Should CIT Group be bailed out?
Update: CIT appears to have reached a deal with its debt holders for a US$3 bn loan.
I’ve been ignoring the story of CIT Group so far. But it seems that they will be filing for bankruptcy soon if nothing is done:
July 18 (Bloomberg) — CIT Group Inc.advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said.
JPMorgan and Morgan Stanley are talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, according to the people, who declined to be identified because the negotiations are private. CIT and its advisers, including Morgan Stanley and Evercore Partners Inc., are also trying to arrange rescue financing to avert bankruptcy, they said.
CIT may need as much as $6 billion to avoid filing for bankruptcy protection after the U.S. wouldn’t give the firm a second bailout, according to CreditSights Inc. A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse by that measure since regulators seized Washington Mutual Inc. in September.
Now I believe by now everyone will be sick of bailouts. And there certainly is good reason why. We saw how AIG sent bailout money overseas earlier this year to honour their counter-parties’ contracts. There’s also good reason to think that AIG’s role in guaranteeing debt by GM and Chrysler could have led to their forced bankruptcy. And I’ve repeatedly pointed out, one of those who stood to gain was Goldman Sachs Group which recently declared a US$3.4bn profit.
What makes CIT so different that we should at least consider seriously whether we ought to extend them a conditional helping hand? Well, unlike investment banks like Goldman Sachs and Morgan Stanley, CIT is a major financier of small-to-medium businesses and consumers. Lines of credit and loans are critical for any economy to start functioning again. But it appears as though the White House doesn’t appear to be in the mood for negotiation any longer:
Regulators ran through roughly a half-dozen different scenarios. All focused on giving CIT a short-term bridge so that it could eventually find a private-market solution. But officials ultimately determined that CIT would need an extraordinary amount of government aid to survive, according to people familiar with the matter. On Wednesday afternoon, a New York Fed official notified CIT that the government wouldn’t be offering aid to the firm.
At 6:55 p.m., the Treasury issued a statement that concluded: “Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies.”
So farewell CIT, which didn’t get to enjoy as much aid as similar sounding financial institution Citi.