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HomeUPDATE: CIT-go Into Bankruptcy? Yes…and American Taxpayers Likely To Lose $2.3 Billion
Posted by Larry Doyle on November 2nd, 2009 9:08 AM |
Did the American taxpayer unnecessarily take a $2.3 billion hit on financing provided to the now bankrupt entity known as CIT? You bet. It’s only money we don’t have, right? This is also true.
In the midst of so many other dramatic developments on our global economic landscape, people may lose sight of the fact that the handwriting was on the wall ten months ago for this middle market lender. That bankruptcy handwriting was crystallized this past July. I addressed the likelihood in my commentary of July 21st, “CIT-go Into Bankruptcy?”, and posed the following questions at that time:
I thought CIT pulled the rabbit out of the hat in arranging $3 billion in financing yesterday. What happened? Let’s navigate this institution and shed some light where Wall Street may care to keep us in the dark.
> Why is the stock plummeting and why are analysts speculating it may very well file for bankruptcy?
> What did the $3 billion financing accomplish?
> Were certain unsecured creditors just abused by this transaction?
> Are CIT shareholders about to be wiped out?
> Will CIT be a precursor for other lenders to the middle and smaller markets?
Now let’s review the particulars we learn about the prepackaged bankruptcy filed over the weekend by CIT. Bloomberg provides details in CIT’s Bankruptcy May Help Bondholders and Erase Taxpayers Stake:
CIT Group Inc.’s decision to seek court protection probably will keep money flowing to bondholders and 1 million customers of the 101-year-old commercial lender. Shareholders and taxpayers won’t be as fortunate.
CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds. Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.
The question begs as to why the wizards in Washington allowed CIT to convert to a bank-holding company last December in order to receive TARP funds. In my opinion, the lack of discipline displayed by the Washington crowd in this CIT bankruptcy is rampant across a wide number of other situations. Washington neither has the political will nor courage to truly protect taxpayer interests.
I firmly believe CIT will be the first of many bankruptcies in which Washington’s ploy to “extend and pretend” entities which are already toast ultimately cost American taxpayers more in the long haul.
LD
Related Sense on Cents Commentary:
No ‘Get Out of Jail Free’ Card for CIT (July 10, 2009)
Random Thoughts on CIT (July 16, 2009)
CIT Gets ‘Don Corleone Financing’ (July 22, 2009)
Random Thoughts on CIT
Posted by Larry Doyle on July 16th, 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
So What About CIT?
Posted by Larry Doyle on July 15th, 2009 10:20 AM |
Still so many questions on the CIT front. As Bloomberg highlights, CIT Presses U.S. Regulators for Aid to Forestall Cash Crunch:
CIT Group Inc., the small-business lender with $1 billion in bonds maturing next month, pressed for more aid from regulators who are reluctant to use taxpayer funds for a company that may not be a risk to the financial system, people familiar with the matter said.
Treasury officials have indicated in talks that they are reluctant to deploy funds from the $700 billion bank-rescue program, and the Federal Deposit Insurance Corp. continues to balk at debt guarantees, the people said. As of late yesterday, the Federal Reserve was considering granting permission to shift some CIT parent assets to its bank, two people said. That could boost the amount New York-based CIT could borrow from the Fed’s discount window, affording more time to restructure its debt.
The course of the talks may still change, and analysts have pointed to the potential political implications of letting a lender to thousands of borrowers at smaller businesses go bust after bailouts for some of the biggest Wall Street firms. CIT’s case underscores calls for new federal powers to allow an orderly wind-down of a bank holding company.
“CIT represents a difficult policy issue for Washington as there is sentiment to punish the fat cats and greed matched by what potential damage could be done against an economy struggling to regain momentum with all of its possible political fallout,” said Scott MacDonald, head of research at Stamford, Connecticut-based Aladdin Capital Management LLC.
Sameer Gokhale of Keefe Bruyette & Woods discusses possible outcomes on Bloomberg News:
As I questioned last week in my initial post about CIT, “Where do you draw the line?”
LD
No ‘Get Out of Jail Free’ Card for CIT
Posted by Larry Doyle on July 10th, 2009 11:37 AM |
Green shoots? Stop the madness.
Despite all the disguises and shams perpetrated on the American taxpayers to this point, the simple fact is our economy is awash in excessive debt. The inability to refinance debt will be with us for a while. No company is more reflective of this dynamic than CIT.
Who and what is CIT? You should take the time to quickly study this company because it may very well be the linchpin that drops and causes the next leg down in our economy. Are they too big to fail?
From the CIT corporate web site:
CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets. For more than 100 years, CIT has provided lending, advisory, and leasing services to small and middle market businesses guided by unparalleled industry expertise and focus. Headquartered in New York City, CIT is a Fortune 500 company and member of the S&P 500.
CIT operates CIT Bank, a full service Utah state bank, which is regulated by the Utah Department of Financial Institutions and the FDIC.
Deep industry expertise
Operating in more than 50 countries, we have deep expertise across 30 industries. Our areas of expertise are:
Corporate Finance is a top 10 lead arranger for small and middle market level loans (less than $150 million) with more than 3,000 customers. Businesses include Commercial & Industrial, Communications, Media & Entertainment, Energy, Healthcare, Investment Banking Services, and Small Business Lending.
Trade Finance is a leading factoring company in the U.S. with customers in the U.S., Canada, Europe and Asia. CIT factoring services provides funding to thousands of small manufacturers which, in turn, sell to small and large retailers that also rely upon CIT for the flow of goods into their stores.
Transportation Finance is the third largest rail car leasing firm in the U.S. with more than 116,000 railcars and the third largest in aircraft financing worldwide with over 100 commercial airline customers and more than 300 business air customers.
Vendor Finance is the #1 independent leasing company in the U.S. serving more than 500,000 commercial end customers ranging from small businesses to Fortune 500 companies. It maintains customer relationships with a variety of marquee technology and office equipment companies providing trusted business equipment leasing.
Commitment to small business and the middle market for more than 100 years
Since 1908, CIT has driven success by delivering three types of capital to clients. We believe that the combination of relationship capital + intellectual capital + financial capital can yield infinite possibilities for our customers.
Relationship Capital: Our employees and the long-term partnerships they have created with thousands of clients are our biggest asset.
Intellectual Capital: We understand that it takes more than money to help our clients grow and prosper. Our knowledge and ideas, combined with relationship and financial capital ensures client success.
Financial Capital: The funding we provide is critical to our clients’ success.
CIT does have CIT Bank in Utah. Can CIT utilize that vehicle to get government funding or government backstops on debt financings much like Hartford Financial, Lincoln Financial, GMAC, and GE Capital? As of now, CIT has not received a “get out of jail free” card. As Bloomberg reports, FDIC Said to Withhold CIT Debt Guarantees Due to Risk.
If CIT were to fail, there would be a significant ripple effect across our economy. There is no sugarcoating that reality. The fact of the matter is, these are not new developments for CIT. Their predicament is simply a function of the timing of the maturities of their debt. They have plenty of company.
Where do you draw the line?
LD
