Sunday, November 01, 2009

Oh C#$T!

The news of the day will likely focus on the CIT bankruptcy. CIT is another one of those enormous financial conglomerates that provides a tremendous amount of financing to small and medium businesses. The company contends that its daily operations will be unaffected by the bankruptcy, but it won't be long before they start tightening lending standards and shrinking their book of business. If you really want to have a good time tomorrow watch the common stock of CIT which should go to zero, but may not b/c it's become a favorite of daytraders everywhere.

"One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program ... The government investment is likely to be wiped out ...

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co."

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Via 24/7 Wall St. the FDIC continues to go easy on the banks and let them alter the classification of many troubled commercial loans.

"New guidelines for examining commercial real estate loans issued by the FDIC appear to allow examiners to go easy on banks as they account for what would be, under many circumstances, considered non-performing commercial real estate loans. This may help banks with their balance sheets and solvency, but it also misleads bank investors and the public about the seriousness of the huge problem in the commercial real estate lending business.

The new FDIC directive says ”Financial institutions that implement prudent CRE (commercial real estate) loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classification.”

All that does is distort and hide the seriousness of the problem. It is a problem that is likely to ruin a number of banks. Putting it off does not alter its threat to the banking system."

I couldn't agree more. By changing the rules in the middle of the game we will ultimately reduce investor confidence in our banking system regardless of what the banks' financial statements say.

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Cheers!

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