Monday, November 2, 2009

Bank Bankruptcy Bonanza

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

CIT filed for bankruptcy in New York on Sunday. This is the fourth biggest bankruptcy in U.S. history, just behind number three General Motors (Lehman Brothers was number one). The CIT bankruptcy filing followed nine bank failures on Friday, which coincidentally involved the 4th largest bank failure this year. The FDIC Insurance fund which pays off depositors of failed banks is itself bankrupt. CIT itself is a bank holding company and became one last year in order to TARP funds. It will not be countered as a failed bank since it is expected to come out of bankruptcy.

The amount of money the government put into CIT was a small $2.3 billion (compared to $45 billion put directly into Citibank). CIT was not deemed too big to fail. It has actually been on the verge of collapse for several months now and almost went under in July. Lots of parties have been holding it up, including Goldman Sachs, with temporary measures since then - and for good reason. CIT is the largest loan provider for small and medium sized business in the U.S and 300,000 retail outlets are at least partially dependent on it for their merchandise. Imagine the impact on the holiday shopping season (goods are already at the stores by this point) if CIT had failed in the summer? The U.S. economy would have taken a major hit since retailing is its largest industry.

The federal government's indifference to CIT puts the lie to Bernanke, Paulson and Geithner's claims that the TARP government bailout money was to restore lending and support the economy. The biggest U.S. lender to small and medium size businesses has been allowed to fail. Before the failure, its was drastically cutting its loans to try and stay afloat. CIT lent $11.3 billion in the first half of 2008, but only $4.4 billion in the first half of 2009. While this was taking place the large banks, who got copious amounts of TARP money to increase lending, were cutting consumer credit sharply. So the U.S. has moved toward an economy where only big businesses and the rich are supplied with adequate credit (a third-world model). There is no way an actual economic recovery can take place given this situation.

Of course the government will probably come up with a plan for the CIT post-bankruptcy. I imagine a Cash Loans for Clunker Businesses program where huge amounts of money are lent to insolvent subprime businesses that don't have a chance of every making any money (businesses with Washington connections will be at the top of the list and get 99% of the funding). Bernanke is probably starting up the printing presses right now to pay for it. Just as a reminder, Bernanke claims he and the other central bankers 'saved' the financial system last year and he has been heralded by Obama for preventing another depression. With 115 bank failures this year and counting, a major financial company bankruptcy, and an insolvent FDIC bank insurance fund, the financial system isn't looking so 'saved' lately. Well, at least we've got the stock market, which just had its best seven month performance since 1933 . Hey, wasn't that during the Great Depression?

NEXT: Markets Roller Coaster Ride Powered by Media Hype

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:


The banks are basket cases.