Wall Street Crisis: And The Wall Street Bankers Win .... Yet Again

Again yet another example why corporate America is working!

Here's the best trading deal ever:

• The trade makes money, we share the profit.
  The trade lose money, it's your losses not mine!

And as incredibly lopsided, insane and stupid, such a trade agreement actually exist in Wall Street!

No wonder America is in its crisis!

Heck, they should call it the Wall Street CRISIS!!!!!!

On NY Times: Banks Shared Clients’ Profits, but Not Losses

• JPMorgan Chase & Company has a proposition for the mutual funds and pension funds that oversee many Americans’ savings: Heads, we win together. Tails, you lose — alone.
  
  Here is the deal: Funds lend some of their stocks and bonds to Wall Street, in return for cash that banks like JPMorgan then invest. If the trades do well, the bank takes a cut of the profits. If the trades do poorly, the funds absorb all of the losses.
  
  The strategy is called securities lending, a practice that is thriving even though some investments linked to it were virtually wiped out during the financial panic of 2008. These trades were supposed to be safe enough to make a little extra money at little risk.
  
  JPMorgan customers, including public or corporate pension funds of I.B.M., New York State and the American Federation of Television and Radio Artists, ended up owing JPMorgan more than $500 million to cover the losses. But JPMorgan protected itself on some of these investments and kept millions of dollars in profit, before the trades went awry.
  
  How JPMorgan won while its customers lost provides a glimpse into the ways Wall Street banks can, and often do, gain advantages over their customers. Today’s giant banks not only create and sell investment products, but also bet on those products, and sometimes against them, putting the banks’ interests at odds with those of their customers. The banks and their lobbyists also help fashion financial rules and regulations. And banks’ traders know what their customers are buying and selling, giving them a valuable edge.
  
  Some of JPMorgan’s customers say they are disappointed with the bank. “They took 40 percent of our profits, and even that was O.K.,” said Jerry D. Davis, the chairman of the municipal employee pension fund in New Orleans, which lost about $340,000, enough to wipe out years of profits that it had earned through securities lending. “But then we started losing money, and they didn’t lose along with us.”
  
  Through a spokesman, JPMorgan’s chairman and chief executive, Jamie Dimon, declined a request for an interview. The spokesman, Joseph Evangelisti, said that JPMorgan had a long record of success in securities lending, and that the losses represented only a small fraction of the funds in the program.
  
  Moreover, Mr. Evangelisti said, all of the investments had been permitted under guidelines negotiated with the bank’s clients. JPMorgan, he said, did not take undue risks.
  
  “We have powerful incentives to take only prudent investment risks,” Mr. Evangelisti said. If customers lose money that they have entrusted with the bank, he said, that “can lead to a loss of clients and can affect the reputation of the business.”
  
  The financial regulation bill that Congress just passed, after fierce lobbying by banks, is aimed at curtailing some of the practices that caused the financial crisis. But much of Wall Street has mostly gone back to business as usual. Nowhere are the potential conflicts more apparent than on the trading floors, where executives must balance their pursuit of profits and their duty to customers.
  
  In addition to losing money for New Orleans workers and others, securities lending also played a central role in the near-collapse of the American International Group. Through securities lending, pensions and mutual funds borrow money to make trades, adding to the risks within the financial system.
  
  Lawsuits are flying against JPMorgan and others, including Northern Trust. Clients say that they were not warned of the risks associated with this practice and that the banks breached their fiduciary duty. Wells Fargo lost such a suit over the summer and was ordered to pay four institutions a combined $30 million. The State Street Corporation, which took a $414 million charge in July to cover some of its customers’ losses, faces suits from other clients.
  
  Representatives for these banks said the companies had acted appropriately and that they intended to fight the suits.
  
  Despite such troubles, the securities lending business has rebounded after plummeting during the crisis. Today shares with a combined value of $2.3 trillion are out on loan, according to SunGard, which provides technology services to financial companies. In 2007, before the bubble burst, the total on loan was worth $2.5 trillion.
  
  The quick revival of securities lending raises concerns about whether banks and their pension customers have learned any lessons.
  
  “What happened was the banks got greedy and they looked at the return they were getting on the collateral and said, ‘Why don’t we go further with this?’ ” said Steve Niss, the managing partner at the NFS Consulting Group, an executive search firm specializing in investment management. “But the clients got greedy right along with the banks.”
  
  
  

Utter Lack Of Disclosure And Transparency

Interesting article from Bloomberg: Trading Eludes Dodd-Frank as No Investors See Inside Black Box

• Trading Eludes Dodd-Frank as No Investors See Inside Black Box
  By Bradley Keoun - Sep 13, 2010 7:00 AM GMT+0800
  
  It took a Congressional inquiry this year to force Goldman Sachs Group Inc. to disclose how much it made in the mortgage market -- and that was only for 2007.
  
  Goldman Sachs hasn’t revealed mortgage-trading revenue since then, leaving investors to guess how much it contributes to the fixed-income, currency and commodities division, or FICC, which also trades junk bonds, yen, oil and uranium, sells weather derivatives and operates power plants. The division brought in $23.3 billion last year, or 52 percent of the New York-based firm’s total, and by itself would rank 90th by revenue in the Standard & Poor’s 500 Index, just ahead of McDonald’s Corp., according to data compiled by Bloomberg.
  
