The truth of CIT's bankruptcy

Business Value Magazine columnist Li Qiang, PhD, Regional Economics, George Mason University, USA.　　He has served in international financial institutions such as the World Bank, the Federal Deposit Insurance Administration, American Express Bank, HSBC Bank and Citibank, and is mainly engaged in the decision-making analysis and consultation of economic research and financial risk. CIT's filing for bankruptcy protection may not be as bad as we think.　　Some rejoice in the sorrow. U.S. GDP grew by as much as 3.5% in the third quarter, with more than 80% per cent of companies earning better than expected, and the three indices returning to pre-crisis levels, while unemployment climbed to 10.2%, the highest level in 26 years.　　Puzzled by these contradictory economic indicators, the world's top 500 Business investment trust Group (CIT Group) filed for bankruptcy protection, becoming the fourth largest U.S. bankruptcy since the financial crisis after Lehman Brothers, Washington Mutual and General Motors. CIT Group is the largest SME credit company in the United States, providing customers with sales loans, equipment and transport loans, production lending and equipment leasing business, including North America, South America, Europe and Asia-Pacific, with Asia-Pacific headquarters in Shanghai. November 2, as the United States financial services century-old shops and nearly millions of customers in CIT Group announced the bankruptcy protection, nearly 20 financial institutions in 10 days of successive closures, the U.S. economic situation is still grim, it also shows that the aftermath of the Wall Street crisis has not been exhausted. The case is a measure of concern, not because of its own impact on the U.S. economy, but because it reflects the realities of the post-crisis period and because CIT has received a 2.33 billion dollar bailout from the US government and the first financial institution to accept government bail-outs.　　Analyzing the causes and consequences of CIT's bankruptcy may unravel some of the mysteries of U.S. economic data. Under the pre-packaged (prepackaged) insolvency scheme, the main creditors (including investor Carl Icahn and Goldman Sachs Group) had begun to own the company before entering bankruptcy protection, and approved a corporate debt restructuring plan, including delaying repayment time, lowering interest rates, Converting some loans into restructured priority shares and so on, while lowering the par value of the original bonds by 30%. These arrangements have reduced the debt burden of 10 billion of billions of dollars for CIT, created conditions for its future rebirth and profitability, avoided many lawsuits and reduced the cost of bankruptcy, but failed to redeem the heavy losses suffered by secondary creditors and shareholders. The US government, which has been the holder of former priorities, has only been ranked as a creditor and bondholders, and the bail-out is only a fraction of the money, and common stock is worthless. After the bankruptcy reorganization of CIT, although it claims that the business is not affected by bankruptcy protection, but for many potential customers, CIT has ceased to exist, packaged packaged business units may be merged. CIT's main rival, JPMorgan Chase, Citigroup and American Express, will benefit. CITThe original customers and debtors are mostly SME owners, who may be affected by the increased difficulty and cost of loans. On the reasons for CIT's announcement of bankruptcy at this time, the industry has a variety of interpretations, mainly that CIT in the financial bubble at the height of the 2007-2008 years of debt, excessive lending, a large part of the subprime mortgage. The amount of assets before filing for bankruptcy was $71 billion, while debt was as high as $64.9 billion, and as much as 91% of the debt ratio was enough to make its shares junk, further financing was difficult.　　Despite the crisis's critical period, barely through the bailout of the US government, but in the two-sided squeezing of maturing debts and bad debts, the profit space appears very meager, especially weak in the fierce market competition, so it can only sell the preferential equity in exchange for the loan funds needed for the operation of the company and finally get rid of the debt by the way of bankruptcy protection. The bankruptcy of the company's top executives and policymakers, is the end of bad and a good start, the long low profit and low reward status as early as possible to abandon, at least some people can obtain a one-time compensation after a career or retirement, the other part of the reorganization of the company in the market with the corresponding compensation and bonuses, At the same time also can absorb outstanding management talent.　　From the macro-economic environment, CIT's bankruptcy also shows that the U.S. economic crisis cycle has not been completed, the restructuring of industry and market structure is intensifying, the survival and development of small and medium-sized enterprises is still very serious, employment and the welfare of ordinary employees will also become a corporate restructuring and profit chasing victims. CIT bankruptcy is not isolated, it is the necessary response to the challenges of the crisis, that is, to seek new life and development of bankruptcy is the strategic choice of enterprise development, followed by more corporate restructuring and mergers and acquisitions, and more banks and the original investors losses and bankruptcies. The process has undoubtedly brought pain to some, but has offered a rare opportunity for Wall Street banks and savvy investors to advantage at low prices, regain their strength in a short period of time and create a lucrative record of profits. These changes will affect the restructuring of the market structure and redistribution of social interests, after the tsunami-like crisis, the U.S. economy and society will be the same as before?