CIT's Failure Could Threaten Financial Sector's Overall Recovery

Just as the financial services industry seems to have made it past the worst of the economic meltdown, one small lender now threatens to reverse that trend. CIT Group (CIT), a lender to small and medium sized businesses, appears to be on the brink of collapse for the second time this year.

CIT Group averted bankruptcy over the summer, when it secured a $3 billion loan with its bondholders, and managed to tweak a giant tender offer for debt maturing shortly thereafter. The move served as a mere stopgap however, since the lender had a $2.9 billion negative cashflow position at the end of June this year.

With the moment of truth at hand once again, insiders say that CIT is attempting to prioritize nearer-term debt holders, a move which would dilute common stock holders by around 95 percent, leaving them almost wiped out.

Wednesday, traders pushed up the cost of CIT’s credit default swaps by 4 percent, to 26 percent; the implication is that the lender has a 45 percent chance of defaulting on its debt within three months, and an 85 percent chance of defaulting on its debt by 2014.

Meanwhile, CIT is also rumored to be recommending that bondholders approve a pre-packaged bankruptcy plan in case the new debt-exchange doesn’t go through.

Whatever the outcome, it’s clear that CIT doesn’t have the financial muscle to protect all parties involved.

For equity holders, any further financing efforts are likely to leave them holding the bag, since they are at the bottom of the heap in terms of having any claims on the firm’s assets. Holders of debt maturing later than next year look likely to experience some sort of default.

Most worryingly of all, for small businesses there really aren’t many other places they can go to get the kind of financing that CIT provides them with right now:

“Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure,” said Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said on Tuesday at the Reuters Restructuring Summit.

Tilton wants the firm to use the potential consequences of its own bankruptcy as a way for government officials to sit up and listen, and potentially step in to save the day. In that case, the result would be an additional fresh bailout package, just as it was thought that many financial services firms were weaning off their own and starting to raise money in the capital markets.

That in turn will make many of the recent bank share offerings much less attractive, as stock prices of small banks decline on fears of further CIT-style fallouts.

Followers of financials will be watching CIT like a hawk over the coming days, and so they should be. It genuinely appears now that the lender threatens to put a spanner in the works of much of this year’s momentum among financial services firms.

Comments

[David White:]

Good article. I have my doubts the proposed deal will go through. First the stock holders will not like it. Second some bond holders might prefer to enter bankruptcy now, while they may still be able to get some money in the closure. At the rate CIT has been bleeding money, it seems likely their bonds will be worth less with time. Finally some of the bond holders are likely also holders of CDS's. Those bond holders may want CIT to enter bankruptcy because that will activate their CDS's (i.e. they will get more money that way). They will vote against the deal.

I hope the government has some plan to rescue CIT. If it fails, it seems likely to be an even bigger disaster to the financial system than Lehman. CIT has their fingers in many more pies as they are an SMB lender. A CIT failure would be a harsh blow to the SMB world. It would have terrible repercussions. Bernanke et al, where are you?

Oct 01 10:23 AM

[demlord:]

all cit needs is govt run healthcare... they will then have billions to give to people and life will be better than ever... not just more better which is better than more bad but more gooder which is .... i lost track... whatever democrats rule cut the repubs off to their own country and dont forget soylent green is old people

Oct 01 10:30 AM

[User21284:]

The brilliance of some of the contributors here can be measured by such references - presumably to the current legislation working its way through the Senate Finance Committee - as "govt run healthcare".

Oct 01 11:01 AM

[I am rage:]

You best be trolling. I vote no more bailouts and no more big government programs. Fascism is bad, mmmkay?


On Oct 01 10:30 AM demlord wrote:

> all cit needs is govt run healthcare... they will then have billions
> to give to people and life will be better than ever... not just more
> better which is better than more bad but more gooder which is ....
> i lost track... whatever democrats rule cut the repubs off to their
> own country and dont forget soylent green is old people

Oct 01 11:43 AM

[Anthony Alfidi:]

The Midwest purchasing index reported a yoy drop this week, representative of CIT's core clientele. Bring on the CIT bankruptcy. This fragile rally could be shattered by the slightest bad news and a CIT failure is just the thing to puncture it. Let the ripple effect expose bank insolvency and take us down far enough to clear bad debts through bankruptcies.

Oct 01 12:23 PM

[AndrewBaker:]

Whether CIT or any other financial, the so-called financial sector recovery is already threatened: by the bad loans that have still not yet been brought into the reckoning, plus good loans going bad due to the parlous economic situation we are now in because of the banks playing their games with money in the past and creating the problem in the first place.

I can't even say they were playing clever games either, because so few of them even understood what it was they were doing. Cheap money and complicated derivatives that seemed so profitable came home to roost, not just in their barns, but ours too.

And we'll be paying the price for many years to come.

