I’m selling the dollar vs. the euro, pound and A$ while going long the S&P mini futures contract, and I’m going to look for this to hold. I think that the debt work-out for CIT, which doesn’t involve the government (tax payer funds) in any way is a market positive in that it “paves the way for an orderly restructuring” while providing CIT’s customers with “plenty of capital.”
CIT provides credit for over a million small and medium-sized US companies, including Dunkin Donuts and Eddie Bauer in 2 ways; Small Business Administration loans and lines of credit based on accounts receivables, a type of lending that requires a detailed knowledge of a company’s business.
According to an article on Bloomberg, some of its largest bondholders will provide $3 billion in bridge financing for 2 years. PIMCO, the world’s largest bond fund, is CIT’s biggest bondholder.
Today’s move doesn’t solve all of CIT’s problems although $1 billion of floating rate notes due next month appear to be covered. The company has about $10 billion of debt maturing through next year, according to Bloomberg.
All this has come after the F.D.I.C. refused last week to guarantee CIT’s debt, as it has done with other banks over the course of the financial crisis. The Federal Reserve had also refused to accept the firm’s assets in exchange for cash, which it has been doing over the past year or so with its purchases of mortgage backed securities and other credit instruments. The Fed current holds over $489B of MBS, $99B of Federal agency (Fannie Mae and Freddie Mac) debt securities and $112B of Commercial Paper as part of its Quantitative Easing programs. The Fed also still has over $43B lent out to AIG.
In other news that should bode well for equities (and therefore act as a negative on the dollar), the Wall Street Journal is reporting there is far less demand for borrowing from the Fed’s emergency short-term lending programs.
According to the WSJ, the commercial paper facility is less than one third its peak size, securities dealers and investment banks haven’t used a Fed borrowing program for 10 weeks, while swap lines with foreign Central Banks are over 80% below their $583B peak. At the same time, a Fed facility that allows securities firms to trade collateral for Treasury debt showed just $4 billion in volume recently, down from more than $235 billion in October.
Other programs are still expanding; the Term Asset-Backed Securities Loan Facility, designed to support the securitization of consumer and business loans, expanded to $30B last week from $24B the previous week.
Also, it’s highly unlikely to see credit markets functioning at pre-bubble levels any time soon. Banks are writing loans far more conservatively than before while consumers and businesses figure to demand less credit as they de-lever their balance sheets.
