The Bank Scare That Isn't

Editor's note: Every Friday, we showcase a featured topic from our YouTube show, Altimetry Authority.

This week, we tackle themes from today's episode, which airs at 8 a.m. Eastern time.

Read on below to learn about a wave of bankruptcies that's spooking investors...

A wave of bad loans is ripping through the markets and shaking investor confidence...

It started with commercial real estate firm MOM CA Investco's implosion at the start of the year. The bankruptcy exposed banks like Zions (ZION) and Western Alliance (WAL) to legal battles over contested property loans.

Then came Tricolor in mid-September. The used-car dealer filed for Chapter 11 amid accusations of collateral fraud. Allegations surfaced that it promised the same vehicles to multiple lenders to raise more debt.

By the end of the month, First Brands – a publicly traded auto-parts supplier – had followed Tricolor into bankruptcy.

Shares of exposed regional lenders tumbled as investors braced for potential ripple effects. Fifth Third Bancorp (FITB), a super-regional bank, disclosed up to $200 million in possible exposure to Tricolor. Shares are down 7% in the past month.

Investors worry this cluster of corporate failures could signal more widespread trouble in the banking system. They're scared this is the beginning of another banking crisis... a repeat of the turmoil that followed Silicon Valley Bank's sudden failure in 2023.

But their panic may be premature. From where we stand, these bankruptcies are more about the state of the consumer than the health of our banking system.

The regional banking crisis of 2023 left a deep scar...

Silicon Valley Bank collapsed that March amid a bank run sparked by rising interest rates that hurt the value of the bank's investments.

In the aftermath, investors scrutinized every balance sheet... and yanked deposits at the first sign of weakness. They were scared more banks had made the same mistakes as those that went under.

Today's bankruptcies are much less likely to cause a contagion. Tricolor, for example, catered to subprime car buyers. That's already a risky business.

And as we mentioned, the company allegedly over-borrowed by posting the same cars as collateral for multiple loans.

Fifth Third conducted a sweeping audit of 120,000 vehicles in its own portfolio... to understand if there were more of these supposedly overcommitted cars. It uncovered just two discrepancies.

In other words, out of billions of dollars in loans, only two were questionable.

Remember, the bank stands to lose up to $200 million from its Tricolor exposure. That certainly sounds alarming. But it's not enough to trigger an avalanche in the industry. Fifth Third executives said they still feel good about their overall loan book.

Commercial real estate ('CRE') is seeing similar stress fractures...

In 2016 and 2017, Zions underwrote more than $60 million in CRE loans secured by Southern California properties.

But when MOM CA Investco went bankrupt earlier this year, it became apparent that there are other lenders ahead of Zions in line for repayment. The deeds had already been reassigned.

That's why both Zions and Western Alliance are suing. If they knew all the details, they may not have made those loans in the first place.

Once again, this is nothing like what happened in 2023. Unless every real estate firm is borrowing on (alleged) fraud, the situation involves isolated bad actors.

These events share a theme... Borrowers in distressed sectors are getting desperate... 

We're probably not on the cusp of a banking contagion. We're just watching companies claw for scraps in areas that weren't doing well to begin with.

Tricolor, First Brands, and MOM CA Investco were all exposed to vulnerable consumer or property trends. That's the common thread.

The banking system, on the other hand, is in much better shape than it was in early 2023. Banks have tightened their lending practices.

The failures haven't spread beyond these already-fragile sectors. Unless that happens, there's no reason to panic over another round of bank implosions.

Regards,

Joel Litman
October 24, 2025

P.S. We'll dive deeper into these recent bankruptcies in today's episode of Altimetry Authority. New episodes air every Tuesday and Friday at 8 a.m. Eastern time.

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