My OperaWoes Mount For CIT Group ... Commercial Lending Gridlock Crisis Is Emerging
Monday, June 23, 2008 1:33:45 AM
A shortfall of commercial lending credit to meet lending loan demand of corporations is likely to develop soon, as a record amount debt matures this year with the result being a systemic financial failure event, that is a financial emergency may develop, as the credit crisis morphs to become "credit gridlock", and many companies, lacking working capital, may fold and go out of business.
Traditional commercial lenders such as CIT Group are bone dry of capital and lending resources.
And to add to the credit crisis, "vulture capitalism", is arising in in 'Godfather 2' type fashion, where the investment bankers "come to the aid" of stricken corporations and municipalities, only to provide financialization services that pick apart the victim organizations and secure corporate resources to the disadvantage of stock holders and the community at large, with the result eventually being, that the investment bankers getting the corporation's assets at zero value.
David Enrich and Aparajita Saha-Bubna of the Wall Street Journal provides this March 24, 2008 report on CIT Group which exemplifies the struggles of commercial lending companies:
When Jeffrey M. Peek took the helm of CIT Group Inc. in 2004, the company had a reputation as a sleepy, but reliable, lender to small and midsize businesses. Today, CIT is reeling.
The situation, some say, has its roots in Mr. Peek's attempts to rejuvenate the New York company. A veteran Wall Street investment banker, Mr. Peek steered CIT into investing heavily in subprime mortgages. It bought a student-loan company. And instead of holding many of its loans on its books, CIT sold them to outside parties.
The strategy, at first, appeared to be working. CIT's shares, trading for about $35 when Mr. Peek became chief executive officer, approached $60 in early 2007.
But last week, after ratings firms downgraded its debt, the company lost access to the funding that normally finances its day-to-day operations. CIT had to drain a $7.3 billion backup credit line, igniting fears that the company was headed for bankruptcy court.
Its shares tumbled 37% last week, ending Thursday at $9.63 in 4 p.m. New York Stock Exchange composite trading.
CIT executives are now hunting for a partnership with a bank that can provide CIT with a steady stream of inexpensive funding to finance its core lending business. A person familiar with the matter says CIT is in talks with overseas banks.
Under Pressure
• The News: CIT Group is hunting for a partnership with a bank to provide it with a source of inexpensive funding. Some fear a bankruptcy filing, though company executives say they have enough cash through year's end.
• Background: After its credit ratings were downgraded last week, the lending company lost access to funding for its daily operations and had to tap a $7.3 billion credit line.
• The Bottom Line: Whether or not CIT can continue alone, skeptics say the business model has been rendered obsolete by the crunch and it should sell.After tapping the credit line, CIT executives say they have adequate cash to make it through the year. They expect to shed billions of dollars in additional assets, which should help pad the company's cash cushion.
But skeptics contend that CIT's business model, which relies on its ability to raise short-term debt backed by its loans, has been rendered obsolete by the credit crunch. They say CIT likely will have to sell itself to another lender to survive.
Mr. Peek's "Wall Street background means he should know when it's time to give up and sell," says Richard Hofmann, an analyst at CreditSights Inc., an independent research firm. "CIT is approaching that point." He points to General Electric Co.'s commercial-lending unit as a logical buyer.
Mr. Peek declines to comment on whether CIT will remain independent. For now, he says, the company is focused on weathering the credit crunch by lining up stable sources of funding. "This is a difficult time to extrapolate long-term strategy," he says. "The market is just too short-term-oriented right now."
CIT -- which was founded in 1908 and stands for Commercial Investment Trust -- was devoted to lending money to businesses that felt neglected by banks. CIT built strong businesses focused on niches such as aircraft-leasing and railroad finance. It shunned risk.
In 2001, Tyco International Ltd. bought CIT. But the industrial conglomerate quickly became embroiled in an accounting scandal. As Tyco's credit ratings plunged, CIT suddenly found itself frozen out of the market for short-term debt known as commercial paper. To keep doing business, CIT had to tap a bank credit line that was considered a last resort.
