CIT Prepares to File for Bankruptcy 27 comments
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The WSJ reporting that CIT, the lender to over 1 million small sized businesses, has hired Skadden Arps in preparation of a bankruptcy filing. The formerly largest competitor to GE Capital (GE) for any and every semi- and fully-toxic loan imaginable, has been so far outright denied a bailout by an administration that has rarely professed a non-socialist approach to corporate demise.
Unfortunately for the company, whose new HQ office lobby on 42nd Street looks more like a club out of meatpacking flashing either a blue or deep purple colored decor, may be Obama's first Guinea pig in financial failure since Lehman.
CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.
CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.
A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners andclothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. 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. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.
According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.
If "run into problems" isn't the most greenshoot colored euphemism for a virtual halt in credit line access for small and medium corporations (that nobody really even wants now in the first place), I don't know what is. However, as in the Lehman failure, the CIT bankruptcy will merely expose the thousands of unintended consequences that the government, in its newly minted centralized planning role, has no possible way of fully evaluating, and the pain could likely be as pervasive and acute as last September.
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This article has 27 comments:
With all the billions of bailout cash being held by other banks, pressure needs to be applied to these banks to ensure that the small businesses can get their operating loans.
Another step in the demise that those that will be asked to pay the most are all but ignoring.
The major banks are calling in loans from performing small businesses based on financials, now the intentionally bankrupted have one less place to turn.
Which is exactly what the money brokers, and their toadies in Washington, want. Apparently CIT and its owners did not make enough campaign contributions--or horror, contributed to McCain and co.
Sad days and apathy and corruption loom.
If the goal of balilout mania is to save jobs, then why is the government intentionally bankrupting the small & mid sized businesses?
The bankruptcies of major corporations are gutting these companies. Suppliers are heavily leveraged and now will never be paid AND their business yanked away and sent (more and more) off shore.
We need jobs. Saving 500 small companies would save more jobs (and homes & credit card debt, not to mention the retailers and health care/insurance) In this never ending open-checkbook from Washington, by policy they are gutting millions of jobs by forcing big company bankruptcies on them when sales are the lowest.
We are saving a handful of very lucky employees, then orchestrating the destruction of millions of jobs by off shoring, importing and loss due to bankruptcy and/or finance and debt.
Those that haven't been hit yet are the ones most screaming "kill the small business," soon they will figure out that the small businesses were their best customers--or their customers' best customers.
Apathy, it is the final step before annihilation.
This will hurt small businesses, like mine, that hires 300 people in a small town.
Was it just a terrible ACCIDENT that CIT got into the position its in today? Are we to mourn its poor business practices, its poor underwriting, its denial about the devastation of its own balance sheet until it was too late?
Hopefully the FDIC is also well into planning on how to take CIT down in a controlled, managed burn, at least more controlled than LEH anyway.
I'm sorry, but this denial crap has to stop somewhere, and if people like Ms. LaVelle STILL don't get that we are so freaking oversupplied with unnecessary, underutilized STUFF, then maybe a failure of CIT is just what Darwin had in mind :
"A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands,"
That's just what we need - Dunkin Donuts expanding their "network," whatever a freaking donut chain needs in possessing a "network". Drive through every small and medium sized town in the northeast - there are as many Dunkin Donuts on street corners as there are underutilized CVS/Walgreens, oil/tire changers, bank branch offices, etc etc. etc. I know one town 30 miles west of Boston with a population of 35,000 that when I was last there two years ago had 9 or 10 Dunkin Donuts in it... that's about one every two square miles! I'll bet they have at least that many today in their "network."
This is simply unneeded, excess capacity that is totally out of control and STILL the denial aisle crowd just don't get it. People can't drive an extra 3 minutes to get to a freaking Dunkin Donuts, they have to have one in every square mile radius???? Try walking people, and maybe you can drop some of the 60 pounds of excess lard YOU carry around before you shovel a couple of creme filled time bombs into your face.
Dunkin Donuts needs to expand its "network."
Give me a BREAK!
I would gladly trade bailing them out and letting AIG go belly up. Same with all the banks going under now. I'll take them all and put them under my wing in exchange for Citibank. Doing so will have saved the US tens of billions, if not hundereds when all is said and done.
At least we are learning from our mistakes, mainly because we are finding it impossible to issue any more treasury notes for another round of financial fiascoes.
Revisionist history or mere stupidity?
I remember when RCA first took it over. Their management demanded a 15% growth in every important statistic: sales, assets, and income. It's as if they never heard of 'business cycles'.
Almost overnight, CIT went from a 'down in the trenches' shirtsleeve credit operation to a dark-blue suited (pin stripes preferred), gold cuff links, Gucci shoe operation. It was like oil and vinegar. Eventually, 'growth for growth's' sake dominated, to the demise of the company.
When lending institutions go under, it's usually because of poor credit decisions and a distension of balance sheet debt equity ratios. Granted, if executive management balked at keeping up with the growth of other financial institutions, they probably would have been fired and their company trashed by Wall Street analysts. Pax America.
