CIT Group's Woes Shatter Illusions of Recovery

There often comes a time when the Purveyor of a falsehood, regardless of the nature of said falsehood, is simply no longer able to maintain the lie. Bernie Madoff's moment came as the world's financial markets crashed in unison, triggering redemption requests that he could not Ponzi away. Many parents, determined to shield their children from unpleasant aspects of the world, are able to construct a fantasy world for the child that is devoid of any true responsibility. The problem is, the Wonderland will inevitably be crushed by some inescapable reality of life. Similarly, the Government has for several months now treated Americans as if they were small children - too fragile or weak to be told the truth about the state of this economy. The woes of CIT Group Inc. (CIT) however, represent inexplicable evidence that, contrary to the Administration's propaganda, all is not well with the economy.

Throughout 2009, we have been told repeatedly that credit markets are "thawing", and that things in general are starting to return to normal. Such statements hold water only if one is referring to the top few percentiles of corporations as determined by creditworthiness and, more importantly, sheer size. The Market has understood this distinction quite well, and the past several months have largely been a discovery process, whereby the Market has attempted to discern the precise location of this Administration's proverbial line in the sand. Ideally, the Government's implicit backing of the financial system would hold the Market at bay. What has happened however, is that participation in a vast swath of Government programs has been interpreted as an Explicit Government guarantee. The consequences of being denied participation in these programs can be seen with startling clarity, as CIT Group has rapidly descended to the precipice of bankruptcy.

That a company the size of CIT group is unable to access it's traditional funding sources, absent an explicit government guarantee, is a direct blow to the Government's assertion that the financial markets have recovered. The Market has decided to test the Government's willingness to support an institution of CIT Group's size, daring the Obama Administration to let this company fail. Such represents the Catch-22 that the federal government faces: to allow a failure of this size signals to the Market that all corporations smaller than CIT are effectively on their own. To save CIT however, simply drags Geithner et. al further into the business of guaranteeing literally every segment of the economy and the financial system.

Most importantly we think, is the message that the Market is sending with it's denunciation of CIT Group. This Company is the primary lender to thousands of American small businesses - in other words Main Street. When the Market loses faith in CIT, it is essentially losing faith in the ability of thousands of small businesses to service their obligations to CIT Group. Many of these business owners, preoccupied with the immense job of running a business, may not be aware of the troubles at CIT Group. In the event of a CIT bankruptcy however, this reality will be immediately apparent, it will disrupt a large segment of Main Street in abrupt fashion, and most importantly, it will render useless the Government's ability to maintain it's lie that "everything is ok".

*no position in CIT Sphere: Related Content

GM's Bankruptcy to be "Expedited" Through Kangaroo Proceedings

Last night, the day after the fourth of July - and a Sunday - Judge Robert Gerber, a federal bankruptcy judge for the Southern District of New York, penned an opinion which approved the sale of Old GM's viable assets to New GM. The sale will proceed pursuant to Section 363 of the Bankruptcy Code; a section that specifically calls for an "expedited" process when, basically, it can be shown that a lengthy visit to bankruptcy would be particularly destructive to the value of the failed entity. Section 363 is also especially convenient in the event that a Government - let's say of the Federal variety - wishes to avoid the rather Inconvenient issues of creditor's rights and the like that would arise under a more prolonged set of proceedings. Of course, the latter explanation is purely speculative in nature.

We've included the full text of the order below, as we found it to have some significant humor value; primarily this is the product of Judge Gerber's stating of obvious circumstances in very candid terms, for example:

"Importantly, the DIP financing to be furnished by the U.S. Treasury and EDC is the only financing that is available to GM. The U.S. Treasury (with its Canadian EDC is the only entity that is willing to extend DIP financing to GM. Other efforts to obtain such financing have been unsuccessful."

"While the Liquidation Analysis projected some recoveries for secured debt and administrative and priority claims, it concluded that there would be no recovery whatsoever for unsecured creditors. The Court has no basis to doubt those conclusions. The Court finds that in the event of a liquidation, unsecured creditors would recover nothing."

