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CIT Group (CIT)
CIT Group -- Too Small to Save
The too big to fail theory is meeting a significant test in Washington right now as the government and the FDIC wrestle with the question of whether to bailout CIT Group and if so, how? CIT is not a quintessential financial powerhouse as its balance sheet totals only $75 billion but it is a big player in the small business lending market. Therefore, the firm is selling the deep financing connection that it has with the small business community to make its case for a bailout. Initially, the administration was not having any of it but now they seem to be coming around.
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CIT was founded in 1908, and for a while went by the name - Commercial Investment Trust - before deciding that the acronym alone would be sufficient. It has gone through various corporate incarnations -- in the '80s it was a part of the Manufacturers Hanover Trust and then for a brief period earlier this decade it was a part of the Tyco empire. Since a 2002 IPO, CIT has been functioning as an independent bank. The focus at CIT typically has been small business loans, however, recently it expanded into housing and student lending. Though it sold off most of its housing portfolio in July of last year as the credit crisis was worsening, it has not been able to shore up its financial position.
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The current situation is that CIT has $2.7 billion in debt that is due this year and another $4.7 billion comes due in 2010. The bank has been unable to access the funding markets because its debt rating has been lowered to below investment grade. CIT did receive $2.3 billion in TARP money but that wasn't enough to stem the red ink. So CIT went to the government for help and the Fed, Treasury and FDIC are trying to decide whether to help the lender out or not. The FDIC has been fairly adamant in its position that CIT does not qualify for special assistance due to its lack of credit quality and therefore, has not approved CIT's application to issue FDIC-backed debt.
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But unlike the FDIC, the Treasury has to consider the political side of things. If, after bailing out the big banks on Wall Street that mostly dealt institutionally, the government decides to make an example out of the firm that directly lends to entrepreneurial mom and pop shops, and lets it fail, there will be a fair amount of outrage. The economic case to bail out CIT is just not there. It has a balance sheet that is 15-20 times smaller than the major banks and given its small presence in bank to bank transactions, there is not much systemic risk. Yes, there will be an impact on small businesses who will see a major line of funding dry up but that should be temporary, at the most, because another lender will step in and fill the void when they are commercially viable loans to be made. GE (GE: Charts, News, Offers), JP Morgan (JPM: Charts, News, Offers) and Bank of America (BAC: Charts, News, Offers) are some of the bigger banks that can step in for CIT.
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Plus, CIT had already severely constrained its lending. Typical annual loan volume at CIT was in the $600-$700 million range but during the October 2008- May 2009, it only made $59 million in loans. So letting CIT fail is not going to severely impact the current level of lending. However, the chances are that the government is going to make another direct capital injection in CIT or take another step such as allowing the parent company to transfer money from its bank subsidiary in Utah. This is just going to prolong the pain for CIT and create another zombie bank. The best approach might be to have CIT's assets taken over by a healthy bank and provide the acquiring bank with financing because the odds of the government getting paid back in that scenario are much higher. Either way, common shareholders will be wiped out and the stock, which has taken a huge hit recently, but is still trading at around $1.50, is worth nothing.
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Click here to view a detailed profile of CIT Group.
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