“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Monday, April 14, 2008

CIT Is Too Important to Fail.

There were many bad decisions that were made in the banking and financial areas. The consequences reveal themselves daily. Jefferey Peek was an absolute disaster for CIT, but CIT is too important for thousands of businesses, to let it fail.

Commercial financing is a complicated vital business that is best not left to commercial banks who are mostly unqualified to understand the many businesses that are served by CIT and other commercial finance companies. CIT should be saved.


CIT is everyone's headache
Instability at the century-old finance firm could bring Wall Street's pain to Main Street businesses that depend on it.

By Marcia Vickers, contributor

(CNN) --
CIT Group's advertising slogan may sum up its problem: "At CIT, we are Capital Redefined." Thanks to its recent foray into subprime mortgages, CIT's capital has been radically redefined. On March 20 it was forced to draw down a $7.3 billion backup credit line. Its stock has plunged from around $60 a share earlier this year to $13 on April 9, and CIT shuttered its student loan business and is trying to sell off non-core businesses to keep afloat.

The decline of the century-old finance company has not gotten as much attention as the Bear Stearns bailout, but its instability could bring Wall Street's pain to Main Street. How? Factory owners, car dealers, dry cleaners, and many other businesses depend on specialty lenders like CIT for capital.

"Small and medium-sized companies struggling with cash flow are in for a hard time. Lenders may want them to shut down and liquidate their assets rather than work with them to refinance as in the past," says Kenneth Posner, a Morgan Stanley analyst.

When Jeffrey Peek became its CEO in 2004, CIT (CIT, Fortune 500) was a stodgy $9.5 billion (market cap) lender to the small businesses historically eschewed by Wall Street. (Its market cap is now $2.8 billion.) CIT obtained capital mostly from raising unsecured debt, using the integrity of its loans as collateral. Its steady performance was based on the loyalty its service commanded from its customers.

Peek, who headed the investment managers division at Merrill Lynch (MER, Fortune 500) and later financial services at CSFB, almost immediately started gussying up the company for growth. He created a health-care financing group and began lending to technology and media companies. But CIT also started selling mortgages to credit-risky folks, and it bought a student loan company right before the government cut subsidies last year. Also, CIT had increasingly been securitizing its loans and selling them off, making a sizable profit, but that market has now dried up. And its ability to raise debt from the capital markets has been deeply eroded as investors fret about CIT's borrowers' stability.

"Peek wanted to even out CIT's cyclicality by diversifying into consumer vs. commercial businesses," says Michael Taiano, an analyst at Sandler O'Neill & Partners. "His timing was obviously bad."

Mortgage fallout. CIT's problems didn't really come to light until last summer, when the mortgage meltdown began. Wall Street analysts say the company was slow to react, and some say it now needs to be bought by a company with ample liquidity if it's going to survive. GE Capital and community banks including Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500) are the suitors most frequently mentioned.

On April 4, two Chinese banks said they had backed off from purchasing CIT because of concerns that it couldn't continue to finance itself. A CIT spokesman declined to comment on that point, but told Fortune, "Our decision to draw down our bank lines ensures that our clients have the financing they need to operate and grow their businesses successfully."

Even CIT's direct competitors are rooting for it. Says Mark Sunshine, president and chief operating officer of First Capital: "We're hoping someone comes in and buys it. If it fails, it could take 3,000 or 4,000 businesses down. No one wants to see lives destroyed. It would be a train wreck."


  1. JUST PRINT MORE MONEY(Take care of the war debt too)

    The Inflation Solution to the Housing Mess

    April 14, 2008; Page A15
    Wall Street Journal

    The policy alternatives in the post-housing-bubble world are painfully unpleasant. In my view, the least bad option is for the Federal Reserve to print money to help stabilize housing prices and financial markets. Yes, use reflation to soften the pain for Main Street and Wall Street. If instead we let housing prices fall another 25%-30% – as predicted by the Case-Shiller Home Price Index – it's almost certain that Washington will end up nationalizing the mortgage business.

