Banking Crisis: Money-Spinning Operation for the Financial Giants

India May Get $1 Billion in IT Outsourcing Contracts

November 22, 2009

Reuters - Leading Indian outsourcers such as Tata Consultancy (TCS.BO), Infosys (INFY.BO) and Wipro (WIPR.BO) stand to gain contracts worth about $1 billion in the next one or two years as U.S. banks emerge from the troubled asset relief program, the Economic Times reported on Monday.

The newspaper said JPMorgan (JPM.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N), which received approval to buy back government stake worth $68 billion earlier this year, are among the firms seeking operational efficiencies by outsourcing non-core IT and back-office projects to India.

American Express (AXP.N), Bank of New York Mellon (BK.N) and Capital One, which have started repaying government debt, were also considering outsourcing, it said.

NY Times to Goldman Sachs: Pay Up to Cut Public Debt

November 22, 2009

Reuters - A New York Times editorial slammed Goldman Sachs for its role in the financial crisis and said that instead of paying big bonuses to its employees it should make a multibillion-dollar gift to help reduce the U.S. national debt.

The editorial, dated November 21 on the Times' website and published in the Sunday, November 22, print edition, attacked Goldman for everything from its top executive's failure to apologize properly for his investment bank's part in creating the crisis as well as Goldman's awarding of bonuses related to profits that the paper said were boosted by a government bailout.

The Times sniffed at Goldman CEO Lloyd Blankfein's acknowledgment last week that his bank "participated in things that were clearly wrong," saying that he was not specific about what the company had done wrong and his remarks did not "come close to an apology."

It cited the company's ability to set aside $16.7 billion for bonuses this year as it was able to post "blowout profits" after receiving a $10 billion government bailout and $12.9 billion in payments and collateral in relation to the government bailout of American International Group.

The paper described Goldman's pledge earlier this week of $500 million over five years to help small businesses as "crumbs from its table," saying it should do much more.

"The money will be welcomed by recipients, but if Goldman wants to make a meaningful contribution, it would have to be in the billions and aimed more directly at taxpayers," the Times said.

It noted, for example, that the federal Bureau of the Public Debt accepts tax-deductible donations to reduce the national debt and urged Goldman to participate.

The paper said that a multibillion-dollar donation from Goldman could be made in such a way that it does not harm shareholders, noting that the related tax savings could help finance the company's small-business initiative.

A contribution could also help Goldman ward off "serious calls for a windfall tax on bonuses, which would be justified since the profits they are based on are in a large part the result of government efforts," the editorial said.

In another story published in the Times on Saturday, Gretchen Morgenson quotes Janet Tavakoli, an expert in derivatives at consulting firm Tavakoli Structured Finance, who urged Goldman to repay money from the AIG bailout, saying Goldman should be forced to take back toxic collateralized debt obligations, or CDOs, which had been insured with AIG.

"The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening freefall, and the cost of replacing AIG's protection would have been sky-high," she said. "Goldman must have known this, because it underwrote some of those value-destroying CDOs."

Goldman should do this before it gives bonuses to "taxpayer-protected employees," Tavakoli said in the Times report.

CIT’s Bankruptcy May Help Bondholders But Will Wipe Out Shareholders' and Taxpayers' Stake

November 2, 2009

Bloomberg - CIT Group Inc.’s decision to seek court protection probably will keep money flowing to bondholders and 1 million customers of the 101-year-old commercial lender. Shareholders and taxpayers won’t be as fortunate.

CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds. Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.

“It doesn’t look too good for the government preferred or any preferred holders,” Brian Charles, a debt analyst at New York-based brokerage RW Pressprich & Co., said yesterday. “It’s unlikely common shareholders realize any value.”

CIT failed to win a second government bailout in July or persuade bondholders to swap $30 billion in debt to prevent a bankruptcy filing this month. The New York-based lender posted more than $5 billion in losses in the last nine quarters. The filing is the fifth-largest U.S. bankruptcy by assets.

