Commercial Lenders

As the credit markets started to close for over a dozen companies, including Prudential Financial, CIT Group, and GMAC Inc., the firms began to get their funding for debt financing from retirees-reports Bloomberg in an August 2009 article. For example, between December 2007 and 2008, CIT sold $827 million of debentures created specifically for individuals at a time when the credit market was experiencing “disruptions,” the global economy was falling apart, and the company’s credit ratings were experiencing downgrades. One analyst, David Hendler, says that the financial firms engaged in a “pump-and-dump scheme in a bear market” and that they chose to “offload risk” without having to field too many questions.

Although the retail bond market usually lets companies sell debt at lower yields than what institutional investors call for, the notes can trade at higher relative yields when a company starts to lose its fortune. There is also a lack of liquidity that occurs. This can make it hard for senior investors-especially if their savings are tied into the smaller issues. It didn’t help that late last year CIT, a 101-year-old commercial lender, filed for Chapter 11 bankruptcy after a US bailout and debt exchange offer failed and its funding dried up.

Also, while some debentures-specifically, CTI InterNotes-came with “survivor’s options” that lets an issuer repurchase them at par after the owner passes away, the Internote issuers are entitled to limit how much can be exercised each year through the option to the greater of 2% of the outstanding principal amount or $2 million. Ex-US Securities and Exchange Commission head Arthur Levitt has described this type of financing as an “affinity-type” approach that focuses on the elderly.

The Financial Industry Regulatory Authority has been investigating whether the risks were adequately disclosed to investors or whether securities fraud occurred.

Related Web Resources:
CIT Debt Sold to Widows Has Fine Print Pimco Resists, Bloomberg.com, August 21, 2009
CIT Files Its Bankruptcy Plan, The Wall Street Journal, November 3, 2009 Continue Reading ›

Many investors were told that investing in CIT preferred stock and bonds was safe and appropriate for them. Some sales pitches were based on the $2.3 billion government bailout of CIT. This is just another example of material misrepresentations and omissions in the sale of fixed income products, which have become rampant on Wall Street.

There are some reports that misrepresentations were made to sell CIT securities to smaller institutions and individuals even as Wall Street and large institutions were unloading their own holdings of CIT. This is similar to claims made concerning the sales of auction-rate securities and recommendations prior to the Lehman, Fannie Mae, and Freddie Mac debacles.

This week, the 101-year-old commercial lender announced that it is filing for bankruptcy in an attempt to get rid of $10 billion in debt. Not only has CIT run out of funding, but also a US bailout and debt exchange offer faltered.

CIT says it will continue to stay in business and that bankruptcy will allow the commercial lender to keep providing funding to middle-market and small business clients.

With $64.9 billion in debt and assets valued at $71 billion, it is unlikely that the government will recover a lot of the $2.3 billion in taxpayer money that the commercial lender received under the Troubled Asset Relief Program.

CIT says bondholder support will allow it to get out of bankruptcy pretty quickly-two months is its current estimate. A prepackaged bankruptcy plan has been approved.

CIT’s prepackaged plan outline stated that majority of noteholders would get new notes at 70 cents on the dollar in addition to new common stock.

CIT is the country’s biggest lender to mid-sized and small businesses. CIT funds some 1 million businesses. It is the number one aircraft financier and the number three biggest US railcar-leasing firm. CIT finances trades in North America, Europe, and Asia.

Related Web Resources:
CIT Files Bankruptcy; U.S. Unlikely to Recoup Money, Bloomberg.com, Nov 1, 2009
Lender CIT files for bankruptcy, Portland Business Journal, November 2, 2009
Troubled Asset Relief Program, Federal Reserve
Chapter 11 Bankruptcy
Continue Reading ›

Articles Posted in Commercial Lenders

CIT Group Inc, Prudential Financial Inc., and GMAC Inc. Looked to Retirees for Debt Financing When They Lost Access to Credit Markets

CIT Group Bankruptcy Exposes Fraud Against Many Investors Who Were Sold Preferred Stocks And Bonds