  The Dodd-Frank Act, designed to prevent future financial crises, does little to improve investors’ ability to analyze results at the five biggest U.S. firms that trade securities, which together lost $38.6 billion as markets froze in the fourth quarter of 2008. Since taxpayers may have to bail out banks again, firms should be forced to disclose more, said Tanya Azarchs, former head of North American bank research at Standard & Poor’s.
  
  “The health of the banking system impinges on all areas of the economy,” said Azarchs, now a consultant in Briarcliff Manor, New York. “So their disclosure has to be top-notch.”
  
  Hoarding Information
  
  Wall Street firms’ tendency to hoard information about markets and how they make money has come under scrutiny after investors were caught by surprise in 2007, when confidence in everything except Treasury securities vanished and credit markets collapsed.
  
  Lawmakers and regulators are pushing firms to move derivatives trades onto clearinghouses, where prices can be monitored, while demanding fuller disclosure on consumer loans, including mortgages and credit cards. In July, Goldman Sachs agreed to pay $550 million to settle Securities and Exchange Commission accusations the firm gave incomplete information about a mortgage-linked investment sold in 2007 that caused buyers more than $1 billion in losses.
  
  More transparency might have provided clues about risk- taking that led to the credit markets seizing up and the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. in 2008, said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees about $6 billion, including shares of Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs.
  
  “If you saw large revenue from an outlier, that should raise a question,” Kovalski said. “You’d like to see all the businesses contributing and growing at the same rate. If you saw one doing well and all the others struggling, you’d have to ask whether they’re trying to squeeze out a little more revenue there to offset the overall slowdown.”
  
  Loss of Confidence
  
  Opacity also may have contributed to a loss of confidence in the banks, said Richard Bove, an analyst at Rochdale Securities in Lutz, Fla. Investors who had been given few details about how the firms made money in the years before the crisis suddenly grew concerned that mortgage-trading losses might lead to insolvencies.
  
  Bear Stearns and Lehman Brothers, which for most of the 2000s were the two biggest mortgage-bond underwriters, both imploded in 2008. Merrill Lynch & Co. had to sell itself to Charlotte, North Carolina-based Bank of America, and Citigroup got a $45 billion taxpayer bailout.
  
  “They’re going to resist it, but they’re going to have to disclose more,” said former SEC Chairman Harvey Pitt, now chief executive officer of Washington-based consulting firm Kalorama Partners LLC. “If there’s one thing we’ve learned from the financial crisis, it’s that a lack of transparency is absolutely devastating.”
  
  ‘Nobody Believes’
  
  Investment banks combine the results of trading categories to keep them secret from competitors and trading partners and to smooth out gains and losses from swings in individual markets, said Adam Hurwich, a former member of the Financial Accounting Standards Board’s Investors Technical Advisory Committee who’s now a partner at hedge fund Jupiter Advisors LLC in New York.
  
  The resulting opacity undermines confidence in the firms’ results, said Brad Hintz, a former Morgan Stanley treasurer and Lehman Brothers chief financial officer.
  
  “Nobody believes the brokerage firms right now,” said Hintz, now an analyst at Sanford C. Bernstein & Co. in New York. “When you’re mixing euros and yen and dollars together, and then on top of that you’re throwing in commodities, what I have is succotash, and it’s very difficult for us to analyze.”
  
  Goldman’s FICC
  
  The difficulty of analyzing the banks with the five biggest FICC divisions -- Goldman Sachs, Citigroup, JPMorgan, Bank of America and Morgan Stanley -- has taken on greater significance as those businesses have grown. The banks reported $79.9 billion in FICC revenue in 2009, more than double the amount in 2004, when breaking out the figure became standard practice. FICC accounted for 22 percent of the banks’ total revenue last year compared with 14 percent in 2004.
  
  Goldman Sachs’s FICC division is the biggest, based on 2009 revenue and the percentage of overall revenue. Citigroup got $21.5 billion of revenue from the business last year, or 27 percent of its total. JPMorgan got $17.6 billion, or 18 percent; Bank of America got $12.7 billion, or 11 percent; and Morgan Stanley got $5.02 billion, or 22 percent.
  
  Spokesmen for Goldman Sachs, Citigroup, Bank of America and Morgan Stanley declined to comment. Kristin Lemkau, a spokeswoman for New York-based JPMorgan, said the bank tries to “provide sufficient disclosure to allow investors to make informed decisions about our business.”
  
  Shirts, Pants, Belts
  
  U.S. accounting rules allow companies “quite a bit of latitude” in how much detail to disclose about business segments, said Regenia Cafini, a project manager at the Norwalk, Connecticut-based FASB, which sets bookkeeping standards.
  
  According to FASB Statement No. 131, published in 1997, companies are supposed to break out business segments whose “results are reviewed regularly” by the “chief operating decision maker,” typically the CEO or chief operating officer. While advised to report on businesses that account for more than 10 percent of total revenue or 10 percent of assets, companies are allowed to combine as many segments as they want, according to the document.
  
  A July proposal by FASB staff to be considered later this year would require companies to disaggregate income and expense items “so that the information is useful in understanding the activities of the entity and in assessing the amount, timing and uncertainty of future cash flows.”
  
  Absent that, “there really aren’t rules per se on defining a segment,” Cafini said. “It’s how the company sees itself. I’m a manufacturing company, and I make clothing. I could segment myself by shirts and pants and belts, and have three different segments, or I could lump them all together.”
  
