C it collapse

July 16, 2009

With government talks aimed at averting its collapse having, er, collapsed, CIT appears to be headed for bankruptcy. Dire predictions about a wave of failures by small and medium-sized businesses are still echoing, sustained by uncertainty. The suggestion that other lenders are going to step in and offer financing to CIT clients sounds hollow in the lingering recession.

Paritosh Bansal and Jui Chakravorty spoke with investment bankers who said asset sales under duress would not only draw fire-sale prices in depressed markets — a lethal combination, as AIG found — but could also lead to legal challenges from creditors if deals are rushed through ahead of a bankruptcy filing. Much like AIG, CIT is having trouble valuing its loans. Private Equity is also unlikely to show much interest.

Government efforts to avoid or manage bankruptcy elsewhere in finance and in the auto industry have led, at best, to inefficiency in clearing the dross from the boom years. At worst, the result has been a degradation of faith in investing in credit.

Yesterday we argued that a lender to small and medium-sized businesses would find more broad political support among conservatives, who count on small business as their base. Clearly, that isn’t paying off. But it’s also worth asking who, exactly, is issuing the dire predictions about the impact to the American dream of a CIT collapse.

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