"Great news" readers; the Wall Street Journal reports that Bailout Nation was only in a bit of a hibernation for a few months... we're baaaaaack. As I wrote last Friday [Jul 10: Keep CIT Group on Radar]
This morning CIT Group (NYSE:CIT) is crumbling as the FDIC refuses to backstop their loans due to deteriorating quality. If the US wanted to pretend it still believes in free market capitalism they should let this "not too big to fail" financial fall into the ether. Then we can at least pretend we are not propping up zombie financial institutions all over the map. (anyone claiming free market capitalism exists in the US is now banished to FOX News
channel permanently in a state of delusion)
Hah, was there really any debate? Only auto suppliers can be allowed to fail. I almost bought CIT in my personal account when I saw Sheila Bair was the only person who actually thought the junk on their balance sheet was too risky, but Geithner and "the Fed" were "cool with it". I mean, why have standards?
Remember we've written countless times the ultimate ending to this is the Federal Reserve will suffer countless losses in their balance sheet passed onto them in the form of "AAA" rates paper (riskless!). Even though they already are suffering through losses from the junk they are sitting on from Bear and others. Anyhow, due to "free market" actions by Geithner and pals, CIT is up 23% after hours. My gosh, it feels all 2008 / early 2009 all over again.
But again we HAD to save CIT Group because if we did not, countless small business would perish across America; certainly there was no other financial institution in America salivating at taking over the business of a failed company. As we did in the mainline banks, reward those who failed and let those who should be benefiting from the failure sit on the sidelines with head firmly in hand as they are not allowed to scoop up the damaged goods ... like a functioning market would allow.
And the losses suffered by the taxpayer that will come of this? Not to worry - your attention will be diverted by a new bubble, or American Idol by that time. Remember the AIG bailouts that benefited Goldman Sachs along with a host of global financial companies? Well if you do, you are in the minority - we're already past that. Just as we'll be past the losses suffered by Fannie, Freddie, FHA, CIT, Bear, Lehman, Merrill, Bank of America, Citi... by the time it happens. This is the great thing about having a middle class who doesn't keep up with financial news and is happy to partake in reverse Robin Hood actions (steal from the middle to give to the rich)
Oops, I'm sorry - hundreds of thousands of small businesses would fail overnight if CIT Group is not bailed out. Hopefully we can make sure CIT bondholders are also made whole as we did with almost every company in the biggest financial crisis in 80 years. Because investing in financials is a riskless proposition! Sometimes I forgot the company line - forgive me.
Hold on, before I continue let me check call activity on CIT. Yep someone came in and bought nearly 60,000 CIT August $2.00 calls. Should be a nice little win for Goldman.... err, I'm sorry. Talking points Mark... talking points! Should be a nice little win for any entity that has inside lines to the Washington communication and thinking. Would the SEC ever look into these purchases? Nah, that's part and parcel of the business; no one ever checked who bought that slew of Bear Stearns puts right before they imploded... just darn luck.
p.s. since General Electric (NYSE:GE) runs a similar type of lending scheme but many times larger than anything CIT has, you can now buy GE with the firm hand of the US taxpayer firmly behind you. GE Finance is in good hands! (yours)
- U.S. government officials are in advanced talks about aiding CIT Group Inc., one of the country's primary lenders to small and midsize businesses, people familiar with the matter said. The discussions are fluid. It remains unclear if a final deal can be brokered and, if so, how expansive it might be. CIT, which has debts due shortly and is unable to borrow on its own, isn't big enough to typically warrant emergency government help. Support for the company on Capitol Hill appears to be lukewarm.
- But government officials are worried about unforeseen consequences that a collapse of CIT could trigger. The 101-year-old company is a lender to nearly a million companies.
How about the government take over the company but extinguish it over a span of 1 year. Over the next 12 months parcel off the loans (via auctions in a free market exchange) to companies which actually did the right thing and have viable businesses that don't need the helping hand of the government? You know - reward astute management and punish those who destroyed their company. Then all the small businesses CIT Group is "supporting" are fine, and their loans are sold off to others and we can kill off CIT Group; and the bondholders who made the bad decision to invest with them would be punished.
What's that? Ah - we can't do that! Bring out the "spooky" dogma terms that scare Americans! This would be temporary nationalization! Bad word! Bad word! Like socialization but even more spooky! Therefore bailouts instead! We don't do nationalization in USSA! Plus it would hurt bondholders of a financial company! Nevermind then - just prop up another zombie.
One possible source of aid would be a Federal Deposit Insurance Corp. program that guarantees new debt issuance, a hand the FDIC has been reluctant to extend to the company because of its financial weakness.
If the FDIC reverses its position, it would be similar to an earlier move this year to backstop debt issued by GMAC. The FDIC was initially hesitant to allow struggling GMAC to participate in the Temporary Liquidity Guarantee Program but relented amid pressure to produce a broad rescue package for the car business. FDIC officials have said credit quality is a key consideration in whether they allow certain companies to participate in the program, and this has been one of their main concerns with CIT, in addition to worries about high operating losses and poor liquidity.
