Unintended Consequences

This is CIT, not CitiGroup.   THIS IS HUGE.

CIT is a commercial lender.  They loan money to businesses.   They had tried to get FDIC coverage on their obligations, but the FDIC has said no way.  FDIC coverage is for retail banks  (which is what Paulson/Geithner/FDIC should have said to American Express and GE Capital).   They had also been involved with mortgage investments, which they have already exited.

According to Reuters, CIT has retained a bankruptcy firm and is writing up the paperwork to file bankruptcy.   Commercial lending (funding of shopping centers, office buildings, factories, leases of airplanes and rail cars, factoring of receivables) tends to take a bit longer to go into default than consumer lending.

This might be the first indirect fallout of the GM and Chrysler bankruptcies.  By setting the precedent that Tim Geithner can brute force companies through bankruptcy, forcing the government and non-secured creditors to the head of the line and leaving the bondholders with all the worthless junk, that is going to kill the ability of companies to raise money by selling secured bonds by companies that have any hint of financial problems.    There is no free lunch.   The “quick fix” has unintended consequences.

CIT will announce its earnings on July 23rd.  That seems the logical date to also announce their restructuring.  The company lost about $1 a share in the first quarter of 2009.   A year ago their stock sold for about $60 a share, it is now approaching $1 a share, which is the kiss of death for a publicly traded stock.

In addition to what a bankruptcy will do to people holding stock and bonds, clients who rely on them for working capital (like selling receivables to get the cash sooner) will have to find another commercial bank.   If the clients themselves are on shaky ground, they will have trouble finding access to loans on their existing terms, and they could ultimately cascade into this dark deep hole being dug by Tim Geithner.

Tim Geithner and Mr Paulson created a “temporary” commercial lending facility run by the U.S. Treasury and funded by the Federal Reserve that is “cherry picking” the least risky and most profitable commercial lending clients, which will ultimately bury all of the commercial banks if it doesn’t go away (There is no such thing as a temporary government program).  

If you’re in business, you can’t compete against the government and survive, because the government owns all the weapons.   That’s why the notion that the US government and Health Insurance companies competing will never work.  Either it is extremely naive or it is deliberate strategy for complete government control after capitalism “fails”.