Greed Makes Bankers' Brians Turn to Mush
Bankers will be bankers, and AI can only add to their hubris. J.P. Morgan Chase, led by Jamie Dimon, reportedly the smartest banker of them all, announced last week it was taking a $170 million charge off on the collapse of AI-powered sub-prime auto lender Tricolor Holdings. Dimon was philosophical in announcing the loss. “When you see one cockroach, there are probably more,” the bank’s chief executive officer said on a conference call with analysts Tuesday. “Everyone should be forewarned on this one.”
Wolf Richter explained, “It’s hard to imagine a more intensely reeking cesspool than Tricolor – a bankruptcy trustee said that the initial reports ‘indicated potentially systemic levels of fraud’ – and it’s hard to imagine more reckless banks, lenders, and investors who eagerly closed their eyes to these shenanigans because they were chasing yield and they didn’t want reality to get in the way – typical behavior at the peak of a credit bubble.”
Back in 2023, Dallas Innovates reported, “Tricolor, the largest used vehicle retailer to the Hispanic market in the US, has secured a new patent for its innovative AI tool called Automás. The tool lets customers self-select and finance vehicles, generating offers for different models and financing terms with machine learning. A unique feature of Automás is that it empowers customers to customize their own financing terms within the parameters of the system-generated offer.”
Of course AI can’t fund these loans so Tricolor went to J.P. Morgan Chase, Fifth Third Bancorp, Barclays Plc, and other lenders. The financing included a ‘Floor-plan line of credit’, a ‘warehouse line’, and ‘securitization’ (bundling the loans into asset-backed securities). “Tricolor allegedly pledged the same vehicles as collateral for multiple loans from multiple lenders, misrepresented the credit quality of the borrowers, understated the risks of the loans, etc., etc., and money has vanished,” Richter wrote.
If this brings back memories of 2008, read on. Just three months before Tricolor collapsed, S&P Global rated $217 million of Tricolor ABS, with the four top-rated slices rated “investment grade” amounting to $189 million, or 87%, of that securitization. “The four slices were rated “investment grade” on the theory that the two lower-rated slices, representing 13% of the securitization, would eat the first losses,” Richter wrote.
The brass at Fifth Third called its loss, said to be $200 million, a “one-off,” and that the bank is lawyering up. Which also has a familiar ring to 2008.
“It is not our finest moment,” Jamie Dimon said. “When something like that happens, you can assume that we scour every issue, every universe, everything about how it could be taking place to make sure it doesn’t take place from here. You can never completely avoid these things, but the discipline is to look at it in cold light and go through every single little thing, which you can imagine we’ve already done.”
Mr. Richter had it right, when he wrote, “Tricolor was a creature of alleged fraud, taking advantage of willfully blind lenders and investors in the midst of a huge credit bubble when greed had turned their brains to mush.”
