CIT Group 'Rescued' By Secret Group of Private Investors

The Associated Press
July 21, 2009

The board of CIT Group Inc., one of the nation’s largest lenders to small and midsize businesses, approved a deal with major bondholders to keep the company out of bankruptcy, said two people briefed on the talks. CIT will receive a rescue loan from key bondholders hoping to keep it alive long enough to restructure its debt, these people said.

The emergency loan would provide temporary financing to CIT so it could launch a debt exchange offer to free itself from upcoming debt maturities. Under the deal, CIT’s main bondholders would give CIT $3 billion at an initial interest rate of about 10.5 percent, according to a New York Times report.

The deal will not necessarily prevent a bankruptcy filing for the ailing firm, but will give it desperately needed breathing room while it attempts to refinance existing debt. CIT has a $1 billion payment due in August.

The Times said the temporary funding would provide CIT time to launch an exchange of outstanding debt for equity. By swapping debt for an equity stake in the company, CIT would no longer have to pay back the debt, which is essentially a loan. Instead, investors would hold an ownership stake in the company.

CIT has been scrambling to raise $2 billion to $4 billion. The New York-based lender received $2.3 billion from the government’s Troubled Asset Relief Program last fall. That money could be lost if CIT files for bankruptcy protection. The lender faces $7.4 billion in debt due in the first quarter of next year.

CIT’s failure could pose a major threat to the economy, industry representatives have warned. A collapse of CIT could cut off financing just as businesses need it most during the ongoing recession. Its failure could force thousands of companies to cut costs or shut down — driving up unemployment and dashing hopes for an economic recovery.

CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing, so other lenders taking up all the slack would pose a big financial strain.

CIT in Talks with JPMorgan, Goldman

Reuters
July 17, 2009

CIT Group Inc (CIT.N) is in talks with JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N) about short-term financing as it looks for ways to avoid bankruptcy, a source close to the company said on Friday, sending the lender's shares and bonds up.

Bankruptcy, however, is still possible over the next few days, and CIT, a 101-year-old lender that services nearly one million small- and mid-sized businesses, is continuing to talk with regulators about the situation, the source said.

Financing talks have turned primarily to arranging for a debtor-in-possession (DIP) loan for the lender in case of a bankruptcy, CNBC reported, adding that talks were also continuing for financing out of court.

JPMorgan and Morgan Stanley were in talks with other banks about a DIP loan, Bloomberg reported.

Meanwhile, CIT's bondholders were going to hold another conference call on Saturday, a source in the lender's bondholder group said.

"They haven't thrown the towel, and they still are trying to work very hard to get some sort of funding, but at the end of the day I still think that there is a very high risk of a bankruptcy event," said Sameer Gokhale, an analyst at KBW.

CIT is in search of $2 billion to $3 billion of financing, according to the source, who declined to be identified because the talks were private. The company also is in talks with bondholders about a debt for equity swap, the source said.

But the source in the bondholders' group said many bondholders were pursuing a "debt for new debt" exchange and that a debt for equity exchange was not a real consideration.

The first source added one potential scenario is a sale of some assets to raise capital. The lender had wanted regulators' permission to transfer assets to its bank unit, but that did not happen, the source said.

"It is just going to allow them to pass the next 30 to 60 days, but they have exhausted their balance sheet condition so fast that it was kind of breathtaking," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

The company's shares moderated early gains and closed up 29 cents, or 71 percent, at 70 cents, after more than doubling their price amid hopes of financing. The company lost 75 percent of its market value on Thursday as government talks for financing collapsed and bankruptcy loomed.

Standard & Poor's said on Friday that it was removing CIT from its S&P 500 .SPX market index as of July 24 after the close of trade, replacing it with software maker Red Hat Inc (RHT.N).

CIT's credit default swaps rose to about 51 percent as an upfront cost on Friday afternoon, according to Markit Intraday data, up from about 44 percent on Friday morning and up from about 48 percent late on Thursday.

The price of CIT's floating-rate notes due in August rose to 71.5 cents on the dollar in busy trading, from about 61 cents late on Thursday, according to MarketAxess, helped by news about the negotiations with Goldman Sachs and JPMorgan, bond fund manager Sean Simko said.

The company sought additional help even after gaining the status of bank holding company in December so it could draw $2.33 billion of taxpayer money from the Treasury's Troubled Asset Relief Program.

But the Obama administration declined help, saying it had set high standards for granting aid to companies and leaving private investors as the one alternative to avoid collapse.

The impact of CIT's demise would likely pale by comparison with the collapse of investment bank Lehman Brothers Inc (LEHMQ.PK) last September, analysts said.

