CIT Board votes to restructure – Reuters reported at 7:30 PM that the CIT Board has agreed on the final offer to lenders, and authorization to file bankruptcy if the lenders refuse to accept the terms of the restructuring
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Wow. What do you think will happen next? Is this The Big One, finanxiially speaking? (Saw your post earlier this week that Friday could be ugly,)
In a very loose analogy – CIT is to commercial lending as Freddie Mac and Fannie Mae are to mortgage lending. CIT provides the working capital funding for a very large number of medium and small businesses – often overlooking credit worthiness chasing higher yields. On the positive side, businesses have had 6 months to adjust their borrowing (the WSJ Deal blog has a story about a T-Shirt company and how it is dealing with CIT). CIT is one of the companies that magically became a “bank” overnight by virtue of Henry Paulson waving his hand. It’s the holding company that would be shedding its debt – the day to day operations would probably be fairly normal (kind of like the way GM hasn’t been affected… :))
The danger is the ripple effect – if suppliers face tougher credit rules on who they can sell to (and sell the receivables to CIT), then retailers will not be able to buy merchandise…. half empty shelves scare away customers. If retail stores close, than hits shopping center occupancy rates… people don’t like to shop in half empty malls, etc… it just all has the potential to cascade downward…
A factor in the decision whether to accept the plan or go Chapter 11 is the presence of Credit Default Swaps. There are a large number of CDS contracts outstanding – if they go Chapter 11, the CDS owners get paid for their “loss” (See: Moral Hazard). The folks who sold them those CDS contracts are motivated to NOT go into bankruptcy. It’s one very high stakes poker game at this point. The US Govt is in the game with a $2.3 billion stake in the ante, and is motivated to prevent Chapter 11.