The Lehman of 2009

Naturally, at the focus of renewed market pessimism is a struggling financial: CIT Group. The company — a hundred-year-old staple of small/medium business lending — is no stranger to walking the credit tightrope. They narrowly averted fiscal meltdown late last year with $2.3 billion in TARP bucks… then again in July by goosing bondholders with a $3 billion a debt-to-equity deal. Back then we joked, “Look for this crisis to repeat in a couple weeks.” We were wrong… it took a couple months.

So with some historic irony, one year and two weeks after Lehman Bros. bit the dust, another debt-burdened, credit-reliant, potentially “too big to fail” institution is looking to either stick its bondholders with a raw deal or enter sudden bankruptcy. We won’t pretend to know exactly how this one will end, but the market has certainly voiced its opinion:

CIT Group Decline

Heh, and of course, Goldman Sachs has a horse in this race. They stand to make about a billion bucks if CIT goes into bankruptcy — the fruits of a smartly designed loan agreement. Hank Paulson, despite his GS pedigree, didn’t make such a deal when he put $2.3 billion in TARP funds on the line… a CIT bankruptcy would mean a near-total loss of taxpayer bailout loans.

CIT is one of the biggest lending sources for small- and medium-size business in America… what happens to this recovery when this well runs dry?

With or without CIT, “The real job creators in the U.S. economy, small businesses, will not expand hiring as expected,” forecasts Dan Amoss. “There are many reasons for subdued hiring plans; an emerging reason to avoid expansion and hiring will be heightened expectations that tax rates will soar in the future to pay for out-of-control government spending.

“So I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows. As we ‘lap’ the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I’m amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality…

“The labor market is dealing with a structural imbalance fueled by government-sponsored housing and credit bubbles. Many will call for the government to ‘solve’ this labor market problem, which will cause a new type of market dislocation. By early 2010, some will push for the federal government to start hiring the chronically unemployed in ‘New Deal’ types of programs.”