Thursday, July 23, 2009

No Better Than Mafia?

If one is to judge by the terms under which CIT just got a loan from a group led by PIMCO and a bunch of hedge funds, credit is so tight that we should all start making friends with our local loan shark right away - I mean the real one in the ill-fitting suit and brass knuckle bracelets, not the one working at the bank.

The terms are eye-popping:
  • 5% upfront fee paid in cash.
  • Interest rate at least 13%.
  • Pre-payment fee of 2% plus 6.5% of the amount retired.
  • ..and get this: posted collateral book value must be at least 500% of the loan amount and its fair value (i.e. market price) must be at least 300%.
All of this for a 2 1/2 year loan of up to $3 billion. No wonder this was immediately dubbed the Don Corleone loan (I'm going to make you an offer you can't refuse..).

I am no lawyer, but I have a faint suspicion that fraudulent conveyance may apply here.. And if it doesn't, because no one else is willing to lend money to a 101-year old company at better than the above Mafioso terms, then the absolute shortest joke for 2009 is: "Green Shoots".


  1. you missed the best part of it: the loan can be funded by short selling treasuries!

  2. Re: funding

    No, you can't really do that, at least in the regular meaning of "funding", i.e. coming up with the hard cash.

    Maybe you mean putting up a spread trade (a credit spread, in this case)?


  3. Hmmmm....
    I read the Wikipedia link for once, even though I find Wikipedia VERY OVERRATED as a source of information.
    Perhaps someone here would care to tell me just HOW (in God's name...) you can make a FRAUDULENT TRANSFER of assets in... GOOD FAITH ?
    Since you are so interested in history, Hell, and this is one of your BEST points in my book, just when and HOW did debtor's prison go out of style ?
    Perhaps that's NEXT on the list of the punitive measures that our social body will resurrect alongside of the Mafia style "LEGAL" techniques that loss of collective faith has made possible ?
    After all, I have been witnessing collective regression for quite some time now, just how FAR BACK CAN WE GO ?

  4. One small linguistic observation, Hell :
    When there is NO DIFFERENCE between legal practices and illegal ones, there is NO POINT in underlining fictitious ones through the use of the word "real"...

  5. CIT has a history in the US of 101 years.

    How is this better than bankruptcy.....

  6. The intersting part of this is that the terms are so bad, and CIT is in such a bad shape, that CIT really has just some months of life left anyway.

    So why bother to "save" CIT at all?

    I read that Pimco is the biggest owner of CIT debt (around 5 USD Billion).... what gives?

  7. The "new" lenders are CIT's largest existing bondholders. This essentially looks like a power play to get every other creditor to agree to terms favorable to them.

  8. ..oh, and it delays having to book massive losses stemming from an "uncontrolled" bankruptcy.

  9. I read an article by Michael Hudson a while back which said that fraudulent conveyance laws were severely weakened in the mid 80's to allow just these sort of transactions by the banksters. It was done to allow Milken at Drexel Burnham Lambert to market junk bonds.

    On the topic of brass knuckels, it seems China is ramping up its hard ball game. American imperialism will henceforth have competition of the uncivil variety.

  10. Hey, What's a matta you? You don't like America? Go back to the old country.

    From the AMA and the insurance companies through the media and tele-communication companies, enabled by the government, its Racketeer Land.

    Time to seriously think about cheating on your taxes (at least), fraudulence deserves the same.

  11. Yoyomo,

    I think it was even in this blog that I got chastised for referring to Michael Hudson’s discussion of fraudulent conveyance. I think what Hell is referring to (and I’ve seen this and know it to be true) is that a company that is close to bankruptcy cannot favor one creditor over another before declaring bankruptcy. The courts can go back for some period of time and take back any monies paid to creditors prior to the bankruptcy. I would agree with Hell that this looks to be exactly that. Current creditors getting a deal which will ease the pain of the losses to come. This seems to be the common understanding of “fraudulent conveyance” today.

    Michael Hudson has written even recently about his own understanding of fraudulent conveyance, which I found very intriguing. He is referring to a law, which says that it is ILLEGAL to lend money to someone when you can see that they have no means to repay you.

    “Ever since colonial times, New York State has had the Fraudulent Conveyance Law on its books. This wise legislation states that if a bank makes a loan to a borrower without knowing how the debtor can reasonably meet the terms of the loans out of normal income, the loan is deemed fraudulent and therefore null and void.”

