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CIT timing not the greatest

July 16, 2009

Though, I’m not sure if it would have been better for the talks between CIT and the government to break down last week either. The pairing of almost certain bankruptcy of the little guy lender with the blow-out earnings of Wall Street giants, JP Morgan and Goldman Sachs, makes a strong argument for smaller financial institutions to beef up their operations so they, too, can be too big to fail.

I hope Geithner and Bernanke are preparing their defense for the populist backlash.

Given CIT’s long battle to stay afloat, bankruptcy can’t be far away. Reuters, citing CNBC, says that the lender is preparing for a filing Friday.

Though CIT provides loans to small and medium-sized businesses, it’s still a big lender itself. From Reuters:

If CIT were to go bankrupt, it would join Lehman Brothers Holdings Inc and Washington Mutual Inc among large financial companies to collapse since the credit crisis accelerated last September.

Standard & Poor’s said on Monday that a CIT bankruptcy was possible if no federal aid emerged.

CIT ended March with $75.7 billion of assets, making it roughly one-ninth as large as Lehman and one-fourth as large as Washington Mutual, whose banking units were bought by JPMorgan
Chase & Co.

And Goldman Sachs, which reported a blockbuster quarter on Tuesday, has protected itself from the $3 billion credit line it extended to CIT. It’s hedged.

Meanwhile, back on Wall Street…JP Morgan earned $2.72 billion in the second quarter. Not too shabby for a quarter’s work.

From Mr. Dimon in the press release:

“Even after further strengthening our credit reserves by $2 billion to $30 billion and repaying the $25 billion of TARP capital, the firm ended the quarter with a very strong Tier 1 Capital ratio of 9.7% and a Tier 1 Common ratio of 7.7%. With these additions to reserves, we now have an extremely high loan loss coverage ratio of 5%.”

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And let us not forget that JPM has a stake in CIT and, though they recently posted impressive, bounce-back earnings, we will soon see how CIT’s failure will affect not only JPM, but the markets as a whole.

 

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