CIT Bankruptcy Shenanigans Plus Who is Actually Buying All Those Treasurys (Hint: It's the Fed)

I'm not sure if this is relevant
but I'm pretty sure it is always relevant

Look on the bright side, at least we know where this particular $2.3 billion in TARP money went.


The $2.3 billion of Troubled Asset Relief Program money that will likely be lost in the bankruptcy of commercial lender CIT is hard to swallow, but it may be the most instructive loss taxpayers absorb all year.

Just as the Treasury Department is urging Congress to junk the bankruptcy process and hand over virtually unlimited bailout authority to the executive branch, CIT is proving two things: Bankruptcy works—even for financial firms—and the U.S. Treasury judges systemic risk out of its political hip pocket.

Treasury provided the $2.3 billion TARP injection last December. Then when CIT was on the ropes last July, Treasury urged the Federal Deposit Insurance Corp. to provide debt guarantees to help the company raise capital. Treasury made the case that a CIT failure posed a systemic risk given the number of small and medium-sized companies that rely on CIT for short-term financing.

We argued against this in July. More importantly, FDIC Chair Sheila Bair rejected it. Since her wise decision, CIT has been providing a laboratory to observe the recuperative pain of bankruptcy in an experiment uncontrolled by politicians.

With no federal lifeline coming, the company's major bondholders quickly agreed to a $3 billion secured loan facility and the company began restructuring its liabilities. It became clear that bankruptcy would be necessary and the company recently gained the support of almost 90% of its voting debt holders for a prepackaged reorganization plan that could allow the lender to emerge from Chapter 11 by the end of the year.

I remind dear reader here that though the US government is losing $2.3 billion, Goldman Sachs is making $1 billion off of this. So let's just kill that rumor about the government being an arm of Goldman Sachs, if they were they'd get a better return on their stupid ass bailout plans. No wonder Goldman is on a PR trip, I'd be too if I was associated with terrible investors like this.

I covered it on Goldman Sachs 666.

Awesome, so all we have to do is track the other $697 billion. I tracked TARP in May but warn you, clicking on Tracking TARP: Where Did the Billions Go? Right Here! will likely explode your browser, especially if you're mobile. That right there should be a giant blaring red flag.

The government is reckless at this point - you have TARP recipient banks offering to lend to broke municipalities that haven't paid their bills in 16 months and regulators still missing the warning signs. That right there should be enough cause for concern.

Speaking of TARP, remember that thing about the Fed officially not buying Treasurys any longer? My suspicions were correct. (WC Varones caught me saying Also, the Fed is done buying Treasurys. I'm not sure what happens now, I'm fairly sure it involves them still buying Treasurys.)

Economic Policy Journal:

The Treasury has been announcing record debt auctions, and yet we see little in the form of increasing interest rates to attract buyers to these securities that are still somehow gobbled up. The Fed's balance sheet, of late, doesn't seem to account for it, as any buying they are doing seems to be sterilized. Are the Chinese so insane that they are buying up anything the Treasury throws up in the air? It appears not.

The securities purchases are to a large degree forced purchases. They are muscled purchases. It's as if a 6' 5" mugger in the middle of the night has set up a toll road that you can't pass unless you empty the contents of your wallet.

So who is doing the muscling? The U.S. government? Who are they muscling? The banking sector.

The four largest U.S. banks by assets -- Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. -- have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, reports Bloomberg.

Liquidity includes cash, deposits at other banks and debt securities that can be pledged as collateral in exchange for overnight borrowings from the Federal Reserve or other banks. Do you want to guess what is at the top of the Fed's list of acceptable collateral? Whoever said Treasury securities, step to the head of the class.

Same old same old it appears.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.