First Brands

And the Cockroach Theory

The recent bankruptcies of First Brands, a large auto parts supplier, and Tricolor, a car dealership chain, have renewed concerns about lending practices more than two years after the collapse of Silicon Valley Bank. That earlier failure was driven by rising interest rates that reduced the value of its bond holdings and caused panic across the banking sector.  Appraisers may regard these as isolated instances rather than evidence of a broader financial crisis. Either way, the author proposes that business valuation professionals should consider these issues when completing current business valuation engagements.

Introduction

MSN[1] recently quoted JPMorgan Chase CEO Jamie Dimon as warning that there could be credit risks lurking in the U.S. economy, saying that “when you see one cockroach there are probably more.” Dimon was referring to JP Morgan Chase’s quarterly earnings call where he acknowledged that the firm had to take a $170 million write-off in the third quarter related to the bankruptcy of subprime auto lender and dealership Tricolor. “He also pointed to the bankruptcy of auto parts maker First Brands as suggesting there could be some other credit problems looming in the economy.”[2]

The MSN article continued:

“When you see one cockroach, there are probably more, and so everyone should be forewarned of this one,” Dimon said. “First Brands, I’d put in the same category, and there are a couple of other ones out that I’ve seen put in similar categories. We always look at these things, and we’re not omnipotent; we make mistakes too.”

While Dimon did not name the other companies he was referring to when he said, “a couple of other ones out there,” he was hinting at more exposures or failures buried in the non-banking “shadow” credit world (private credit funds, non-bank financial institutions).

Loan Losses and Fraud Allegations Shake Regional Banks

Investing.com[3] reported that this year, only two banks have fallen: Chicago-based Pulaski Savings Bank in January and the Santa Anna National Bank in late June. However, over the last month, regional banking stocks have suffered a steep drop as evidenced by the performance of SPDR S&P Regional Banking ETF (KRE). The reporting continued to note that Zions Bancorp had announced a $50 million charge-off stemming from two defunct loans from its San Diego-based subsidiary, California Bank and Trust. Likewise, related to the same borrower, Western Alliance Bancorp filed a lawsuit alleging fraud by the borrower Cantor Group V, LLC, according to August’s court filing, which only recently became known.

Implications for Appraisers and Valuation Professionals

How do these current events impact appraisers and valuations?

The collapses of certain companies in specific industry sectors may be signaling that credit risk is being repriced across certain industries, especially in private credit, auto, and manufacturing sectors. One result is that appraisers might need to reexamine and adjust discount rates to reflect higher systemic risk and potential tightening of credit conditions. It is also possible that weighted average cost of capital (WACC) assumptions that rely on low spreads/stable debt markets might need to be reviewed. Experts should re-evaluate company-specific risk premiums, particularly for borrowers in subprime lending, auto, or leveraged manufacturing supply chains. Comparable company multiples might contract, affecting valuations of debt-dependent businesses.

Appraisers may need to perform additional forensic accounting work preceding and/or in addition to their business valuation engagement. The First Brands, Tricolor, and other current business failures may be indicative of aggressive revenue recognition (capitalization of questionable receivables or deferral of losses), off-balance-sheet financing (private credit, side-letters, and factoring), and/or misstated asset values (receivables and inventory). This additional forensic accounting investigation may need to examine reported financial statements for off-balance-sheet exposures, related-party transactions, and the impact of side-letters as these could materially affect valuations.

There may also be issues relating to the impairment of goodwill. Additional procedures may need to be considered regarding impairment testing for goodwill and long-lived assets; especially where clients depend on leveraged customers or suppliers. These would be considered “triggering events” requiring immediate fair value reassessment. Appraisers may need to explain how market conditions deteriorated, whether valuation inputs are still reasonable, and/or how credit tightening affected valuation conclusions.

Market Volatility and Its Impact on Cost of Capital Assumptions

Risk-free rates, equity risk premiums, and the cost of debt may need to reflect current volatility in impacted industries. The automotive aftermarket sector may be especially impacted.