Sooner or later, the chickens come home to roost as they have during the past two years. And the United States government's mantra to all this is become, "they're too large to fail". But in truth, as history amply demonstrates, "they may just be too large to succeed".
Yes, many businesses we'll be scrambling for a new lender, but that is not a taxpayer problems. Those companies should have known for months if not longer that CIT was not going to be a reliable source of credit in the future. As a result, they should have either been looking for another lender or cutting back on borrowing as much as possible.
People need to understand the capitalism offers risks and rewards. We cannot backstop every lender out there. I am not sure what happens when the FDIC step into a bank and there is an outstanding borrower. I presume that if another institution takes over the collapsed bank, they do not guarantee credit availability to exist borrowers for an indefinite period of time. Why should this case be any different?
On Jul 12 10:54 AM superbee wrote:
> This will Kill small business, for example the furniture market runs
> on CIT credit. If you wanted to have as many people as possible lose
> their jobs and have a domino effect this is the very best way.<br/>
>
> This will hurt small businesses, like mine, that hires 300 people
> in a small town.
>
Sure, CIT has some problems, like most lenders. CIT's major problem is that they have a large short-term debt maturity that needs to be refunded. So, what's the plan?
It's the usual. CIT is just the latest victim of a concerted effort to short the company out of existence by generating enough fear and misinformation that no private lender is willing to bet on the company, and even the Feds remain paralyzed, either out of uncertainty or complicity (more later).
Here's a quiz for those who think this company is an unmitigated disaster:
Question: How many years in the last five has CIT suffered negative cash flow?
Answer:Zero
As with many other financial firms, most of the red ink appearing on CIT reports is paper writedowns, not actual lending defaults. So, the cash flow keeps rolling in.
But, the shorts and CDS traders know that if they can create enough hysteria, loud enough and for long enough, CIT debt maturities will come due, and the company will collapse, as its terrified lenders refuse to extend new credit.
But, what about Uncle Sam? Didn't they allow CIT to become a bank holding company so that it could participate in various government programs? This is where the supreme irony comes in.
Yes, they are a bank holding company, under the FDIC. But, the FDIC has confiscatory powers that far exceed the dangers that might face a normal operating company in trouble. The FDIC has draconian takeover powers (see the list of bank takeovers, including Wachovia and Washington Mutual), which permit them to step in at a moment's notice, confiscate assets and deposits and to "resell" these to other "favored" instiutions.
The net effect, therefore, of having the FDIC as one's potential "savior" is that nobody else will go near CIT because the FDIC could pull the rug out at any moment, without warning, and distribute CIT's assets to other firms under sweetheart terms of its own choosing.
So, now, the question seems to be whether the FDIC follows through to assist CIT, as they seemed to favor when CIT was approved as a bank holding company, or whether the FDIC now wishes to break up CIT's various operations and sell them off to the FDIC's "buddies," who would love to get CIT operations on the cheap.
The one thing that won't happen, no matter how this plays out, is the disappearance of vehicles to fund various small businesses. They'll just be transfered to new ownership, more favored by the government powerbokers and insiders.
Excellent comment! You hit the nail on the head, as did several other commenters. The administration & Congress have debts of their own to pay and they have used taxpayer money to do it with in the first round. But now that taxpayers are beginning to question the wisdom of piling up so much debt, those in power have switched to strategy B; to wit, they can use the power of the FDIC to starve small and medium financial institutions into bankruptcy, seize their assets, then sell them off to their favored "to-big-to-fail" buddies.
Remember one thing: the people on Wall Street are very smart and can can not only create derivative investment vehicles that are next to impossible to understand, but they can also develop strategies to manipulate whole industries and markets if given the leeway to do so. They will use the government's own rules to their own benefit if the opportunity unveils itself. They are, I fear, smarter than our elected representatives.
Ambition lies in greed. Defeating the competition, gaining market share, improving their balance sheets at the expense of those companies who are not part of the network; these are worthy goals in their eyes.
Okay. Okay. I'm sorry. That was a bit over the top. But just think what a great movie this could all make someday, true or not!
On Jul 12 10:51 AM User 445849 wrote:
> Mr Durden-- What are your qualifications for writing investment articles?
> What is the rate of return on your portfolio over the past 1, 3,
> 5 years?
2. Many small businesses go down.
3. Lease payments stop.
4. Commercial property values drop.
5. Lenders refuse to roll over commercial mortgages on declining value property.
6. Bankruptcy and massive foreclosures hit many commercial property owners/developers.
7. Regional banks that made these loans die by the hundreds.
Do you really want to start down this path? Or are we already so far down the commercial property dead end road that it makes no different whether we save CIT or not?
Indicated action to take -- short IYR.
Crappy job, but now they are gonna staple CIT.
On Jul 12 10:59 PM secmaven wrote:
> 1. CIT goes down.
> 2. Many small businesses go down.
> 3. Lease payments stop.
> 4. Commercial property values drop.
> 5. Lenders refuse to roll over commercial mortgages on declining
> value property.
> 6. Bankruptcy and massive foreclosures hit many commercial property
> owners/developers.