Oct 01 12:31 PM

[Tydown4fun:]

Good riddance to bad rubbish. How about some accountability? These zombie companies must die so that new, profitable businesses can take their place and fill the vacuum. Don't prop up dead people or dead companies.

Oct 01 12:56 PM

[Indian:]

Well they say too big to fai, that leaves about less than 10 financial instution out rest are not too big to fail, that means we are going to have domino effect of failure and all combine will surpass all the big one combined and much more. Tis will be hard to control, too many loose ends. Real Melt down is coming.

Oct 01 01:26 PM

[Nettligent:]

Commercial Real Estate industry is on the verge of failures. Let these failed banks to collapse and merge with a healthy financial institutions.
No More Bailout because it does not work.

Oct 01 02:51 PM

[zagrebzagreb:]

I apologize in advance for being so blunt, but who are you kidding that the financial sector is 'recovering'?

In my humble opinion the whole sector has yet to even pull its head out of the sand and count its losses.

There has been little reckoning with its past dealings, as evidenced by the bad debt that is STILL carried on the balance sheets by all major players. And then there's the fact that the only reason it is breathing is due to gov't subsidization, which simply can't last...

My point? A recovery only begins when the industry can stand on its own two feet without gov't training wheels... That has yet to happen.

Oct 01 07:38 PM

[carey_jim:]

This market is too crazy for rational analysis. If an atomic bomb dropped in Manhattan the stock market would probably go up, with real estate and finance stocks leading the way. (Think of all that construction.)

On a more sober note, only about 3% of advisers were bullish in March, 2009. Now about 95% are bullish. What does that tell you? Their advice sounds like the screams coming from roller coaster riders to me.

Oct 01 08:04 PM

[RatWatcher:]

'Meanwhile, CIT is also rumored to be recommending that bondholders approve a pre-packaged bankruptcy plan in case the new debt-exchange doesn’t go through'

Minimum 10% equity in the post-bankruptcy CIT to the UAW.....

Oct 01 11:23 PM

[sethmcs:]

Is CIT really needed? Right now the only game in town for the type of lending CIT does is regional banks with SBA guarantees. Business owners generally hate SBA guarantees because of the requirement that owners with 20% must personally guarantee the loan. I recently came across a hotel deal that fell apart because of this.

Oct 02 12:45 AM

[Nettligent:]

Bankruptcy is the Only Best Option for CIT. The sooner they getting through Bankruptcy process, the better.
If if takes too long, CIT will never have a chance. Like divorce, Lawyers are the only Winners and Shareholders are big victims.

Oct 02 05:16 AM

[MJJP:]

It has been shown over and over that single payer health care works well and delivers far more value than the system in place here in the US. Had a single payer system been in place years ago GM and Chrysler among others might be operating profitably today instead of having their hand out. Somehow it works well all over the world but propaganda has convinced the media that it won't work here.


On Oct 01 11:01 AM User21284 wrote:

> The brilliance of some of the contributors here can be measured by
> such references - presumably to the current legislation working its
> way through the Senate Finance Committee - as "govt run healthcare".

Oct 02 09:54 AM

[MJJP:]

Sure it's easy to just say let them fail until YOU find out your IRA or 401 is heavily invested in these banks along with many mutual funds , pension funds and who knows how many other large institutions. I don't know about you but I don't like the idea of losing thousands of dollars in my IRA which was supposedly invested in safe conservative vehicles and I am sure millions of others share my sentiment.


On Oct 01 02:51 PM Nettligent wrote:

> Commercial Real Estate industry is on the verge of failures. Let
> these failed banks to collapse and merge with a healthy financial
> institutions.
> No More Bailout because it does not work.

Oct 02 10:00 AM

[asceptic:]

I think you've nailed it. The headlines would probably read as follows : '' New York flattened but damage not as bad as expected
- Dow rallies ''


On Oct 01 08:04 PM carey_jim wrote:

> This market is too crazy for rational analysis. If an atomic bomb
> dropped in Manhattan the stock market would probably go up, with
> real estate and finance stocks leading the way. (Think of all that
> construction.)
>
> On a more sober note, only about 3% of advisers were bullish in March,
> 2009. Now about 95% are bullish. What does that tell you? Their
> advice sounds like the screams coming from roller coaster riders
> to me.

Oct 02 10:05 AM

[ERCaptain:]

CIT has jumped through hoops to try to meet FDIC requirements. They did not come to the serving line early enough to get any bailout money. The system is not prepared to adsorb one million companies that do their financing through CIT.
If CIT fails there will be enormous negative impacts on the markets.
If CIT fails there will be enormous negative impacts on small business.
If CIT fails the government can socialize the small business funding practices and put more power in the hands of the beaurocrats. Small businesses are traditionally not your Democractic voting block, so this will be pay back. To bad CIT isn't unionized -- that may have helped.

