CIT on the verge of bankruptcy

cit
Pedestrians walk outside CIT headquarters in New York, on July 10, 2009. Photographer: Daniel Acker/Bloomberg News

July 16 (Bloomberg) — CIT Group Inc., the 101-year-old commercial lender running short of cash, said it probably won’t receive a federal bailout, fueling speculation the company is on the verge of bankruptcy.

Talks with regulators have broken off and “there is no appreciable likelihood of additional government support,” the New York-based firm said yesterday in a statement. CIT, once the biggest independent commercial lender, may seek court protection if no U.S. aid emerges, Standard & Poor’s said this week. The company said it is “evaluating alternatives.”

CIT Chief Executive Officer Jeffrey Peek failed to convince regulators that fallout from a collapse would threaten the rest of the financial system. Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp. have resisted putting more taxpayer funds at risk, on top of the $2.33 billion granted to CIT in December, to keep the lender afloat.

“Maybe they can put together a last-minute deal and try to sell themselves,” said Adam Steer, an analyst with CreditSights Inc. “The most viable alternative once the government decides to not step in is a trip into bankruptcy.”

CIT is seeking $2 billion in rescue funds from owners of its debt and has given them 24 hours to put up the money, the Wall Street Journal reported today, citing unidentified people familiar with the matter. CIT told investors that without the cash, it will probably file for bankruptcy, the Journal said.

Messages to CIT spokesman Curt Ritter weren’t immediately returned. Andrew Gray at the FDIC declined to comment.

First for TARP?

“Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the Treasury said in a statement.

A bankruptcy filing may be the first by a company that took money from the Troubled Asset Relief Program, the Treasury’s $700 billion fund designed to keep lenders solvent by investing the public’s money in the financial industry.

“We don’t have any prior experience with a bankruptcy filing by a TARP recipient,” said Kathleen Shanley, a Chicago- based bond analyst for Gimme Credit LLC. “It is possible the U.S. TARP investment could be wiped out.”

The lender gained 1.9 percent to $1.64 yesterday before trading was halted by the New York Stock Exchange. The stock, which dropped 64 percent this year, sold for more than $60 in February 2007. Common shareholders typically get little or nothing in a bankruptcy unless creditors are paid first. CIT employed about 4,800 people at the end of March.

Cash Shortages

CIT has battled cash shortages and faces $1 billion of bonds maturing next month. Liquidity tightened over the weekend after a “run” by customers who used up all their credit lines after hearing CIT might face bankruptcy, Steer said.

The Fed carried out a so-called stress-test on CIT on July 14 and concluded the company would need as much as $4 billion in funding under the worst possible economic scenario, the Wall Street Journal said. Government officials considering putting more cash into CIT under the Troubled Asset Relief Program, decided not to last night because of the perceived absence of a viable business plan, the newspaper reported.

The FDIC, led by Chairman Sheila Bair, is concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking said last week. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

‘It’s A Killer’

“It’s a killer,” Sean Egan, president of Egan-Jones Ratings Co., said after the rescue talks broke down. “What’s next is that they’re going to have to scrape for capital to meet the next loan payment and it’s highly likely that they’re going to file for protection.”

Peek, 62, joined CIT in 2003 after failing to land the top job at Merrill Lynch & Co. He pushed the lender into subprime mortgages and student loans to pump up growth.

CIT’s record includes eight straight quarterly losses totaling $3.4 billion. Analysts are predicting losses the rest of this year, including $346 million when second-quarter results are reported on July 23, according to a survey by Bloomberg.

President Barack Obama was briefed on the status of CIT during his regular meeting with economic advisers this morning, administration spokesman Robert Gibbs said.

Cascading Failures

Regulators were debating whether a CIT collapse would cause a cascade of failures among other businesses, the same reasoning used to justify multiple bailouts of American International Group Inc., once the world’s biggest insurers, and Citigroup Inc., formerly the largest U.S. bank.

House Financial Services Committee Chairman Barney Frank said he’s “heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem” if CIT failed.

“I was struck by the number of people who were concerned and felt that if there was a total collapse it would have very negative consequences,” Frank, a Massachusetts Democrat, said in an interview yesterday.

Supporters of U.S. aid pointed to CIT’s 1 million customers who may lose funding, including 300,000 retailers. Tracy Mullin, chief executive of the National Retail Federation, said in a letter to Treasury Secretary Timothy Geithner that a CIT failure “cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”

Systemic Risk

CIT isn’t big enough to be a systemic risk, said Jason Mudrick, president of New York-based investment firm Mudrick Capital Management LP and a CIT bondholder.

‘Lending to small businesses wouldn’t stop,’’ Mudrick said, adding that CIT has valuable assets, including the unit that finances the retail industry. “Their factoring business could be sold in a heartbeat to a competitor,” he said. “It has the best technology in the industry and is CIT’s crown jewel.”

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net.

Last Updated: July 16, 2009 03:27 EDT
By Linda Shen

Source: Bloomberg

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