CIT is Not the FDIC’s Problem
The team of Treasury Secretary Tim Geithner and OCC chief John Dugan are trying to paint Sheila Bair and the FDIC as the villains in the CIT situation. CK this missive I just got from one of the members of the working press:
“The lobbyists are ready to string Bair up and claim this could be the end of every small business in America. The lefty academic types say it’s a terrible precedent, too small to care etc. I’m reading your newsletter on the matter right now.” Read our comment by clicking the link below:
What Do AIG and CIT Have in Common? Asset Deflation
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=370
The Fed and Treasury (and the lobbyists for the small business mafia) are trying to get a bailout a la the banks in terms of cheaper funding costs for CIT, but FDIC is right to say no. CIT’s bank, which we rate “F” by the way, has a whole $3 billion in assets. But the real issue is that the asset values of CIT and most of the financials are falling — and the markets know it. No amount of subsidy will fix this situation.
The trouble with CIT is the same problem affecting many financials, namely that the value of assets is now below the face value of the liabilities. As Nassim Taleb any many others have suggested, the only way to fix this is debt-for-equity conversion and asset write-downs. The policy of “extend and pretend” that is being used by the Obama Administration is going to soon run out of time. CIT illustrates the basic issue and one that we’ll be hearing a lot about in coming months. — Chris
July 15th, 2009 at 2:54 pm
Whalen? It’s got to be wrong.
July 15th, 2009 at 3:00 pm
I think the solution is simple… Just add an “i” to the end of CIT and become CITi…. Then the money will rain down on them like rain =)
On a different note, great job on Bloomberg Surveillance, Chris!
HCF
July 15th, 2009 at 3:19 pm
I’m impressed with Sheila Bair. So far it seems she’s not afraid to call it BS when she sees it. What should worry Geithner is that she is proving to be a better Treasury Secretary than him. His or BB’s position is on the line and their replacement is currently heading the FDIC. I don’t know her background but I can almost guarantee that the banks will go out of their way to stop her nomination to either of those positions.
July 15th, 2009 at 3:49 pm
FWIW trading has been halted on CIT.
July 15th, 2009 at 4:00 pm
My bet is that Obama won’t be able to resist the urge to bail them out.
July 15th, 2009 at 4:02 pm
@DL: I think it’s already a done deal to bail out CIT.
July 15th, 2009 at 4:07 pm
I’m going to take the “crazy” side of this debate. If they were going to bail out CIT, then it would have happened by now.
I guess we’ll find out soon.
July 15th, 2009 at 4:08 pm
“has a whole $3 billion in assets. ”
So Chris, what have we dropped into the AIG black hole so far? 130B? Compared to 3B? The USG could refund CIT 43X with the money its given in one fashion or another to AIG. Sounds like a better bang for your buck to me. Oh but wait… AIG and its army of lobbyists who have their tentacles spread into the USG as well as most if not all the large U.S. corporations (banks) need help first because….???? Oh yeah, they’re connected. Can’t harm the well healed afterall, they’re providing all these well paying U.S. jobs, right? No, that would be CIT. Now you can see how class warfare gets started. The largest creation of jobs in the U.S. come from small business enterprises and you know this. What happens when these folks can’t get a loan from CIT? They cut back on employment or even close, exasperating unemployment and therefore “deflation”. The USG will ride to their rescue, as they should. Deflation or more correctly; how it’s generally perceived today is the boogy man right now. What they shouldn’t have done to begin with was started picking winners and losers and arranging for mergers and acquistions last year.
July 15th, 2009 at 4:12 pm
GS is “fully hedged” against their CIT exposure.
July 15th, 2009 at 4:29 pm
Picking winning and losers..never easier…I’ll pick the losers:
Any US taxpayer for years to come…
OK…my part is finished, you can pick the winners..
July 15th, 2009 at 4:43 pm
Maybe CIT will get taken down after all; GS is hedged, no doubt via AIG – our nation’s favorite CDS bookie.
There are two ways of looking at this, which will both have their adherents:
a) save small businesses and jobs now, or :
b) let ‘em fail before the debts get deeper, b/c we already have too many Dunkin Donii and they are all going to be in empty strip malls anyway by next year
July 15th, 2009 at 5:09 pm
@Bruce in Tn
Easy. Everyone on the other side of the taxpayer trade.
