Creditors' Resource : Bankruptcy and Creditors Rights Advisor : Corporate Recovery Associates : Richard J. Feferman : Creditors Committee, Reclamation, Unsecured Creditors

• CIT provides financing to over 1,000,000 small and mid-sized businesses. 

 

• CIT provides more loans than any other lender under the Small Business Administrations most popular program.

 

    CIT is the provider of capital to America's small businesses. One can argue that there are others such as GE, but no other company has the focus of CIT. Given the other bailouts, saving CIT should be a no brainer. The Wall Street Journal reports that there has not been a ground swell of public support for assistance to CIT.

 

    Ironically hasn't the public complained that the large banks aren't lending bailout dollars quickly enough to help the economy? CIT likes to make loans, they are good at making loans, and CIT is has the best infrastructure in place for getting out financing for the small businesses that can generate jobs. Importantly they are not punch drunk push-overs that make stupid loans. Their trouble emanates from the current economic contraction.

 

    The stimulus programs are not going to work unless money is put to work. CIT actually has the infrastructure in place to augment the recovery of small business in America. Here is a great opportunity to save a financial institution worth saving.

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    CNNMoney.com reports credit insurer Euler Hermes ACI forecasts a 45% increase in bankruptcy filings in 2009. Banks are in danger as US business bankruptcies may be up sharply.

 

    The FDIC reports year over year charge-offs to commercial and industrial borrowers are up by $4.2 billion as of the end of the first quarter. Credit rating agency DBRS states "business bankruptcies surpassed the peak levels of the previous cycle last year, and there is little to suggest that business bankruptcies have reached their peak."

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    Chelsea Emery of Reuters covers corporate bankruptcy and restructuring. On Reuters shop-talk blog, Chelsea reports that commercial bankruptcy filings in May were up sharply from the same month a year earlier. 7,514 bankruptcy petitions were filed for businesses in 2009 compared with 5,354 for May 2008.

 

 

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MIT Professor Simon Johnson is a thought leader on the Global Economy. His blog The Baseline Scenario is a great resource for understanding today's financial crisis. Last week he presented his Global Economic Outlook to the Senate Budget Committee.

 

I'm of the opinion that The Baseline Scenario is the best place on the web to stay easily updated on the  crisis. Johnson and his 2 co-founders are stimulating conversation and making this difficult subject understandable.

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Dear Sir:

The goal of federally financed bailouts should only be to augment feasible plans of reorganization, not to prolong the life of businesses beyond hope.

Bailout recipients should be required to devise and execute a feasible "Plan of Reorganization" as in Chapter 11 of the Bankruptcy Code. The financing could be in 2 parts: 1) the first part can provide interim financing while a Plan of Reorganization is developed; and 2) the second part will be "Exit Financing" that should only be provided to companies that can prove a that they have a feasible Plan of Reorganization.

All of the laws to administer the process are present in the Bankruptcy Code, with the exception of any legislation needed to let the government step into the shoes of the provider of the money. The Bankruptcy Courts also provide the only forum where certain issues can be dealt with (renegotiation or cancelation of existing contracts, protection for warrantee holders, etc.).

To handout money without conditions is not fair to the taxpayers, however given the seriousness of the financial problems we are faced as a nation perhaps a structure that requires responsible action by the recipients (with a recovery for the government) makes sense.

Respectfully,

Richard Feferman, Certified Insolvency and Restructuring Advisor
Corporate Recovery Associates
3830 Valley Centre Drive, Suite 705-152
San Diego, CA 92130
Tel: (858) 792-7473
email: richard@crarecovery.com
blog: www.creditorsresource.com

 

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We all know the housing bubble was inflated by easy credit and that market has become totally unhinged.


The Credit Market's issues are far from being sorted out. Certainly this is not going to be resolved in the short term. I think it is a fairy tail to believe the same abundant levels of consumer credit will return anytime soon. Money is going be more expensive and in shorter supply, hence we will have fewer dollars chasing houses. The next paragraph (and corresponding chart) shows why I think housing may be far from a bottom.


The S&P/Case-Shiller Home Price Indices are the gold standard for measuring aggregate home price fluctuations. The below chart, illustrating monthly changes in year-to-year comparisons, shows nationwide home prices falling at a faster rate each month.

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    What started as a residential real estate crisis is causing a shortage of funds throughout the Capital Markets. The Federal Reserve is doing an effective job regulating risk free rates, but businesses don’t borrow at these rates. Today the Federal Funds Rate is 2.20%. Unfortunately this is not solving the problem of providing dollars to businesses. Capital providers are scared and sitting on the sidelines. Commercial bankruptcy filings are on the rise. In fact bankruptcy filings of all types are on the rise.

    In order to induce lenders to invest in alternatives to the Treasury’s Risk Free Securities, Businesses pay a risk premium on borrowed funds; this Risk Premium is the difference between the Risk Free Rate and the actual rate paid. The Risk Premium is the compensation for lending to you instead of buying US Treasury Securities (Risk-Free). Commercial loan rates are not going down. The fact is lenders are scared; Risk Premiums are expanding and underwriting criteria is tightening up. A year ago when a middle market company needed to restructure financially it was much easier to recapitalize whether it was bank financing or selling securities. On top of that, you had plenty of private capital investors with money burning a hole in their pockets; commercial bankruptcy filings were at a low. The world is different today and the problem is at a point that the government is going to have to step up and provide risk capital. The downside of this is who knows what the unintended consequences of government intervention will be.

    Remember during the last banking crisis during the first half of the 1990s things were not resolved until the government formed the Resolution Trust Corporation which took over (and subsequently liquidated) the portfolios of bankrupt lenders. If the holders of today’s pools of loans cannot efficiently liquidate problem assets the country is in for a painful digestion period that this analyst believes will last through 2010 perhaps through 2012.

    We may have just seen the tip of an iceberg. News reports today included the revelation that credit default swaps (insurance against a bad receivable) on the debt of CIT Group (the largest independent commercial finance company in the U.S.) are more expensively priced than the Bear Stearns' swaps were just before the government arranged rescue of Bear Stearns.

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