EconomicCrisis.US

CIT Group Inc.’s board of directors, in what would be among the biggest corporate bankruptcies ever, said Sunday it has approved the filing of a prepackaged reorganization plan.

The formal filing in U.S. Bankruptcy Court was expected to follow within hours.

CIT, a major lender to small and midsize businesses, has struggled to avoid collapse since the recession triggered billions of dollars in loan losses and the financial crisis cut the company off from its main source of financing.

“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” Chairman and CEO Jeffrey M. Peek said in a statement.
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In the early days of the credit crisis, a few of us on Wall Street and in the media, myself included, worried that the imminent blow to the markets and economy would come, not from mortgage-related debt, but corporate debt, specifically the debt used to finance the private-equity buyout boom.

We were definitely wrong about the timing, but there’s mounting evidence we were right about the problem.

The debt piled on companies amid the decade’s $1 trillion buyout boom is coming due. The only question is about the extent of the fallout. The day of reckoning could simply be disruptive for the parties involved, or it could bring down the whole economy in much the same way bad mortgages broke confidence in the credit markets, effectively grinding them to a halt.
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We’ve always been impressed by David Einhorn, the young manager of Greenlight Capital. Einhorn made our Ten To Watch list this past August for his prescient shorting and outspokenness about the shenanigans going on at Lehman. (His fund had been up by more than 20 percent in the first half of this year, fueled by his bearish bets; he had almost no long positions. Wonder how he is faring these days.)

In a speech to the Value Investing Congress yesterday (the speech was called, “Liquor Before Beer, in the Clear”), he paints a dim view of our financial system and the government’s role of enabler. Einhorn didn’t use the word bankruptcy, but he thinks the stimulus package is a “black hole” that, in the long run, will not produce long-term economic value. It’s all short-termism, so that elected officials can say they are doing something—and seek reelection.
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A year after the financial system nearly collapsed, the nation’s biggest banks are bigger and regaining their appetite for risk.

Goldman Sachs, JPMorgan Chase and others – which have received tens of billions of dollars in federal aid – are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.

That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.
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