Thursday, July 16, 2009

Lehman, Again, Must We?

“A shut-down in rational decision making”

Good afternoon. In today's call we will continue to use the word unprecedented to describe our environment. As a Company, we have never seen a change as abrupt as the one that has occurred in our E&C market since early September.

The first break came in mid-September when demand dropped as a result of the meltdown in the financial markets….—Steven Berglund, CEO Trimble Navigation; February 3, 2009

Trimble Navigation is, for readers who don’t know the company, the Garmin or Tom-Tom of the agriculture and E&C (engineering and construction) businesses.

Steve Berglund, for readers who don’t know him, is about as straight-talking a CEO as they make.

And it was Berglund’s comments about the credit collapse from the company’s February conference call—especially “the first break in mid-September”—that played in our minds as we considered the following headline on our Bloomberg:

CIT Says U.S. Bailout Unlikely as Talks End, Studies Options With Advisers

CIT, for readers who don’t know the company, is to the retailing and manufacturing businesses of America what Lehman Brothers—whose collapse triggered that “first break in mid-September” of 2008—was to hedge funds and commercial real estate developers.

And it was the collapse of Lehman Brothers that triggered the credit crisis Steve Berglund, in that same February call, described as forming “two distinct periods” in 2008:

Total year 2008 really consisted of two distinct periods. The first nine months were recession conditions and difficult....
The sharp break in the fourth quarter represented a major loss of confidence by businesses which constituted our primary customer business base.

This resulted in businesses across the U.S. and Europe cutting back dramatically on investments. In practical terms, the E&C market has shut down rational decision-making while awaiting events.

Now, we hear at NotMakingThisUp are not suggesting CIT's problems will have any impact on Trimble Navigation. If CIT goes down, it will not be the engineering and construction business that will “shut down rational decision-making.”

Rather, it will be thousands of small and middle market and large companies that borrow money and lease equipment from CIT that may well see a “shut down in rational decision-making.”

For CIT lends to manufacturers and wholesalers and distributors and importers and retailers and technology companies, and broadcasting, publishing, security, gaming, sports and entertainment companies.

And it provides credit to Small Business Administration borrowers.

In addition, CIT does business with “all of the U.S. and Canadian Class I railroads,” according to the CIT 10K. It leases hopper cars to ship grain, gondola cars for coal, open hopper cars for coal, and center beam flat cars for lumber through CIT.

And CIT leases aircraft to airlines—23 aircraft placed in 2008, and 114 aircraft on order at the end of 2008—and it finances parts for defense companies.

And woe be the retailers who finance their accounts receivable through CIT—$42 billion worth in 2008—and the small commercial businesses who lease office equipment financed by CIT.

When Lehman went down, the Feds claimed they couldn’t get involved, even while they were preparing the necessary documents to take over AIG, the collapse of which would have brought down the world (see
“Widespread Panic, Starting Today” from September 18, 2008).

CIT may not bring down the world, but its failure, we think, could well trigger an echo of the Lehman collapse.

Why the Feds are not prepared to help—a shut down in rational decision making in and of itself—we can’t fathom.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

CIT has no (significant) deposit base, and that can and will be protected by the FDIC. The Feds could expropriate the business and sell it to JP Morgan (to write back the value the following quarter as they did with WAMU to the tune of some $30b) or they could just use Paulsonesque moral suasion to ensure the Morgans, Citis and Wells of this world take over the lending to all these small and large companies. Why the need to bailout bond and equity investors yet again?

Troy Peterson said...

I can "fathom" one BIG reason:

Goldman had $1.5Bln drawn against a $3.0Bln secured credit facility. Goldman reported no material exposure, which means they likely own north of $3.0Bln long (unsecured) cds positions.

This CDS insurance would be rendered worthless if the government gave CIT the same funding terms extended to GE (as any rational person would have expected). Since Goldman has secured debt that is likely to see a full/majority recovery, it will maximize its profits if the CIT bankruptcy is disorderly and messy.

This is not hard to figure out, its not hard to fathom. Goldman made $3.4Bln last quarter, I predict they will make at least that just on the CIT bankruptcy/CDS.

Tahoe Kid said...

Too bad CIT employees are not members of the UAW. Then there would be no question about the merits of a rescue-only the amount of money the US Government would want to throw at them.

Dean said...

And this is why Doug Kass is so spot on when he outlines the necessity to preserve "precious cash". The gubmint simply adds nothing but more uncertainty to the marketplace as they continue to utilize The Magic Eightball when making some of the most important financial decision in nearly a century! (N.B. "Concentrate and ask again") Yep, that'll do it.

Jeff Matthews said...

I'm not sure what "Dean" is talking about.

I like "Troy's" conspiracy-theory, and agree with "Tahoe Kid" on the union angle.

