CIT Bankruptcy Looks to be Unavoidable

Can you say, CHAIN REACTION! This is a game changer: "CIT finances about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the clothing chain in Bellevue, Washington, that’s operating under bankruptcy protection. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier."

CIT Bonds Signal Bankruptcy Inevitable as Debt Exchange Expires

By Pierre Paulden and Caroline Salas

Oct. 30 (Bloomberg) -- CIT Group Inc. bond and credit- default swap prices show that investors are betting the 101- year-old commercial lender will file for bankruptcy after the deadline for a debt exchange expired overnight.

Since CIT Chief Executive Officer Jeffrey Peek started a $30 billion debt swap Oct. 1, the company’s notes due Nov. 3 dropped 12 cents to 68 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders of the $500 million in notes were offered 90 cents on the dollar in new debt and equity in an out- of-court exchange that expired at 11:59 p.m. yesterday in New York. They would get 70 cents on the dollar in bonds and new stock in a pre-packaged bankruptcy.

“We believe they will file for bankruptcy within the week, provided nothing unexpected occurs,” Adam Steer, an analyst with CreditSights Inc. in New York, said in a telephone interview before the deadline passed.

CIT, which lost $5 billion in the past nine quarters and failed to get a second round of taxpayer funding in July, sought to avert collapse by asking bondholders to agree to the swap or vote for the pre-packaged bankruptcy. It faces opposition from billionaire investor Carl Icahn, who says he’s the largest bondholder, with $2 billion in debt. If CIT is forced into a “free-fall” bankruptcy, unsecured claims may fetch as little as 6 cents on the dollar, said Peek, who plans to leave the company at yearend.

Keith Rodwell, a spokesman for CIT in Sydney, declined to comment on the outcome of the debt-exchange offer. Curt Ritter, a company spokesman in New York, declined to comment yesterday.

READ ENTIRE ARTICLE HERE

$1,000,000,000,000,000 In Derivitives (Quadrillion If You Don't Want to Count)

The fed hasn't just painted itself into a corner, it's taken a bath in cement and is now frozen in place. Raise interest rates - keep them the same...there is no cheating the invisible hand.

Trillion Dollar Ticking Derivatives Time Bomb to Explode Under Bankrupt Banks

* The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion.
* 97% of these ($196 trillion) sit on FIVE banks’ balance sheets (more on this shortly)
* If even 1% of this $203 trillion is “at risk” … you’re talking about $2 TRILLION in at risk bets made in the derivatives market
* If 10% of that 1% end badly, you’re talking about $200 billion in losses

Total equity at the five banks is $737 billion. So if you assume that only 1% of derivatives are “at risk” (odds are it’s more) and 10% of that at risk money is lost, you’ve wiped out nearly 1/3 of the banks’ equity.

If 2% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out $400 billion or nearly HALF of the banks’ equity.

If 4% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out ALL OF THEIR EQUITY and they go to ZERO.

Remember, I’m only accounting for derivatives here… I’m not even including ON BALANCE sheet risks, mortgage backed securities, and all the other junk floating around.

Suffice to say derivatives are HUGE time bomb waiting to go off.

And what could trigger them?

Interest rates.

Of the $200+ trillion in derivatives on US banks’ balance sheets, 85% are based on interest rates.

For this reason, I cannot take ANY of the Fed’s mumblings about raising interest rates seriously AT ALL. Remember %$firstname$%, most if not ALL of the bailout money has gone to US banks in order to help them raise capital. So why would the Fed make a move that could potentially destroy these firms’ equity (essentially undoing all of its previous efforts)?

However, at this point, the Fed may not have a choice….

As I showed in yesterday’s issue, the bond market is DEMANDING higher yields from US debt. Put another way, US debt holders are unwilling to continue funding our profligate spending without getting paid more to do it… I can’t say I blame them, since the prospect of collecting a 3% yield to own a currency that’s lost 15% in the last six months isn’t too appealing.

But if yields rise this could blow up the derivatives market (remember 85% of derivatives are related to interest rates). So the question remains:

I want to be clear here. The above chart MAY not be as bad as it looks. Remember, NOT ALL notional value of derivatives are at risk. For instance, only 1% of the above numbers might actually be REAL money at risk…

The issue however, is that NO ONE knows how much money is at risk here. No one. But considering:

* The derivatives market is TOTALLY unregulated….
* The nightmare that has occurred due to instruments that were allegedly regulated (mortgage backed securities, etc.)…
* EVERY attempt to increase transparency or accounting standards at the banks has been met with threats of financial Armageddon…

It’s very difficult NOT to be freaked out by the above numbers. Personally, I sure hope that less than 0.0001% of that stuff is “at risk.” I hope bankers were more careful with interest-rate based derivatives than they were with mortgage-backed securities.

I hope… But I doubt it.

Two Face: Inflation Vs. Deflation

In the world of Batman, the public good is constantly under attack from Harvey Dent, aka Two Face: the insane arch criminal that makes decisions based on the flip of a coin. Unfortunately for those dependent upon the flip, each side of the coin is the same because two face likes to "make his own luck."

Today the world economy is under attack from two different scenarios that look different at face value but may lead to the same result for nations that are heavily indebted: deflation and inflation.

