The tales of AIG, CIT, Goldman and asset deflation: Update

This from Chris Whalen at Institutional Risk Analysis:

The troubles apparently faced in selling AIG’s assets and the death struggle of CIT both illustrate a larger problem facing all financials, namely that with the cash flow from and value of the many financial assets falling, financing is unavailable and cash buyers of assets are very aggressive.  We find it sadly amusing to see the Sell Side analysts laughing at the “systemic” impact of the failure of a small non-bank vendor like CIT. These same people won’t be laughing when retailers and vendors in their communities shut their doors for good.

via The Institutional Risk Analyst: What Do AIG and CIT Have in Common? Asset Deflation.

In fact, Whalen isn’t the only one to note that the feds are stepping away from a firm that finances the little guy vs Morgan Stanley and Goldman Sachs. Nonetheless, Treasury certainly can’t print enough money to save everyone. Checkbook policy will bring us all down. Whalen nails the weakness in the policies in the nation’s Capitol:

The impending collapse of CIT illustrates a key problem with Washington’s response to the larger financial crisis, namely that rescuing the banks has not addresses the collapse of the non-bank financial sector, which at its peak accounted for more than half of all financing activity in the US economy. While CIT by itself may not be “systemic” in terms of causing the failure of other financial institutions, an eventual bankruptcy and liquidation for CIT may well mean a death sentence for thousands of private employers and the loss of many thousands of additional jobs.

In theory, competitors who do get government-subsidized loans like GE and GMAC should pick up the slack; and well they should. The government has put CIT at an unfair competitive disadvantage. The problem is that many will just cherry-pick the best credits. The problem is we can’t randomly support the weak links in the system. Capitalism is brutal and it feels unfair to let CIT topple into bankruptcy when others have been brought back from the brink. And the ghost of the Lehman bankruptcy, a mess of a deal, haunts us all. (Lehman is a different story that I’ll write about another time  — but it also suffered, shall we say, from a case of weak  asset-itis.)

There’s a sense of whew! for those saved. But the costs of saving Citicorp and others have not yet been fully tallied. Goldman earned more than Croesus himself last quarter. But it knows it can take risks that few can take — and get saved if necessary. That’s not the luxury CIT has been given.

The inimitable Zero Hedge notes that Goldman actually got a waiver from the SEC to take on more risk. It worked this time. But next time, instead of issuing bonus checks to its traders let’s hope we won’t be issuing checks to bail out a too-big-to-fail player.

Question to consider: Did Goldman bet against CIT in the CDS market?

And another thought to ponder: Can Treasury auction the billions in dollars of warrants it received from the Tarp firms and deploy them in a special Small Business Administration program?


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