CIT Group: Taxpayers' Investment Is Virtually Worthless

CIT Group (CIT) filed for Chapter 11 bankruptcy on Sunday, November 1, 2009. With that filing, taxpayers absorbed their first loss of bank bailouts. Taxpayers will likely lose their $2.33 billion investment in CIT Group less than one year after it was made. The Chapter 11 bankruptcy filing and the success of the prepackaged bankruptcy exchange offer reported on in the New York Times means that taxpayers, other preferred shareholders, and common stockholders get wiped out according to page 6 of the exchange offer filing.

According to my analysis of the transaction reported in TheStreet.com, the CIT Group investment was a bad deal for taxpayers on the day it was made. Today it looks like what little value remained in the taxpayers' preferred stock investment has been wiped out. There was little evidence that Treasury officials performed basic due diligence when investing in CIT Group in December 2008. If they had, they would have been shocked by the high yields on its publicly traded preferred stock. Preferred stock is a very risky security. CIT Group is the first large lesson for taxpayers of its risks.

• On the day before the US Treasury agreed to its investment in CIT, on December 22, 2008, the preferred stock and warrant investment that the U.S. Treasury received represented a 65 percent subsidy to CIT’s existing investors. That is, the U.S. Treasury was to receive securities worth $805 million in exchange for an investment of $2,330 million.
• On the day that the U.S. Treasury made its investment in CIT, on December 31, 2008, the preferred stock and warrant investment that the U.S. Treasury received represented a 42 percent subsidy to CIT’s existing investors. That is, the U.S. Treasury was to receive securities worth $1,355 million in exchange for an investment of $2,330 million. In other words, taxpayers overpaid by $900 million for the securities on December 31, 2008, based on securities prices that day.

Today the taxpayers' investment is virtually worthless. With $71 billion of assets CIT Group never posed any systemic risk to the U.S. economy. That is, it surely is and was small enough to fail. This begs the question, “Why was it bailed out in December 31, 2008?” Taxpayers deserve answers.

Disclosure: I only have long positions in broad-based index funds. This is not investment advice.

Comments

[apppro:]

Thank you Goldman, Pimco, & Ichann.

Nov 02 06:48 AM

[PPY:]

Government policy has been inconsistent throughout this whole mess.

It handed out TARP money but then what?

Why didn't they step in here and rearrange the pay order like it did with GM to save our TARP money?

Oh yeah, that was technically illegal but rules could be bent for GM bankruptcy but not CIT's.

People need to stop blaming the creditors, the bondholders, the investors, and uninsured depositors.

With respect to bondholders whom we later found out that included teachers and police officers, our government made them look greedy and unsympathetic when they were merely protecting their investments.

"Surviving on government loans as it burns through billions a month..."
online.wsj.com/article...

Yes we were giving them "BILLIONS A MONTH" but these words were in fine prints.

"One of the saddest stories emerging from the GM bankruptcy drama is the plight of “Main Street” bondholders. Most of the investors holding $27 billion in GM debt are big banks and institutional firms, but apparently Mom and Pop-type investors hold about $7 billion in GM bonds.

Unlike the big firms, they’re generally not secured: They can’t demand collateral if GM defaults, and for the most part they didn’t buy financial insurance to hedge against the risk of losses. So in bankruptcy, they go to the back of the line, where they’ll be lucky to recover even a small portion of their investment."
www.usnews.com/money/b...

Are you kidding me that Paulson, as the former ceo of GS, did not know how to make deals in the best interests of the government investments and made us senior bondholders in many of his emergency rescues?

When OTS allowed IndyMac to backdate capital infusion, why should uninsured depositors take the hit?
latimesblogs.latimes.c...

Why did FDIC decide to help GMAC sell another $2.9 billion of bonds just last week via TLGP but not CIT at all?