CIT regained its independence in 2002. The next year, CIT's longtime CEO, Albert R. Gamper Jr., recruited Mr. Peek to join CIT as his heir apparent. Until then, Mr. Peek had spent most of his career as an investment banker at Merrill Lynch & Co., where he was a contender to become the Wall Street brokerage's CEO.
Under Mr. Gamper, "there was really this mindset of sticking to the knitting," says Brenda B. White, who as an investment banker had tried -- and failed -- to pique CIT's interest in buying some noncore businesses.
When Mr. Peek became CEO, that mentality started to change. "It was this idea that they were going to supercharge it, now that there's this guy from Wall Street there," says Ms. White, who now runs a boutique advisory firm, B.B. White & Co.
CIT hired a handful of investment bankers, hoping to build an internal unit to provide mergers-and-acquisition advice to its middle-market clients. CIT last year rounded out the business by buying Edgeview Partners, a Charlotte, N.C., advisory firm.
Meanwhile, Mr. Peek was strengthening CIT's core franchise: its commercial lending business. CIT built a new health-care-lending group and got bigger in a number of other sectors.
CIT also enlarged its Utah banking business, a source of relatively inexpensive financing. The bank's deposit base grew from $300 million when Mr. Peek became CEO to roughly $3 billion today, according to CIT executives.
But some of CIT's moves proved ill-timed.
By selling more of CIT's loans to outsiders, executives figured the company would free up capital that could be used to make new loans. But when loan and securitization markets ground to a halt last year, the strategy came under mounting pressure.
Financing short to lend long proves tortuous as risk aversion to underlying debt assets increases.
In addition to selling its loans, CIT also gets its financing from raising short-term and long-term debt via the capital markets. But, with investors worried about the declining values of lenders' assets, those sources have largely evaporated in recent months.
The reliance on securitization "has contributed to the difficulty they are in," says Sean Egan, managing director at Egan-Jones Ratings Co., an independent credit-rating firm. "Because there's very little securitization being done right now, a major issue is whether the company will be successful in raising long-term capital sources."
Meanwhile, in 2005, CIT jumped into student loans by purchasing Educational Lending Group Inc. CIT also started making more mortgages to people with weak credit histories.
As the subprime-mortgage industry imploded, CIT was stuck with hefty losses. And while CIT quickly bulked up its student-loan portfolio, a new federal law last year significantly eroded industry profits.
After decades of slow growth, CIT "ventured outside of its comfortable realm and aimed into higher-profit markets," Mr. Hofmann says. "They timed that very badly."
Mr. Peek acknowledges the error, but says the mistakes were understandable. With student loans, "our crystal ball didn't go out three years," he says. "No one could have predicted the legislative changes that would take place."
As for subprime mortgages, "there are a lot of smart people out there who are in it deeper than we are," Mr. Peek says. "In retrospect, we probably grew it faster than, in hindsight, we would have liked."
Student lending crisis is at hand.
Last summer, CIT pulled out of the mortgage business, although it still has about $9 billion of loans on its books. CIT also has discontinued some types of student loans, and executives are mulling what to do with the full unit. There's a "good likelihood that we will move out of the business" entirely, says a person familiar with the matter.
CIT executives say they couldn't have anticipated the extent of the credit crunch. But they also acknowledge that their situation was worsened by their exposure to consumer loans that rapidly lost value.
"We're not delighted with [last] week's activities, but we see a way forward here," Mr. Peek says. "When you talk about us in the future, we're going to be a more-focused commercial franchise."
Commentary
As the Yahoo Finance Chart of CIT Group shows, this financial company was a leader in stock market returns from the neoliberal milton friedman economic policies, that came through Alan Greenspan credit liquidity and financialization, that is securitization, provided by the repeal of the Glass Steagall Act by President Bill Clinton.
