CIT's Pain Is Goldman's Gain

 |  Includes: CIT, GS, JPM, LEH, LEH.F, TYC
by: New Low Observer
In light of the recent apology that was offered up by Lloyd Blankfein, CEO of Goldman Sachs (NYSE:GS), I came across something that highlights Goldman's role in the world of guerrilla investment banking. I pulled the old Value Line for CIT Group (NYSE:CIT) dated November 24, 2006. I was trying to determine the pre-banking crisis book value of CIT.

What caught my eye was the brief historical description of CIT which indicated that the company was established in 1908. In 1915 the company moved from St. Louis, MO to New York City. According to Value Line:

On 11/18/97, J.P. Morgan (NYSE:JPM) and Goldman Sachs jointly led CIT's initial public offering of 36,225,000 shares, priced at $27.00 per share on the NYSE. On 6/1/01, CIT was acquired by TCH, a wholly-owned subsidiary of Tyco Intl., Ltd. On 7/8/02, Tyco sold 100% of CIT's outstanding stock in an IPO, led by Goldman Sachs and Lehman Brothers ((LEH)). Offering was for 200,000,000 shares, priced at $23.00 per share on the NYSE.

In the first public offering done with Goldman Sachs as the joint underwriter, CIT was valued at $978,075,000 or just less than $1 billion dollars. Four years later, Tyco International (NYSE:TYC) acquired CIT Group in a cash and stock deal worth $9.2 billion. CIT was taken private for a year then relisted as an IPO. Who was there to administer the second IPO but none other than Goldman Sachs, of course.

It is important to note that TYC shares were trading at a (pre-split) price of $57 a share when the acquisition of CIT took place. By the time the second IPO of CIT took place, TYC was trading at $12 a share (a decline of 80%.) What led to the dramatic decline in Tyco shares? Insiders at TYC were tried and convicted of manipulating the financials and using the company cash as a personal treasure chest. Based on the court proceedings that followed the trial of CEO Dennis Kozlowski and CFO Mark Swartz, it became apparent that the earnings that led to the high share price that allowed TYC to buy CIT Group was based on fraud.

What is most interesting about the second issuance of CIT Group was that somehow in a years time the company lost more than half of its value. The IPO on July 8, 2002 was valued at $4.6 billion, exactly half of the price that the company was initially paid for by TYC. Either TYC paid 100% more than CIT Group was worth or TYC raided the coffers of CIT.

TYC is a shadow of its former self. TYC had to do a reverse split in order to mask the deplorable condition of the company. At an all time high of $250 (pre-split $62.50) in January of 2001, the stock has fallen to the current $37.08 (pre-split $9.27), a decline of 85%.

As for CIT Group, well that company just recently filed for bankruptcy. CIT traded as high as $61 in May of 2007. The last quote of CIT on November 18, 2009 was $0.20 or twenty cents.

Goldman Sachs, doing God's work [the implied message in a recent interview], had no problems brokering fraudulent transactions. Some would say, "How could you accuse Goldman Sachs of knowing that Tyco was cooking the books?" I would suggest that the question should be, how could they not know? This is where knowledge of stock market history is plenty useful. There are too many examples to reference where corporate raiders descended upon hapless companies that didn't have the largess of a high stock price to defend themselves.

It is clear that somebody got hosed in the Tyco/CIT Group deals. One thing is for sure: Goldman Sachs wasn't one of them.

Disclosure: No positions