CIT Files For Bankruptcy

Yet another banking failure and this time it's huge!

On MSNBC: Commercial lending giant CIT files bankruptcy

• Government to likely lose $2.3 billion it spent to prop company up last year
  
  updated 6:28 p.m. ET Nov. 1, 2009
  
  NEW YORK - Lender CIT Group has filed for bankruptcy protection, in an effort to restructure its debt while trying to keep loans flowing to the thousands of mid-sized and small businesses.
  
  CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders have overwhelmingly approved a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.
  
  "The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," said Jeffrey M. Peek, chairman and CEO. Peek has said he plans to step down at the end of the year.
  
  CIT's move will wipe out current holders of its common and preferred stock, likely meaning the U.S. government will lose the $2.3 billion it sunk into CIT last year to prop up the ailing company. The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year.
  
  The bankruptcy protection filing is one of the biggest in U.S. corporate history. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. Its collapse is the latest in a string of huge cases driven by the financial crisis over the past two years, as bailed out industry heavyweights like General Motors and Chrysler both entered bankruptcy court.
  
  CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.
  
  It received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.
  
  It is unclear what the filing will mean for the nation's small businesses, many of which look to CIT for loans to cover expenses like buying materials at a time when other credit is hard to come by.
  
  Analysts have warned that already ailing sectors, like retailers, could be hit especially hard, since CIT serves as the short-term financier for about 2,000 vendors that supply merchandise to more than 300,000 stores.

Fifth biggest corporate bankruptcy filling in US corporate history.

CIT is a New York-based bank and it is one of the US largest lenders to small and mid-sized businesses.

$71 Billion in finance and leasing asset!

This bankruptcy filling will be massive.

Blogged previously: Last Chance For CIT?

• Q: Who does CIT serve?
  
  A: CIT says it serves more than 1 million business customers, most of them small or mid-size businesses.
  
  The company's clients run the gamut, but tend to be in industries considered riskier in the small business landscape, such as restaurants and retail. Dunkin' Donuts franchisees and Dillard's Inc. are among the company's clients.
  
  It's not clear what percentage of the country's small business lending market CIT Group holds, but the company is the ninth-largest commercial and industrial lender in the United States, according to Foresight Analytics.
  
  As of March 31, CIT Group held 1.7 percent of the $1.4 trillion in commercial and industrial loans on bank balance sheets.
  
  Q: What role do small businesses play in the broader economy?
  
  A: Small businesses provide about half of all private-sector jobs. According to the U.S. Small Business Administration, small firms generated 60 percent to 80 percent of net new jobs every year over the past decade.
  
  Small businesses — defined as having fewer than 500 workers — made up 99.9 percent of the 27.2 million businesses in the country in 2007, according to the SBA. Just 17,000 were large businesses.
  
  The odds aren't great for small firms, however. The SBA says that while two-thirds of new businesses survive at least two years, only 31 percent survive at least seven years.

As such, much focus will be on the small business. Will this bankruptcy filling impact small business lending? And if so, how huge an impact?

See also That CIT Bailout Delima Is No Small Issue

Other news report: CIT Files Bankruptcy; US Unlikely to Recoup Money and CIT files for 5th largest US bankruptcy

Total US Bank Failures Is Now 115

Posted exactly a week ago, 24th Oct 2009. Should You Be Worried With All These Bank Failures

• The tally of bank failures easily broke past the No. 100 milestone on Friday night, with regulators announcing the year's 106th closure.

A week ago, there were 106 bank failures.
Today the today is 115!

9 banks in major holding company fail

• NEW YORK (CNNMoney.com) -- Nine subsidiaries of FBOP Corp., a multistate holding company that included California National Bank of Los Angeles, succumbed Friday to the nationwide banking crisis, bringing to 115 the number of banks closed by regulators so far this year.
  
  ....
  
  The banks, which had combined assets of $19.4 billion and deposits of $15.4 billion, will open Saturday as U.S. Bank branches.
  
  The nine banks are Bank USA N.A. of Phoenix, California National Bank of Los Angeles, San Diego National Bank of San Diego, Pacific National Bank of San Francisco, Park National Bank of Chicago, Community Bank of Lemont in Lemont, Ill., North Houston Bank in Houston, Madisonville State Bank in Madisonville, Texas, and Citizens National Bank of Teague, Texas.
  
  Together, the nine banks had 153 offices.
  
  .........
  
  This year's failures have already reduced the FDIC's insurance fund to below $10 billion from $45 billion a year ago. Friday's closure will cost the FDIC an estimated $2.5 billion.
  
  After factoring in expected closures, the agency says its insurance fund is in the red and will remain there through 2012. Over the next four years, the agency expects bank closures will cost $100 billion.
  
  The insurance fund also carried a negative balance during the savings in loan crisis.

