While Wall Street dances in an “everything rally” with stocks breaking record highs daily, gold glittering near $4,000 an ounce and Bitcoin (CRYPTO: BTC) soaring past $125,000, private equity stocks are the only ones not invited to the party, stumbling instead of soaring.
The S&P 500 topped 6,800 and the Nasdaq 100 surged past 25,000, up 14% and 20% year-to-date, yet private equity leaders like Blackstone Inc. (NYSE:BX), Apollo Global Management Inc. (NYSE:APO) and KKR & Co. Inc. (NYSE:KKR) have tumbled double digits in less than two weeks.
These aren't the kind of moves you'd expect when the Federal Reserve is cutting rates and signaling more to come.
So what gives?
Chart: Private Equity Giants Crumble, But Wall Street Barely Flinches
A Bankruptcy That Rattled The Private Equity Market
The shock came on Sept. 30, when U.S. auto parts supplier First Brands filed for bankruptcy, disclosing over $10 billion in liabilities.
In an interview with the Financial Times earlier this month, hedge fund manager Jim Chanos said the collapse of First Brands may be just the beginning, as cracks in private credit markets start to surface.
"I suspect we're going to see more of these things, like First Brands and others, when the cycle ultimately reverses," he said, noting how "private credit has put another layer between the actual lenders and the borrowers."
"With the advent of private credit… institutions are putting money into this magical machine that gives you equity rates of return for senior debt exposure," Chanos said, warning that such high yields for supposedly safe loans "should be the first red flag."
First Brands’ implosion was chaotic.
The company had reportedly been marketed as a $6 billion loan opportunity just weeks earlier, with Jefferies Financial Capital Group Inc. (NYSE:JEF) pitching it to investors. It supposedly had $1 billion in cash.
That story collapsed fast: its top-tier loans now trade at just 33 cents on the dollar.
Some days later, Tricolor Holdings—a used car dealer and subprime lender catering to undocumented borrowers—also collapsed. Its AAA-rated bonds fell to 12 cents on the dollar.
Fifth Third Bancorp (NASDAQ:FITB) is accusing Tricolor of pledging the same collateral to multiple lenders, a type of alleged fraud reminiscent of the worst behavior before the 2008 crisis.
Jefferies is also now under scrutiny. The Financial Times reported on Oct. 6 that the investment bank earned undisclosed fees on financing it provided to First Brands. Other lenders say these arrangements may have violated their own credit terms.
Is Wall Street Chasing Yield On Shaky Ground?
First Brands' collapse revealed how off-balance-sheet financing, overlapping claims, and leveraged acquisitions can mask dangerous fragility.
These weren't exotic bets held by speculative hedge funds. They were AAA-rated loans, sold as safe, and parked in the portfolios of pension funds, insurers and mainstream asset managers.
So far, the fallout hasn't rippled through broader markets. Risk appetite on Wall Street remains wide open.
Junk bond spreads—just 2.8% over Treasuries—are now at their narrowest level since 2007 and far below the 20-year average of 4.5%. That's thin compensation for credit risk, especially with signs that more First Brands-style collapses may lie ahead.
Yet Wall Street isn't blinking. Just days after the bankruptcy, the largest leveraged buyout in history was announced: a $55 billion takeover of Electronic Arts, loaded with $20 billion in debt.
The risk-taking hasn't stopped. It's just gotten harder to see.
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Image created using artificial intelligence via Midjourney.
