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alstry (35.68)

Are 10,000,000 Jobs At RISK?????

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July 16, 2009 – Comments (11)

The company is running out of time as its liquidity erodes quickly. If it could secure the private financing, CIT believes it could then buy enough time to pursue debt for equity swaps on some of its debt and have its capital structure properly aligned to prevent any future liquifty concerns.

Meanwhile, CIT's bonds with short term maturities have sold off from 90 cents on the dollar late yesterday to 60 cents Thursday.

"This comes as a surprise as we had thought CIT had a good chance of obtaining support," analysts at brokerage Stifel Nicolaus said in a research note. "With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution."

http://finance.yahoo.com/news/CIT-Is-Seeking-Up-to-3-cnbc-1464350071.html?x=0&sec=topStories&pos=2&asset=&ccode=

 

CIT is the key lender to 300,000 retailers and about one million small to midsize businesses.  Assuming that each of its borrowers employ 10 people, it appears that 10,000,000 jobs could be affected by a CIT bankruptcy.

CIT is in trouble becuase many of its borrowers are unable to service the debt any longer.  This would be consistent with a number of small businesses I survey.  You would be amazed how many small business owners and independent contractors have been forced to max out credit cards simply to keep the doors open. 

Based on an unwillingness to help, it appears that the stress at the small/midsize business level is simply too severe for the government to try to bail out.

If CIT actually does file for bankruptcy, and cuts off credit lines, thousands of businesses will likely not be able to obtain alternative financing due to the current environment and the ripple effect could be enormous...not only to those businesses, but to their vendors and landlords as well.

As the press and Wall Street are talking green shoots, we could see millions of families' livlihoods shot down the drain.

9.09..........................................................

11 Comments – Post Your Own

#1) On July 16, 2009 at 4:07 PM, jesusfreakinco (29.55) wrote:

I bought a bit of CIT as a call, betting with the Fed today.  I don't believe this admin has the balls to ruin millions of small businesses.  That is a much higher risk than the political risk of another bailout IMO.

I think the Fed extends a loan to CIT and buys them a few months just like they have done in the past. We'll see.  A high stakes game of poker right now.

JFC

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#2) On July 16, 2009 at 4:31 PM, alstry (35.68) wrote:

Although I have no position personally, I will take the flip side of the bet.......

as you know, it has been my position that sometime between now and the end of 9.09 we will leave the matrix.

Letting CIT go would be a good first step.....

The private economy is in shambles right now.....and deteriorating rapidly, and small business generally does little with government.

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#3) On July 16, 2009 at 5:28 PM, alstry (35.68) wrote:

GOOD ARTICLE ON TOPIC:

Alone, Rick Rush is small enough to fail. The problem is he probably wouldn't go down alone.

Mr. Rush owns a light industrial company called MetFin in Suffield, Conn. MetFin makes abrasive blast cleaning equipment used for metal fabrication. MetFin doesn't borrow from CIT Group Inc., it borrows from a rival. When cash flow is tight, Mr. Rush draws on his credit line to keep the bills paid and meet payroll.

Still, as CIT's financial condition deteriorated and its talks with the government escalated this week, Mr. Rush watched closely and became worried. Business is already tough for his company and CIT's looming failure could escalate the trouble. That's because his suppliers and customers depend on CIT the way he depends on his lender.

"The double whammy is that many of my customers are the medium size businesses that count on CIT for funding the projects we support," he said.

As Mr. Rush's experience shows, the failure of CIT Group would have a far-reaching impact on the estimated one million small businesses that depend on specialty finance. A 2003 study by the Federal Reserve found that nonbank lenders provided 13% of small business lines of credit, 22% of its lease financing, and 28.9% of equipment financing.

Without CIT and companies like it, small businesses in the U.S. -- producing half of this nation's gross domestic product -- would be suddenly caught in a financing crunch at a time when the nation needs small businesses to hire workers, fuel production and lead the economy out of recession.

That's why government aid for CIT Group isn't just about bailing out one of Wall Street's less luminous financial lights, it's a referendum on what bailouts are for, whom they serve and what their purpose is.

Until now, the Treasury Department, Federal Reserve and banking regulators have focused almost exclusively on systemic risk to the banking system. If big players such as American International Group Inc., Fannie Mae and Freddie Mac, or Citigroup Inc. were allowed to fail, their failure would trigger more failures. These banks were too interconnected, goes the thinking. Bail them out or risk massive failures.

But as the financial landscape appears to have stabilized, a bailout-weary public and officials in Washington who worry we may have committed too much are balking at expanding aid to smaller players.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., has waffled on backing CIT Group debt with the same guarantees the agency has given to its bigger rivals, and there are calls in Congress to immediately turn over repaid bank bailout funds back to taxpayers.

Taking the chips off the table, however politically expedient, would still come in the middle of the game. U.S. productivity is hugely dependent on small business, a part of the economy that has taken its fair share of the financial crisis fallout through tightening credit and higher interest rates.