  Analyst Estimates
  
  The opacity makes it harder for analysts to estimate earnings. On average over the past five years, JPMorgan has beaten quarterly earnings-per-share estimates by 40 percent, according to Bloomberg data. The figure is 21 percent for Goldman Sachs and 10 percent for Bank of America. Citigroup on average missed estimates by 6 percent. By comparison, the five members of the S&P 500 Index with the greatest revenue beat estimates by an average of 4.6 percent.
  
  More details on trading won’t necessarily lead to better earnings estimates because markets are constantly shifting, said Robert Albertson, a former Goldman Sachs banking-industry analyst who’s now head of investment strategy at brokerage Sandler O’Neill & Partners LP in New York. “You still wouldn’t know where the activity would be in the future,” he said.
  
  Directional Hints
  
  Goldman Sachs breaks out 12 revenue lines in its quarterly statements, among them FICC. Others include equities trading, asset management fees, securities services and investment- banking advisory. That’s about a fourth the number of revenue lines management sees: In an interview with Bloomberg Businessweek published in April, Goldman Sachs CFO David Viniar, 55, said, “I personally see the profit-and-loss statement of each of our 44 business units every single night.”
  
  Goldman Sachs’s FICC division has “five principal businesses,” the firm said in its annual report in March. They are commodities; credit products, which include corporate bonds and credit-derivatives; currencies; interest-rate products, which include government bonds; and mortgages.
  
  The firm gives directional hints about the performance of the businesses within FICC in press releases about its quarterly earnings. In a July statement about second-quarter results, Goldman Sachs said FICC revenue fell 35 percent from a year earlier to $4.4 billion because of “significantly lower results in credit products, interest rate products and currencies,” partially offset by “higher net revenues in mortgages, and, to a lesser extent, commodities.”
  
  ‘Eyes of Management’
  
  That’s not good enough for Lynn Turner, a former SEC chief accountant who’s now a Denver-based managing director at consulting firm LECG LLC. Simply saying gains in one trading area were offset by losses in another “doesn’t seem to quite be adequate to me,” he said.
  
  “Management has to provide the investor a view of the company through the eyes of management, so that the investor is really able to see what’s going on clearly with the business,” Turner said.
  
  Citigroup CEO Vikram Pandit, 53, speaking in May at the graduation ceremony at the Johns Hopkins Carey Business School in Baltimore, said that “markets cannot function without transparency” and that improved disclosure of bond prices would help “revive and sustain confidence in our financial system.”
  
  ‘Volatile and Opaque’
  
  Pandit’s plea for transparency in bond markets contrasts with the bank’s own disclosure about its fixed-income division, which includes mortgage-trading and securitization units that contributed to $25.7 billion of net losses from 2007 through 2009. In April, Moody’s Investors Service published a list of four “credit challenges” for the bank. Among them: “Citigroup has a large investment bank, which we view as inherently volatile and opaque.”
  
  The pronouncement came after New York-based Citigroup reported a 43 percent decline from a year earlier in first- quarter fixed-income and equities trading revenue to $6.59 billion, about a quarter of the bank’s total revenue.
  
  “Like its peers, Citigroup did not give clarity on how these revenues were generated,” Moody’s said.
  
  The banks do a better job of breaking out revenue when they’re losing money than when they’re making it, said Azarchs, the former S&P researcher.
  
  Merrill, Lehman
  
  In 2006, Merrill Lynch began reporting that its stock- trading results were bolstered by “record” revenue from gains on investments in private companies. The exact amount wasn’t disclosed until May 2007 -- two months after Merrill filed its annual report for 2006 -- when trading chief Dow Kim said at an investor conference that the firm had garnered $1.5 billion of private-equity revenue the prior year.
  
  Merrill started breaking out private-equity results on a quarterly basis as full-year revenue dropped to $400 million in 2007. The business had $2.1 billion of pretax losses in 2008.
  
  Lehman Brothers, while expanding in mortgage trading and mortgage-bond underwriting during the 2000s, didn’t detail how much it earned from the business. Investors and reporters deduced that it was a leader in the business by analyzing rankings produced by third-party data collectors, including Bloomberg LP, parent of Bloomberg News.
  
  ‘One Fine Day’
  
  The firm opened up in early 2007 as subprime-mortgage lenders, including New Century Financial Corp., lost their funding sources. On March 14 of that year, CFO Christopher O’Meara said on a conference call that the New York-based firm got less than 3 percent of its revenue from making subprime mortgages, packaging them into bonds and trading the securities.
  
  O’Meara didn’t detail Lehman’s revenue from other types of residential mortgages, including Alt-A, which are a level between subprime and the safest borrowers. Nor did he detail how much the firm made from commercial real estate and lending, which contributed to Lehman’s bankruptcy in September 2008.
  
  “One fine day you wake up and there’s a problem, and then they start to disclose it,” Azarchs said.
  
  Banks should break out the revenue they get from each of the categories within FICC, said Bove of Rochdale Securities. Within each segment, they should further break out how much comes from commissions, how much comes from buying and selling securities, and how much comes from simply recording changes in the value of investments held on the books, he said.
  
  ‘Worst Assumption Possible’
  
  More disclosure prior to the crisis might have helped prevent the panic that gripped markets in 2008 once mortgage losses began to emerge, Bove said. Lehman Brothers and Bear Stearns failed partly because trading partners backed away. In mid-September 2008, Bank of America cut Merrill Lynch’s trading lines in the days before it bought the securities firm, Merrill CEOJohn Thain told employees at the time. Citigroup in late 2008 had to borrow at least $9 billion from an emergency Federal Reserve credit facility set up after investors grew leery of its short-term debt.
  
