Cit Group $2.3 billion Tarp loan lost to bankruptcy

CIT group, America’s leading specialist lender to small business, filed for Chapter 11 late last night in the fifth biggest bankruptcy in US history.
The collapse of the 101-year-old Utah-based lender, which trails behind only those of Lehman Brothers, Washington Mutual, Worldcom and General Motors in size, will leave US taxpayers with a $2.3 billion (£1.4 billion) bill.
It is believed the board of the lender, which has $71 billion of loans, approved the filing after its creditors agreed a pre-packaged plan designed to ensure it emerges from bankruptcy with the core of its business intact.
Only last year, US financial regulators judged CIT sufficiently well-capitalised to survive. While the lender was given access to $2.3 billion of funding under the Troubled Asset Relief Programme (Tarp), the Obama administration refused the bank’s subsequent pleas to give it further cash injections.
The bank’s collapse will be a blow for its million small and medium-sized customers, many in the retail sector, for whom sources of debt are scarce. Experts believe that, even if CIT can emerge intact from Chapter 11, its lending capacity could fall by 20 per cent.
The entire $2.3 billion Tarp loan is expected to be wiped out by the bankruptcy process, but the bill could have been signficantly bigger. While the US Government helped other big non-bank lenders, including GMAC, General Motor’s finance arm, it rebuffed CIT’s subsequent bailout requests in July, concluding that its demise would not threaten the broad financial system.
CIT narrowly avoided bankruptcy in the summer, but its troubles have since been exacerbated by customers who, fearing that the bank is about to go out of business, have been drawing down on credit lines, using up its remaining cash.
On Friday, the company ended a fight with Carl Ichan, the billionaire activist investor, who had previously wanted to push CIT into liquidation. Mr Icahn instead agreed to back the prepackaged bankruptcy plan and in return has been allowed to provide the company with a lucrative $1 billion loan that will help to fund it through Chapter 11. SEC filings also show that last week the company secured important agreements to aid the plan, obtaining another $4.5 billion loan from investors.
Crucially the bank also hammered out an agreement with Goldman Sachs to preserve its bank funding throughout the bankruptcy process. The investment bank will pocket a $285 million termination fee for the restructured deal, which will see CIT’s credit facility cut from $3 billion to £2.13 billion.
However, under the original deal, which was sealed in 2008, Goldman would have been entitled to an automatic $1 billion termination fee when CIT entered bankruptcy. The deal will see the unsecured bondholders cut the company’s debts by 30 per cent and in return receive shares in CIT.
Preferred shareholders, including the US Treasury, which received preference shares in return for the Tarp bailout money, will be repaid only if there is money left over after paying the bondholders; ordinary shareholders will be automatically wiped out.
In a statement the company said: "None of CIT's operating subsidiaries, including CIT Bank, will be included in the filings. As a result, all operating entities are expected to continue normal operations during the pendency of the cases."