Now with risk aversion rising to debt, we are seeing de-financialization and de-securitization at work in vulture capitalism, with the result being that investors and mankind will be enslaved to the investment bankers.
Related Information
Diversified financial services stocks finish sharply lower as jitters escalate about likely bank portfolio write downs the Associated Press reports on June 20, 2008.
Heidi N. Moore of the WSJ, writes a tale financing of CIT by Goldman on June 13, 20008: "It seems CIT was so in need of capital this year that it drew down its $7.3 billion emergency credit lines in March. Since then, it has been focused on shoring up its cash position; in the news release this week announcing the Goldman agreement, it touted “raising $1.6 billion in new capital, while retiring approximately $5 billion in debt; completing financings of approximately $1.5 billion and selling more than $2 billion of assets at approximately book value."
"Given that any investment in financial services these days is a risky one, Goldman took care with the terms of the financing. To address the risk Goldman was taking, the facility was structured as a total return swap, backed by CIT’s investment-grade asset-backed securities, such as aircraft leases. Goldman can seize the collateral if it needs to. After the first 10 years, the size of the facility will drop by $300 million every year".
A commentator on the article relates: "This article reaks of PR I can smell it here. Heidi Moore and Henny Sender have become PR agents for Goldman, the former the writer of this article, the latter the writer of so many others. Especially effective are the PR for the bank loan guys like Denis Coleman. If the WSJ puts out a release it should mention how Goldman’s underwriting of the IPO lined its pockets while it screwed the shareholders. This makes it sound so benign. This was a distressed company and Goldman “took care with the terms of the financing” to make sure it makes out a fat fee and leaves shareholders in the lurch. Only good news is the bank loan guys shared credit with FIG this time, unlike earlier when the M&A guys were forgotten".
Reuters and the Nytimes relates CIT gains financing for its debt June 10, 2008: "The CIT Group, struggling to secure financing for billions of dollars of debt maturing this year, said that it had secured $3 billion of financing from Goldman Sachs".
The Stockcharts.com chart of CIT Group, CIT, shows the company has the same wave structure as the overall finance of the financial sector, IYF, with the exception that CIT is more depleted and extreme.
One can use Yahoo Finance to follow CIT Group, Inc.
Keywords
vulturecapitalism,
Traditional commercial lenders such as CIT Group are bone dry of capital and lending resources.
And to add to the credit crisis, "vulture capitalism", is arising in in 'Godfather 2' type fashion, where the investment bankers "come to the aid" of stricken corporations and municipalities, only to provide financialization services that pick apart the victim organizations and secure corporate resources to the disadvantage of stock holders and the community at large, with the result eventually being, that the investment bankers getting the corporation's assets at zero value.
David Enrich and Aparajita Saha-Bubna of the Wall Street Journal provides this March 24, 2008 report on CIT Group which exemplifies the struggles of commercial lending companies:
When Jeffrey M. Peek took the helm of CIT Group Inc. in 2004, the company had a reputation as a sleepy, but reliable, lender to small and midsize businesses. Today, CIT is reeling.
The situation, some say, has its roots in Mr. Peek's attempts to rejuvenate the New York company. A veteran Wall Street investment banker, Mr. Peek steered CIT into investing heavily in subprime mortgages. It bought a student-loan company. And instead of holding many of its loans on its books, CIT sold them to outside parties.
The strategy, at first, appeared to be working. CIT's shares, trading for about $35 when Mr. Peek became chief executive officer, approached $60 in early 2007.
But last week, after ratings firms downgraded its debt, the company lost access to the funding that normally finances its day-to-day operations. CIT had to drain a $7.3 billion backup credit line, igniting fears that the company was headed for bankruptcy court.
Its shares tumbled 37% last week, ending Thursday at $9.63 in 4 p.m. New York Stock Exchange composite trading.
CIT executives are now hunting for a partnership with a bank that can provide CIT with a steady stream of inexpensive funding to finance its core lending business. A person familiar with the matter says CIT is in talks with overseas banks.
