Money Stuff: First Brands Did Some Round Trips

Modern trade finance comes in two basic flavors, accounts receivable financing and accounts payable financing. Accounts receivable financing — “factoring” — is the traditional form:

1. Company sells product to customers.
2. Customers buy on credit; they get the products, the company sends them invoices, and they have, say, 60 days to pay.
3. The company would like the money sooner.
4. A lender lends the company, say, 98% of the money, collateralized by the invoices.
5. When the customers pay the invoices, the money goes to the lender.

That is, the company is borrowing money against its accounts receivable, and paying it back within 60 days. Sometimes this form of financing leads to fraud. The two main forms of fraud are:

• Double-pledging: The company borrows more than once against the same invoice, from multiple different lenders; and
• Just making up invoices: An “invoice” is at most a PDF document, and often just an entry on a spreadsheet, so you can kind of type whatever you want and see if someone will lend you money against it.

These frauds are not necessarily a great idea: You are getting loans, generally short-term loans, that you have to pay back when you get money from customers. If you are faking invoices, you’re not getting any customer money in 60 days, which means that in 60 days you will have to roll over the loans using even more fake invoices, etc., until you land in prison.

Accounts payable financing — “reverse factoring” or “supply chain finance” — is another kind of trade finance:

1. Company buys products from suppliers.
2. Company buys on credit; it gets the products, the suppliers send it invoices, and it has, say, 60 days to pay.
3. The suppliers would like to get the money sooner.
4. A lender provides a financing program for the company, under which the lender pays the company’s suppliers, say, 98% of the money immediately. 
5. When the company pays the invoices, the money goes to the lender.

That is, the company is sort of borrowing money against its accounts payable. Its suppliers get paid immediately (which they like), the company has a few months to pay (which it likes), and a lender stands in between to make it work and collect a spread. It is less intuitive than standard factoring — the accounts payable are a liability, for the company, not an asset, and it seems strange to borrow against a liability — but it all basically works.

How could this lead to fraud? Well, it seems hard for the suppliers to do fraud: In this sort of program, the lender’s customer is the buyer, the company, not the suppliers, so it’s hard for the suppliers to make up invoices and get them paid. The person hitting the button that says “Pay This Invoice” is at the company, and that person is not going to pay a fake invoice.

Of course, the company itself could make up a fake invoice, but that doesn’t necessarily help. You make a fake invoice, you send it to your lender, you say “pay this invoice” — but then the lender pays your supplier. It’s not an invoice owed to you; it’s an invoice that you owe. It’s not an asset; it’s a liability. The money just goes to your supplier, who is like … “huh weird random windfall”? “Huh I got paid for a fake invoice, better send that back”?

The way to do fraud, I guess, is to collude with your supplier. You call up your supplier and say “hey, for reasons, I need $10,000. I’m going to submit a fake invoice for $12,000 to our reverse factoring lender, which will send you $11,500. Then you send me $10,000 and we’re both ahead.” I guess? And then you owe the reverse factoring lender $12,000 in 60 days? Seems like a lot of friction.

Also: Is it even fraud? If you borrow against fake accounts receivable, your lender is deceived about something essential: You are pledging assets that don’t exist. But accounts payable financing is essentially unsecured lending — you are not pledging any invoices; you are borrowing against your own credit to pay your invoices — so should the lenders even care if the invoices are fake? Accounts receivable financing is “someone owes me $10,000, so lend me the money until they pay”; if the debt is fake that’s a problem. Accounts payable financing is “I owe someone $10,000, so lend me the money until I want to pay it.” Does it matter if the debt is real?

We have talked a few times about First Brands Group, a car-parts company that went bankrupt in September 2025. First Brand’s lenders have sued Patrick James, the company’s founder, accusing him of doing all sorts of malfeasance, much of it relating to double-pledging of invoices and inventories. Today James and his brother Edward were indicted by federal prosecutors for alleged bank and wire fraud. Here is the indictment, which alleges various schemes, many of which overlap with the lenders’ claims: “First Brands employees routinely submitted fake invoices, fraudulently inflated invoices, and double-pledged invoices for the purpose of selling and pledging them to factoring counterparties,” “the defendants defrauded First Brands’ senior lenders by concealing the nature and scale of the off-balance-sheet financing,” “the James Entities pledged inventory that PATRICK JAMES and EDWARD JAMES, the defendants, purported to be unencumbered but in fact was already subject to liens,” etc.