    This law is the one that I think he says was weakened in the 80’s to suit the Milken crowd. Now, for this last part I’m on very weak ground and am not planning to look it up, but I think he was suggesting that the Milken crowd was extending terms that could clearly not be repaid in order to take the company.

    I looked and looked at the time and cannot find anything about the law to which Mr. Hudson refers. I am interested in it because if it truly exists it has huge ramifications for any credit extended which didn’t do any due diligence on income or assets (i.e., ninja loans)

    I’d love it if someone could clarify this.


  12. Okie Lawyer would be the best commenter to ask on this topic as he's handled bankruptcy cases.

    I don't know any more than what you have summarized in your comment.

  13. @Anonymous:

    [Michael Hudson] is referring to a law, which says that it is ILLEGAL to lend money to someone when you can see that they have no means to repay you.

    I think you are trying to get to Predatory Lending instead of Fraudulent Conveyance.

    However, predatory lending generally only refers to consumer (non-business) cases, as it is pretty much assumed that business owners go into transactions (particularly large ones, like CIT) having professional advice and at an "arm's length" transaction.


    Proving that these debt terms acted as a fraudulent conveyance would be very difficult as PIMCO and others would simply counter that the oppressive terms were in response to the high risk of default of CIT and the large amount of money involved.

    Proving such an allegation would be virtually impossible, I think. It's not what you know, it's what you can prove.

  14. Um, it's PIMPCO please. Green shoots, like almost everything being sold to the American public, whether it be banker bailout bills, cap and trade schemes, or Obama's hollow chocolate of a health care plan, is a fraud through and through. Thanks for pointing out the CIT lending scam. We can be sure that no one in a position to intercede in this case, will.

    And I like the suggestion by Marcus who offered the following:

    "Time to seriously think about cheating on your taxes (at least), fraudulence deserves the same."

    That, my friend is coming, just as sure as Christmas.

  15. Dear Okie,

    If it isn't fraudulent conveyance - and I'm not saying it is - the implications for the broader economy are very, very troubling.

    If these are the best terms a solid company like CIT could come up with in order to roll over its existing debt in its normal course of business (which is borrowing and lending) then the credit system is completely broken.

    Since CIT is a major lender to small-medium businesses, what "the market" is saying is that it does not want ANY exposure to that segment of the economy. But that's - BY FAR - the one that accounts for most of the jobs and turnover in the USA.



  16. Dear Thai,

    The economy is now officially a bailout junkie.

    Some (e.g. Stiglitz and Krugman) say this is just a re-birth of Keynesianism, but I respectfully disagree.

    The bailout effort is so perverted that we have to call it something else, entirely. Perhaps "Cronyism"?


  17. Hey, Thai, great link. Really interesting.
    It looks like the banks BIG AND SMALL are busy doing themselves OUT OF BUSINESS.
    I won't shed a tear for them.

    This reminds me of that great book SMALL is beautiful. Some people just haven't got the point yet.
    Ouch. There's gonna be a lot of weeping and wailing and wanking along the lines of "where's that (entitled) handout ?" when the shit hits the fan.
    When the ancient Greeks shit in their nest, thereby ensuring the demise of their civilization, somebody else was waiting to pick up the pieces. But... the world was SMALLER then.
    Not now. Nobody, and certainly NOT the Chinese is going to be picking up the pieces THIS TIME.
    The nest is PLANETARY, and has no convenient "symbolic" borders to fool us...

  18. Okie Lawyer:
    If CIT is already insolvent, it cannot grant a third party a security interest in assets larger than the new loan. I'm with Hellacious. This looks like a fraudulent transfer to me to the extent of the over colateralization. Consider, CIT's unsecured creditors gave the new lenders real value, not CIT.

  19. Hell, Okie and IA, thanks for the education into fraudulent transfer, a term I have never heard of.

    But thinking this over, it seems a classic tragedy of the commons issue. Wouldn't fraudulent transfer be raised for any insolvent company which unsuccessfully avoided bankruptcy with a last minute cash infusion?

  20. PIMCO is one big fraud. These guys have played genius for decades and gotten away with it. Suddenly their stuff turns to crap and they are scamming bailouts and false lending altogether. PIMCO and others were already on the line for the defaults. I agree with Hellasious that any additional funds acquired in this matter are under duress. I would have to believe those that rolled this financing would have to take their spot at the end of the line, so maybe the real deal is the whole matter was dead and the 5% they got up front was a head start on a process where they were to lose all. Can you spell CDS?