On LA Times: Regulators seize California National Bank in country's fourth-largest bank failure this year

Should You Be Worried With All These Bank Failures

On CNN Money: Bank failures stack up: Now 106 for 2009

• NEW YORK (CNNMoney.com) -- The tally of bank failures easily broke past the No. 100 milestone on Friday night, with regulators announcing the year's 106th closure.
  
  That's more than four times the number that were closed in 2008, and the highest total since 1992, when 181 banks failed.
  
  Earlier on Friday evening the dubious honor of the 100th failure went to Partners Bank, of Naples, Fla., which had $65.5 million in assets, according to the Federal Deposit Insurance Corp.
  
  The 101st failure was American United Bank, of Lawrenceville, Ga., which had $111 million in assets.
  
  The 102nd failure was another Naples, Fla., institution: Hillcrest Bank Florida, which had $83 million in assets.
  
  The 103rd closure was Bradenton, Fla.-based Flagship National Bank, with $190 million in assets.
  
  The 104th was Bank of Elmwood, based in Racine, Wis., which had $327.4 million in assets.
  
  The 105th failure was Riverview Community Bank of Otsego, Minn., with $108 million in assets.
  
  The 106th failure was First Dupage Bank in Westmont, Ill., which had $279 million in assets.
  
  Customers of all seven banks are protected, however. The Federal Deposit Insurance Corp., which has insured bank deposits since the Great Depression, covers customer accounts up to $250,000. This is funded through premiums paid by member banks.

Holy Cow!

Seven banking failures in one day!!!!!!!!!!!!!!!

Yeah, how optmistic can one be for an economic recovery!

Highlighted earlier this month: Georgian Bank: Yet Another Failed Bank!

• Oct. 1 (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.

And as mentioned, it really makes one wonder. The bank was 'supposedly' have plenty of capital and it was not even on the problem banks list.

Now we have SEVEN more bank failures!

Which makes this posting Banks' Health Were Exaggerated! more relevant!

Mentioned in that posting was a CNBC article: US Officials Exaggerated Banks' Health: Watchdog

• Senior U.S. officials deliberately created the impression last year that banks receiving huge government cash infusions were healthier than was the case, a Treasury Department watchdog's report released Monday said.
  
  As a result, the government and the bailout lost public credibility when the financial crisis deepened.
  
  Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke said at the time that their dramatic force-feeding of $125 billion into nine banks in October 2008 was a program for "healthy" institutions.
  
  Privately senior officials worried about the health of some of those firms, Treasury's Special Inspector General for the Troubled Asset Relief Program, Neil Barofsky, said.
  
  "By stating expressly that the 'healthy' institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions' condition and their ability to increase lending," the report said. Paulson won approval from Congress to spend $700 billion to repair the financial system.... (read the rest here )

Anyway, the article on CNN then continues.

• Why regional banks are failing. While larger financial institutions have received aid from the federal government, smaller banks have found themselves left adrift. Like their larger counterparts, many of these banks made risky loans to individuals and real estate developers during the boom years and are now facing large numbers of defaults as the recession drags on.
  
  Rising unemployment has made it difficult for many individuals to keep up with expenses, and businesses are feeling the crunch of consumers' reduced spending power. As a result, regional banks are left holding loans their customers can't repay.

The very last passage explains clearly why one the current so-called 'recovery' is clearly not sustainable if the unemployment problem persists.

No employment, how could these 'many individuals' keep up their expenses?

No employment, how about their housing loans (if any)?

No employment, how could they spend?

And if they do not spend, what then for America and the world? What then for the world largest consumer?

A consumer equals to a customer, no?

In a business, if customer spends less or if there is less customer, how optimistic can one be?

Remember Warren Buffett's Comments On US Economy

• The patient really went into the emergency room and it won’t come out of the hospital entirely for a while."

That the patient is STILL in the hospital.

That the patient is likely to stay in the hospital for a while.

The CNN article then continues.

• Problem banks list looms. The FDIC keeps a list of "problem banks," though it does not disclose the names to the general public out of fear that depositors at those institutions may prompt a "run on the bank."
  
  In June, the agency said 416 banks were at risk of failure -- the highest level in 15 years.
  
  It's a whopping figure, to be sure. But even as the pace of failures accelerates, 2009's numbers remain far from what happened during the savings and loan crisis two decades ago. More than 1,900 financial institutions failed from 1987-1991, peaking at 534 closures in 1989.

The problem bank list has 416 banks at risk.

But... but... but... one cannot even discount the banks NOT in the list.

Why? The US Banks' Health Were Exaggerated! as per CNBC article. Look at the example of Georgian Bank!

So what if there is MORE banks at risk?

And to make the matters even more worrying.

• Federal coffers running dry. An average of 10 banks have failed per month this year, and the federal coffer is thinning under the massive strain. The fund now stands at $7.5 billion, down significantly from $45 billion a year ago.
  
