John Paulson (IndyMac + CIT )= FDIC Disaster

Let's do some arithmetic.

Add this:

FDIC is backstopping the mortgage losses at IndyMac Bank (now OneWest Bank), and IndyMac Bank is hell-bent on foreclosing the properties, as in:
Is FDIC Killing Short Sales? (Active Rain, September 09)

To this:

Creditors of CIT Group is mulling the merger of CIT with IndyMac Bank, as in:
John Paulson mulls CIT and IndyMac merger: report (9/29/09, Reuters via Yahoo Finance)

Then multiply it by the common denominator:

John Paulson, a hedge fund billionaire

And the product is:

Potential huge profit for Paulson and his co-investors in IndyMac and CIT, and potential huge loss to taxpayers (because FDIC is already broke).

John Paulson's firm is one of the large creditors to CIT Group; it is also one of the private investors who are behind OneWest Bank that bought IndyMac from FDIC back in April this year. IndyMac Bank's press release lists the following entities as OneWest Bank investors:

Steven Mnuchin (former Goldman Sachs exec)
entities advised by

• J.C. Flowers & Co. LLC,
• Paulson & Co.,
• MSD Capital, L.P.,
• Stone Point Capital LLC,
• SSP Offshore LLC and
• SILAR MCF-I LLC

OneWest bank president Terry Laughlin is a former Merrill-Lynch, Fleetboston, and Mellon Bank executive.

IndyMac-CIT merger talk is simply a rumor at this point, may or may not be true. CIT share jumped on the news on Tuesday, surging 31% to close at $2.20. Then, this news broke after hours, and the stock took a nose-dive on Wednesday, plunging 45% to $1.16:

CIT near plan to turn over co to bondholders: sources
(9/29/09 Reuters via Yahoo Finance)

"NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News) is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

"CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

"The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

"If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history."

As structured, the current offer will practically hand over the entire company to the bondholders. I have a feeling that the bond holders will refuse, and force the company to go through Chapter 11 so that they can pick apart CIT's assets. Then, the bondholders, including John Paulson, will discuss the merger of thus restructured CIT and IndyMac (now OneWest), combining troubled mortgages and troubled commercial loans to create a potent money making machine for them. Fully backstopped by FDIC (i.e. taxpayers).

The Treasury Department, FDIC, and the Federal Reserve have all refused to help CIT, the largest lender in the United States that lends to small and mid-sized businesses for more than 100 years. Like they've done many times since last March when Bear Stearns went down, they are picking who's to survive and who's to die.

October 1st is the deadline for CIT to present a restructuring plan to its lenders.

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Irreconcilable Differences Between Goldman Sachs and CIT

From Minyan Peter at Minyanville.com. He hits the nail right on the head.

Irreconcilable Differences Between Goldman Sachs and CIT
(7/14/09 Minyanville.com) [emphasis is mine]:

"As a teenager, I hated those conversations with my father that began with him saying, “So let me get this straight…” during which my adolescent logic would be picked apart, thought by thought, until even I saw how clearly stupid I'd been. Bread crumb, bread crumb, bread crumb -- bear trap.

"This morning as I saw Goldman Sachs' (GS) cup-runneth-over earnings and the headlines regarding CIT Group (CIT), I couldn’t help but hear my father’s voice once again. Only this time, he'd be saying:

“So let me get this straight. Last year, the government agrees to make Goldman Sachs a bank holding company. They move all of their counter-party derivatives business into a newly formed bank. They receive billions in TARP funds, and tens of billions in FDIC guarantees so they can issue debt.

"And now they report unbelievable earnings, but they don’t have an asset category called “loans” on their balance sheet? And as Todd noted this morning, Goldman executives sold $700,000,000 worth of stock during the period when they received $10 billion in TARP money?

"And then on the other side, you have CIT, whose balance sheet is almost all loans, whom the government won’t step up to support in a liquidity crisis -- even though the government allowed them to become a bank holding company and gave them TARP funds? And they're both 'banks’?”

"To which my only response is: “Yes.""

