Is CIT Group On Outside Looking In?
CIT Group’s (CIT) financial situation is looking more ominous by the day, unless of course Uncle Sam rides to the rescue.
The cost of insuring CIT’s debt has spiked, its short-dated bonds have plunged and two rating agencies cut the lender’s credit ratings on Monday. CIT shares plunged yesterday but have recovered a bit today on news that regulators are in advanced talks about providing some sort of aid to the lender, according to WSJ. Shares are up 8% at $1.47 in mid-morning trading.
If the government bails out CIT, it will set an important precedent of what constitutes too big to fail, former IMF chief economist Simon Johnson writes at The Baseline Scenario. CIT only had about $80 billion in total assets at the end of 2008, which he notes was about 1/10th the size of Goldman Sachs (GS) and 1/25th the size of Citigroup (C). It also sits outside the top 20 publicly-traded financial services companies and wasn’t included in the government’s stress tests.
Even though CIT’s reportedly discussing a rescue package with regulators, Johnson says he doesn’t foresee a government rescue, especially considering a lack of strong connections between CIT’s CEO Jeffrey Peek and senior Treasury officials.
From Johnson:
CIT seems to sit at the edge of the charmed circle, with regard to meetings, shared social engagements, and intellectual entanglements. This is a close call, but I think it is just on the outside of the circle – in the sense that with the overall financial market situation more stable, the GM bankruptcy well-managed relative to expectations, and other credit support programs still in place, the balance of official opinion will tilt against CIT.
Another interesting twist developing is the possible conflicting interests the Treasury Department and FDIC face when determining whether to save the lender. As our colleague Matt Phillips points out at MarketBeat, a source of aid could be the TLGP program which guarantees newly issued debt.
From MarketBeat:
The Treasury Department likely doesn’t relish the possibility of watching a company it lent $2.3 billion — CIT got that much from TARP — go into default. On the other hand the FDIC, which has seen its insurance fund fall in the face of recent bank failures, probably isn’t exactly thrilled with the prospect of opening itself up to exposure from backstopping the troubled lender’s borrowing, which is how the TLGP works.
Ultimately, the grim situation at CIT shows just how far the financial system is from actually being fixed. The government is ultimately deciding which troubled financial companies stay in business, notes NYT’s Floyd Norris, “which is something you expect from a centrally planned socialist economy, not from the great bastion of the free enterprise system.”
How to get around this problem? Find a way to value toxic assets and get them off of bank balance sheets, he says, which will ultimately lead to increased lending and a healthier environment. Of course when that’ll happen is anyone’s guess.
“We are back to a situation where no one knows which balance sheet can be trusted,” Norris says. “In that climate, the easiest decision is to trust no one — or at least no one without a credit line backed by Uncle Sam. Citi is too important to fail, but CIT may not be.”
July 14, 2009
[...] “CIT’s bailout possibilities are now in the realm of political choice.” (Baseline Scenario also Market Talk) [...]