17 September 2025
When Tricolor Holdings, a subprime auto lender in the US, collapsed into bankruptcy this September, many market participants dismissed it as an isolated failure. The company specialised in providing financing to borrowers with little or no credit history, packaging those loans into asset-backed securities (ABS), and selling them on to investors. The fraud allegations, including suggestions that collateral may have been pledged twice, seemed more like a potential corporate scandal than a systemic event.
Yet, as details emerge, the story has begun to stir uncomfortable memories. While this is not a rerun of the 2008 subprime mortgage crisis, the similarities are hard to ignore. And they raise a fundamental question: have investors, regulators, and markets really absorbed the lessons of that seismic collapse?
Tricolor’s model was a familiar one. Its loans carried eye-watering interest rates of more than 16% on average, and a majority of its borrowers lacked even a credit score. Some did not have driving licences. Still, these loans were bundled into securities, sliced into tranches, and sold with ratings as high as AAA.
This echoes the mechanics of 2008, when risky mortgage loans were bundled into mortgage-backed securities (MBS) and granted similarly generous ratings. Investors assumed diversification and structure would transform weak assets into safe ones. In both cases, the risks were not eliminated; they were merely repackaged.
Credit rating agencies played a controversial role in 2008, and they are back in the spotlight here. KBRA, the ratings agency, assigned AAA ratings to parts of Tricolor’s June bond deal, despite the borrower pool being heavily subprime. When the company collapsed, even those senior tranches traded at distressed levels.
This raises an old question: how can investors rely on ratings when the underlying loan quality is so weak? More than a decade after the crisis, the assumption that ratings equal safety is still proving costly, reminding investors that ratings can lag fast-moving fundamentals.
Another echo of 2008 lies in the banks’ involvement. JPMorgan Chase, Barclays, and Fifth Third were among Tricolor’s warehouse lenders, providing hundreds of millions in financing. While their exposure is not system-threatening, it highlights how quickly risky credit can infiltrate the balance sheets of mainstream institutions.
In 2008, the danger was that subprime mortgages had spread invisibly through the financial system, transforming what appeared to be a contained sectoral issue into a global collapse. Today, subprime auto lending is far smaller in scale. However, the fact that banks are again backing risky securitisation vehicles should make investors uneasy.
To be clear, Tricolor is not the “next Lehman.” The scale is orders of magnitude smaller, just $1–10 billion in liabilities versus trillions of dollars in subprime mortgages. The collapse is also idiosyncratic, driven by alleged fraud and aggressive underwriting, rather than a systemic housing downturn. It’s also vital to note that broader spreads in subprime auto ABS have not yet widened dramatically.
But it is precisely because this looks “contained” that it should serve as a wake-up call. In 2006, early tremors in the mortgage market were also dismissed as isolated. Investors told themselves the market was diversified enough to absorb minor shocks. We all know how that story ended.
Perhaps the most troubling comparison is not structural but behavioural. In both 2008 and 2025, investors have been willing to suspend disbelief in the pursuit of yield. Tight corporate credit spreads today reflect an obsession with returns in a yield-starved environment, much like mortgage-backed securities did in the past.
This hunt for yield breeds complacency: complex structures are viewed as risk mitigants rather than risk disguises, and ratings become shortcuts for diligence, while systemic exposure accumulates quietly.
The collapse of Tricolor is not a financial cataclysm, but it should remind us that crises rarely start with the big, prominent players. They start with smaller cracks in the edifice, a lender here, an ABS deal there, that reveal how risk has been mispriced.
Markets today appear stronger and better regulated than they were in 2008, but investor psychology may not have changed nearly as much as we think it has. The uncomfortable parallel is this: investors still appear to believe that credit alchemy can turn base assets into gold, and that systemic risk is always someone else’s problem.
Tricolor is unlikely to bring down the financial system. However, if we shrug it off too lightly, do we risk ignoring the real lesson? It’s not just about structures or ratings, but about discipline, scepticism, and humility in the face of risk.
The actual question is not whether Tricolor will be another Lehman, but whether markets have truly learned anything from Lehman at all.
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