"... Goldman Sachs receives all of the benefits of being a bank without lending money, while CIT -- which has been a small and midsize company lender for more than 100 years -- can’t make the transition to “bank” fast enough and risks complete failure."

But Goldman Sachs is hardly alone.

"Now, in the interest of full disclosure, Goldman is hardly alone in its arbitrage of government-banking regulations: Look at the balance sheets of State Street (STT) and Bank of New York Mellon (BNY) and they don’t look much like banks either, yet they were quick to take full advantage of the government bank-bailout programs. "

A commercial bank accepts money from one party and lends it to another.

The government must be high on something (I don't know what) and is playing God. They refused assistance to Bear Stearns, Washington Mutual, Lehman Brothers but bend over backward to help AIG, Citigroup, Goldman Sachs and Morgan Stanley (whose applications to become a commercial bank were approved over one weekend - a lightening speed), Bank of America (although you could feel BofA is sort of treated as an "outsider", not a true-blue Wall Street bank which BofA isn't).

And according to CNBC, the government, after denying any federal help to CIT, may be trying to block the private sector help to CIT [emphasis is mine]:

"CIT, the finance company struggling to avoid a Chapter 11 filing as soon as tomorrow, is seeking to line up between $2 to $3 billion in secured financing from private investors over the next day, according to people close to the situation.

"A number of private equity firms and fixed incomve investors have expressed interest in talking to CIT about providing financing that would be secured by some of the company's currently encumbered assets, such as airlines and rail cars.

"If it materializes, that financing would be incumbent on CIT gaining approval from regulators to move assets from the finance company to its bank.

"These approvals are all CIT is currently asking of regulators, who have thus far indicated they would provide no addtional support for the company.

"And so CIT finds itself in the postion of needing the approvals in order to have a chance to secure private capital and having regulators who appear unwilling to ofer those so called "non-objections." "

Goldman Sachs had no problem transferring assets to its so-called bank. But the regulators are unwilling to allow CIT to do the same.

I can understand the logic, however arbitrarily it is applied, that the taxpayers shouldn't foot the bill any more. But why block the transactions between the two willing, private parties? CIT needs money, and private investors may be willing to provide that money and willing to take the risk. What business does the government have?

Irreconsilable differences between Goldman and CIT? The former is favored by the government, the latter isn't. Why? Is it maybe because CIT actually lends to businesses and that is too much risk for the government?. It makes you wonder whether the government really wants to see the economy out of recession (it says so). It probably does (if only for the sake of higher tax revenue), but it wants to see it happen under the government's direction and strong guidance. Good luck with that.

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No Bailout For CIT

Just as I thought, only 2 days ago on Monday.

CIT talks fall apart, bankruptcy may loom
(7/15/09 Reuters via Yahoo Finance)

"WASHINGTON/NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News), a major lender to small- and mid-sized U.S. businesses, said on Wednesday that talks with the government to bail out the company had ended, a development that could make bankruptcy likely.

""Discussions with government agencies have ceased," the New York-based company said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term."

"The announcement came after last-ditch talks in which Treasury Department had been concerned about a worsening liquidity crunch at CIT over the last few days, and that government aid would not put the lender on a path to recovery.

"CIT said its management, directors and advisers were evaluating alternatives. It did not elaborate.

"A bankruptcy filing would mark one of the largest for a U.S. company since the global credit crisis accelerated last September."

CIT had received $2.3 billion of TARP money. No more, says the Treasury. I suspect CIT lacked a strong connection to the present administration.

I also find FDIC's attitude very amusing:

"The FDIC has been reluctant to do so [granting CIT access to its government debt guarantee program], however, because the program is designed for healthy institutions, and it believes CIT's participation involves too much risk."

FDIC has granted access to numerous institutions that are not the best examples of health (Citigroup and Bank of America come to mind). FDIC itself is no such example either, with reserve ratio of paltry 0.27% as of March 2009. It would need a massive bailout from the taxpayers more than any private sector financial institution.

But no matter. The government has decided who will be the winner and who will be the loser. CIT is the latter, but won't be the last loser as the government continues to extend its grabby hand into every aspect of our lives.

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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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