The "Financial System" vs. The Real World
On Wednesday, the federal government refused to rescue the CIT Group, and refused to extend anymore financial support to America's largest specialist in lending to small manufacturers and retail stores.
David Hendler, a research analyst at CreditSights told The New York Times, that "even though it [CIT] was a large company, it was 'small enough to fail'...He said the 'Treasury Department's message was clear: 'firms not vital to the inner workings of the financial system 'will probably be shut out' of the government's rescue efforts.'"
What that means is that the government is willing to bail out large banks and other major financiers, but will not extend a hand to companies and people who actually make things. Small manufacturers have depended on CIT for credit and factoring for a century. Most people don't understand CIT's most important contribution to small business. When a small business manufacturer or retailer needs money immediately, CIT will "factor" his invoices. Typically, CIT gives him 80% of the gross invoice, then it waits for his customer to pay, and it profits from the 20% spread between the cost of invoice and the final payment. The manufacturer retailer often needs the money immediately, just to survive.
Now CIT will be gone, and I don't think there's anyone else to take its place. Hundreds, maybe thousands, of small manufacturers all over the United States will shut down, but they are not, according to Hendler's reading of the Treasury Department, "vital to the inner workings of the financial system."
I don't pretend to be an expert on small manufacturers. I don't think I've ever met anyone who's ever borrowed from CIT, but I do deal with people who know the manufacturing and retail areas, and one of the savviest of those guys, a man whose made a fortune manufacturing goods, both in the United States and in China, tells me that if CIT goes under, whatever's left of manufacturing in America may go down with it.
President Obama was personally briefed on the situation Wednesday morning, but even after that the Federal Deposit Insurance Cooperation (FDIC) will refuse to permit CIT to use its debt guarantee program. They thought the risk was too great, and apparently doomed CIT.
The Administration continues to proclaim that we will create new jobs through small business and entrepreneurship. That's going to be very hard to do with CIT gone. In the real world, under current conditions, national banks are loath to loan money to small businesses and start ups. Most local banks are not stepping up to the plate, and with CIT gone, it's going to be very tough for the small guy.
I'd recommend that employees of companies that have been relying on CIT for financing begin looking for new jobs. Maybe they should try Wall Street, where they know the FDIC will take good care of them.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
If CIT goes away, someone else will take its place.
If lending money to small businesses is profitable, then someone else will move in to capture the market. If its not profitable, then it shouldnt have existed in the first place, and the capital is better allocated in some other industry.
true, but there is the issue of market disruption during the process of natural selection so it is not a cut and dry analysis.
So CIT was a leech which took 20% for a one time loan on customers which paid late????
Wow... no wonder our small businesses are going under. Customers paying late and finance companies like CIT profiteering from their cash flow problems.
It's simple: if you are a small business, make your unreliable customers pre-pay at least 50% of the invoice. Problem solved.
Meet the new boss same as the old boss. We've been fooled again. Oh well, we are only maybe 20 years from a total ecological catastrophe anyway. The current crisis is but a footnote in the history that will not be written.
See Reese Schonfeld's Profile
For once, I am much impressed by the quality of the comments. Each one of you seems to get it. I particularly want to thank Rule of Law for introducing the term "working capital", the lack of which, of course, if CIT goes under, threatens the entire economy. Those who want to learn more about "working capital", might start looking at: http://ano
I wonder how it comes that so many small businesses seem to be without "working capital". That's the very first thing one accumulates as a small business and one has to hold onto it under all circumstances. If small businesses in the US lack that, we better have shakeout which will raise the price level for the goods they produce until we have a stable market for the remaining firms.
Now, for those who fear that small businesses will go away and won't come back, let me explain the basics. If your local metal fabricator goes out of business, that does not mean you, another small business, don't need any metal parts any longer. You still need those parts and you will go to another metal fabricator in the US to get them. Same for all other industrial needs. The choices might change, but the demand does not. But maybe the business culture will change to
"If you like your supplier and you are happy with them, you might consider paying them early and often... just in case."
