What are the ramifications of CIT Group (CIT) going into bankruptcy? Will it hurt our economy? Will businesses suffer? Will there be a ripple effect? Will credit be available? Are there unintended consequences? Are there any outfits who benefit from CIT’s bankruptcy?
Bloomberg reports, U.S. Cites ‘High Threshold’ for Aid as CIT Denied Assistance.
As I think this situation over, I am compelled to shed further light on this institution.
1. Just what exactly was CIT’s niche and role in the economy? CIT provides an overview of The Vital Role of CIT.
2. Will the economy suffer if CIT declares bankruptcy? Of course. Anytime an outfit the size of CIT goes under, it hurts. CIT is a 100 year old company with deep and longstanding relationships well developed over time. Those relationships and financial exposures are not recovered immediately.
3. What business lines did CIT have? CIT Businesses include: corporate finance, trade finance, transportation finance, vendor finance, CIT Bank, Insurance Services.
Additionally, my instincts tell me the following:
1. Looking at that lineup of businesses, what other companies have these same business lines? GE Capital, Bank of America (BAC), Citigroup (C), AIG. Other commercial banks and insurance companies have them as well, but my point is that companies with significant support from Uncle Sam should actually benefit from CIT’s downfall. Don’t think for a second that Washington has not been talking to these companies telling them to immediately engage traditional CIT customers.
From a similar standpoint, who benefitted from the downfall of Bear, Lehman, and Merrill Lynch? None other than Goldman Sachs (GS) and JP Morgan (JPM) simply due to lessened competition.
If and when CIT fails, and other financing outlets as well, I think it is highly likely that firms currently ‘too big to fail’ will only get bigger. What does that mean for our future economic landscape? This scenario with CIT is likely to play out with plenty of other smaller financing firms as well.
In layman’s terms, do the ‘too big to fail firms’ have all the leverage, literally and figuratively?
2. It is not widely broadcasted, but CIT had gotten involved in sub-prime financing over the last 4-5 years. They were certainly not one of the larger players but their presence is just another indication of how companies were chasing profits wherever possible.
3. Who within the government would have borne the brunt of losses from CIT if Uncle Sam had chosen to backstop the company? Sheila Bair and the FDIC. Sheila has been picking and choosing her spots with her support knowing that there are plenty more banking institutions poised to fail.
4. Does Uncle Sam have any exposure currently to CIT? Yes. CIT Bank, formed last year, was provided $2+ billion in TARP funds. In a bankruptcy proceeding, the taxpayer will likely only get a return of some small percentage of that money.
5. Is this a win for capitalism? Yes and no. Yes, if in fact the playing field was currently level. No, from the standpoint that the playing field is not level.
I have very mixed feelings. On one hand, I am not in favor of bailouts. On the other hand, how do companies compete with other institutions flush with Uncle Sam’s cash and backing?