Banking Crisis: Money-Spinning Operation for the Financial Giants

Goldman Sachs, CIT in Talks to Amend Loan Terms

October 5, 2009

Reuters - Goldman Sachs Group Inc said on Monday that it is in talks to amend the terms of a $3 billion loan to CIT Group Inc, the Wall Street Journal reported.

The investment bank is expected to receive about $1 billion if commercial lender CIT were to file for bankruptcy, the Wall Street Journal said. This is a point of contention as the company battles to raise additional funds as part of its broader restructuring plan, the Journal said.

CIT is studying several options for the loan from Goldman Sachs, one of which is trimming the $1 billion payment, the Journal said, citing a person familiar with the situation.

"Goldman Sachs is working with CIT and its creditors to enable it to continue to use the facility, which we believe gives it an attractive cost of funding, particularly relative to the other financing that has been provided to CIT at less attractive levels," Goldman Sachs said in a press release on its website.

Goldman spokesman Michael DuVally declined to comment further.

CIT spokesman Curt Ritter declined to comment on the report.

Goldman extended $3 billion in funding to CIT in June 2008, according to regulatory filings. The 20-year contract, which was set as the credit markets froze, calls for CIT to pay Goldman 2.85 percent of the maximum amount lent. That translates to about $85.5 million a year for the first 10 years of the agreement, the Journal said, and CIT would be required to pay $1 billion if it were to file for Chapter 11 bankruptcy.

Citing a Goldman Sachs internal memo, the Wall Street Journal the financing for CIT required the bank to "establish long-term funding" of its own, which it is obligated to pay even if the CIT facility is paid off early or CIT files for bankruptcy. The $1 billion payment is "designed to cover Goldman Sachs in such an event," according to the memo.

CIT, a century-old company that is one of the largest lenders to thousands of small and medium-size businesses, pays roughly 10 percent interest on its latest loan. Goldman's loan, made before CIT acknowledged massive financial problems, charges about 3 percent interest, the Journal said.

Citi Selling Smith Barney Retail Broker Business to Morgan Stanley

October 5, 2009

Reuters - Citigroup said on Monday it is building its own retail investment advisory business, after announcing plans last month to sell all of its Smith Barney retail broker business to Morgan Stanley over time.

Analysts said that Citigroup's strategy could be difficult to execute, and that many banks have failed at similar efforts in the past.

Citigroup is starting the business with 600 advisers who sit in Citibank branches or operate next door to branches and are not included in the Smith Barney deal. The bank also is looking to build relationships with independent advisers, who will pay fees in exchange for client referrals.

Citi's current brokers will start charging annual fees to clients, rather than commissions on transactions.

The moves follow Citigroup's sale of a controlling stake in its Smith Barney business to Morgan Stanley in June for $2.75 billion. Although Citigroup retained some brokers after that sale, it did not have a clear strategy for building that part of its business, or winding it down.

Citigroup is trying to figure out a way to not just accept deposits and make loans to its retail banking clients, but also to manage their overall financial portfolio, an effort that banks have made for years -- and failed at.

Major Citigroup competitors Bank of America Corp and Wells Fargo & Co have large U.S. retail bank branch networks, and large retail brokerages.

Citigroup has a relatively small branch network and is starting off with a small number of advisers.

Combining the two businesses gives a bank access to more of their client's financial life, potentially generating much more revenue.

But brokers and investment advisers tend to be focused on selling products to customers, ideally knowing their customers very well, and helping them plan their entire financial lives. Retail bankers tend to focus on providing service and underwriting loans as the customer needs them. Getting these two cultures to work well together has proven difficult for many banks.

Citigroup, meanwhile, is starting with a very small foundation. It has about 1,000 bank branches in the United States, compared with more than 6,000 each for Wells Fargo and Bank of America. To build up a network of trusted advisers could take a good deal of time and effort, analysts said.

Citigroup Chief Executive Vikram Pandit said at a conference last month that the bank expects to sell the rest of the business to Morgan Stanley over time. When the deal was announced in January, Smith Barney had about 12,000 advisers.

Saudi Prince Urges U.S. to Sell Citigroup Stake

October 4, 2009

Reuters - Prince Alwaleed bin Talal, a big investor in Citigroup, urged the U.S. government to sell its stake in the bank as soon as this year to boost investor confidence, Emerging Markets magazine reported.

"The earlier the U.S. government exits its investments in those companies, the better," as long as the withdrawal is not done in a way that hurts the prices of U.S. banking stocks, the Saudi billionaire was quoted as saying in an interview published on Sunday.

"We need to give confidence back to the shareholders and investors that these companies are moving along without government support."

A series of bailouts during the financial crisis has left the U.S. government with a 34 percent stake in Citigroup, after the bank obtained $45 billion from the government's Troubled Asset Relief Program.

Sources told Reuters last month that Citigroup was talking to U.S. officials about how the government should shed its 7.7 billion shares in the bank.