"In Chrysler, Judge Gonzalez discussed at great length the evolution of the law in this area and its present requirements,28 and this Court need not do so in comparable length. " *way to throw Judge Gonzalez under the bus for creating a skewed set of precedent

"Bondholder Parker (so far as the Court can tell, the only one of the 850 objectors) objects to the 363 Transaction on the additional ground that the U.S. Government was not authorized to use TARP funds to assist the auto industry, and hence that the 363 Transaction is unlawful. The Court agrees with the United States Attorney that the issue of the U.S. Treasury’s lending authority now is moot, and that Mr. Parker lacks standing to raise the issue. Thus the Court does not need to reach the third issue." *a nice bit of political dodging on Judge Gerber's part; failing to address the argument itself in politician-like fashion.

"Many GM stockholders, understandably disappointed that the 363 Transaction will leave them with no recovery, have voiced objections. Once again, the Court is sensitive to their concerns, but cannot help them. GM is hopelessly insolvent, and there is nothing for stockholders now. And if GM liquidates, there will not only be nothing for stockholders; there will be nothing for unsecured creditors. Under those circumstances, GM stockholders cannot claim to be aggrieved by the transactions before the Court here."

In case anyone glazed over the section above, a federal bankruptcy judge has referred to GM as being "hopelessly insolvent". Not only is this funny, but it is also extremely obvious in light of the fact that the US Government was the only entity willing to offer DIP financing to GM. This little fact arose in Judge Gerber's opinion, and explains why the SDNY is no more than President Obama's puppet at this point; the federal Government has stated it's willingness to provide DIP financing only in the event that the bankruptcy proceed according to Section 363, leaving the Court without any real voice of it's own. Judge Gerber did give appearing independent the old college try though.


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Lear Bankruptcy: More Than Meets the Eye?

Lear Corp.'s imminent bankruptcy filling, prefaced by it's failure to make a $38M bond payment, is unlikely to even dominate the news cycle for more than 15 minutes; probably due to the fact that, in the wake of GM "collapsing into the Government's arms", it isn't too shocking that the world's largest supplier of automotive interior products would have some issues. We also think that Joe-sixpack is probably unaware that Lear Corp. booked $17.8B in revenue in 2006. Let's not fool ourselves: this is a Major Bankruptcy.

The interesting aspect of Lear's trouble is that the majority - roughly four out of every five dollars - of Lear's revenue is attributable to business conducted Outside of the United States. Additionally, GM only accounted for 23% of the Company's revenue in 2008. This all said, we would argue that Lear is much more a barometer of the Global Auto Market than of the US auto market. Are we talking about re-de-decoupling?

Fortunately for auto maker's supply chains, Lear has apparently already arranged $500M in DIP financing; a hurdle that quality visitors to bankruptcy court seem to have had no problem with recently (think Smurfit-Stone). Ultimately though, we see this as a process that will have to play itself out again and again until an actual recovery can occur. Clearly, Lear accumulated too much debt during the heyday of US auto sales; as a company judged by the market to possess a sound underlying business, it is getting what amounts to a pass for this period of profligacy. For many zombie corporations that exist today in America however, there will be no pass; there will be no DIP financing, and there will be no collecting $200. These companies will vanish into the wind, leaving behind a wake of destruction in the form of unpaid creditors. Hundreds of billions of dollars worth of capital that once fueled corporate growth, will essentially be lost. That is what a deleveraging process looks like.

*no positions, thankfully

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Chrysler Tests the Independence of the Supreme Court

We recall a certain first day of Consitutional Law class where the professor questioned us regarding the strength of the legislative, judicial, and executive branches of the federal government, relative to one another. We quickly reacted and, in idealistic fashion, proclaimed something along the lines of "The United States Constitution, in it's brilliance, created three separate yet equally powerful branches of Government. The wonderful document forced the implementation of a variety of checks and balances such that no one branch could act outside of it's legally proscribed bounds. Therefore, all three branches are of equal power!" That may technically be true, said our Professor, but in the end, the President commands every branch of federal law enforcement, in addition to the United States military. In contrast, he reminded us, each Justice of the Supreme Court is assigned a lone US Marshall, carrying a single handgun. If there ever erupted an actual struggle for power, he questioned, who do you all think would prevail?

