The October Crash Meme (2009)

[Uncle Festivus]

Are we all CITing down?? The delayed convergence of reality...

NEW YORK (Reuters) - If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a "drastic mistake" as the small businesses that rely on it would have few alternate sources of funding, turnaround experts said at the Reuters Restructuring Summit this week.

"I have a great fear of the collapse of CIT and that people don't understand the ramifications of what that can be," Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said, adding she believed any collapse would result in millions of job losses at smaller U.S. companies.

"I think it would be a very, very drastic mistake in this country to allow CIT to go under," Tilton said.

The Vital Role of CIT
Over 1,000,000 business customers depend on CIT to provide the financing they need to run their businesses. And for more than 100 years, CIT has remained committed to the lending needs of the small and middle market – providing needed capital to markets that other larger and smaller financial institutions often don’t.
The current financial challenges in the market haven’t wavered our commitment to the businesses that count on us. To get a sense of the vital role CIT plays to small and middle-market businesses throughout the US, let’s look at the role it plays in two important sectors at the center of the current credit crisis.
The importance of CIT to the retail industry
CIT is the leading factoring company in the US. Factoring is a crucial part of ensuring the retail industry can fill their shelves with the products they sell. If, for example, a small dress manufacturer delivers a shipment of dresses to a retailer, CIT “factors” their invoice, taking on the responsibility of procuring payment from the retailer – providing them with the capital they need to continue their business. Without CIT as a factoring partner, manufacturers would find it more difficult to maintain the capital they need to produce the products that US retailers need.
The importance of CIT to small businesses
According to the SBA, small businesses make up more than 99.7% of all employers and create 75% of net new US jobs. And for nine straight years, CIT has been the #1 SBA 7(a) lender in the US – and the top lender to women, minorities, and veteran entrepreneurs for the last six. CIT provides the vital capital that mid-size and small businesses – from private schools to restaurants to veterinary hospitals – depend on to keep their company’s dreams alive – including commercial real estate financing, construction loans, franchise financing and more.

 

[Temjin]

Are we all CITing down?? The delayed convergence of reality...

http://market-ticker.denninger.net/archives/1477-CITing-The-Bowl.html

Sept. 30 (Bloomberg) -- CIT Group Inc., the commercial lender that has said it may be forced to file for bankruptcy, is considering an offer of financing from Citigroup Inc. and Barclays Capital, people familiar with the situation said.

The 101-year-old company’s bondholders are also seeking to provide about $2 billion in loans as a restructuring deadline approaches tomorrow, said the people, who declined to be identified because the negotiations are private. New York-based CIT may choose other options, the people said.

This would be the third time they've gone to the well this year - the previous being a $3 billion "rescue" back in July.

For those who are math-challenged this means they're running at a roughly $1 billion a month "burn rate" (to use a phrase from the old Internet Bubble); isn't "capitalism" grand?

The problem with this firm is that it shouldn't be in trouble. "Factoring", which is the primary business CIT is engaged in, is usually an insanely-profitable enterprise. So what went wrong?

Simple: They started eating the rest of the financial industry's cooking - the belief that they could branch out into various other forms of lending and ignore credit quality. This put them squarely in the same box as the rest of the banks (except that unlike BAC, C and others, they haven't been allowed to cook the books and steal from the taxpayer!)

The result was technical insolvency.

Now they're trying to stave off a full-on default and bankruptcy filing.

It is unlikely to work.

Even if they strike a deal this week there's a nasty $2.1 billion line from Citibank and Bank of America (yes, really, two banks that themselves are insolvent on a mark-to-market basis!) that has to be paid in April of next year. Where's that going to come from?

The irony of one insolvent entity borrowing from two more effectively-insolvent entities isn't lost on me. This is really no different than finding that you can't make the credit card payment so you find someone who will "roll over" your credit card balance into a new card, and "whew!" - you don't have to make a payment on the "new" line for 30 more days.

This sort of shell game is really nothing different than playing "hot potato"; legal under the rules of accounting, but a clear sign of desperation by everyone involved. The continued claims of economic improvement by the media and Washington have to be squared against the fact that debt defaults are not abating and ability to pay is not improving; indeed, we continue to see a pattern where people are simply "kicking the can" for another month or two, piling up yet more debt that they can't cover.

The back story that is not being talked about with CIT is that there's a major problem with many small and mid-sized businesses - they have fallen into the trap of "pulling forward" their financial condition.

Credit, when used to buy plant and equipment for productive purposes, can be a net positive for an enterprise. When used to finance inventory in a heavily-inventory-laden business it is more dangerous, in that the failure to meet gross margins due to a bad guess on product mix and quantity can sink you.

Factoring is more dangerous still, in that one is giving up a percentage of the gross billed ticket in exchange for "money now." When a business is driven to this sort of gimmickry it calls into question the viability of one's customers; if you have to pass the risk of slow (or no) pay customers to someone else, how viable is your company and its customer base? Remember, the reason you "factor" is that you believe that the discount on that paper is less than you'd spend on a traditional credit line - or you can't qualify for that traditional line with your bank!

How long this goes on before someone finally throws up their hands and says "no more!" is difficult to determine - but the outcome is not.

All we're arguing over is the timing.

CIT is technically insolvent anyway. The reality would be harsh.

 

[Uncle Festivus]

RIP thread

The Fed = 1, bears = 0

The NYSE had these caps made for today

 

[jonnycage]

yep still waiting ..... glad i didnt cash out

j c

 

[Timmy]

The NYSE had these caps made for today

Uncle F. - the NYSE had these caps made AGAIN for today .... think this is the 4th time (?) the DOW has gone through 10,000. If the index if rejigged often enough there should be a few more round turns. Keep those caps.

 

[Dowdy]

What type of crash are we talking about....

The US dollar or the stock market?

 

[greggles]

China's property market is teetering on the edge, and the country is experiencing an energy crisis. The US is playing chicken with the global economy as it hurtles towards the cliff edge over the debt ceiling. Republicans are saying they won't play ball as they try and shut down Biden's spending spree.

Are we heading for another October to remember?

 

[Sean K]

Are we heading for another October to remember?

I hope so. I'm 80% cash.

 

[greggles]

I hope so. I'm 80% cash.

Nobody can say we weren't warned this time. The bells have been ringing for some time. People have been pushing all their saved lockdown income into real estate and financial markets, ignoring the economic reality facing the world in the wake of COVID-19. There will be a recovery in 20222 and beyond, but not until markets are shaken out by a big correction.