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.

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!

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.

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.

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

Any US taxpayer for years to come…

OK…my part is finished, you can pick the winners..