CIT's bankruptcy raises new questions about bailout

By Tomoeh Murakami Tse
Washington Post Staff Writer
Monday, November 16, 2009

NEW YORK -- A year ago, the financial system was tottering and government officials arranged a $2.3 billion emergency cash infusion into CIT Group, a troubled lender to small businesses.

Today, CIT is in bankruptcy court, and the taxpayers' investment is on the brink of being wiped out. It would be the largest loss so far from the government's massive rescue of the financial system, but it isn't likely to be the last.

Officials poured about $700 billion into investments in scores of companies, from giants such as the automaker General Motors and the insurer American International Group to smaller regional banks. Of them, 46 had missed required dividend payments to the government as of the end of September, according to the inspector general overseeing the program.

On Nov. 6, United Commercial Bank of San Francisco failed, becoming the first recipient of the Troubled Assets Relief Program, or TARP, to collapse. The cost to taxpayers: $299 million.

Analysts expect more bailed-out firms to fail in the months ahead. Others may survive but will struggle to repay the government. Steven Rattner, the former head of the government's efforts to bail out the auto industry, said recently that the full public investment in GM is unlikely to be repaid. Meanwhile, AIG is dismantling itself, selling healthy subsidiaries at what critics say are bargain prices in an all-out effort to get cash to repay the government.

About $400 billion of federal investments remain in the corporate sector, much of it channeled through TARP. Critics of the program say losses were inevitable, in many cases.

Bankers, lawmakers, state banking regulators and oversight committees have faulted federal officials for providing funds to firms that were so sick that they couldn't recover and for failing to be open about how recipients were chosen. Some critics have also attacked the government for the types of investments they made.

Many investments were in the form of preferred shares, which pay a high dividend but get wiped out in bankruptcy, even reorganizations in which the firms survive. That's what's happening with CIT.

The government provided assistance to CIT only after the Fed determined that the company would be "well capitalized" by regulatory standards by the time it became a bank holding company. But that didn't mean that it had enough money to ride out its snowballing losses, even with federal help. And while the Treasury Department's stated goal was to help CIT keep making loans, in practice lending all but evaporated afterwards.

"It was very obvious as of a year and a half ago that it was in dire need of a substantial amount of more capital," said Sean Egan, co-founder of the independent credit rating firm Egan-Jones, who had questioned the move at the time. "The $2.3 billion was wasted. They didn't save CIT, and they didn't save the taxpayers' money."

Bert Ely, an Alexandria banking analyst, said CIT should have been reorganized under bankruptcy in December because its business model -- borrowing money cheaply and lending it out again to others -- was "basically broken." With the company's credit ratings tumbling, its cost of borrowing had reached a point where CIT could no longer be profitable, he said.

"The problems of CIT would have been confronted earlier," Ely said. "There wouldn't have been a lot of the turmoil in CIT and among CIT customers that we've seen. But in the meantime, it's kind of rotted on the vine. . . . CIT is one particular TARP investment for which there ought to be a lot of questions asked."

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