Oct 02 10:08 AM

[jackooo:]

Throw money at them.

Oct 02 10:40 AM

[bottoms-up:]

No! Ben and the Fed will just flush it with freshly printed funny money or make up some other accounting system...

It worked before... For awhile...

Oct 02 10:44 AM

[bottoms-up:]

Maybe the U.S. Government can use some of that funny money to bury the dead, not just prop them up.

www.nydailynews.com/mo...


On Oct 01 12:56 PM Tydown4fun wrote:

> Good riddance to bad rubbish. How about some accountability? These
> zombie companies must die so that new, profitable businesses can
> take their place and fill the vacuum. Don't prop up dead people
> or dead companies.

Oct 02 10:51 AM

[Allan Frain:]

Let me go out on a limb here...

The assets will be assigned to GS and/or JPM. The liabilities will be moved to the taxpayers' ledger.

The only thing in question is the nature of the accompanying PR campaign.

Oct 02 11:09 AM

[TrojanOne:]

After CIT defaults, many more workers will be unemployed without health insurance. The expensive line to emergency room care, will increase and tax payers will pay more than ever.

Let fix one huge problem by offering single payer and reducing taxpayers cost of operating this country. Also keep in mind the #1 reason for personal bankruptcy is "medical debt".

Competitor Nations (All Developed Countries) do not put this burden on their economy. Let's start competiting by lowering the cost of doing business .

Where would our economy be without VA Care and Medicare? We would probably be right there with Honduras.

Oct 02 11:10 AM

[change is t...:]

Thanks for the article. This company demise is because of securitizations collapse. A finance company with negative cash flow cannot survive, as every day it becomes weaker. How quickly CIT goes will determine how badly the economy becomes. If quick and total annilation, we will have a huge surge of bankruptcies, followed by a huge surge of unemployment; if a slow wind down, we will see the slow painful loss of many small businesses, who were surviving by syphoning cash in a credit based economy. Large companies finance needs are sheilded by the capital markets and large banks. This company WAS the capital markets for many small businesses.

Oct 02 11:12 AM

[NYM Arts:]

BOTTOM LINE :
If you can't afford to PAY CASH for whatever it is,
You Can't Afford it !

Oct 02 11:13 AM

[sod:]

It might surprise you to know, we will soon be competing with Hondurans for job.


On Oct 02 11:10 AM TrojanOne wrote:

> After CIT defaults, many more workers will be unemployed without
> health insurance. The expensive line to emergency room care, will
> increase and tax payers will pay more than ever.
>
> Let fix one huge problem by offering single payer and reducing taxpayers
> cost of operating this country. Also keep in mind the #1 reason
> for personal bankruptcy is "medical debt".
>
> Competitor Nations (All Developed Countries) do not put this burden
> on their economy. Let's start competiting by lowering the cost of
> doing business .
>
> Where would our economy be without VA Care and Medicare? We would
> probably be right there with Honduras.

Oct 02 12:57 PM

[titans:]

100% correct...lately i've been reading more & more articles how gs is called gov't sachs & they will get the most money from the sale of these toxic waste reits assets.gs even has their # 1 puppet jim cramer pushing these reit companies on his show every couple of weeks WHEN HE HARDLY EVER MENTIONED THESE REITS IN HIS 4 PRIOR YEARS OF RANTING & RAVING.I WONDER HOW MUCH GS PAYS WAKCO JIMBO TO PUSH THEIR AGENDA ??? also the .djusre is being pushed (manipulated) higher everyday which contain all these toxic waste companies (reits).i'm sure gs will get more money on every transaction if the stock price is higher for these lousy companies (reits) !!!!!!!!!!!!


On Oct 02 11:09 AM Allan Frain wrote:

> Let me go out on a limb here...
>
> The assets will be assigned to GS and/or JPM. The liabilities will
> be moved to the taxpayers' ledger.
>
> The only thing in question is the nature of the accompanying PR campaign.

Oct 02 01:03 PM

[LaVern Isely:]

Seeking Alpha has been doing a terrific job of financial reporting and it's about time people in Congress noticed. They have to put REAL REGULATIONS on TOXIC DERIVATIVES such as credit default swaps which also got AIG in trouble. A quote from the article: "Wednesday, traders pushed up the cost of CIT's credit default swaps by 4% to 26%, the implication is that the lender has a 45% chance of defaulting on its debt within three months, and an 85% chance of defaulting on its debt by 2014." You can't expect to keep borrowing, without taxing the wealthiest billionaires, which makes up the 1% that has been escaping the burden of their own mistakes, by operating the economy like a lottery, through HEDGE FUND DEALERS and the TOXIC DERIVATIVES they promote through the INVESTMENT BANKS and the STOCK MARKET. The COMMERCIAL BANKS or the Small Business Administration are the ones that need the help because they are keeping the jobs in this country at a far greater percentage than the ones that are using AIG and taking the jobs abroad. How high do they think the unemployment has to go before they think it is real serious and how far in debt does Social Security have to be until we quit BORROWING FROM IT?
Yours truly, LaVern Isely, Overtaxed Middle Class Taxpayer, Public Citizen and AARP Member

Oct 02 01:50 PM

[Did U Think...:]

What a laughable title for your article. You should have called it "Can CIT BK be the catalyst for the popping of the banking sucker's rally?".

