These Shares Are a Speculation

By Alex Dumortier, CFA
July 13, 2009 | Comments (1)

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Will business lender CIT Group (NYSE: CIT) fail? Will the government support it? Those questions are coming to a head as confidence in the lender's viability appears to be waning. On Friday, investors sent CIT shares down by 18% (as I write this, shares are down another 15%-20%). Compounding its funding woes today, Moody's (NYSE: MCO) cut CIT's debt rating to B3 -- six notches into speculative grade territory.

Waiting for a lifeline
CIT has already received $2.3 billion in TARP funds. However, with a debt repayment due in August and $2.7 billion to repay this year, the key to CIT's survival may be an FDIC authorization to issue debt with a government guarantee. The FDIC's Temporary Liquidity Guarantee Program (TLGP) has enabled banks including JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Goldman Sachs (NYSE: GS) to issue debt at very attractive rates.

CIT has been waiting for the Federal Deposit Insurance Corp.'s approval for several months. However, at $75 billion in assets, it falls shy of the $100 billion level that qualifies a financial institution as "systemically important" (too-big-to-fail, in plainer language) and, at this stage in the financial crisis, there is little congressional support for propping up failing institutions unless absolutely necessary.

Furthermore, extending the list of TBTF institutions would send a very unhealthy message; the repercussions of a CIT failure are unlikely to match those that followed Lehman's bankruptcy.

CIT shares are now officially a speculation
Owning CIT shares isn't in the mad hatter category of owning "old GM" shares (where a total loss is certain), but it has clearly become a speculation: The risk of substantial (or even total) capital loss is not insignificant. My sense -- but it is no more than an educated guess -- is that the administration will certainly let CIT fail if it comes down to it.

Caveat emptor, indeed.

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Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. Moody's is a Motley Fool Stock Advisor recommendation. Moody's is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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  • Report this Comment On July 14, 2009, at 9:47 AM, dchabino1 wrote:

    CIT is to small and medium businesses what Leahman is to big businesses. I expect CIT to eventually fail, and this will strongly reverberate throuhout small and medium retailers in particular. There are other sources for these retailers out there, but the more capital is limited the more these businesses will fail. Much of the effect has already been in place for the past year, but the failure will just cause more damage. I don't at all support any furter bailouts, but the events from this failure are just an economic reality. CIT has been a lifeblood for many many retailers.

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