that the rope tightens, or the bubble inflates.
But perhaps we’d be better served to understand the market in 2025 as a severed one, not a taut one. Somewhere along the way, the stock market left the dock with the people still on the land. Maybe this arrangement will not endure, but it’s hard to argue that it isn’t the predominant post-COVID zeitgeist. The equities market seemed to learn that it could remain “optimistic” even while ignoring devastating jobs data, declining consumer reports, and the business cycle. Yet such optimism rests upon a mass of disillusioned, toiling, and indebted workers.