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The Obama Administration is making a big mistake in not bailing out CIT
CIT (NYSE:CIT) shares are down sharply today after the company announced that the Obama Administration is not going to provide any more support or assist in the bail out of the major provider of financial services to approximately one million U.S. businesses.
Before I get into the implications of this new development here is some background on CIT:
CIT Group Inc. operates as the holding company for CIT bank that provides commercial financing and leasing products, and management advisory services to the small and middle market companies worldwide. Its products principally include asset based loans; secured lines of credit; operating, capital, and leveraged leases; vendor finance programs; import and export financing; debtor-in-possession/turnaround financing; acquisition and expansion financing; letters of credit/trade acceptances structuring; and small business loans.
The company’s services primarily comprise financial risk management; asset management and servicing; merger and acquisition advisory services; debt restructuring; credit protection; accounts receivable collection; debt underwriting and syndication; capital markets; and insurance services for small businesses and middle market customers. It serves clients in various industries, including transportation, particularly aerospace and rail, manufacturing, wholesaling, retailing, healthcare, communications, media and entertainment, and various service-related industries. The company was founded in 1908
The 101 year old CIT is about 1/8th the size of Lehman. However, I think that its failure will more severely impact U.S. economy than Lehman’s failure. CIT is the leading provider of financial services to “small businesses”. Small businesses have traditionally been a major net provider of job growth in the U.S. A bankruptcy of CIT and a possible liquidation could result in a vacuum in the amount of capital, which is available to small businesses. The likely result could be a contraction in the number of small businesses and obviously the jobs that are provided by small businesses. CIT’s failure would also likely stymie any increase in jobs for the economy that could be created by small businesses.
According to the SBA office of advocacy Small businesses:
• Represent 99.7 percent of all employer firms.
• Employ about half of all private sector employees.
• Pay nearly 45 percent of total U.S. private payroll.
• Have generated 60 to 80 percent of net new jobs annually
over the last decade.
• Create more than half of nonfarm private gross domestic
product (GDP).
• Hire 40 percent of high tech workers (such as scientists,
engineers, and computer workers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.3 percent of all identified exporters and produced
28.9 percent of the known export value in FY 2006.
• Produce 13 times more patents per employee than large
patenting firms; these patents are twice as likely as large
I believe that the Obama administration is making a big mistake in not bailing out CIT because it is a major provider of financial services to the very businesses that the economy is dependent on for job growth. This is especially because the bail out of CIT would cost only several billion which is a paltry amount when compared to the hundreds of billions that it has spent to bail out AIG and the banks and other financial institutions that it has already bailed out.
Investors should remain very cautious. My recommendation is that investors maintain 80% liquidity in U.S. Government debt securities, which have maturities of one year or less. The remaining 20% of the portfolios can be invested in emerging growth industries and companies and most especially those companies, which reside in the online financial sector. For more information on the bear market go to www.bearmarketnavigator.com. For more information on the online financial sector go to www.onlinefinancialsector.com.
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