None of CIT’s operating subsidiaries, including Utah-based CIT Bank, were included in the filing, CIT said in a statement.

The lender funds about 1 million businesses such as Dunkin’ Brands Inc. in Canton, Massachusetts, and Eddie Bauer Holdings Inc., the bankrupt clothing chain based in Bellevue, Washington. CIT also provides financing to about 2,000 vendors supplying 300,000 U.S. retailers, according to a July statement from the National Retail Federation.

Getting Credit

“You’ll still be able to get your lines,” said Charles, the debt analyst. CIT has created a “relatively seamless transfer of its own operations in the bankruptcy without disrupting those of its customers,” he said.

CIT’s struggles sparked concern among retail trade groups and lawmakers that customers would be left without financing while traditional banks also were cutting back credit. CIT originated $4.4 billion of new business as of June 30, less than half the $11.3 billion in the first six months of last year.

The lender’s clients “are not doomed,” said Sean Egan, president of Egan-Jones Ratings Co.

“The next step for the company is going to be an assessment of whether or not they want to continue to do business in various areas. The truth is in the middle.”

‘Minimal’ Recovery

Although customers may be spared, the government isn’t likely to recover its preferred stock investment.

“We will be following developments very closely with an eye toward protecting taxpayers during the bankruptcy proceeding,” Treasury spokesman Andrew Williams said in an e-mailed statement yesterday. “But as the company’s disclosure on the prepackaged bankruptcy makes clear, with debt holders receiving less than face value of their instruments, recovery to preferred and common equity holders will be minimal.”

Current common shareholders would own just 2.5 percent of the reorganized company under a scenario outlined by CIT in an Oct. 2 filing. The stock has fallen 83 percent since Dec. 23, when CIT secured preliminary U.S. approval to get money from the Troubled Asset Relief Program. Last week, the shares still fetched more than $1 apiece in New York Stock Exchange composite trading on speculation that a CIT rescue would leave some value, and they closed on Oct. 30 at 72 cents.

CIT won approval from the Federal Reserve on Dec. 22, 2008, to transform itself into a bank holding company, a move that allowed the commercial lender to accept the Treasury investment.

Legislative ‘Folly’

The bankruptcy filing, and the probable loss to shareholders, “highlights the folly of a legislative proposal that makes the Federal Reserve the unchallenged arbiter of systemic risk, capital adequacy, and financial stability,” Representative Spencer Bachus, senior Republican on the House Financial Services Committee, said in a statement.

The House panel is considering a measure introduced by Chairman Barney Frank, a Massachusetts Democrat, that would give the Fed the most power on a new council of regulators.

Bachus said the Federal Deposit Insurance Corp.’s refusal to allow CIT to participate in its debt-backing program “probably spared taxpayers billions more in losses.”

The bankruptcy came after bondholders rejected a debt swap that would have trimmed $5.7 billion of CIT’s debt. Billionaire investor Carl Icahn had earlier made a competing offer and then agreed to support CIT’s prepackaged bankruptcy after the lender agreed to certain corporate governance changes.

Debt holders rejected the exchange offer, with 90 percent of holders who voted opting for the company’s prepackaged bankruptcy plan, and the filing “will allow CIT to continue to provide funding to our small business and middle-market customers,” said Peek, 62, in a statement. Peek previously said he would step down later this year.

Bank of America

According to the petition, CIT’s largest unsecured claim holders were Bank of America Corp., as collateral agent for a $7.5 billion claim, and Bank of New York Mellon Corp., as a trustee for retail bonds with a claim of $3.2 billion.

The company said in its Oct. 2 outline of a prepackaged plan that CIT would give most holders new securities at 70 cents on the dollar plus new common stock, compared with the range of 70 cents to 90 cents and new preferred stock proposed in the exchange offer. CIT said it will try to emerge from bankruptcy two months from the date of its filing.

