First Brands Bankruptcy Showed a Deeper U.S. Manufacturing Weakness

Last year's bankruptcy of American auto parts maker First Brands Group (FBG) was a major news story in Cleveland, where the company was headquartered and where its loss dealt a heavy economic blow. Yet the story's most significant implication was largely overlooked.

The bankruptcy drew intense scrutiny in the Cleveland area when it triggered more than 1,200 layoffs in the region. Thousands more jobs were lost in the rest of the country.

It is our dwindling manufacturing strength, not just the legal drama surrounding the bankruptcy, that should be the real headline, particularly given the hard lessons COVID-19 taught us about the vulnerability of domestic supply chains.

The story goes well beyond he-said-she-said disputes between the company's creditors and the auditing firms, most notably BDO, that advised them as they evaluated loans in what proved to be a sinking ship.

The larger significance of the First Brands bankruptcy lies in what it reveals about the vulnerability of American industrial independence. That factor is something government leaders of all political stripes, from Donald Trump to Elizabeth Warren, correctly characterize as key to our national security.

Beijing is savoring FBG's demise, particularly since North American auto parts manufacturing has long been a barrier to China's own industrial ambitions. At its peak, First Brands served as an anchor for the domestic automotive supply chain. Roughly 22 percent of aftermarket automotive parts had been manufactured in North America before FBG's bankruptcy. Following the company's collapse, that share has collapsed to less than half that amount.

Why did it happen? Simply put, major financial institutions issued loans with inherent risks that they either failed to recognize or chose to ignore. Where have we heard that tale before?

While multinational manufacturers like FBG are hardly comparable to naïvely first-time homebuyers, the story's parallels to the 2008-2009 home mortgage crisis cannot be dismissed. The underlying dynamic is the same: borrowers seeking capital, lenders chasing returns, and incentives rewarding decisions fraught with risk. In other words, a classic formula for system collapse.

FBG's bankruptcy was neither a routine market failure nor an easily explained case that turns on corporate fraud. Court filings indicate that the company's downfall was actively accelerated by ever-opportunistic Wall Street lenders who structured nontraditional loans with restrictive provisions that left the borrower little room to navigate through the thicket of an intensely competitive market.

Lenders such as Evolution, Onset, Aequum, and CarVal had full contractual rights to perform site audits and physically inspect FBG's inventory. These are sophisticated financial institutions that earned substantial returns while assuming responsibility for monitoring the company's condition. When their investments soured, however, they immediately moved to protect themselves from their own bad bets.

In another all-too-familiar aspect of the story, the ultimate victims were rank-and-file factory workers in places like Ohio, Indiana, Texas, and California. After making massive profits from complex financial agreements, lenders leveled accusations against FBG founder Patrick James when the company struggled to keep up with payments and stay afloat amid a broad economic downturn.

Equally striking is how federal law enforcement brought its heavy hand to the case. According to court filings, lawyers representing financial creditors spent an estimated 1,500 hours helping the government prepare a criminal case against James. Adding to the heavy-handedness, prosecutors then moved to freeze civil discovery, effectively blocking James from using the courts to subpoena corporate records and obtain the exculpatory evidence needed to prove his innocence.

More broadly, FBG's failure represents the latest chapter in the decline of American manufacturing capacity, and a troubling case study in a self-inflicted wound. The story illustrates what happens when Wall Street's short-term financial interests collide with Main Street's industrial base, opening the door for China to step in and shore up its own manufacturing dominance in a strategically vital sector that keeps American cars and trucks on the road.

Washington would do well to focus equal attention on how high-risk financial structures and governmental overreach undermine domestic manufacturing, rather than watching critical industrial capacity slip away to foreign competitors.