At the end of the day, CIT Group (CIT) had nothing. Their asset quality was poor, their systemic risk implications seemed limited, Sheila Bair dug in her heels, and Jeffrey Peek (CEO) didn’t have sufficiently strong connections to get her overruled.
CIT had friends, but not enough – and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking – and prominent senators – seemed otherwise engaged.
CIT’s small and mid-size customers are important to the recovery. But the reckoning is that this business can be easily sold to someone else – after all, this is exactly what bankruptcy can get right in the U.S.
So the question became: is CIT too big – on its liabilities side – to fail? And if $80bn financial firms are now “too big to fail”, what does that imply for other potential bailout conversations and for our fiscal future?
In the final analysis, CIT wasn’t even big enough to meet Secretary Geithner face-to-face – he’s still out of the country.
The bottom line: we need fewer $800bn firms and more $80bn firms. If Goldman Sachs were broken into 10 independent pieces, we could all sleep much more soundly.
(More in my NYT.com column this morning – what are the implications of CIT’s failure for overall levels of capital in the banking system? This will run shortly.)
There’s a chance private money could save CIT, but clearly the odds are long. It’s amazing how firmly bondholders stick to their guns in these situations. The cents on the dollar they will get in bankruptcy is way below what the stock they get would be worth if they let go for a while.
So the risk on this stock now is whether the bondholders will take the leap and give themselves a chance.
Plus outside money that’s willing to wait until the recovery kicks in.