Under Pressure
• The News: CIT Group is hunting for a partnership with a bank to provide it with a source of inexpensive funding. Some fear a bankruptcy filing, though company executives say they have enough cash through year's end.
• Background: After its credit ratings were downgraded last week, the lending company lost access to funding for its daily operations and had to tap a $7.3 billion credit line.
• The Bottom Line: Whether or not CIT can continue alone, skeptics say the business model has been rendered obsolete by the crunch and it should sell.After tapping the credit line, CIT executives say they have adequate cash to make it through the year. They expect to shed billions of dollars in additional assets, which should help pad the company's cash cushion.
But skeptics contend that CIT's business model, which relies on its ability to raise short-term debt backed by its loans, has been rendered obsolete by the credit crunch. They say CIT likely will have to sell itself to another lender to survive.
Mr. Peek's "Wall Street background means he should know when it's time to give up and sell," says Richard Hofmann, an analyst at CreditSights Inc., an independent research firm. "CIT is approaching that point." He points to General Electric Co.'s commercial-lending unit as a logical buyer.
Mr. Peek declines to comment on whether CIT will remain independent. For now, he says, the company is focused on weathering the credit crunch by lining up stable sources of funding. "This is a difficult time to extrapolate long-term strategy," he says. "The market is just too short-term-oriented right now."
CIT -- which was founded in 1908 and stands for Commercial Investment Trust -- was devoted to lending money to businesses that felt neglected by banks. CIT built strong businesses focused on niches such as aircraft-leasing and railroad finance. It shunned risk.
In 2001, Tyco International Ltd. bought CIT. But the industrial conglomerate quickly became embroiled in an accounting scandal. As Tyco's credit ratings plunged, CIT suddenly found itself frozen out of the market for short-term debt known as commercial paper. To keep doing business, CIT had to tap a bank credit line that was considered a last resort.
CIT regained its independence in 2002. The next year, CIT's longtime CEO, Albert R. Gamper Jr., recruited Mr. Peek to join CIT as his heir apparent. Until then, Mr. Peek had spent most of his career as an investment banker at Merrill Lynch & Co., where he was a contender to become the Wall Street brokerage's CEO.
Under Mr. Gamper, "there was really this mindset of sticking to the knitting," says Brenda B. White, who as an investment banker had tried -- and failed -- to pique CIT's interest in buying some noncore businesses.
When Mr. Peek became CEO, that mentality started to change. "It was this idea that they were going to supercharge it, now that there's this guy from Wall Street there," says Ms. White, who now runs a boutique advisory firm, B.B. White & Co.
CIT hired a handful of investment bankers, hoping to build an internal unit to provide mergers-and-acquisition advice to its middle-market clients. CIT last year rounded out the business by buying Edgeview Partners, a Charlotte, N.C., advisory firm.
Meanwhile, Mr. Peek was strengthening CIT's core franchise: its commercial lending business. CIT built a new health-care-lending group and got bigger in a number of other sectors.
CIT also enlarged its Utah banking business, a source of relatively inexpensive financing. The bank's deposit base grew from $300 million when Mr. Peek became CEO to roughly $3 billion today, according to CIT executives.
But some of CIT's moves proved ill-timed.
By selling more of CIT's loans to outsiders, executives figured the company would free up capital that could be used to make new loans. But when loan and securitization markets ground to a halt last year, the strategy came under mounting pressure.
Financing short to lend long proves tortuous as risk aversion to underlying debt assets increases.
In addition to selling its loans, CIT also gets its financing from raising short-term and long-term debt via the capital markets. But, with investors worried about the declining values of lenders' assets, those sources have largely evaporated in recent months.
The reliance on securitization "has contributed to the difficulty they are in," says Sean Egan, managing director at Egan-Jones Ratings Co., an independent credit-rating firm. "Because there's very little securitization being done right now, a major issue is whether the company will be successful in raising long-term capital sources."
