Tuesday, August 11, 2009

CIT hangs over financials, and more

CIT's delay in filing its quarterly reports to the SEC and their not reassuring comments about the potential for bankruptcy next week are not good news for financial stocks today, and other sectors as well. Perhaps it's one more bit of brinksmanship on their part but the absence of the 10Q is a bad sign.

"Other sectors" are more of a concern than the financials if CIT files. In recent weeks various numbers have flown around as CIT's share of the U.S. factoring markets from small commercial vendors to merchants, numbers from 30% to 70%. Even at the bottom of that range, it's huge. It has been commented that banks like Wells Fargo, BofA, and Chase would step in and fill the gap so that this fundamental grease to retail trade stays intact. That's unlikely. The gap would be too large and CIT's history suggests that it would be too risky.

CIT has always been a commercial finance company. In competing with major national and regional banks over many years they have always been scrappier and more willing to take risks that the banks would not take, and more willing to be the tough guy if a client didn't pay. They were not out giving toasters away for deposits or burnishing their reputations to consumers with billboards. That meant that if Joe the bridal veil manufacturer on 36th street between 6th and 7th began to get too far behind on his payments, they could just go ahead and take his collateral, which often included his house, as repayment. Their reputational risk to Joe's neighbors in Roslyn was minimally important, in fact in their business it was just as good as a warning sign to other garmentos in his area as it was a negative.

So CIT had a different business model because it was not a bank. In a still problematic credit market that model no longer works from a funding side but it also no longer works from a credit risk and reputational point of view for those that could pick up their business. Unless CIT can get some bulletproof debtor-in-possession financing arranged when it files and therefore keep doing business, there will be a meaningful percentage of their clients who would also be in financial trouble.


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