Thursday, July 16, 2009

CIT - Banks' Competitor or Customer matters

So - why the headline? It would appear that when a competitor (CIT) can be eliminated, by definition, it reduces competition, profits from commercial lending to the remaining "LUCKY" goes? Up. At borrowers expense. How the FED and or FDIC justified this decision is curious. CIT looks to declare BK being denied FDIC TLGP or other emergency program assistance.

(I note a subtle, but important contrast - the absence of most TARP recipients' insiders to acquire stock in the face of myriad uncertainties yet a brief review of the past few months and last year shows CIT insiders were, net, with a few sales, putting their own personal cash on the line.)

Note: Goldman Sachs record profits were CAUSED by another Government backstop as here in Janet Tavakoli's article today
"In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed."

The FDIC TLGP (Term Loan Guarantee Program) announced June 23 that $285B (not a typo) was committed to provide a back-up, implicit government guarantee upon debt issued by certain Banks, Thrifts and NON FDIC INSURED affiliates. YES NON FDIC INSURED affiliates of same. It would appear that affiliation, like membership has its privileges.
A FOIA (Freedom of information request) was submitted by my office to the FDIC requesting names of the affiliates and amounts backed under the TLGP on June 24, I'm told it may take 30 days for a response. Stay tuned sports fans.

In further contrast, of the estimated $1.4 T (not a typo) of Commercial Mortgage Backed loans and securities (owed to banks by customers) that an Alliance Investment expert on Bloomberg TV Friday July 10, 2009 stated "we expect 25% ($350B) to default yet only 10% (of the $350B ) has been reserved thus far" OK time will tell - however as in the headline it appears to matter whether you're a competitor or customer of the LUCKY banks.

Off balance sheet leverage CAUSED the massive TARP and TSLF facilities not to mention the ensuing relaxed, kinder, gentler fair value accounting rules - did CIT exceed the "speed limit" compared to a certain few banks and brokerage firms?

We may never know all the facts, yet uneven policy may impact the customers of CIT and their customers too. Where and more importantly HOW do our elected and appointed officials draw the proverbial line in the sand? It appears that a so called AAA rated mortgage backed derivative security (held or to be traded for the purpose of proprietary profit and compensation) is deemed a better use of US Taxpayers public monies than a non rated loan to a commercial business; make that thousands of small businesses; the core of CIT's customer base.

Where is the nascent lead singer voice of the US Chamber of Commerce on this one? And NO Mr Buffett is unlikely to ride to the rescue - Berkshire owns substantial stakes in two CIT competitors, Goldman Sachs and General Electric.

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