We need more Sheila Bairs. And what happened to good ole GMAC? Ah, it's all part of the plan to provide a nanny state to Americans with low credit or who don't save. Since traditional lenders are shying away from low credit scores or people who put nothing down, GMAC (Geither / Bernanke sponsored and approved!) is more than happy to provide the loans down to FICO 620 and even gave out some juicy 0.0% terms for Chysler last I checked. Thank you! (and I say that to the readers whose tax dollars are subsidizing their fellow consumer).
You can take it from here what happens down the road when the loans go bad. GMAC will go back to the government and ask for more money since they play a critical role in car financing. Notice a pattern yet? It's called a backdoor subsidization scheme - the exact same one happening at Fannie, Freddie, and FHA.
The Treasury Department and Federal Reserve are more supportive of such a move, said several people familiar with the process. It is unclear whether the FDIC will soften its position and allow CIT to issue debt guaranteed by the government.
So we need more Bairs, and less Timmy Geithners and Ben Bernankes. Ironically we want to give even more power to the Fed - almost as good as fiction. More importantly it is scary how each of these institutions are so dominated by 1 person - literally 3-4 people are running financial decisions of national scope without any checks and balances. Anyhow, that's crony capitalism... err, I'm sorry - that's the free market at work.
Government officials are considering a package including a regulatory waiver that could make it easier for CIT to pass assets from its parent company to its bank division and a separate way to borrow from various government programs.
Oooh, loopholes! Sounds exotic and sophisticated. Tell me more!
Remember, CIT Group already jumped through 1 loophole. To hide under the umbrella of the FDIC in the first place it became a bank holding company based on its one industrial loan company in Utah! Just like the insurance companies - look ma, we're not insurance companies anymore; we're all banks now (and hence can be protected under all the loophole programs)
- CIT became a bank holding company in late December and received $2.33 billion in bailout funds from the Treasury.
This was the quote I read midday that had me thinking "Mark stop thinking morally, act like a bailout deranged addict and buy! Timmy G. will protect you Mark!"
Treasury Secretary Timothy Geithner, asked in London about CIT, told reporters on Monday that he was "actually pretty confident" that "we have the authority and the ability to make sensible choices."
And you know what "sensible" means to these people.
Analysts started speculating last week that CIT may be forced to file for bankruptcy. Mixed messages from Washington and the company sparked confusion in financial markets and led many investors to believe the government was preparing to let the lender fail. CIT shares fell 18 cents Monday, or 12%, to $1.35, the lowest since its 2002 initial public offering. The cost to insure CIT bonds against a default soared, with investors having to pay $4.1 million up front plus $500,000 a year to insure $10 million in CIT debt against default.
But not to worry - unlike most (small) investors who hope to survive in the Wild Wild West of actual markets, the US government has not learned to throw good money after bad.
- Even if CIT weathers the storm, many still question whether the lender can survive. CIT relied mainly on capital markets for financing, for instance borrowing in short-term debt markets, and those markets aren't hospitable to junk-rated financial companies.
How did we get here?
Founded in 1908, CIT focused on lending to businesses snubbed by traditional lenders. In 2004, the company revved up its lending and expanded into areas such as subprime mortgages and student lending, which saddled it with large losses.
CIT's troubles deepened in the spring of 2008 when credit ratings companies began downgrading its debt, further limiting its financing options. Delinquencies and bankruptcies of customers hurt by the recession also began to mount. Over the past few months, CIT customers such as Eddie Bauer Holdings, Filene's Basement Inc. and Kainos Partners, a franchisee of Dunkin' Donuts stores, filed for bankruptcy protection.
So do you see how it works? They took on more risk. Their CEO and other C level executies I am sure made tons of money in that era where volume - regardless of quality = profits! (p.s. are we asking for any clawbacks? pshaw!!! don't make me laugh) Those risks blew up. Conclusion? I'm going to help them out of this jam (so are you, it's your national duty as a patriot).
Next step: CEO and other C level executives laugh to bank - probably will get retention bonuses because of their "unique skill set" to keep running CIT. Because who knows the company better and knows best how to steer them out of the troubles? I mean if you burn down the house, who knows best how the house looked before you lighted the match - in fact, give the person with a match a bonus! We all win here - reverse Robin Hood style.
Again lesson of USSA. Don't fail small, because you will fail alone. Fail big, and the US taxpayer will be there for you. Because apparently the US taxpayer does not care nor pays attention to these "complicated financial things."
And let me finish this thought with... who else. We do NOT want this (fill in the blank) company to lose any money, so bring all the King's horses and all the King's men (more importantly bring the peasants coins) to save the Gold Men again. Whatever is done, CIT Group must be saved. Otherwise - Goldman could lose money.
- The company secured $3 billion in financing from Goldman Sachs (NYSE:GS) in June 2008.
The reasons for bailout suddenly became so much more clear.