CIT files for bankruptcy

CIT Group Inc's bankruptcy filing, while long expected, could still trigger a financing crunch for many of the hundreds of thousands of small businesses it finances.
CIT filed for bankruptcy protection on Sunday, and said its creditors have already approved the century-old commercial lender's reorganization plan.

But the company's long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, lawyers said.

link

Well this won't be good for the stock market tomorrow.

If you log into Citi bank account, it informs you in the headlines that:

11/01/09 - 17:05 - CIT files for bankruptcy
11/01/09 - 16:28 - CIT files for bankruptcy

Great, now I feel very confident banking here.

Take more of my paycheck and do a Government bailout please. This company made stupid decisions so we definitely need to keep them operating.

Everyone knew that CIT was going to file for bankruptcy. Just like Fannie and Freddie will eventually file for bankruptcy. Rightly or wrongly, the government spent the money to make sure that all of these bankruptcies were done in an orderly manner. Was it worth it? Who knows. Was the government successful in adverting complete and total chaos in the financial system? It seems like it.

Go short FNM or FRE. It's the same thing. Or AIG. The problem is that you could get caught in a short squeeze and forced to cover before they go to 0. All of 3 of those will go to 0... the question is how long and whether you get a pop between now and then.

Look what happened to GM stock after bankruptcy.

How do I profit from this?

walletfart said: Look what happened to GM stock after bankruptcy.

You do realize that the new GM is not a publicly held company, right?

kantscholar said: comptalk said: Damn. Shoulda shorted on Friday.

This is why most retail investors lose money. Futures are up, significantly. No one cares about CIT group filing for bankruptcy except all of those morons who were buying CIT common and the bondholders. Everyone knew CIT was going to 0... just like FNM, FRE, AIG, etc.

As for GM, the common went to 0 when it went bankrupt. That's generally how it works.Maybe it was up more earlier, but I am looking at S&P500 only up 5 points. More importantly, in the stock markets that are open for trading now, Neikei, Hangseng and Shanghai, indexes are showing heavy losses. But they could be just the catching up with the US market's move on Friday. So if the futures don't go down further, you seem to be correct in saying the CIT bankruptcy was "priced in".

dkcs said: I wonder how this will affect Dell since CIT was the backer of their consumer / business credit cards and business leasing?

Was it CIT, or CIT Bank (which did not file for BK)? I don't know the answer, but I noticed that Bill Me Later (and other skins on the same setup) are all CIT Bank.

SUCKISSTAPLES said: Just to make it clear for the numerous people who dont read carefully, CIT IS DIFFERENT THAN CITI

Great coincidence. Maybe a bunch of dumb people will think CITI filed for bunkraptcy, and the stock market will tank 500 points, maybe more. We will have some excitement finally in the stock markets.

BetterBrainBureau said: SUCKISSTAPLES said: Just to make it clear for the numerous people who dont read carefully, CIT IS DIFFERENT THAN CITI

Great coincidence. Maybe a bunch of dumb people will think CITI filed for bunkraptcy, and the stock market will tank 500 points, maybe more. We will have some excitement finally in the stock markets.

Sorry, futures are up right now.

scrouds said: jburger said: If you log into Citi bank account, it informs you in the headlines that:

11/01/09 - 17:05 - CIT files for bankruptcy
11/01/09 - 16:28 - CIT files for bankruptcy

Great, now I feel very confident banking here.

Who logs into their bank account just to check the news?...those who thought their bank went under?

ThePessimist said: brettdoyle said: Take more of my paycheck and do a Government bailout please. This company made stupid decisions so we definitely need to keep them operating.
CIT's biggest mistake was to rely on the money markets for funding. Sure, they had some delinquencies, but nothing of the order of Citi, BofA, etc.

What upsets me is that CIT would have been profitable (and avoided bankruptcy) if it could have had similar support to the "too big to fail" banks: ability to issue FDIC-insured bonds, Fed waivers allowing them to transfer assets to their banking subsidiary to use as collateral at the discount window, etc. The huge banks could basically borrow unlimited nearly-free money, while CIT was left scrambling for enough liquidity to fund their operations.

I am against bailouts in general. However, I think it's disgraceful the way that the government so blatantly played favorites here. Worst was the way that the FDIC kept CIT's application to issue bonds under review for months. If they had just said no quickly, CIT would have known to seek private funding much earlier. It's almost as if the government wanted CIT to fail.Why are you upset given CIT is essentially bailed out by its bond holders without incurring additional costs to tax payers? It seems its business will be minimally impacted throughout the prepackaged bankruptcy.

nycll said: Why are you upset given CIT is essentially bailed out by its bond holders without incurring additional costs to tax payers? It seems its business will be minimally impacted throughout the prepackaged bankruptcy.
First, the drawn out saga of CIT has already had a severe toll on small businesses. They've been very limited in their ability to extend credit to new customers or expand credit to existing ones, hampering many business's expansion plans. It wasn't clear before now that creditors would approve a prepack. With many merchants concerned that they'd lose their only source of factoring, many were avoiding purchasing inventory.

More importantly, I find it philosophically repugnant that Washington should be so blatantly arbitrary in their treatment. These banks are too big to fail, these banks aren't... these banks get unlimited cheap money, these banks don't. Warren Buffett made the point a while back that much of CIT's business (leasing, factoring, etc.) really had to be in the hands of a government subsidized institution that could get that cheap money. It wasn't that CIT didn't have the expertise to run it, rather that the government's discriminatory actions made it less profitable for them than the same business would be at a "too big to fail" bank.

