So after all that drama – the sky falling on small businesses, the need for the government to watch out for deflation, the view that CIT would kick off another round of bank failures – the lenders went and negotiated a capital infusion to buy some breathing space:
Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.
CIT would receive $3 billion from some of its main bondholders, though at an initial rate of about 10.5 percent.
The affected parties were able to work something out? Will miracles never cease?
One minor note of caution: to the extent that the bondholders are themselves Too Big To Fail institutions, we are really looking at government money through the back door. But no reason to let this get us down.
The big success is that the government publicly refused help and not only did the sky not fall, the debtors thought about their interests and put something together on their own. It would, of course, have been much easier for all involved if the Treasury had simply cut a check and let everyone carry on as before. But it turned out that government aid was not necessary.
Most of the market commentary seems to be focused on the size of CIT relative to the firms that have been bailed out, with the conclusion being that there is some threshold of safety below which a meltdown is acceptable. At least, that’s my take from the Washington Post’s main graphic; that, or CIT is Earth and Lehman is Jupiter:
Unfortunately, there seems to be less focus on the question of whether government intervention was ever necessary. To have any relevance the graphic assumes that Lehman should have bailed out and there is some critical mass of between the two sizes that is the threshold case. If true, this observation would argue powerfully for making a law that no American financial firm can be larger than $x – whatever threshold amount brings the government to its knees. But government intervention isn’t that simple, and its application has never been as convincing as “we must bail out any organization larger than $x.”
Suppose, for example, that Goldman and Morgan had been left to their fate in September. The creditors would not have had the resources or the coordination to put together a rescue outside of bankruptcy; things happened too quickly, and the scope of the problems would have been too large. But so what? Would some entity have paid some amount of money for 25,000+ Goldman employees, a bunch of office buildings, and all that letterhead with the ugly font? Of course they would.
It’s hard to shake the suspicion – and I have had it since those days in September – that the bailout has less to do with the health of the US economy going forward than with the health of the net worth of the politically relevant. Whether CIT’s shares are owned by the owners in June 2009 or some entirely new set of owners is hardly a matter of national interest, but it’s terribly important to Jeff Peek. The government seems to realize this now; it’s just another way of saying, to paraphrase Simon Johnson, that no one in DC cares about Jeff Peek. Goldman is and was no different, except Hank Paulson simply could not bring himself to imagine a state of the world in which the Goldman share registry was cleaned out. Shame.
