Bob O'Brien
Head Instructor
bobrien@mywealth.com
CIT, a lender to small and mid-size companies, is having some real financial difficulties and may soon be filing for bankruptcy. Although CIT does not compare in size to Lehman or some of the other Wall Street giants that have had problems since the credit crisis, it is significant because it is just one more broken link between Wall Street and Main Street.
What are the other links between Main Street and Wall Street that have been broken? Obviously residential mortgages, which have been at the forefront of the economic disaster, have been decimated. In addition, there has been a huge disconnect with credit cards, with historical defaults piling up and a projected default rate of nearly 25% by the end of the year.
CIT is different in many ways in the sense that it helps create jobs, by lending to small businesses in which 70% of all the jobs are created.
The biggest driver of credit card defaults has been people losing their jobs, and when their employers (small businesses) are defaulting on their loans and not able to acquire credit, where does this really leave us in the credit crunch?
Things have gotten better, but this is just another sign of the challenging times still ahead.
In the end the Government will have no choice but to bailout CIT, due to the fact that letting it fail would be like cutting off their own nose to spite the face. This is just another reminder as to how fundamentally bad the entire financial system is right now, and the long road it faces toward recovery.
We may see financials rally again on speculation, as we start another cycle of Financials and Techs doing well to the point that heavy inflation becomes a real threat which drives up commodity prices like oil.
Be certain to check out our Investing Courses, to make certain you are navigating these turbulent markets properly.
