Century-old CIT Group Inc filed for bankruptcy in the Southern District Court of New York on Sunday.
According to the terms of the bankruptcy, bondholders will hold new CIT Group Inc. (NYSE: CIT) debt worth about 70% of the face value of the old debt. Preferred creditors, including the U.S. government, will get money only after other creditors are paid back. Common shareholders will receive nothing.
In December 2008, the U.S. government invested $2.33 billion dollars in CIT under the Troubled Asset Relief Program (TARP).
What caused the CIT bankruptcy? Like many other companies, CIT borrowed too much in the debt market in the heyday, before the credit crunch of 2007-2008. Servicing the debt became overwhelming in the year following the financial crisis. This forced CIT to receive money from the government. That proved to be a stop-gap measure and staved off bankruptcy for a few months. Eventually, the weight of debt obligations was too much for the company to handle.
As an aside here, we have a simple lesson in investing in common stock vs. investing in the bonds of the same company. Bondholders are debt holders and always come first when it comes to a bankruptcy filing. Common shareholders will participate only after bondholders are given a chance at getting their money back. In this case, the bondholders will get 70% of their investment. There will be nothing left over for the common stock holders; they won't receive anything.
Would you invest in CIT after it comes out of bankruptcy?
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Reader Comments (Page 1 of 1)
11-02-2009 @ 9:00AM
Beltway Greg said...
This will pass relatively unnoticed. I believe that if the braniacs that run the game had taken the same actions when Lehman went kaput so much of what we experienced during the last 365 days wouldn't have occurred. History will eventually show that the decision to allow Lehman to die in the manner that it did was largely a political decision on behalf of both the republicans and democrats. Both parties behaved like a Hawaiian cane toad confronted by an eighteen wheeler-they hunkered down and allowed the American economy to be flattened. This brings up another point. If the economic conflagration had transpired in a non-election year would things have been different? I think so.
If you're a working journalist feel free to steal my idea because I have thousands more.