> 7. Regional banks that made these loans die by the hundreds.
>
> Do you really want to start down this path? Or are we already so
> far down the commercial property dead end road that it makes no different
> whether we save CIT or not?
>
> Indicated action to take -- short IYR.
Right or wrong, it's certainly the "Left" thing to do, so I'm pretty sure Obama is going to try to push for a CIT bail out. He might even put an infomercial on ABC explaining how important it is to help small businesses and the jobs they create.
On Jul 12 10:51 AM User 445849 wrote:
> Mr Durden-- What are your qualifications for writing investment articles?
> What is the rate of return on your portfolio over the past 1, 3,
> 5 years?
Hind-sight is 20/20 but clearly the FED should not have allowed CIT to form a bank holdco earlier this year. The FDIC may have not had much clout then but the game has changed. Sheila calls the shots now and she is putting her foot down. Again, as it stands the FDIC is on the hook for the assets of the bank and only the bank. The assets of the hold co are subject to a bankruptcy trustee. I am not sure what Fed liquidity facilities CIT has tapped but that is the Fed's problem. TARP which was also at the hold co level, is the Treasury's problem. The FDIC is only responsible for assets at the hold co level if it chooses to back the holdco senior debt.
Sheila is looking at the docket of undercapitalized banks, the dwindling insurance fund, the list of calls from banks pissed off at the increased FDIC assessment and is saying 'no mas.' They are very good at disposing traditional bank assets but CIT has many assets that are not in the FDIC's wheelhouse. And throw in the fact they are understaffed from years of hiring public accounting dropouts.
On Jul 12 07:41 PM Tack wrote:
> The same old game goes on and on.
>
> Sure, CIT has some problems, like most lenders. CIT's major problem
> is that they have a large short-term debt maturity that needs to
> be refunded. So, what's the plan?
>
> It's the usual. CIT is just the latest victim of a concerted effort
> to short the company out of existence by generating enough fear and
> misinformation that no private lender is willing to bet on the company,
> and even the Feds remain paralyzed, either out of uncertainty or
> complicity (more later).
>
> Here's a quiz for those who think this company is an unmitigated
> disaster:
>
> Question: How many years in the last five has CIT suffered negative
> cash flow?
> Answer:Zero
>
> As with many other financial firms, most of the red ink appearing
> on CIT reports is paper writedowns, not actual lending defaults.
> So, the cash flow keeps rolling in.
>
> But, the shorts and CDS traders know that if they can create enough
> hysteria, loud enough and for long enough, CIT debt maturities will
> come due, and the company will collapse, as its terrified lenders
> refuse to extend new credit.
>
> But, what about Uncle Sam? Didn't they allow CIT to become a bank
> holding company so that it could participate in various government
> programs? This is where the supreme irony comes in.
>
> Yes, they are a bank holding company, under the FDIC. But, the FDIC
> has confiscatory powers that far exceed the dangers that might face
> a normal operating company in trouble. The FDIC has draconian takeover
> powers (see the list of bank takeovers, including Wachovia and Washington
> Mutual), which permit them to step in at a moment's notice, confiscate
> assets and deposits and to "resell" these to other "favored" instiutions.
>
>
> The net effect, therefore, of having the FDIC as one's potential
> "savior" is that nobody else will go near CIT because the FDIC could
> pull the rug out at any moment, without warning, and distribute CIT's
> assets to other firms under sweetheart terms of its own choosing.
>
>
> So, now, the question seems to be whether the FDIC follows through
> to assist CIT, as they seemed to favor when CIT was approved as a
> bank holding company, or whether the FDIC now wishes to break up
> CIT's various operations and sell them off to the FDIC's "buddies,"
> who would love to get CIT operations on the cheap.
>
> The one thing that won't happen, no matter how this plays out, is
> the disappearance of vehicles to fund various small businesses.
> They'll just be transfered to new ownership, more favored by the
> government powerbokers and insiders.
"Touch sh*t" for a few can be even tougher sh*t later for everyone. CIT greases transactions between retailers and small companies. Competitors don't have enough cash or infrastructure to immediately soak up all of CIT's customers. So there will be a temporary (or longer) disruption in retail if CIT fails. Back-to-school and holiday shopping are coming up, and retail is already beaten up, so they can't really handle a disruption, and probably neither can our consumer-based economy. If you want let CIT fail in 2011, ok fine. But let's at least delay it.
On Jul 12 07:29PM C. Fischer wrote:
> Tough sh*t. Your lender is insolvent. Find a new one, if your business
> is viable. It's not my job (as a taxpayer) to help you.
To wpdragon:
While I think I understand the premise of your comment, the bashing of Dunkin Donuts was a tad unnecessary. The Starbucks downtown, big city model is probably not a good idea for any company (Starbucks is, I guess, the exception). But don't judge a company's need to expand and grow it's market share on the basis of your perspective in the Northeast. I can tell you that when you get farther into the Mid-West and Southeast, there are ample opportunities for a company like that to grow outside the canabalistic model in cities.