CIT: A Different Kind of Bankruptcy?

Monday, November 02, 2009 , , , 0 Comments

I can't say I understand bankruptcy in the first place. Not my favorite part of CPA Review but this seems fairly clear.


As the CIT Group sought desperately to avoid bankruptcy this summer, it argued that being forced into Chapter 11 protection would spell disaster for its customers: a wide swath of the nation’s small and midsize businesses who rely on the 101-year-old company for financing.

On Sunday, CIT entered what it called a different kind of bankruptcy, one that will let it reemerge from court protection by the end of the year under the ownership of its creditors, who widely supported the reorganization plan.

The filing marks the culmination of months of bargaining among CIT, its creditors and the federal government over the company’s fate. Bank regulators concluded over the summer that even though CIT was vital to many small businesses that needed financing, the company’s problems did not pose the type of systemic risk that led to the aggressive rescues of Citigroup and Bank of America.

Even so, the bankruptcy filing means taxpayers will lose the $2.3 billion investment they made in CIT as part of the government’s sweeping financial rescue last fall, marking the first such loss of the bailout program.

Even though the government has been repaid with interest for its investments in companies like Goldman Sachs and Morgan Stanley, it will probably see more losses in companies like the American International Group and Chrysler.

By filing a so-called prepackaged bankruptcy plan, CIT is aiming to limit the damage inflicted on the scores of retailers and other companies that depend on the specialized financing it provides. It is the dominant provider of factoring, in which a company sells the debt it is owed to a company like CIT at a discount.

The US government is losing and Goldman Sachs is winning -- fuck, it's like the shit just writes itself.


Lender CIT Group has filed for Chapter 11 bankruptcy protection, in an effort to restructure its debt while trying to keep loans flowing to the thousands of mid-sized and small businesses.

CIT's move will wipe out current holders of its common and preferred stock, likely meaning the U.S. government and taxpayers will lose the $2.3 billion sunk into CIT last year to prop up the ailing company. Goldman Sachs however, will gain $1 billion because of CIT's bankruptcy, according to a report published Oct. 4 by the Financial Times:

The payment stems from the structure of a $3bn rescue finance package that Goldman extended to CIT on June 6 2008, about five months before the Treasury bought $2.3bn in CIT preferred shares to prop it up at the height of the crisis...

While Goldman is entitled to demand the full amount, it is likely to agree to postpone payment on a part of that sum, these people added. A CIT filing last week said that it was in negotiations with Goldman "concerning an amendment to this facility".

The $2.3 billion lost in taxpayer funds is the largest amount lost since the government began infusing banks with capital, according to the Financial Times.

Even better, WaPo informs us that this is exactly what the retail sector does not need just before what already promised to be a bitter holiday season.

WaPo (July 2009):

The potential bankruptcy of lending firm CIT Group threatens to disrupt the flow of merchandise between retailers and their vendors just as they are gearing up for the crucial holiday season.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would rip a hole in the industry supply chain. Dunkin' Donuts said the ability of its franchisors to open new stores or expand operations could be affected. And New York bankruptcy lawyer Jerry Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees today.

"They are unbelievably concerned right now," Reisman said. "What we may have here is a total disruption in small business."

CIT plays an important behind-the-scenes role in the retail industry. When stores place orders for merchandise, they typically have two to three months to pay for the goods. Suppliers hand those IOUs over to lenders such as CIT -- a process known as factoring -- which in turn provide suppliers with cash upfront to make their merchandise. If that system were to be disrupted, industry experts said, the result could be barren store shelves and a ruined Christmas.

See, this is what happens when you play with your paper too much.

What does bankruptcy mean now anyway? Pennies on the dollar? Dirty lawsuits?

Don't hold your breath for the regulators to stop any of it, in fact, it appears as though bankruptcy is totally okay and somehow translates into being solvent, at least if that's the criteria banks are using for lending these days.

There goes Goldman with a huge payout again. Or maybe I'm just being conspiratorial again and throwing out totally unfounded suspicions. Yeah.

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.