To call what has happened over the past 6 months a "recovery" is to not know your a$$ from a hole in the ground. Almost every important metric except tier 1 capital ratio has gotten much worse and the only reason that metric got "better" was accounting tricks enabled by the softening of mark to market rules.

The banking fundamentals have continued to implode lead by falling home prices and rising unemployment. Credit card defaults have increased and late or missing payment recidivism after mortgage "workouts" have proven to be the norm. The consumer is broke and not likely to recover any time soon. Boomers have finally started to worry about their retirements and so they are going to keep the cash they have and walk away from underwater homes.

Recovery? Suuuuuuure there has been a recovery. After all, didn't Bernanke and Geither and Obama tell us the "recession" is over? Anyone who believes this crap is a total patsy.

Oct 02 02:28 PM

[Truth teller!:]

Some frustrated souls here who missed the rally r finding it touch to accept the fact US of A is out of the woods and economy and market r recovering. Guys accept the truth, it's a V-shaped recovery and markets r not likely to go down in a big way. Would be better for u folks if u invest in correction. CIT or no CIT it'll not effect the market in a significant way though it might effects the perpetual bears who run Seeking Alpha.

PS: Invest in India and China if u want to make the killing!

Oct 02 02:52 PM

[tripleblack:]

Correct. CIT's failure is not the scary factor here, its the multitudes of otherwise healthy companies dependent on their unique factoring business taking a hit that should scare us.

If the point is that in normal times CIT could fail and dozens of other banks would willingly jump in to take up the slack, thus stabilizing entire industries composed of small-to-medium sized companies using the factor services to operate, then sure...

But that baby just got tossed out with the meltdown bathwater, and a key support for a huge chunk of the economy is in danger.

I have no particular love for CIT. Heck, cobble together a FDIC brokered rescue deal by which some other bank absorbs its assets and customers, and then carry on as before, while all the CIT execs hit the unemployment line and their stock and bondholders get pennies on the dollar.

But it would be a mistake to "do a Lehman" here. The repercussions would be all out of proportion, and if there was EVER a reason for the "merge failing banks to whole ones" process, this is it.


On Oct 02 10:08 AM ERCaptain wrote:

> CIT has jumped through hoops to try to meet FDIC requirements. They
> did not come to the serving line early enough to get any bailout
> money. The system is not prepared to adsorb one million companies
> that do their financing through CIT.
> If CIT fails there will be enormous negative impacts on the markets.
>
> If CIT fails there will be enormous negative impacts on small business.
>
> If CIT fails the government can socialize the small business funding
> practices and put more power in the hands of the beaurocrats. Small
> businesses are traditionally not your Democractic voting block, so
> this will be pay back. To bad CIT isn't unionized -- that may have
> helped.

Oct 02 04:26 PM

[multi007:]

I got in at 1.10 and out at 1.56, i wish i had the guts to do it again but sadly i cant. what i got i consider lucky, but i cant press my luck again. no extra cash to risk.

Oct 03 03:28 PM

[Mike from NYC:]

I lost all faith in the stock markets beginning in early 1998 when I realized that it was basically a legalized pyramid scheme during the dot com frenzy. Nothing the markets have done since then has changed my opinion - in fact the markets have only strengthened my belief that it's just another form of gambling and a pyramid scheme.

The breed of workers who inhabit the financial sector since the early 1980s has gotten worse and worse and turned the markets into gambling casinos for their own benefit using all the IRA and 401K money that has flowed into it by workers, especially the middle class.

Wall Street promises us that they can make us rich by making money from money and that their above-average expertise will enable that dream. Nothing is further from the truth. The only people getting wealthy are those who gamble with our money while we the investors get poorer as a result of their greed and gambling. It seems that the Streeters make profits for themselves no matter the markets and no matter whether or not they make profits or losses. To me the markets are all run by Bernie Madoff.

Am I crazy?


On Oct 01 08:04 PM carey_jim wrote:

> This market is too crazy for rational analysis. If an atomic bomb
> dropped in Manhattan the stock market would probably go up, with
> real estate and finance stocks leading the way. (Think of all that
> construction.)
>
> On a more sober note, only about 3% of advisers were bullish in March,
> 2009. Now about 95% are bullish. What does that tell you? Their
> advice sounds like the screams coming from roller coaster riders
> to me.

Oct 04 09:50 AM