But "Anonymous" couldn't be more wrong about CIT. It's not a matter of bailing out bond and equity investors--the equity is already wiped out, while the bonds can be wiped out by the Feds.

It's about saving the CIT customer base from a seize-up, which already appears to be happening, as per today's WSJ:

"Worries about the fate of CIT Group Inc. cascaded through the retail and manufacturing industries on Thursday, as companies stopped shipments and businesses worried about cash being tied up at the lender should it file for bankruptcy-court protection."

That is no good for anybody.


Opinion Dalek said...

I think there's a big difference between "will destroy the global financial system" and "loan book can be sold off to similar banks".

Kevin said...

Troy is on to something here... The Goldman cronies wearing the white hat of government service have long since given up the facade of their allegiance. Taxpayers be damned, GS will thrive. (Blankfein fiddles while Rome burns...)

I guess saving CIT wouldn't do much for the financial sector - other than remove a competitor. CIT is not the awesomely important systemic counterparty that either Lehman or AIG was. All CIT does is aid and abet the growth of the "real economy" - which apparently isn't at all important to the folks in DC. What's more important is that the broken system remain in place! Somebody once told me the reason the US govt needed to save the financial sector was because the banks act as the lifeblood of the economy - greasing the wheels of commerce to allow small businesses and ideas to grow into the businesses that define American entrepenuership and innovation (and, um, employers). But I guess the one institution that acts as the primary lender to these small businesses is unimportant. Because... ?

Maybe it's because Uncle Sam told you he would either create or SAVE 3.5 million jobs. And this is going to go a long way to saving the 3.5 million jobs that he otherwise would have CREATED had things not been so darn lousy. It could have been worse, you know. Had the ol' Uncle not acted (or actually acted, in this case), 100 million jobs would have been lost. So, on a net-net basis, we're sort of even here.

In the meantime, Uncle Sam is going to concentrate on supporting every free enterprise leech he can find. And if his plans to force feed the expansion of union rolls doesn't work, well don't worry, he has this sweet health care thing going on that is going to bankrupt the country!!

Anonymous said...


Well, that was an interesting 72 hours! Watching CIT go from near-bankrupt on Friday to possibly restructured today has been fascinating. I found this fascinating because I can fathom why the government decided not to help CIT, and I think this has to do with “bailout fatigue”. Given the Treasury’s $2.3 billion TARP infusion and the Fed’s $954 million TALF securitization, my opinion is that maybe Geithner, Bernanke and company decided that they’re tired of throwing more “good money after bad” and to let CIT investors such as Morgan Stanley, Wells Fargo, and Goldman Sachs negotiate their own solutions to CIT’s liquidity issues without further government intervention. I see nothing irrational now in the government’s decision to let CIT fail because, by doing so, they forced CIT’s investors to take action and prevent CIT from going bankrupt. Quite a risky move that was, but very shrewd in the end, if you think about it. My opinion could be wrong, however.

p.s. – I recently had an A-HA moment after re-reading your post. Back in October of 2008, guess where CIT stashed $600 million of its cash? The Reserve Primary Fund, run by the now-bankrupt-and-soon-to-be-liquidated Lehman Brothers! In the spirit of your mantra, Jeff, I am not making that up – readers can see for themselves by checking out CIT’s 3Q08 results.

p.s. 2 – I wonder how much of CIT’s commercial paper (CP) is sitting in money market funds and whether those money market funds did anything to sell what is now, in effect, CIT’s “near- worthless” CP?

Anonymous said...

"Why the Feds are not prepared to help—a shut down in rational decision making in and of itself—we can’t fathom."

I admire you for keeping this post in your blog now that CIT has been rescued without help from the Feds.

I am surprised but also proud that it took a Democratic administration to put their faith in capitalism. Unfortunately this adds credence to the conspiracy theory folks who think the Republican bailouts were not for the good of the economy but just to support Republican campaign donors.

Jeff Matthews said...

Anonymous re the CIT restructuring: Yes, it was saved without the Feds. And a good thing it was saved.

As for keeping the blog up despite the outcome--well, that would be sort of a North Korean thing, pretending it never happened, right? The fact is, it would have been very bad for CIT to go down. And the fact was, in hindsight, as you point out, it didn't, despite the government not stepping in.

Regarding the politics/conspiracy theories of the thing, I have no opinion. But Jeff Peek probably did himself no favors dealing with the Feds. He's not exactly Everyman.


Anonymous said...

Let's see here, this month the "fact" government can't manage a parking garage (although it is really managed by a contractor who is best considered part of the private sector) "proves" that government can't manage a basic health care package (even though the government does a pretty good job on Medicare, at least compared to the shambles market forces have produced in non-Medicare U.S. public health), but right below that we are supposed to believe government could directly bail out a highly technical lending business efficiently? Jeff, you must be making that up.