This one was new to me, though:

First Brands also used third-party financing to pay its suppliers through accounts-payable factoring (also called supply-chain financing). Under these arrangements, financial institutions advanced funds against invoices First Brands owed to its suppliers. In some instances, the financer paid suppliers directly at a discount and First Brands repaid the financer on a later, fixed due date. In other instances, the financer paid First Brands, which then paid the supplier, with repayment due later to the financer. …

First Brands also defrauded its accounts payable factoring partners. … At First Brands’ direction, certain financers sent funds to a third-party bill-processing intermediary based on fabricated invoices manufactured by First Brands. Contrary to the understanding of the financers, those funds were not used by the bill processor to pay First Brands’ suppliers. Instead, those funds were routed to First Brands itself. At First Brands, these self-payments were referred to as “round trips” or, euphemistically, as “corporate initiatives.” Their purpose was to inject additional cash into First Brands at moments when the company was unable to meet its payment obligations with legitimate cash on hand.

I am a little bit of a connoisseur of criminal euphemisms around here, and I have to say, “corporate initiatives” is really really good. Not legal advice, I mean, just that it’s funny.

One theory, the standard theory, is that an asset that performs poorly in bad times should have to pay a high return to compensate for that bad timing. “The required risk premium for any asset … reflects its covariation with bad times,” as Antti Ilmanen puts it. Coval et al. write: “Securities that fail to deliver their promised payments in the ‘worst’ economic states will have low values, because these are precisely the states where a dollar is most valuable. ” A bond that has a 5% probability of defaulting, but whose defaults will only come if the stock market crashes, should pay a higher interest rate than a bond with a 5% probability of defaulting that is uncorrelated to the broad market. Performing badly at bad times is much worse than performing badly at random times, and should have a higher risk premium.

Another theory, of considerable folk importance, is that an asset that performs badly in really bad times doesn’t need to compensate investors for that bad timing, because if the times are bad enough the investors will have bigger things to worry about. A bond that pays back principal and interest in every imaginable scenario except global nuclear war, but defaults in case of global nuclear war, should not really pay much of a premium over an entirely risk-free bond. The global nuclear war will be a bad time, sure, and the market will probably be down, but that bond’s default won’t appreciably add to anyone’s problems. The worst states are precisely the states where a dollar is least valuable.

We have talked about the cost of buying insurance against an artificial intelligence apocalypse, and it raises similar issues. On the one hand, an AI apocalypse would be very bad and cause a lot of damage, and would be correlated with a collapse in the extremely-AI-heavy equity and debt markets, so in some sense it should be expensive to insure against it. On the other hand, if the robots kill or enslave humanity, the insurance payout is really the least of the insurance company’s chief executive officer’s worries. At that point, she’s in a tank being turned into a slurry to feed the AI; she’s not, like, stressing about her capital ratios. In states of the world where the insurance pays out, the insurance paying out will be a source of rueful amusement for her, not a problem. AI extinction is the state where a dollar is least valuable. “It may be difficult to know what role money will play in a post-[artificial general intelligence] world,” threatens OpenAI. So, whatever, she’ll sell you the insurance for cheap. As I put it, “I’d happily sell OpenAI insurance against the complete extinction of humanity for a million bucks. I’m not sure what insurance regulators would say about this.”

The solution to that last problem — insurance regulation — is catastrophe bonds. Instead of buying AI extinction insurance from insurance companies, which might not be able to sell it to you with a straight face, you buy it from the bond market, which would. You issue bonds that pay an interest rate of X basis points over Treasuries, but that don’t pay back their principal if AI enslaves or destroys humanity. What is X? On the traditional theory, it is high. On the folk theory, it is zero. 

I am mostly kidding, and no one is really trying to buy or sell AI extinction insurance. But people do think a lot about, like, sub-extinction-level AI insurance, insurance against smaller and more realistic bad effects of AI. Here are Daniel Reti and Gabriel Weil on AI cat bonds:

The market currently cannot provide liability insurance for extreme AI catastrophes. This is for two reasons. First, the process of underwriting, which involves assessing risk and setting insurance prices, requires a stable historical record of damages, which does not exist for a fast-moving, novel technology like AI. Second, the potential scale of harm caused in an AI catastrophe could exceed the capital of any single carrier and strain even the reinsurance sector. ...

Catastrophe bonds can fill the gap left by conventional insurance. As an alternative market-driven solution to liability insurance, we propose AI catastrophe bonds: a method of insurance tailored to cover a specific set of large-scale AI disasters, inspired by how the market insures against natural disasters. As well as offering coverage, our proposal would be structured to encourage higher safety standards, reducing the likelihood of all AI disasters. …

In technical terms, an AI developer would issue a cat bond through a type of legal entity called a special purpose vehicle (SPV). When investors purchase the bond, their funds are held as collateral inside the SPV (typically in safe, liquid assets). In normal times, the developer pays investors a “coupon,” which is economically analogous to an insurance premium. If a defined AI “catastrophe” trigger occurs (more on that below), some or all of the collateral is released to fund payouts, and investors absorb the loss.

