Here’s something else for the conspiracy theorists out there (I think its merely a fortuitous coincidence, but I never like to stand in the way of the tinfoil crowd)

One year ago, Goldman Sachs gave CIT a $3 billion line of credit. I heard no mention of this in the Goldman blowout earnings.

Now 2 days later, CIT is on the verge of bankruptcy.

A few questions come to mind:

-How much of GS’ $3B has CIT used?
-How collateralized is this line?
-Will the recovery be closer to 90 cents or 25 cent on the dollar?
-Did Goldman know that CIT was about to do the big faceplant?

The really interesting question is what would Goldman’s earnings have looked like if CIT filed last week rather than next week — would it have wiped out the entire quarter’s blowout numbers?

>

UPDATE:  July 16, 2009 7:22am

Goldman announced it hedged its credit line to CIT

>

Interesting timeline after the jump . . .

Nice overview of CIT’s recent history via Reuters”

July 18, 2007 – CIT said it was exiting the mortgage business, including sub-prime home lending, and posted a surprise second-quarter loss. Its shares slide more than 10 percent to $49.17.Sept 19, 2007 – Says it plans to sell up to $4.2 billion of mortgage-backed securities to Freddie Mac and borrows $2 billion from Morgan Stanley against the expected proceeds as it seeks to shore up financing.

March 20, 2008 – Draws down $7.3 billion of bank lines to help fund daily operations, and its shares plunge 17.3 percent to $9.63. A few days earlier, its long- and short-term credit ratings were cut.

April 17, 2008 – CIT slashes its dividend by 60 percent as it reports another quarterly loss and further asset sales.

June 9, 2008 – It secures $3 billion of financing from Goldman Sachs.

July 17, 2008 – CIT posts a $2.1 billion quarterly loss, but says it can meet its cash needs through the end of 2009.

Sept 29, 2008 – CIT renews about $6 billion in bank financing. Eleven days earlier Wells Fargo Bank agreed on a $500 million credit facility for CIT.

Nov 13, 2008 – CIT applies to become a bank holding company and says it will seek capital under the U.S. government’s program bailout program, sending its shares up more than 20 percent to $4.24.

Dec 23, 2008 – The company gets preliminary approval for $2.33 billion under the government’s $700 billion financial bailout program.

March 31, 2009 – CIT Group says it is unable to issue government-backed debt as regulators have yet to approve its applications.

June 12, 2009 – Standard & Poor’s cuts its rating on CIT Group into junk territory, saying the lender’s conversion into a bank holding company did not benefit its liquidity as much as expected.

July 12, 2009 – CIT executives meet government officials and try to work out a financing plan to convince customers and investors that it can work its way out of a deepening liquidity crunch.

July 15, 2009 – Talks with the government fall apart, leading to increasing expectations of a bankruptcy filing.

>

Sources:
Goldman Shows CIT The Money
Miriam Marcus,
Forbes, 06.09.08

http://www.forbes.com/2008/06/09/cit-goldman-closer-markets-equity-cx_mlm_0609markets34.html

TIMELINE: CIT’s troubles deepen over past two years
Reuters, Jul 16, 2009 4:03am

http://www.reuters.com/article/newsOne/idUSTRE56F05S20090716

Category: Bailouts, Earnings

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Will CIT Wipe Out Goldman’s Earnings?”

  1. Michael M says:

    Goldman Says It Has ‘No Material Exposure’ to CIT

    http://www.bloomberg.com/apps/news?pid=20601103&sid=a9IV.uJ0d8Zk

  2. Transor Z says:

    At this rate, “no material exposure” will become the new “terminate with extreme prejudice.”

  3. adbutler007 says:

    The more interesting question now is, “Who is Goldman’s CDS counterparty for their CIT hedges?” Certainly the government won’t force the bankruptcy until the major banks have reported so the loss can be deferred.

  4. call me ahab says:

    “BofA Under Secret Regulatory Sanction: Report”

    “Rarely disclosed publicly, the so-called memorandum of understanding (MOU) gives banks a chance to work out their problems without the glare of outside attention, the paper said.”

    http://www.cnbc.com/id/31937534

  5. Steve Barry says:

    @adbutler:

    When is everyone else wiped out and only Goldman left standing? They seemed to have perfectly hedged out all risk to the rest of the financial system.