Disrupting the flow of cash to this important sector would be catastrophic. Small businesses employ about half of all private-sector workers, represent half of the nation's payroll and are responsible for 28.9% of U.S. exports, according to the U.S. Small Business Administration.

And, of course, small businesses have created 60% to 80% of all the new jobs created in the last decade.

CIT isn't providing loans to all of those companies, of course. But companies like MetFin are indirectly dependent on the future of CIT. If CIT fails and its loans are sold, to rivals, the marketplace would lose a source of credit and the disruption could force many companies searching for financing into a marketplace where credit is tight.

http://online.wsj.com/article/SB124774724987851145.html?mod=mktw#printMode

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#4) On July 16, 2009 at 6:58 PM, CaptainFiveBaggr (94.04) wrote:

great call alstry.. its unfortunate that CIT was not extended the same rescue funds that the larger companies got.  But I think the fallout will be far less damaging than people are predicting.  Yes its unfortunate, yes it will have an impact, but the govt bailouts had to stop somewhere. 

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#5) On July 16, 2009 at 7:12 PM, ozzfan1317 (79.39) wrote:

Good stuff +1 Rec I think it could have a meaningful impact but I think its more likely that it only causes a small ripple of job losses. However nothing is guaranteed so we will see how it all plays out.

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#6) On July 16, 2009 at 7:12 PM, ozzfan1317 (79.39) wrote:

Good stuff +1 Rec I think it could have a meaningful impact but I think its more likely that it only causes a small ripple of job losses. However nothing is guaranteed so we will see how it all plays out.

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#7) On July 16, 2009 at 7:24 PM, jesusfreakinco (29.55) wrote:

I hope you are right.  I'd rather lose my small bet and see the Admin finally get some balls to start the re-org process that we all know has to come...  Its a crap shoot when they will start.

As many articles have stated, the impact of CIT Ch 11 on SMBs will be significant and accelerate job losses.  I am not sure this is the time to draw the line in the sand, at least politically.

I read some commentary that GS has significant counter-party risk to this deal.  That may help or hurt the Admin's case politically.

Who knows...

JFC

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#8) On July 16, 2009 at 7:44 PM, CPAMITCH (< 20) wrote:

I am a CPA with a concentration in the garment business.  No one seems to be talking about the factoring part of CIT's business.  The factor loans money to the wholesaler/manufacturer in advance of the retailer paying his invoices.  The factor also establishes credit limits to the retail customers.  There are established credit limits that will disappear in the event CIT disappears. I spoke to another major factor this afternoon and he told me in no uncertain terms, that they and the other factors will not be able to extend significant additional creditlines to the retailers.  This will cut off the smaller retailers and cause thousands of business failures.  This will then impact the other factors because they have the same customers and won't get paid on their invoices.  Not to mention the suppliers of raw materials who supply the manufacturers.  CIT factors a significant percentage of these businesses as well.

 Trying to say that other banks will simply come in and extend credit to the truly creditworthy is naive.The loans I am talking about may only be in the hundreds, or thousands of dollars to creditors that are not bankworthy but have been being financed by the factors like CIT for decades.

CPAMITCH 

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#9) On July 16, 2009 at 8:20 PM, OneLegged (< 20) wrote:

Good job Big A.  Good to hear from you too CP.  Keep it coming!!

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#10) On July 16, 2009 at 9:13 PM, IIcx (< 20) wrote:

oddly on this 10,000,00 post I finally figured out a way to end the "a" era on Fool.

Pharma has a black box (outline box) describing the fact that the product has killed many and could if you consume it.

"a" clearly only teases to learn so each post should contain a "black box" posted by his peers warning the unsuspecting that he is simply fishing for clues.

Would you post on a "Fool" Blog that contained "the black box" making you the fool for posting? 

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#11) On July 18, 2009 at 11:45 AM, AdirondackFund (< 20) wrote:

@ CPAMITCH

That is exactly the transaction as it is currently being considered.  It is funny how many folks don't even know that 'factoring' exists, much less the importance of the exercise itself.  Garment Factors have been legendary in NY for many generations...but alas most are gone as the Businesses they relied upon all moved out of NY.  It is commonly referred to as the 'Shylock' Business.  Perhaps Goldman Sachs will get back into this Business after having neglected it for so long.  Of course, GS won't make the move until they are given assurrances that the economic recovery will be shoved down the throat of every American.

The common thread and 'missing ingredient' to the entire debate has consistently been the same.  There is never any discussion of INDUSTRY.  It seems a major oversight.  A simple oversight such as this ensures the demise of any Nation as large as America.  It is counterproductive to administer aide to those who 'service' Industry if the Rate of Industrial Formation continues to implode, which is what is currently occurring.  No matter how 'merged' and leveraged the Factor becomes, it is of little support to his Business if Industry, his customer, simply vanishes. 

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