Just my two cents as a design engineer in a perfectly well capitalized small business in the US which pays all its bills on time.
Reese, thanks. Read your bio, and wonder of wonders, you are the man behind our family's favorite--The Food Network!
As I posted elsewhere, if the goal is to return the United States to the role of supplier of raw materials for export, and continue to use us as pure consumers, then we have reached the point of being, once more, a Colony. The problem with a colony is that it is an unsustainable model when the citizens who live there are no longer able to afford those products. My guess is, that's where China and India become the next big markets, and we become a huge 3rd world country.
As it says on anonymousb
It was a con then, and an even bigger con now.
wow, scary post!
It doesn't have to be Finance vs. The real world, but that is apparently what Finance wants. They can up the interest rates, charge excessive fees, and do all manner of immoral but technically legal things they want. In the end, we still live in the real world. If the home you live in is worth zero dollars, it still has intrinsic worth to you as a place to live. These are the facts of reality in the non "Finance" sector: we all need food, water, shelter, and sometimes healthcare and transportation. If the entire economy collapses in a black hole of absurdity, we will still need these things. When the climate changes even more dramatically than it has and so-called natural disasters occur, we will still need these things. This is the real world, and we have been foolish to divorce the real world from our Finance, but how could we not when our Financial system is built on debt? Wealth is access to, not necessarily ownership of. And we have to realize the intrinsic value of all of these things beyond the fluxuating dollar.
I do not favor saving any bank. But this is the crux of the matter--
"Now CIT will be gone, and I don't think there's anyone else to take its place. Hundreds, maybe thousands, of small manufacturers all over the United States will shut down,..."
The result will be a plunge this Fall into Depression this false recovery is only hiding.
And THAT is the goal of Goldman, Morgan and the FED.
They've stolen billions so far through the bailouts, tarps, what have you, but the real Brass Ring is to buy up as many businesses and properties as possible at rock bottom prices when this economy hits the basement.
It's what the banks did in Depression Part 1. Businesses went belly up for lack of working capital they depended on, unemployment skyrocketed, homes went into foreclosure, people starved in the streets.
Obama should put CIT into receivership as the law requires, and then extend the power of the Federal Government to guarantee working capital for any businesses that will be affected. And if that takes bringing the FED under full control of the United States Government, then so be it. Any thing else is a recipe for disaster unlike the first time, as we have fewer farm families, greater concentration of urban population, and no industrial infrastructure to provide the jobs we'd need to work through this.
Obama better do the right thing this time, or we all pay. And Goldman is just licking its chops...
Maybe a year from now working class Americans will finally shake off their cable-induced stupor and realize they have no more power over their own lives than their ancestors did in the late 1800's.
Maybe...
Well, I think most us understand that corporatism isn't driven by small companies/
This just takes one step closer to the day when democracy and entrepreneurial capitalism are nothing more than elements of corporate government storefront--or perhaps lipstick on a very gross pig.
after this latest american financial bubble has popped, banks are in panic mode. It's true they are hoarding capital, and compounding toxic assets by mixing them with good assets.
Point #2, with the loss of manufacturing jobs and exports, the power of finance and banks is only enhanced. I think banking has always been tremendously important, but really have banks ever before been in a position to make policy, as the banks can make policy now? I think our situation is unprecedented.
Yawn. There are plenty of well run small businesses without any needs for this kind of financing, Rule. You are again pounding the block to save the losers instead of supporting the winners who know how to run their businesses right.
We need to stop rewarding failure. That goes for everyone, small and large.
Hey, look, you actually stayed on topic.
Now that didn't hurt, did it?
With the exception of a few social issue stances and a command of the English language, I feel like I am witnessing the half black version of George Bush in Barack Obama.
You must be logged in to comment. Log in or connect with
