In a series of articles between July 13 to July 20, I
warned investors away from the shares of small business
lender CIT, insisting that they were the province of
speculators who must be willing to lose everything,
adding: "Personally, I expect CIT will ultimately declare
bankruptcy." The firm did just that yesterday; this morning,
if you are still holding any CIT shares that were not bought
today, it is a full certainty that you are underwater on your
"investment."
What this means for investor-speculators
CIT shareholders should now consider that their shares
are worthless -- the overwhelming likelihood is that they
will be wiped out. Junior bondholders will receive equity in
the "new" CIT.
If you are
stillconsidering speculating on CIT shares before
the shares are delisted, I strongly advise you
against it-- there is no edge to be had in that game.
What this means for small businesses and the
economy
While the overall effect of CIT's bankruptcy on the
economy won't be significant, this is another blow for small
businesses that don't have the same access to capital markets
as large companies.
CIT wants to exit a prepackaged bankruptcy by the end of
year, but that sounds extremely aggressive; in any event, it
has already reduced its lending substantially this year.
Unfortunately, large financials
JPMorgan Chase (NYSE: JPM),
Citigroup (NYSE: C),
Bank of America (NYSE: BAC),
Wells Fargo (NYSE: WFC), and
General Electric (NYSE: GE) don't look that
eager to
take advantage of this opportunity.
What this means for taxpayers
If you're feeling smug about not having punted on CIT
shares, don't. The U.S. government sank $2.3 billion of
taxpayer funds into CIT through the TARP program. Odds are
excellent the investment will be entirely wiped out, along
with the common equity.
One redeeming factor here is that the government didn't
make a follow-up investment -- that would have been throwing
good money after bad. The other is that we are finally
witnessing a high-profile example of capitalism being allowed
to function properly -- something the government should have
encouraged initially by denying CIT any aid whatsoever.
As we emerge from the recession,
this is exactly the time to buy these stocks.
This article was originally published as
Do You Still Own CIT Shares?on
Fool.com
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