In Deep CIT - Another Short Comment on a Bankrupt Lender

CIT Group Inc. is one of America's largest commercial. finance companies. What a commercial finance company does is make loans that banks turn down. In the old days of lending, before the repeal of Glass-Steagall, this meant the FDIC banking establishment did their lending based more on a person's character, than what actual assets that person had.

Commercial finance companies, picking up the stuff regulated banks wouldn't touch, based their lending practices more on the underlining assets of borrowers. In other words, there was an assumption that the debtor may go broke and that therefore the commercial lender had something to grab onto. For this risk, they charged a higher interest rate.

Since the repeal of Glass-Steagall, and the explosion of lending induced by debt to fund this same lending < aka Credit Default Obligations >, this nice little dichotomy disappeared. The banks, with money to burn, made all kinds of reckless loans no matter what the borrower's character was. And the commercial finance companies, like CIT, picked  up the rest, which evidently are turning into deadbeats.

Therefore, it is no wonder that within a few days, possibly tomorrow, CIT may be declaring bankruptcy. Some familiar with the situation suspect that if the B word is not uttered, CIT will at the very least go into "equivalent" bankruptcy, whatever that's suppose mean.

The same thing also happened last July, before some kind of half ass quasi gov / private "temporary" bailout. All this did was postpone the inevitable for a few months. Who knows, maybe they thought Bernanke's "green shoots" would blossom into a thousand Mao Zedong flowers < a bad label considering the results of that Mao slogan >.

Well we're still waiting for the "green shoots", like some religious wackos expect the second Resurrection to arrive any minute. What's not waiting, evidently, are some of CIT's junior creditors. A few involved in this stupid mess claim that these juniors will be insisting on bankruptcy.

What CIT claims is that they are "essential" for the financial health and liquidity of many small to medium sized firms. Ah, where have we heard that word "essential" before? I seem to remember Sam Zell claiming on Bloomberg video that Citicorp was "essential". Then of course there is Bank of America, Wells Fargo, etc. etc.. But then what / who are the inessentials? The Joads, of course,  from  Steinbeck's novel The Grapes of Wrath.

What Guido finds hard to understand, however, is how CIT can be so essential to the financing of small business, when its' latest quarterly financials show a loss in excess of $1.6 billion. One would think they'd be a little crimped, to be making any new loans. Why not just let them go broke and forgive all the debt owed by these small businesses that could use a windfall? That actually might provide a greater economic stimulus than anything Geithner, Bernanke, and Summers have done so far.

Well, the reason is that CIT owes some of those same "essential" banks, mentioned in the above paragraph,  money. Probably pretty close to the CIT loans outstanding. < Commercial finance companies are usually heavily leveraged. >

So based on the political clout some money center banks have accrued, in all likelihood CIT will continue to be the walking dead aka a zombie. That's why there is so little news about this or concern in the financial markets. So far.

Needless to say, it would cause a surprise tomorrow if the plug were pulled. Sooner or  later, this will happen. But then we can always hope for a miracle until then.

"Bad money drives good money out of circulation." - John Gresham. < In this case it happens to be bad and good loans, not money. >