After the failures of Tricolor, a Texas-based subprime lender, and First Brands, an automotive supplier, Jamie Dimon of JPMorgan Chase famously said that if you see one cockroach there are probably more around. Late in February, another one (allegedly) showed up in the UK: Market Financial Solutions.
Market Financial Solutions (MFS) was a private lender that, in its own words, provided “complex, property-backed” bridging loans to tie over real estate buyers until they could get longer-term financing. In hindsight, the word complex might have been the first clue. It is rarely a good sign when someone says, “This is so not what it seems, and it is way too complicated for you to understand.”
Another red flag? MFS had eight companies under its wings, all registered at the same address in London. That’s in addition to one of its auditors, who resided there, too.
There was so much overlap between the people who ran these companies that they could fit within one circle. This (again, allegedly) made MFS’s underwriting standards cross over from sparse to fraudulent, with some properties—if they could be located—being pledged as collateral multiple times or by people with no legal standing to do so. And don’t get me started on the watch-to-house ratio, but that is for you to look up.
Eventually, MFS was found out, collapsed, and is now being investigated for being a cockroach.
The other side of the story and balance sheet is that MFS itself was funded by some pretty big lenders such as Barclays, Jefferies, Santander, Wells Fargo, and Apollo Global Management’s Atlas SP Partners. Now it seems those creditors could be $1.8BN in the hole.
Bank of England’s PRA, the UK Team Regulator, is asking if these guys did their homework before lending MFS money. If they did not, that is, of course, against the rules and can result in fines.
In a broader perspective, BoE, like many other authorities, is also concerned about the general opaqueness of private credit that makes it difficult to see the line between fraud and risk, deceit and default, cockroach and ladybug.
FRG and The Risk Report find private credit interesting because it affects the financial infrastructure we work within.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.