CIT Averts Bankruptcy: Another Sunday Night Save (Perhaps)

It is good to hear that the 'well capitalized' CIT may strike an eleventh hour deal with its creditors and financiers to avoid an ugly bankruptcy for now.

Now if only the United States can do the same thing for itself with its bondholders...

Let's see if it is real, and what happens. Remember that what is being discussed here is 'bridge financing' for a company that is in a debt death spiral. The plan for their recovery will be more important than any temporary deal.

Financial Times
CIT seals rescue package
By Henny Sender and Francesco Guerrera in New York
July 20 2009 04:31

CIT on Sunday night clinched a two-year, $3bn rescue financing with its creditors that will enable the troubled US finance group to avoid a bankruptcy filing.

After round-the-clock weekend talks that included the possibility of a Chapter 11 filing, CIT and its main creditors sealed an agreement on the financial lifeline, according to people close to the situation.

“This paves the way for an orderly restructuring of the balance sheet with time and capital,” said one participant in the likely financing. “And it will give CIT’s customers plenty of capital.”

The company, which provides finance to nearly a million small and medium-sized companies in the US, and its creditors had to move quickly to arrest a slide into bankruptcy and prevent its best customers from defecting for fear that the lender could no longer support them. (We had thought the problem was that their customers had no alternative - Jesse)

The group of at least six creditors who are planning to provide the capital comprise a mix of traditional money management firms and hedge funds who bought into the debt at much less than 100 cents on the dollar. They include Baupost, a Boston-based hedge fund, CapRe, hedge fund and private equity firm Centerbridge Partners, Oaktree Capital, Pimco and Silverpoint Partners. Barclays is expected to act as agent on the financing package.

CIT’s board met on Sunday night and approved the financing. If the agreement holds, CIT will have enough time to work out which, if any, assets it should sell. The next step will likely involve cajoling other holders to exchange their debt into equity and then, having demonstrated that CIT has a viable survival plan, to go to the government and ask for help.

Jeff Peek, CIT’s chief executive who led negotiations with creditors, was likely to stay on following the financing, people close to the situation said. The management has been criticised for diversifying into high-risk businesses such as subprime lending and student loans and relying on capital markets to fund CIT’s balance sheet.

CIT’s creditors stepped in after it became clear that the government was not willing to provide any emergency assistance, whether in guaranteeing CIT’s debt, or in accepting assets in exchange for cash from the Federal Reserve or in allowing CIT to transfer more assets into the bank holding company it set up at the end of December.

The rescue financing will come as a relief to the government – had CIT filed for bankruptcy protection, the Treasury would likely have lost the $2.3bn of bailout funds CIT received late last year.

It would also have been a huge embarrassment for the Fed, which had described CIT as adequately capitalised when it approved of its banking application.

The creditor-led rescue of CIT may stave off political criticism of the government’s handling of the crisis. If CIT had gone under, at least some of its smallest customers in the business world would probably have had a hard time finding alternative sources of capital, adding to economic weakness.

New Silver Fund

Silver Bullion Trust, an all silver fund from the CEF/GTU closed-end fund group, has its roadshow going on now.

Initially it will only be available in Canada. It will trade on the TSX to start, then on the AMEX once it has risen to $75 million of assets which is a similar process used in the introduction of GTU.

It will trade in Canada in both U.S. and Canadian dollars.

The initial offering is reported to be for up to $200 million, so the $75 million threshold could be met immediately depending on the bid size of the deal.

It is expected to price at around US $10 (1 share + 1 $10 warrant) by July 29th.

This could be a interesting alternative to SLV and to CEF for those who wish to invest more heavily in silver.

Paper, Scissors, Gold

As you may have heard recently, the Comex has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange.

Is GLD really the same as physical bullion?

"...it appears that a lot of investors believe and trust that investing in GLD is the same thing as buying physical gold bullion. A close reading and analysis of the GLD Prospectus, however, reveals that investing in GLD is drastically different from owning gold. This analysis will show why GLD is nothing more than another form of a derivative security which is loaded with counter-party default risk."
Owning GLD Can Be Hazardous to Your Wealth

Here is a recent statement from Dennis Gartman who most often derides those he calls 'goldbugs.'

"To finish, we do agree that recent decisions to allow for the "delivery" of ETF shares in the stead of actual physical gold against a futures position does cause us some concern. Indeed, it causes us some very real concern, for if we stand for delivery of wheat we expect to receive wheat, not paper. The same holds true for delivery processes on the COMEX, and if GATA and the "Bugs" have a complaint it is this new decision by the COMEX. On this, we’ll grant that the "Bugs" have something to complain about." Dennis Gartman in The Gartman Letter

We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.

This is what makes the current structure of the short positions held by a few banks on the precious metals exchanges a 'racket,' a type of Ponzi scheme where the same thing is sold repeatedly with no means of satisfying the aggregate of the claims and ownership.

We are sure the Comex is "well capitalized," and will continue to be so, even as it is rocked by de facto delivery failures and the substitution of more paper to back up the general failure of paper.

The wheels of justice grind slowly but they grind exceedingly fine.

