CIT’s dead reckoning
NEW YORK, July 17 (Reuters) – Three cheers for progress. After the government refused to back CIT debt, the firm’s bondholders got on the phone to discuss a debt for equity swap. Now it appears that JPMorgan Chase and Goldman Sachs may still ride to the rescue with emergency financing.
But whatever happens, with no prospect for a bailout, the CIT situation will be resolved privately, at no additional cost to the taxpayer. It’s unfortunate that the Obama administration hasn’t been this unforgiving with the housing market and banking sector. That’s the only way for the economy to find solid footing.
CIT is presumably insolvent. The company lacks sufficient cash flow to meet lending commitments and future debt maturities. Now as customers race to draw down credit lines, the company faces a liquidity squeeze. The government could continue lending — CIT has already blown through $2.3 billion of TARP cash — but to what end?
Those arguing for a bailout say that small businesses dependent on CIT credit lines may themselves be forced into bankruptcy. But this misses the point. CIT no longer has sufficient capital to lend. A government lifeline thrown their way would just make Uncle Sam the lender of last resort to yet another sick segment of the economy, putting taxpayers on the hook for more credit losses.
Taxpayers are already stretched to the breaking point. We are borrowing fantastical sums of money to finance previous bailouts, stimulus and, presumably, a new national healthcare plan. We should try to borrow more from China so that Dunkin’ Donuts franchisees don’t lose their credit lines?
Obama can’t rescue everyone. If he tries, the bond market will cut him off. We’ll be in far worse shape than if we had let lenders like CIT fail in the first place.
In the aggregate, the U.S. economy is insolvent. That was noted by the “Black Swan” author, Nassim Nicholas Taleb, who earlier this week recommended “immediate, forcible and systematic conversion of debt to equity.”
He’s right that balance sheets across the economy need to be recapitalized. But we don’t need a legislative decree to make it happen all at once. Bankruptcy law in the United States is very robust. Debtors and creditors can work out debts themselves, in or out of court, which is precisely what’s happening with CIT now that the government has gotten out of the way.
If the administration stopped propping up the housing market and too-big-to-fail banks, bankruptcies would be able to clear much more bad debt.