CIT Goes Bankrupt: American Taxpayers Likely to Lose $2.3 Billion

Did the American taxpayer unnecessarily take a $2.3 billion hit on financing provided to the now bankrupt entity known as CIT? You bet. It’s only money we don’t have, right? This is also true.

In the midst of so many other dramatic developments on our global economic landscape, people may lose sight of the fact that the handwriting was on the wall ten months ago for this middle market lender. That bankruptcy handwriting was crystallized this past July. I addressed the likelihood in my commentary of July 21st, “CIT-go Into Bankruptcy?”, and posed the following questions at that time:

I thought CIT pulled the rabbit out of the hat in arranging $3 billion in financing yesterday. What happened? Let’s navigate this institution and shed some light where Wall Street may care to keep us in the dark.

  • Why is the stock plummeting and why are analysts speculating it may very well file for bankruptcy?
  • What did the $3 billion financing accomplish?
  • Were certain unsecured creditors just abused by this transaction?
  • Are CIT shareholders about to be wiped out?
  • Will CIT be a precursor for other lenders to the middle and smaller markets?

Now let’s review the particulars we learn about the prepackaged bankruptcy filed over the weekend by CIT. Bloomberg provides details in CIT’s Bankruptcy May Help Bondholders and Erase Taxpayers Stake:

CIT Group Inc.’s decision to seek court protection probably will keep money flowing to bondholders and 1 million customers of the 101-year-old commercial lender. Shareholders and taxpayers won’t be as fortunate.

CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds. Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.

The question begs as to why the wizards in Washington allowed CIT Group (CIT) to convert to a bank-holding company last December in order to receive TARP funds. In my opinion, the lack of discipline displayed by the Washington crowd in this CIT bankruptcy is rampant across a wide number of other situations. Washington neither has the political will nor courage to truly protect taxpayer interests.

I firmly believe CIT will be the first of many bankruptcies in which Washington’s ploy to “extend and pretend” entities which are already toast ultimately cost American taxpayers more in the long haul.

Photo: Ernst Moeksis

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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