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Small-Biz Lender CIT: Knocking On Heaven's Door
By Marc Tracy
Day 4 of the CIT watch dawns. On Day 1, we explained the situation: prominent small-business lender CIT is on the verge of bankruptcy, unless a government bailout saves it, as Lloyd Chapman of the American Small Business League advocates. On Day 2, we noted that CIT actually has not been making that many small-business loans since last fall's financial meltdown. And on Day 3, our Anonymous Banker weighed in with the prediction that the government would not save CIT--which even then was looking to be true.
So today is Day 4 for us. And this morning's news is that, last evening, CIT formally announced that it failed to persuade the government to step in. The government's thinking appears to be that, both due to CIT's comparatively small size and relative lack of interconnectedness, as well as the economy's and financial sector's burgeoning strength, the company's collapse would not have major ripples. (That said, as the article notes, a bankruptcy would all-but-certainly wipe out the $2.3 billion that you, the taxpayer put into CIT as part of TARP.)
Not having major ripples, of course, is not the same thing as no ripple at all, and today the New York Times points to all that retailers stand to lose in the event of CIT's collapse. The key here is less CIT's role as a typical small-business lender and more as an intermediary in a practice known as factoring (OPEN Forum--snazzy redesign, by the way!--posted on factoring about a month ago, and we linked). Its role is to pay vendors in business-to-business transactions cash essentially immediately after a sale goes through, allowing the buyer to take the standard 30 to 90 days to make its full payment while giving the vendor the benefit of instant cash; it also guarantees vendors that they will be paid even should the buyer go bankrupt. All told, CIT's factoring affects 300,000 retailers around the country, most of them with under $50 million in annual sales, many of them much smaller.
So what would happen if CIT disappeared today? (And we're not catastrophizing--that's really quite possible.) Lots of suppliers likely wouldn't get paid, and lots of retailers wouldn't be able to purchase (and hence sell) merchandise. And yet, fact is, we will be surprised--pleasantly surprised, but surprised--if CIT remains legally solvent one week from now. Interesting times we live in.
Comments (0)July 17, 2009 9:21 AM
