Commentaries

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from Rolfe Winkler:

CIT shareholders should take their money and run

NEW YORK, July 20 (Reuters) - Why did shares of CIT rally as much as 100 percent today? Presumably investors saw headlines with the word "rescue" and thought it made sense to take a flyer. This is foolish.

CIT is highly leveraged and its assets are deeply troubled. Even if CIT is "saved" through a restructuring, there's no prospect that the equity will have any value. The only hope is a backdoor bailout, and that's highly unlikely.

To understand why CIT's stock is essentially worthless, all you need to know is one equation: Assets = Liabilities + Equity. For a financial company like CIT, assets are the loans it makes to borrowers. Its liabilities are the dollars it borrows from lenders and depositors to fund those loans. Shareholder equity is what's left over.

As the economy has deteriorated, so has the value of CIT's assets. But the value of its liabilities remains fixed. Equity acts like a buffer to protect the value of liabilities as asset values fall. In other words, stock investors eat losses so that lenders and depositors don't have to.

from Rolfe Winkler:

Why would CIT’s bondholders want assets transferred?

I noticed an odd paragraph in this morning's WSJ story on bondholder plans to rescue CIT:

CIT and its bondholders hope that their effort to stabilize the company will cause bank regulators to look more favorably on a CIT plan to transfer more of the company's loans from the holding company to its bank in Utah. CIT has trouble borrowing money, but its bank can finance itself by taking in deposits. To transfer more assets to the bank, however, CIT needs an exemption from the Federal Reserve and a nod from the Federal Deposit Insurance Corp.

CIT far from out of the woods

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It looks like CIT has once again narrowly escaped falling over the edge after a group of bondholders agreed to extend $3 billion to the troubled lender in exchange for high-quality collateral and juicy interest rates. The thing is CIT still needs to sort out its failed business model based on borrowing in credit markets to provide financing to small and medium-sized businesses. But as we’ve seen again and again in this credit crisis, relying overwhelmingly on markets can sink even well established banks – think Northern Rock.

CIT’s alternatives, however, are few. Its deposit base is small, and as David Hendler notes via Bloomberg, building up it up isn’t easy or cheap.

CIT timing not the greatest

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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.

from Rolfe Winkler:

No rescue for CIT, taxpayers lose $2.3 billion

CIT's press release this evening:

CIT Group Inc....has been advised that there is no appreciable likelihood of additional government support being provided over the near term.

The Company’s Board of Directors and management, in consultation with its advisors, are evaluating alternatives.

A CIT CDO problem

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CIT isn’t supposed to be a systemic threat, but a potential failure of a big lender, even if its customers are small and medium-sized businesses, is bound to shake up some corners of credit markets. That’s a rule, isn’t it?

The FT is reporting that the problem area is likely to be synthetic CDOs – the really fun structured products that are made up of sliced and diced credit default swaps referencing individual companies. But this time it looks like the losses just may be in investors’ heads.

CIT is a warning sign

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agnes1If it’s not a risk to the financial system, let it fail.

That’s the message from the government’s reluctance to swoop in and bail out one of the nation’s biggest commercial lenders, CIT Group Inc, as it struggles to stay afloat. But even though CIT doesn’t have the firepower to take down the global financial system, its failure would certainly be felt by some of the struggling small businesses that rely on its financing.

CIT is negotiating with its regulators to find a solution to its near-term liquidity problems, but speculation that it will file for bankruptcy has intensified after the Wall Street Journal reported that it was preparing for a possible filing.

from Rolfe Winkler:

Let CIT fail

As CIT hangs by a thread, some news outlets are reporting that it would be the biggest bank to fail since WaMu.  Measured by total firm assets this is true, but measured in terms of deposits, CIT is a fraction of WaMu's size.  That's why Sheila Bair is willing to let CIT go under.  And she's right. FDIC only backs CIT Bank, which is a much smaller operation withing CIT Group.  CIT Bank has just over $3 billion worth of deposits.  WaMu had $188 billion in deposits when it failed and was sold to JP Morgan.  BankUnited had $8.6 billion when it went under.*

CIT Group's balance sheet is plenty big ($76 billion of assets as of 3/31/09), but it's funded primarily with debt, not deposits.  If the firm goes boom, investors will lose, not FDIC's deposit insurance fund.

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