CIT Group Inc. (CIT) has filed for Chapter 11 protection on Sunday. The company struggled for months to avoid collapse since the recession elicited billions of dollars in loan losses, and the financial crisis made it incapable of funding itself from its main financing source.

This widely expected Chapter 11 filing is one of the largest in U.S. history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. The U.S. government will probably lose most of its $2.3 billion aid given to CIT last December through the Troubled Asset Relief Program (TARP). We think the problems at CIT will further weigh on the U.S. economy.

CIT’s bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. The company cited that its bondholders selected a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to run its business.

According to management, the decision to proceed with the company’s plan of reorganization will allow it to continue to provide funding to two sectors — small business and middle market customers — which remain vital to the U.S. economy.

Though for few quarters CIT’s funding had come from the unsecured debt market, the company was unable to continue to fund its operations as the financial crisis got deeper. However, bank deposits made up 0% to 5% of CIT’s funding.

Based in New York, CIT was one of the largest diversified specialty lenders that focus predominantly on secured commercial lending and leasing, which formed the major portion of the financial system that collapsed during the height of the financial crisis last year.

The Chairman and CEO, Jeffrey M. Peek, said that he is planning to step down at the end of the year.

Zacks Investment Research
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