CIT Bankruptcy Filed: US Will Likely Lose $2.3 Billion, Goldman Sachs Will Gain $1 Billion

WASHINGTON -- Lender CIT Group has filed for Chapter 11 bankruptcy protection, in an effort to restructure its debt while trying to keep loans flowing to the thousands of mid-sized and small businesses.

CIT's move will wipe out current holders of its common and preferred stock, likely meaning the U.S. government and taxpayers will lose the $2.3 billion sunk into CIT last year to prop up the ailing company. Goldman Sachs however, will gain $1 billion because of CIT's bankruptcy, according to a report published Oct. 4 by theFinancial Times:

The payment stems from the structure of a $3bn rescue finance package that Goldman extended to CIT on June 6 2008, about five months before the Treasury bought $2.3bn in CIT preferred shares to prop it up at the height of the crisis...

While Goldman is entitled to demand the full amount, it is likely to agree to postpone payment on a part of that sum, these people added. A CIT filing last week said that it was in negotiations with Goldman "concerning an amendment to this facility".

The $2.3 billion lost in taxpayer funds is the largest amount lost since the government began infusing banks with capital, according to the Financial Times.

CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders have overwhelmingly approved a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.

"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," said Jeffrey M. Peek, chairman and CEO. Peek has said he plans to step down at the end of the year.

The Chapter 11 filing is one of the biggest in U.S. corporate history. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. Its collapse is the latest in a string of huge cases driven by the financial crisis over the past two years, as bailed out industry heavyweights like General Motors and Chrysler both entered bankruptcy court.

CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.

It received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.

It is unclear what the filing will mean for the nation's small businesses, many of which look to CIT for loans to cover expenses like buying materials at a time when other credit is hard to come by.

Analysts have warned that already ailing sectors, like retailers, could be hit especially hard, since CIT serves as the short-term financier for about 2,000 vendors that supply merchandise to more than 300,000 stores.

Comments

[CAPTAINSKIPPY]

Our first evidence of success for the TARP plan - what's good for Goldman Sachs, is good for ... Goldman Sachs?

[etiennemacchias]

A question to some commentators here:

Why are you placing the blame on Obama? Did he pass the tax cuts for the greedy rich? Did he start the baseless war without the consent of the Congress? Did he take Clinton's national surplus and invert to a record-setting national deficit?

If you ask me, I think you're holding the wrong person accountable.

[blueken]

The real joke is, that GS made the government beg them to take the deal. No wonders these guys think their worth the big bucks.

[IcemanXTS]

Welcome to the United States of Goldman Sachs.

[haljett]

Too big to fail? Apparently not.

[StickMarket]

need to stop the admixure of money & politics. Time 4 the peopel to get the reform they need. heath care, education, a stable well paying job, and housing.

good articles; http://financeopinionss.blogspot.com

Lets hope Obama will succeed

[Veri]

Government Sachs strikes again. Why did not Timmy structure our deal like GS did theirs? Isn't he supposed to be a bright GS-man? Head of The Federal Reserve of New York? Come on. Timmy knows how to write a good deal. He just "forgot" to write a good deal when it came to the taxpayers. Seems he has been doing that too many times for coincidence. Inside job. $2.3 billion dollars of government subsidies of which $1 billion just might be used to pay GS. Money is fungible.

As two important Congress members have stated, "The banks own Congress." And The Treasury. And The Fed. And Presidents since (at least) Reagan. Though, I would opine, since Nixon.

[Raccoon1]

CIT received it's bailout money in December of 2008 - during the Bush administration - before "Timmy" was in charge.

[cybexg]

Ouch....that's a smack down

[AngryOhioan]

He was President of the Federal Reserve Bank of New York before he was Treasury Secretary and has been part of the corrupt bailouts from the beginning. It was the Federal Reserve that allowed CIT to change its charter to get the bailout. Why don't you Geithner apologists stop lying and claiming he isn't responsible for anything before he became Treasury secretary.

[Veri]

Timmy has been pivotal, as head of The New York Federal Reserve, in nearly all major decisions involving the financial crisis. Included on his resume as being instrumental the in the decision not to rescue Lehman Brothers, thereby eliminating a Goldman Sachs competitor. The forced sale of Bear Stearns, another Goldman Sachs rival, which is now subject to hundreds of lawsuits and federal investigation. AIGs rescue and the decision to pay one-hundred cents on the dollar to counterparties. Of which Goldman Sachs was a $12.9 billion dollar beneficiary. A further $77.1 billion in U.S. taxpayer dollars went to foreign financial companies and banks.

As United States Secretary of the Treasury, Timmy does have the power to renegotiate contracts. The simple threat of an investigation into fraud at CIT is very powerful and persuasive.

As I said, the clear evidence is that $1 billion of the $2.3 billion (100 cents on the dollar) of taxpayer dollars will go to Goldman Sachs.

You are correct about 2008. However, he has been active in negotiating the bailout of Wall Street since before he became United States Secretary of the Treasury. What should be further stated is, "He has not acted alone." Bernanke, Paulson, et. al.

Now this is a smackdown.

[blueken]

I once worked for a manufacturer of equipment that was as dominant an icon as Coke. A finance company bought us out. For five years we had the green light to purchase anything in the way of real estate or capital equipment our little heart's desired. During that period we lost money every year. The finance company used the loses as a tax shelter for thier real business (finance). When they could no longer use the loses as a tax shelter, the hammer came down and the business was sold to a Japanese competitor. What Goldman Sachs has pulled off, reminds me of that. They are probable better off with CIT going out of business, and they knew it all along.

[Jimboy17]

Gosh, you don't say.

[Voodou]

Why haven't we been hearing so much about "moral hazard" like we did when the bankruptcy bill was sailing through congress?

Just socialized corporate risk and privatized profit. Adam Smith's not-so-invisible hand has just picked our pockets clean and is now contemplating auctioning off our organs.

[ddDinah]

FYI: CIT is not related to CITI GROUP in anyway, two different companies.

[WellTickleMeWillie]

Armagedon may come in the form of a financial collapse of the US gov't not in the biblical sense. And it may be 2012 as Nostradomus predicted.

[darter22]

Damn. I was really counting on that $2.3B to help pay the AIG bonuses.

[SangZe]

Watch the U.S. go down the tubes. By the time we muddle through the chaos and ruin Bush and his party brought us, we will be just another group of colonies again.

[wheresthetruth]

Not to rub salt in the wound, but it's not taxpayer money that is funding these bailouts, it's money that the taxpayers are BORROWING. We have a meganormous deficit remember?

So, not only do we supply the bailout money, but we pay interest on it. Money that bailed-out companies turn around and charge us interest for!

Wait, it's worse, we are borrowing this money from countries that aren't exactly our friends. Countries that our government allows our corporations to send our jobs to, countries that send us toxic goods!

But we are so divided and conquered, manipulated, and bamboozled that we don't care! Nothing else matters as long as our _____ * wins!

* Fill in the blank. Possible choices include political party, sports team, reality show contestant, etc...

[jpshotwheels]

We are borrowing money from paper that is worth nothing, but they keep printing it.

[JohnSawyer]

2.3 billion? That's not so much these days... :)

When we soon start dealing with a few trillion here, a few trillion there--then we'll be talking real money.