CIT's Bankruptcy and the Trading Sardine

CIT, one the world's largest finance companies specializing in lending to medium-sized companies and equipment leasing, just filed for bankruptcy. It is highly unlikely that American taxpayers are going to recoup any of the $2.33 billion of bailout money the company was provided in the form of preferred equity.

In the chart below, let's take a look at CIT's balance sheet assets, its equity and the price of its shares - all at year-end except for the last two quarters of 2009 (click to enlarge), and ask ourselves this simple question: What is the probability these assets (mostly loans and leases) were really worth what the annual and quarterly reports said, particularly after 2006?

Judging from the share price: zero probability, of course.

But this post is not really about CIT. Rather, it is meant as a general comment on financial company balance sheets. To wit, it is nearly impossible to properly value loans, leases and other more esoteric financial assets (e.g. CDO, CDS, IRS, FRA, etc.) when we are out in 3+ sigma territory in delinquencies, defaults, counterparty risk metrics and volatility. One day a company like CIT is supposed to be "worth" $6 billion according to its books, and the next it's hyena food.

I've said it before and I'll say it again: A company that bases its valuation, indeed its entire business, on the Trading Sardine principle (see below) should be judged not by analysts but by fishmongers. Better yet, by their wives...

The Trading Sardine

Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him, too, about how great these sardines are. The process is repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the “world’s absolute best sardines – EVER..."

Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick: “You crook! You liar! I paid you a million bucks for plain ordinary sardines. They were not the greatest tasting sardines - EVER!” yells Zeb.

Yorick shrugs and replies…

“Hey Zebediah, you are such a schmuck. Those were not eating sardines – them were trading sardines!"

Comments

[ryanclarke:]

CNBC hasn't given much air time to CIT finally going belly up. I guess, since it's a "nicely planned" bankruptcy supported by a big fish like Icahn ... all is well and wonderful. We should be paying attention to the Pending Home Sales Number CNBC and the National Association of Realtors ... that's what we are suppose to pay attention to ... another HOUSING RECOVERY IS AT HAND! Yoo hoo ! The realtors have found more renters to turn into mortgage slaves !

Nov 02 10:18 AM

[Donald Ingram:]

CIT's position vis a vis CLO/CDO/CDS has yet to be fully explained as to exposure. The latest hard numbers from an S&P Report Dated end November 2008 has CIT as the most widely referenced obligor in European Synthetic CDOs at 1,053 or 66% of total.
We are led to believe that this pile of dung has been dealt with?
Commercial real estate will be one of the prime victims of CIT's bankruptcy, along with regional banks who are heavily exposed to commercial real estate paper.
For the regionals it will be a double whammy because of their use of CLO/CDO/CDS to hedge themselves against a ton of the CIT issues, CITI issues, etc. which the regionals claimed as Tier 1 capital on their balance sheets. Those regionals in the Southeast and West will be the hardest hit because of their heavy exposure.

Nov 02 12:22 PM

[imagtek:]

Obama has rescinded the regulation that HIV (aids) positive individuals are barred from entering the USA. The floodgates are now open.An HIV positive foreigner in the USA can:a. infect more people with HIVb. become a permanent medical ward of the stateThe next step is for the courts to rule that HIV positive foreigner's in the USA illegally may not be deported because the absence of free HIV treatment in their nation of origin would be a 'death sentence'.It is over. This country is down the toilet. And I voted for this clown.

Nov 02 12:59 PM

[ETFdesk.com:]

CIT Files Its Bankruptcy Plan, Regional banks should benefit from CIT failure bit.ly/nOy3d ETFDesk users see this as a potential opportunity to: buy KBW Regional Banking ETF $KRE

Nov 02 01:45 PM

[Kinabalu:]

Over the last 40 years I've probably heard 50 versions of the trading sardines story, from Cannery Row to the Alaskan gold rush. This was one of the worst. Here's another version if any one's interested:

The story goes that sometime in the early years of the Twentieth Century there was a lull on the trading floor of the New York Stock Exchange, a lull that extended from hours to days - and the boys were getting bored and restless. One afternoon, for want of any better entertainment, a trader pulled out an elderly sardine tin and announced his willingness to sell this unique item for no more than a nickel. In a moment two jobbers from the Railroads pitch had bid and counter-bid for the tin, pushing the price up to a dime. Not to be outdone, the cowboys who trade Texas oil stocks jump in, doubling the price of the sardines, then doubling it again. The tin passes from professional hand to professional hand, with the ticket sometimes a cent or two higher, sometimes up a quarter. At last the hubbub attracts the attention of the baby of the floor, a wet behind the ears college kid. He spots the unusual label and can't miss the excitement in the open outcry yelling of the traders. The kid, determined to show he can play with the big boys and genuinely intrigued by the apparent rarity of the item, firmly calls out 'Ten bucks' and is delighted when the bidding comes to an abrupt end. Hefting out his pocket-knife, he punctures the tin, only to be met with the unmistakeable stink of rotting fish. Bewildered and heavily out of pocket, the new boy turns to one of his elders, who had taken a half dollar turn out of the tin an hour previously. 'I don't get it' says the kid, 'these sardines are terrible.' 'Son', says the old jobber, 'those weren't eating sardines, those were trading sardines.'

Nov 02 05:37 PM