SHAREHOLDERS LOSE...MANAGEMENT AND BONDHOLDERS WIN...Apparantly it happens all the time in situations like this..

Jim Sinclair’s Commentary

They are missing the point entirely. It is not whether or not a shuffling of paper and flushing the stockholders will stave off bankruptcy.

The real point is that CIT must be financially able to operate as a viable lender and ready factor to Middle American businesses.

Failing that, middle American business implodes in small to medium sized enterprises because big banks will charge them to death and not even deal with the majority.

CIT’s Failure Could Threaten Financial Sector’s Overall Recovery
October 01, 2009
Daniel Harrison

Just as the financial services industry seems to have made it past the worst of the economic meltdown, one small lender now threatens to reverse that trend. CIT Group (CIT), a lender to small and medium sized businesses, appears to be on the brink of collapse for the second time this year.

CIT Group averted bankruptcy over the summer, when it secured a $3 billion loan with its bondholders, and managed to tweak a giant tender offer for debt maturing shortly thereafter. The move served as a mere stopgap however, since the lender had a $2.9 billion negative cashflow position at the end of June this year.

With the moment of truth at hand once again, insiders say that CIT is attempting to prioritize nearer-term debt holders, a move which would dilute common stock holders by around 95 percent, leaving them almost wiped out.

Wednesday, traders pushed up the cost of CIT’s credit default swaps by 4 percent, to 26 percent; the implication is that the lender has a 45 percent chance of defaulting on its debt within three months, and an 85 percent chance of defaulting on its debt by 2014.

Meanwhile, CIT is also rumored to be recommending that bondholders approve a pre-packaged bankruptcy plan in case the new debt-exchange doesn’t go through.

Whatever the outcome, it’s clear that CIT doesn’t have the financial muscle to protect all parties involved

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