C.M.O. 7.17.2009
Credit Market Overview
July 17, 2009
Two years after it was formed in 1978 the Entertainment Sports Programming Network or ESPN as it is more commonly known began broadcasting 24/7/365. Great for sports fanatics but a headache and a half for the person responsible for filling up all of that air time.
The solution was to include various displays of athletic prowess in the form of competition. As a result we have wonderful things like the “World’s Strongest Man” competition. The competitors, if you’ve never seen it or just won’t admit to it, are men, obviously way out on the tail of the genetic distribution curve, who must do little else besides lift the corners of buildings and eat to maintain their enormous size.
One of the events, yes I will admit to having seen at least parts of it, has the competitors harnessed to a tractor trailer and they pull the rig a specified distance to see who can do it fastest.
A bit of insomnia after being short during the 26 point up day on Wednesday found me flipping channels in the wee hours and I came across this truck pull in action. Mindless as the competition was it did trigger a thought based on two current events, CIT and the proposed health care regulation.
Imagine if you will the “strongman” as the U.S. economy and the rig as all of those things that are now proving a drag on its growth. Leaving the housing bubble and its causes alone for a moment I was thinking not about the past but what could be done now to accelerate growth. Not in artificial stimulus measures but real growth. Small businesses starting, hiring a few people, growing, hiring more people; you get the picture.
The Small Business Association, SBA, recently stated that small businesses (less than 500 workers) employ 58.6 million people, firms with less than 20 workers employ 21.3 million people and that these small businesses are responsible for 60%-80% of net new jobs.
CIT is (was) a source of funding for many of these small businesses as well as a major player in advancing cash to clothing manufacturers along with giving credit to retailers to pay off invoices. Some of CIT’s clients include Dunkin Donuts, Dairy Queen, Union Pacific, Bed Bath & Beyond, Tommy Hilfiger, Avaya and Dell. Some of these are now big corporations but none started out that way.
With the stock closing at $0.41 last night the lights at CIT appear to be just about out. The CDS rocketed from 1997bps on 7/15 to 6429bps last night.
A treasury spokesperson said, “U.S. officials ultimately decided CIT’s problems were too severe to be solved by any of the plans under review”. Rahm Emanuel had a slightly different take saying that “Given the sense of calm, it is a symbol of a different phase”. I do wonder if the 2.6MM people who have lost their jobs since January of this year feel that same “sense of calm” but then Mr. Emanuel still has his job.
The real cause of inaction with regard to CIT might be the structure of the support network itself. Brian Gardner at Keefe, Bruyette & Woods said, “There are no clear lines of authority about who should do this, you have different programs and different authorities, and there is not a clear delineation of who should be dealing with CIT.
Bill Isaac, former chairman of the FDIC, though letting CIT go away was ill advised saying, “If I were at the Fed or the Treasury, I would think about: Will we spook the markets if we let this one go? It’s not a time for philosophy; it’s a time to be practical”. Obviously Mr. Isaac and Mr. Emanuel disagree on this point.
The current effort to provide healthcare to everyone within our borders is also proving to be a weight born by the small business owner as the House plan would like employers with payrolls exceeding $400,000 to provide health insurance to their workers or face an 8% penalty tax, firms smaller yet ($250,000) would be penalized 4% for not providing healthcare and those with less than $250,000 would, thankfully be exempt.
Regardless of how strong the U.S. economy inherently is, does it make sense to weigh down the engine of job creation, the small business, by removing a ready source of financing while adding to the overhead?
Whether the guy pulling that truck eats a cow for lunch or not he’s smart enough to know that the less weight he has to pull that faster he’ll get to the finish line. Maybe he should run for Congress.
Enjoy the weekend.
Jim Delaney