Alwaleed, who owns part of Citigroup through his investment firm Kingdom Holding Co, has said little in recent months about the stake. Kingdom owned 3.6 percent of the bank in July 2007 and five months later Alwaleed said he was among investors who agreed to put more money into the bank.
Citigroup is expected to return to the black on an operating basis next year at the earliest, Alwaleed was quoted as saying in the interview.

"Citigroup has learned a huge lesson. The worst is behind them right now," Alwaleed said, adding that the bank's $100 billion of tangible common equity, "the highest in the industry," and the large scope of its operations meant its future was "very bright."

The bank has been profitable on a net basis in each of the last two quarters because of one-time gains and accounting items, but has not posted a quarterly profit from its main operations since 2007.

In the wake of the financial crisis, U.S. regulators have been discussing the problem of banks becoming "too big too fail" -- since the collapse of a big institution could undermine the entire banking system, governments can find themselves forced to spend huge sums supporting debt-ridden and unprofitable banks.

But Alwaleed said the solution to this problem was not breaking up big banks, and that he did not expect the U.S. government to decide to do this.

"Any failure of a broken-up bank is still going to impact the whole system. You need to fix the problem, not a symptom of the problem," he was quoted as saying.

CIT's Failure Could Threaten Financial Sector's Overall Recovery

October 1, 2009

Seeking Alpha - Just as the financial services industry seems to have made it past the worst of the economic meltdown, one small lender now threatens to reverse that trend. CIT Group (CIT), a lender to small and medium sized businesses, appears to be on the brink of collapse for the second time this year.

CIT Group averted bankruptcy over the summer, when it secured a $3 billion loan with its bondholders, and managed to tweak a giant tender offer for debt maturing shortly thereafter. The move served as a mere stopgap however, since the lender had a $2.9 billion negative cashflow position at the end of June this year.

With the moment of truth at hand once again, insiders say that CIT is attempting to prioritize nearer-term debt holders, a move which would dilute common stock holders by around 95 percent, leaving them almost wiped out.

Wednesday, traders pushed up the cost of CIT’s credit default swaps by 4 percent, to 26 percent; the implication is that the lender has a 45 percent chance of defaulting on its debt within three months, and an 85 percent chance of defaulting on its debt by 2014.

Meanwhile, CIT is also rumored to be recommending that bondholders approve a pre-packaged bankruptcy plan in case the new debt-exchange doesn’t go through.

Whatever the outcome, it’s clear that CIT doesn’t have the financial muscle to protect all parties involved.

For equity holders, any further financing efforts are likely to leave them holding the bag, since they are at the bottom of the heap in terms of having any claims on the firm’s assets. Holders of debt maturing later than next year look likely to experience some sort of default.

Most worryingly of all, for small businesses there really aren’t many other places they can go to get the kind of financing that CIT provides them with right now:

“Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure,” said Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said on Tuesday at the Reuters Restructuring Summit.

Tilton wants the firm to use the potential consequences of its own bankruptcy as a way for government officials to sit up and listen, and potentially step in to save the day. In that case, the result would be an additional fresh bailout package, just as it was thought that many financial services firms were weaning off their own and starting to raise money in the capital markets.

That in turn will make many of the recent bank share offerings much less attractive, as stock prices of small banks decline on fears of further CIT-style fallouts.

Followers of financials will be watching CIT like a hawk over the coming days, and so they should be. It genuinely appears now that the lender threatens to put a spanner in the works of much of this year’s momentum among financial services firms.

CIT Collapse Would Be a Mess, Turnaround Experts Say

October 1, 2009

Reuters - If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a "drastic mistake" as the small businesses that rely on it would have few alternate sources of funding, turnaround experts said at the Reuters Restructuring Summit this week.

"I have a great fear of the collapse of CIT and that people don't understand the ramifications of what that can be," Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said, adding she believed any collapse would result in millions of job losses at smaller U.S. companies.

"I think it would be a very, very drastic mistake in this country to allow CIT to go under," Tilton said.

CIT is planning to offer its unsecured debt holders an option to either exchange their debt voluntarily or face a pre-packaged bankruptcy, sources close to the situation said on Wednesday.

Shares of CIT fell 40 percent on Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. But if those options do not work, there is unlikely to be any company able to fill CIT's shoes, the experts said.

"Over 80 percent of our workforce lies in small and mid-size companies, and yet there is absolutely no credit available to these companies," Patriarch's Tilton said.
"Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure."

And while CIT's need to restructure has been telegraphed for months, retailers and other small businesses, which are particularly reliant on their funding, appear to have done little to prepare for a collapse, said Cory Lipoff, an executive vice president at Hilco Merchant Resources who works with distressed retailers.

"Everybody has adopted a wait-and-see attitude," Lipoff said. "Everybody is uncertain and cautious, but nobody is taking any actions right now," Lipoff said at the summit.

Part of the issue for retailers and other businesses that rely on CIT for loans, is that it remains unclear how a bankruptcy would affect their contracts, turnaround experts said. If CIT goes through a pre-packaged bankruptcy, or ends up with deals to sell some units, their loan contracts might not change at all. If its bond exchange is successful, there may also be no change.