  6. cvienne says:

    @adbutler007

    ““Who is Goldman’s CDS counterparty for their CIT hedges?” Certainly the government won’t force the bankruptcy until the major banks have reported so the loss can be deferred”

    Nowadays it probably wouldn’t matter, they’d just change their reporting date and end up with an orphan month just like Goldie back in December…

    Steak tartar for all!

    Isn’t accounting fun?

  7. Lt. Dangle says:

    AIG would be really ironic

  8. call me ahab says:

    All TBTF banks profits should be forfeited-

    since they are the result of mark to model (AKA- mark to bullshit) and engineered by the USG- with negligible borrowing costs and FDIC backed bonds-

    the money could be used to help those that were hurt by the economic breakdown that was result of TBTF bank greed and recklessness-

    there- generally more in the libertarian camp- but these banks are bringing out the socialist in me

  9. danm says:

    Maybe that loan is now on the Fed’s books!

  10. wally says:

    No problem. Hedge it with AIG and take it from the taxpayers. That’s what their pals Hank and Benny set them up to do and that’s what they’re doing.

    Bastards.

  11. call me ahab says:

    the TBTF bank’s profit’s should be forfeited-

    since they are the result of USG engineering- the switch to mark to model (AKA- mark to bullshit)- with negligible borrowing costs and FDIC backed bonds- profits are as good as guaranteed-

    and the money can be used to help those hurt by the economic breakdown that was the result of TBTF bank’s greed and recklessness-

    there- usually take a libertarian view of things- but- the TBTF banks are bringing out the “cultural revolution” side of me

  12. danm says:

    Isn’t the fact that GS hedged their position an indication that they knew CIT was not a going concern?

    Oh no silly me, they just hedge all their positions!

    Sometime in the early to mid-90s, a GS salesperson kept on leaving messages on my answering machine pumping some Russian oil producer that just IPOed. It was a bought deal and I guess GS got the reserves at much less than a dollar per BOE. By the time they actually got the stock off their books it was at over 5$ per BOE. As if their clients can ever expect more than crumbs.

  13. ubiktwo says:

    Is AIG the counterpart in the hedge again

  14. Robespierre says:

    If GS had any exposure to CIT the government would have bent over backwards to save it.

  15. The Curmudgeon says:

    Of course Goldman has no material exposure to CIT. They’ve got no “material exposure” to any fucking thing. What part of socialized losses and privatized profits don’t we understand? Being Goldman means having no downside risk, just upside profits. Since the credit crisis conveniently wiped out most of their creditors, its all profits, all the time, until it isn’t, and then Uncle Goldman takes the hit.

    Great thing, this Amerika style of capitalism.

  16. call me ahab says:

    “Brown Backs Holding Back Bank Bonuses for Five Years ”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aO4xs6RPse6k

    too bad it’s the UK

  17. Stillaway says:

    GS has a dedicated shipping dock at the Bureau of Printing and Engraving. An 18-wheeler arrives every hour to pick up 20 pallets of 100′s for transport to the Bonus Vault.

  18. jc says:

    I just have this mental image of a meeting where Treasury tells GS that CIT won’t get any more bailouts. I mean if Paulson is giving Lewis legal advice about material adverse events and Lewis’ responsibility to BAC shareholders and basically threatened him – how much easier would it be to casually mention to GS that Treasury has a DNR on CIT.

  19. uno,

    what’s your take on the ‘log periodic power law’?

  20. jc says:

    GE Capital and CIT, birds of a feather, but GECC gets the white glove TBTF treatment!

    http://www.breakingviews.com/2009/07/13/cit.aspx?sg=nytimes

  21. V says:

    Where have I heard that no material exposure line before?
    Oh that’s right:
    http://www.marketwatch.com/m/story/c177ea75-3eb8-4631-b1ec-6ebae68cdcb7/0

    No material exposure to AIG either apparently?
    I thought they had 19 Billion of exposure that taxpayers coughed up for.

  22. rfsnyc says:

    Barry – don’t break a sweat researching before you post – the answers to half your questions are in the links you posted along with the hyperbolic headline – yes it is secured! A quick google search gets you the structure of the deal – Total Return Swap – secured by investment grade securities – since GS underwrote it in 3/2008 not 3/2007 its reasonable to assume the advance rate is pretty conservative but that’s pure speculation – this took all of 90 seconds – you could take another 10 mins and pull the filings to learn more but then you probably couldn’t post with such enthusiasm!

    ~~~

    BR: Fair points (mostly).

    The blog has a mix of longer more detailed posts, and quick hits. This was obviously the latter.

    If it interests me enough to post about, the enthusiasm is always there.

  23. leftback says:

    Classic. I assume GS has CDS on CIT through AIG. Classic.

    Isn’t it cute the way Johnny Retail buys a few stocks early in the morning after a big squeeze day??
    Even Jamie “Erin Burnett’s dreamboat” Dimon couldn’t perk up the market this morning.
    So I’m thinking, what chance do Pandit and Lewis have on options expiration day?

  24. Stuart says:

    Someone is going to freakin’ lose it at this end of the keyboard if it turns out they were hedged thru AIG and get 100 cents on the dollar again…. Jesus Mother Mary of God…. lose it I says….

  25. leftback says:

    Stuart, don’t lose it, just play the Gary Shilling video, and get some Treasuries* for the end of the year.
    (yes, I know, you are a gold bug, but that phase comes later…)

    *LB likes the 5-year.

  26. Stuart says:

    Uh-oh..

    AP’s writeup:

    Foreign demand for US financial assets down in May
    By MARTIN CRUTSINGER
    AP Economics Writer

    WASHINGTON (AP) — Foreign demand for long-term U.S. financial
    assets plummeted in May as Japan and Russia trimmed their holdings
    of Treasury securities.

    The Treasury Department said Thursday that foreigners actually
    sold $19.8 billion more long-term U.S. securities than they
    purchased in May. That compared with net purchases of $11.5 billion
    in April.

    China, the largest foreign holder of U.S. Treasury securities,
    bucked that trend. Its holdings rose to $801.5 billion, an increase
    of 5 percent from $763.5 billion in April.

    China’s holdings are a direct result of the huge trade deficits
    the U.S. runs with the emerging Asian power. The Chinese take the
    dollars Americans pay for Chinese products and invest them in
    Treasury securities.

    American manufacturers argue that gives China unfair trade
    advantages by keeping the dollar overvalued against the Chinese
    currency, which makes U.S. goods more expensive for Chinese
    consumers and Chinese products cheaper here.

    Both the Bush and Obama administrations have argued that China
    should allow its currency to rise faster in value against the
    dollar but the yuan has stopped appreciating against the dollar in
    recent months.

    Japan, the second largest foreign owner of Treasury securities,
    trimmed its holdings 1.3 percent to $677.2 billion in May, from
    $685.9 billion in April.

    Russia cut holdings even more sharply, reducing them 9.1 percent
    to $124.5 billion in May from April.

    Oil exporting countries, another large holder of Treasury
    securities, boosted their holdings by 1.8 percent to $192.9
    billion.

    Treasury Secretary Timothy Geithner traveled to Saudi Arabia and
    the United Arab Emirates this week to assure those governments that
    the administration is committed to getting its soaring budget
    deficits under control once the current recession and financial
    crisis have been contained. Geithner delivered a similar message to
    the Chinese in a trip to Beijing a month ago.

  27. Groty says:

    Senior secured with quality assets and downside hedges. Maybe CIT was worth more dead than alive.

  28. uno says:

    @MEH: Log-periodic power law observations strike me as being interesting, but not tradable. They might serve to put on on notice, but speaking for myself I need signal(s)…not just tremors…to call an earthquake.

    Having said that, signals aren’t everything. E.g., while I observed & called the very top in Oct ’07 (to the day) by way of fractal analysis, it didn’t help me one bit as I was at that time handcuffed to a well-intended but inexperienced trading partner who demanded “no more shorts” (literal quotation) 2 days prior to the peak.

    Not blaming, and I mean that quite seriously,…but the red pill does clearly have its side-effects as well.

  29. Onlooker from Troy says:

    “Treasury Secretary Timothy Geithner traveled to Saudi Arabia and
    the United Arab Emirates this week to assure those governments that
    the administration is committed to getting its soaring budget
    deficits under control once the current recession and financial
    crisis have been contained. ”

    In other words, our treasury sec traveled abroad again to kiss our creditors’ asses again, hoping they won’t cut us off. It’s really pathetic ain’t it? Of course our president traveled there recently to kiss their asses hoping for them to help get our energy costs down. And that’s a regular trip in recent years. (Witness Bush holding hands for a stroll through garden with the Saudi king; blech)

    We’re no better than a dope ridden, strung out, broke hooker on the streets of NY, begging her dope dealer and pimp for mercy.

    The borrower is indeed slave to the lender.

  30. Pat G. says:

    “but I never like to stand in the way of the tinfoil crowd)”

    Hey!! I resemble that remark…lol