CIT, a company that specializes in providing lending, advisory and leasing services to small and middle market businesses — was in trouble last month. Short on cash and with no help in sight, the largest small business lender in the US was considering bankruptcy. That would spell disaster for small businesses already under strain; many companies rely on lines of credit from CIT to make payroll or pay their vendors.
CIT’s problems stem from the fact that, unlike banks, it doesn’t have a consistent funding source, relying on the credit markets to raise money instead. When those markets tightened, CIT had more and more trouble getting funds, and the funds it did get were more expensive. In addition, CIT had over $3 billion in losses in the past eight quarters from bad home mortgages, student loans and commercial defaults.
On July 16 the government said no additional bailout money would be available (CIT received $2.33 billion in December). But then, on July 21, CIT’s bondholders pledged $3 billion to keep CIT afloat. CIT also announced that the deal is only the first step in a bigger restructuring effort, including asking debt holders to reduce their claims.
What is interesting is that the bailout came from bondholders, not the government. What does that mean?
- Has our government changed its strategy about bailouts?
- Was CIT not important enough for our government to worry about?
- Are small and medium sized businesses not a strong enough lobby to push through a bailout?
- Is everyone just tired of bailing out companies?
- Or, is something else happening?
First, let’s ask another question. Why didn’t the bondholders of GM, Chrysler, AIG, and Citigroup offer this kind of deal? Our guess is that they analyzed the businesses, and didn’t see a positive outcome from further investment. The losses were so severe, and in some cases had been going on for so long, that the investment community didn’t see a path for survival.
CIT bondholders, we think, saw opportunity rather than failure. The bondholders know that if CIT does go bankrupt, they will lose a great deal. But their analysis revealed an opportunity for success instead.
We hope and believe that the fact that CIT was able to garner a private bailout is a good sign for the economy and for CIT itself. It appears that investors now have more confidence in the system and that CIT still has a viable business model.
Originally published on Harvard Business Review Blog.