WARNING_ Another Huge Bankruptcy Just Rocked Wall St. (What You Need To Know)

Another huge bankruptcy just rocked Wall Street. Is this going to lead to the next 08 style credit crisis? I'm going to reveal the answer to you and pretty much everything you need to know in three simple fast steps. Step number one, let's go over the shadow banking system. This is at the core of the problem we are seeing. We're going to start by looking at a chart from today's date going all the way back to November 2024. On the left, we go from 40 bucks up to 80. This is a chart of Jeffries. Say what on earth is Jeffries? They are one of these Wall Street financial institutions that's part investment bank, part lending, part asset management, and I'm sure they do a bunch of other things. And they made a really big mistake. The mistake here, and this is the key, is they lent to a company called First Brands. They're the ones that just blew up. It was an auto part manufacturer. And what this shows us is how, let's say, fragile all of this private credit is. And that's basically another word for the shadow banking system. I'm sure you hear private credit when you're watching CNBC or Bloomberg or even on social media. And I'm sure one of the problems you always hear is that it's very opaque. We don't know really what's going on. We don't know what the credit risk looks like. There's a lot of off balance sheet stuff and a lot of things happening in the shadows. But what's not happening in the shadows is not only did First Brands just go bust and file for bankruptcy, but they lost $2 billion. Now, when I say lost, I'm not referring to borrowing $2 billion and then spending $2 billion and then just not getting the $2 billion back. I'm saying they lost it like you had a bag of money and you set it down somewhere and you forgot where you set it down. Different type of lost money, right? And the thing that's crazy here is this has a lot of insiders on Wall Street, a lot of hedge fund managers I know, concerned that this might actually be fraud. And where there's smoke, there's fire. And one thing that we always see in these credit events or these bubbles, these manias, is we always see the amount of fraud increasing to a point where it's almost always systemic. And that could be what's happening right now with First Brands. But let's go back to this chart. You can see that right around November of 2024, trading right around 60 bucks goes up, goes way down, especially when we had the, I hate to say liberation day. I like to call it retardation day because that's basically what it was. And then we go up, up, up, up, up, up, up to the point right here. Just more recently, they were trading right back at this high or close to it. We'll call it 75 bucks. Yeah, maybe a little under 80. But then what happened? We get the wild E. Coyote moment here. An editor go ahead and throw up a candlestick chart. And what I want to show the viewers is how many down days in a row Jeffries has had. I don't know if I've ever seen anything like this. Usually nothing goes down in a straight line, but Jeffries share price definitely has. Now, I want to get into how this shadow banking system actually works. And I know it sounds technical and kind of a little scary right around Halloween, but it's really very simple to understand. And when you do, it'll be crystal clear as to why there could be so much counterparty risk that's lurking, let's say beneath the surface. But one of the other big, huge problems here that we have to go over is if this is the beginning of an 08 style credit crisis, not that it plays out the exact same way, but let's remember a credit crisis is really when everything freezes up liquidity. Why does it usually freeze up? Because everything is marked at 100 cents on the dollar. So let's say that you have a loan to first brands and two weeks ago, well, you looked at your balance sheet and you said, Hey, this loan to first brands is worth a hundred million dollars. But then you wake up today and you're like, Oh, wait a minute. No, no, no, no, no. That's not worth a hundred million dollars. That's worth about a hundred bucks. And that's, if I can even get it back from a company that's walking around with bags of money and just setting them on the corner and forgetting where they put them. So the probability that you can get the a hundred bucks back is extremely, extremely low. That's when you have the emperor is wearing no clothes moment. That's when the tide goes out and you see who's swimming naked, but you have to realize that each one of those people that are swimming naked around you represents counterparty risk that could blow a hole in your balance sheet. So what do you do? You stop lending. There's just another way to say that we have another way to say a credit crisis. So now let's get back to how the shadow banking system works. We've got a bank right here and they have a pristine balance sheet. That's right. And they are abiding by all of the rules and regulations and their investors don't need to worry at all because the only loans they're making are to these entities that are a very, very low credit risk. In fact, I mean, Jeffries as an example, probably triple a rated. I don't know if they are. I'm just saying that for the sake of the example, the bottom line is here conceptually, you have to envision an entity where the credit rating is very, very high. So the credit risk is extremely, extremely low. So this bank can show their investors and the regulators that they're not making any risky loans at all. No, no, no, no, no. But then what Jeffries does is take the money and lends it directly to, let's say garbage corporation and garbage corporation pretty much describes their credit rating. It's FFF. Now I don't even know if that's a thing, but again, it makes a great visual, doesn't it? And it helps you understand the concepts behind this shadow banking system or private credit. So you see what's happening is the bank is basically lending to garbage corporation. That is a huge credit risk, but they're just doing it through Jeffries so they can make it seem like they're not making any risky loans. And Jeffries doesn't have the regulatory burden that the bank has to begin with. But what