Monday, July 13, 2009

CIT Group's Looming Bankruptcy Threatens Small Businesses

CIT Group Says Its Failure Risks Demise of Customers (7/13/09 Bloomberg)

"CIT Group Inc., the century-old lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers.

"A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.

"A failure of CIT, run by Chief Executive Officer Jeffrey Peek, would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter. "

The government seems reluctant to assist CIT, despite the dire consequence that its collapse would pose for their clients, mostly small to mid size companies in manufacturing and retail. The officials are saying "a CIT failure would not cause system risk to the financial markets".

Both the Treasury Department and FDIC are saying they only help "credit-worthy" companies. Such as?? AIG? Citigroup? Fannie and Freddie?

(And how "credit-worthy" is FDIC, anyway? FDIC's reserve ratio as of March 31, 2009 was 0.27%.)

"CIT is in “active discussions” with regulators on a “series of measures to improve the company’s near-term liquidity position,” it said in a statement distributed by Business Wire today. The talks include CIT’s application for FDIC funds and measures such as the transfer of assets to CIT Bank, it said.

"CIT’s internal report outlines the potential effects of a failure on customers to which it’s committed $3.9 billion of bank lines.

"A “substantial portion” of clients “would not have easy access to additional revolving credit without CIT,” according to the documents. “This could lead to business failure for those who lack additional liquidity.” "

My take: As long as it is the Main Street (small/mid size manufacturers and retailers) that takes the hit, the government will "tighten the belt", claiming painful but necessary adjustment. GM and Chrysler were essentially taken over by the government for the puny amount of loans compared to what the government has given and will continue to give to the financial institutions.

Large financial institutions like Goldman Sachs and hedge funds are probably stuffed with credit default swaps (CDS) on CIT's debts. They would rather see CIT dead.

Here's Yahoo's Tech Ticker video. Aaron Task and Henry Blodget seem to think if the government bails CIT out it's a slippery slope. Hello, the slope's been slippery for very, very long time now. But do not worry. I have a feeling that the government will show a firm stance of not "wasting tax payers' money" any more. Certainly not on a financial firm that actually lends to small businesses.


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