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Trouble brewing at CIT group

Friday, July 17, 2009, 7:19 AM

From a recent In Session post:

This week, the big news is the trouble brewing at CIT group.  If you don't know them, they are a large financial services firm, mainly providing loans and financing to mid-sized companies.

Their business model involves lending at one rate, then selling the loans to the market at a slightly lower rate and pocketing the difference.  Something like a bank, but they do not leverage their loans off of deposits.  Of course, I am simplifying the business model of a very large and diversified company.  Suffice it to say that the way the securitization market has been operating, and with the cost of capital climbing the way it has, their business model has gone to heaven.  It has shuffled off the mortal coil. 

At any rate, things have not looked good for a while.  This is one of the more horrid-looking charts you will ever see...

...with a technical breakdown below the lows (purple line and arrow), while the MACD and RSI (red arrows) say this thing is just now rolling over or still has a ways to fall, respectively.

Last week there was this news:

CIT in talks with US; plunges on liquidity worry

NEW YORK (Reuters) - CIT Group Inc (CIT.N) said it is in active talks with the U.S. government to gain access to a key lending program, as the commercial lender's stock fell to a record low on Friday on concerns that it would be excluded.

The shares fell as much as 39.2 percent on reports the Federal Deposit Insurance Corp will reject the New York-based company's effort to join its Temporary Liquidity Guarantee Program because CIT's credit quality is worsening.

The program has allowed dozens of financial services companies, many of which are suffering big losses, to sell "triple-A" rated debt at low cost. Through May 31, about $345.8 billion of debt issued under the program was outstanding, according to the FDIC website.

CIT said it is having an "active dialogue" with the government, but that there is no guarantee the FDIC will approve its application.

The lender to small- and mid-sized businesses became a banking company in December and obtained $2.33 billion of funds from the federal Troubled Asset Relief Program.

But it has lost close to $3.3 billion since the end of 2007, and in a May regulatory filing said it had $10 billion of funding needs to address in the year ending March 31, 2010.

On Wednesday, Fitch Ratings downgraded CIT deeper into "junk" status, a move that affected $35 billion of CIT debt.

And now this warning from CIT cautioning (threatening?) the government to not let it fail:

CIT Group Says Its Failure Risks Demise of Customers

July 13 (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 CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn’t doing trade finance and lending, its customers will look to other banks for replacement and from what I’ve seen, they aren’t willing to step up.”

CIT has already retained the bankruptcy experts at Skadden, Arps, Slate, Meagher & Flom LLP, so they're gearing up for a probable date with bankruptcy.

This is an event worth watching this week, because this is a very, very large compan. And so far, the government looks like it is going to let it go the way of Lehman's.

This would certainly roil the markets anew.

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7 Comments

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
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Posts: 546
And another one to bite the dust . .

Chris -

Can you interput what you think the loss of gov backing will do to the small-to-mid size business? Obviously if they don't have loans to pay while this company is in limbo, wouldn't that be a good thing? Or does it not work that way?

EGP

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2219
Re: Trouble brewing at CIT group

 I heard on radio biz report that many of CIT's customers cannot carry on operations without their credit lines/loans to cover payroll, suppliers et al.  If this stream of funding goes away, they have to either secure new credit streams or pursue bankruptcy (the example given was clothing companies -- the only way out of their contracts with customers [should they not be able to fill them] would be to go bankrupt).  

But the way the markets have been smoking crack all week, they'll figure CIT's demise is a *good* thing and the DOW will go up another 200 points.  

Can you tell I'm short the DOW?  

Viva -- Sager

crash_watcher's picture
crash_watcher
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Posts: 146
Re: Trouble brewing at CIT group

Some plausible reasons why the government is willing to let CIT bite the dust:

" Unlike Detroit automakers that were bailed out, CIT was not backed by powerful labor unions that could mobilize voters ahead of midterm congressional elections next year. And CIT’s lobbying push for federal help paled in comparison to big Wall Street firms that received a taxpayer handout last fall.

“The reason CIT didn’t get rescued is because it didn’t have enough clout,” said Jonathan Macey, deputy dean of Yale Law School and author of a book on Sweden’s bank bailout. “If they had just had a few more labor unions and special interest groups, they might have (been saved), and that’s extremely discouraging.”

........

Goldman Sachs, for instance, has benefited greatly from having access to a Federal Deposit Insurance Corp. program that guarantees newly issued debt. That’s the same program that CIT had sought and was ultimately denied access to.

