One of the biggest companies you’ve never heard of went bankrupt yesterday. It was the 5th largest in US history. CIT Group, which is not to be confused with Citi, was one of the largest providers of financing to businesses. They worked with 80% of Fortune 1000 companies and millions of small and medium businesses to secure financing backed by assets (stuff the businesses own) and other services meant to help businesses with their money needs. Last year, then Treasury Secretary Hank Paulson made a pitch to bail them out due to an affliction I’ve come to call “Inflammation of the Lower Manhattan financial artery due to macroeconomic conditions and negligence” or simply “Wall-Street-Itis”.
CIT became a bank holding company and secured $2.3 billion in TARP money. With 138 million taxpayers that’s about $17 a pop we gave to a company that went bankrupt. That does not include the interest we must pay to the Chinese for the privilege of borrowing the money to support CIT.
Bankruptcy does not mean the end for CIT, and it’s still possible that the government will get their TARP money back, but it’s unlikely they’ll get all of it. CIT plans to emerge from bankruptcy quickly and be back on their feet before the end of the year.
It’s important for you, as a Weakonomics reader, to understand how a company like CIT goes down, and not just because your children will have to pay more taxes in 30 years because of it.
If I were a small business and needed cash, I could go to CIT and get some. Perhaps I would back it with some assets, such as a building. Many times I’ll actually back the loan with money that is owed to me by my customers. These are known as receivables, and are a fact of life in business. So the money I get from CIT is backed on the money I’ll receive from my customers when they pay up. If the world keeps spinning, must customers will pay me, and then I can pay CIT. Well, in 2007 the world slowed down and in 2008 the world came to a halt. My customers weren’t paying me and therefore I couldn’t pay CIT.
CIT, in order to stay afloat needed to get some money. Since the businesses they had lent to couldn’t give them the cash they needed to operate they had to find investors willing to give them cash. No one believed in them and so they went to the government and got some of that tasty TARP. It wasn’t enough so they struck a deal with some of their bondholders to get some more cash. It still wasn’t enough and alas they exhausted every possible cash collection method and were forced to file bankruptcy.
In bankruptcy, CIT is protected from having to pay up on some of their bills, which gives them the space they need to reorganize and get back on their feet.
Hank Paulson tried to convince us that CIT was too big to fail. That doesn’t seem to be the case because Wall Street hardly bat an eye over the news. It’s been a long time coming for CIT, but I can’t help but wonder, what other banks did we save that were too big to fail the same way CIT was? We can always ponder, but like the licks it takes to get to the center of a tootsie roll pop, the world may never know.
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Great straightforward explanation of the situation and you touch on many topics that I find to be particularly irksome about the various govt bailouts that they claimed we so needed. To your question regarding too big to fail, of course they had to bail out AIG – otherwise, how would Goldman have been paid the billions AIG owed them right? Since AIG owns the administration and the rest of the world for that matter, there was no chance the administration was going to let them lose money on a bad bet.
Recall also the claims that if ANY of the big three were to declare bankruptcy, it would mean MILLIONS of additional jobs lost and would cause the entire economy to collapse? Well, after multiple cash infusions which were equivalent to throwing money down a rat hole, GM DID declare bankruptcy and we didn’t see all the parts suppliers in the country tumble and we’ve just reported a favorable GDP number (albeit govt-maniupulated via stimulus).
Bottom line: They’ve really screwed up. A lot of bad decisions were made. The American public went along with it because we were scared and Washington/Fed said “Just Trust Us…We need full automony to do whatever we want in order to save the country”. Well, this is just one of many blunders we’ll look back on shaking our heads saying, “Never again”…until the next bubble ten years from now. How soon we forget.
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