does this do? Obviously creates a lot of systemic risk. So if garbage corporation goes bust, they can't pay back Jeffries. And if Jeffries doesn't get paid back, well, they can't pay back the bank. So you're basically adding another layer of risk on top of what you would have had if the bank would have just lent to garbage corporation to begin with. In fact, if it was just the bank, then garbage corporation would not have got the and they wouldn't have grown to $10 billion or whatever their valuation was before they went bust. It's the typical financial shenanigans that you see whenever we're going into this big boom that inevitably is followed by the bust. But now let's go into more of the shocking details of this bankruptcy. And then at the end of the video, I'm going to give you my opinion as to whether or not I think this is the beginning of the next 08 style credit crisis. Step number two. I hope you're sitting down because it is definitely stiff drink time. That's for sure. Let's go right over to the financial review. Fantastic article on what's happening with this interplay between first brands, UBS, the shadow banks, Jeffries, everything that we're talking about in step number one. I want to start by going all the way down to this email exchange. Check this out. In an email exchange filed in bankruptcy court, Ray Stone's lawyer, and I believe Ray Stone is another lender to first brands. Emmanuel Grillo asked first brands legal team two questions. First, do we know whether the FBG actually received first brands actually received the 1.9 billion no matter what happened to it? Fair question. Second, would you tell us how much is in the segregated accounts in respect of the factored receivables as of today? In other words, how much money do you have to pay out to creditors? That's what they're saying here. The response from first brands restructuring lawyers, Sunny Singh, has become a butt of jokes on Wall Street. Number one, we don't know. Number two, zero. Remember in step number one, how I was saying they just had a bag of money and they lost it? Well, now what they're saying is they might not have even received the bag of money to begin with, even though they have liabilities for the bag of money. And then of course, you get the second point, and that's how much money do you have? Nada, goose egg. Ray Stone's team, among many others, have raised allegations of financial misconduct. In other words, fraud. One creditor claims that some of the collateral tied to their loans is being pledged to different first brand lenders. You see what they're saying here? They were rehypothecating, or they were likely rehypothecating their collateral. And by the way, it was collateral they didn't even have. So let's assume that they were using accounts receivable. So that's not cash that they have in the back of their pocket, but it's future cash that they should receive, hopefully, right? So they take a billion or a hundred million or whatever it is, in accounts receivable, and they use that as collateral. Let's say it's a hundred million to borrow $10 billion. And each lender thinks they have a claim on the hundred million. So let's just say they have all these lenders that are giving them a hundred million dollars each that equal the 10 billion or whatever it is that first brands ended up borrowing. And each one of those lenders thinks they have that hundred million in accounts receivable as collateral. But there's multiple, many, many, many, many, many lenders. So obviously, if or when first brands goes bust, all of these lenders that think, oh, well, that's my collateral. They get the old rug pull because it was none of their collateral to begin with. Well, it might've been the first guy's collateral, but all the other entities that lent them the hundred million dollars that equaled the 10 billion, they're SOL. Because although they thought they had collateral, they didn't have any. Now let's get back to the article because this next part is extremely important. Listen to this. First brand itself has appointed independent directors to probe the way it's borrowing merry-go-round worked. Does that remind you of anything cough AI bubble cough AI circular economy, AI infinite money glitch. Sorry. I couldn't help myself. Check out this next part here that they've highlighted rightfully. So how could a no name relatively small company borrow so much from the smartest people in the and no one noticed a problem because that's what happens in a bubble. That's what happens in the boom times. That's when everyone goes out the risk curve. That's when everyone is swimming naked because they think that nobody can go bust. So they don't even consider the possibility that first brands as an example, could be rehypothecating all of this collateral. And they don't even consider the possibility that first brands could actually go bust because when the music's playing, you got to dance baby. So then the article says, this isn't the GFC. They say it's contained just like subprime was contained. And I'll give you my opinion in step number three, but then they also point out the second question is the one reflected in the share price of private capital giants, just KKR, Blackstone, Aries, Apollo global management, which are down at least 14% since the middle of September. Are there more unexploded hand grenades such as first brands out there? I think that's the major point here. Usually, especially in these boom times when everyone goes far, far, far out the risk curve, where there's smoke, there's fire. And it's like a cockroach. When you see one, you know that there's like millions of them within the walls. There's never just one ever, but let's get back to the article because this next bit is really important. Jim Chanos, the legendary short seller who profited from the collapse of Enron said this week that similarities between the subprime disaster and private credit are that both put so many layers of people in between the source of the money and the use of the money. I think it's very interesting that Chanos is making comparisons between today and 2008. Step number three. So do I think this is the beginning of the next GFC? It's called the GFC 2.0. That depends. Let me explain my