What CIT's Troubles Really Mean

By Bob O'Brien

CIT Group (CIT), a lender to small and mid-size companies, is having some real financial difficulties and may soon be filing for bankruptcy. Although CIT does not compare in size to Lehman or some of the other Wall Street giants that have had problems since the credit crisis, it is significant because it is just one more broken link between Wall Street and Main Street.

What are the other links between Main Street and Wall Street that have been broken? Obviously residential mortgages, which have been at the forefront of the economic disaster, have been decimated. In addition, there has been a huge disconnect with credit cards, with historical defaults piling up and a projected default rate of nearly 25% by the end of the year.

CIT is different in many ways in the sense that it helps create jobs, by lending to small businesses in which 70% of all the jobs are created.

The biggest driver of credit card defaults has been people losing their jobs, and when their employers (small businesses) are defaulting on their loans and not able to acquire credit, where does this really leave us in the credit crunch?

Things have gotten better, but this is just another sign of the challenging times still ahead.

In the end the Government will have no choice but to bailout CIT, due to the fact that letting it fail would be like cutting off their own nose to spite the face. This is just another reminder as to how fundamentally bad the entire financial system is right now, and the long road it faces toward recovery.

We may see financials rally again on speculation, as we start another cycle of Financials and Techs doing well to the point that heavy inflation becomes a real threat which drives up commodity prices like oil.

Original article

Comments

[Dave Wrixon:]

What this means is you cannot brush water under the carpet because it just oozes back out again.

Jul 15 07:47 AM

[Top Gun:]

These guys must be allowed to fail if we are to have any hope of credibility left for our system.

Jul 15 08:12 AM

[whidbey:]

A symptom, not the cause. Saving Citi is of little or no benefit to anyone since it is fatally hollow and has no prospects but the government, if FIDC has the money to take it on.

Another Zombie gets another breath of life, but in the end it will liquidate, just a question of what will it cost to get there.

Jul 15 08:37 AM

[john s. gordon:]

CIT failure @ this point in time is not an option.
> jack

Jul 15 08:43 AM

[Zee4Money:]

The wall street to main street connection is the key point. The government can't allow a sudden disruption of lending to small and mid sized business with the unemployment rate hovering at 10%. The economy and financial system are not able to absorb this blow without creating another set back. The request to move assets to the bank is not an unreasonable step to secure access to the fed discount window. With access to low interest money CIT has a chance of getting out of its hole due to the step learning curve and the associated higher earnings. The economy must stabilize for lending to become profitable.

Jul 15 09:06 AM

[CTfsconsultant:]

One answer: GS...check FT.com form yesterday, ""a failure at CIT could result in losses for Goldman Sachs and Wells Fargo," which both agreed to provide financing for the company last year."

Enough said.

Jul 15 09:15 AM

[The Geoffster:]

What I'm hearing is, "When capitalism fails, socialism must step in." This nonsense has been with us since the last depression and' aside from creating a permanent underclass and exploding deficits, socialism has done nothing to advance liberty or prosperity. We are now witnessing the championing of the unproductive classes at the expense of the productive, job producing sector as though the USA were an oppressive feudal dictatorship instead of the land of opportunity. Inner city schools controlled by teachers' unions and corrupt school boards are keeping our children ignorant and poor so that government largess is their only hope. The rich are getting richer for the simple reason that they are better educated. The socialist are the oppressor class.

Jul 15 09:20 AM

[Hal.P.:]

What makes you think the government won't cut it's nose off to spite it's face? It does that all the time. Of course anymore it seems the noses it prefers to cut have been the American public.

Jul 15 09:29 AM

[Gregman2:]

CIT is failing because the small and mid-sized businesses they finance are having trouble servicing their debt...bacause the consumer isn't buying. CIT is suffering from a collapse in revenues.
When will policy makers take the clue...that until purchasing power is restored we're on the way down?

Jul 15 12:56 PM

[Soonersavvy:]

If some small and medium sized businesses are failing due to debt cost, then they are being revealed as marginal and must be liquidated. Why did this happen? Federal Reserve credit expansion in the past distorted markets and elicited boom, i.e., subsidized entrepreneurs. Solution? Abolish the Fed and return to sound money anchored on gold. What about the government's debt? Government (politicians' cartel) is the largest and most marginal entrepreneur of all. Government needs to be largely liquidated. What can the sound entrepreneurs do in the meanwhile? Buy gold and silver or other commodities and resist further taxes and public debt so you can restart society with a free market.

Jul 15 05:34 PM

[Northstar10000:]

They just said no. Will they stick to it or cave.

Jul 15 09:00 PM

[johngonole:]

A CIT bailout will be just another socialization of other people's bad debt. This will allow those who had bad debts to take on more debt and then hand it to me. Some are getting filty rich with this process.

If we would just let the bad banks fail (with FDIC only bailing out the depositers) control would taken away from the bad decision makers. Meanwhile those left standing increase market share grow larger and hire new employees. Thus unemployment stabalizes. Resource decision making is left in the hands of the wise and responsible.

The current system with bailing out all financial failures has resulted in an elite upper class who believe they were born into the privelige of running other peoples lives. They can only succeed. Failure is rewarded with a new job with big bonuses so they can repeat the same failures over and over. Meanwhile the average taxpayer is being saddled with debt and FORCED into a position of slavery only they don't know it. But eventually the US will default. Inflation will wipe out savings and everyone will be living paycheck to paycheck eventually.

Jul 15 11:19 PM

[Augustus:]

The reason that all of these borrowers are with CIt is that the local bank won't "bank" them. A good bit of that is because the bankers are lazy and don't want to have to really understand a business. But if the operator has 15 operations in five states then the local bank isn't really a good candidate anyway. Now in a downturn all businesses have cash problems which backs up on their lenders. Sure, CIT is suffering. But I would much prefer saving CIT which WILL finance a small business operation that BAC which is a national leach. What would the CIT P&L have looked like if they had been financed with $45 Billion at 1.5% as GE Credit has been? We really are seeing how the govt. programs are playing out.

Jul 16 03:32 AM

[Carlos Lam:]

"CIT is different in many ways in the sense that it helps create jobs, by lending to small businesses in which 70% of all the jobs are created."
. . .
"In the end the Government will have no choice but to bailout CIT, due to the fact that letting it fail would be like cutting off their own nose to spite the face."

Looks like it's game over for CIT. At least on this one occasion, the government and Fed are smart enough to let the market deal correctly with failed actors.

Author(s): Obviously, your prediction about a CIT bailout is incorrect. Can you identify a reason or reasons why -- not including the obvious one: CIT isn't as politically powerful as Big Banking or the Big 3 -- the government and Fed didn't extend a bailout to CIT as opposed to those provided to other companies?

Jul 16 12:02 PM