Should CIT Be Saved? I Think Not 12 comments
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The current dustup over CIT will tell us a lot about the intentions of the Treasury with respect to the banking 
industry.
If you aren’t familiar with the story, CIT (CIT) converted to a bank holding company last year in order to qualify for TARP funds and the other goodies that supposedly come with that Charter. It got about $2.3 billion of TARP funds but the other plum it had its eyes on was participation in the Temporary Liquidity Guarantee Program. This is the program under which the FDIC guarantees the debt of the issuing financial institution. It was heavily used by the banks at the height of the crisis to raise new debt as a means of shoring up their capital ratios.
The FDIC isn’t turning out to be quite so generous with its guarantees as the Treasury was with its TARP grants. So far, they haven’t seen fit to agree to guarantee any debt under the TLGP on the understandable grounds that they’re concerned about CIT’s ability to pay back the money. I know it’s hard to believe someone’s actually thinking about piddling details like that! So for the time being CIT is having to content itself with ramping up pressure through back channels in order to get the FDIC to play ball.
Oh, I forgot to add one little detail or actually two. CIT lost $500 million in the first quarter and they have a cool $10 billion of debt maturing through 2010. Those are pretty good reasons to be worried about the credit risk.
So, that brings us to the point. Should CIT be saved? It’s not systemically important, commercial finance companies have historically failed fairly regularly with no substantial adverse effects on the economy and there aren’t a substantial number of insured deposits at risk. Where is the logic of putting more money at risk? True we’re already on the hook for $2.3 billion but does that justify throwing more money at the company.
We can’t save everybody, nor should we. Failure is difficult but it’s also a means of culling out the weakest players. It seems as if CIT fits that bill. Truth be told, it should probably never have been granted bank holding company status and in calmer times with cooler heads prevailing probably wouldn’t have had its application approved. The Treasury should have exercised more due diligence in handing out the money but that’s water under the bridge now. Guaranteeing CIT’s debt looks like a case of throwing good money after bad. Hopefully, the FDIC will pass on this opportunity.
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This article has 12 comments:
CIT has not done anything wrong regarding lending or portfolios and much of its demise is simply from media frenzy and envy. I stand behind CIT and will continue to purchase it's stock. See me in a couple of years.
CIT has been around for a long time, so it has been around the block a few times and has survived many "parent" companies which purchased it, and then spun it back out. The most recent was TYCO. While I am not an economic guru, I fortold the calamity I thought was coming and was right, but CIT was able to split from troubled TYCO (or more accurately Kozlowski) and true to form survived that.
CIT has been responsible and has not done anything wrong regarding lending or portfolios (but there was that Student Loan issue) and I believe that much of its demise is simply from media frenzy (as in the above article) and envy. I stand behind CIT and will continue to purchase it's stock. See me in a couple of years.
www.SoberLook.com
Not having CIT in the picture means that access to business loans, the foundation of entrepreneurship and capitalism, will be increasingly hard to come by.
Not to sound the gong of doom, but a CIT bankruptcy would send the economy into a significantly deeper recession: if the initial worry was that the credit markets had seized up, imagine the panic that will come when business owners are unable get financing to keep their companies running; when we have more failures like what's going on with Dunkin Donut franchisers, pushing more workers into unemployment.
CIT needs to be saved -- if GMAC was given approval for the TLGP, so should CIT!
A CIT bankruptcy doesn't mean that the financing they extend to small businesses will vanish. It will be a Chapter ll which means they will continue to function. No small business owner will be thrown out in the street.
At some point we have to start letting the free market function. There may be a risk but we have to let the weak companies go down, restructure in bankruptcy and emerge hopefully in a more competitive format. Now is a good a time as any to give it a try. CIT's demise will not take down the economy.
On Jul 11 11:16 PM Lefly wrote:
> Except, of course, that CIT was the #1 lender to small-to-medium-sized
> businesses in the US, according to the SBA -- the kind that make
> up the majority of employment in the economy, and account for over
> half of the non-farm GDP.
>
> Not having CIT in the picture means that access to business loans,
> the foundation of entrepreneurship and capitalism, will be increasingly
> hard to come by.
>
> Not to sound the gong of doom, but a CIT bankruptcy would send the
> economy into a significantly deeper recession: if the initial worry
> was that the credit markets had seized up, imagine the panic that
> will come when business owners are unable get financing to keep their
> companies running; when we have more failures like what's going on
> with Dunkin Donut franchisers, pushing more workers into unemployment.
>
>
> CIT needs to be saved -- if GMAC was given approval for the TLGP,
> so should CIT!
Namely, the credit lines which have been established will freeze during bankruptcy. Small businesses need operating capital the same as large companies do. There are almost 1 million small businesses that rely on CIT with established credit lines to purchase raw materials and inventory to produce a product or services. It would not be unreasonable to estimate that several thousand of businesses out of a million could run into problems themselves or even its own bankruptcy if CIT fails.
It's preposterous to save the fat cats on Wall Street while the small business owner with several hundred employees could end up in the unemployment line. A Small Business is considered to be a net profit of $6 million or less for 2 preceding years - that takes in a lot of companies such as Baskin & Robins for example. CIT is the No. 1 lender to SBA and such would produce a large gap. Small Businesses also pay a larger share in taxes than large corporation per IRS -- do your research. Also 40% of large companies don't pay any. Read your IRS pages and there is always Google to find data.
I don't agree with bailouts but there must be a level playing field otherwise the system is corrupt and looses respect, and therewith future taxes not to mention loses to 401K`s and investors who in the past seeked bonds for safety and stability.
With attitudes that its OK to bail out those that caused this mess, the fat cats, but not Main Street we might as well teach each other and our younger generation how to milk the system. Yes, I know quite a few that do, managing rentals. Have your rent paid for 90%, food stamps, welfare payments, and let the consumer contribute to their utility bills. That 25 year old Lady I talked to this morning was heading to the beach while I worked my as*s off -- but that is what this country is coming to when our leaders are corrupt themselves then they teach corruption by example.
On Jul 11 12:13 AM BPYHO wrote:
> Im buying, At least today I bought 2k shares. Bank #'s well be better
> than expected and it should enjoy a nice bump up.... Look forward
> to selling when it gets back to 1.8 next week