Investing.com[4] reported that:

According to Stellar Market Research, the aftermarket sector has shown mixed performance over the last six years, with a downward growth trajectory since 2021.

The aftermarket parts sector is primarily negatively affected by technological advancement. Case in point, the adoption of EVs decreases demand because electrified vehicles have fewer moving parts, reducing the need for fluids, brake components, and traditional engine parts.

Additionally, the ‘smartification’ of cars with sensors/software and advanced driver-assistance systems (ADAS) greatly increases parts complexity and cost, disadvantaging independents. On the economic front, e-commerce players sidestep traditional channels, putting pressure through price competition and direct OEM part sales with integrated warranties.

Perhaps more importantly, sustained inflation lowers disposable income, placing additional pressure on the demand for aftermarket parts. In fact, disposable income correlates highly … showing a spike in the stimulus year of 2021, with little growth since.

Risk-free rates, equity risk premiums, and the cost of debt are key inputs in determining WACC and discounting future cash flows when doing a business valuation. During periods of market instability, these components may deviate from long-term historical averages. Risk-free rates may rise due to inflation expectations and increase discount rates, and reduce present values for automobile aftermarket companies with long-duration cash flows. Equity risk premiums may expand in volatile markets as investors demand higher returns for taking on additional uncertainty. Investors may require higher equity risk premiums for automotive parts manufacturers and distributors. The cost of debt may rise as lenders reassess the probability of default in the automotive aftermarket.

Dimon’s “cockroach” comment appears to relate to the potential for financial contagion. Investing.com[5] continued to report that:

First Brands’ customer invoice payments appear to have occurred before customers actually paid for their invoices. Moreover, there is concern First Brands double-sold the invoices. In short, effectively acting as creditors, these third-party financiers may have been left exposed, holding claims to invoices that either no longer exist or were already committed elsewhere.

Irrespective of the legal fraud issue, the more important question is whether the market condition itself drove First Brands to engage in this practice. In other words, if other companies from other sectors adopted the same approach, regional mid-sized banks could face contagion due to double-pledged collateral. This could render their assets on the books as impaired or worthless.

Conclusion

The recent bankruptcies of First Brands, a large auto parts supplier, and Tricolor, a car dealership chain, have renewed concerns about lending practices more than two years after the collapse of Silicon Valley Bank. That earlier failure was driven by rising interest rates that reduced the value of its bond holdings and caused panic across the banking sector.

At this time, concerns about loan quality among regional banks are again raising questions regarding parts of the U.S. economy. Those concerns have grown after Zions Bancorporation reported a $50 million charge-off tied to two bad loans made by its California subsidiary, and Western Alliance Bank filed a fraud lawsuit against the same borrower.

The failures of First Brands and Tricolor have rippled through parts of the credit markets, pressuring investors to reconsider their exposure to auto and consumer lending. Appraisers may regard these as isolated instances rather than evidence of a broader financial crisis. Either way, these issues should be considered when completing current business valuation engagements.

[1] Jamie Dimon warns of ‘cockroaches’ in US economy as credit concerns grow

[2] MSN story by Eric Revell 10/17/2025, quoting from Dimon warns of credit issues following Tricolor, First Brands bankruptcies | Fox Business

[3] First Brands Collapse Exposes Hidden Credit Risks in Regional Banking Sector | Investing.com

[4] Quoted in First Brands Collapse Exposes Hidden Credit Risks in Regional Banking Sector | Investing.com

[5] First Brands Collapse Exposes Hidden Credit Risks in Regional Banking Sector | Investing.com

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Michael D. Pakter, CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV, has more than 45 years of experience in forensic accounting, investigations, and litigation services, including more than 25 years of experience in economic damages and business valuations. State, federal, and bankruptcy courts have recognized him as an expert in forensic accounting, economic damages, business valuation, alter ego, marital dissolution, and bankruptcy core proceedings.

Mr. Pakter can be contacted at (312) 229-1720 or by e-mail to  mpakter@litcpa.com.