CIT went bankrupt last Friday, it’s the fifth biggest company to ever go bankrupt.
The only bigger ones were Lehman Brothers (2008), Washington Mutual (2008), General Motors (2008) and WorldCom (2002). The company leaves the market with 64,9 billion of debt.
These debts are on the accounts of other big American banks en are also ‘repacked’ in CDO’s. Normally this would lead to declines in the value’s of the CDO’s but ever since the banks don’t have to value those at market price anymore but at the price they think the CDO’s are worth they can keep the value the same by ‘accounting creatively’.
Not only banks will lose money on those debts, also the American taxpayer has to pay for the bankruptcy. The US government invested 2,3 billion USD in the company, this money is lost now.
The worst is that CIT lend a lot of money to smaller businesses and actually had a 70% market-share in this segment. For it to be taken over by some other bank it might take some time, CIT might cause a domino-effect since the smaller businesses might be having serious trouble liquidity problems.
The total amount of banks falling in US is on 115 for this year.
Apparently Sheila Bair, head of the FDIC, thinks everything is still OK:
I hear: ‘Please, be confident in the banking system, please, PLEASE?!’ As you all know I am not confident in this financial system anymore... Banks have to face their own accounting tricks since the 'real value' of assets is highly overestimated, however: If the banks would value their assets at a market price, not 115 banks would have collapsed but possible even double...
Tuesday 3 November 2009
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Two things:
ReplyDelete1. If I send students to your blog then you must explain your terms.(CDO, for example)
2. Expand on what you write. For example:
"The worst is that CIT lend a lot of money to smaller businesses and actually had a 70% market-share in this segment. For it to be taken over by some other bank it might take some time, CIT might cause a domino-effect since the smaller businesses might be having serious trouble liquidity problems."
What happens to the loans smaller businesses have taken out - would they still have to be paid back? would the interest rate be the same? is it now impossible/easier to get a loan if a bank has gone bust? What happens to savers? what happens to those with mortgages?