Let CIT Fail: The Business Model Is Broken 38 comments
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The FDIC has spoken... and they are unwilling to guarantee CIT Group's (CIT) bond sales. This is an extremely positive step in the recovery process, in my opinion. Broken businesses MUST be allowed to fail.
From Bloomberg:
The Federal Deposit Insurance Corp. is unwilling to guarantee CIT Group Inc.’s bond sales because the commercial lender’s credit quality is worsening, according to people familiar with the regulator’s thinking.
The FDIC, which has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25, is concerned that standing behind CIT debt would put taxpayer money at risk, said the people, who declined to be identified because the application process is private.
Credit Ratings and "Raw Material" Prices
Capital is a lender's raw material. As with any business, if the cost of your raw materials increase, your profitability will suffer (especially if you can't increase prices to offset the increase in costs). This credit crunch has significantly increased the cost of capital for lenders and banks across the board, regardless of credit quality. A lender lives and dies by its credit rating. Their credit rating dictates their cost of capital. Without access to cheap capital the business model breaks down.
CIT has been downgraded to "junk" status by all three credit rating agencies. Their cost of capital has gone through the roof and the FDIC is refusing to lend (no pun intended) a helping hand by guaranteeing their bonds. This is huge problem for CIT because the company has a $2.1 billion credit line maturing in April 2010. If CIT can't refinance this facility (which is looking more unlikely everyday), the company will default and it will set off a downward spiral that may be impossible to recover from.
CIT's Business Model is Broken!
I think that there is virtually no chance that CIT will recover from this. Like most other banks, CIT is paralyzed by the bad assets that are on its books. CIT is a "zombie bank". The company can't continue lending because its cost of capital is too high and it will eventually bleed to death from its deteriorating portfolio.
This is not something that happened overnight. CIT got greedy in the credit boom and they entered into bad reward-to-risk trades. Part of the blame can be attributed to the fact that CIT is a publicly traded company, that is in large part judged by its quarter-over-quarter asset growth. The only way you could grow assets the past few years was to be a market-taker. CIT knew that the risk was mispriced, but they bought it anyway (forbid they would not meet or beat the street's asset growth targets). By looking at a monthly chart (see below), you can see that no one was really fooled. The stock fell off a cliff in mid-2007 and it has never recovered.
CIT is NOT a "Value" Play
If you bought Citigroup (C) and Bank of America (BAC) back in March at $2 or $3, the trade has worked out pretty well for you. However, don't be fooled into thinking that the government is going to continue to support bad banks. The "systemic" risks were definitely mitigated by bailing out the large, "too big to fail" financial institutions... but CIT is not "systemically important" according to the FDIC.
CIT will likely be liquidated and sold off in pieces, but I think the equity is worthless. Don't be fooled, CIT is NOT a value play. If your currently long the stock, I would take your $1.30 and cut your losses...
Disclosure: No positions
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This article has 38 comments:
"The lender [CIT] has reported more than $3 billion of losses in the last eight quarters, faces $10 billion of maturing debt through 2010 and hasn’t had access to the corporate bond market in more than a year, according to data compiled by Bloomberg.
Without the TLGP, CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings."
Source: www.bloomberg.com/apps...
@BPYHO
Trading in CIT with such poor fundamentals is paramount to gambling. I wish you good luck.
"The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system by:
* insuring deposits,
* examining and supervising financial institutions for safety and soundness and consumer protection, and
* managing receiverships."
Does CIT have deposits? Were they supervised by the FDIC before 2009? Bravo for not insuring their debt. There are thousands of small banks paying to boost the FDIC reserve fund and CIT is not deserving. One small step toward responsibility.
So multiple our employee numbers by the tens of thousands of CIT’s customers, who face the possibility of not being able to secure other financing or surviving an interim period, and CIT’s lack of support by the Federal Gov’t will be more devastating than any other bank/financial institutions failure so far.
busdevoffice@yahoo.com (not company's email)
Shrike: GS does not make bad loans? In this case you might be right. One can assume that that GS has collateral against those advances. (or they bought CDS against it). If you are a troubled borrower the last thing you want is to owe money to
GS. They are not nice and will move fast to protect themselves.
This is an interesting case of 'too big to fail'. With $70+ billion of IOUs it is not a small bust up. If CIT goes chapter it will not kill us. This has been in the works for some time. But the absence of CIT as a lender to small business is going to hurt the broad economy.
A decidedly brown shoot....
That Goldman facility is fully secured with investment grade assets which CIT owns. Repeat: it's fully secuured and subject to seizure by Goldman. Don't invest in CIT common just because Goldman made a secure loan to a customer.
______________________...
On Jul 10 09:47 PM shrike wrote:
> Don't schedule the funeral for CIT yet - Goldman Sachs extended a
> $3 billion credit line to them last June and they rarely make loans
> to deadbeats.
