Rebel Traders – Analysis Without The Hype

The Wall Street Journal is reporting that CIT, a major lender to small businesses intends to file for bankruptcy protection in New York within days, perhaps as soon as this Sunday.

CIT had already received $2.3 Billion of tax payer funds to keep the company alive. Under the possible bankruptcy filing the money that came from the tax payers is at jeopardy of being completely lost for good.

[...] The $2.3 billion in taxpayer money spent to save CIT Group Inc. is likely to be wiped out, as the lender prepares to file for bankruptcy protection in a high-stakes restructuring plan aimed at keeping the firm in business.[...]

[...] With $71 billion in assets, CIT would have the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers Holdings Inc., Washington Mutual Inc., Worldcom Inc. and General Motors Corp. CIT’s Utah bank, which has about $10 billion in assets, wouldn’t be part of the bankruptcy filing.

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said. [...]

[...] A filing could also be a blow to some of the tens of thousands of small- to medium-size businesses that are customers of the century-old lender. Unlike public corporations — which enjoy access to reinvigorated credit markets — small borrowers are finding capital remains scarce.

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co. CIT made just under $40 billion in new commercial loans in 2007, not including an additional $45 billion for trade financing, according to company figures. That plunged to just $4.4 billion in the first half of 2009. [...]

(source: WSJ)

The lender for small and medium-sized business is having increasingly more difficulties in reaching an agreement on restructuring its debt. Just as it emerged a few weeks ago that GS had an interest in CIT’s bankruptcy, it would appear today that most bondholders are not following either on refinancing its debt or approving a prepackaged bankruptcy.

The main reason being that many “vultures” attracted by the huge portfolio of CIT and the perspective of splitting it up are playing hardball, considering that they have more to earn from a bankruptcy (particularly if they have securitized loans guaranteed by collaterals). Of course, one of these is the ominous GS.

For those who rant about bailouts, CIT has received about 2.3 Bn $ in TARP funds, all of which would most likely be lost for the taxpayer in the event of a bankruptcy of CIT. In terms of market efficiency, this is one case where letting “pure capitalism” play would end up with a disastrous result on many levels.

First, it would shut down one source of financing for small businesses which have been suffering in this recession. Second, it would concentrate into the hands of the bailed out giants the control of the market, thus restricting competition and creating an oligarchic structure. Finally, as could be expected, a whole sector of the lending market would be wiped out or submitted instantaneously to costly conditions. And I have left out the question of the loss to the taxpayer…

CIT Group Inc is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter said.

The lender to small and medium-sized businesses said earlier this month it was looking for investors to approve a large debt exchange that would reduce its borrowings, or to approve a prepackaged bankruptcy.

CIT is now more likely to try a prepackaged bankruptcy, two people familiar with the matter said. They declined to be identified because the exchange offer is ongoing and information about its progress is private.

But separately, investors in CIT securities said it is possible the company will not find enough debtholder approval for a prepackaged bankruptcy, which requires sufficient support before the company files for protection from creditors. Instead, CIT might have to aim for a prenegotiated bankruptcy, which typically has less support before the actual filing.

CIT spokesman Curt Ritter declined to comment.

CIT has limited time to work out its debt difficulties. It has about $3 billion of debt to repay in the fourth quarter, including both secured and unsecured obligations, according to a CIT quarterly filing with regulators.

CIT has lost access to unsecured debt markets, but has billions to refinance in coming years. In three of the next four years, it will have more debt to repay than cash to pay it back. CIT has roughly 1 million customers and more than $70 billion of assets, but many of its borrowers are struggling amid the worst recession since the Great Depression.

The company’s debt exchange aims to reduce CIT’s borrowings by at least $5.7 billion, with specific targets for lowering the company’s liabilities through 2012. The exchange offer expires on October 29.

AT LEAST TWO WANT MORE

At least two groups of investors are pushing for better terms in a bankruptcy than those suggested by the company earlier this month, one of the sources and investors said.

A subordinated debt holder said last week he was hoping to press for either more equity, or for a promise from the company to pay extra money to current subordinated debt holders if the company’s assets perform well enough.

Separately, investors holding debt that funded CIT business in Canada are pushing for greater consideration in any bankruptcy plan, too. These investors are entitled to recover money from Canadian assets and the parent company in the United States and could therefore get close to 100 cents on the dollar in any bankruptcy.

