“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."
Friday, July 17, 2009
CIT and the Economic Ignorance of the Obama Administration
Nothing demonstrates to this writer the depth of real world ignorance of the academics running the Obama Administration than CIT. The media is almost as bad as none of them has a clue about how an old line factor even works. I heard Senator John Sununu pontificating about the market and the thousand of local banks that do account receivable financing who will supposedly step in and do what CIT seems to be failing at. I heard some other geniuses saying that CIT just did not get it done. Bullshit on both counts. CIT is the canary in the coal mine.
CIT is one of the last of a breed. Factoring is the buying of a receivable the day it is created by a wholesaler or manufacturer. A factor can advance 80%, 90%t or 150% on a receivable accelerating the cash flow of a company. A local bank can provide receivable financing but that is not factoring. The bank takes the receivable as collateral, a factor buys the receivable. When a customer of a "factored" company receives an invoice, the invoice tells him that he owes the money to the factor and not the manufacturer or seller of the goods.
You see, CIT is not just a bank to the thousands of job creating small businesses that it serves, it is their credit department. It is their accounts receivable department. It controls the arteries of commerce in some businesses, especially to retailers. CIT determines which department stores get approved for credit in the goods that they purchase and receive. Let me give you an example.
Suppose a furniture manufacturer, if there are any left, in North Carolina wants to sell patio furniture to Wal-Mart. Manufacturing is a year round operation, selling it is not. Big department stores get to be big , not because they pay promptly, but because they don't. They pay on time but on their stated terms, not the manufacturers. They work off of their suppliers working capital.
A factor sits down with a manufacturer, examines their business plan and the credit worthiness of the manufacturer's customers and creates a financial plan to finance the manufacturing cycle and take care of the credit decisions for the company. Once a company is factored, the company sells the invoice to the factor when the goods are shipped, and the burden of collection shifts to the factor. Credit losses now belong to the factor. No local bank does anything remotely related to factoring.
CIT is a huge reserve of knowledge and experience of the retail trade in the US. Those retailers depend on the credit decisions made by CIT on their ability to get suppliers to ship to them. The suppliers depend on CIT to provide the financing. The customer list of a factored company is almost more important than their financial sheets.
CIT is more important to the US economy than Chrysler. It takes months for a company to get set up with a factor, years to establish a relationship. It is a tough business at the best of times. Criticizing CIT for getting in trouble durning this crisis is like assigning blame to fire fighters for going into burning buildings. That is what they do.
Let this one go down at your own peril.
When asked about CIT, White House spokesman Bill Burton told reporters that President Barack Obama had set high standards for granting aid to companies. "A lot of that had to do with whether or not they could show themselves to be sustainable in the long term," Burton said.