Fortunately, branches of the federal government have never literally gone to arms against each other. However, based upon the example set during the Great Depression by Franklin Roosevelt, it is not impossible for politics to enter the decisions of the 9 Supreme Court Justices. As a refresher, Roosevelt was having trouble implementing every aspect of his New Deal. The trouble was, the Consitution only provided Congress the ability to pass laws based upon an explicit set of justifications. One of those justifications, the ability to regulate interstate commerce, was commonly cited as the basis for Roosevelt's New Deal measures. At the time however, the Supreme Court was a slightly conservative leaning body that in fact struck down several New Deal programs as being unconstitutional on the basis that they had nothing to do with interstate commerce. Roosevelt's plan: announce that he would like the Supreme Court to be a 12 person panel, with the additional three members arriving via Presidential appointment. The threat of vote dilution and embarassment was successful, as it prompted the current members of the Court to "behave" and not make things difficult for Mr.Roosevelt.

Today's "stay order" (below) is significant because it shows that the Supreme Court is at least considering whether it wants to behave as an independent body, as opposed to a rubber-stamping Kangaroo Court that would allow a sitting President to destroy decades of precedent regarding a creditor's rights in bankruptcy proceedings. The interesting thing about the stay order is the sheer indefiniteness of it; the Court has literally halted proceedings until further notice. With every day that passes however, the storyline gets increasingly compelling.

As we see it, the Court only has two choices: To follow the political will of a popular President, or to follow the law. To choose the former would be a complete repudiation of the Court's independence, in our most humble opinion.

In Police Pension v Chrysler

Publish at Scribd or explore others: Law & Government Business & Law bankruptcy Chrysler

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Rate of Job Losses Slows, But For How Long?

This morning, the Department of Labor, Bureau of Labor Statistics, in a preliminary estimate, reported that US nonfarm payroll employment fell by 345,000 in the month of May. This report marked the most substantial departure from the rapidly accelerating decline in payrolls that has transpired in each month since the collapse of Lehman Brothers. Economists and analysts, understandably focused on the deciphering of trends, will be sure to note that while the US economy is still losing jobs, it is no longer losing jobs at an increasing rate. (Calculus geeks might note that while the second derivative "flatlined" several months ago, this month's data marks the first time that the anticipated change in the first derivative has occurred). Considering this positive development, we find it ironic that the major job loss inflection points have been marked by the bankruptcy of a major US corporation. We wonder then, to what degree will the collapse of GM continue to affect the labor markets?

There are numerous and obvious distinguishing factors between the Lehman Brothers and GM bankruptcies:

• The Government is holding GM's hand through the bankruptcy process.
• GM will restructure, and emerge as a leaner entity.
• The Lehman collapse put the entire financial system at risk.
• The Lehman collapse caused the failure of a multi-billion dollar Money Market Fund
• and the list goes on (further than we care to take it)

Due to the obvious differentiating factors between these two embarassing chapters in US corporate history, it at least appears that the immediate and severe fallout witnessed in the Lehman debacle will not repeat itself in the wake of GM's failure.

We are sure that, somewhere, an economist has attempted to calculate the overral effect that the GM bankruptcy will have on the labor market. While such an analysis might be useful from an academic perspective, we are of the opinion that the downsizing of GM will bring with it a multitude of incalculable shock waves. The two that come to mind are 1) How will the bankruptcy affect the general attitudes of prospective car buyers? and 2) Will car dealers anticipate a subsequent round of dealership closings, and how will they respond to this perceived threat? These are both highly unknown variables that will largely determine the labor market fallout that results from the downsizing/bankruptcy of GM. We will not pretend to be able to calculate the impact.

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