Meanwhile, in 2005, CIT jumped into student loans by purchasing Educational Lending Group Inc. CIT also started making more mortgages to people with weak credit histories.
As the subprime-mortgage industry imploded, CIT was stuck with hefty losses. And while CIT quickly bulked up its student-loan portfolio, a new federal law last year significantly eroded industry profits.
After decades of slow growth, CIT "ventured outside of its comfortable realm and aimed into higher-profit markets," Mr. Hofmann says. "They timed that very badly."
Mr. Peek acknowledges the error, but says the mistakes were understandable. With student loans, "our crystal ball didn't go out three years," he says. "No one could have predicted the legislative changes that would take place."
As for subprime mortgages, "there are a lot of smart people out there who are in it deeper than we are," Mr. Peek says. "In retrospect, we probably grew it faster than, in hindsight, we would have liked."
Student lending crisis is at hand.
Last summer, CIT pulled out of the mortgage business, although it still has about $9 billion of loans on its books. CIT also has discontinued some types of student loans, and executives are mulling what to do with the full unit. There's a "good likelihood that we will move out of the business" entirely, says a person familiar with the matter.
CIT executives say they couldn't have anticipated the extent of the credit crunch. But they also acknowledge that their situation was worsened by their exposure to consumer loans that rapidly lost value.
"We're not delighted with [last] week's activities, but we see a way forward here," Mr. Peek says. "When you talk about us in the future, we're going to be a more-focused commercial franchise."
Commentary
As the Yahoo Finance Chart of CIT Group shows, this financial company was a leader in stock market returns from the neoliberal milton friedman economic policies, that came through Alan Greenspan credit liquidity and financialization, that is securitization, provided by the repeal of the Glass Steagall Act by President Bill Clinton.
Now with risk aversion rising to debt, we are seeing de-financialization and de-securitization at work in vulture capitalism, with the result being that investors and mankind will be enslaved to the investment bankers.
Related Information
Diversified financial services stocks finish sharply lower as jitters escalate about likely bank portfolio write downs the Associated Press reports on June 20, 2008.
Heidi N. Moore of the WSJ, writes a tale financing of CIT by Goldman on June 13, 20008: "It seems CIT was so in need of capital this year that it drew down its $7.3 billion emergency credit lines in March. Since then, it has been focused on shoring up its cash position; in the news release this week announcing the Goldman agreement, it touted “raising $1.6 billion in new capital, while retiring approximately $5 billion in debt; completing financings of approximately $1.5 billion and selling more than $2 billion of assets at approximately book value."
"Given that any investment in financial services these days is a risky one, Goldman took care with the terms of the financing. To address the risk Goldman was taking, the facility was structured as a total return swap, backed by CIT’s investment-grade asset-backed securities, such as aircraft leases. Goldman can seize the collateral if it needs to. After the first 10 years, the size of the facility will drop by $300 million every year".
A commentator on the article relates: "This article reaks of PR I can smell it here. Heidi Moore and Henny Sender have become PR agents for Goldman, the former the writer of this article, the latter the writer of so many others. Especially effective are the PR for the bank loan guys like Denis Coleman. If the WSJ puts out a release it should mention how Goldman’s underwriting of the IPO lined its pockets while it screwed the shareholders. This makes it sound so benign. This was a distressed company and Goldman “took care with the terms of the financing” to make sure it makes out a fat fee and leaves shareholders in the lurch. Only good news is the bank loan guys shared credit with FIG this time, unlike earlier when the M&A guys were forgotten".
Reuters and the Nytimes relates CIT gains financing for its debt June 10, 2008: "The CIT Group, struggling to secure financing for billions of dollars of debt maturing this year, said that it had secured $3 billion of financing from Goldman Sachs".
The Stockcharts.com chart of CIT Group, CIT, shows the company has the same wave structure as the overall finance of the financial sector, IYF, with the exception that CIT is more depleted and extreme.
One can use Yahoo Finance to follow CIT Group, Inc.
Keywords
vulturecapitalism,