    So far, the Fed's lending programs have not provided adequate liquidity to financial markets: Reserves supplied to the banking system have grown at a tiny 0.6% annual rate since December. That's because the reserves the Fed is injecting by lending are effectively pulled out or "sterilized" by its sales of Treasury securities. The Fed has been selling these securities to keep the fed funds rate at the level targeted by its Federal Open Market Committee directives.

    Congress and the Treasury have proposed voluntary measures to help mortgage borrowers, but the impact on mortgage availability has been nil. As average house prices plummet – declining at a 23% annual rate over the three months ending in January – lenders are sharply curtailing access to mortgage-based, home-equity loans. The 15% of U.S. mortgage holders with negative equity in their homes have no access to credit, and 20% with marginal equity have limited access at best. Overall access to credit is contracting: Ask Americans trying to utilize home-equity lines or arrange student loans.

    Meanwhile, the collapse of house prices and the attendant damage to credit markets have become so severe that the Fed has been forced to create new policy measures at a fast clip, including the radical decision to take $30 billion worth of Bear Stearns' risky mortgages onto its own balance sheet, and to open the discount window to investment banks.

    The bottom line is this: The Fed could have watched a run on investment banks quickly turn into a run on commercial banks, or protected the creditors of investment banks (like the depositors of commercial banks) at the expense of Bear Stearns' shareholders. The Fed wisely chose the second alternative.

    Still, the Fed's intervention has done no more than buy a respite from the crisis in the financial markets. The monetary easing I'm recommending can occur by having the Fed print money to purchase mortgages directly, or purchase Treasury securities directly. The latter is probably more desirable because it adds higher-quality assets to the Fed's balance sheet. The Bank of Japan was also forced to reflate by printing money in 2001, after two years of a zero interest-rate policy failed to lift the economy out of a prolonged recession that had moved Japan to the brink of a deflationary crisis.

    Fed reflation – to slow the fall in home prices and alleviate the distress for households and lenders – carries many risks. But the alternative is to struggle with a patchwork of inadequate efforts to shore up mortgage markets, while the Fed sticks to its current tactic of pegging the fed funds rate without increasing the money supply. This, I would submit, is even more risky. It risks a severe recession that will only intensify the drive for reregulation of financial and mortgage markets after the election.

    Printing money is a radical step that enables the Fed to stop pegging the federal-funds rate and start increasing market liquidity directly. In any event, there is substantial evidence that the fed funds rate has been well above the equilibrium level. One piece of evidence is the accelerating deterioration in credit markets and the real economy that ensued even while the Fed cut the rate. Even more compelling, consider the sharp widening of the gap between the fed funds rate and the yield on three-month Treasury bills.

    That gap, usually close to zero, measures the intensity of demand for riskless assets relative to the Fed's target rate in the interbank market. At the time of the Bear Stearns crisis on March 16, the fed funds rate was an extraordinary 250 basis points above yields on three-month Treasurys. This corresponded to a "10 sigma," or ten-times-the-typical deviation from the mean event. Statistically, 2 or 3 sigma is a very unusual event suggesting, in this case, an unusually strong preference for riskless T-bills. Four or 5 sigma represents a serious risky event, and 10 sigma is an outright panic. Based on this gap criterion, the August 2007 crisis onset was a 5-sigma event, while the October 1998 LTCM crisis and the 1987 stock market crash were each 4-sigma events. This suggests that even at those earlier times of crisis there was less fear as expressed by a run into riskless Treasurys. Ominously, after dipping close to 5 sigma after the Bear Stearns crisis, the gap has crept back above 6 sigma.

    The Fed should announce its intention to add to its holding of Treasury securities in order to provide additional liquidity. It should cease pegging the fed funds rate while this policy is in effect. While there is no guarantee, direct injection of money holds some promise of alleviating the worst of the credit crisis. This means that, after the election, Congress will not feel justified in nationalizing mortgage markets.

    While there is a substantial risk that inflation may rise for a time – this would be the policy goal – monetization is more easily reversible than nationalization of the mortgage market. Meanwhile, Fed officials concerned about inflation should rethink their view that it is impossible to identify an asset bubble before it bursts.

