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.
