A whiff of the "subprime crisis"? Credit funds under Wall Street investment banks blow up, peers like Morgan Stanley start to withdraw capital

A manufacturing company's bankruptcy is triggering a storm sweeping through Wall Street's top financial institutions. At the center of the storm is the Point Bonita Capital fund under Jefferies, an investment bank. Having been hit by the non-listed auto parts supplier First Brands, the fund is facing urgent redemption requests from top Wall Street institutional investors. On October 11, the latest news confirmed that Morgan Stanley has officially initiated procedures, joining BlackRock and other institutions in withdrawing their capital. The escalating "run-on-the-bank storm" was directly triggered by the sudden collapse of First Brands Group, the non-listed auto parts supplier, and its exposure of nearly $12 billion in complicated debt and off-balance-sheet financing. However, what truly chills the market is not a single bad investment, but the massive risks unveiled behind it in the $2 trillion private credit market. Legendary short seller Jim Chanos—who previously predicted the collapse of Enron—recently warned that the private credit "black box" exposed by this incident bears an uncanny resemblance to the playbook that triggered the global financial crisis years ago. First Brands’ collapse has served as a precise stress test, tearing away the glamorous veneer of the private credit market lured by “high yields,” and exposing its fragile structure where risks are layered and hidden through complex transactions. A whiff of the 2008 subprime crisis is now spreading from this opaque corner to the whole of Wall Street. --- ### $700 Million Risk Exposure and Wall Street's "Run-of-the-Bank Storm" On September 28, 2025, the privately-held auto parts manufacturer First Brands Group filed for bankruptcy protection, unleashing nearly $12 billion in complicated debt and off-balance-sheet financing, making massive waves on Wall Street. The eye of the storm first targeted Jefferies, a notorious investment bank known for its aggressive style and led by “junk bond king” Mike Milken’s protégé Richard Handler. According to Jefferies’ disclosures and subsequent media reports, the Point Bonita Capital fund under its asset management arm, Leucadia Asset Management, was revealed to have accounts receivable related to First Brands totaling $715 million—accounting for nearly a quarter of its $3 billion investment portfolio. Such massive single risk exposure instantly became a bottomless pit after First Brands collapsed. Market reactions were swift and brutal. As major investors in the fund, global asset management giant BlackRock and Texas Treasury Safekeeping Trust Company were the first to issue redemption requests. On October 11, Morgan Stanley followed suit, casting a “vote of no confidence” in Jefferies. A typical Wall Street run-on-the-bank storm was unfolding. However, the Point Bonita fund’s crisis is just the beginning, with the roster of entangled institutions growing: - UBS Group: One of its funds was found to have risk exposure related to First Brands, accounting for as much as 30% of its assets. - Cantor Fitzgerald: Due to the incident, is seeking to renegotiate its deal to acquire UBS’s O’Connor Asset Management arm. - Western Alliance Bank: Was passively dragged into the risk chain by providing leveraged financing to Jefferies. - Across the ocean, Norinchukin Bank of Japan and Mitsui & Co.’s joint venture face potential losses of as much as $1.75 billion. - Insurance giant Allianz and other institutions are anxiously assessing and preparing to respond to massive pending claims. Beyond the shocks to the financial world, regulators have also taken notice. According to media reports, the U.S. Department of Justice (DOJ) has launched a preliminary investigation into the collapse of First Brands. Though early and not necessarily indicative of wrongdoing, it adds further uncertainty to this chaotic crash. --- ### Holding “Receivables from Walmart,” Yet Never Received a Penny from Walmart For investors in the Point Bonita fund, this investment was packaged almost perfectly at the outset. Jefferies repeatedly emphasized that the fund wasn’t investing directly in First Brands, the “junk-rated” company itself, but in its customers’ accounts receivable. These customers include retail giants with stellar credit ratings like Walmart, AutoZone, NAPA, etc. In theory, the investment should have been “rock solid.” This approach, called “factoring,” is supposed to transfer credit risk from fragile suppliers to robust buyers. However, the devil is precisely in the overlooked details. Jefferies’ statement revealed a key role: First Brands acted as the “Servicer” in the deal, responsible for “channeling” payments from companies like Walmart to the Point Bonita fund. This means that funds which should have been paid directly by Walmart and others to the fund actually went first into accounts controlled by First Brands, which then “instructed” and “transferred” them to Point Bonita. In other