"If they can't survive, the market will resolve this for them and move on. I don't see massive systematic disruptions if CIT will not exist three months from now," Wirtz said.

Still, the ripples of a collapse could be widespread and worsen the effects of the economic downturn for some firms.

CIT has about $40 billion of long-term debt, according to independent research firm CreditSights. About $1.1 billion of debt will come due in August, followed by about $2.5 billion by year end.

The New York Post reported JPMorgan could acquire CIT's factoring unit, which finances more than $50 billion of wholesale inventory, at a time of the year when the collapse of the lender could disrupt retailers holidays plans.

CIT declined to comment and JPMorgan was not available for comment. But analysts cooled expectations of an asset sale.

"It has some valuable franchises, but if they sell the assets in a distressed situation, they don't even get the par value for the assets. They will have to take losses and those losses will further weaken the balance sheet, so that doesn't seem to be a viable strategy," Gokhale said.

CIT Crisis Threatens Wave of Business Failures and Layoffs

World Socialist Web Site
July 18, 2009

The Obama administration has refused to provide government backing for outstanding debt or other emergency aid to CIT, a New York-based bank that finances nearly one million small and midsize companies in the U.S.

The collapse of CIT’s efforts to secure government relief on Wednesday has left the 101-year-old bank teetering on the edge of bankruptcy and threatens a cut-off of funding to retailers and suppliers. That could result in a wave of bankruptcies and closures, leading to tens of thousands of layoffs.

The administration’s decision to deny aid to CIT stands in sharp contrast to its policy of providing unlimited bailouts to major banks that cater to large corporations and big investors.

It is of a piece with its decision to drive General Motors and Chrysler into bankruptcy in order to impose tens of thousands of layoffs and slash the wages and benefits of auto workers, its opposition to bailing out auto dealerships slated for closure, and its rejection of any federal aid to California or other states facing fiscal insolvency.

It is also in line with the administration’s policy of allowing weaker and smaller financial institutions to fail in order to effect a further consolidation of the banking system in the hands of a few giant Wall Street firms.

CIT is the 26th largest bank in the United States. Its bankruptcy would represent the fourth largest bank failure, by assets, in U.S. history. As of Friday, the bank was seeking to stave off filing for Chapter 11 bankruptcy protection, a development that could rapidly lead to its liquidation.

It was reportedly in talks Friday with Goldman Sachs, JPMorgan Chase, and Morgan Stanley (a spinoff of JPMorgan) on securing credit either to avert a bankruptcy filing, or secure sufficient financing to survive in bankruptcy court.

The New York Post reported that JPMorgan, the biggest U.S. bank, by assets, was interested in acquiring CIT’s factoring unit, the bank’s biggest and most lucrative business.

As the country’s largest factor, CIT buys the receivables of thousands of manufacturers and suppliers, mainly to retail businesses. For a fee, it pays its clients cash up front so they do not have to wait 30 to 90 days for retailers to pay for their supplies and inventory. It also guarantees suppliers that they will be paid even if retailers whom they supply go bankrupt.

CIT controls 60 percent of the U.S. market for factors. It is a factor for some 2,000 manufacturers and suppliers whose goods are sold at 300,000 retailers across the country.

Both suppliers and retailers fear that a CIT bankruptcy will disrupt the flow of cash and credit, disrupting supply chains and leaving businesses unable to pay their bills.

Gail Dudack, chief investment strategist at Dudack Research Group, told clients:

“The company’s collapse would certainly ripple through thousands of small and medium business that rely on CIT for trade financing and lending. This raises the risk of more bankruptcies and more unemployment and would be a significant negative for an already fragile economy.”

Roy Calcagne, CEO of Craftsmaster Furniture, said CIT’s crisis could disrupt the entire supply chain of the furniture industry.

“There could be a huge ripple effect that I’m not sure the government is fully aware of,” he said, “especially if you look at all the ways this impacts supply chains. It could be devastating for our industry.”

Jerry Reisman, a bankruptcy attorney at the law firm Reisman, Peirez and Reisman, told Reuters that he was “deluged” with desperate calls from apparel companies concerned about losing access to credit.

“The government’s decision will,” he said, “result in many companies being unable to make payroll on Friday and inability to pay suppliers. Many of these companies and their suppliers will be forced to file bankruptcy themselves, causing a further decline in the economy.”

CIT, which has an $80 billion balance sheet, has had eight straight quarters of losses, totaling $3 billion. Beginning in 2004, when its current CEO, Jeffrey Peek, took control, the bank plunged into subprime mortgages and student loans. The impact of the subprime collapse and resulting credit crunch has had a particularly crippling effect on CIT, which does not take deposits but rather relies on short-term commercial credit to finance its long-term debt.

