Thursday, July 16, 2009

What's Next For CIT?

From CNBC:

  • "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.''

From GlobeAndMail Troubled CIT won't get bailout from Washington

  • For days now, the commercial lender has argued it is too big to fail, and warned that if it was forced to seek bankruptcy protection, hundreds of thousands of small businesses would be left in the lurch, threatening the country's fragile recovery.
    But Washington's 11th-hour refusal to mount a rescue suggested the opposite: That lawmakers view CIT as too small to save, and that their growing exasperation with bailouts more than offset any fears they had about a larger ripple effect in the economy.
  • CIT said its board is examining alternatives amid a cash crunch, but the prognosis looks grim. Rating agency Standard & Poor's predicted this week that CIT would teeter into bankruptcy if it could not secure further government support.

    The company already received $2.3-billion (U.S.) worth of aid money last year, but that is not nearly enough to help it repay looming debts and finance its lending operations. Customers have recently drawn down their lines of credit by more than $750-million, exacerbating the company's cash woes.

    CIT has $75-billion in assets, making it a fraction of the size of Lehman Brothers, which the government allowed to fail last September despite its sizable $639-billion in assets.

    Yet despite CIT's diminutive stature, its fate has become highly politicized, not least because it is seen as an important source of funding for the engine of the American economy: small and mid-sized businesses.

    CIT told Washington that 760 manufacturers and more than 300,000 retailers – along with several National Hockey League teams – could suffer a “crisis” if it did not receive a lifeline.

    That spurred several members of the U.S. Congress to plead for a bailout on its behalf.

    Barney Frank, chairman of the House financial services committee, said earlier yesterday he hoped the government could come up with a structured aid package for CIT.

    “If CIT doesn't get structured help, then it will have a very negative effect, I'm told, on small businesses around the country,” he said.

    U.S. President Barack Obama, however, appears willing to gamble that other banks will step in to fill the lending void, and take on CIT's stranded customers.

Chatter is out that Could Goldman pinch CIT!. Yes Goldman Sachs had 3 Billion worth of credit extended to CIT and the following article suggests that Goldman would not be hit.

  • That’s because Goldman’s lending facility is basically a fully-collateralized repo facility. Any money drawn down by CIT is collateralized with physical collateral. That is, not securities of unknown value but things like real estate and aircraft. In addition, Goldman has taken out a small amount of credit default swaps intended to cover any decrease in the value of the collateral. ( source: )

See also That CIT Bailout Delima Is No Small Issue

I chuckled remembering how one declared that one should hold stocks for decades (yeah, twenty or thirty years) in an investment. Ideally it is a yes. However, there are so many exceptions to such a simplistic rule. And common sense rules over these exceptions. Holding long term does not solve a wrong stock selection. Holding long term does not help the investor if the business of the stock fails.

Here's the chart of CIT since 2002. It's only 17 short years.

Would this be the start of the next crisis? Well, here's another cracker from Jesse:
Derivatives Crisis: More Bailouts On Deck?. He highlights an article featuring Mark Mobius.

  • “Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation,
  • The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.Looming Crisis
  • “Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.
  • A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.
  • “Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore.