The team of Treasury Secretary Tim Geithner and OCC chief John Dugan are trying to paint Sheila Bair and the FDIC as the villains in the CIT situation. CK this missive I just got from one of the members of the working press:
“The lobbyists are ready to string Bair up and claim this could be the end of every small business in America. The lefty academic types say it’s a terrible precedent, too small to care etc. I’m reading your newsletter on the matter right now.” Read our comment by clicking the link below:
What Do AIG and CIT Have in Common? Asset Deflation
The Fed and Treasury (and the lobbyists for the small business mafia) are trying to get a bailout a la the banks in terms of cheaper funding costs for CIT, but FDIC is right to say no. CIT’s bank, which we rate “F” by the way, has a whole $3 billion in assets. But the real issue is that the asset values of CIT and most of the financials are falling — and the markets know it. No amount of subsidy will fix this situation.
The trouble with CIT is the same problem affecting many financials, namely that the value of assets is now below the face value of the liabilities. As Nassim Taleb any many others have suggested, the only way to fix this is debt-for-equity conversion and asset write-downs. The policy of “extend and pretend” that is being used by the Obama Administration is going to soon run out of time. CIT illustrates the basic issue and one that we’ll be hearing a lot about in coming months. — Chris