Taking Stock of Bonds
July 13, 2009
Have Regulators Learned Their Lesson?
Nearly a year has passed since regulators and central bankers let Lehman Brothers fail, unleashing a credit markets riptide that hobbled financial markets globally. It appears that the lifeguards on duty may have forgotten what it means to lose a significant player in the financial markets.
This time, the life ring may have to be tossed to a century-old company that neither has the size nor the breadth of Lehman. While it is not a fixed income behemoth akin to Lehman, New York-based CIT Group has a pretty important role in the nation’s economy.
CIT’s share price has plummeted in recent trading sessions amid concerns it won’t get approval to issue FDIC-backed debt and the government’s OK to transfer assets to a bank subsidiary as part of an effort to shore up its liquidity (see related story).
It is not clear as to what is holding up the approvals -- CIT and the FDIC won't comment -- but S&P equity analysts seem to think the U.S. government will come through. Moody’s, meanwhile, was more cautionary when it cut CIT’s unsecured rating. According to Moody’s, CIT “has made inadequate progress in advancing its near-term liquidity initiatives.”
CIT has made some mistakes -- it got mixed up with home equity lending and student lending on the eve of the credit meltdown -– but its role in the U.S. economy is notable at a time when more restrictions are being placed on credit for small and mid-sized businesses. The company specializes in a finance that is not exactly cookie cutter and likely won't be easily replaced if CIT closes its doors: trade finance such as factoring, transportation finance and vendor finance.
An April survey of banks by the Fed reveals that slightly fewer lenders tightened credit standards, but 80% of domestic banks increased spreads of loan rates to large and middle market firms and 75% of respondents upped the spreads for commercial and industrial loans to small firms. Higher premiums were demanded for riskier loans and costs for credit lines jumped.
With this sort of backdrop one cannot help but wonder why regulators are not pulling out the stops to make sure CIT keeps its doors open to 950,000 small and medium sized businesses. It can't be that tough to figure out that an increase in corporate failures will add to the jobless rate which, in turn, will fuel more problems for consumer debt like credit cards and mortgage loans.
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