Friday, November 6, 2009

The Falling of a Large Shoe

If you are a small business, dependent on lenders to provide you a bridge loan from the time your buyers order your products to the time when you manufacture and deliver those goods (or the “factoring business” – selling accounts receivable to fund your operations) or to stock your shelves with goods to sell, this economic collapse has been a real bitch. All the talk of “the recession is ending” and the surge in the stock market has to appear strange to a businessperson who has been either getting loans or selling receivables routinely for decades, but who has had that credit dry up and blow away for the last year plus. Sorry faithful employees for decades, your job has been discontinued pending the end of the credit freeze or sorry faithful employees for decades, we are folding the tent.

The HUGE failure of TARP wasn’t even the untracked government give-away or even the horrific bailout of institutions that are now creating mega-millionaires among their traders and bankers, feeding on the distressed economy and the misery of others. It is that the government pushed capital into these large institutions in order to unfreeze the credit markets (but failed to attach a string that mandated this result!), and these ingrates used that capital for their own accounts, shoring up their balance sheets and buying their leveraged way back into the equity markets. What they most certainly did not do is create an unfrozen credit market.

Without government-backed lending in the housing market, residential real estate would be even more moribund than it already is now. The automotive business got direct cash infusions at every level of the government. GMAC – a lender for car loans, GM and Chrysler – the obvious manufacturer, and even the consumers – under the “cash for clunkers” program. It seems that to get meaningful government assistance in this country, the key is to fail BIG. Further and generally, publicly-traded companies usually have access to easier channels of debt financing – bonds, commercial paper and even some bank lines (because they have credit ratings), which funding sources are simply not available to most small businesses.

The financial biggies are not the only ones playing with and hording their cash. It seems all the rage to horde these days. The cover story on the November 2nd Wall Street Journal notes: “In the second quarter, the 500 hundred largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments… ‘Everyone is hording cash,’ says Carsten Stendevad, head of Citygroup Inc.’s financial-strategy group. He and others call that a hangover from the financial crisis of a year ago, when companies couldn’t raise money or had to pay much higher rates than usual.” Well, folks, that good for the big public players, but the little companies that account for 40% of America’s jobs still can raise or borrow money!

The has been one company that has catered to small businesses, factoring and providing these bridge loans as its core competency – CIT Group, Inc. On November 1st, this most significant player in this arena filed for protection under Chapter 11 (reorganization) under the U.S. Bankruptcy Code. Management released this statement: “With the overwhelming support of its debtholders, the Board of Directors voted to proceed with the prepackaged plan of reorganization for CIT Group Inc. and a subsidiary that will restructure the Company's debt and streamline its capital structure.”

The November 2d “The Chapter 11 filing is one of the biggest in U.S. corporate history, following Lehman Brothers Holdings Inc., Washington Mutual Inc., WorldCom and General Motors Corp., points out The Associated Press. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion…” The fifth biggest, to be precise (not quite the order of magnitude of the biggest), and one of the largest providers of lending capital to small businesses all across the United States. Taxpayers invested $2.3 billion in CIT last fall, and that money is gone… but the government support for this institution paled in comparison to what it provided to the biggest of the big, financial institutions that have grown fat (at least for now) in the recent market rise.

There is a modicum of hope in this “restructuring.” With 85% of its bondholders participating in a vote to take 70 cents on the dollar (the equity players are relegated to 6 cents on the dollar), at least this is not a free-fall Chapter 11; there is order to the chaos, CIT had little choice than to pull the bankruptcy trigger since a slew of bonds were about to mature this week, and the lender had no chance to pay those off or restructure under the current marketplace. The holding company (and not most of its subsidiaries) filed for bankruptcy, but whether this causes a ripple of smaller bankruptcies among the small businesses, particularly retailers who have relied on CIT to buy inventory, remains to be seen.

Looking at this side of the marketplace is not particularly sexy and some of these financial blogs aren’t the most exciting pieces to read, but the impact on our daily lives from news like this can be very significant. With consumers hanging on to seeming locked pockets and unemployment ratcheting up month-by-month (breaking the magic 10 percent number for October – 10.2%, to be precise, announced November 6th), the failure to restore the ordinary and routine credit markets threatens to send this economy back for another round of painful recession, no matter how the political economists spin their financial analysis. The government better figure this one out sooner rather than later or watch the value of the “stimulus” package disintegrate in a sea of new bankruptcies, job loss and further erosion in consumer confidence.

I’m Peter Dekom, and I approve this message.

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