One investor that would take a hit in a CIT bankruptcy is the U.S. government. The United States’ Troubled Asset Relief Program invested $2.3 billion in CIT in December and much or all of that could be lost if the company files for bankruptcy, analysts said.

But many debt investors are likely to end up with much more than zero if CIT files for bankruptcy. One group of bondholders lent $3 billion to the company in July. That loan is collateralized by an estimated $30 billion of assets, which would ensure that the July loan could likely be paid back in full.

As the G-20 tries to solve the issue of rolling back those trillions of dollars spent to keep banks afloat and to jump-start the economy, a Bloomberg article warns that of an impending new “Age of Austerity” might hit the world.

For this article, taxes will have to be raised and spending cut to hope facing the huge debt ahead. In a way not unlike Andy Xie, Pr. Kenneth Rogoff also warns that this could trigger the “double-dip” recession everybody fears so much. And for those who thought that the stimulus would predict high inflation and endless profits for the companies, they better revise their views: growth will be at best “dampened” according to Pr. Stiglitz.

Global leaders may be saddled with the weakest recovery since World War II if they are to pay off the $9 trillion tab they ran up rescuing the world economy from the deepest financial slump in seven decades.

(…)

“There’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt,” said Harvard University Professor Kenneth Rogoff who is a co-author of a new history on financial crises. “It’s very likely that will trigger the next crisis as governments have been stretched so wide.”

Unwinding the borrowing will probably require leaders to raise taxes and cut spending, ushering in what HSBC Holdings Plc Chief Economist Stephen King calls an “age of austerity” that saps growth prospects for years to come even amid recovery.

The Organization for Economic Cooperation and Development predicts the world economy’s potential growth rate will fall to 1.1 percent next year, compared with 2.4 percent in the decade before the crisis. The International Monetary Fund says G-20 debt will reach 82.1 percent of gross domestic product in 2010, almost 20 percentage points more than two years ago and the equivalent of about $37 trillion.

‘Fiscal Mess’

“Economies have stabilized and now governments have to think more clearly about the fiscal mess,” said HSBC’s King, a former U.K. Treasury official.

Former Federal Reserve Chairman Alan Greenspan said Sept. 16 that U.S. debt, already about 84 percent of GDP, is “very dangerous” and threatens both Treasuries and the dollar.

Greenspan said that if there was a significant issuance of Treasury securities that increased the debt, “there would be of necessity downward pressure on the dollar.”

“We’ve got to confront that issue immediately,” he said.

(…)

Voter Anxiety

Voters are starting to signal discomfort with the global round of fiscal excess, adding to pressure on politicians. The budget deficit was listed as the third most-important issue facing the U.S. after the economy and health-care in a Bloomberg News poll this month and a majority of those surveyed criticized Obama’s handling of it.

In the U.K., Brown’s Labour Party received the support of just 26 percent of those polled by ICM this month, while backing for German Chancellor Angela Merkel’s Christian Democrats slid further in two surveys released yesterday before Sept. 27 elections.

Central bankers are sounding the alarm too in a sign they worry interest rates will have to be raised higher than they otherwise would be if governments don’t cut budgets.

“Everyone is concerned that we get back to a position where the public finances are clearly on a sound footing,” Bank of England Governor Mervyn King said Sept. 15.

Sovereign Debt

For now, bond investors are showing little concern about the debt as they focus on weak growth and indications from central banks that they’re not ready to start increasing interest rates. The Merrill Lynch & Co. Global Sovereign Broad Market Plus Index shows government debt yields this month reached the lowest since April.

AAA-rated countries, including the U.S., Britain, France and Germany, must articulate “credible exit strategies relatively soon” to shore up investors’ confidence, said David Riley, head of global sovereign ratings at Fitch Ratings in London.

Leaders say they are starting to plot how to withdraw the stimulus. Facing the biggest budget deficit in the G-20 at about 12 percent of GDP, Brown last week promised to make “hard choices” to cut U.K. costs. Goldman Sachs Group Inc. estimates U.S. fiscal policy will tighten by at least 1.6 percent of GDP in 2011.

The policy makers “need especially to speak about the U.S. deficit and the enormous amount of foreign capital that’s flowed into the U.S. to cover this deficit,” German Finance Minister Peer Steinbrueck told reporters in Berlin today before flying to Pittsburgh with Merkel.

