Tricolor Auto’s Failure Has It All - ESG, Woke Capital, Illegal Immigration, Securities Fraud, Government Diversity Programs, BlackRock, etc.

Tricolor Auto Group, the nation’s seventh largest used car dealer (and 3rd biggest in Texas and California), just filed for Chapter 7 bankruptcy – e.g. liquidation. Its target customer had been illegal aliens, and with President Trump deciding to start enforcing the nation’s immigration laws, there has suddenly been a major “market correction” in that market segment. Not only has the customer base largely evaporated, but so have loan repayments, which Tricolor also serviced.

The “tri colors” that the name references are the colors of the Mexican flag – red, white, and green.

While the sudden loss of customers and loan repayments was the catalyst that caused the final collapse of Tricolor, its failure has revealed so much more, including securities fraud, Wall Street ESG gimmickry, race-based federal programs, etc.

Tricolor has securitized more than $2 billion of its very high risk auto loans over the past seven years. The most recent issuance was in June of this year, with JP Morgan Chase and other money center banks peddling more than $200 million of “social bonds” to credulous investors. These securities are certified as “social bonds” by the US Treasury’s CDFI (“Community Development Financial Institution”) program because Tricolor focuses on selling its cars and financial services to underserved communities, specifically Spanish-speaking non-citizens. Tricolor’s CEO, Daniel Chu, was quoted by Barron’s in 2022 as stating, “No one else is providing meaningful dollar credit to an illegal immigrant.”

As documented in this recent Barron’s article (“Tricolor Files for Bankruptcy, The Auto Lender Was Once an ESG Favorite,”) “Financial institutions until recently touted their social bond purchases as part of their commitment to ESG—or environmental, social and governance—principles. BlackRock took a $90 million stake in Tricolor in 2021 as part of its Impact Opportunities Fund focusing on businesses and projects owned, led by, or serving members of minority groups.” Of course BlackRock was involved.

You may recall that a major contributor to the financial crash of 2008 was Wall Street wizards packaging up a bunch of sub-prime mortgages, securitizing them, and then selling those “mortgage backed securities” to investors as something other than perfumed garbage. That is effectively what Tricolor has been doing with its auto loans, with the help of Wall Street.

In a Tricolor press release from March of this year titled “Tricolor Closes $328 Million Securitization to Advance Financial Inclusion at Scale in Underserved Communities,” CEO Chu stated, ”By providing deserving people with access to reliable, affordable transportation, Tricolor, which operates across six states and ranks as the third largest used auto retailer in Texas and California, helps move them into the financial mainstream and reverse systemic financial inequities in America.” Like the other securities issuance I referenced, JP Morgan Chase also promoted these odious securities, along with Barclay’s and Fifth Third Bank.

Per Car Dealership Guy, Tricolor’s bonds have collapsed to a value of 12 cents on the dollar, virtually wiping out the investors who bought those bonds. But as bad as this all sounds so far, it’s actually worse. There was massive fraud by Tricolor, which is causing losses to all parties who did business with it.

The banks who were packaging Tricolor’s securities also had lines of credit extended to Tricolor. There was a recent regulatory filing by Fifth Third Bank revealing that it was booking a $200 million impairment (loss) for fraud involving one of its customers. In this filing, Fifth Third disclosed that there was “recently discovered alleged external fraudulent activity at a commercial borrower,” and that it “is working with the appropriate law enforcement authorities in connection with this matter.” Barron’s confirmed that this commercial borrower was Tricolor. JP Morgan Chase also has about $200 million in loans outstanding to Tricolor, so it too will almost certainly be booking a massive impairment charge for this unrecoverable debt.

Some of the news reports about the Tricolor fraud state that collateral was “double pledged,” meaning that unbeknownst to the banks lending money to Tricolor, the collateral they thought was backing up their loans was also pledged to other banks.

Tricolor was also the servicer of its “buy here – pay here” loan portfolio, remitting collected payments to the banks who securitized their loans. From my experience dealing with fraud in this arena, it is quite likely that there was some level of kiting / ponzi scheme at work, and a constant inflow of new debt was necessary to keep servicing old debt that was not supported by actual assets.

Working in Tricolor’s favor to perpetuate the fraud was the aura of woke virtuosity that kept the money flowing in, which also helped shield Tricolor from appropriate due diligence by those same woke banks throwing money at it.

Working against Tricolor was President Trump’s immigration enforcement. The Department of Homeland Security issued this press release earlier this week: “Over 2 million Illegal Aliens Out of the United States in Less than 250 days.”

This mass exodus of illegal aliens has obviously resulted in a collapse in Tricolor vehicle sales, but much of the existing customer base has now either been deported, or chose to self-deport. Their loans will obviously not be repaid. As for the cars being driven by illegal aliens who have left the country, Tricolor’s liquidators will see a huge loss on those vehicles that were surrendered. But the loss will be even worse on the cars that were simply abandoned to be stolen and stripped…or taken across the border.

Blackrock, JP Morgan Chase, and all the other titans of Wall Street who bought into the hype about ESG investing deserve the loss they are going to take.

But for American citizens seeking affordable used cars, there is some good news. Supply is about to improve in relation to demand.

[buck.throckmorton at protonmail dot com]

posted by Buck Throckmorton at 11:00 AM

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