For the past two years it has been cut off from wholesale credit markets. Last December, it obtained permission from the government to register as a bank holding company in order to receive $2.3 billion in cash under the Troubled Asset Relief Program (TARP).

CIT has $1.1 billion in debt coming due in August followed by $2.5 billion due by year’s end. The Federal Reserve Board reportedly carried out a “stress test” on the bank earlier this week and concluded it needed at least $4 billion in capital to stay afloat.

Its speculation-driven problems are not essentially different from those of giant banks and financial firms such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and American International Group, which have received tens of billions in taxpayer handouts and are deemed by the Obama administration “too big to fail.”

An administration spokesman said the decision to deny CIT emergency support demonstrated that Obama has “a very high standard” as to which firms can receive government assistance. More to the point, it demonstrates the degree to which the administration’s economic policies are dictated by the biggest Wall Street players.

Since the financial crisis erupted last year, the government has engineered the disappearance of Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual, immensely increasing the economic power of the strongest mega-banks, particularly Goldman Sachs and JPMorgan Chase.

There are a host of smaller regional banks that are sliding toward bankruptcy, further increasing the dominance of the biggest Wall Street firms. At a Senate Banking Committee hearing on Thursday, Senator Jim Bunning, Republican from Kentucky, said Federal Deposit Insurance Corporation Chairman Sheila Bair had told him another 500 banks could fail “unless something dramatic happens.”



The decision to deny aid to CIT came amidst spectacular second-quarter earnings reports by Goldman Sachs and JPMorgan Chase. Goldman reported record earnings of $3.44 billion and JPMorgan reported a sharp rise in profits to $2.7 billion for the quarter. Both banks reaped the vast bulk of their profits from their investment banking and trading divisions.

They are benefiting from the demise of competitors and the ongoing troubles at Bank of America and Citigroup, which gives them greater access to fees generated by underwriting stocks and bonds, while they take advantage of market volatility to place their own bets on stock and bond price fluctuations. Neither these, nor other major banks, are using the lifeline provided by government cash and other subsidies to significantly increase lending to businesses or consumers.

They continue to hide an estimated $2 trillion in toxic assets on their balance sheets, refusing to sell the nearly worthless assets at market prices or write down their value. JPMorgan, even as it reported higher profits, noted large losses in consumer loans and commercial real estate. Citigroup and Bank of America, in their earnings reports released on Friday, similarly reported growing losses in these sectors. These assets will continue to deteriorate as the impact of mass unemployment leads to more defaults on consumer loans and prime mortgages, and the recession further depresses commercial real estate values.

Goldman set aside nearly half of its quarterly revenues of $13.8 billion for salaries and bonuses, setting the stage for record compensation packages for executives and senior employees. This is in line with a general resumption by the banks of seven-and-eight-digit windfalls for top executives.

White House Chief of Staff Rahm Emanuel implicitly alluded to the bumper earnings reports by Goldman and JPMorgan in justifying the decision to cut off CIT. “Given the sense of calm,” he said, “it is a symbol of a different phase” in the government’s rescue of the banking system.

Similarly, Obama’s top economic adviser Lawrence Summers in a speech in Washington DC declared that the U.S. financial system was “back from the abyss,” and Treasury Secretary Timothy Geithner said the financial markets were sending “important signs of recovery.”

Who Will Be CIT’s Buffett?

July 17, 2009
Reuters Blog

The behind-the-scene negotiations surrounding CIT Group’s threatened bankruptcy filing is bringing to mind the 2001 collapse of Finova, another sizeable mid-market lender.

On the eve of Finova’s bankruptcy filing in March 2001, Warren Buffett seemingly came to the rescue with a $6 billion loan package to help keep the financial firm running in bankruptcy and payoff creditors. The financial package, which Buffett put together with Leucadia National Corporation, came from a new company called Berkadia.

The offer from Buffett set-off an usual bidding war for the right to provide rescue money to the bankupt company. Rival bids soon emerged from GE Capital and Goldman Sachs.

Ultimately, the Buffett and Leucadia partnership prevailed. Finova, which did a lot of factoring for mid-sized companies like CIT, emerged from bankruptcy and the loan was paid off several years ago.

Finova shareholders, of course, lost out in the bankruptcy. But the firm’s creditors were treated rather well and the firm was able to continue running some of its lending business.

Right now, Reuters and others are reporting that Goldman Sachs and JPMorgan Chase are talking about providing some short-term financing of up to $3 billion to CIT. But CNBC is also reporting that the banks may be talking about providing CIT with bankruptcy financing to continue operating.