Investors could buy AI cat bonds as part of a hedged strategy. It is worth noting one important difference between AI risks and the types of risks traditionally covered with cat bonds: correlation with market performance. Natural disasters are largely uncorrelated with the financial markets, making the cat bonds covering them more appealing to investors. On the other hand, an AI-related event severe enough to trigger a payout would probably prompt a sharp repricing of AI equities.

This effect means any losses would likely occur at a particularly bad time for investors, which might reduce appetite for AI cat bonds specifically. Yet it also opens the door to hedged strategies, such as earning interest from AI cat bonds while betting against tech stocks. In this sense, AI cat bonds would make the tail risk of AI tradeable for the first time.

Well, not the tail of the tail risk, but you know what they mean.

It is approximately true that:

1. Institutional investors value SpaceX at about $800 billion;
2. SpaceX would like to go public at a $1.5 trillion valuation in a few months; and
3. Retail investors seem to want to buy SpaceX shares at roughly a 100% premium to what institutions pay.

That last point is not particularly rigorous. To a first approximation, retail investors can’t buy SpaceX shares; SpaceX is not a public company, only “accredited investors” can buy its shares, and even they don’t get offered SpaceX shares that much. But there are various ways to buy exposure to SpaceX shares — forwards, tokens, special-purpose vehicles, funds that own SpaceX, etc. — and we have discussed several of them that charge high fees and/or trade at huge premiums. Certainly some individual investors are buying some form of SpaceX exposure at twice the institutional price.

Probably the right way to explain this premium is as a matter of scarcity: Institutional investors get regular opportunities to buy billions of dollars’ worth of SpaceX stock, while individuals mostly don’t, so the few individuals who do pay up for the privilege. If individuals could buy as much stock as they wanted, alongside institutions, in SpaceX’s occasional secondary share sales, probably the premium would go down.

Still it is at least possible that some of the explanation is about differing desires. Perhaps SpaceX’s institutional investors think “ah yes this is a great company whose future cash flows are worth about $800 billion,” while a giant mass of individual investors think “ooh Elon Musk is dreamy and I’d pay $1.6 trillion for that.” Tesla Inc., Musk’s public company, has a lot of enthusiastic retail shareholders, a history of selling stock directly to retail, a $1.6 trillion valuation and, uh, some meme-adjacent vibes. It’s possible that, if individuals could buy as much stock as they wanted in SpaceX’s occasional secondary shares, the clearing price of those sales would go up. 

Crudely speaking, the traditional way to do an initial public offering is:

• You sell stock to institutional investors at the price that clears the market for selling stock to institutional investors. (This is called the “IPO price.”)
• The next day, the stock opens for trading, and some of those institutional investors turn around and sell stock to individual investors at the price that clears the market for selling stock to individual investors. This price is often higher than the IPO price, and the difference is called the “IPO pop.”

Again, this difference is mostly a matter of scarcity, but there are probably some cases where it’s a matter of differentiated investor interest. Some companies are more appealing to retail than to institutions. If those companies sell their stock to institutions at $420 per share, the institutions are going to turn around and sell it to retail at $840. So the companies might as well sell to retail themselves. 

Anyway:

Robinhood Markets Inc., the upstart broker credited with getting young people hooked on trading, is vying for a key role in SpaceX’s blockbuster initial public offering, according to people familiar with the matter.

Robinhood is jockeying with several Wall Street banks to secure a big slug of coveted SpaceX stock to sell directly to its retail investors, said the people, who asked to not be identified because the details aren’t public. The company would likely offer the shares through its IPO Access platform, which lets users buy stock at the IPO price, before they trade on the open market.

Elon Musk’s rocket and satellite company is considering earmarking a significant portion of the shares for retail investors, the people said.

It would be weird not to.

Incidentally. I write sometimes that the meme stock numbers are 69 and 420. Recently, when I write that, I get emails saying “no it’s 6 7.” As a father of young children, I am keenly aware that “6 7” is the most important meme number for young children. [1]  (Though also: 41.) Is it the most important meme number for adults trading stocks on their phones? I am not sure yet. Yesterday we discussed reports that SpaceX might try to do its IPO on June 8 or 9, because Jupiter and Venus will be aligned with each other on those days. Or, I submit to you, because June 9 is 6/9. If you’re trying to maximize retail interest, doing the IPO on 6/9 couldn’t hurt. June 7 is 6/7, though. We could see a real regime shift in meme finance if SpaceX goes public on 6/7. I guess we won’t because this year it’s a Sunday, oh well. Still, if you are investing based on meme numerology, you might have to start putting 6 7 in your models.

