CIT files for bankruptcy, among the biggest in US

CIT Group, a lender to hundreds of thousands of small and medium-sized businesses, filed for bankruptcy late on Sunday, as the global financial crisis left it unable to fund itself and the recession clobbered its loans.

The bankruptcy, one of the largest in US corporate history, had been widely expected for months and is unlikely to provide a massive near-term shock to the financial system. But CIT's trouble could further weigh on the fragile US economy.

The bankruptcy is a blow for the US Government, which invested $2.33 billion (Dh8.56bn) in CIT in December through the Troubled Asset Relief Programme (Tarp) and will likely lose most of it. Taxpayers will receive money only after bank debt and bond investors are repaid. The bankruptcy would translate into the first realised loss for the government from Tarp, although it may recover some funds.

CIT had fought activist investor Carl Icahn, who said he was CIT's largest bondholder, over its future plans. But late last week the two resolved their differences. Most of CIT's creditors have already approved its reorganisation plan, and the company said it hopes to emerge from bankruptcy by the end of the year, around when Chief Executive Jeff Peek is slated to resign.

Getting through bankruptcy quickly is crucial for CIT if it wishes to keep its customers, which include Dunkin' Donuts franchisees and film producer Dark Castle Entertainment.

"The longer a financial institution stays in bankruptcy, the more the value of the business dissipates. It's faith and trust and perception that are so important for a financial institution," said Jack Williams, a bankruptcy law professor at Georgia State University College of Law.

CIT does intend to stay in business, and its operating subsidiaries were not part of the New York bankruptcy court filing. CIT is still making new loans and honouring commitments to fund customers, said people familiar with the matter.

Once CIT emerges from bankruptcy, it hopes to move businesses including vendor finance, which companies use to offer financing to their customers, and factoring, which helps companies finance their unpaid bills to customers, into its bank subsidiary. If regulators approve the move, CIT hopes to fund new loans and leases for those businesses with bank deposits.

S&P 500 stock index futures opened slightly lower on Sunday and the US dollar edged higher as news of the bankruptcy spurred traders to reduce risk-taking.

The bankruptcy filing is unlikely to crater financial markets, said Chip Hanlon, President of Delta Global Advisors in Huntington Beach, California, but he noted it is not a positive. "If anything it may be psychological and weigh on people's mind about how things are overall," he said.

CIT, which filed for protection under Chapter 11 in New York, plans to reduce its total debt by about $10bn in bankruptcy. As of the middle of this year, CIT and its operating units had $71bn of assets and $64.9bn of debt. That would make CIT's bankruptcy one of the largest in US history.

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