  “Not having any idea as to what the size of the losses would be resulted in a total breakdown of confidence,” Bove said. “You had no basis on which to make an assumption, so you made the worst assumption possible.”
  
  In November 2007, after Merrill Lynch and Citigroup ousted their CEOs because of mortgage-trading losses, Goldman Sachs CEO Lloyd Blankfein, 55, gave an investor presentation showing that mortgage-trading was the smallest business within FICC, representing 7 percent of the division’s revenue since 1999.
  
  ‘Black Box’
  
  Credit-trading accounted for 34 percent of FICC, followed by interest rates at 25 percent, commodities at 20 percent and currencies at 14 percent, according to the presentation. At an investor conference in February this year, the firm provided an update: Mortgages accounted for an average of 3 percent of FICC revenue from 2007 through 2009.
  
  Investors got more detailed information on the mortgage unit in April, when the U.S. Senate Permanent Subcommittee on Investigations released more than 900 pages of Goldman Sachs e- mails and other documents obtained during its 18-month investigation of the financial crisis.
  
  Among them was a page headlined, “Quarterly Breakdown of Mortgage P/L.” P&L is shorthand for the profit-and-loss statements produced by each trading unit.
  
  The document showed results for the four quarters of 2007, with a final column showing $1.27 billion of fiscal year-to-date revenue through Oct. 26, 2007. Goldman Sachs’s fiscal 2007 ended on Nov. 30. The bottom of the page reads, “Confidential Treatment Requested by Goldman Sachs.”
  
  No details were given for the rest of FICC, which according to a December 2007 press release had $16.2 billion of total revenue that year, 13 percent more than the record set in 2006, “reflecting strong performance in all major businesses.”
  
  “That’s just one big black box,” said Mike Mayo, an analyst at Credit Agricole Securities USA in New York. “You can’t get around it.”
  

Them US Bankers Could Well Turn Into Real Estate Agents

Posted on WSJ's Real Time Economics : Number of the Week: 103 Months to Clear Housing Inventory

• 103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.
  
  How much should we worry about a new leg down in the housing market? If the number of foreclosed homes piling up at banks is any indication, there’s ample reason for concern.
  
  As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30% from a year earlier.
  
  Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That’s nearly nine years. Of course, banks could pick up the pace of sales, but the added supply of distressed homes would weigh heavily on prices — and thus boost their losses.

The banks have 103 months to unload their housing inventory???

LOL!!!

It's only some 9 years plus. Only 9 years.

Aha!

But don't you worry about it since it's a capitalist world.

Let's see what can our beloved money loving bankers can do...

Create a property subsidiary, write down as much as possible the value of these housing inventory, sell them (how difficult is it to get good profit margins since the value written down low?), LIST THEIR SUBSIDIARY IN THE MARKETS, profit from the listing, Viola! No problem!

Say Doc, could them bankers have more houses to sell?

Pretty please... and if you don't mind, since our darling bankers are making more money, can they be paid more? Yeah, give them more compensation for all their hard work too!

Nothing wrong, yes?

And not forgetting this is such a non-issue. Doesn't anyone knows that them US Bankers don't make money via banking anymore? The bulk of the profit comes from their trading activities.

I wonder if them bankers should be reclassified as Trading Banks!

What a wonderful capitalist world this is.

What Wall Street Crisis Are We Even Talking About?

Here's an article published last week: Speculating Banks Still Rule -- Ten Ways Dems and Dodd Are Failing on Financial Reform

• As we wind up for another dramatic bipartisan squabble over all the crap Wall Street flung at us, things are getting back to normal – for the wealthy. The top 25 hedge fund managers made a record $25.3 billion dollars in 2009. And despite all those dramatic congressional hearings, average compensation of Wall Street bankers rose by 27 percent in 2009.

Top 25 hedge fund managers made a record of $25.3 Billion in 2009.

Average Wall Street bankers compensation rose by 27% in 2009.

Where's the Wall Street crisis?

What Wall Street crisis are we even talking about?

Life is freaking good, eh?

From the same article.

• On the other side of humanity, more sobering numbers include a record 2.8 million properties in foreclosure for 2009, a 21 percent increase over 2008's astonishingly high figure, with another 4.5 million foreclosures projected for 2010. Federal mortgage modification plans have not stemmed this tide, because lenders aren't required to particiapte; and lenders, in the words of Herman Melville's Bartleby, "would prefer not to" renegotiate a mortgage for which they'd then have to book a loss. As foreclosures continued to climb, so did bankruptcies, rising 35 percent in 2009 over 2008 levels.

More foreclosures. More bankruptcies.

Who cares about the poor? Screw the poor.

Make them bankers rich!

• "Banks -- shockingly -- aren't helping. They posted their lowest lending rates since 1942; despite all the subsidies and cheap money they received from, well, us, including exceedingly low Federal Reserve loan rates (zero to 0.25 percent interest)."

What a wonderful world this is!

Yeah, the banks are recording better numbers. What crisis?

But.. how many of these bankers are making the money the old fashion banking way? Does it bother anyone that the bulk of the money earned by the banks are made via extraordinary items such as accounting profits and yeah, them bankers apparently are now super duper traders too! Trading profits are so easy for them bankers.

But who cares, right?

We need the good news. We ONLY want the feel good financial news.

Does anyone even care how the trading profits are made?

News like Ex-Goldman trader blows whistle on silver and gold manipulation does not matter.

Yeah.. how cares?

Yeah.. most important them bankers make money!

Life is simply superb!

