Friday, October 30, 2009

CIT: Another Sunday Bankruptcy and Goldman Profitpalooza?

CNBC reported small business lender CIT will enter prepackaged bankruptcy this Sunday. CIT's stock is down 15%. Will Goldman Sachs get their $1 billion payment when CIT officially implodes? Will it come out of the $4.5 billion recently raised? Will Goldman Sachs own a big chunk of the reorganized CIT, having beaten Carl Icahn in the Battle of the Bondholders?

The market knew the risk of failure:

According to CMA datavision, CIT credit default swaps widened 4.7 percentage points to 38.7% upfront since late September.

Who made credit bets on CIT's failure? FT reported:

In the case of CIT, the market has bought more insurance than the company's $30bn in debt.

That list, especially those not holding underlying debt instruments, is worth perusing. One firm clearly made it, Goldman Sachs.

However, today markets have stabilised and Goldman is over-collateralised on rescue financing. And thanks to the position in CDS, Goldman will actually profit in the event that CIT files for Chapter 11 bankruptcy protection in what one regulator describes as a "double bonanza".

People familiar with the matter say Goldman has no desire to see its client file for Chapter 11. It is in fact trying to renegotiate the rescue financing. But regardless of Goldman's intention, the bank would profit handsomely if CIT were to file for bankruptcy protection.

The high stakes Wall Street boys are at it again.