words, the Point Bonita fund paid money to First Brands, and First Brands then paid money back to Point Bonita. Throughout, the fund may never have received a single cent directly from Walmart. The fund’s lifeline was entirely in the hands of the borrower it was supposed to avoid risk from. On September 15, 2025, this lifeline was severed. Jefferies admitted in a notice: “First Brands stopped timely transferring funds from payers on behalf of Point Bonita.” The carefully engineered risk mitigation structure instantly failed. Deeper truths were revealed in bankruptcy court. First Brands’ new Chief Restructuring Officer disclosed that the company’s factoring business was being probed by a special committee, with a central question of whether “accounts receivable may have been factored multiple times”—so-called “repledging.” This is akin to mortgaging the same property to nine different banks to fraudulently secure loans, flirting with financial fraud. Another creditor, fintech firm Raistone, submitted even more shocking court documents. In an emergency motion demanding an independent reviewer, its lawyer wrote: “Based on the sworn statements of the debtor’s representatives and lawyers, as much as $2.3 billion in third-party factoring finance has simply vanished into thin air.” To prove the breakdown in communication, Raistone’s law firm Orrick even attached a darkly humorous email exchange with First Brands’ law firm Weil: when pressed on the whereabouts of huge funds, the only reply was a cold, “We don’t know...$0.” [Image] At this point, the truth is out. So-called “Walmart receivables” have become worthless scraps of paper. The fatal design and possibly malicious actions have left Jefferies and other lenders with claims in bankruptcy court marked as “contingent,” “unliquidated,” or “disputed,” making any recovery incredibly challenging. --- ### Echoes of History: From Enron to First Brands, "Dr. Doom" Sets His Sights on Private Credit If First Brands’ blow-up is a textbook micro case, Wall Street legend Jim Chanos has voiced a systemic warning from a macro perspective. In his view, this is not an isolated event, but a sign that the private credit marketplace’s “Emperor's New Clothes” is about to be exposed. “The booming private credit market operates alarmingly like the subprime mortgage model that triggered the 2008 global financial crisis,” asserts the investor famous for his timely short of energy giant Enron. Chanos likens the private credit market to a “magic machine”: promising investors returns comparable to high-risk equity by taking what should be relatively safe senior debt risk. As previous reports mentioned, some private credit fund managers optimistically projected returns on First Brands’ secured inventory debt might exceed 50%. “The high yield offered by seemingly safe investments should itself be a danger sign,” Chanos sharply notes. He believes excessive returns stem not from value creation but from risks meticulously hidden. Like the 2008 subprime crisis, risk is hidden within multi-layered structures between sources and uses of funds. As money gets repackaged and transferred multiple times, the real risk of the underlying asset is obscured by intermediaries separating lenders from borrowers. The First Brands case reminded Chanos of his career peak—shorting Enron. Both relied heavily on complex off-balance-sheet financing tools to hide debt and beautify accounts. Private credit today is harder to see through than Enron was; at least Enron had obligations for public financial reporting as a listed company. First Brands, being private, only allowed hundreds of loan managers who signed NDAs access to its financials, locking information away from public and market scrutiny. “We rarely get to see how the sausage is made,” Chanos commented. [Image] --- ### Pandora's Box Has Been Opened First Brands' collapse and the resultant Wall Street trust crisis have torn the glamorous veneer off a fast-growing, massive yet opaque private credit market, revealing its frail—and perhaps already rotten—internal structure. From Jefferies fund’s fatal design to Chanos’s keen industry insight, echoes of history are everywhere. When the zeal for high returns outweighs respect for basic risk, and financial innovation morphs into a tool for evading regulation and hiding risk, seeds of crisis are planted. The First Brands event has opened Pandora’s Box. With the global credit cycle reversing and the economic climate deteriorating, the real question for investors and regulators is: within this massive “black box,” how many similar, yet-to-detonate “time bombs” are still hidden? Risk Warning and Disclaimer: The market involves risks, and investment must be cautious. This article does not constitute personal investment advice and does not take into consideration the individual investment objectives, financial circumstances or needs of any particular user. Users should consider whether any opinions, views or conclusions in this article are appropriate for their specific situation. Investing accordingly is at your own risk.