Donna Childs and Sameer Bahtia argue that the market is seriously under-estimating the pssibility of a systemic freeze-up of financial markets if CIT’s capital crisis leads to a collapse. Credit default swaps are at the lowest levels in months, the stock market has been rallying. And the government had declared CIT can drop dead.
Shouldn’t there be a bit more fear?
CIT factors the accounts of some 1 million small businesses, by which process it purchases their accounts receivable. In some cases, it advances cash against those purchases; in other cases, particularly with many Chinese institutions, it doesn’t. Should CIT default, small businesses that believed they were borrowing from CIT would become unsecured creditors of CIT.
Many of those small businesses operate in the manufacturing, textile and garment industries. This appears to be a different type of risk exposure than that represented by Lehman or AIG yet it is nonetheless a real risk to the economy and by extension the global financial system.
The failure of Lehman precipitated a seizure in the credit markets from which the world has not yet recovered. The failure of CIT will likely precipitate similar seizures in both trade finance and commercial real estate markets. The attendant consequences will inevitably come back to haunt the larger financial institutions with exposure to these sensitive sectors.
The business news media correctly report that CIT has a 1% share of market for loans to U.S. small and mid-size businesses. Friday, The Wall Street Journal reported a pertinent fact: CIT services roughly 300,000 retailers and 1,900 manufacturers and importers, representing as much as $40 billion in receivables.
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