Over the past two years the debate has raged between inflationary and deflationary camps sparring over how the world economy would suffer. This talk has recently come to a crescendo as much ado is being made about the upcoming G20 meeting in early November where many countries are expected to discuss the role of quantitative easing in their internal economic policies.

Some feel that these nations will be forced to curtail the expansion of the money supply by abandoning QE and raising interest rates - end result massive deflation.

Some feel that these nations will be forced to continue QE as the only means to fund themselves - end result massive inflation.

The common ground between both is that the fundamentals of the world economy are far from healthy.

Is it not becoming more clear that both scenarios may lead to the same result for those countries which are heavily indebted? That perhaps we have already made our own luck?

If the intervention is stopped, the financial system faces potential systemic collapse - much of which is guaranteed by these nations' governments. With a collapsing tax base, the interest payments on the debts become untenable (both public and private) and the default scenario emerges - forcing a devaluation of the currency and isolation of country from trade/financing with others. (This is a much different scenario than deflation in the Great Depression - the level of personal and governmental debts for countries was minimal if not nonexistent - same story in Japan in the 1990s).
END RESULT - CURRENCY DEVALUATION

If the intervention is continued, the integrity of the currency is undermined by both supply and confidence as holders of currency try to unload it, rushing to the exits like somebody yelled fire in a movie theater.
END RESULT - CURRENCY DEVALUATION

One thing we can all agree on is that two face has a gun to the world economy's head.

Let's hope there is an economic Batman out there somewhere to save us.

A Little Perspective

Faber & Roubini on Dollar

For those who didn't catch this video yesterday, Faber predicts the dollar approaching a value of zero on a time line between now and ten years.



Roubini has come on record lately stating that he is not a believer in gold and commodities at any price and that they are in a bubble. While this could be true in the short term he seldom makes projections further than 6-18 months out. Lost to many is his continued use of "right now."

Where is the truth between Faber & Roubini - likely somewhere in between.

Japan: Dollar Still World's Strongest Currency

For all of our sake, let's hope this is true and continues to be true. A weaker dollar will devastate Japanese exports - more so than it will China (you can bet this will be a conversation between United States Trade Representative Ron Kirk today in Hangzhou, China as he attends the 20th session of the U.S.-China Joint Commission on Commerce and Trade (JCCT)). Perhaps we will see a sustainable greenback rally in the near future coinciding with a stiff equities correction which will likely take out major financial players. Unfortunately, all good things come to an end, including the reign of king dollar. As intervention in failures continue, such actions will beget the erosion of currency integrity. As to the time line, it is debatable should we avoid another major market shock.

Maintaining confidence in the US economy and it's currency will be of paramount importance in maintaining stability. The Worsening Job Picture Fuels Slide In Confidence is a major challenge.

Dollar 'World's Strongest Currency': Japan

(AFP) – 6 hours ago

TOKYO — Japan's finance minister said on Tuesday that the dollar was still the world's strongest currency and it was natural for Tokyo to keep large stockpiles of the greenback.

"It is clear that the dollar is still the world's strongest currency," Finance Minister Hirohisa Fujii said at a press conference.

"It is a matter of course that the country keeps its foreign exchange reserves in a strong currency."

This in turn "also supports the dollar," he added.

Japan has the world's second-largest forex reserves after China. Tokyo gives no breakdown of the currencies, but most are believed to be held in dollars as a result of past intervention to sell the yen against the greenback.

Fujii said countries should not seek to artificially weaken their currencies to boost the competitiveness of their exports, but also reiterated that he was not necessarily in favour of a stronger yen.

"It would have a negative impact on the world's economic and political conditions if each nation engages in a race to devalue their currencies," he said.

Japan has not intervened in the foreign exchange market since March 2004, allowing the yen to find its own level against the dollar.

Fujii has said on several occasions since taking his post last month that in principle he opposes action to curb the strength of the yen, which hurts Japanese exporters' earnings.

But he has also said Tokyo does not rule out stepping into the market to sell the currency "in an abnormal situation."

The dollar hit an eight-month low against the Japanese currency last month, dropping below the 89 yen level, as the greenback came under broad pressure.

But it has since recovered some ground, striking a five-week high of 92.33 yen early in Tokyo trade on Tuesday.

Max & Erma's Is Toast

The only thing shocking here is that Max & Erma's was still in business. The retail climate will continue to deteriorate.

Sign of the times: it is rumored that the former flagship Marshall Field's in Chicago, now a Macy's, may not be able to afford a Christmas tree this year for the Walnut room.

Restaurant Chain Max & Erma's Files For Bankruptcy

(AP) – 23 hours ago

PITTSBURGH — The restaurant chain Max & Erma's Inc. has filed for Chapter 11 bankruptcy protection, listing between $1 million and $10 million in debts.

The hamburger and casual dining chain, which is based in Columbus, Ohio, has about 80 restaurants. It was acquired in April 2008 by G&R Acquisitions, which is based in Pittsburgh.

Documents filed Friday in U.S. Bankruptcy Court in Pittsburgh say Max & Erma's has between 200 and 999 creditors.

Typically, companies file for Chapter 11 protection so they can get temporary relief from creditors while developing a financial reorganization plan.