NEW YORK, Jan. 29, 2026 /PRNewswire/ — Egan-Jones released an analysis titled Lessons Unlearned Avoiding the Next Tricolor, focused on helping sophisticated institutional investors and risk managers identify early warning signs of flawed transactions before losses escalate.
The commentary emphasizes that accurate risk assessment is a core responsibility for investors and notes that Egan-Jones did not rate Tricolor, First Brands, or Saks. It observes that Tricolor’s bonds were rated at or near AA before being downgraded to CCC and stresses that fraud was not the root cause but rather a symptom of deeper structural problems. The article states that no number of warranties can compensate for a transaction that is flawed from the outset.
According to the analysis, the Tricolor business model was fundamentally unsound, particularly due to the economics of lending to subprime borrowers and the high cost of recovering depreciating collateral. The commentary explains that as discovery of these flaws is delayed, losses tend to grow because there are no practical fixes for a broken model.
The publication outlines best practices intended to mitigate fraud risk, including independent control of cash through lockboxes and reconciliations, independent custody and verification of collateral, global collateral reviews across facilities, data integrity testing, and prompt enforcement of representations and warranties. It also highlights delayed audits as a major red flag that should not be ignored.
The article details several specific warning signs from the Tricolor case, including lending to borrowers without Social Security numbers, double pledging of assets, misrepresentation of loan performance, unreconcilable accounts, and accounting inconsistencies related to advances and collateral values. These issues, the commentary notes, should have provided early indications of fundamental weaknesses.
The commentary concludes that while mistakes can occur, investors should be cautious about attributing failures solely to fraud. As seen in prior cases such as Enron, WorldCom, and Lehman Brothers, fraud often masks deeper problems. Recognizing these issues early may help investors avoid similar outcomes.
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