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Random Thoughts on CIT

Posted by Larry Doyle on July 16, 2009 4:25 AM |

What are the ramifications of CIT going into bankruptcy? Will it hurt our economy? Will businesses suffer? Will there be a ripple effect? Will credit be available? Are there unintended consequences? Are there any outfits who benefit from CIT’s bankruptcy?

Bloomberg reports, U.S. Cites ‘High Threshold’ for Aid as CIT Denied Assistance.

As I think this situation over, I am compelled to shed further light on this institution.

1. Just what exactly was CIT’s niche and role in the economy? CIT provides an overview of The Vital Role of CIT.

2. Will the economy suffer if CIT declares bankruptcy? Of course. Anytime an outfit the size of CIT goes under, it hurts. CIT is a 100 year old company with deep and longstanding relationships well developed over time. Those relationships and financial exposures are not recovered immediately.

3. What business lines did CIT have? CIT Businesses include: corporate finance, trade finance, transportation finance, vendor finance, CIT Bank, Insurance Services.

Additionally, my instincts tell me the following:

1. Looking at that lineup of businesses, what other companies have these same business lines? GE Capital, Bank of America, Citigroup, AIG. Other commercial banks and insurance companies have them as well, but my point is that companies with significant support from Uncle Sam should actually benefit from CIT’s downfall. Don’t think for a second that Washington has not been talking to these companies telling them to immediately engage traditional CIT customers.

From a similar standpoint, who benefitted from the downfall of Bear, Lehman, and Merrill Lynch? None other than Goldman Sachs and JP Morgan simply due to lessened competition.

If and when CIT fails, and other financing outlets as well, I think it is highly likely that firms currently ‘too big to fail’ will only get bigger. What does that mean for our future economic landscape?  This scenario with CIT is likely to play out with plenty of other smaller financing firms as well.

In layman’s terms, do the ‘too big to fail firms’ have all the leverage, literally and figuratively?

2. It is not widely broadcasted, but CIT had gotten involved in sub-prime financing over the last 4-5 years. They were certainly not one of the larger players but their presence is just another indication of how companies were chasing profits wherever possible.

3. Who within the government would have borne the brunt of losses from CIT if Uncle Sam had chosen to backstop the company? Sheila Bair and the FDIC. Sheila has been picking and choosing her spots with her support knowing that there are plenty more banking institutions poised to fail.

4. Does Uncle Sam have any exposure currently to CIT? Yes. CIT Bank, formed last year, was provided $2+ billion in TARP funds. In a bankruptcy proceeding, the taxpayer will likely only get a return of some small percentage of that money.

5. Is this a win for capitalism? Yes and no. Yes, if in fact the playing field was currently level. No, from the standpoint that the playing field is not level.

I have very mixed feelings. On one hand, I am not in favor of bailouts. On the other hand, how do companies compete with other institutions flush with Uncle Sam’s cash and backing?

Thoughts and comments always welcome.

LD

  • coe

    LD – Do you mind if I toss a few more random thoughts into the mix?
    Just what exactly seems to be going on here? I submit that the credit exposures embedded in the balance sheets of the banks and of the finance companies, like CIT, have outraced the liquidity concerns as public enemy #1…not because liquidity isn’t a real challenge, but only because the administration has flooded the markets with a slew of assistance programs to prime the liquidity pump…yet there is no real health to the financing markets in the traditional sense of how they operated over the past several decades…why is that? even as the politicians jawbone the banks to get back to the business of lending, the regulators and examiners are slapping them with speeding tickets (MOUs/C&Ds) and requiring them to raise capital, stop making marginal loans by tightening credit and raising pricing (a la the credit card banks move to variable rates) so that any new business doesn’t make a bad situation worse..you rightly have pointed out that there might be as much as another $2T+ of unrecognized losses buried on the FIG balance sheets (some “credit” goes to FASB for offering up an accounting loophole, by the way) – think consumer, commercial, residential, and yes CIT, small business loans – so the point is that we are far from out of the woods..and let’s not forget the structural tools that fueled the phenomenal growth and profitability of the financial system – leverage and securitization – are pretty much still rusted shut…

    Think about it – everywhere we turn we have people who frankly ought to know better layering program after program on the backs of the American taxpayer – and do you want to try something else on for size – to your point that the ironic beneficiaries are those same mega-sized institutions that are already getting the government aid – Citi/Bank of America et al – these very same companies are enormously advantaged by a slimmed down playing field, and one that is skewed to their success…keep an eye, though, on the likelihood of additional inconsistencies playing out on the political scene – did I just see where Bair and Bernanke are possibly trying to tax the big banks with large risk-taking investment banking activities? What I think we really could use now is a map of all the programs, all the acronyms and alphabet soup defined, and a clear and concise editorial note on the money involved, how things interact, and the likely winners and losers…sounds silly to even say it, but there is enough material here for a syllabus for a graduate course in business, and most of us need things broken down to the elementary school level…help!!!

