By Greg Hunter’s USAWatchdog.com
It is official, CIT filed for bankruptcy protection Sunday night (11/01/09). This was not a surprise because the lender had been having financial trouble for months. The government tried to save CIT with a 2.3 billion dollar bailout last fall. Now that money will be written off by the taxpayer. I was listening to CNBC, last week, talk about the prepackaged bankruptcy of CIT. You would have thought it was some small bank with 1,000 depositors. The CNBC commentator brought up the term “prepak” referring to a prepackaged Chapter 11 Bankruptcy. That’s when a company tries to reorganize debt to stay in business. This is different from Chapter 7 Bankruptcy where a company liquidates assets and goes out of business. The inference was that “prepaks” happen all the time and that this was expected, so it is OK. It is not OK! CIT is the 5th largest bankruptcy in corporate history! The lender has $71 billion in assets and more than $64 billion in liabilities. This bankruptcy will be dire for small and medium businesses across America.
Reuters reports, “…But the company’s long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, lawyers said. “This could have a devastating effect,” said Jerry Reisman, a partner at law firm Reisman Peirez & Reisman in Garden City, New York, who has been working with many of CIT’s factoring clients. These clients — about 2,000 small companies — are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest provider of factoring services. In the factoring business, CIT buys accounts receivables from vendors that range from $5 million to $1 billion in size and then works with their customers to ensure payment.” (Click here for the complete Reuters story)
CIT will have a lot less money to lend. That means many small and medium business will go bust because financing will dry up. This is not a sign of things getting better but a signal the economy is taking another turn downward. The CIT bankruptcy will set off a chain reaction of other failures for businesses that will not be able to keep their doors open without ongoing backing. Even CIT may or may not survive bankruptcy.
Keep in mind, this happened on a weekend the FDIC took over 9 other banks in one day! That is a record (so far) for the financial crisis that started in 2007. This brings the total number of failed banks to 115 this year. The FDIC expects more failures. More bank failures means less lending! It is as simple as that. (more on CIT from Forbes)