So, CIT will get USG help. Go figure…. This just may be the bailout you were referring to LB in order to approve another pain killer (stimulus) for the masses. The only way out of this kind of mounting debt is to eviscerate the dollar.
July 15th, 2009 at 5:25 pm
Perhaps they will arrange a shotgun wedding for CIT (along the lines of Ken Lewis’ betrothal to John Thain). Wonder who is out there with a big cash dowry, looking for a blushing bride? Hey, Blankfiend, how about it??
July 15th, 2009 at 5:40 pm
As a taxpayer, I’m sure I’ll get an invite. Let’s have a beer at the reception. Just another marriage made in hell.
July 15th, 2009 at 6:12 pm
NEW YORK–(BUSINESS WIRE)–CIT Group Inc. (NYSE: CIT – News), a leading provider of financing to small businesses and middle market companies, today announced that it has been advised that there is no appreciable likelihood of additional government support being provided over the near term.
July 15th, 2009 at 8:44 pm
@Chris
Thanks for the update. But “appreciable likelihood” is not a definitive NO. I still say the USG steps in and rescues them because of leftback’s (4:43) response (a). Either way, the USG pays by creating more debt.
July 15th, 2009 at 10:41 pm
Chris, I agree that CIT is not the FDIC’s problem. However, I do not agree with your assertion that CIT is not failing because their asset values are falling. In addition, debt holders HAVE lost money on CIT by agreeing to swap their bonds at less than par in return for common stock in the fall of 2008.
CIT is failing because it has not had access to the commercial paper markets since 2007 and the term unsecured debt markets since 2008. As a result, the company was forced to seek additional forms of funding including a very expensive secured line of credit in 2008 from, guess who, Goldman Sachs!!!
The $3 billion line of credit is structured as a ten-year total return swap between CIT and Goldman Sachs. Goldman Sachs completes a daily valuation of CIT’s assets and allows CIT to lend against those assets at an undisclosed advance rate. The cost of the facility is 2.85% annually and CIT pays Libor+285 on borrowings. A lot more expensive than borrowing at 4% fixed for 2 years or commercial paper at 2% annualized. These new costs of borrowing sapped CIT’s profitability leading to a broken wholesale-funded business model for CIT. The FDIC knew this and made the right decision rather than kicking this can down the road.
Goldman Sachs also knew that CIT’s business model was broker but lent to it anyway. Why? Since the facility is secured by CIT’s assets, if CIT folds, Goldman Sachs can sell CIT’s assets to repay its loan. For most banks, this is the most attractive part of asset based lending – the company goes bankrupt, you get all your money back from collateral sales. However, for Goldman, getting repaid at par is nothing. How about getting a daily snapshot of a distressed company’s assets and as soon as you start to see deterioration in asset quality, buying every CDS contract you can on the company when you see things taking a turn for the worse and shorting the hell out of the stock?
So, yes, Viniar was spot on. Goldman has no downside exposure to CIT. However, a better question would be: “HOW MUCH MONEY WILL GOLDMAN SACHS MAKE WHEN CIT GOES BANKRUPT? You can bet its a lot. And the best part? Its legal!
July 16th, 2009 at 1:08 am
First, I think Bloomberg Radio and Tom Keene have been doing a worthwhile service by having Chris on so frequently (three times in the past month or so I think). The longer “On The Economy” segment was great… but I shot both Tom and Chris an email bitching about how that discussion ended.
I’m happy to see Chris cite Taleb; both seem to me practitioners with some understanding of the nuts and bolts and as well have the ability to take in the situation from a broad perspective.
Barry’s latest on CIT puzzles me a bit, but maybe if I read the sources he cites it’ll make more sense. I can understand that CIT might not be making many loans, but that could plausibly be to both low demand and tighter underwriting standards, so on its face that doesn’t seem so much an issue. But from what I’ve heard many businesses have a revolving line of credit with CIT and loosing that will not help in the current environment. And as the anonymous IRA piece Chris links to above points out, “Like financing commercial real estate, providing debt working capital to small businesses is a risky line and one that demands deep channel knowledge and a tough approach to credit.” Seems unlikely the GSEs will step up. This failure will have repercussions.
tim3’s scenario sounds all too likely. As credit markets froze up, CIT was forced to go to a GSE which played them for a while and exploited every advantage to the benefit of its employees, debtholders and maybe even shareholders, secure in knowing that taxpayers would be responsible for any losses if things went south.