The real life observation is that "other banks" are just sitting on free capital from the Treasury, and doing nothing with it. Like you, I have to deal with this inanity in real life.
I would recommend (and I am sure you are already doing this) that you aggresively pursue other lending sources. Good luck. You are doing business in a country that does not help small business.
On Jul 11 08:18 AM American Businessman wrote:
> CIT's failure will cripple many small to medium size businesses.
> I am one of the small (not mom and pop) businesses that CIT finances
> and has for the past 17 years. I understand that like many other
> financial institutions CIT has made poor investments/decisions. However
> financing me and thousands of other businesses like me was not one
> of them. We are responsible for about 100 jobs in the US, the same
> number in Mexico and another 200 or so worldwide.
> So multiple our employee numbers by the tens of thousands of CIT’s
> customers, who face the possibility of not being able to secure other
> financing or surviving an interim period, and CIT’s lack of support
> by the Federal Gov’t will be more devastating than any other bank/financial
> institutions failure so far.
>
> busdevoffice@yahoo.com (not company's email)
From the WSJ: Major Lender Faces Crunch
CIT Hires Bankruptcy Adviser as Payment Looms; Financier to 1 Million Businesses
The USA has the lawyer hoard which is just like the golden hoard in that it is willing to confiscate all wealth in the lands in it's path to feed itself as its size explodes.
The lawyer hoard does the confiscation by taking over all three branches of all USA governments judicial, administrative, and executive. They use these to set up regulations which require vast numbers of consuming but counter-productive government employees. The productive non-government employed members have their taxes raised to pay the hoard. The hoard does not ever stop expanding its tax and regulate demands even as USA businesses fail.
USA businesses are replaced by foreign ones to supply the USA hoard and paid in US$s from an exploding USA money supply. The USA money supply explodes all product prices in USA $'s until only USA government employees and the employees if the remaining USA government created cartels and monopolies can afford the very high pried goods and services available in the USA.
Of course the USA banking cartel will loan the money at 30% to help buy the auto priced at 3 times its cost of production.
Once the USA has lost the good will of all lenders abroad who notice that their collateral is worthless as the loan goes into default
the USA sees its asset values collapse as sales volumes and taxes and everything in the USA collapses.
As the year 2009 by the Christian calender. progresses under the management of the lawyer hoard, good luck to you in this USA collapsing business cycle.
.
lorddarley - You bring up an excellent point. If you're a small business owner that banks with CIT, you should be looking for alternative sources of financing. Even if CIT survives in some form, its cost of capital has permanently increased. CIT will likely look to renegotiate all its financing agreements (at higher rates) when they mature.
I fear for those not proactive.
Welcome Any Advice??
Many thanks
This is a difficult situation that will require constant monitoring over the weekend. Specifically, I would watch for any new information regarding the FDIC decision and also the bond pricing. From the WSJ article mentioned above, “CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full.”
The decision is ultimately your own, but as a risk-averse investor, I would try to look for a more fundamentally sound company that has not retained bankruptcy counsel.
Source: online.wsj.com/article...
Thanks for your constructive advice. I think i have to monitor closely on the current news for latest update.
It's a Catch-22: Effectively, CIT is being starved to death, because on the one hand, middle-market businesses are unable to borrow money from CIT, because its ratings have been cut; and its ability to issue bonds is hampered because the TLGP application has yet to be approved.
However, CIT could easily recover if the perception was that the Fed is going to support it. Its bond would have higher ratings, and it would be able to have access to liquidity.
Apparently, CIT didn't make a sufficient number of political contributions to enable them to be bailed out like the broke banks and investment firms.
NOW Comrade Obama wants to take $700 billion of taxpayer money to ... lend to small businesses through the SBA.
Brilliant!
On Jul 10 03:46 PM BPYHO wrote:
> I agree you definitely dont want to be long but think its a perfect
> trading stock and now is a good time to buy 1-2k of shares. One could
> bank a quick 10-25% profit. Next week the banks will put up better
> #'s then expected and the euphoria should propell this stock to close
> to 2$ regardless of the fundementals of CIT.
On Jul 12 08:41 AM Paul Price wrote:
> CIT has too much risk and should be allowed to fail because it made
> bad/risky loans to small businesses.
>
> NOW Comrade Obama wants to take $700 billion of taxpayer money to
> ... lend to small businesses through the SBA.
>
> Brilliant!
I'm glad the government won't back GS. Unfortunately, I don't think this is due to an etical about face. Rather, I think it is mainly because the FDIC can't even afford to cover the banks anymore.
However saving AIG and not CIT is also, once again, a great demonstration of the arbitrary and capricious nature of government intervention. Perhaps with a dash of corruption and crony favoritism thrown in.
would you look into ZION, i think they are in a bit of a spot also, wouldnt mind an expert like yourself just confirming what i think is bankruptcy within a year.