I was a classics major in college, focused on reading Greek and Latin poetry. Somewhat later, I became an investment banker. That was a thing that people used to do. You treated college as a sort of luxury consumption good, you read some poetry, you had some fun, you lazed about on the quad, you graduated, you were like “ugh job I guess,” and you got a job. Some kinds of jobs (doctor) were only available to people who spent long years studying the relevant subject matter. Most kinds of jobs, though, were open to bright hard-working young people with good general educations and a willingness to learn on the job. Investment banking, in my day, was a job like that. “How hard could it be to learn how to build Excel models,” people reasonably asked. In fact, people who treated college as a luxury consumption good were in certain ways more appealing to investment banks. I once heard that the Harvard major whose students were most likely to be rich 20 years after graduation was art history. I have no idea if this is true and can find no evidence for it, but doesn’t it sound like it should be true?

This all shaped my view that finance is an essentially humanistic profession, that the study of the financial markets is the study of human behavior, that the essential quality of a derivative structure or tax strategy is its aesthetic beauty, that finance is a proper subject for art criticism. I think that view is … right … and that many of the people who do best in the financial industry have broad curiosity and a certain sense of whimsy, not just really good Excel skills. But perhaps this is a bias resulting from my personal history. Perhaps, in fact, the best way to populate the financial industry is to take the 16-year-olds who show the most aptitude for Excel and put them through a rigorous single-minded eight-year training program that makes them really, really, really, really, really good at Excel. Perhaps more specialization is always good.

At the Financial Times, Sujeet Indap, who is about my age, writes about college finance clubs, and the increasingly strict and early process for finance recruitment:

The finance rat race used to be less frenzied. More than 25 years ago, when I was a college student, I recall music majors stumbling upon the career centre during their senior year and landing at McKinsey. When I decided to go into investment banking, I did not need to do much until late into my third year of college. My dad took me to buy a cheap suit for a handful of summer internship interviews, none of which proved successful. But I had no trouble securing an offer when most students got their entry-level job: senior year with graduation just a few months away.

The timing has now shifted far earlier. Wall Street banks typically fill summer internship slots during students’ second year of college, more than a year before they take place. Those interns will account for nearly all the full-time trainees starting two years later.

The system forces nervous students to get their ducks in a row essentially from the moment they set foot on campus.

With this in mind, virtually all big public and private universities now offer professionally focused finance clubs that help students prepare for careers on Wall Street. First years often seek places in these clubs within weeks of moving into their dormitory rooms.

The funnelling begins with the club selection, a process largely supervised by the students themselves. George, the Wharton student who did not want to use his full name in case it put him at a disadvantage with potential employers, says those throwing their weight around on campus are increasingly not athletes or star scholars but second and third-year students who have secured prestige internships.

Honestly I want to watch a Pitch Perfect-style movie about college finance clubs? I sometimes think that this all tends to lower the prestige of financial employers. I wrote in 2018:

If you run a major investment bank, you want that bank to be the first choice of smart people everywhere, to beat out Google for engineers and NASA for physicists and law school for poets. It is nice to be around a group of smart people with diverse interests, but it is also validating. If you can pick from the best of everyone, that means that you are the best of everything. You are an institution, a part of elite culture, a training ground for powerful people. If you’re just hiring investment bankers, you’re just an investment bank. It’s just a job.

If the only people who work in finance are people who have pursued that goal single-mindedly since they were 16, the pool will be less diverse, and maybe less fun.

Wall Street’s Stamp of Legitimacy Fuels Suspected Pump-and-Dump Schemes. TikTok Star Khaby Lame Signs $975 Million Deal to Monetize Global Fan Base. Zuckerberg, Musk Vie for AI Supremacy With $155 Billion Splurge. Meta Overshadows Microsoft by Showing AI Payoff in Ad Business. Blackstone lines up ‘one of largest IPO pipelines in history.’ Barry Diller Told Warner Discovery He Is Interested in Buying CNN. Brent Crude Hits $70 a Barrel as Trump Ramps Up Iran Threats. AMC Agrees on Amendment With Creditors to Clear Refinancing Path. How the Son of Iran’s Supreme Leader Built a Global Property Empire. Lululemon Blames Customers Again After See-Through Tights Fiasco. First Brands Lenders Weigh Scrapping Firm After a Cleveland Trip.

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