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CIT No More

Today was a sad day for small businesses in America.

"CIT Group Inc, a lender to a million small and mid-sized U.S. business, filed for bankruptcy" and will " cost US taxpayers another $2.3 billion."

Didn't President Obama say that " Small Businesses have always formed the backbone of the American economy?"

So what happened?

Well guess what, Sheila Bair was involved again.

"All the FDIC had to do was guarantee CIT’s debt, as it had done for many other lenders, and that TARP money would have been safe. And get this – CIT put in for guarantees back in January, but Bair sat on the application and provided no reason why."

Our FDIC chairwoman was all over the news chanting " no more bailout" recently.

Yet the next thing we saw was this:

"GMAC Sells $2.9 Billion In FDIC-Backed Debt"

Everyone knew bad managements ran their companies into the ground, but our government should either not help them at all, or treat them all equally.

I could praise her for refusing to help CIT if she made consistent decisions, but I could only despise her for playing favoritism while pretending to agree with the public anti-sentiment against government assistance.

What justification was there for FDIC to guarantee bonds for GMAC but not CIT?

" CIT’s small-business book is largely asset-backed – very different paper than run through the stress test on the biggest banks’ corporate books. Asset-backed paper is secured through a firm’s receivables, making it essentially collateralized lending to handle borrower cash flow... There is no policy rationale to the CIT decision.  GMAC got TLGP even though it was in extremis, but CIT apparently still can’t persuade the FDIC to give it up.  Is this because we like lenders for autos better than small business?"

The truth was, " CIT's bankruptcy exit [remained] fraught with uncertainty," but why would our government introduce uncertainty to small business owners instead of support, trust, stability and confidence at such a critical time? 

" CIT Group bankruptcy imperils small business lending"

" Retailers ‘Dodge Bullet’ With CIT’s November Bankruptcy Filing"

" CIT bankruptcy could have domino effect"

With Bair's decision on CIT's TLGP application, lending became even more difficult.

"One analyst familiar with CIT's plight says that the bankruptcy will likely have 'more of a psychological effect' than anything else right now. 'My understanding is that CIT, especially since the FDIC had denied it access to the guaranty program, was cutting back on its lending for the past several months and using payments on loans to repay its debt,' says Christie Sciacca, a former FDIC regulator, now an executive at consultancy LECG."

Unfortunately, this was not the first time her decisions and actions negatively affected the credit crunch.

First, her seizure of Wamu based on liquidity pressure exacerbated deterioration in lending markets.

Her short-sighted decision to wipe out Wamu bondholders ended up destroying the bond market.  CIT, like many companies across all industries, could no longer raise money by selling bonds.

Last but not least, to combat FDIC insolvency, Bair, whose agency's DIF ratio had fallen below the mandatory minimum since June 2008, has proposed charging a 3-year prepayment.  This assessment plan, however, would end up penalizing healthy and responsible banks and threatening their existence and worse, further aggravating the current credit and lending crisis for consumers and small and mid-sized businesses.

Under her leadership, the Federal Deposit Insurance Corporation, the agency that was supposed to protect us common citizens, failed miserably in its mandated missions.

What justification was there to use TLGP, a program designed to improve liquidity and lending, to help Goldman Sachs, who had nothing to do with small loan servicing, sell $20 billion worth of bonds?

Via TLGP, Bair not only stealthily sold failed banks, the result of both corrupt management and poor government supervision, cheap to financial giants, but she essentially gave them money to do so.  She misused this bond guarantee program and helped Wall Street Institutions raise an insane amount of money, with which they then used to pay back TARP and hand out record-breaking bonus this year.  

She also agreed to finance non-recourse loans for and share losses with private investors to overpay for bank assets.

"In the meantime I think you’re getting some negative results from the various government interventions. This is way beyond my book, in terms of time, but all of the direct involvement in the management and salaries of the banks and the implications that it could have in the future, the change in the priority of debt-holders in the case of the automobile workouts, some of the interventions of the FDIC (how they intervened with Washington Mutual), I think all those things are raising concerns in the banking sector."

Until the current power-hungry and irresponsible regulators are replaced, the future, regrettably, remains dim for the restoration of equal rights, as well as the return of respect for the U.S. Constitution.


***I am sorry that some of my articles are long and repetitive, but there is a reason for that.  Traffic isn't so hot around here, and I want to share as much information as possible with the few that happens to run across my blog and read one of my posts.

I have been extremely critical of Sheila Bair because she has shown very little respect to her important mission: deposit protection.  

I felt that no matter how many billions of dollars Paulson and his buddies pumped into the bonus pool or their favored institutions, as long as the FDIC did its job we would at least have our savings to help us weather all ensuing economic uncertainties.***