Fisher Investments Editorial Staff
Investor Sentiment, Media Hype/Myths, US Economy

Bedtime Stories to Scare Investors

By, 11/03/2009

Story Highlights:

  • CIT Group Inc. filed for Chapter 11 bankruptcy on Sunday, after months of struggling to obtain financing to pay off debts coming due.
  • While it's tempting to label CIT's bankruptcy as the proverbial "second shoe," it's normal for weaker firms—financial or otherwise—to fail during economic downturns and even as recovery begins.
  • We wouldn't be surprised to see more failures, nor would we be surprised to see the recovery keep plugging along despite them.
  • Investors will constantly "fight the last war" and look for the things that caused the last bear to trigger the next one. However, those things are often already priced into stocks.

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Halloween—the movie, not the sugar-fueled holiday—no doubt terrified those first movie-goers. But after umpteen sequels, literally, the franchise lost that initial scare power. And so it is with CIT's chillingly familiar tale: A storied, behemoth financial company faces failure after struggling to obtain financing to cover its billions in liabilities—putting its shareholders, bondholders, and millions of borrowers at risk. Though a scary premise, CIT's story—after Bear Stearn's, IndyMac's, Lehman's, Washington Mutual's., etc.—has gone stale with little surprise. We've been there, done that, and survived each time. And because every good horror story is only as powerful as its shocks and spooky suspense, we believe CIT's saga should fizzle rather than climax.

CIT's problems have been well-documented. The financial firm became a bank-holding company last year to secure $2.3 billion in TARP funds to pay coming-due debts. CIT's request in July for more federal funding was denied, but they cobbled together a $3 billion deal with bondholders, averting collapse again. Now three months later, CIT finally called it quits and filed Chapter 11. CIT bondholders already voted in favor of a "prepackaged" bankruptcy plan, and the company expects to exit court protection next month—very speedy.

CIT is no tiny firm—it listed $71 billion in assets and $64.9 billion in liabilities in its bankruptcy petition, making it the fifth-largest bankruptcy by assets in US corporate history. It funds about one million companies and is a major provider of aircraft financing, small and medium business loans, vendor financing, and a short-term US financing practice known as factoring. The implications of a CIT bankruptcy seem broad and particularly painful to smaller businesses, but the fallout may not be as bad as feared.

The financial system is much more stable now, and there are a slew of other banks in healthier capital positions that could pick up CIT's slack. Plus, the quick bankruptcy court timeline suggests CIT's reorganization may proceed relatively smoothly. While it's tempting to label CIT's bankruptcy as the proverbial "second shoe," it's normal for weaker firms—financial or otherwise—to fail during economic downturns and even as recovery begins. We wouldn't be surprised to see more failures, nor would we be surprised to see the recovery keep plugging along despite them.

Anticipation of CIT's bankruptcy filing may have spooked markets last Friday—who knows—but stocks largely yawned on Monday, ending nicely higher after some mid-day volatility. On the whole, the CIT bankruptcy filing doesn't have the surprise factor to knock stocks off course. Markets are down from this year's highs, but only fractionally so compared to their big run-up. New bull markets are full of such intermittent pullbacks.

Investors will constantly "fight the last war" and look for the things that caused the last bear to trigger the next one. That's not impossible, but to us, these fears seem more like bedtime stories to scare investors than conclusive reasoning. Financials' ills are very well priced into stocks today, and a new bear—probably a long ways off—will likely come from some other area not already widely recognized by investors. CIT ain't it.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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