CIT Bankruptcy

[Eredar Warlock]

CIT Group Inc. shares tumbled more than 75 percent Thursday morning as its inability to get emergency government funding raised expectations that the commercial lender will file for bankruptcy protection.

But it is unclear how such a filing by a company that lends to thousands of small and mid-size businesses would affect shaky financial markets hobbled by an economy in recession and bleeding hundreds of thousands of jobs a month. Small businesses are seen as keys to economic recovery.

CIT said late Wednesday that negotiations with regulators about a possible rescue had broken off after days of round-the-clock talks.

The move marked a defining moment for the Obama administration and showed it's drawing a line in the sand on federal rescues for troubled financial firms.

CIT shares dropped $1.24, or 75.6 percent, to 40 cents in morning trading Thursday.

The Wall Street Journal said in Thursday's edition that CIT was trying to line up at least $2 billion in rescue financing from existing debtholders and had given them 24 hours to decide if they can come up with the cash. It cited unidentified people familiar with the matter.

The muted response to CIT's woes suggests investors are more focused on signs that the economic slump may be easing, said Paul Baiocchi, senior market strategist at Delta Global Advisors in San Francisco.

"The market may simply scoff at this news," Baiocchi said. "We're seeing more optimism with the earnings outlook this quarter, so that could outweigh CIT's problems."

CIT's small size relative to other big commercial banks may also ease worries of a ripple effect. Though a major lender to small and midsize U.S. business with about a million clients, CIT is one-eighth of the size of Lehman Brothers when massive credit losses forced the investment bank into bankruptcy last fall.

CIT had also begun cutting back on lending in recent months, diminishing the risk a possible bankruptcy could cause significant damage to the broader economy. The lender had $5.3 billion in credit lines to customers as of March, down from $6.1 billion at the end of 2008.

"That shows they were pulling back and should lessen the immediate blow of this," said Kathleen Shanley, an analyst at corporate bond research firm Gimme Credit. "I don't see a real contagion effect here."

And neither, it seems, does the Obama administration's financial rescue program, headed by Treasury Secretary Timothy Geithner. By withholding aid, the administration is betting that CIT's likely failure won't pose a critical risk to an economy weighed down by rising unemployment.

CIT, which got $2.3 billion of bailout money in December, has warned that depriving it of more federal aid could imperil about a million corporate borrowers -- from Dunkin' Donuts franchisees to retailer Dillards Inc.

The Bush administration paid a price for its decision not to save Lehman Brothers, whose collapse helped spark the financial crisis last fall.

Asked about CIT, a Treasury Department spokeswoman said in an e-mail that "even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies."

With its assets deteriorating and dangerously little cash on hand, the news left CIT with few options outside of bankruptcy.

A bankruptcy filing would wipe out CIT's shareholders and the government's $2.3 billion stake. But CIT's clients would not automatically lose their lines of credit, longtime banking analyst Bert Ely said.

Still, with other lenders to retailers already under financial strain, many CIT clients may lose their financing options.

"The industry just won't be able to absorb the amount of volume," said Michael Cipriani, executive vice president of Rosenthal & Rosenthal Inc., a competitor of CIT that's considered healthy.

New York-based CIT was negotiating with officials from the Treasury, Federal Reserve and Federal Deposit Insurance Corp. for much of the week. FDIC Chairman Sheila Bair resisted lobbying by CIT and other regulators for her agency to come to the rescue.

An agreement on aid appeared close at midday, but trading of CIT's shares was halted Wednesday afternoon. CIT said late Wednesday that negotiations had stopped.

"I think it makes a bankruptcy filing a near certainty," Ely said. "It's quite possible they could file before trading on Thursday."

The company in April posted a larger first-quarter loss than expected and has seen funding options disappear as investors shy away from purchasing all but the safest forms of debt. The lender has $7.4 billion in debt coming due in the first quarter of 2010, plus other obligations.

A spokesman for the Fed declined to comment. A spokesman for the FDIC could not be reached for comment Wednesday evening.

Though a fraction of the size of big commercial banks, CIT's holdings are substantial. The company had $75.7 billion in assets as of March 31, according to a corporate filing.

Lehman Brothers, which collapsed after former Treasury Secretary Henry Paulson declined to save it, listed $639 billion in assets when it filed for bankruptcy Sept. 15.

Paulson, serving under President George W. Bush, was lambasted for letting the company fold, a move that unleashed chaos in world markets.

But nearly a year later, the government faces growing criticism over its policy of propping up companies -- including General Motors, Chrysler and large insurers -- that claimed to be systemically important.

But the decision could come back to haunt the administration if CIT's failure proves devastating to the firm's many small business borrowers. Small businesses are considered crucial to economic recovery, employing about half of the private-sector work force.

"CIT may not be 'too big to fail,' but they are systemically important," said Scott Talbott, top lobbyist with the Financial Services Roundtable, which represents CIT and other big financial firms. "Many small businesses will be severely impacted by today's actions, and the effect could lengthen the economic crisis."

http://www.foxnews.com/politics/2009/07/16/bailout-cit-despite-bankruptcy-fears/

I have mixed feelings about this. I am glad that the Administration is saying 'no" to bailouts (which I was against in the first place) but I don't like the prospect of an organization that lends money to so many small and medium sized businesses go belly up. I have to wonder if this won't cause bankruptcies in some small businesses, which would destroy jobs.

 

[Netto Azure]

Troubled CIT 'gets rescue deal'

CIT provides funding for small and medium-sized firms​

Troubled US bank CIT has approved a $3bn (£1.8bn) loan from shareholders to keep it out of bankruptcy, reports say.

The emergency financing is aimed at giving the firm time to restructure some of its debt payments, The New York Times and the Wall Street Journal said.

Its shares almost doubled in value on the reports, though they are only about 20% of the value they were last year.

The US government has said it will not offer a bail-out to CIT - which lends to small and medium-sized businesses.

Last week, shares in CIT plunged as analysts warned investors should brace themselves for the bank's collapse - though they later rallied on news of the rescue talks.

Business support

Fitch and Moody's - the credit ratings agencies - downgraded CIT on Thursday, after it said it was unlikely to receive any more government help.

The US Treasury said that the government needed to "keep the threshold high" for exceptional aid to individual companies.

The failure of CIT would remove a key source of credit for thousands of small and middle-sized US firms, which are already struggling in the recession.

If CIT, founded more than a century ago, went bankrupt it would join Lehman Brothers and Washington Mutual on the list of large financial services companies to collapse since the acceleration of the credit crisis in September last year.

But analysts say that if it did fail, it would be unlikely to have the same impact.

Well, it gives it more time. =/