answer and then you guys can go ahead and come to your own decision. But I will give you my base case here in just a moment. So as you can see, I am one heck of an artist. That is true. That is undeniable. And this is a guy swimming naked. And that is a guy also swimming naked, but he's further out. And then you go all the way out to that guy that you can barely see. He's way out there in the distance, but this guy is closer to the shore. So as the tide goes out, this guy is going to be exposed first. So this guy represents the corporation, the bank, the entity that is the most risky. And this guy out here is the least risky, although they're all connected. You'll see that in just a moment. So in this analogy, I think it's a very, very good one. Thank you, Warren Buffett. So as the tide comes in or as it gets higher, this equals an increase in fraud and risk. Why? Because these guys, they see all of the people that are making all this money by swimming naked and they say, well, I'm going to go ahead and do it. So it creates an incentive, a perverse incentive to take more and more and more risk. And why not? Because the tide has been in for many, many years and we have recency bias. So we assume that if the tide is in now and it's been in or very high for the last three or four years, five years, well, then it's going to remain that way indefinitely into the future. But what happens is that tide starts going out and this, this guy right here, is exposed. Say this guy right here is first brands. So he's embarrassed. He doesn't know what to do. He's going to run off into bankruptcy court. But this guy was very, very happy. But now he's getting a little worried. He's got some stress going there because he knows that the direction of the tide is that way going out and he's the next entity to be exposed. So the key here, other than the fact that I'm a fantastic artist, is the tide represents the economy. So we'll say the economy equals the tide. So if the economy continues to get worse, continues to soften, continues to go down, the tide is going to continue to go out. And pretty soon that guy is going to be exposed. This guy and inevitably that guy way out there in the distance is going to be exposed as well. But here's where it gets really interesting. And I don't know if interesting is the right word, probably scary or maybe even terrifying, is we have to realize that the more people that are swimming naked, it increases the speed. Now you're never going to see this formula in any other economic video. Naked equals speed. Remember that. Go ahead and write that down. Naked equals speed. I'm joking. What I'm saying here is the more naked people you have, it increases the speed the tide is going out. Well, why is that? Let's think it through. Because as you guys know, a lot of these financial institutions, they're all interconnected in one way or the other. It's very similar to that AI bubble, the circular AI economy. And that NVIDIA invests in OpenAI, OpenAI invests in Oracle, Oracle invests in CoreWeave, wherever it works. So if one of those players blows up, it blows up the whole entire ecosystem, or it very well could. So what we have to realize is that First Brands is their balance sheet is connected to this guy. And this guy's balance sheet is connected to that guy. And this guy's balance sheet is connected to this guy. And this guy's balance sheet likely is somehow connected to First Brands. So you can see what happens is if First Brands or this first guy is exposed, then what happens to liquidity? What happens to credit? It gets tighter. And then we take it a step further. Let's say that guy is exposed. Well, now all of a sudden credit gets even tighter. And the reason these people are still swimming naked is because they can access liquidity because there still is credit to a certain degree. But if we get a credit crunch, then what happens to the economy? Well, you guys know that. It's called the GFC. And to illustrate how quickly this can happen, I want to remind everyone that Jeffries valued First Brands just a little over a month ago at $6 billion, in fact, more than $6 billion. Because just a little over a month ago, Jeffries was going to do a refi of First Brands for $6 billion. So you got to figure their valuation was at least $10 billion. And that was a month ago. And a month later, they're at valuation of zero. That's how quickly the tide can go up. That's how quickly liquidity can freeze. And that's how quickly you can have that oh, crap moment in the financial system. And that's why it can be so devastating. Because at the end of the day, a lot of these balance sheets with these financial institutions in the financial economy, they're all connected to a certain degree. So if you think the economy is going to stay exactly where it is today or improve, and I would use the labor market as a specific proxy for that. So if you think the labor market is going to stay right where it is frozen, or it's going to even get better and better and better, then you should be in this camp. We're likely going to have the tide in for a lot longer. Let's party like it's 1999. But if you think the economy is going to continue to deteriorate, the labor market is going to continue to soften, then you also have to believe that the tide is going to continue to go out. And if the tide continues to go out, the more naked people we see, which increases the speed of the tide continuing to go out even further to a point where you get to that guy right there. So the main takeaway here is if you think the economy is going to stay as it is or improve, this is your most likely outcome. If you think the economy is going to deteriorate further and get worse, then this is your most likely outcome. So what's my base case? It's definitely this, but I think by the time we get to this guy, the government will likely step in and try to kick that can further down the road. In other words, try to bring the tide back in, and that will just create more malinvestment, more misallocation of resources, more fraud, and more risk-taking, which inevitably at some point in time, we are going to have to pay the fiddler. And that doesn't end well. 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