  • fiscalliberal

    So – do I understand it correctly that if CIT goes into bankrupcy, will they not be absorbed into another bank.

    How is that the end of the world. I fact it is kind of refreshing that we get back to regular business.

    More over – what part of their business model caused the failure? Can we learn from it?

    That is the role of expeience – give the test first and th elesson afterwords

  • Larry Doyle

    Fiscal….It may very well be that CIT ends up being split into parts with different lines of business purchased by different entities as opposed to the entire firm being absorbed by one entity.

    CIT could not roll their debt (financing) much like Bear and Lehman. Why? One can only assume that whomever would lend to CIT has to believe CIT’s outstanding loans will suffer a heightened level of defaults forcing CIT to take significant losses in the process.

  • Aaron kramer

    I think CIT going out of business is great and will provide ample opportunity for JP Morgan and B of A to issue new loans.

    • Aaron kramer

      But only to the politically connected customers the rest will have any and all credit lines cut forever.

  • Larry Doyle

    Aaron….I think what we are seeing is that we are now “on the other side of the mountain” so to speak.

    Not a level playing field at all and not unlike the NCAA basketball tournament, the approach for everybody, individual consumers and corporations alike, is….’survive and move on.’

  • Aaron kramer

    LD I whole heartedly agree. There are clearly going to be some big winners in this scenario and being consumed with anger at what is happening will blind you to the opportunities that exist. This is not to say that you will be able to enjoy anything you earn but I guess we will have to worry about that another day.

  • fiscalliberal

    Aaron – in general I agree with your thesis of move on. In the farming community, for every bankrupcy auction, there are willing buyers. People moved on.

    However there were lessons learned. At the Financial Services committee meeting yesterday, the financial industry was commenting on the new regulations. They overwhelimingly wanted to continue on as is, like there was no financial crisis.

    The fact of the matter, is that regulaters did not do their job and changes need to be made. As in the business community, lessons need to be learned. More over the current financial structure of shadow banking, with high leverage for loans fraudulently written is unsustainable.

    • Aaron kramer

      I not saying that we shouldn’t apply the knowledge that has been gained in many areas. I agree that the financial community is going back to its old bag of tricks. The regulators did not fail us independently but with help from the political class. The rating firms are a prime example of this. These firms enjoyed a monopoly/oligopoly guaranteed by Congress. Congress passed legislation that created barriers to entry and forced these firms to rate CDS and CDO securities, so Wall St could gain access to the lucrative pension fund allocations that legally required investment grade ratings.

      I think the down turn has yet to play out completely, but that said it is clear that the government will allow certain entities to enjoy and benefit from “Favored Status.” If you properly identify these corporations than you can make a mint. As said earlier I just don’t know if the government will let us keep it, because as an individuals we are not holders of “Favored Status.”

  • gregory orr

    Hi Larry,
    Was thinking about the loss of CIT, in view of the long-term trend towards tv/internet retail, and those impacts on sidewalk retail, and the commercial real estate market…Any thoughts?
    G.

  • Larry Doyle

    I think CIT is more a reflection of the problems within the credit industry than an actual source of those problems.

    While there will be short term anxieties for a number of these companies, the fact is there have already been enormous anxieties already. Who will step in to pick up some of the credit opportunities? Well run and well managed community/regional banks as well as the larger banks. They will only lend, though, to entities which are well managed and well capitalized themselves.

    For our economy as a whole, CIT will be viewed as a blip on our path to the newly structured economy.

    Not trying to be cold to those directly connected to this situation but viewing it from a macro standpoint.

    • Aaron kramer

      Your right Ld when you say someone will fills CITs shoes. GE capital is going to make a killing but I wouldn’t call them well run or well managed but part of the “Favored Class.”

  • Larry Doyle

    Good point…






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