IV Capital Partners

November 5th

Retail ‘Killer Wave’ Coming Due to CIT Failure

The bankruptcy of business-loan giant CIT made headlines last weekend, but the story seems to have died all too quickly, considering its importance. Women will recognize this soon enough, since CIT provided financing to 60 percent of the apparel industry. All told, CIT was lending to 2000 firms that supplied merchandise to more than 300,000 stores. If you think vacant storefronts are a blight now, wait till you see how the malls, big-box stores and strip centers look in another year. One thing’s for sure, a CIT in reorganization will not be doing nearly as much lending to a cash-strapped retail sector.   

With CIT seriously hobble, we have provided a breezy, up-to-the-minute view of the economic landscape. We proffer it below for your enjoyment.  

Will Earth Stand Still… Again? 

Who missed the 1943 Academy Award nominee tear-fest set in Depression Era Yorkshire, starring young Elizabeth Taylor and Roddy McDowell? Who did not feel at least a twinge as 1951/1989 galactic ambassadors Michael Renee/Keanu Reeves were shot dead warning Washington that the earth would be terminated if it did not stop building atomic weapons, destroying the environment or fighting in space? Who saw Michael Jackson’s eloquent posthumous plea for loving each other and saving the world with peace? 

As the cards started to crumble and our collapsing debts came home, the earth’s financial systems may be about to stand still. The second shoe from Panic Fall 2008 perhaps dropped this week, after long heroic useless measures to save $78B CIT, choking on its own debt. CIT was a major financier of Dunkin Donuts and payrolls for thousands of other small businesses providing low-wage jobs in the service economy. The end of dollars to donuts may not be a good sign.

Not So Manageable 

Epic Halloween Thriller graveyard collapse of the debt-bubble mania may be coming soon to a financial theatre near U.S. CIT’s implosion could sweep all global leveraged debtors into the whirlpool while drowning in IOUs, selling assets and scrambling for cash. The official line is that CIT is manageable. Tell that to the companies and creditors affected. 

A prepackaged CIT bankruptcy perhaps did not help Goldman Sachs, banks, governments, hedge and mutual funds holding CIT paper, 300,000 stores, or underemployed, consumer-taxpayers tapped out by TARP.  $2.33 Billion in TARP bailout money may be long gone with bad manufacturing credit, mortgages, student loans and retail factoring as the global economy collapses from too much debt. 

CIT’s stress-refinancing via bankruptcy could close down a lot of banks, businesses, consumers and even governments holding CIT paper for manufacturing, education and consumer goods, further contracting credit, economy, jobs and taxes. CIT more than AIG may teach the first generation in three to save rather than borrow. 

Pimco Takes a Hit 

Aflac and Pimco were the largest CIT bondholders in the prepackaged bankruptcy. The bankruptcy declared last weekend was similar to GM in wiping out CIT equity shareholders who rode the rollercoaster of hope down to an inevitable destination of destruction. Only the $328 Billion Washington Mutual failure was bigger than CIT. JPM bought $328 Billion WM for just $1.9 Billion, with Fed taxpayer TARP financing. That was less than a penny on the dollar. A stunned WM is suing JPM for $13 Billion. 

The FDIC bailed out on CIT’s rescue last summer. CIT was admittedly beyond their ability to bail out. Publicized reports that the feds decided CIT would not materially impact anybody may be false bravado designed for calm assurance. It seems Europeans had CDO Collateralized Debt Obligations on CIT in size, amounting to two-thirds of European CDOs. So did American regional banks. CIT credit market failures could take Europe and American banks down and out again. This could lead to an emergency scramble for dollars with unwinding of the short dollar carry trade at internet speeds.

Creditanstalt Trigger 

Picture $50 trillion of foreign exchange suddenly trying to crowd into the dollar. That could make more stress for the biggest OTC derivative-writing corporations that once called themselves commercial banks. When the debtor derivative dust falls out and settles many years from now, it may become clear CIT or GS was the Creditanstalt Trigger of the Greatest Depression. Creditanstalt was bailed out by the Rothschild's but did not stop the inevitable Winter Season of the Economy. 

Meanwhile, the USA is only the 20th most indebted nation, with enough currency to buy in size for some time. Euro nation and Hong Kong currency economies are actually more indebted than the dollar. The neo-Keynesian debt disease was more contagious and fatal than Swine Flu so far. Ireland, Switzerland and UK head the global debtor-deflator list, with Foreign Debts 5-12 times their GDPs. 

Surplus nations Brazil, China, India, Japan and Russia do not have enough currency market size to absorb up to $50 Trillion of flight capital. Nor does gold. All the gold producers in the world combined are less than one-third the size of Exxon Mobil. The world has $50 Trillion in Forex, $4 Trillion in cash and five billion ounces of gold. 

Cash/Gold Relationship 

The cash/gold relationship overpriced gold around $1000 when it might be closer to $800 an ounce. As derivatives, $50 Trillion of Forex could disappear with deflationary impact before driving gold much higher.  $250 Billion of IMF International Monetary Fund SDR Special Drawing Rights may still be Forex fantasy. So dollars may once more become the currency of last resort. We are saving our dollars for a rainy day. 

The last shall be first. The world has $53 Trillion of debts that could drive gold to $10,600 or default first, wiping out equity everywhere. 

Big Five bank failures in America could eventually become big enough to take out and down all linked global financial institutions and markets as well as global economies. That was the rationale of Treasury Secretaries Paulson and Geithner for committing trillions of taxpayer dollars and Federal Reserve Credit to bail out banks and not consumers. This rationale was restated on Meet The Press this past weekend with slightly less conviction. 

A Hollow Bailout 

Who really believes the +3.5% Third Quarter 2009 GDP will long replace a Depression year of GDP down –15.2%? Thanks to Big Bank Boyz buying Congress and the President, there were no Fed Glass-Steagall SEC Firewall regulations and little common sense or financial prudence left. That was for old fuddy duddies, old Scot dialect term for buttocks, not Masters of the Universe. This suggests, as we e-mailed the President’s website last Fall,  bailouts may not work for long or at all if they do not produce lasting productive  jobs with private economic growth to pay taxes. We further suggested the 1% Transparent Total Transaction Tax could replace disappearing income taxes as more and more municipalities are in trouble. All governments but Federal are downsizing, but not fast enough. 

The Federal Government may be forced to downsize by default. The latest Municipal Halloween Trick-or-Treat was the California emergency doubling of state income tax withholding. 

It's just an opinion.

More to come: