CIT Group Closer to Bankruptcy as U.S. Denies Aid

[cal04]

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/15/AR2009071503305.html

CIT Group, an important lender to smaller companies, said last night that it had failed to persuade the federal government to provide further financial assistance to help it avert a likely bankruptcy filing that could hurt thousands of clients ranging from small clothing manufacturers to retailers such as Dunkin' Donuts and Dell.

The decision, which appears to mark the first time that the Obama administration has denied aid to a large, troubled financial company, reflects the judgment of senior officials that the economy is now strong enough to absorb a painful failure, in part because New York-based CIT is not among the very largest financial firms.

The consequences of a bankruptcy filing still could be severe. CIT provides financing to roughly 1 million companies, many of them already struggling to weather the recession. CIT estimated in its pleas for assistance that thousands of firms might be unable to survive its demise.

A bankruptcy filing also could wipe out the $2.3 billion that the Bush administration invested in the company in December as part of the government's $700 billion financial rescue program. CIT would become the first firm bailed out by the government to subsequently fail.

[DJ13]

1. Obama's economic team is very shortsighted

[Speck Tater]

2. That's right. EVERY bankster with bad judgement should be given truckloads of money.

It's the American way. Protect the rich, piss on the poor.

[kickysnana]

4. This is going to crush thousands of small businesses. That is the shortsightedness. n/t

[dkf]

5. Well now you will see what a wonderful idea it is to let the

banks go belly up.

[unc70]

8. Did not require bad judgment by bankers. Retailers/small biz really hard hit

The definition of "small business" varies by industry and includes many that I would describe as "medium sized businesses" with gross revenues over $100 million.

Lines of credit are essential for the survival of many small businesses in normal times, enabling retailers to increase their stock of goods for holiday shopping, contractors to pay suppliers and employees during contract performance prior to completion, manufacturers to inventory materials, farmers to buy fuel and fertilizer, and everyone to deal with seasonal fluctuations and with unexpected events.

Most of these businesses are owned by a family or by a small number of individuals, most of whom work in/for the business. Any loans or credit lines to these businesses are almost always personally guaranteed by the owners and their personal assets (in addition to being secured by business assets, equipment, inventory, and such). They may have business credit cards with modest limits, possibly as part of a low-end credit line ($10-50,000).

Most businesses that survive the first couple of years are acutely aware of downside risk and attempt to limit possible damages. In lean months, owners might pay themselves little or nothing, might reduce staff seasonally, might use available credit to maintain essentials. For example, most retailers and restaurants in Chapel Hill have dramatic drops in their revenue during the summer while many students are away, and they often have a truncated Christmas shopping season as many students return to their homes after exams.

Many small businesses have seen their credit lines and credit card limits cut by half or more this past six months, many reduced to their outstanding balances. Often, only a small part of the credit card limit can now be used for cash advance/overdraft, the rest available for purchases.

Those owners who used credit lines or credit cards that were actually home equity loans face additional risks now, particularly in places the housing market collapsed. Even in places like here where home values are only down a little, the loan-to-value requirements still cause problems. If your business is failing, your home is immediately at risk for foreclosure from this.

BTW Some of the large shopping center and mall owners are themselves having major financial problems, many facing default on their own loans. Several local shopping centers and malls have new owners (non-local REITs, etc.) in the last year or so, and in spite of the economy are dramatically raising rents on existing restaurants and retail tenants, forcing them to relocate or to close completely after decades of operation. Why would any landlord force out successful tenants, often without a viable replacement? If a new tenant in the space was likely to fail within a year or so, what motivated these landlords? I suspect the owners are trying to "improve" the apparent value of tenant leases either for resale or to enable them to collateralize the income stream!

Unfortunately, I see no one in the Obama administration that seems to know what small business really are facing.

[xchrom]

3. oh now this is interesting -- be a good thing to keep an eye on. nt

[girl gone mad]

6. Go Sheila!

"Reportedly, a struggle had broken out between Treasury Secretary Tim Geithner and FDIC chair Sheila Bair. Geithner favored the rescue, citing dangers to small businesses. Bair opposed extending FDIC credit to the weak firm that many believe could fail without causing major systemic upheavals.

While CIT and U.S. regulators spent worked through the night discussing details of a potential recue, a bank run was underway. Customers reportedly drained hundreds of millions of dollars from the lender in the past few days, drawing down on credit lines they had with CIT. The run seems to have been prompted by news over the weekend that CIT had hired lawyers to prepare for a bankruptcy filing."

It's about time someone put the brakes on this madness.

[cal04]

7. Treasury Bets U.S. Financial System Can Weather CIT Collapse

http://www.bloomberg.com/apps/news?pid=20601083&sid=au7g7OjDYZ10

The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender.

“I hate to say this, but it was probably expendable,” said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. “It may have just missed the boat” on federal rescues, Santiago said.

Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT.

Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.

[HamdenRice]

9. It should be neither "bailed out" nor bankrupted. It should be nationalized.

For fear of a word, we have allowed untold damage to the economy to occur.