CIT Files for Bankruptcy

Analyst: 'More of a Psychological Effect than Anything' CIT Group Inc filed for bankruptcy protection Sunday after its board of directors approved of a plan to reorganize the small business lender. The plan has also been approved by CIT's creditors. The company was able to secure $1 billion in credit from Icahn Capital to finance its restructuring efforts on Friday, before the filing.

"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," Chief Executive Jeffrey Peek says in the statement announcing the filing. Its operating subsidiaries, including CIT Bank, were not part of the filing and are expected to continue operating.

Psychological Effect

One analyst familiar with CIT's plight says that the bankruptcy will likely have "more of a psychological effect" than anything else right now. "My understanding is that CIT, especially since the FDIC had denied it access to the guaranty program, was cutting back on its lending for the past several months and using payments on loans to repay its debt," says Christie Sciacca, a former FDIC regulator, now an executive at consultancy LECG.

"To the extent that CIT will emerge from the bankruptcy with lower debt and an ability to lend, the bankruptcy is a positive," Sciacca says. If the way out of bankruptcy is to spend the next 12 or so months strengthening its balance sheet, "that probably means not taking on any more risk, and that is a negative," he adds. "Given the current environment and the general view of the economy through 2010, I would expect that it is a net negative."

Bankruptcy Smaller than Lehman, GM

New York-based CIT lists assets of about $71 billion and almost $65 billion in liabilities. The size of its bankruptcy comes short of only Lehman Brothers, General Motors and Enron. CIT says it hope to decrease its debut by $10 billion through the reorganizations and shift ownership to its bondholders and creditors. Its bankruptcy hands the Treasury Department a $2.3 billion loss to its Troubled Asset Relief Program.

CIT earlier this year was caught in a squeeze between loans gone bad, as the economy worsened, and being cut off from the unsecured debt market, which it relied on for about 75 percent of its funding. More stable bank deposits made up less than 5 percent of its funds. CIT had battled cash shortages, and $1 billion of its bonds matured in August. Its stock price has dropped more than 60 percent in 2009.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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