Tack

CIT's Debt Issues Show Why the Economy Won't Be Picking Up Any Time Soon

Although it may surprise some, CIT has shown positive cash flow continuously for the last five years. The company does not have unmanageable financial problems; it suffers from a worse enemy: manfactured fear.

CIT's problem is the classic liquidity trap, aided and abetted by well-timed, fear-inducing media reports and the actions of short sellers and CDS holders, who wish to see CIT's lender's scared away from renewing credit lines, thereby causing the company to fail. If CIT's credit lines are rolled over, as would routinely occur in normal times, then they have no problems that can't be internally managed through the recession and recovery cycle.

The failure of the Feds to confirm guarantees to CIT, after specifically allowing them to qualify for funding, smacks more of politics or scheming than any sound business judgment. First, the public squawks about "bailouts" when they have little or no understanding of the mechanics or what is at stake. Second, because classic lending models are seen to be more in favor for the future of the post-crisis financial world, rather than the exotic instruments of the recent past, CIT's borrowers are likely coveted by some behind-the-scenes forces (i.e., big banks) that previously would have had little interest in the firm's business sectors. No doubt, some would welcome buying CIT's business units out of bankruptcy and/or FDIC seizure for pennies on the dollar.

It will be interesting to see which forces win the current tug of war.

CIT Group Woes Shatter Illusions of Recovery

Just as other firms were manipulated into bankruptcy to serve the interests of large Wall Street firms with influence in Washington, so is the case with CIT. There are numerous large lenders, no doubt, who would love nothing more than to have the FDIC to swoop in, seize CIT's assets and sell off their opertations to the "favored" for pennies on the dollar. Ironically, in fact, CIT's conversion to a bank holding company and its resultant exposure to capricious FDIC seizure, now, is an impediment to potential rescue by the private sector.

Firms both far larger and small than CIT have been offered Federal assistance, so the "small-enough-to-fail" argument holds little water, it would appear. No, something else is going on behind the scenes, and it's not pretty.

CIT Prepares to File for Bankruptcy

The same old game goes on and on.

Sure, CIT has some problems, like most lenders. CIT's major problem is that they have a large short-term debt maturity that needs to be refunded. So, what's the plan?

It's the usual. CIT is just the latest victim of a concerted effort to short the company out of existence by generating enough fear and misinformation that no private lender is willing to bet on the company, and even the Feds remain paralyzed, either out of uncertainty or complicity (more later).

Here's a quiz for those who think this company is an unmitigated disaster:

Question: How many years in the last five has CIT suffered negative cash flow?
Answer:Zero

As with many other financial firms, most of the red ink appearing on CIT reports is paper writedowns, not actual lending defaults. So, the cash flow keeps rolling in.

But, the shorts and CDS traders know that if they can create enough hysteria, loud enough and for long enough, CIT debt maturities will come due, and the company will collapse, as its terrified lenders refuse to extend new credit.

But, what about Uncle Sam? Didn't they allow CIT to become a bank holding company so that it could participate in various government programs? This is where the supreme irony comes in.

Yes, they are a bank holding company, under the FDIC. But, the FDIC has confiscatory powers that far exceed the dangers that might face a normal operating company in trouble. The FDIC has draconian takeover powers (see the list of bank takeovers, including Wachovia and Washington Mutual), which permit them to step in at a moment's notice, confiscate assets and deposits and to "resell" these to other "favored" instiutions.

The net effect, therefore, of having the FDIC as one's potential "savior" is that nobody else will go near CIT because the FDIC could pull the rug out at any moment, without warning, and distribute CIT's assets to other firms under sweetheart terms of its own choosing.

So, now, the question seems to be whether the FDIC follows through to assist CIT, as they seemed to favor when CIT was approved as a bank holding company, or whether the FDIC now wishes to break up CIT's various operations and sell them off to the FDIC's "buddies," who would love to get CIT operations on the cheap.

The one thing that won't happen, no matter how this plays out, is the disappearance of vehicles to fund various small businesses. They'll just be transfered to new ownership, more favored by the government powerbokers and insiders.