The CIT Group is estimated to have approximately $75 billion in assets and after 8 straight quarters of losses needs an additional $6 billion to continue.
At $75 billion, that’s about 150 % more than Bernie Madoff was alleged to have stolen from clients in his ponzi scheme. The problem with a ponzi scheme is that they burn through cash at an exponential rate. The CIT Group has helped to fuel manufacturing of everything from textiles and clothing to consumer electronics.
Manufacturers attempting to finance every stage of their production and distribution by leveraging and re-leveraging the same products over and over again were able to create what could be akin to a legal micro ponzi scheme secured with CIT Group guarantees.
CIT Group does not have the capital on hand to secure those guarantees and their cash flow has created a crisis in liquidity during the recession. Governments and banks now have to ask themselves what their direct exposure to a failed CIT group might be. Jamie Dimond of JP Morgan Chase feels that the CIT Group exposure for his company will not be material.
As I had a direct experience in doing business with CIT Group, my own personal account partially covered here, I believe that the bank with the largest direct exposure to CIT Groups failure will be HSBC.
Could the World’s Largest Bank Fail Because of CIT?
Several years back CIT Group absorbed HSBC’s factoring group, which had done a good deal of business with HSBC naturally. CIT Group in taking on that book of business and the risk that went with it, not to mention a number of employees that had strong ties with HSBC and their business practices also took on a the risk that went with the business.
The multi-billion dollar question now is “How much exposure does HSBC have to a CIT Group failure?” and the question after that will be “If HSBC stumbles or fails as a result of CIT’s eminent demise, How will that impact the Chinese economy?”
HSBC IS the world’s largest banking group and the world’s sixth largest company according to Wikipedia with $2.3 trillion in assets as of Feb 2008 according to Forbes. The sub prime mortgage crisis and HSBC’s acquisition of Household bank has resulted in HSBC taking a $40 billion impairment in the last 12 months. Many see HSBC as having a significant exposure to consumer loans, think of all of those consumer credit cards pushed at retailers around the US.
Add to this trifecta of a perfect storm the CIT Group exposure of debt not only from the consumers buying goods, but the retailers, distribution companies, and manufacturing companies themselves. HSBC has managed to position itself possibly at the pinnacle of the next wave of financial failures.
So tonight as America eats dinner and prepares for bed, the bank founded as the HongKong and Shanghai Banking Corporation (HSBC) will need to consider whether they can afford a CIT failure, and the ripple effect of that failure across China’s manufacturing sector, America’s retail sector and possibly America’s populace of department store credit card holders too.
China’s future and stability May Be Tied Directly to CIT
China may not have a vested interest in saving Americans from the folly of their real estate investments. But the youthful Chinese manufacturing economy may very well have a vested interest in saving the CIT Group and avoiding that all too Chinese kryptonite, the unexpected unemployment of a quarter billion migrant people on the mainland. If HSBC can weather the storm unassisted, if the HSBC sea walls can hold back the surge of ripple effect failures, then maybe CIT is small enough to fail. If HSBC is not that strong, can not afford that much more cash, then China may need to open the coffers of cash hoarded at 50%+ savings rates over the last few years and save themselves by saving CIT.
