Turnaround at Thain's CIT hinges on Fed OK

By Aaron Elstein
October 6, 2010

It's early yet, but we just might have the beginnings of a nice turnaround story at CIT Group, the lender to small and midsized businesses that sank into bankruptcy last year.

On Tuesday, the company announced plans to redeem $860 million in debt that carried a hefty interest rate of 10.25%. It was the second time in two weeks that the company said it would reduce the high-cost debt lingering from its bankruptcy and would help further Chief Executive John Thain's goal to lower the company's cost of capital.

Ok, enough about the numbers. The much more interesting story concerns Mr. Thain, who, you may recall, last year left Merrill Lynch after he was ousted by Bank of America, which then leaked damaging news that he had a small fortune spent to renovate his office. Mr. Thain, who spent 24 years at Goldman Sachs and rose to president of the firm, came to Merrill in late 2007 with a reputation as a fix-it sort of guy after helping modernize the New York Stock Exchange. It didn't work out with Merrill, but if he can turn around CIT, he'll restore his reputation and then some.

He's got quite a bit of hard work ahead of him. The previous CEO--another career Wall Street guy named Jeffrey Peek--left behind a mess. The big problem: CIT, like a lot of Wall Street firms that didn't survive in 2008, funded itself using ultra-short-term loans. When CIT got cut off from that market, its fate was sealed. Mr. Thain's challenge is to create a more stable funding base for CIT by building up a base of deposits it can lend out.

The best way to get those deposits would to buy them by acquiring another bank. Deal-making is in Mr. Thain's bones from his days at Goldman and the NYSE, whose transformation he kick-started just a year after joining by acquiring electronic stock exchange Archipelago in 2005. And there sure are a lot of troubled banks just looking to be bought out nowadays.

Trouble is, CIT's hands are tied.

In August 2009, two months before it filed for bankruptcy, the Federal Reserve Bank of New York identified problems with CIT's credit risk management practices and accounting. That's a big problem, considering the Fed would have to approve any acquisition CIT, and the "agreement" between the New York Fed and the company is still in effect. CIT said in its latest quarterly filing that it continues "to work with our regulators in a constructive manner" to resolve its problems. That must be fun.

In other words, there's only so much that Mr. Thain can make happen at CIT until the Fed says it can happen. There aren't many starker examples of how power has shifted on Wall Street than this one.