"My partner went out and talked to retail lenders (about CIT)... and the message that came back is 'We're just going to wait and see how this all plays out over the next 60 days,'" Lipoff said.

Few financial companies have survived bankruptcy, but CIT believes its customers will continue to borrow from it even if it is reorganizing in bankruptcy court, the sources said.

But the lurking possibility of a free-fall bankruptcy could actually be useful to CIT in gaining support for its plans at this stage, another turnaround expert said.

"Clearly CIT is negotiating in the shadow of bankruptcy," said Corinne Ball, the attorney at Jones Day who led Chrysler through its bankruptcy earlier this year. Ball said the threat of bankruptcy can push the company's stakeholders to more "productive discussion" about what course to pursue and force bondholders to think about what they would get if the company were to fail.

Goldman Sachs, Wilbur Ross Seeking to Buy CIT Assets

September 29, 2009

Reuters - CIT Group Inc is negotiating a new credit facility of up to $10 billion that could help the finance company pay off maturing debt and stave off bankruptcy, people familiar with the situation said.

The details of the facility are still being negotiated, and its size might be substantially smaller than $10 billion, two people familiar with the matter said. The company may forgo the loan altogether if it successfully renegotiates the terms of some of its existing credit lines, the sources said.

The existing credit lines include a $3 billion loan that CIT clinched from bondholders in July and a financing facility from Goldman Sachs.

CIT spokesman Curt Ritter declined to comment.

CIT shares rose 34 cents to $2.01 in afternoon trading, up 20.4 percent to their highest level since July. The company's bonds rallied too.

CIT is struggling to fund itself after losing access to the unsecured corporate bond market. The company has $3 billion of debt maturing in the fourth quarter, according to a quarterly filing in August. About half of that maturing debt is unsecured and must be refinanced or repaid from the company's dwindling cash holdings.

Regulators have put CIT Bank under a cease-and-desist order, preventing the unit from accepting new deposits. That bank was supposed to be a key source of funding for the company in the future.

The bank said in a quarterly filing that it hopes to restructure itself. If it is unsuccessful, it might have to file for bankruptcy, it said.

Analysts said CIT is struggling with real problems that may be difficult to solve even with additional loans in the near term.

"You can buy yourself a year of life, or maybe more, but then where are you? The world might get better and you might be able to borrow again in secured and unsecured bond markets, but there's no guarantee that it's going to play out that way," said Shawn Abboud, executive director of credit sales and trading at APS Financial Corp in Austin. Many of CIT's competitors are banks that have much cheaper funding costs.

SOME BULLISH

But some investors in CIT securities are much more bullish on the company's ability to avoid bankruptcy. One debtholder said the company could reduce its debt by exchanging current notes for new securities.

When it has more equity relative to its debt, regulators may lift the cease-and-desist order on its bank, allowing it to gather more deposits. CIT may also be able to sell assets, such as its railcar leasing business, and rely more on secured financing in the future, the debtholder said.

There may be interest in asset sales. Billionaire investor Wilbur Ross (former executive managing director of Rothschild Inc) told the Reuters Restructuring Summit on Tuesday that he would be interested in buying some CIT businesses. He also said he was interested in expanding his railcar leasing business, a unit that CIT has tried in the past to sell.

CIT shares have rallied in recent weeks, and the cost of protecting its debt against default has dropped, helped by rumors of a new credit. Under the terms of the $3 billion July loan, it must come up with a restructuring plan agreeable to lenders by October 1. That plan will likely include debt exchange offers, the company said in a regulatory filing in August.

Several investors who spoke to Reuters said they expect the company to offer new secured CIT debt to holders of short-dated debt, and to offer equity in the company to holders of longer-term debt. Investors may also get some combination of debt and equity, and perhaps even cash, to encourage them to exchange, debtholders said.

CIT's notes with a 4.25 percent coupon due in February 2010, the fifth most actively traded corporate bond in the U.S. market, rose on Tuesday to 76.5 cents on the dollar, from 74.5 cents on September 25, the last most significant trade, according to MarketAxess. That debt traded at 63.25 cents at the start of the month.

CIT Near Plan to Turn Over Company to Bondholders

September 30, 2009

Reuters - CIT Group Inc is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history.

A second source said that while some bondholders supported the plan, a majority was not yet on board.

CIT's board has yet to approve any course of action, the first source said.

CIT spokesman Curt Ritter declined to comment.

Although CIT received $2.3 billion in December under the Troubled Asset Relief Program (TARP), federal regulators this year declined further requests by CIT for funds.

U.S. taxpayers are likely to see much of their investment wiped out under a bankruptcy, but not under a successful exchange offer, the first source said, adding that U.S. regulators had been frequently briefed on the developments of the plan.

The lender to small and medium-sized businesses, as well as to commercial real estate borrowers, has until October 1 to present a restructuring plan to lenders.