Bankruptcy May Be CIT's Only Choice

Shoulda, Woulda, Coulda? When the economy comes back, the high tide will raise all boats. That have not sunk. Or been flushed down the toilet.

Despite all the positive reinforcement from industry trade publications from the garment industry, small businesses, and even Leasing News, the government turned down the CIT Group (CIT) for a "loan extension." It must have felt quite different to be on the other side of the desk being told "no."

This is what the government saw as CIT officially informed the SEC and public in a filing yesterday what was going on inside. The company needed $7 billion of unsecured debt to meet its funding needs for the 13 month ending June 30, 2010. It had other serious problems, too. The government was already aware of a July 16 FDIC cease and desist order on unit CIT Bank and a consent agreement with the Utah Department of Financial Institutions (disclosed in a Form 8-K made public). If CIT does file for bankruptcy relief, it said the FDIC could place CIT Bank into receivership or conservatorship, making assets unavailable to creditors. There goes $2.3 billion from the government, plus brokered deposits the bank purchased. This is what the government saw when they said, "No way! No more." The government bites the bullet, something it has been criticized for doing, and said, "No way. No more!"

So the company went to the bondholders and others saying you can lose a lot more, lend us more, and we'll even pay 13% (prime is zero, basically). Associated Press reported it at "a minimum of 13%," noting the SEC filing. Ironically, the factor for small businesses has little left to factor for itself. Its customers could little complain about the factoring rate, and now CIT is the customer. And to bring in more business, it must sell at a higher rate than its competitors, attracting more subprime business as the better credits go elsewhere.

Then there was talk about letting the CEO Jeffrey Peek go, as GM and other companies let their coaches go. But the story then came out that Peek is owed $14.7 million if he's terminated or there's a change of control at CIT. But then again, is that enough to compensate him for what he has gone through the last 18 months.

Former Chairman Al Gamper got the company back from Tyco, raised the money, then retired as many of the key department heads, operation people, and top sales personnel also retired. They moved the securitization to Arizona and CIT moved into a major building, branding into the consumer market place, hiring a major advertising firm to set the new direction.

In October, 2008, Leasing News questioned the loss of some major department heads such as Walter Owens, President of Corporate Finance, as well as Rick Wolfert "resigning" and Thomas Hallman, "retired," when we interviewed him a few months earlier on his expansion plans in the vendor marketplace.

For those that retired, they worry about their pensions. And as to the CIT stock that they earned over the years of employment, perhaps people such as Bob Cragin should have stayed at Harrah's in Reno, Nevada instead of winning the top awards in sales at CIT.

The official second quarter SEC report is due Thursday, July 23rd. As one Leasing News reader wrote in "We get emails:"

CIT should have stayed in its core businesses, equipment financing being one of them. According to insiders, the leasing broker generated portfolio of equipment finance contracts was one of its most profitable divisions. Instead, it cut off all its brokers, closed its broker program, and went into sub-prime residential mortgages and student loans and got creamed.

Bankruptcy may be CIT's only choice, and hopefully it will not stay in it for very long.

• July 21 SEC 8-K Filing
• Owens out at CIT - Is Peek Next?

Disclosure: No Positons