CIT is trying to move its trade and vendor financing businesses into its Salt Lake City-based banking unit after the company emerges from bankruptcy. The shift would allow CIT to use deposits to help fund loans. Still, it may be difficult for CIT to win the regulatory approvals needed, Egan said.

“Since the U.S. government is going to have to write down a big portion of a $2.3 billion preferred investment, I can’t imagine they’re going to be on the fast track for any regulatory approvals,” Egan said. “They’re persona non grata as far as the federal banking regulators are concerned.”

Video: What Happens if CIT Fails
Published: July 17, 2009
Description: Heidi Sorvino of Smith, Gambrell and Russell weighs in on what a CIT bankruptcy would look like.

TIMELINE: A Century of CIT, from St Louis to New York

CIT Group Files for Chapter 11 Bankruptcy Protection

November 1, 2009

Bloomberg - CIT Group Inc., a 101-year-old commercial lender, filed for bankruptcy with financing from Carl Icahn [an American billionaire financier, corporate raider, and private equity investor] after the credit crunch dried up its funding and a U.S. bailout and debt exchange offer failed.

New York-based CIT listed $71 billion in assets and $64.9 billion in debt in a Chapter 11 filing in U.S. Bankruptcy Court for the Southern District of New York. None of its operating subsidiaries, including CIT Bank, a Utah-based bank, were included in the filing, and operations will proceed as normal, CIT said in a statement.

The bankruptcy “will allow CIT to continue to provide funding to our small business and middle-market customers,” said Chief Executive Officer Jeffrey Peek in a statement.

CIT has $1 billion from Icahn to fund operations while it reorganizes. The credit line, to be drawn on until Dec. 31, will be a so-called debtor-in-possession loan.

The company had asked bondholders to exchange $30 billion in debt for new securities and equity. Icahn made a competing offer. After CIT’s offer expired at midnight on Oct. 29, the company said it was tallying 150,000 ballots.

The company’s debt holders had rejected the exchange offer, with 90 percent of holders who voted opting for the prepackaged bankruptcy plan. The plan will cut $10 billion in debt, and CIT seeks “quick confirmation” of its plan, CIT Group said in a statement.

CIT said it would try to emerge from bankruptcy two months from the date of its filing.

The case is in re CIT Group Inc., 09-16565; U.S. Bankruptcy Court, Southern District of New York (Manhattan.)

Video: Ripple Effect of Possible CIT Bankruptcy
Published: July 17, 2009
Description: Fifth Street Financial President and CEO Leonard Tannenbaum and Wall Street Journal Money and Investing Editor Ken Brown on how the possible bankruptcy of CIT Group is already having an impact on the retail and manufacturing industries

Big Lender in Historically Huge Bankruptcy

November 1, 2009

UPI - CIT Group Inc. filed Sunday for bankruptcy protection, a move analysts said could cost U.S. cost taxpayers $2.3 billion.

CIT, a major source of credit for small and mid-size businesses, said in a statement it hoped to reduce its unsecured debt from about $30 billion to about $20 billion by using a "prepackaged" bankruptcy process, The Washington Post reported. The process would allow the 101-year-old company to emerge from Chapter 11 bankruptcy by the end of 2009, the newspaper said.

By filing one of the largest bankruptcies in U.S. history, CIT became the first firm to fail after being bailed out by Washington in 2008, the Post said.

The plan calls for CIT bondholders to recover 70 cents on the dollar but the U.S. government would recover nothing because bondholders would receive new notes and equity while Washington's $2.3 billion investment in CIT was in the form of preferred shares.

CIT lends to about 1 million companies.

"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small-business and middle-market customers, two sectors that remain vitally important to the U.S. economy," CIT Chairman and Chief Executive Officer Jeffrey M. Peek said in a statement.

CIT will be controlled by debt-holders after the reorganization, the Post said.