Whitney Warns On Bank Profits

On CNBC: Bank Profits Ready to Tumble, Stocks to Fall: Whitney

• The US banking system will lose 30 percent more than consensus estimates as shrinking loan portfolios squeeze profits, analyst Meredith Whitney told CNBC.
  
  While increased governmental regulations will restrict the industry somewhat, Whitney said that the decline of up to 20 percent in lending portfolios will enact far more damage on bank balance sheets.
  
  "Your good borrowers don't want to borrow, and your bad borrowers you're trying to kick out of the system," she said. "So on average lending portfolios are down 4 to 20 percent and we think they're going to be down another 10 to 15 percent for all the big banks this year."
  
  Whitney's call comes amid a fairly strong round of financial earnings reports from the banks as well as nearly 80 percent of all companies on the Standard & Poor's 500. Financials comprise about 20 percent of the S&P.
  
  This year could be different, though, as banks have to find another way to make money.
  
  "Big banks made all their money from fixed income currency and commodity trading last year," Whitney said. "It's a very different story this year, so they're not re-equitizing themselves."
  
  Of the banks she rates, Whitney said Bank of America comes in as the "least worst" of the group even as the group as a whole could lose 10 to 15 percent off their share value.
  
  She said regionals aren't safe anymore and could come under pressure for acquisitions as the year progresses.
  
  "You may start to see some arranged marriages in the regional bank space, and that's not going to be good for equity holders of those regional banks," she said.
  
  As for regulation, she said the final shape of the Washington clampdown on financials is yet to be seen but most certainly will involve an emphasis on less risk.
  
  "They will separate the risk that's on Wall Street from that which is associated with consumer deposits," Whitney said. "It's going to be a tougher environment."
  
  
  

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!

Fright Night For Bull Run?

On the UK Telegraph: Bank of America reports $1bn loss as customers struggle to pay bills

• The bank said it had been hit "by continued weakness in the US and global economies and stress on the consumer, which continues to result in high credit costs".

ahem.. continued weakness in the US and global economies.... and STRESS ON THE CONSUMER.

• .. Earlier this week Citigroup and JPMorgan Chase also reported higher loan losses in the third quarter as consumers struggled to keep up with their credit card and mortgage payments.

All is well?

Current bull run JUSTIFIABLE?

Don't ask me.. I know nuthin'

:D

Yeah.. the bears.. they are naysayers.. and despite them giving many, many reasons, the naysayers are 'proven wrong' because the markets keep rising.

Yeah.. how can the naysayers reasoning be justifiable when the markets keep rising?

Is one's reasoning only correct if the market agrees with one's reasoning?

How now?

Selected worthwhile reading: Sumitomo Forecasts Dollar to 50 Yen, End of Dollar as Reserve Currency , SP Weekly Chart Updated and Flamingo, Fright, or Friday?

Are You Pissed With The Bankers' Pay???

So they (JP Morgan) made $3.59 billion.

But get this.. they are setting aside $7.3 billion to pay their staff!

Which means the bank is on track to payout $29 billion in pay and bonus!!!!

Does this make sense?

WTF is wrong with our world today?

Where and what are they lawmakers doing?

Is the world really ruled by the bankers now???

Is any sane person out there who is NOT ANGRY WITH WHAT THESE BANKERS are doing?

Hell yes! I am utterly pissed!

Sigh.

JPMorgan heralds return to bumper bonuses

• JPMorgan Chase heralded a return to the golden days of Wall Street bonuses after delivering $3.59bn (£2.25bn) in profits and setting aside $7.3bn to pay staff.
  
  By James Quinn, US Business Editor
  Published: 4:01PM BST 14 Oct 2009
  
  The global banking conglomerate – best known in Britain as the parent company of investment bank JP Morgan – has now set aside $21.8bn in compensation for employees for the first nine months of the year. Should it keep it up, the bank will be on track to hand out as much as $29bn in pay and bonuses this year
  
  The news – combined with expected confirmation on Thursday that Goldman Sachs is on track to pay out as much as $22-23bn in its bonus pot this year – is likely to reignite the row over bankers' pay.
  
  Across the board, Wall Street banks are expected to collectively dole out more than $140bn by the end of the year, a record figure for the US banking sector, beating the previous high of 2007.
  
  JP Morgan Chase appears set to dole out as much as $29bn in compensation at the year-end, a 27pc rise on the last two years, when its total pay pool has amounted to approximately $22.7bn each year.
  
  This year’s bumper pay-out, which will be paid in mid to late December, is therefore likely to equate to $131,304 for each of the bank’s 220,861 employees, compared to a $100,906 pay-out for the 224,961staff the bank at the end of the last year.
  
  JP Morgan received $25bn in financial support from the US government, money it repaid in June, and has handed over a package of linked warrants to the Treasury, which will auction them off to the highest bidder by the end of the year.......

Posted this morning: Bankers To Be Paid Much, Much More In Bonuses!

Bankers To Be Paid Much, Much More In Bonuses!

Highlighted by Jesse: Wall Street Set to Pay a Record $140 Billion In Bonuses Topping 2007

While the world suffers, Wall Street pays itself record bonuses, larger even than the peak year of 2007, by taxing the productive economy to maintain an extravagant lifestyle. These bonuses are being paid with your money, and your children's money, if you hold US dollars.

And while this happens, the US credit card banks are raising interest rates to 20+% even on customers with excellent payment records and jobs which is certainly usury, and with an arrogant impunity. The insider trading scandals and tales of government graft yet to be told are so blatant and shocking that only a captive mainstream press keeps them from being investigated.

