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CIT Files for Bankruptcy - Stocks Will Probably Go Up

Article Submitted by: Sam Cass
News


Tags: Bankruptcy, Cit.

Lender CIT filed for bankruptcy today after the credit crunch dried up its sources of funding. The bankruptcy is one of the largest in US history and will impact thousands of small and medium sized businesses. But if all stays true to form, the stock market will go up tomorrow.

 

Submitted: Nov 1, 2009    Views: 136    Comments: 0    Likes: 2   


Lender CIT filed for bankruptcy today after the credit crunch dried up its sources of funding. The bankruptcy is one of the largest in US history and will impact thousands of small and medium sized businesses. But if all stays true to form, the stock market will go up tomorrow.

Here's why the CIT bankruptcy is a bad indicator:

1. CIT will be the fifth largest bankruptcy by assets in US history. This is not a small bankruptcy. It's a pre-packaged filing which means it's supposed to be whisked through the courts but I have little hope it will emerge in any decent shape. The reason CIT needed to file is that it can no longer raise inexpensive funds via the debt markets. That's not going to change. The days of cheap money from the shadow banking system is over. In addition, financial companies rely on trust and confidence, and last I checked a Chapter 11 company doesn't have much of either.

2. CIT helped fund thousands of small and medium sized businesses. These companies will all be impacted negatively from the chaos surrounding CIT.

3. The problems that dropped CIT are still out there. In particular the lack of funding and leverage for financial companies. That model is still broken and there has been no indication that is is coming back.

Nevertheless...

The stock market will probably rally several hundred points. Why?

1. In a bubble market awash in Fed liquidity, bad news is ignored.

2. The market has supposedly already priced this in. Sure, just like they had already priced in Bear Stearns and Lehman.

3. CNBC will put the best possible spin on it. "This is just the process we would expect needs to happen for a recovery in credit markets to continue." Yeah, right.

I think either way, the next week will be telling. If the market shrugs it off then the bubble is strong. If the market does indeed drop, then maybe it will start to behave somewhat rationally again.


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