CIT Called "Well-Capitalized" Even As It Teeters on Bankruptcy

This underscores the charade that is the Fed and Treasury stress testing. There is a cloak of accounting fraud covering many US financial institutions, even as their value soars on paper and the public continue to be robbed of their savings.

The Fed and Treasury are using their current position as de facto crisis regulators of US financial insitutions and pseudo-banks to cover up the deep problems of regulatory failure and financial fraud, largely their responsibility as the overseers of US credit and monetary policy and the financial system during the credit bubble.

They seem to have taken on the role of the Ratings Agencies in perverting their stewardship to serve the Wall Street bankers.

The Fed should not and cannot be allowed to obtain any more power over the US regulatory process. That they even resist a fair and honest audit of their lendings of public monies is an insult to our Republic.

Until the banks are restrained, and balance restored to the economy, and the financial system reformed, there can be no sustained recovery.

Bloomberg
CIT Group’s ‘Capital’ Was All Talk, No Trousers
by Jonathan Weil
July 15, 2009 21:00 EDT

July 16 (Bloomberg) -- Even as CIT Group Inc. teetered near collapse this week, neither the company nor its overlords at the Federal Reserve Board ever backed off their official position that the struggling lender was “well capitalized.”

Coming from the world’s most powerful central bank, that designation used to mean something about a company’s financial strength and ability to absorb losses. Not anymore.

Investors watched yesterday as yet another major financial- services company angled for a government bailout -- this time unsuccessfully -- while still sporting U.S. banking regulators’ highest capital rating. It’s a sure thing CIT won’t be the last.

Even the regulators say their capital standards are broken. Just last month, in an 88-page report outlining its regulatory overhaul plans, the U.S. Treasury Department wrote: “Most banks that failed during this crisis were considered well capitalized just prior to their failure.”

It was only last December that the Fed’s board of governors voted unanimously to let CIT become a bank-holding company, making the commercial lender eligible for federal rescue funds and allowing it to borrow from the Fed’s discount window. In doing so, the Fed said CIT would be well capitalized once it received its $2.3 billion of bailout money from the Treasury’s Troubled Assets Relief Program, which CIT got later that month.

CIT’s bosses, led by Chief Executive Officer Jeffrey Peek, had been touting the company’s well-capitalized status repeatedly ever since, in financial filings and investor presentations. In reality, whatever capital CIT possessed existed only in its executives’ heads -- literally.

Accounting Standards

The problem here is with the accounting standards as much as the government’s capital rules. Consider this disclosure from the footnotes to CIT’s latest annual report. As of Dec. 31, CIT said the fair market value of its loans was $8.3 billion less than the value it was using on its balance sheet. Loans at the time were about two-thirds of its $80.4 billion of total assets.

By comparison, New York-based CIT had $7.5 billion of so- called Tier 1 regulatory capital as of Dec. 31, and $8.1 billion of shareholder equity. Take away the inflated loan values, and CIT’s capital and equity would have been less than zero. CIT hasn’t said what its loans’ market values were as of March 31.

The craziest part is that the difference in the loan values came down to nothing more than CIT executives’ state of mind. (And the Fed's and the FASB's tacit endorsement of this accounting fraud on investor - Jesse)

Had CIT classified the loans as “held for sale,” the accounting rules would have required the company to carry them on its balance sheet at their cost or market value, whichever was lower. By labeling almost all its loans as investments instead, CIT got to avoid writing them down to market values.

Say the Word

So, for capital purposes, the only difference between an insolvent CIT and a well-capitalized CIT was a mere utterance by management that it planned to keep holding the loans. No wonder so many zombie banks continue to roam the country. All they have to do is wish away their ruin, and the rules let them.

There is one catch. As CIT said in its annual report, it’s allowed to classify loans as investments only if it “has the ability and intent” to hold them “for the foreseeable future or until maturity.” Otherwise, it must book the market losses.

It’s hard to see how CIT’s management could believe the company still has the ability to keep holding onto its loans now. Not with more than $3 billion of reported losses in the past eight quarters, a looming cash crunch, and its debt trading in the bond market as if the company might fail. A CIT spokesman, Curt Ritter, declined to comment.

Not Making Sense

Think how arbitrary these accounting labels are. A declining asset doesn’t stop falling in value just because its owner intends to keep it. Nor, if you were applying for a loan today, would a bank value your collateral based on what you think it might be worth someday after the economy rebounds. Its value would be what you could sell it for now.

Back on Dec. 22, when it approved CIT’s application to become a bank-holding company, the Fed released a nine-page statement explaining its rationale. While the Fed said its board considered “all facts of record,” nowhere in that document did it discuss the possibility that CIT’s loans might not be worth what the company’s balance sheet said, or that CIT might lack the ability to hold them for as long as it claimed.

The current capital rules “simply did not require banking firms to hold enough capital in light of the risks the firms faced,” the Treasury Department said in its report last month. The financial crisis, it said, “has demonstrated the need for a fundamental review of the regulatory capital framework.”

That review, to be led by the Treasury Department, won’t be completed until the end of this year. Whatever form the new rules take, the report said they must be “credible and enforceable.”

What a welcome change that would be.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)