The rest of the world looks on in shock and amazement. What has gone wrong with America? What are they thinking? America has not only lost the high ground, it is sliding into a ditch.

While Americans are pacified by bread and circuses, the rest of the world looks at a painful reality show in the States, a country in a death spiral of corrupt leadership and public apathy. If it was Zimbabwe or Iceland there would still be sympathy for the people, but far less concern.

A deflationist friend was railing about the US slide into bankruptcy, and I could not help but ask, "What happens to the paper of a bankrupt company, or country?"

Where indeed will the dollar gain its long anticipated strength, its renaissance of value?

Or yes, from "less dollars" through debt destruction. Mutant monetarism gone mad, an argument worthy of Herr Goebbels. The dollar will rise in value by immersing itself in a pool of corruption, and by destroying its shareholders, those who hold their savings in it, while oligarchs loot the financial system. Unless the US can turn its trade balance positive overnight, while raising interest rates, and maintaining a growing domestic economy based on consumption, it is not going to happen. The US is running out of degrees of freedom.

Wall Street holds the US public and government hostage by threatening financial armageddon if they do not get what they wish. We would anticipate a similar threat to the global economy based on dollar debt at some point, asking for a global monetary regime controlled out of New York and London, with perhaps a few associates.

Nothing goes straight up or down. There will be more sucker rallies and bubbles, but the train is starting to come off the rails a little more with each wrenching turn of this cycle.

The banks must be restrained, and the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

Finfacts Eire

• Wall Street firms set to break new records in 2009 with pay rising to $140bn; Bailed-out insurance giant AIG paid “retention bonuses” to kitchen staff
  By Finfacts Reporting Team
  Oct 14, 2009 - 6:10:22 AM
  
  Wall Street firms are set to break new records with employee pay set to rise to $140bn this year. Meanwhile, it has been reported that the bailed-out insurance giant AIG paid “retention bonuses” to kitchen staff earlier this year from a $168m pot, that was ostensibly designed to keep staff from leaving the government controlled firm.
  
  Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did in the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal.
  
  The Journal reports that total compensation and benefits at the publicly traded firms it analyzed, are on track to increase 20% from last year's $117bn -- and to top 2007's $130bn payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.
  
  Average compensation per employee at investment bank Goldman Sachs, is set to reach about $743,000 this year, double last year's $364,000 and up 12% from about $622,000 in 2007, according to the Journal analysis...

-------------------

See also Goldman Sachs $20 Billion Bonuses?!!! and What's Wrong With Our Financial Worlds?

Folks keep asking me, is the worst over?

Oh can it ever be over when the very same financial institutions are still running the rule? Yeah, is our world now truly run by the financial markets?

How can things get better when NO reform is made on the very same financial system that had brought the world to its knees recently?

And these very same people are to be rewarded more?

What for?

These bankers take on insane risks and when they fail, they get bailout. And now they are being rewarded with more money?

Are they serious? Or are they out of their minds?

Capitalism rules?

The rich elite gets richer and needless to say, screw the poor!

Is the worst over when there is a foreclosure filing every 13 Seconds?!

Oops... who cares! The worst is because the financial markets says so! Loooook at the stock markets! Can't you see what it has been telling you for so many months already?

Damn!

Life is certainly good as long as you are in the financial markets! Heck the kitchen staff is even getting retention bonus!

What a wonderful world!

ps: please don't forward this to ALL THE ANGRY AMERICANS!

Do see this video on MSNBC.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Banks' Health Were Exaggerated!

Posted on Friday 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.
  
  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!

----------------------------------------------

On today's CNBC: 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 )

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?

Collapse Of Guaranty Bank Would Be The Biggest In 2009

On CNN: Big Texas bank on verge of failure

• NEW YORK (Fortune) -- Guaranty Bank is hardly a household name. But the Austin, Texas-based thrift's looming failure is shaping up as a big headache for bank supervisors -- not to mention a black eye for Carl Icahn and others in the smart money set.
  
  Guaranty (GFG) could be soon seized by the government in what would be the biggest bank failure in a year that has already had 64 of them. Last week, the bank warned investors to expect a federal takeover after regulators forced a writedown of its risky mortgage investments and a bid to raise new capital failed.
  
  Guaranty has $13.4 billion in assets and operates 160 branches in Texas and California -- two of the three best banking markets in the nation, thanks to their size and population growth.
  
  But the bank's capital problems and its smallish, scattered network of branches could detract from Guaranty's appeal, making it tough for regulators to find a buyer quickly -- or without substantial federal subsidies.
  
  "This may not be closed as quickly as you think, since it will require bids and rebids," said Miami banking consultant Ken Thomas.
  
  That means resolving Guaranty's failure is likely to be costly to the FDIC's deposit insurance fund, whose balance is at its lowest point in almost two decades.
  
  The Federal Deposit Insurance Corp. isn't the only one taking its lumps. So have some big investors.
  
  Shares of the bank's parent, Guaranty Financial, have dropped 97% since a group led by billionaire Texas hotel mogul Robert Rowling and Icahn, the renowned New York corporate raider, poured $600 million into the company in June 2008.
  
  Other big Guaranty holders whose stakes stand to be wiped out include hedge fund managers David Einhorn, who was among the most persistent skeptics of Lehman Brothers before its collapse, and Dan Loeb.
  