So, to summarize, there's a large indirect cost to the economy, and thus indirectly to taxpayers. That cost could easily have been avoided had the government not engaged in egregiously discriminatory behavior. I think that's enough reason to be upset.

Edit: Here's an article from today describing the ongoing impact of CIT's bankruptcy on the retail sector: Link

nycll said: Another point I disagree with you is I don't think CIT's small business lending will be materially different even if the government had agreed to bail it out with more tax payer money.
Just to clarify - I didn't want to see CIT get more taxpayer money in a direct bailout. My point was that if they had gotten the same indirect support as bigger banks, they wouldn't be in a position where they'd need an additional bailout. The lower cost of money provided by FDIC-insured bonds and increased discount window access would have made them profitable enough to survive.

Also, at least in terms of book value, CIT's net worth isn't negative. They have more assets than liabilities listed in the bankruptcy filing. You can argue whether some of those assets should be written down more, but this bankruptcy is driven liquidity, not insolvency.

nycll, I don't know why you keep saying that CIT has "negative net worth" and is insolvent. As I said, CIT has a positive book value - are you arguing with the valuations? (The bankruptcy filing cited $71 billion in assets and just under $65 billion in liabilities.)

The bondholders agreeing to the haircut doesn't prove that CIT is insolvent. Rather, it proves that CIT doesn't have the liquidity necessary to pay its upcoming bond maturity. There's a difference between a liquidity-driven bankruptcy and an insolvency-driven one. Yes, bondholders agree to a haircut in exchange for ownership of the company, because not to do so means that CIT would repeatedly face the same problem each time a major bond issue matured. And given that the company needed to file a bankruptcy, a non-prepack would probably kill the business, result in a fire sale of assets, and result in a terrible recovery.

Part of CIT's liquidity problem is that, to get the loans in May, they had to pledge as collateral a huge basket of their assets. It was a hugely expensive loan. If CIT could have gotten "big bank"-style relief back then, they'd have plenty of unencumbered assets now, and would probably be able to raise cash to pay off the next several upcoming bond maturities.

kantscholar said: Rightly or wrongly, the government spent the money to make sure that all of these bankruptcies were done in an orderly manner. Was it worth it?

No, it wasn't. If they were given a super-senior position in the debt structure, the taxpayer getting cornholed 100% could've been EASILY avoided. The "we had to throw away 2.3B to save the financial system" is a very weak/stupid argument. You kinda of have to prove the system would've blown up had they not taken the action, which is of course impossible..

Was the government successful in adverting complete and total chaos in the financial system? It seems like it.

So far.. I guess some folks with the same line of thinking probably believe "the real estate market is fixed now" as well.

It doesn't really matter. This is just people fighting over control of the business. CIT has barely been lending for almost 18 months. The other commercial lenders are pretty horrific as well. Couple weeks ago I met with a commercial lender from one of the 'safe' national banks. This 'safe' bank wasn't lending on a govt. guaranteed DOE loan, would only lend on appraised assets at 50%, and had no interest in doing any type of revolver. The banker admitted to not having much work to do ... FYI this was for a profitable growing business looking for expansion capital of ~30% EBITDA.

To be honest, there was no point in saving the banks if this is how they behave.

cheezedawg said: I've read some of Backus's research, and I have to say that I kind of doubt that you have based on the conclusions you are drawing in this thread. I might have missed the paper you are referring to, but the closest thing I could find to this was some research about asset prices as an economic indicator, which I hope you can see is different than net worth. Additionally, his research on current accounts and trade deficits (like this paper, for example) directly contradicts the claims you have been making in this thread on that subject.

BTW, that paper might interest you, nycll. He has a pretty good analysis of Buffet's Thriftville vs Squanderville analogy. Spoiler: he proposes renaming Squanderville to Entrepeneurville.I just read Backus' paper "Current Account Fact and Fiction". Here are some comments not in particular order.

1. I'd like to ask thePessimist a cite of how exactly he debunked the wealth effect. In this paper, one argument Backus made to prove Americans were not spending beyond their means (more on this later) was Americans networth in stocks and real estates were growing as fast as spending. This line of reasoning seems to be recognizing the wealth effect, as least the version I understand.

2. In this paper he disputed several of the trade deficits alarmists claims. On the following points I do agree with him (i.e. the statements are not true):

The US external deficit is unprecedented.
The US external deficit is the result of the government deficit.
Interest on foreign debt is becoming a significant burden.

3. But I agree with the alarmists' 2 key statements:

The deficit will lead the dollar to depreciate. In this point, Backus says the foreign exchange market is too complex to predict, which is true. But over the long run, short term impacts such as economic growth and recessions, interest rate cycles tend to cancel out. Only thing won't cancel out is the net shortage or surplus of dollars in the international market. If we constantly function as net buyer of foreign made goods, there is no way the extra supply of dollars won't push down the value of it.

Another example is Japan. Its economy has been abysmal for many years. Yet the Yen remains strong. Why? The rest of the world need the Yen to buy Japanese products more than the Japanese need the foreign currencies to buy imports.

Americans are living beyond their means. He wrote the paper before the Great Recession. Now with hindsight we all know he was wrong.