" All the FDIC had to do was guarantee CIT’s debt, as it had done for many other lenders, and that TARP money would have been safe. And get this – CIT put in for guarantees back in January, but Bair sat on the application and provided no reason why."
www.cnbc.com/id/32011061

" CIT’s small-business book is largely asset-backed – very different paper than run through the stress test on the biggest banks’ corporate books. Asset-backed paper is secured through a firm’s receivables, making it essentially collateralized lending to handle borrower cash flow... There is no policy rationale to the CIT decision. GMAC got TLGP even though it was in extremis, but CIT apparently still can’t persuade the FDIC to give it up. Is this because we like lenders for autos better than small business?"
www.fedfin.com/index.p...

TLGP was launched to improve lending and Bair used it to help GS raise $20 billion. How much loan servicing to small and mid-size businesses did GS do compared to CIT?

*imho*

Nov 02 08:04 AM

[Donald Ingram:]

"Why was it bailed out in [on] December 31, 2008?"
From an S&P Report dated the end of November, 2008 -
CIT Group Inc. as obligor to 1,053 CDOs at 66% of total.
Most widely referenced obligor in European Synthetic CDOs at 1,053 or 66% of the total.
We are now being led to believe that this rather large stinking pile of rotting toxic, financial waste has been satisfactorily dealt with? Where did it go? My nose tells me there is more here than meets the eye. Watch out for the regionals - especially the ones in the Southeast and West.

Nov 02 12:35 PM

[HBWOW:]

Has the government and its many agencies sought to determine the
degree of fraud (pre bankruptcy insider/broder knowledge and sell off of positions, illegal loans, horrendous insider stock option dealings, unearned bonuses paid, etc, etc, etc? ? ? The TARP loan was only a temporary bandaid and time to allow the insiders/brokers to milk more of the cash out of the company. I know SEC, auditors, and other non responsible (make that irresponsible) agencies continue to work for Wall Street and not the stockholders, bond holders, and taxpayers, so there is no surprise with this blowup.

Nov 02 12:48 PM

[Nathan Hale:]

You know, I was never asked if I wanted to do this thing, my 'men' seem to have over stepped their bounds, along with a long line of other folks "at the top" The only thing I can see keeping this all together is that we the sheeple haven't realized the government works for us, and have assumed as they *the government* wants us to, that we indeed work for them. If we all said enough is enough, would they not have to stop? We haven't really been told how these people who "borrowed" our money without our consent ...thief... convinced us all that they could do it just because they could and we have nothing we can say about it? Is it because it is only the money of our children and we have no say over who spends theirs? Then they as well have no say because we failed to say? When the government sees the angry sentiment, and they do see, they seem to want to do something about it, like throw more of not their money at it. What to do....what to do...who is going to do the what...hmmmm

Nov 02 01:21 PM

[ETFdesk.com:]

ETFDesk users see this as a potential opportunity to: buy KBW Regional Banking ETF $KRE bit.ly/nOy3d

Nov 02 01:46 PM

[Buckoux:]

Does this mean that Santa Claus won't come this Christmas?

Nov 02 01:57 PM

[a. palmer jr.:]

I don't think that any more of these businesses should receive government money just so they can continue to do business as usual. Haven't we learned our lesson yet? All this money spent on CIT and they probably weren't even called on to change their business practices. Any other business beside banking and auto making and the government probably would let you fail, but they let these guys fail several times and we pay for it.

Nov 02 03:03 PM

[Tony Petroski:]

Professor Wilson has spoken the truth.

Bury this enterprise, check your wallet to see if there's anything left (I suspect there is), and let's get on to the next subsidy.

Nov 02 08:02 PM

[Moon Kil Woong:]

Haha Tony apparently the money in your walet is not yours and it's certainly worth less than you think even if it was.

It is true that the bailouts have been completely inconsistant unless you look at it under the lens of insiders. Then it the image becomes crystal clear. Cronyism lives!

Nov 03 02:00 AM

[Madcow2:]

Ordinary Americans are finally starting to wake up to the reality that their Government has been taken over by a crime syndicate. Why should bankers be paid so much more than other public employees like firemen and soldiers? Great question. One that will be very difficult to explain next November.

Nov 03 08:50 AM