  "Relatively low franchise value and the fact that two big money investors already got burned on this bank may suggest less interest than with BankUnited," said Thomas, referring to the Florida thrift that failed in May and was bought by a group of private equity investors.
  
  BankUnited had half as many branches and operated in only one state, but had a strong competitive position in the most lucrative counties -- something Guaranty lacks.
  
  Despite BankUnited's relative attractiveness, its sale to investors led by vulture investor Wilbur Ross was hardly a walkover for the FDIC. The deal cost the FDIC insurance fund $4.9 billion.
  
  A big tab on Guaranty would be costly to the deposit fund, whose balance was $13 billion at the end of the first quarter. The FDIC has estimated failure costs on cases since then at $11.2 billion.
  
  A spokesman for the FDIC stresses that it has already set aside an additional $22 billion for failure-related costs in 2009, and adds that congressional action this spring gave the agency access to $500 billion in Treasury credit.
  
  Though Guaranty has been around since 1988, it came public less than two years ago. Guaranty was part of the Temple-Inland (TIN) cardboard-box conglomerate until Icahn pressured the company to split up at the end of 2007. Guaranty shares were then distributed to Temple-Inland holders.
  
  Guaranty's chief executive at the time, Ken Dubuque, assured investors that despite the gale force winds sweeping the financial world, the bank would be safe.
  
  "We're keenly aware of the importance of good credit, disciplines and effective risk management, in good times and in difficult times," he said on the bank's first earnings conference call in February 2008.
  
  But Guaranty's risk management soon was found wanting. The bank aimed to expand beyond lending to the builders of office buildings, shopping centers and houses to new areas such as small business and corporate energy lending.
  
  Because its thrift charter obliges Guaranty to keep 70% of its assets in housing-related investments, the bank matched growth in other areas with expanded investments in housing. That, Dubuque said, is how the bank ended up taking on a giant portfolio of mortgage-backed securities, backed largely by option adjustable-rate mortgages in California and Texas.
  
  "We needed to increase the size of the balance sheet, so that was a relatively risk-free way of doing it," Dubuque told investors in 2008. "We also have liked the returns in that business as well."
  
  But securities backed by option ARMs are anything but risk-free, as investors have learned. Among institutions that dealt most heavily in those were Washington Mutual, the Seattle thrift that collapsed in September with $307 billion in assets, and Wachovia, which was sold to Wells Fargo (WFC, Fortune 500) later in 2008. Other big option ARM users included failed California savings banks Downey Financial and PFF.
  
  Losses built at Guaranty over the past year, and Dubuque quit without explanation in November. In April regulators told Guaranty to raise more capital. When that effort failed, they told Guaranty to write down the value of the mortgage-backed securities by more than $1 billion. That move, announced this month, left the bank with negative capital of $748 million, according to filings.
  
  Despite its many problems, Guaranty is -- for now -- operating as usual.
  
  "We are open for business. We continue to work with our regulators," Guaranty said Friday in an emailed statement. "We are focused on providing the best customer service possible and believe we can avoid any disruptions to our customers."
  

Last Chance For CIT?

On CNBC: CIT Strikes Deal for $3 Billion Rescue to Avoid Bankruptcy

• CIT Group's board is scheduled to meet on Sunday evening to consider a $3 billion financing deal from seven of the company's top ten bondholders, sources familiar with the talks told CNBC.
  
  The liquidity facility carries a 2.5-year term and portions will be available immediately. The funds should help the company stave off a chapter 11 bankruptcy filing at least in the short-term, the source said.
  
  CIT is also planning a cash tender offer for outstanding senior notes in August as part of a broader recapitalization plan.

On WSJ Bondholders Plan CIT Rescue

• By JEFFREY MCCRACKEN and SERENA NG
  
  CIT Group Inc. was close to securing $3 billion in last-minute rescue financing from its bondholders Sunday in a deal that should keep the struggling firm -- once the largest issuer of small-business loans in the U.S. -- out of bankruptcy court, people familiar with the matter say.
  
  The deal, which was being considered by CIT's board Sunday night, charges CIT very high interest rates, and it doesn't permanently fix the company's long-term financing needs, say people involved in the transaction. But it buys time for the lender to restructure itself, and minimizes bondholders' losses. Bondholders calculated they would lose more if CIT filed for bankruptcy and sold assets at fire-sale prices than if they offered the rescue.
  
  If the deal is completed, it could help reduce CIT's debt load, strengthen its capital position and alleviate pressure on CIT to pay down $1 billion in debt that comes due in August. It may also preserve the U.S. Treasury's $2.33 billion investment made as part of the Troubled Asset Relief Program.
  
  The development appeared to vindicate U.S. regulators, who balked at appeals to help CIT. And it suggested that, unlike in recent months, private capital is available to plaster over cracks in the financial system.
  
  Still, CIT and its bondholders hope that their effort to stabilize the company will cause bank regulators to look more favorably on a CIT plan to transfer more of its loans from the holding company to its bank in Utah. CIT has trouble borrowing money, but its bank can finance itself by taking in deposits. To transfer more assets to the bank, however, CIT needs an exemption from the Federal Reserve and a nod from the Federal Deposit Insurance Corp.
  
  The final term sheet still needs to be reviewed by the various financial and legal advisers, said the people familiar with the matter. And there is the chance that a final deal could falter over last-minute negotiations.
  
  Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. (As of Friday, three-month Libor stood around 0.5%.) CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package.
  
  The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.
  
