TOPICS > Economy

Taxpayers’ $2.3 Billion ‘Gone’ in CIT Bankruptcy

November 2, 2009 at 6:35 PM EDT
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The recession claimed another major financial institution, as lending giant CIT filed for bankruptcy after months of struggling to keep the company, which funds about 1 million small- to medium-sized businesses, afloat.

GWEN IFILL: There was even more fallout from the financial crisis today, after century-old commercial lender CIT filed for bankruptcy. It came after months of struggles to keep the company afloat, even after the Treasury Department ponied up $2.3 billion to bail the company out last December. CIT has been an important lender to small and midsize businesses, and theirs is the fifth biggest bankruptcy in U.S. history.

Michael de la Merced has been covering the story for The New York Times, and he joins me now. Welcome.

MICHAEL DE LA MERCED, “The New York Times”: Thank you, Gwen.

GWEN IFILL: So, Michael, how big is this bankruptcy, really?

MICHAEL DE LA MERCED: It’s one of the biggest in American corporate history. And what really concerned people is, as you said, the fact that so many small and midsized businesses really depend on CIT for its financing. There aren’t that many companies that specialize in that sort of lending. And when CIT ran into trouble this summer, there were a lot of retailers, a lot of restaurants, a lot of manufacturers who were genuinely panicked, because they didn’t know what they would do if CIT were pushed into bankruptcy, and more likely at that time, a bankruptcy that would have liquidated the company.

GWEN IFILL: Now, when you say small and midsized businesses, we’re not talking necessarily about the mom-and-pop store down the street. Give us an example.

MICHAEL DE LA MERCED: Well, one of the most notable examples is actually Dunkin’ Donuts, which relies on CIT for a lot of its franchises. And that just shows the breadth of the companies that CIT services. You do have the mom-and-pops, but you do have big companies that are reliant on the specialized financing that CIT Provides.

GWEN IFILL: Now, when CIT came back to the federal government for a second effort for a loan, they were denied. They were clearly deemed not too big to fail. How do you gauge the impact of allowing a company like CIT to go bankrupt?

MICHAEL DE LA MERCED: Well, clearly, the government thought that companies like Citigroup and Bank of America were too big to fail, because they said that those pose systemic risks for the national and the global economy, whereas, with a firm like CIT, there are a lot of small and midsized businesses that depend on it, but the government thought at the time that it could find a solution in the private markets, and that it didn’t need additional help from the government. It already got the $2.3 billion. And, at that time, the government just said that enough is enough, and let’s let the company’s own investors see if they will help out.

GWEN IFILL: Well, if this is the private-market solution the government was talking about, what happens to the $2.3 billion that the Treasury lent to CIT in the first place?

MICHAEL DE LA MERCED: Well, unfortunately, the bankruptcy will save a lot of people from paying, but not taxpayers. That $2.3 billion is gone, because it came in the form of stock — preferred stock, actually — and that usually gets wiped out in bankruptcy.

GWEN IFILL: So, if you are a CIT bondholder, what happens? Do you get anything back?

MICHAEL DE LA MERCED: Yes, you do actually. You get about 70 percent of your holdings back. And that actually made a lot of investors feel pretty good about this so-called prepackaged bankruptcy. It was almost unanimously supported. And this was after the company had tried for months to persuade these investors to back this reorganization plan.

Timing the bankruptcy

GWEN IFILL: Now, Michael, we have been reporting on the CIT what feels like a slow spiral for a long time. Why was bankruptcy a good idea this weekend, when it wasn't a good idea, say, six months ago?

MICHAEL DE LA MERCED: Well, there is a time element to CIT's bankruptcy filing. It had about 800 million of its bonds coming due between yesterday and tomorrow. And the company was really hard-pressed to pay those down. So, at this point, it had lined up the support that it needed from many of its creditors. It had gotten about $5.5 billion worth of additional financing, which could help it out in bankruptcy, whereas, three months ago, it would have been pushed into the courts without a plan. And that would have meant an almost certain liquidation. And that would have been disastrous for its creditors, for its customers, who didn't really have time to prepare. There were a lot of retailers that were busy lining up their holiday orders back in July. And, if they weren't sure of their financing source, then they would be left dumbstruck.

GWEN IFILL: Does leadership change, do the people at the top change when a company goes through something like this in this case?

MICHAEL DE LA MERCED: In this case, yes. Jeff Peek is the CEO. And he's a former high-level executive at Merrill Lynch. He was actually in line to become its next CEO several years ago, but he lost out. So, after a couple of years, he ended up at CIT. And he tried to make it into a really big financial player.

For most of its history, CIT was a pretty sleepy company. It was lending to restaurants, retailers, mom-and-pop shops. But, under Mr. Peek, it tried to become the next Merrill Lynch. It became something of an investment bank. It started making subprime loans, student loans. And it got caught by the financial crisis. And, given all of that, Mr. Peek has said that he's going to step down by the end of the year. And the company's new owners, who will be its creditors, have pretty much said, that's what they expect.

Becoming more stable

GWEN IFILL: But its banking business stays intact, largely, doesn't it?

MICHAEL DE LA MERCED: Yes, it does. The problem with CIT was that it relied on the capital markets. It relied on issuing debt at its primary source of financing, as opposed to just a regular banking operation. And the regulators have told the company that it needs to move to something more stable, like a bank. So, yes, its bank operations will stay the same. And, in fact, the company is going to try to rely more on its bank unit for its operations, to make sure that it doesn't hit the sort of cash crunch.

GWEN IFILL: Now, when we say bankruptcy here, we don't mean that CIT is going out of business. In fact, it's already on track to come out of bankruptcy. When?

MICHAEL DE LA MERCED: By the end of the year. It is filing what it's called a prepackaged bankruptcy, in which case it already has a plan of reorganization, which is supported by the vast majority of its creditors. So, basically, it goes to court. It tells the judge that: We already have a plan. The creditors are on board. We would like to be out in about a month to two months. So, they're hoping to be out by the end of the year.

GWEN IFILL: Michael de la Merced of "The New York Times," thanks so much for joining us.

MICHAEL DE LA MERCED: Thank you, Gwen.

GWEN IFILL: You can learn more about the winners and the losers in the CIT bankruptcy on our Web site,