If I had to place a bet, it’s looking like a Finova all over again.

Fed Grants CIT Group Bank Holding Company Status

December 23, 2008
Reuters

The Federal Reserve Board on Monday approved commercial finance firm CIT Group's bid to become a bank holding company, clearing the way for it to access up to $2.5 billion in capital from a federal financial rescue program.

The Fed said in a statement that it allowed CIT's industrial loan company, CIT Bank, to convert to a state bank in Utah, making CIT a bank holding company.

"In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in accordance with the Bank Holding Company Act and the Board's regulations," the Fed said in a statement.

CIT is one of several commercial finance companies hit by the financial crisis to seek bank holding company status -- including GMAC and American Express Corp. -- to qualify for government equity injections under the U.S. Treasury's $700 billion financial bailout fund.

CIT is seeking some $2.5 billion in capital from the Troubled Asset Relief Program, which requires participating financial firms to be bank holding companies. Bank holding company status also would allow CIT to borrow funds directly from the Fed's discount window.

American Express won bank holding company status last month, while GMAC, owned by private equity firm Cerberus Capital Management and General Motors Corp., has yet to complete a $38 billion bond exchange that would provide it with the equity capital it needs for Fed approval.

The CIT approval followed the New York-based finance company's debt-for-equity swap last week, which was expected to raise $1.5 billion in regulatory capital. It also announced a $250 million share sale as a final step of its capital plan.

The Fed said CIT Group has total consolidated assets of $80.8 billion, while the CIT Bank unit would have total assets of about $3.1 billion and deposits of $2.3 billion.

JPMorgan Chase - Credit Derivatives, Interest-Rate Swaps

JPMorgan Chase & Co. is a global financial services firm with assets of $2.1 trillion and operations in more than 60 countries. For years, the company made big profits by arranging complex investment deals involving credit derivatives for states, cities, hospitals, school districts and other entities that sell debt in the municipal bond market.

In 2007, the collapse of the subprime market and the subsequent liquidity squeeze caused many of these financing arrangements to sour, forcing countless public agencies to come up with billions of dollars to pay for increased interest payment costs.

JPMorgan also is credited with launching the credit derivatives market back in the late 1990s, a market that billionaire investor Warren Buffett has often referred to as “weapons of mass destruction.”

Holy Smokes, JPMorgan Chase Holding $92,000,000,000,000 in Derivatives

That's $92 trillion for those who aren't able to count that many zeros. Here's the complete chart if you want to see what other banks are holding. Do the math: $92 trillion is 74 times JPMorgan's assets and 7 times the entire Gross Domestic Product of the United States.

The value is a "notional value," meaning they didn't actually spend $92 trillion to acquire the contracts. Derivatives are highly leveraged (which can actually make them worse). But their "direct exposure" is a lot less than $92 trillion, as much of the derivatives are hedged.

However, no one knows exactly what derivatives JPM, or any bank, are holding (the derivative system is entirely unregulated); and as Warren Buffet pointed out in 2002, bankers cannot be trusted to just "do the right thing" with derivatives.

It's impossible that 100% of JPM's derivatives are hedged, but surely the vast majority are. But when you're talking $92 trillion, the tinniest mistake can spell doom: a 1.7% adjustment of the $92 trillion wipes out their assets.

It's interesting that JPM has yet to really tank, compared to most of its peers. That may be coming soon though. Their Chase division of course has massive exposure to consumer credit card debt, which is the next shoe to drop. Not to mention JPM acquired Bear Stearns, a cesspool of toxic waste.

Source for the data:
Comptroller of the Currency
OCC’s Quarterly Report on Bank Derivatives Activities (p. 21)
Third Quarter 2007

Speculators Blamed for Oil Price Spikes

McClatchy Newspapers
July 28, 2009

The chairman of the Commodity Futures Trading Commission signaled Tuesday that his agency is likely to limit financial speculators' ability to drive up prices for oil and other fuels.

Excessive speculation, suggested CFTC chief Gary Gensler, drove the price of oil to a record $147 a barrel a year ago, making it unnecessarily more expensive for Americans to heat their homes and fuel their cars.

"I believe we must seriously consider setting strict position limits in the energy markets," Gensler said at the start of a public hearing to consider limiting the number of contracts that an oil trader can hold.

Gensler's comments mark a stark shift from the Bush administration's view. When a Republican headed the CFTC last year, the agency concluded that market forces of supply and demand, not financial speculators, drove record increases in energy prices. However, Gensler and at least one other commissioner, Bart Chilton, think that speculation, at a minimum, drove the price of oil higher than it would've gotten otherwise.

