CIT Failure: Consumers Out $2 Billion, Goldman Recovers $1 Billionby Tim Manni
Taxpayers: can you afford to shell out any more money to pay for another failing industry or institution?
Last month when we wrote about the embattled commercial real estate market — saying it was primed for failure — our readers reacted by saying that they’re tapped out, that they can’t afford another bailout. However, the latest financial threat to taxpayers may not be a bailout at all — we just may not be getting paid back for money we lent early on in the crisis.
According to Financial Times, if struggling lender CIT files for chapter 11 bankruptcy, consumers may have to eat over $2 billion that was loaned to the institution, while investment firm Goldman Sachs is contracted to recover $1 billion off the bankruptcy:
The payment stems from the structure of a $3bn rescue finance package that Goldman extended to CIT on June 6 2008, about five months before the Treasury bought $2.3bn in CIT preferred shares to prop it up at the height of the crisis. The potential loss for taxpayers would be the biggest to crystalise so far from the government’s capital injection plan for banks.
The agreement with Goldman states that if CIT defaults or goes bankrupt, it “would be required to pay a make-whole amount” that totals $1bn, the people familiar with the matter said.
In this bankruptcy, taxpayers get $0 in return, unlike Goldman, who stands to recover about one-third of the cash it extended.
However, Goldman said today that the terms of the $3 billion loan may in fact be amended, according to the Wall Street Journal. CIT’s Chief Executive Jeffrey Peek said his institution is currently negotiating possible options that would allow them to avoid bankruptcy (at least for now):
Jeffrey Peek, CIT’s chief executive, is attempting to persuade bondholders with about $31 billion in debt to swap that for new secured debt worth at least $5.7 billion less and to extend debt maturities. If enough creditors sign on, this reduction in debt load will help CIT avoid bankruptcy court, for now. The company warned in July it may be forced to file for a pre-packaged bankruptcy after it failed to get additional financial aid from the government.
While important to certain audiences, CIT’s pending bankruptcy proves that they’re not ‘too big to fail.’ A certain amount of cash was extended to CIT — which proved insufficient — and now, without Washington offering another stream of taxpayer funds, bankruptcy seems like the next step.
(hat tip: Seeking Alpha)