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.
I understand why CIT would want to transfer assets to the bank, sort of. Deposit funding is clearly much cheaper than other options they have. Backed by FDIC insurance, deposits can be had at interest rates far below CIT could get in the bond market.
But as everyone points out, you can’t build a deposit base overnight. Not unless you’re offering a high interest rate on brokered deposits, I suppose. And FDIC will most certainly NOT let them do that.
But why would bondholders be in favor of a plan to transfer assets out of the holding company? If those assets go to the bank, then they would back deposit liabilities. Bondholders need those assets to back their debt.