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CIT Bankruptcy – SMEs’ Future Uncertain

The bankruptcy of CIT, the biggest SME lender, is adding anxiety to retailer worries ahead of the Christmas season. CIT filed for Chapter 11 bankruptcy protection in New York on Sunday after months of trying to stay afloat. The company is most well-known for providing much-needed credit to small and medium-scale businesses. It helps retailers stock up their shelves, expand business operations, and stimulate growth. Through the years, it has become an important player in enabling capital to flow in the retain sector.

While the bankruptcy spells bad news for most, CIT announced that its lending activities will continue even as it proceeds with the bankruptcy. It hopes to shed around $10 billion in debt and implement the prepackaged reorganization plan. Chairman and CEO Jeffry Peek said that the reorganization “will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the US economy.”

No matter CIT’s good intentions though, analysts and retailers said that the case will most likely contribute to instability within the retail industry. CIT works with 2,000 vendors that provide merchandize to 300,000 stores. And a majority of players in the apparel industry rely on CIT for credit. Stores have already begun stocking up on holiday merchandize. However, they will require a reliable source of funding to restock their inventory, avoid shipping disruptions, and ensure continues supply.

Even a day without financing could create a bottleneck because shipments can be left in vendor’s warehouses or in the dock. CIT entered bankruptcy in a critical season but it dodged the worst of it for now because most merchandize for the holidays are already in distribution centers. More serious problems may emerge in the 2010 spring season as retailers gear up for a rebound in customer spending.

Citigroup Inc. Delisted From Dow

The financial downturn has definitely taken its toll on a lot of banking companies. Undeniably one of the worst hit was Citigroup. Now, it seems that the company’s disgrace is not yet over. The Dow Jones Industrial announced that Citigroup Inc will be delisted from the index. It will be replaced by Travelers Cos (TRV) in the flagship 30-stock index, starting June 8.

Since mid-January, the shares of Citigroup were already trading at below $5. In fact, it even dropped as low as 97 cents on March 5 after huge losses were announced and the government had to bail them out. Currently, it is estimated that taxpayers actually owns up to 34 percent of Citigroup. Who would have thought that this would happen to the world’s largest bank?

Established in 1998 with the merger of the Travelers Group and Citicorp, it was nicknamed as a “financial supermarket” because it carried virtually all financial products in the market. Later on, the company spun off its Travelers’ arm. The removal of Citigroup signals the end of company’s 12-year status on the Dow Jones Index.

Explaining why it took some time before Citigroup was removed from the Dow despite months of weak performance; the Dow Jones Editor-in-Chief Robert Thomson explains “We were reluctant to remove Citigroup at the height of the financial frenzy”. The editor further added that they hoped the company can rejoin the Dow in the future once it has refashioned itself.

In an effort to assume investors and the public, Citigroup said that this development will not affect the bank’s strategy to get back to sustained profitability. Another interesting bit of news is that Citigroup has started a brokerage venture together with Morgan Stanley (MS). The bank will transfer its Smith Barney subsidiary to get $2.75 billion and a 49 percent share in the new venture.

With the delisting of Citigroup, only two banks are left standing: JPMorgan Chase & Co (JPM) and Bank of America (BAC). There are still other financial services companies in the Dow though. For example, General Electric Co (GE) and American Express Co (AXP) both have financial arms. Previously, Kraft Foods Inc (KFT) has replaced the American International Group (AIG) in the Dow.

Bank of America Now Closing in on the $33.9 Billion Gap

Previously, the government stress test had revealed that Bank of America (BofA) has a deficiency of $33.9 billion in common equity. Now, it seems that the company is fast plugging this loophole. The bank announced its plans to add an extra $26 billion, or as much as 76%, of the $33.9 billion that they were told to raise.

The Charlotte-based bank was able to raise $5.9 billion by exchanging its 436 million common shares into preferred stock. The bank further noted that it might issue an additional 564 common shares in the same scheme. Another source of capital was the sale of its stake in the China Construction Bank Corp. which is worth $13.47 billion. It is highly likely that the BofA will also sell its Columbia Management Group and First Republic Bank units to close the remaining gap.

The BofA statement included stipulations that requires future capital raise to fulfill the regulator’s mandate. In the earlier part of this month, it was revealed that 10 of the nation’s biggest banks need to infuse capital into their system.

Government regulators have asked these institutions to raise common equity levels as the safety net against possible adverse economic situations in the future. In addition, this will provide a sense of security for the banks’ depositors. After the expected announcement, the shares of the company went up 1.5 percent to $11.5.

Other Banks Are Doing the Same

BofA, as the largest US-based bank, does not stand alone in these drastic measures. Several major financing firms such as Citigroup Inc increased its common equity by requesting preferred shareholders to swap their stakes into common shares.

Meanwhile, PNC, the seventh-largest bank today, was asked to raise $600 million by the government. This bank is plugging their shortfall by selling 15 million common shares in a market offering. PNC has also said that it planned to repay the $7.6 billion it took from the TARP program as soon as it was “appropriate”.

Although the TARP has greatly helped the banking sector at the time of crisis, it is seen as a weakness by most. Furthermore, most of the banks it helped does not like the excessive restrictions imposed including its executive pay regulations.

Bond Issue Considered by IMF: Will This Help Improve Lending Programs?

The International Monetary Fund (IMF) is now considering selling its bonds to developing countries in order to raise sufficient capital against the worldwide economic crisis. Brazil and China are among the countries that showed interest in purchasing the securities. The tentative offer opens new doors in the way member states can contribute to the fund. The IMF, through all its years of history, has never issued bonds before.

Essentially, the fund is looking for ways to finance loans and provide aid to members during the worst-economic crisis in its history. With more uncertainties ahead, the institution is tapping into its 185 members for fresh cash infusions. However, developing countries have suggested that they want more decision-making authority within the IMF; this sets up a possible clash with developed countries in the future.

Is the Bond Issue Likely to Push Through?

According to Dominique Strauss-Kahn, “I’m sure that this vehicle will be used…we’re discussing with different creditors the way to implement it and the amount that we put in it.” He further added that bonds provide flexibility. Despite the prospects of the IMF bond issue, Brazilian Finance Minister Guido Mantega has said that the sale proposal is premature.

Brazil is demanding higher yields compared to those attached to US Treasuries before they will buy. Mantega has met with his counterparts from China, India, and Russia to discuss the situation. Contributions made by the four largest developing countries are “provisional”. That is, they want to increase their decision-making power in the IMF.

What does it mean to both Rich and Emerging Economies?

If the bond issue really pushes through, it is inevitable for emerging economies especially the four largest developing nations mentioned earlier to attain more decision-making power within the IMF. Right now, Mantega has revealed that they want their contribution to help developing countries weather the global financial slump instead of strengthening the “current structure of the fund”.

There was an implicit suggestion made by Bank of France Governor Christian Noyer that the IMF should forget this kind of “exercise”. But everyone agrees that the fund needs to be correctly capitalized in order to be operational. Though the next move of the IMF is unclear, the common aspect everyone agrees on is that institutions like the IMF and the World Bank need to contain the crisis that seems to be worse than what was previously projected.