Why CIT Group's bankruptcy doesn't matter
Filed under: CIT Group, Goldman Sachs , Citigroup
I would like to congratulate the Obama administration for drawing the right line in the sand. Unlike the Bush administration, Obama did not permit a $639 billion bankruptcy -- Lehman Brothers -- whose collapse nearly caused social chaos as people lost confidence in their money market funds. With today's CIT Group (CIT) bankruptcy filing, the U.S. will lose $2.3 billion in TARP money, but with $71 billion in assets, CIT will keep operating and global panic will not follow.
As I posted previously, CIT Group makes loans to about a million small businesses like Dunkin' Brands franchises. Those businesses need capital to operate and they can't get it very easily by accessing public debt and equity markets. So lenders like CIT Group really matter to them. But the company got distracted by subprime mortgages and student loans and it is likely to scale back to its core business of lending to small and medium sized business.
In the pre-packaged bankruptcy, Carl Icahn is providing $1 billion to fund operations while it reorganizes through a debtor-in-possession loan until the end of 2009 -- when Bloomberg reports -- CIT Group expects to emerge from bankruptcy. Bondholders -- 85 percent of whom voted their $30 billion in favor of the deal -- will receive about 70 cents on the dollar according to DealBook.
The U.S.'s $2.3 billion in preferred stock and common shareholders' stock will be wiped out. Those common shareholders include FMR LLC -- a Fidelity Investment company -- with a 9.9 percent stake in CIT common and Brandes Investment Partners LP with 9.7 percent, according to Business Week.
I think that investors should derive confidence from this announcement. That's because it proves that the private capital markets can function well enough without government assistance to allow a company to fail without government intervention. Unfortunately taxpayers will lose $2.3 billion (out of $700 billion in TARP money) in the process.
But the real problem is that bigger TARP recipients -- like Citigroup (C) -- could be in greater danger, according to the New York Times. However, the U.S. has decided that the cost of their failure cannot be born by free markets. So they're still too big to fail. And the U.S. taxpayer may need to throw more good money after bad to prop them up.
An interesting footnote to this deal: up until last Friday, as I posted early last month, Goldman Sachs Group (GS) was poised to pull in a cool $1 billion if CIT went bankrupt. But on October 30th, CNNMoney reports that Goldman and CIT reached an agreement in which CIT would reduce the size of its Goldman loan to $2.125 billion from $3 billion.
In exchange, CIT will pay Goldman a mere $535 million -- including a termination fee of $285 million and collateral of $250 million. That looks much better than the cool $1 billion Goldman would have gotten.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He owns Citi shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 2)
11-01-2009 @ 6:07PM
frank frantz said...
tear up your citi cards and tell em all to go to hell
Reply
11-02-2009 @ 5:54PM
J C said...
Don't go tearing up Citi anything, you have the wrong company, this is Cit Group NOT Citi Group, HUGE DIFFERENCE!
11-01-2009 @ 6:13PM
frank frantz said...
isn't nice they filed on late Sunday so the "comman " shareholder doesn't get a chance to recover some of the loss?
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11-01-2009 @ 7:18PM
BP said...
Peter should do his homework before he writes his articles. GS renegotiated their deal with CIT and are not getting the billion, but dont let the facts get in the way of a good story
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11-01-2009 @ 10:53PM
cinder said...
Is "As I posted earlier" all you can actually say about this occurence Peter? Don't worry, we all think you are about as prescient in your prognostication as the local supermarket bag boy. Remember, if you have to say you are smart, you probaby aren't.
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11-01-2009 @ 11:35PM
Dave said...
Now maybe people that are still playing in this drucken stock will see what false numbers they are reporting every broker in out there was trying to push CIT stock last after Icahn threw his billion in the market should drop about 400 to 450 points on Monday or will these jerkoffs start the morning trade up saying on that didnt hurt the Market its time Obama firgures with CIT and GM THE BAIL OUT WAS A TOTAL FAILURE
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11-02-2009 @ 1:02PM
Whatsdamatterwithya said...
The U.S.'s $2.3 billion in preferred stock and common shareholders' stock will be wiped out.
I think that investors should derive confidence from this announcement.
These two sentences put together in a story show that you are a total IDIOT! Investors at large, are the taxpayers who will be paying for the wipeout, what confidence can they possible derive from the asinine decision of an idiotic prez who turns good money into smoke and then asks to print more money to add to the fire???You are a total reckless idiot to even dare to write such type of articles. You just dont have a CLUE. You need money?, go do something that has value just like harworking taxpayers are doing. go on pooch, go on
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11-02-2009 @ 10:45PM
Peter Vaz said...
After all Peter, Where is all the USD vanishing by...and that too is a million billion dollar question. Don't you think the bailouts and the stimilius packages were only a mere "life line" to the Americans or a "vote gift" to the taxpayers by the new "White House Administration". And who cares for CIT failure and even if USD is "Proudly made in China"....after all it will be heap in the basket of cheap.