Investors, many of them big pension funds working with Wall Street investment banks, poured speculative money into futures, or contracts for future delivery. This inflow, as much as $300 billion, appears to have pushed prices to record levels, and helped them rebound again during the past six months from their winter lows.

Testifying Tuesday before the CFTC, representatives from utilities, the airline industry and petroleum marketers all called on the agency to restrict Wall Street speculators to prevent a return to last year's price volatility.

Allowing such a return would have "serious impact on the national air transportation system and the economy," including airline bankruptcies or mergers, warned Ben Hirst, general counsel for Delta Airlines, testifying on behalf of the Air Transport Association.

Gensler signaled that the question of limits on speculative investment isn't a matter of if but when. "As we move forward in considering position limits, I believe that we should apply consistent, across-the-board regulations to all futures market participants," Gensler said, noting that the agency, and not individual exchanges, should set the new limits. "With competing exchanges, regulations must be applied equally to similar contracts in different markets. The CFTC is in the best position to apply limits across different exchanges, and we are most able to strike a balance between competing interests and the responsibility to protect the American public."

The CFTC is also weighing whether to take back exceptions granted over decades to big Wall Street powers such as Goldman Sachs and Morgan Stanley that allow their investments in energy contracts to be regulated as if they were airlines or refineries, free from limits on the number they can buy.

Commercial fuel users are exempt from position limits because they actually take delivery of the product. Wall Street firms, which don't take delivery, received the same exemptions, first from the CFTC and later from commodity exchanges, on the grounds that they needed to hedge against risks that they've taken through private bets on the price of oil.

These private bets are called swaps. The swaps market dwarfs the regulated futures markets. Lack of transparency in these markets, and uncertainty about who actually owes what to whom, has amplified the global financial crisis.

"It became more apparent to me today than it ever has before that the agency should be the one to grant hedge exemptions," Chilton said in an interview. He noted that exchanges have incentives to grant exemptions to big players who bring more trading volume, and thus profits, to the exchanges. "Our job is to protect consumers and ensure these markets are working effectively and efficiently."

Executives from Goldman Sachs and Morgan Stanley are slated to testify Wednesday before the CFTC. They've denied that the flood of investment they helped direct into commodities drove up oil prices, arguing that global concerns about inadequate oil supplies explain the run-up.

CIT Won’t Get Additional Bailout Money; Bankruptcy Likely

Money Morning
July 16, 2009

CIT Group Inc. (NYSE: CIT) said today (Thursday) that its discussions with the U.S. government have ceased and will not receive any more taxpayer funds.

CIT, which received $2.3 billion in Troubled Asset Relief Funds (TARP) in December, said “there is no appreciable likelihood of additional government support being provided over the near term,” and that it is “exploring alternatives.”

The most likely alternative for CIT is bankruptcy, according to analysts.

“Maybe they can put together a last-minute deal and try to sell themselves,” said Adam Steer, an analyst with CreditSights Inc. in an interview with Bloomberg News. “The most viable alternative once the government decides to not step in is a trip into bankruptcy.”

The company is seeking $2 billion in rescue financing from existing debtholders and has given them 24 hours to come up with the cash, according to a report in The Wall Street Journal, which cited anonymous sources. Should that effort fail, bankruptcy won’t be far off.

Retail Impact
A CIT bankruptcy could have a trickle down effect on the supply chain of many small- to mid-sized retailers.

“At the risk of sounding overly cautious, if the government did not help CIT, we could see significant inventory issues for the holidays,” David Strasser, an analyst at Janney Montgomery Scott LLC told the Los Angeles Times. “Some vendors would simply not be able to finance shipments to retailers for holiday.”

Vendors for retail giants such as Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) rely on CIT for factoring, an old form of finance in which the lender pays the vendor for its accounts receivable. If the retailer fails to pay for the goods, the lender assumes the responsibility to pay the vendor.

Not even an open statement on Wednesday from the National Retail Federation endorsing the need for TARP funds for CIT could help the lender.

“If the criterion for whether a financial institution should receive government assistance is whether it is ‘too large to fail,’ CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress,” NRF President and Chief Executive Officer Tracy Mullin said. “A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation’s economy. That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”

While inventories are important to retailers – especially during the holiday season – the fear of declining consumer spending amid rising unemployment could keep retail merchandise supplies at a lower rate than last year, especially after last year’s dismal holiday shopping season. Thus, the lack of CIT may be offset in part by shrinking retail inventories.

Share of CIT plummeted in midday trading yesterday (Thursday), falling more than 68% to 51 cents.