Will CIT Take Retail With It?
It’s become increasingly
common to hear calls from some in Congress (if not most state capitals)
to cut off unspent stimulus funds (most are scheduled to
be used in 2010) and to get out of the business of bailing out failing
companies.
Among those in the latter
group is the CIT Group. The finance company, which received $2.33 billion
under the Treasury’s Troubled Asset Relief Program last December under
the Bush Administration, is still struggling and it appears, based on reports,
that the Obama Administration will take a pass on providing it any more
help. That, according to many, could be bad news for retailers and ultimately
consumers.
CIT is one of the largest
companies in “factoring services”, where funds are provided to keep goods
moving from suppliers to retailers. The company lends approximately $60
billion to retailers, restaurants and their suppliers annually. Among its
clients are Dunkin’ Donuts franchisees and Microsoft.
Bert Ely, an independent
banking analyst, told The Guardian, “It’s a very large lender
to small and medium-sized businesses and there’s a lot of legitimate concern
about what would happen if it’s allowed to shrink further.”
“At the risk of sounding
overly cautious, if the government did not help CIT, we could see significant
inventory issues for the holidays,” David Strasser, an analyst at
Janney Montgomery Scott, told the Los Angeles Times. “Some
vendors would simply not be able to finance shipments to retailers for
holiday.”
James Barth, an economist
at the Milken Institute, told The Guardian, “Not all firms
have to be saved and the government has to draw the line at some point.
By and large, I don’t think it is going to be a catastrophe, or become
another Lehman Brothers.”
Discussion Questions: Should
the government help CIT? If CIT is allowed to fail, what will it mean
for retailers?
The government should never get involved in the private affairs of a business. Businesses should be allowed to succeed or fail on their own merits. The only businesses that would get hurt by the failure of CIT would be other weak businesses that need to fail. By simply handing out money to keep failing businesses afloat we only stretch out the agony of defeat.
No, the government should not bail out CIT. Let’s hearken back to those thrilling days of “last year” before the government stepped in to save everybody and the free market took care of businesses that were insolvent. We have very specific and detailed bankruptcy law that was written to allow the orderly reorganization of businesses that are viable but must reorganize to regain solvency or provide a process for the dissolution of businesses if they are not. The case has been strongly made that when the government steps in and props up these failing businesses, they are simply prolonging the inevitable. Does Chrysler ring a bell?
As far as the impact of on the retailers, those that are strong will find financing elsewhere. Those that are not will probably ship anyway and hope that their retailers will pay. CIT, albeit the largest factor financing the retail segment, is not the only game in town. There are plenty of factors out there to pick up the pieces.
Just as the consumer is de-leveraging so should suppliers and retailers. The suppliers using CTI are outsourcing their accounts receivable and credit management function for a percentage of the sale. Once the sale is made they have no concerns until they ask for the next order. The retailer takes the hit if the merchandise does not sell.
Yes, for some suppliers they will have to find another factoring source. This will likely cost them more money, but it will not impact Christmas. The impact on this year’s Christmas sales will be the consumer and will not be buying. Sales will be down another 1% to 2% versus last year.
Oh, come on. When does this stop?
If $2.33 billion dollars can’t save them, they’re done.
There is not much to add to the contributions my colleagues previously made. Perhaps the failure of CIT will be good for the industry as weak retailers find they can not operate and strong retailers pay more attention to their inventory activities. For decades retailers have overbought. Maybe now they will become more realistic.
More socialism for the rich? I think not.
Unfortunately many retailers and suppliers also got caught up in the exuberant “buy it with credit” syndrome to support their bloated inventories the same way exuberant credit supported way too much of consumers’ bloated spending in this decade.
It is heart-wrenching to see so many vacant storefronts and there will probably be many more–but the cleansing of the marketplace along with the deleveraging of individual citizens must be allowed to work itself out. NO more bailouts!!! It’s easy to understand, though, why some businesses and most taxpayers are starting to look around and truly resent that a favored few constituencies were bailed out while others are being left to dangle in the wind.
When will the government stop handing out money like it is water? How does giving a company that is poorly run more money help them? Does it not just delay the inevitable? In psychology they refer to it as being an enabler. How many of us understand how much a billion dollars is? When does it stop? When we reach trillions? Oh yeah. Already there. Quadrillion? Quint? I hear the largest number is a googol. Can we try for that? 10^100.
A CIT failure will hurt quite a few people and many of them are not rich. That said, it’s good to see the Obama Administration drawing a line here. As someone else mentioned, if CIT couldn’t make it with the money they got from Bush Administration then they’re probably not a good bet for any more taxpayer dollars.
While I am in general agreement that the government needed to draw the line, I am concerned about the impact of a CIT bankruptcy on small to mid-tier retailers. CIT has been a leader in retail asset-based lending, and for many of these retailers, healthy and otherwise, this has been their primary source of financing. These retailers, many of them independents, are a significant presence in their markets, and collectively employ a lot of people.
While a CIT filing may have a minimal impact on the major retailers, it could still hit many niche specialists pretty hard, and I don’t see that as a good thing.
Let me add one more NO vote.
The retail world will survive and strange as it may sound, so will CIT. It will be just become stronger and better run.
It’s going to put a lot of pressure on the system and small retailers are going to feel the brunt of it. This deleveraging will add to the unemployment ranks as small retailers slip and have closeout sales. The big box boys will be protected since they hardly use a CIT-level firm, but the smaller retailers and their associated suppliers are going to feel the brunt of the reorg. I say NO to any further funds to CIT; it’s time they cleaned up their business practices and balance sheet.
I have to agree with James Barth. They should be allowed to fail.
Much of the crisis we find ourselves in was predicated on the notion that we could buy things we couldn’t afford. I’m afraid that continual bail-outs only perpetuate the problem.
Pruning a tree means cutting off dead limbs so the rest of the tree survives.
Mark Warren, VP for tax policy, Retail Industry Leaders Association, provided RetailWire with the following statement.
“CIT Group is a major source of financing for many manufacturers and retailers, small and large, given CIT Group’s factoring business, and CIT Group’s collapse could have very significant effects on these companies as well as others in the supply chain. From my perspective, it is hard to understand why the government, which has dedicated so much attention and resources to the major banks and the auto companies over the last year, can’t work out an deal in this case. A little bit of help could go a very long way for CIT Group and the companies that depend upon it.”
The National Retail Federation and the Retail Industry Leaders Association have both called on the Obama Administration to step in and help CIT.
Gary Wassner, president of a factoring company, (Hilldun) told The New York Times, “There aren’t enough other people in this market to absorb what CIT does. They have 60 percent of the market. There’s nobody large enough to assume the credit risk.”