CIT lends again, and we take the risk

CIT Group has exited bankruptcy and plans to ramp up lending to small business, but it's taking very little risk in doing so.

By TheStreet Staff Dec 15, 2009 4:04PM

TheStreetBy Dan Freed, TheStreet


CIT Group (CIT) has emerged from its quickie bankruptcy, and is doing its part for America by lending to small business.


"We will continue to support our small business customers as they look to grow their businesses, which will create thousands of jobs and help the US economy recover," said Chris Reilly, president of CIT small business lending, in a statement. CIT said it had not forgotten its earlier pledge to write $500 million in new Small Business Administration loans, while waiving a $1,000 "packaging fee."


It warms the heart that CIT would do this for us. Though some might say it's the least it could do, after its bankruptcy cost the Treasury $2.33 billion under the Troubled Asset Relief Program, or TARP.


Bing: More on CIT Group


Why wouldn't CIT start lending again? The loans are 75% guaranteed by the government -- 85% if they're for less than $150,000.


Chris Flowers, a former Goldman Sachs (GS) whiz turned private equity tycoon, got himself in trouble earlier this year for describing his plan to buy failed banks like IndyMac as "the government has all the downside and we have all the upside." CIT was smart enough not to put that phrase in its press release, but it seems like they got the same deal.


CIT spokesman Curt Ritter wouldn't say how much money CIT will earn if all the loans it makes pay off.


"We will earn an acceptable return on our capital," he wrote via e-mail.


They may also win points with the Federal Deposit Insurance Corp., which could come in handy as CIT tries to get permission to start writing loans out of its Utah bank. The FDIC ordered CIT to stop making loans out of the bank in July.


"It's a good political move, if nothing else, to help ingratiate them with regulators," says Kevin Starke, an analyst at CRT Capital.


Starke wrote in a report last week that "the vast majority of CIT will prove to be, and should be valued as, a controlled runoff of the current loan portfolio."


But CIT still holds out hope of becoming a viable lender again, and as General Electric (GE), which competes with CIT in many lending businesses, has proven, a really good way to lobby these days is to talk endlessly about all the jobs you're creating and all the loans you're making. Nevermind if you're shrinking your balance sheet.


So CIT lends $500 million, while risking just 25% of that, or $125 million, while making "an acceptable return," and scoring political points. Sounds like a good deal for them.


Considering it just came out of bankruptcy, one might ask why the government lets them in on this deal.


CIT's press release notes it was "designated a 'Preferred Lender" by the SBA because of its strong historical record.


In case you just did a double take, as I did when I read that, wondering how a bankruptcy filing is evidence of a "strong historical record," Hayley Matz, an SBA spokeswoman straightened me out, by noting that the loans will be made through a CIT unit called its Small Business Lending Company (SBLC).


"The SBLC was not a part of the bankruptcy proceedings. SBA has been talking to the SBLC and monitoring them closely. While the SBLC has been affected by their parent company's troubles -- which is why the SBLC slowed down their SBA lending in fiscal year ‘09 -- we believe the SBLC is in strong financial shape to ramp up their SBA lending," Matz wrote via e-mail.


CIT making loans is probably a good thing. And the only reason it went through bankruptcy while Citigroup (C) didn't is that it wasn't too big to fail, and Citigroup was.


So, let's hold the outrage. But let's also keep in mind that when CIT says its lending again, doing its part, creating jobs and so on, we know how that sausage was made and it owes us at least as much as we owe it.


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