You can’t follow the action without a scorecard.
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As the bailout has progressed, everyone has become familiar with the roster.
You know who I mean; Bank of America, Citigroup, Goldman Sachs and JP Morgan Chase. We’ve even come to know some of the lesser regional players like Fifth Third, Sun Trust or National Cities.
Now the news is filled with warnings about another major lender that looks ready to go bust, but no one in the government seems to give a hoot.
Factor in the Factoring Factor
The outfit in trouble is CIT. Unless you’re one of CIT’s approximately 1 million small or medium-sized business borrowers, you’ve probably never heard of this bank.
CIT is a so-called niche lender that has been around for about 100 years. CIT is also the leading factoring company in the U.S.
Historically, factoring has been integral to ensuring the retail industry can fill their shelves with the products they sell. If, for example, a small dress manufacturer delivers a shipment of dresses to a retailer, CIT “factors” their invoice, taking on the responsibility of procuring payment from the retailer – providing them with the capital they need to continue their business.
Without CIT as a factoring partner, many manufacturers would find it more difficult to maintain the capital they require to produce the products that U.S. retailers need. In midst of the worst credit crunch since the Great Depression, CIT provides a critical cash flow lifeline for many asset-based borrowers that don’t have any other alternative.
CIT is about to come up short on nearly $10 billion of debt maturing next year. It has asked the government for a bailout. So far, the Feds have refused.
In a sign that the public may be tiring of bailouts, those opposing aid to CIT have steadfastly argued that its lending business doesn't present the same level of systemic risk to the credit markets that was associated with the collapse of Lehman's commercial paper business. Bailout opponents also have said that CIT’s demise will be good for competition and reintroduce “moral hazard” back into the credit marketplace.
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The administration’s muted response to CIT’s bailout request may be a sign that the President and his advisors think that the credit slump may be easing. The Administration’s refusal is particularly surprising, given CIT’s role as a leading lender to small and medium-sized businesses, especially minority-owned concerns.
CIT’s small size relative to other big commercial banks may also ease worries of a ripple effect. Although it was the No. 1 SBA lender in the U.S. last year, CIT was roughly one-eighth of the size of Lehman Brothers when massive credit losses forced the investment bank into bankruptcy last fall.
Small Business’s Niche
Everyone from the President to his most senior advisors like Treasury Secretary Tim Geithner has said that the leading edge of the recovery will be forged by a revival in retail consumer spending. Moreover, according to the SBA, small businesses make up more than 99.7 percent of all employers and will create more than 75 percent of new jobs in the U.S.
With credit lines being slashed, small businesses across the country are struggling to maintain their cash flow. In reality, few lenders are willing and sufficiently prepared to take on the type of asset-based financing that CIT has routinely provided to so many businesses.
While it is likely that CIT soon will be compelled to declare bankruptcy unless it receives further government aid, it also is unclear who will replace its important role in the credit market once it fades into oblivion.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