  For years, CIT funded itself largely by selling bonds -- only to find itself in deep trouble when credit markets froze up amid the depths of the financial crisis a year ago. It has been trying to rely more on deposit funding from its bank, but the transition has been slow, and regulators are concerned about the risk involved.
  
  At least one analyst viewed the deal as a stopgap measure. "Even if they put together a deal today and postpone a bankruptcy filing, CIT may be back in the same place in the not-too-distant future because unemployment rates, business-loan delinquencies and corporate default rates are climbing," said Martin Weiss, president of Weiss Research, an investment consulting firm in Jupiter, Fla. "The outlook for the next six months looks pretty rough for many banks, including CIT," he said.
  
  Late Thursday night, CIT officials believed they had secured a $2 billion rescue-financing plan from J.P. Morgan Chase & Co. But that fell through by Friday morning, said these people.
  
  J.P. Morgan would have considered lending if CIT were first to seek bankruptcy protection, but the bank "couldn't get comfortable with a deal outside (bankruptcy) court," said one person familiar with the matter.
  
  CIT's advisers, which includes Evercore Partners, then launched talks with its bondholders, led by investment firm Centerbridge............

And the following article explains who and what CIT stands for: What is CIT, and what if it does fail?

• By CANDICE CHOI The Associated Press - Published: July 19, 2009
  
  You may not have heard of CIT Group Inc., but there's a good chance you've shopped in stores that it helps keep in business.
  
  The New York-based bank is one of the nation's largest lenders to small and mid-sized businesses. Despite the scope of its customer base, however, CIT emerged from meetings with federal regulators Wednesday failing to secure the cash infusion it needs to avoid bankruptcy. In turning CIT Group away, the Obama administration is betting that any ripple effect from the company's demise wouldn't pose a critical risk to economic recovery.
  
  CIT Group is now rushing to raise billions of dollars in financing from debt holders, but Wall Street doesn't appear confident that the company will pull through. On Thursday, investors sold off shares and drove down the stock price 75 percent. As the company fights for survival, here are some questions and answers about how small businesses and the broader economy are affected by CIT Group.
  
  Q: First of all, what is CIT Group?
  
  A: It's a century-old company that primarily provides lending to small and mid-sized businesses. To a much lesser extent, it also provides advisory services and leases out property such as airplanes and rail cars.
  
  The company has been bought and sold a number of times over the years. Most recently, it was acquired in 2001 by Tyco International, which at the time was embroiled in an accounting scandal. To pay down debt, Tyco spun off CIT Group in an initial public offering in July 2002. CIT has been an independent public company since then.
  
  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.
  
  Q: If CIT files for bankruptcy, would its clients' credit lines be immediately shut down?
  
  A: That depends on the type of bankruptcy CIT would enter.
  
  To reorganize under Chapter 11 bankruptcy, CIT Group would need to line up financing sources to enable operations to continue. In the event that financing can't be found, however, the company might have to liquidate its business and close down under Chapter 7 bankruptcy. That would mean clients would likely not be able to tap credit lines.
  
  The impact of the latter scenario would be diminished since CIT has already been cutting back on lending in recent months. In March, CIT had $5.3 billion in credit lines to customers, down from $6.1 billion at the end of 2008.
  
  Q: Where else could CIT's clients get loans if the company failed?
  
  A: There are 8,300 banks in the U.S., most of them healthy enough to offer loans to small businesses, said Bob Seiwert, senior vice president of the American Bankers Association's Center for Commercial Lending and Business Banking.
  
  "The market over time will fill the void. The challenge for CIT borrowers would be finding new lenders in a time frame that works for them," Seiwert said.
  
  Since many of CIT's customers are in riskier industries, Seiwert said it could be harder for them to find loans given the tight credit market.
  
  Q: How did CIT get into its current predicament?
  
  A: At the height of the credit bubble, CIT Group made the mistake of straying into subprime lending and student loans, said Kathleen Shanley, an analyst with corporate bond research firm Gimme Credit.
  
  The company quickly recognized its mistake and pulled back from those segments more than a year ago, but the damage was done. CIT tapped much of its own credit lines in March of last year, and ever since has had trouble finding funding, Shanley said.
  
  The problem was exacerbated by CIT's reliance on credit markets for financing, said Matthew Anderson, an analyst with Foresight Analytics. Unlike traditional banks, CIT can't lean on customer deposits when it needs money.
  
  And now, CIT is facing $7.4 billion in debt that's due in the first quarter of next year.
  
  At the same time, CIT has a higher delinquency rate on its loans than other banks. CIT's delinquency rate for commercial and industrial loans was 5.4 percent at the end of the first quarter, compared with an average of 3.5 percent for all banks in the country, according to Foresight Analytics.
  
  Q: What are the arguments for letting CIT Group fail?
  
  A: CIT already received $2.3 billion in federal aid last December after converting to a bank holding company. CIT and its representatives have warned that a failure to provide additional government help could prove fatal to the small businesses that rely on it for money.
  
  "The cost of a cash infusion is less than the negatives their failure would cause," said Scott Talbott of the Financial Services Roundtable, which represents CIT and other big financial firms.
  
  But CIT is one-eighth of the size of Lehman Brothers, which went into bankruptcy last fall after suffering massive credit losses. And Wall Street's concern about CIT Group was relatively subdued — major stock markets didn't really move much in response to the news about the company during the regular trading session.
  
  Optimism about good earnings from big technology companies ultimately outweighed the concerns and pushed the market higher.
  
  In other words, there doesn't seem to be widespread panic that a failure at CIT would do serious damage to the markets or the economy.
  
  Source: here