CIT files bankruptcy, $2.3 billion in taxpayer funds likely lost

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CIT Group, the giant small business lender, filed for a "pre-packaged bankruptcy" Sunday night carrying some $71 billion in assets, after last ditch attempts to avert such an outcome failed. The development will keep the doors open at the 101-year-old small business lender, but there will be heavy losses, including, most likely, $2.3 billion in taxpayer bailout funds.

CIT survived the Great Depression, but it couldn't weather the Great Recession. Its demise may be a sign that the wave of crumbling, sub-prime mortgage-infected financial giants has not ceased.

CIT's bankruptcy filing will be the fifth largest in U.S. history, after Lehman Brothers, Washington Mutual, Worldcom and General Motors. CIT's board of directors met Sunday and approved the Chapter 11 procedure, to be taken in New York's Manhattan bankruptcy court. The bankruptcy will be "pre-packaged" so as to allow the company to keep operating and emerge by the end of the year.

"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," Jeffrey M. Peek, CIT's Chairman and CEO, said in a statement. "This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence."

The filing comes after the CIT made a last-ditch debt-exchange offer, which the company's bondholders rejected. On Friday, billionaire Wall Street gadfly Carl Icahn -- who claims to be CIT's largest debt-holder -- agreed to support the prepacked bankruptcy filing. Icahn had previously lobbied for CIT's outright liquidation, but failed to convince other debt-holders to support him.

"Approximately 85% of the Company's eligible debt participated in the solicitation, and nearly 90% of those participating supported the prepackaged plan of reorganization," the company said, adding, "approximately 90% of the number of debtholders voting, both large and small, cast affirmative votes for the prepackaged plan."

CIT's Utah bank, which has about $10 billion in assets, wouldn't be part of the bankruptcy filing, according to media reports.

First taxpayer loss; shares worthless

Bondholders are looking at receiving about 70 cents for every dollar in company debt. The company's common shares will likely be worthless.

The bankruptcy will mark the first time taxpayer funds will be lost since the federal government began its economic stimulus package to help pull the country out of the worst downturn since the Great Depression. CIT received $2.3 billion as part of the Troubled Asset Relief Program, or TARP in December 2008. Those funds helped stabilize CIT, but the giant lender was undone thanks to billions in bad student loans and sub-prime mortgage loans.

While the loss of taxpayer funds is significant, the Wall Street Journal pointed out things could have been far worse. "Despite likely losing its $2.3 billion investment, the U.S. government saved possibly billions more in losses when it rebuffed further bailout requests over the summer, after concluding CIT's demise wouldn't threaten the broad financial system," the paper observed.

Out of bankruptcy by year's end

Dealbook
suggests that CIT's filing will test "whether a financial company can survive the Chapter 11 process."

"Bankruptcy has long been considered a death knell for lenders, whose very existence depends on the confidence of its creditors and customers," wrote Michael J. de la Merced. "The company's struggles have been watched with interest and trepidation by analysts and the thousands of small and mid-sized businesses that borrow from CIT."

Dealbook reported that CIT will be represented in bankruptcy by the investment bank Evercore Partners, the law firm Skadden, Arps, Slate, Meagher & Flom and the turnaround consulting firm FTI Consulting.

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