Goldman Trumps Government Again in CIT Flop
CIT Group Inc. filed for bankruptcy Sunday afternoon, after getting approval on most of the details from its creditors.
At risk, though, is $2.3 billion in taxpayer bailout money, much of which is unlikely to ever be recovered, thus making it the biggest loss for TARP. CIT is the fifth-largest bankruptcy in the history of the country, in terms of assets, and the company has posted more than $5 billion in losses in the last nine quarters.
And once again with the bankruptcy of CIT, Goldman shows the world it is run by a sharper crew of money men than the drunken fire brigade we are seeing in Washington.
Along with other banks, the New York Federal Reserve gave Goldman $12.9 billion to settle its trades with AIG. Goldman was made 100% whole in the collapse of the giant insurer, even though the triple-A U.S. government was backing AIG and even though AIG was reportedly working on reducing the amounts owed under those deals.
A former chairman of Goldman Sachs, Stephen Friedman, was the chairman of the New York Fed at the time of the AIG collapse and oversaw its bailout. The TARP inspector general is set to release a report on this matter within a month, sources indicate.
And once again, no one in the U.S. government can see what’s clear to the rest of Wall Street — that some of these bailed out companies clearly have rotten balance sheets at the time the U.S. taxpayer is being asked to give them money with virtually no strings attached.
So the question for the government is this: Why can’t the U.S. Treasury cut deals with TARP banks to protect taxpayers the way Goldman does its dealmaking?
Why not launch a Treasury-TARP drive-through window, where taxpayer bailout money comes with a shake and fries?
Already, 33 banks that received TARP money have reneged on the 5% dividend payments they owe to the government, says Richard Suttmeier of ValuEngine.com. That’s more than double the 15 last May. And the U.S. inspector general for TARP, Neil Barofsky, says taxpayers may eventually lose $159 billion overall on the TARP bailouts.
"The TARP has become nothing but $700 billion of walking around money,” says Rep. Darrell Issa (R-Calif.), ranking member of the House Committee on Oversight and Government Reform. “Many suggested that TARP was an investment that would yield dividends to the American people; clearly, that line of thinking is absurd as CIT represents $2.3 billion that taxpayers will never get back."
When the commercial-paper market shut down on the 101-year old CIT Group in the early summer of 2008, it was forced into the arms of Goldman and an onerous deal that benefits Goldman if CIT failed. CIT lends to about a million small and midsize businesses including Dunkin Donuts and Eddie Bauer, the bankrupt clothing retailer.
Here’s how the Goldman deal with CIT was structured. On June 6 2008, Goldman initially tossed CIT what looked like a rescue line, but it had heavy anchors attached. At that time, CIT’s balance sheet was rapidly deteriorating, as it eventually couldn’t restructure $30 billion in debt it had to roll over. In trying to trade and run with the wolves like Goldman, CIT loaded up on subprime securities and student loans. CIT had $65 billion in overall liabilities against just $71 billion in assets.
Goldman gave CIT a $3 billion loan at a 2.85% rate due over 20 years ($85.5 million a year for the first 10 years, with declining payments thereafter). Goldman’s loan came five months before CIT got its $2.3 billion TARP investment in its preferreds, sources note.
The Goldman loan came with an onerous $1 billion make-whole payment if CIT failed, meaning Goldman would be first in line to get that money, while taxpayers would lose $2.3 billion (a make- whole payment is sort of like a lump-sum payment, where a borrower has to pay off all the interest after a bond is called early), sources indicate.
So Goldman essentially got a form of a 'last in, first out' deal protection, while the U.S. taxpayer did not.
Then, Goldman further protected itself by buying credit default swaps on the deal. Goldman will "not disclose the outstanding amount of credit default swap protection" on CIT, a Goldman executive tells FOX Business.
“The credit default swaps Goldman Sachs purchased to prudently manage the risk associated with the CIT financing are not a directional ‘bet’ on CIT, but were bought to protect against the possibility of a precipitous decline in the value of the collateral,” Goldman said.
CIT, of course, could not fight that, but it fought the loan. Goldman cut the loan from $3 billion to $2.13 billion, a Goldman official says, but instead of the $1 billion make-whole payment, CIT will now only have to pay a $285 million penalty (called a termination fee) and post an additional $250 milion in collateral.
Bankruptcy was not a trigger for the entire $1 billion make-whole payment, but if CIT liquidates Goldman gets the rest of the $715 million payment on its facility, the Goldman executive says.
Goldman took CIT public (with JPMorgan Chase as co-lead manager) in 1997 with about $6 billion in investor funds, pocketing a fat fee. And it advised CIT on the sale of its construction finance business at the bottom of the market. CIT has $29 billion in debt.
As for the deadbeat banks, there are 23 on the ValuEngine list of problem banks. These banks surpassed the risk guidelines bank regulators had set down in 2006 when it came to having sufficient capital cushions for their construction and commercial real estate loans.
“If the U.S. Treasury, Federal Reserve and FDIC followed their own joint guidelines for risk exposures for construction and development and commercial real estate loans established in December 2006, these banks would not have received a dime from the TARP,” says Suttmeier.