CIT Group (NYSE: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.