Looks like the government may be deciding CIT is too big to fail. Reports all over the Internet indicate talks with CIT (CIT) for a possible government bailout have intensified. Analysts have concluded that a bankruptcy won't solve the commercial leasing and financing company's long-term problems. The most likely solution is a short-term government loan while CIT and the government look for a deep-pocketed investor to buy the company. Sounds like a replay of the Washington Mutual scenario.
CIT's stock plummeted 12 percent to close at $1.35 on Monday. Standard & Poor's downgraded CIT late Monday and warned that the company may try to restructure its debt, possibly through bankruptcy or through a "distressed" exchange offer. S&P told bondholders in a statement, "CIT has more than $1 billion of unsecured notes maturing in both third- and fourth-quarter 2009 - payments that could become increasingly difficult to make if borrower draws increase significantly and CIT does not win regulatory approval of its strategic initiatives."
To get government help CIT must boost its bank deposits from 0% to 5% of CIT's funding to 10% to 20% of CIT's funding, and a bankruptcy will kill any chance of doing that. A bankruptcy would not give CIT the ability to borrow money at competitive rates, so it's business model would be dead.
Sean Egan of Egan-Jones told Marketwatch that some short-term government support and then a sale to a large bank would be CIT's best option. CIT's business model was never that of a bank. It was a lender to small- and medium- manufacturing and retail companies. It filed to become a bank just last December in order to get access to TARP funds, so CIT doesn't fit the FDIC's usual guidelines for a bank bailout.
However, without government aid, CIT estimates that about 760 manufacturing firms may be at risk, as well as 300,000 retailers. These businesses will be without credit to run their operations if the FDIC doesn't back CIT's debt. U.S. Treasury Secretary Timothy Geithner said Monday he was confident the government would be able to deal with CIT, whatever that means.
The big question is that in making the deal to save CIT, how much taxpayer money will be put at risk? Can we afford to keep propping up these financial companies that obviously have been run by risk takers who were out to make big bucks, but didn't care about the true health of their firms?
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.
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