    The postbubble period has yielded some very unattractive policy alternatives. They clearly underscore the rationale for having the Fed target asset prices – in a world where asset markets affect the real economy more than the real economy affects asset markets.

    Mr. Makin is a visiting scholar at the American Enterprise Institute.

  2. They are saving the money printing technique for funding the FICA shortfalls that are projected in ten years.
    The Fed will encourage "nationalizing" the mortgage markets, so that they come under the Regulatory Authority of the Federal Reserve.
    A Federally chartered private company.

    The Boner Class have scored another victory in the quest for "more power"

  3. Why are falling housing prices a problem? They're only a problem to those that want to sell. If you don't sell, you haven't lost a thing.

  4. Anyway, I think most people even with a 30% haircut from today's inflated prices are still ahead of the game.

  5. Metuselah: Why are falling housing prices a problem? They're only a problem to those that want to sell. If you don't sell, you haven't lost a thing.

    They're called Adjustible Rate Mortgages, and they were taken out with low teaser rates that are resetting now. Overnight, people are having to come up with an additional $1000 a month or more. They were warned about this when they signed the papers, but they were also assured that they could re-fi at a fixed rate before the reset. Well, it turns out that with falling prices no one wants to re-fi a mortgage for more money than the home is worth on the open market. So the folks are stuck. A lot of them are walking away, which makes the banks take it in the shorts and contributes to the empty house is one more competitor for a buyer, so it depresses prices even more. And you get a chain reaction.

  6. No down payment? It used to be a minimum of 10 percent.

  7. I read 3% on some of these loans, then the stuff aenea mentions. 3% down? That's ridiculous. But the overseers of the industry wanting to get the folk housed. Regulators wanting the banks to make unstable loans.

    Good time to be a buyer. Get yourself that 3 bedroom 2 bath condo in Vegas, built five years ago, for 105K. Nice digs. Live the exciting Vegas life.

  8. Prices here are maybe 5% off their peak. The market has definitely slowed, but I wouldn't be a buyer, not unless I see a good 25% adjustment, or general inflation catching up with stagnated home prices some years down the road.

  9. Take a look at This Life in lovely down Beijing. One good thing about living there is, you don't have to live long. Gonna shut down during the Games, so as to make a better impression, Potemkin Village style.

    General Potemkin's villages--
    There is a division among modern historians on the degree of truth behind Potemkin villages. While the tales of the fake villages are generally considered an exaggeration, some dismiss it as simply malicious rumors spread by Potemkin's opponents, though these historians argue that Potemkin did mount efforts to develop the Crimea and probably directed peasants to spruce up the riverfront in advance of the party bringing the empress by boat to the Crimea. For example, according to Montefiore, Potemkin's most comprehensive English-language biographer, the tale of elaborate, fake settlements, with glowing fires designed to comfort the monarch and her entourage as they surveyed the barren territory at night, is largely fiction. [1]

    Some Russian historians have a somewhat different view. Aleksandr Panchenko, an authoritative specialist on 19th century Russia, used original correspondence and memoirs to conclude that the myth of the Potemkin village has a basis in reality, as "Potemkin really did build mock towns and villages, but he never denied that they were theatrical sets." [2] Panchenko writes that "Potemkin's goal was to demonstrate that this vast region was already practically civilized, or was at least energetically becoming civilized," by showing a vision of what the area would become, including using screens on which villages were painted, and driving flocks of sheep each night to the next stop along the route.[3]

    Alternatively, it has been suggested that the close relationship between Field Marshal Potemkin and Empress Catherine made it likely she was aware of the fictitious nature of the villages. The deception would have thus been mainly directed towards the foreign ambassadors accompanying the imperial party.[4]

    Regardless, Potemkin had in fact directed the building of fortresses, ships of the line, and thriving settlements, and the tour – which saw real and significant accomplishments – solidified his power. So, while "Potemkin village" has come to mean, especially in a political context, any hollow or false construct, physical or figurative, meant to hide an undesirable or potentially damaging situation, the phrase may not apply to its original context.

