Wall Street Blood Friday! MFS Crisis Involves Billions in Exposure for Major Banks, Are Credit "Cockroaches" Emerging in Swarms?

Cailian Press, February 28 (Editor: Xiao Xiang)

On Friday, Wall Street lending institutions were hit hard by the bankruptcy of a little-known UK mortgage provider—MFS. This move heightened market fears of larger losses for banks and once again raised warnings about the potential emergence of more “cockroaches” in the thriving private credit industry.

MFS’s bankruptcy accelerated a broad sell-off of financial stocks and alternative asset management firms in the U.S. stock market on Friday. Fears over loan standards within the industry are prompting markets to brace for the expansion of credit contagion risks.

Similar to last year’s collapse of the American auto loan company Tricolor Holdings, MFS is also a non-bank financial firm aiming to fill market gaps ignored or avoided by large banks, while lending funds to these Wall Street giants to conduct business. Its dramatic downfall closely resembles that of last year’s auto parts supplier First Brands—banks initially trusted tangible collateral, only to have that confidence shaken by allegations of “double pledging.”

Even the names of some involved Wall Street institutions are eerily similar: Santander Bank and Jefferies Financial Group are once again entangled, trying to recover funds from this sinking company—both had suffered losses in recent months due to the First Brands incident.

This time, alongside them, are Atlas SP Partners under Apollo Global Management, Barclays, Wells Fargo, Castlelake LP, and TPG Inc…

“We are increasingly seeing these kinds of incidents emerge, which is definitely concerning,” said Joe Saluzzi, Co-Head of Equity Trading at Themis Trading. He added that he is now beginning to worry about the severity of the issues.

Nicole Byrns, founder of Dumar Capital Partners, an asset-backed financing fund, also stated, “Over the past six months, the market has been continuously discussing how to prevent fraud. Dedicated working groups have been established, and new anti-fraud products have been developed. However, this incident shows that there may still be gaps in our ability to detect fraud.”

MFS ‘Double Pledging’ Scam?

Based in London, MFS specializes in complex real estate mortgages, claiming to be a dedicated provider of buy-to-let mortgages and bridge financing.

According to court documents, the company has been forced into bankruptcy proceedings after falling into trouble. Creditors who successfully petitioned to place the company under administration on Wednesday accused it of financial misconduct and mismanagement.

Representatives of the creditors submitted documents to the High Court in London this week, stating they received support from “major international financial institutions and their legal advisors” for placing MFS into administration. MFS may have engaged in ‘double pledging’—using the same collateral to secure multiple loans without proper disclosure to lenders, with the collateral gap possibly reaching up to £930 million ($1.25 billion).

It is reported that for the total £1.16 billion in MFS loans, only £230 million of “real value” is available in the collateral accounts. The practice of double pledging could have caused an unexplained shortfall of over 80% on the nearly £1.2 billion debt.

According to recent filings, as of December 31, 2024, MFS’s net assets stood at £15.9 million, with 149 employees. Its loan portfolio amounts to £2.4 billion.

While many questions remain about what exactly went wrong with MFS, two creditors—Zircon Bridging Ltd. and Amber Bridging Ltd.—who pushed to place it into bankruptcy this week, indicated that December last year may have been a turning point. At that time, MFS was accused of beginning to transfer most or all of its income from certain transactions. The companies stated in court documents that the destination of the funds is currently unknown.

Both entities said the whereabouts of the missing income and the reasons for the transfers remain unclear.

Although it is still too early to determine the final losses for creditors (if any), in transactions arranged by MFS, collateral values typically range from 105% to 120% of the loan amount.

Impact on Wall Street with Hundreds of Millions at Risk

MFS’s collapse is undoubtedly another blow to Jefferies, which had already attracted attention for its significant role in the First Brands collapse. Sources say Jefferies’ exposure to MFS loans is about £100 million.

In addition, court documents show that lenders such as Barclays, Santander, Wells Fargo, and Apollo-backed Atlas have also extended loans to MFS, totaling over £2 billion ($185 billion RMB).

At a hearing, the judge noted that Barclays alone has about £600 million tied up with MFS. Barclays is one of the banks that arranged loans for MFS.

Atlas estimates its risk exposure at about £400 million. An Atlas spokesperson said that due to MFS violating contractual terms, the firm has proactively classified two related loans as in default last week and is pursuing all legal avenues to maximize recovery.

Additionally, a TPG spokesperson stated that the firm has an exposure of £44 million—less than 2% of MFS’s total loan exposure, based on publicly available figures.

Citigroup analysts noted that since banks often sell part or all of their risk exposure when arranging such loans, the above figures should be viewed with caution. They said, “Arranged loans are very different from holding that risk on the balance sheet. It is also unclear whether provisions have been made for this, and if so, how much.”

Market data shows that Jefferies’ stock plummeted nearly 10% on Friday, continuing Thursday’s 3.5% decline, amid reports that the New York-based bank has risk exposure to MFS, unsettling investors. Barclays’ shares fell 4.2% in London, underperforming the FTSE 100’s 0.6% gain. Santander’s stock dropped nearly 5%.

This widespread panic also hit bank stocks broadly, with the S&P 500 Banking Index falling sharply by 4% on Friday.

Emerging ‘Cockroaches’ in Credit Markets

Months before MFS’s recent scandal, Jamie Dimon, CEO of JPMorgan Chase, warned that more “cockroaches” could appear in Wall Street’s credit mechanisms following the bankruptcies of First Brands and Tricolor.

Coincidentally, earlier this week, Dimon issued a new warning, saying he sees similarities between today’s markets and the period before the 2008 financial crisis.

“Unfortunately, we saw this situation in 2005, 2006, and 2007—almost identical—rising tides, everyone making big money,” Dimon told investors on Monday. “I see some people doing foolish things.”

Clearly, investors are now highly alert to signs of deteriorating lending standards and cracks in the credit market, with some concerns centered on the overexuberance in the private credit sector—where specialized funds lend directly to companies. While traditional banks are the largest risk bearers, the collapses of First Brands and Tricolor last year have intensified these worries.

According to Jefferies’ disclosures last year, its Leucadia Asset Management division held about $715 million in receivables related to First Brands through its credit fund Point Bonita, though the firm later stated its risk exposure was limited.

This week, major financial players have also engaged in verbal sparring over broader corporate health, especially in private credit. Blue Owl Capital Inc. decided to halt quarterly redemptions for one of its retail funds, unsettling investors and triggering a sell-off in asset management stocks. An Apollo-backed commercial development firm reduced its quarterly dividend and marked about 3% of its portfolio to reflect impairments.

While some large private credit participants still argue that many recent high-profile defaults involve bank loans rather than private lending, others believe the market’s unease is justified—Bruce Richards, Chairman of Marathon Asset Management, compared the risks faced by software companies to “a train coming down the tracks that can be seen from afar.” These companies have accumulated hundreds of billions in debt in recent years, even as AI threatens to eat into much of their business.

“It’s not a question of ‘if,’ but ‘when,’” he said. “The market has just begun to wake up.”