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In a series of articles between July 13 to July 20, I warned investors away from the shares of small business lender CIT, insisting that they were the province of speculators who must be willing to lose everything, adding: "Personally, I expect CIT will ultimately declare bankruptcy." The firm did just that yesterday; this morning, if you are still holding any CIT shares that were not bought today, it is a full certainty that you are underwater on your "investment."

What this means for investor-speculators
CIT shareholders should now consider that their shares are worthless -- the overwhelming likelihood is that they will be wiped out. Junior bondholders will receive equity in the "new" CIT.

If you are still considering speculating on CIT shares before the shares are delisted, I strongly advise you against it -- there is no edge to be had in that game.

What this means for small businesses and the economy
While the overall effect of CIT's bankruptcy on the economy won't be significant, this is another blow for small businesses that don't have the same access to capital markets as large companies.

CIT wants to exit a prepackaged bankruptcy by the end of year, but that sounds extremely aggressive; in any event, it has already reduced its lending substantially this year. Unfortunately, large financials JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and General Electric (NYSE: GE  ) don't look that eager to take advantage of this opportunity.

What this means for taxpayers
If you're feeling smug about not having punted on CIT shares, don't. The U.S. government sank $2.3 billion of taxpayer funds into CIT through the TARP program. Odds are excellent the investment will be entirely wiped out, along with the common equity.

One redeeming factor here is that the government didn't make a follow-up investment -- that would have been throwing good money after bad. The other is that we are finally witnessing a high-profile example of capitalism being allowed to function properly -- something the government should have encouraged initially by denying CIT any aid whatsoever.

As we emerge from the recession, this is exactly the time to buy these stocks.

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Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the other companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2009, at 8:16 PM, jeyner777 wrote:

    Do you recomend buying junior bonds for this bank and if so, where can I find them?

  • Report this Comment On November 02, 2009, at 9:06 PM, TMFAleph1 wrote:


    Thanks for your interest.

    I don't recommend this strategy unless you have experience and expertise in distress investing.


    Alex Dumortier

  • Report this Comment On November 03, 2009, at 9:59 AM, Burt2004 wrote:

    "The other is that we are finally witnessing a high-profile example of capitalism being allowed to function properly -- something the government should have encouraged initially by denying CIT any aid whatsoever."

    Right on.

  • Report this Comment On November 03, 2009, at 10:51 AM, mikecart1 wrote:

    In 1 sentence someone explain what CIT is today? I see it is starting over. Is it just in transition to get the Q if you know what I'm sayin'?

  • Report this Comment On November 03, 2009, at 11:54 AM, madhat007 wrote:

    not many comments by fools the bottom line? Nobody cares! Investors, citizens, taxpayers! why not...unlike the three comments above, the government's failure to protect the taxpayer's investment and accept the prepackaged bk by cit executives shows me how our elected reps don't get it...They spent hundreds of billions in loans and guarantees for the group of nine, and now for american small business and only investing 2.3 billion, they decide to throw in the towel in the name of capitalism are you kidding me? maybe Goldman or boa or jp morgan can come in now and get the companyu for 10 cents on the dollar and the governemnt loses another 2.3 billion....nothing compared to the twenty billion that's gone for investing in autos the 200 billion going to be lost in the gses...and the american people don't hold these executives accountable...bottom line the government

    should pay the bondholders according to the terms of the bankruptcp and then take over the company..and get our investment back. why didn't the government do a reorg like citi bank converting the preferred into common and then guarantyee the debt...i guess there arent enough political bigwigs involved in cit..even so the government should be passing on lower interest rates to small business and cit was just another group of thieves that should be put out of it's misery and the government should go direct to small business! We can't even get oversight to even schedule a hearing as to why the government should lose it's entire investment..maybe it is because the key players in oversight are clueless!

  • Report this Comment On November 03, 2009, at 1:12 PM, Burt2004 wrote:

    I have a better idea: Government should take over every business in every sector to make it cheaper for all.


    Government can't run the private sector better than the private sector can.

  • Report this Comment On December 11, 2009, at 1:08 PM, bridgette107 wrote:

    Doesn't the company have to abide by bk rules by alerting the investors and allowing time for for a "meeting of creditors and investors"? I had almost nothing in a but this seems really arbitrary on the bk courts behalf.

  • Report this Comment On December 11, 2009, at 2:16 PM, alexxlea wrote:


    have you...

    been hiding...

    for the past...

    few years...

    Please tell me you are joking bridgette...

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