The real lesson of CIT
Sometimes a failed lender is just a failed lender.
The relatively small size of CIT Group is a big reason the middle-market lender is headed to the wood chopper as soon as Friday. But the lender’s decision to move aggressively into the world of risky lending and not regroup when troubles in the credit markets first emerged is a classic case of bad decision-making and bad timing striking the mortal blow.
Indeed, one should resist the temptation to draw broader conclusions from a CIT bankruptcy in a world where the government is saving some banks and leaving others to languish.
CIT is no stranger to skirting the edge of trouble. In 2002, it had a near-death experience when problems at its scandal-plagued parent Tyco International cost it access to essential short-term financing. Tapping a credit line averted disaster then.
That lesson seemed to have been lost on Jeffrey Peek, a former Wall Street investment banker. He joined the company just a year later, becoming CEO in 2004. Peek then led the once-under-the-radar lender into the world of subprime loans, student lending and leveraged buyouts at a time when such ventures were hailed as the Promised Land for companies and executives with big ambitions.
But like others on Wall Street, he funded his aspirations through credit markets and by 2007 they had grown tired of such risky ventures and promptly shut off the financing spigot. The drought threw Countrywide Financial, the lender that fed the nation’s housing addiction with questionable loans, into the arms of Bank of America — a clear warning sign to those that relied on debt markets to start shoring up their capital with other sources of funding.
“Management should have addressed their funding problems two years ago,” said Sean Egan, president of Egan-Jones Ratings Co.
For CIT, the death blow came in March 2008 — six months before the financial firm bloodbath that spooked Congress into handing over more than $700 billion to save the financial system. Credit ratings downgrades left the company little choice but to draw on a credit facility — a sure signal of weakness from which it never recovered.
In December, the government still chose to give it a $2.33 billion infusion of TARP funds after the company converted itself into a bank holding company.
In hindsight, it’s a wonder that the government gave the lender funds in the first place, but then again it was handing out lots of funds at a time when it thought broad brush-strokes were needed to stabilize the financial system.
Times have changed and it looks like CIT’s time is up. Financial markets are stable, and earnings from JPMorgan Chase and Goldman Sachs Group this week show that the big banks are now far from failing.
The government’s refusal to give it a second shot in the arm this week isn’t surprising given the rapid deterioration of its collateral.
That CIT is expected to leave only small ripples rather than a Lehman Brothers tsunami makes a bankruptcy less ominous and easier for the government to draw the line.
But for those angry about CIT’s demise, keep your wrath focused on the company and its excessive risk-taking. It helped create a credit crunch that’s about to get worse for the little guy.