    [edit] Modern Uses
    "Potemkin village" has also frequently been used to describe the attempts of the Soviet government to fool foreign visitors. The government would take such visitors, who were often already sympathetic to socialism or communism, to select villages, factories, schools, stores, or neighborhoods and present them as if they were typical, rather than exceptional. Given the strict limitations on the movement of foreigners in the USSR, it was often impossible for these visitors to see any other examples. [5] wiki

  10. That big picture in the illuminated billboard there, in the photo, that's the benevolent Party Chairman, I'd bet.

  11. Isn't there a law or a constitutional provision about private citizens like Jimmy Carter running around negotiating with foreign folk like Hamas?

  12. He lives in a bungalow, flies easyJet and 'dries out' three times a year... the man who founded Ikea and is worth £15bn

    He now lives in semi-retirement with his wife Margaretha in a villa in Switzerland. The couple are often seen dining out in cheap restaurants and haggling over prices in the market.

    He always does his food shopping in the afternoon, when the prices in his local market start to fall.

    Recently, a statue of him was erected in his Swedish home town, and he was invited to cut the ribbon.
    It was reported that instead he untied it, folded it neatly and handed it to the mayor, telling him he could now use it again.

    Explaining his frugal nature, he said:
    "I am a bit tight with money, a sort of Swedish Scotsman, But so what?".

  13. Housing Woes in U.S. Spread Around Globe

    Still, the problems in Britain pale next to those of Spain and Ireland. Residential investment accounts for 12 percent of the Irish economy and 9 percent of the Spanish economy, compared with 5 percent in Britain and 4 percent in the United States, according to the I.M.F.

    The glut of housing has brought new construction to a standstill, driving up unemployment and dimming the prospects for two of Europe’s stellar performers over the last decade.

    “We’re waking up from the property dream and finding ourselves in a situation where prices are falling in Spain for the first time,” said Fernando Encinar, a founder of, a real estate Web site.

    In Spain, more than four million homes were built in the last decade, more than in Germany, Britain and France combined. Average house prices tripled in parts of the country, as Spain’s torrid economy attracted immigrants and Northern Europeans snapped up holiday homes along the Costa del Sol.

    Now, though, thousands of those houses stand empty. The I.M.F. estimates that property is overvalued by more than 15 percent. With mortgages drying up and prices swooning, speculators who once viewed Spanish property as a no-lose proposition are confronting hard reality.

    Economists have been busy cutting their growth forecasts for Spain, with a few saying that it may stagnate this summer. BBVA, a leading Spanish bank, forecasts that unemployment will rise to an average of 11 percent this year, from 8.6 percent in 2007.

    After a 16-year boom that was interrupted only briefly after the Sept. 11 terrorist attacks, Ireland has the most overvalued housing market among developed countries, according to the I.M.F. In its recent economic outlook, the fund calculated that prices are 30 percent higher than they should be, given Ireland’s economic fundamentals.

  14. Swings are from boom to bust, here.

    It is definately bust time, now.

    And you guys and 3% down, why so high?

    Cash back at closing, that was a come-on, for a while there.

    As for buying or selling, the average length of time to own a house is the US is seven years.
    Now I've had mine for three times that, but my behaviour is not the norm. By any means

    So in any given year, about 14% of the housing stock is in transition.
    A two year shake out would effect about 25% of the home owners in the US.
    Tens of billions in lost value, in equity if not liquidity.

  15. A lot of commercial paper at my wife's bank is being downgraded, the collateral being real estate.

    So they are calliing loans and revamping terms in a downward cycle of contraction.

  16. (from the typical right-wing rag,
    "The New Republic:")

    Wright was a former Muslim and black nationalist who had studied at Howard and Chicago, and Trinity's guiding principles--what the church calls the "Black Value System"--included a "Disavowal of the Pursuit of 'Middleclassness.'"

    New Republic: The Agitator -- Barack Obama's Unlikely Political Education

    A Reverend Philips put the problem to him squarely when he learned that Obama didn't attend services. "It might help your mission if you had a church home," he told Obama. "It doesn't matter where, really. What you're asking from pastors requires us to set aside some of our more priestly concerns in favor of prophesy. That requires a good deal of faith on our part. It makes us want to know just where you're getting yours from."