Damping Growth

The crisis has permanently scarred the G-20’s economies by reducing their potential to grow, says James Nixon, co-chief European economist at Societe Generale SA in London. He estimates that the U.K. will have to raise taxes or cut spending to the tune of 9.1 percent of GDP to balance its books.

“This will depress growth for years to come,” said Nixon, a former economist at the European Central Bank.

Weaker long-term growth could compound the impact of a jump in interest rates should investor concern about deficits return. The Basel, Switzerland-based Bank for International Settlements said Sept. 13 that long-term bond yields will likely rise as investors refocus on the widening budget deficits.

“We could be in a pickle,” Nobel laureate Joseph Stiglitz, a professor at Columbia University in New York, said in an interview. “If long-term interest rates go up, that could be a damper.”

More evidence surfaced of Hank Paulson’s suspicious dealings in the wake of the bailout of AIG.

According to evidence uncovered by the New York Times, Hank Paulson who was then Treasury Secretary, spoke “two dozen times” with Lloyd Blankfein, the GS CEO on the week the bailout was granted to AIG, in September 2008.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted.

Michele Davis, a spokeswoman for Mr. Paulson, said that the former Treasury secretary was busy writing his memoirs and that his publisher had barred him from granting interviews until his manuscript was done. She pointed out that the ethics agreement Mr. Paulson agreed to when he joined the Treasury did not prevent him from talking to Goldman executives like Mr. Blankfein in order to keep abreast of market developments.

Ms. Davis also said that Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.

But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.

The fact that many decisions taken by the US Treasury under Hank Paulson’s mandate appear to have directly or indirectly benefitted GS has been the subject of much controversy until now. For instance, the decision to let Lehman Brothers or Bear Stearns fail, but to bail out both GS and AIG, not only eliminated two of the most dangerous rivals of GS, but ensured a flow of 12 Bn USD of taxpayer money into GS, allowing it thus to profit of its CDS and its “intelligent” risky hedging strategy.

On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.

When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.

The calls between Mr. Paulson and Mr. Blankfein, especially those surrounding the A.I.G. bailout, are disturbing to Samuel L. Hayes, a professor emeritus at Harvard Business School and a consultant in the past for government agencies, including the Treasury Department.

“We don’t know what they talked about,” Mr. Hayes said. “Obviously there was an enormous amount at stake for Goldman in whether or not the A.I.G. contracts would be made whole. So I think the burden is now on Mr. Paulson to demonstrate that there was no exchange of information one way or the other that influenced the ultimate decision of the government to essentially provide a blank check for A.I.G.’s contracts.”

For those who would think that it is necessary for the  Secretary of the Treasury to consult so often with one of the leading banks of the US, here is a recap of the phone calls to other important bank CEO’s.

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

So prospers the GS connection in the US government.  There is not much to say anymore about it. Just remains to wait and hope that their crazy risk-taking will ultimately be the cause of the downfall of GS, just as it might have been the case in September 2008, had it not been for the helping hand of Hank Paulson.

I had hoped for a better response from the new administration but so far it is “not so hot“. Today President Obama announced the creation of a task force for the middle class. Why?

The problems facing the nation are already well known and understood. What need is there to establish a task force to study it? I’m sorry President Obama, but you are wasting time and money.

The new task force will be chaired by Vice President Joe Biden. The panel will comprise of Cabinet officials, business, and labor groups. This task force will set out on a road trip across the nation to speak directly to the middle class, why? What more evidence do you need that the economy is in dire trouble?

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If you are familiar with the movie then you will understand my title for today’s market close update. If not, rent the movie somewhere and be prepared for some good old fashioned humor.The events of the past 24 hours can best be summed up as "It’s a Mad Mad Mad Market".

First the US Senate decides to kill the auto bailout bill sending the futures down significantly in the overnight hours.Then this morning we have the Whitehouse issuing a statement that they will intervene and ’save the day’ pulling the market from the grips of hell. The Whitehouse does not yet know how they will bailout the automakers but they assured the market this morning they will. I imagine that when Hank Paulson heard the Senate killed the bailout he was very unhappy.

I am sure that right now Ben Bernanke and Hank Paulson, along with President Bush staffers are discussing the implications of tapping the TARP to give funds to the automakers. The reason why there has been no ‘official’ announcement yet regarding how much, under what terms, or with what conditions is because they are scrambling to find out how to do it.

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