CIT Group files for Bankruptcy

CIT Group, a 101 year old company that lends money to small and medium sized businesses has filed for Ch. 11 bankruptcy. CIT filed what is known as a prepackaged plan.

CIT filed bankruptcy on Sunday, November 1. Since its filing yesterday, every news service has reported this fact. Almost no story has opined on what CIT’s bankruptcy filing actually means. I finally read an article in DailyFinance titled “Why CIT Group’s bankruptcy doesn’t matter”. How wrong the author is!

If you’ve been reading my blog from the beginning, I always opine on events and my predictions are very accurate. It’s difficult to predict the timing of something, but in general my statements have proven completely true.

I will once again go out on a limb. CIT’s prepackaged Ch. 11 bankruptcy filing will be devastating to small and medium sized businesses. I don’t care if Carl Icahn is providing $1 billion in finding to CIT while it reorganizes. I don’t care if the government won’t step in and provide funding to CIT once again. [Note, under TARP the government provided CIT with $2.3 billion which will never get repaid.] Icahn’s funding and the government’s lack of intervention does not provide any confidence.

Although CIT’s bondholders are “on board” with this filing, the cost of filing, the time and attention that management will devote to the corporate politics related to the filing, the water cooler talk that will occur among CIT’s employees and the negative effect on company morale (which already stinks), and the fact that CIT will be so busy managing its problem assets, will cause a further malaise on providing new funds to businesses. It will also create an atmosphere of stupid decision making when it comes to renewing lines of credit with existing customers. CIT’s filing, although anticipated since the summer, is the start of the boulder rolling down the hill and taking out anything and everything in its path.

The stock market declined by more than 2% last Friday, but the financial sector has been down more than 15% since mid October. Watch for a further decline in financial stocks.

My very first blog entry was titled The World is Falling Apart – Part I. We may be up to Part II at this time. Do not let short term increases in the equity markets, albeit substantial increases, fool you. Unemployment is significant, consumer spending is down, and “false” GDP reports (due to government intervention – i.e., cash for clunkers, home buying credits, etc.), lead me to believe the other shoe will be dropping, and dropping very hard. Many companies will fail. More people will lose their jobs. The Alt-A financing market will decimate the residential markets. On and on and on…..

The good news is that out of crisis always comes opportunity. Where will you be looking for opportunities?


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