    After many lectures like this, Obama decided to take a second look at Wright's church. Older pastors warned him that Trinity was for "Buppies"--black urban professionals--and didn't have enough street cred. But Wright was a former Muslim and black nationalist who had studied at Howard and Chicago, and Trinity's guiding principles--what the church calls the "Black Value System"--included a "Disavowal of the Pursuit of 'Middleclassness.'"

    The cross currents appealed to Obama. He came to believe that the church could not only compensate for the limitations of Alinsky-style organizing but could help answer the nagging identity problem he had come to Chicago to solve. "It was a powerful program, this cultural community," he wrote, "one more pliant than simple nationalism, more sustaining than my own brand of organizing.

  17. WBBM: Monkey Comment: Obama Delegate Not Quitting - UPDATE
    Typical Hispanic/Pollack fined $75 for saying neighbor's kids were playing in the tree
    "Like Monkeys"

  18. When she answers, Pastors' mike went off. Well, he was tapping the mike on the altar, and fiddling with the switch, when it comes back on, Mabel having hung up, and he is saying, "There's something wrong with this mike."
    Hearing this, the congregation chimes in, like trained monkeys, "And also with you."


    DAMN! You got to watch what you say these days!

  19. Hillary Unwinds Whiskey in one hand, beer in the other. Hillary lit up a bit would be More Fun Than A Barrel Of Monkeys

  20. The picketers spoke in passing to Democratic Reps. John Larson of Connecticut, Leonard Boswell of Iowa and James Clyburn of South Carolina.

    Clyburn, a member of the House leadership, told union members, "I'm for seating them all," as he climbed into a sport utility vehicle. "We've got to get it done," a union member shouted to Clyburn.

    "We will," Clyburn responded.

    Florida/Michigan Delegates

  21. Isn't there a law or a constitutional provision about private citizens like Jimmy Carter running around negotiating with foreign folk like Hamas?

    Bobal, Jimmy Carter's say-so and seventy-five cents will get you a donut at the cafeteria.

  22. Israel's secret service has declined to assist U.S. agents guarding former U.S. President Jimmy Carter during a visit in which Israeli leaders have shunned him, U.S. sources close to the matter said on Monday.


    Another source described the snub as an "unprecedented" breach between the Israeli Shin Bet and the U.S. Secret Service, which protects all current and former U.S. presidents, as well as Israeli leaders when they visit the United States.


    "I think there's no doubt in anyone's mind that, if Israel is ever going to find peace with justice concerning the relationship with their next-door neighbors, the Palestinians, that Hamas will have to be included in the process," Carter told U.S. television network ABC News's "This Week."

    Security Help

  23. Yeah, I agree, aenea, it's just unseemly.

  24. Delta Air Lines Inc. and Northwest Airlines Corp., squeezed by record high fuel prices and a slowing economy, are combining in a stock-swap deal that would create the world's biggest carrier.

    The boards of both companies gave the deal the go-ahead Monday.

    Delta (DAL: 10.48, +0.47, +4.69%) said the combined airline, which will be called Delta, will have an enterprise value of $17.7 billion. It will be based in Atlanta, and Delta CEO Richard Anderson will head the combined company.

    Merger Announcement

  25. Berlusconi once said he agreed with the United States regardless of Washington's position.

    Berlusconi returns To Power

    This is not a burlesque. This is what one needs in an ally, and a wife.

  26. Mr Howard said he continued to grieve for parliamentary colleagues who had lost their seats, and learned two things while on a recent trip to the United States.

    One was that the Labor Government was praising the strength of the Australian economy overseas, but criticising the Howard Government's economic performance at home.

    The other was that his diplomacy needed work. Asked at a function at the George H. W. Bush presidential library in Texas to name his top three achievements, he started with gun control.

    Speaking his Mind

  27. The proposed merger of Northwest and Delta is reminiscent of Sears and Kmart. The airlines are having a hard time competing these days and in the coming years we may hear a debate to reregulate the industry in order to assure an essential service.