The Peter Principle Lives! CIT Hires John Thain

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 |  About: CIT Group Inc. (CIT)
by: Karl Denninger

They can't possibly be serious....

Feb. 7 (Bloomberg) -- John Thain, the ousted chief of Merrill Lynch & Co., was named to lead CIT Group Inc., the commercial lender that emerged from bankruptcy in December, after a nearly four-month search for a replacement.

Oh, they are serious.

The same John Thain that ran Merrill into the ground with, in part, basis trades (that is, proprietary trading) that blew up in his face? The same John Thain who failed to rein in his prop desk's "geniuses" and was ultimately forced to sell the company to Bank of America (NYSE:BAC)? The same John Thain who didn't know how much exposure he had on (otherwise the detonation wouldn't have happened, natch.)

So now Thain gets to run CIT (NYSE:CIT), a company that is shut out of commercial paper market (because it is still on life support) - a firm that had as its core business factoring receivables (which is an idiotic thing for a small business to do, but when you're playing the leverage game this is just one small part of it) and was making nice money at it until it got seduced by subprime lending and the "great spreads" that could be "earned" there.

CIT, of course, didn't figure out that the reason for the "great spreads" was that the people borrowing the money didn't have the ability to pay, and thus those "great spreads" would blow up in their face. Just like Merrill didn't think there was much risk in the "great spreads" they were getting on those basis trades.

The company has been trying to move its small-business lending, trade finance and U.S. vendor finance operations to CIT’s Salt Lake City-based banking unit so it can use deposits as a source of cheaper funding for loans.

That sounds like an awesome idea! Why don't we lend to small businesses with no collateral using our retail banking deposits!

What could possibly go wrong with that plan?

Of course they have to get the FDIC to lift this pesky cease-and-desist order they slapped on the bank first. That could be a small problem.

Only in America can you lose $27.6 billion along with effectively getting fired as your firm is forced into a shotgun marriage and be rewarded with another CEO position. Oh, and let's not forget the $1.2 million Thain spent on his office at Merrill too - while the firm was losing money.

The Peter Principle is alive and well.