The result: By protecting large institutions and not small ones, “the too-big-to-fail problem gets worse,” said Simon Johnson, a former chief economist with the International Monetary Fund and now a professor at the Massachusetts Institute of Technology’s Sloan School of Management.

“We can expect to see is that the big guys are going to keep getting bigger and the small guys are going to have to clean up their acts or go bankrupt,” he said. "

from: http://blog.taragana.com/n/in-denying-aid-to-cit-group-obama-administration-reveals-that-bailouts-could-end-112047/ 

propamanda's picture
propamanda
Status: Bronze Member (Offline)
Joined: Sep 17 2008
Posts: 61
Re: Trouble brewing at CIT group
Chris M wrote:

 Their business model involves lending at one rate, then selling the loans to the market at a slightly lower rate and pocketing the difference.  Something like a bank, but they do not leverage their loans off of deposits

Why should FDIC be obligated to give them a dime?  I thought FDIC was supposed to be the Federal Deposit Insurance Corporation - a protection for depositers with up to $100,000 being held in a bank in the event that the bank goes bankrupt.  This bank has no deposits and probably never paid a single insurance premium to the FDIC.

And as for the assertion that allowing this institution to fail would "precipitate a crisis," it sounds just like the same story we have heard over and over and over again right before we are fleeced for the money.  Are ALL banks too important to allow them to fail?  If so, perhaps we should come up with some respectable regulations that would keep them from putting their (our) assets at such risk that it leads to their failure in the first place.  If a business is too important to allow it to fail, we should at least make sure the people in charge are running it sustainably.  Or, perhaps we would all benefit from a lesson in what happens when bank managers knowingly put that much money at risk and lose it.

Also, for any of you who have read The Creature From Jekyll Island, this is just another round of the same old sob story we have heard before (I am on page 67 - highly recommend it!)

 

 

 

 

Ready's picture
Ready
Status: Platinum Member (Offline)
Joined: Dec 30 2008
Posts: 917
CIT to be bailed out... but not by USGov, kinda

This just keeps getting better:

Quote:

CIT To Be Bailed Out By Goldman And JP Morgan

Developing Story: I am the great vampire squid's total lack of surprise. So the government and FDIC will not touch CIT, but Goldman and JPM which have tens of billion in dollars owed to the FDIC via the TLGP can bail them out and make it seem like a private bail out? Are all conversations between 85 Broad and Tim Geithner/Sheila Bair over the past 48 hours FOIAble? Red pill please. Also explains the two banks' recent commingled dinning patterns.

I'm beginning to feel like Mainecooncat that this corruption goes far too deep to offer up any hopes of repairing the damage to the US at this point. Hope I'm wrong.

Rog

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Trouble brewing at CIT group

just remember the strategic restructuring plan that's happening in this crisis and you'll understand why CIT would be allowed to fail.  what we've seen thus far is all about centralization of power, wealth, control into DC and Wall St.  the facts:  1) small institutions are being mopped up, taxed, regulated, and dying on the vine.  2) the largest institutions are being propped up so they can mop up even more small guys (oligopoly marketshare) and some are becoming public/private hybrids. 3) meanwhile the people are being taxed, policed, and struggling with impossible debt and even being given more debt by the government to fuel #2.  

what do these facts mean?  aligning everything under a few massive banks and the largest corporations all working in synch with the national government creates a dangerously efficient machine for top-down control of a people.  does that sentence sound like anything you've heard of in history?  this is the economic structure of fascism being created before our eyes. 

small businesses are somewhat out of the web of control of large institutions.  as the fuel for small businesses, CIT will either 1) be allowed to die or 2) become more controlled (like Goldman getting their fingers on the strings) in order for DC/Wall St to gain more control over the small business world.  so it's all about shifting power/control from small to big.  this is the same energy behind the FDIC's new level of taxation on small banks that's basically shutting them down.  same energy behind something like the Monsanto bill...centralizing food production under 1 big corporation by making our own independent food illegal.

small to big...the inertial momentum of our society.  and it's been put into hyper-drive since this collapse.  not good. 

strabes's picture
strabes
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Joined: Feb 7 2009
Posts: 1032
Re: Trouble brewing at CIT group

 

endgameplayer wrote:

Can you interput what you think the loss of gov backing will do to the small-to-mid size business? Obviously if they don't have loans to pay while this company is in limbo, wouldn't that be a good thing? Or does it not work that way?


No it's not a good thing.  It kills them.  Loans are a small business' lifeline...otherwise they have no working capital, can't hold inventory, can't pay operational costs.  

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