The inconsistencies shall continue. CIT Group is a 100 year old commercial lender that is finding itself in a very tight spot. Management had continued to claim that they were easily able to pay all maturing debts for another 12 months until this last weekend when they came out and suggested that they would not be able to make August payments without cash from the government. As with all bank-like institutions, CIT faces a possible run on their current cash and will probably see their own liquidity crunch in the next few days which will be resolved with bankruptcy, seizure, or bailout. With the government involved we have often found the process rather random so bondholders and equity holders have bolted for the door. Countrywide – coerced sale, Bear Stearns – Forced sale, Lehman – Bankruptcy (gift to Barclays), Merrill – coerced sale, AIG – Bailout, Citigroup – Bailout, Washington Mutual – seizure and forced sale (it was more of a gift to JP Morgan). I guess it all depends on who is involved with the companies and how they are viewed by the Fed. There are endless conspiracy theories involving Goldman’s involvement with AIG (unhedged CDS exposure) as well as their disdain for Lehman Brothers. I do believe that those with the ears of the Fed have a lot of power in deciding who goes bust and who gets a taxpayer subsidized free pass. If that is the case, the $3B loan facility that Goldman has with CIT might come into play….
Regardless of the outcome, this issue will be clarified in the next few days. It is amusing that the government originally made an equity stake in CIT and is now saying that they will receive nothing more. I am all for letting companies fail, but I am not for the cherry-picking that the government has done over the last few years. I just hope that the businesses that have lending facilities with CIT have another place to get their loans, otherwise we are going to see a string of defaults from the medium and small businesses that just found that their credit was taken away with CIT Group’s BK.
What is even more aggravating is that the government has continuously used the “too big to fail” rationale. Why is this aggravating? Because by propping up the large institutions (BofA, Citi) while letting the smaller guys fail (Merrill, Lehman, CIT?) they are making sure that this will be the case in the future as well. Why not just take Citi and split it up? It would be a mess in the short run but much better for our financial health in the long run. In the mean time, I am not going to be buying any equity shares in CIT Group…