It would be nice if the GOV/we taxpayers get back apart of the $'s that were pumped into those company's. They played a huge part in destroying our economy and their names should be wiped clean off our public vocabulary.
Apparently, CIT has almost $4 billion of undrawn commitments outstanding. This is a huge problem since the company is having major liquidity issues right now. If weary borrowers all try to draw down at once (out of fear that CIT won't be able to fund), it would exacerbate CIT's issues and it may cause them to seek bankruptcy protection sooner rather than later.
Since banks typically don't have to reserve full capital for undrawn commitments, my guess is that CIT doesn't have $4 billion of availabilty right now. If enough borrowers draw down, CIT will eventually become a defaulting lender and the downward spiral will accelerate...
On Jul 10 09:47 PM shrike wrote:
> Don't schedule the funeral for CIT yet - Goldman Sachs extended a
> $3 billion credit line to them last June and they rarely make loans
> to deadbeats.
The FDIC was created to protect people who have deposited their money into commercial banks. Eventually, if CIT is liquidated by itself under the current mess, it is worth nothing and the FDIC is responsible for the loss of the savers.
On the other hand, why is the Fed doing nothing? The Fed is the lender of the last resort. It should be able to determine whether CIT's problem is a liquidity or a solvency problem. If it is the latter, then the Fed should nationalize CIT just like what Bank of English did to Northern Rock. And then it should clean up CIT's balance sheet, arrange for appropriate actions to help out current debtors and creditors, and eventually liquidate its assets. If it is only a problem of liquidity, the Fed should stand ready to back it up. In the long-run, CIT should be able to stand on its own feet.
Whether CIT is big or not big and whether CIT has a good or bad credit rating is not the key here. Citing the credit ratings of some private credit rating companies simply means that government agencies or quasi-angencies do not want to take any responsibility of their own actions. Don't government agencies have their own accountants, financial analysts, and economists who are capable of doing some research?
Like they say, no good deed goes unpunished.
But, CIT also has the bad luck of being in a very bad place at a very wrong time: The administration needs to prove to an increasingly concerned citizenry that they really are capitalists, and CIT fits the bill as "just big enough to fail".
That will allow more politically connected competitors, like GE Capital, to pick up some of the slack, while providing the administration with the best argument it could have for increasing lending (and another layer of control) through SBA --that the government needs to "help out" now that CIT is gone.
More money for SBA loans just means more opportunity for the government to influence who succeeds and who fails. It means more opportunity for corrupt politicians (Yes, that is now, more than ever, redundant) to make their influence-peddling phone calls on behalf of campaign contributors. And absolutely no time to read the bills they are voting on, as if that matters any more. (By the way, bills are now being passed with more and more "holds" in them-- blank spaces to be filled in after the bill is passed. And Obama, who made a campaign promise that he would not continue with Bush's contemptible "signing statements", is now using signing statements.)
This government is all about getting its hooks into everything it can. Letting CIT go under because they "don't want to risk taxpayer money" is good for a laugh.
Slippery slope, indeed.
I mean, after blowing 700 billion on bail outs (not to mention 600+ billion more on health care....), are we really going to get all stingy with peanuts of 10 bil, and risk disrupting tons of small businesses during the most important part of the year for retail? Small businesses don't deserve any more disruptions caused by fat cat financials and bloated government spending and agendas.
AIG - huge obligations to GS that wouldn't get paid out if AIG failed so they get a bailout
WAMU - no counter party risk, not part owner of the Federal Reserve - bye bye
Wachovia - no counter party risk, not part owner of the Federal Reserve - bye bye
CIT - owes 3 billion to GS but GS is holding collateral so as long as GS can collect even if CIT goes BK they won't get a bailout either IMO
On Jul 13 12:55 AM Arthur Hau wrote:
> Why is the FDIC looking at the credit rating of a bank to determine
> whether to lending money to it?
>
> The FDIC was created to protect people who have deposited their money
> into commercial banks. Eventually, if CIT is liquidated by itself
> under the current mess, it is worth nothing and the FDIC is responsible
> for the loss of the savers.
>
> On the other hand, why is the Fed doing nothing? The Fed is the lender
> of the last resort. It should be able to determine whether CIT's
> problem is a liquidity or a solvency problem. If it is the latter,
> then the Fed should nationalize CIT just like what Bank of English
> did to Northern Rock. And then it should clean up CIT's balance sheet,
> arrange for appropriate actions to help out current debtors and creditors,
> and eventually liquidate its assets. If it is only a problem of liquidity,
> the Fed should stand ready to back it up. In the long-run, CIT should
> be able to stand on its own feet.
>
> Whether CIT is big or not big and whether CIT has a good or bad credit
> rating is not the key here. Citing the credit ratings of some private
> credit rating companies simply means that government agencies or
> quasi-angencies do not want to take any responsibility of their own
> actions. Don't government agencies have their own accountants, financial
> analysts, and economists who are capable of doing some research?