US LENDER CIT TEETERS ON THE BRINK
Shares of the 101-year old firm slid as much as 80 per cent to 31 cents amid fears that CIT would follow Lehman Brothers and be allowed to collapse.
Chief executive Jeffrey Peek was last night pleading for $2bn (£1.2bn) of capital from bondholders as a first stage in a rescue plan.
He was locked in talks with 10 to 15 investors each with around $500m of exposure including Allianz unit Pacific Investment Management.
Peek is said to have been shocked by the government’s decision to step away from a rescue.
The bondholders face a choice between cutting their losses and letting the firm fail, or ploughing in further capital to a company that could still face a serious risk of collapse. Analysts were saying last night the firm needs as much as $6bn to survive as a going concern.
The lender already received $2.33bn of government assistance under the US Troubled Asset Relief Programme (TARP) in December, but the government has decided to cut its losses.
Ratings agency Standard & Poor’s (S&P) last night heightened the collapse fears by lowering its rating on the firm’s bonds by several grades to “CC”, making them junk bonds.
This puts further pressure on the bondholders, as the rating cuts sent the securities plunging in value.
In an accompanying note S&P suggested failure is now likely: “The compressed timeline makes it very difficult for CIT to pursue other liquidity initiatives successfully, such as secured borrowings, asset sales, or debt restructuring.”
Jamie Dimon, the JPMorgan Chase chief executive who was last night toasting record revenues at his bank, said that while his firm is exposed to CIT the effects of a collapse would be immaterial.
A US Treasury statement said there is “a very high threshold for exceptional government assistance to individual companies”.
The government broke off talks on Wednesday. If the bank goes down, it would be the fourth largest bankruptcy in the US by assets.