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11-02-2009 @ 5:35AM
Andrew Gross said...
Nothing to worry about. Just another "Going Out of Business Sale" on Main Street.
Put your money under your mattress!
Andrew Gross
CEO
Automotive Consulting Services, LLC
dba Car Czar Consulting
http://carczarconsulting.com
503-701-6003
andy@carczarconsulting.com
Reply
11-02-2009 @ 5:40AM
Denise Olcese said...
Writing as someone who had to suddenly retire last September due to serious health problems and watched 45% of my "moderately conservative" retirement account go up in smoke, I am wondering from which of your comments I, as an investor, should derive confidence. The one about the 2.3 billion in common and preferred stock being wiped out, or the one about Goldman Sacs only getting 545 million dollars instead of a billion or how the Obama administration should be congratulated for drawing the appropriate line in the sand and saving Wall Street from further panic with this latest little blip of a bankruptcy.
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11-02-2009 @ 2:07PM
John R said...
It is all about confidence. If we have a good feeling about tomorrow we will invest because we believe in stability. Market stability is more important than any quick fix. The market is a risky thing, retirement is not, we all need to "Get Real" with our own lives. Stop pointing at Government to fix our problems.
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11-02-2009 @ 8:55AM
george said...
That was possibly the worst article I have ever read. Yeah, a huge bankruptcy will do nothing to the financial markets. It won't trigger a credit event. AIGFP/taxpayers won't have to pay goldman sachs and the rest of the crooks billions of dollars on their hedges.
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11-02-2009 @ 8:02AM
Rusty said...
Unbelievable, Obama is to be praised even when the fifth largest bankruptcy in U.S history happens under his watch? Am I missing something? What line did Lord Obama draw in the sand? 2.3 Billion shareholder equity gone, 2.3 billion in taxpayer equity gone. Yet I should pat the President on the back? Oh, I forgot, Obama said the recession was over and everything was o.k. so the media tows the party line.
Were you drinking when you wrote this?
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11-02-2009 @ 8:29AM
Ross Espey said...
Why did you have to begin the article with praise for Obama? Your second sentence is incomplete!
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11-02-2009 @ 8:33AM
Gene said...
Lehman went bankrupt because its Board of Directors wouldn't accept a Korean company's offer to buy them out. Please get your facts straight.
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11-02-2009 @ 8:45AM
Fedupsencit said...
You are a total idiot. Praising Obama for drawing a line in the sand!!! That bootlicking, asskissing, political hack is now pledging to bail out the newspapers that are constantly fawning over his idiotitic policies. You can't be serious. Oops, I guess you are one of those media people fighting to kiss Obama's backside.
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11-02-2009 @ 9:03AM
Mary said...
I am just a watcher and do not play the market. However I do watch it to see how prices are going to change in the near future for me as a consumer. I am retired and need every penny to count. In case many of you high rollers donot know that is those small round copper things that have Lincoln's head embossed on them.
To the point I have been following this company for a while and though they only made loans to companies for stock for stores not sub prime mortgages and students loans? By the way if you default on a student loan you cannot buy a house ever, file a mortgage bankruptcy and for 10 years you cannot buy a house. Now what happens if the company that you got the loan from files bankruptcy on the same loan??? Anyone care to comment? Just my comsumer brain at work.
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11-02-2009 @ 10:03AM
Shawn said...
You are the most conflicted, short-term memory person ever to be allowed access to a word-processor. Don't you remember that by allowing Lehman to fail, they saved two other banks? The capital markets were not allowed to work then, and they're not allowed to work now! And I think this all shows the failure of government intervention...Fanny May and Freddie Mac are doing worse now than they were when the crisis started...look it up! Same with CIT, they got bailed out and they STILL failed! And it's not an administration failure, either. These wheels were set in motion back in the 70's, when we decoupled from the gold standard and needed to inflate our way to greater heights. Who is paying you to write this stuff???
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11-02-2009 @ 9:30AM
sgentilejr said...
It appears that somehow everyone here is assuming CIT will survive. All that has been accomplished thus far is CIT eliminated their shareholders and CIT reduced the debt load by maybe 20%.
Yet, if economic conditions remain the same and if the Borrowers do not or cannot repay their CIT loans, then CIT remains in exactly the same boat it was in before____except now they will have a much more difficult time in finding anyone willing to lend them additional money or buy any new bond offerings or investors willing to purchase new CIT shares in fear they might file bankruptcy again in the future and wipe out the new shareholders also.
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11-03-2009 @ 7:49PM
lonnie said...
I agree we had some bonds with these guys about 2 months after we bought them they were down graded were just parking it there for a couple years to keep from getting zero interest instead we got 6.25 of course weve now lost at least 7000.00 any body that would ever buy another bond from these people is crazy they have more assets than debt pay the bondholders, my suspision is that the big boys will take the money and run and you will never hear from cit group again