  When the FDIC factors in expected closures, the agency says the fund is in the red and will likely remain there through 2012. Bank failure costs are expected to total $100 billion over the next four years, leaving regulators strapped for cash.
  
  Last month, the FDIC discussed how to raise quick cash to replenish the fund. The agency proposed that banks prepay their deposit insurance premiums for the next three years.

Oops! The money is drying out really fast in FDIC!

How now?

Hmmm.. posted earlier this month: The Sustained Economic Rebound May Be Elusive!

Georgian Bank: Yet Another Failed Bank!

On Bloomberg News: Banks Have Us Flying Blind on Depth of Losses: Jonathan Weil

The first few passages were rather 'shocking'...

• Oct. 1 (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.
  
  It failed last week.
  
  Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.

Makes you wonder.

The bank was supposedly to have plenty of capital.

It was not ON THE PROBLEM BANK list!

But yet... if failed!!!

• How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind.
  
  The cost of Georgian’s failure confirms that the bank’s asset values were too optimistic. It also helps explain why the FDIC, led by Chairman Sheila Bair, is resorting to extraordinary measures to replenish its battered insurance fund.
  
  Georgian, which had five branches catering to local businesses and wealthy individuals, was chartered in 2001. By 2003, the closely held bank had raised $50 million from an investor group led by a longtime local banker, Gordon Teel, who remained chief executive officer until last July. It grew at a breathtaking pace, fueled by the real-estate bubble.
  
  Triple Play
  
  From 2004 to 2007, total assets almost tripled to $2 billion from $737 million. Annual net income rose seven-fold to $18.3 million. The bank touted its philanthropy, including a $1 million pledge to a local children’s hospital, and boasted of a growing art collection showcasing Georgia painters.
  
  As recently as its March 31 report to regulators, Georgian said it met the FDIC’s requirements to be deemed “well capitalized.” By June 30, that had dropped to “adequately capitalized,” after a $45 million second-quarter net loss.
  
  Georgian also reported a 12-fold jump in nonperforming loans to $306.4 million from $24.7 million three months earlier, mostly construction loans. Georgian’s numbers made it seem as if the surge arose from nowhere. On its March 31 report, the bank said just $79.1 million of its loans were 30 days or more past due. That included the loans it had classified as nonperforming.
  
  Survival Mode
  
  Georgian’s new CEO, John Poelker, downplayed any concerns. “Whether there is enough capital for the bank to be a survivor isn’t an issue,” he told Bloomberg News for an Aug. 5 article.
  
  What wasn’t made public until Sept. 25, the day it closed, was that Georgian Bank had agreed to a cease-and-desist order with the FDIC on Aug. 31 after flunking an agency examination. The 19-page order described various “unsafe or unsound banking practices and violations of law and/or regulations,” including failing to record loan losses in a timely manner. Georgian neither admitted nor denied the allegations. ( My comments: It flunked the FDIC test on Aug 31st... and yet... it was not disclosed until Sept 25!!! Where is the transparency??? )
  
  The FDIC updates the public about the number of banks on its problem list once a quarter. An FDIC spokesman, David Barr, said Georgian was added to the FDIC’s internal list in July. He said the agency adds banks to the list based on exam ratings, not the data in their financial reports.
  
  As for the 416 banks on the list as of June 30, up from 305 a quarter earlier, the FDIC said their combined assets were $299.8 billion. (The FDIC didn’t name the banks, per its usual practice.) If Georgian’s experience is any guide, the real-world value of those assets probably is much less.
  
  Rising Losses
  
  That might help explain why the FDIC keeps increasing its estimates for the losses it’s anticipating from future bank failures. In May, the agency said it was expecting $70 billion of losses through 2013. This week, it bumped that to $100 billion. The agency also said its insurance fund would finish the third quarter with a deficit, meaning liabilities exceed assets.
  
  The FDIC, backed by the full faith and credit of the U.S. government, will get whatever money it needs to protect depositors. For now, it plans to raise $45 billion by collecting advance payments from the banking industry. Those payments will cover the next three years of premiums that the banks owe.
  
  In effect, the FDIC is taking out a massive, no-interest loan to cover its bills. Borrowing from the future won’t improve its insurance fund’s capital, however, only its liquidity.
  
  The big question is what the FDIC will do next time, should its loss estimates keep rising -- and there’s no reason to believe they won’t. By statute, the insurance fund is supposed to be funded solely by the banking industry. The FDIC could keep borrowing from the banks, directly or through more advances.
  
  The agency could tap its $500 billion credit line with the U.S. Treasury. It still would have to pay back the money with fees from the industry, assuming the banks can’t persuade their minions in Congress to change the law. As it stands, the only way to boost the fund’s capital immediately is by charging the banks a lot more money for their insurance premiums.
  
  Given the odds that other surprises like Georgian Bank are lurking, the FDIC will have to bite this bullet eventually.
  

Yet another indicator that the so-called economic revovery is not sustainable?