1. Fed Statement: The Fed released its minutes of the last meeting today. Some member were concerned that inflation will temporarily rise above the Fed's mandate (p. 10). The Fed expects the economy to contract less than its previous forecast made in April, now expecting a 1% to 1.5% contraction compared to the earlier forecast of 1.3% to 2%. The FED expects an unemployment rate this year to hit 9.8 to 10.1 percent. Unemployment is expected to be high for the next few years. The forecast for consumer inflation was raised to 1 to 1.4 percent, a higher range than the April forecast of .6 to .9 percent. The FED still expects inflation to be subdued for some time. The FED noted that credit was tight and many banks were reluctant to lend (p.9)
The current economic projections of the FED are contained in an addendum to the minutes titled "Summary of Economic Projections" which compares the current predictions with those made last April.
2. CIT A Goner-YEP?: The government is going to allow CIT to twist in the wind. I suspect that bankruptcy is CIT's only viable option. There are numerous reports that its customers have drawn down their lines of credit placing further strain on the company. If bankruptcy is filed, which seems to be a foregone conclusion based on news reports, it would be difficult for me to see how the government will recover any of the the 2.3 billion used late last year to buy equity preferred stock. The senior debt is being priced now at a substantial discount to par value.
I did notice that Cramer finally put Jeffrey Peek, the CEO of CIT, on his Wall of Shame tonight, about two years too late in my opinion. Cramer asked, rhetorically, whether there was a Board of Directors at CIT. How else could any CEO survive who has failed with such gusto, in such an obvious manner, beyond reasonable doubt. But, the same question could be asked about hundreds of companies, and CIT's Board may simply be among the most negligent. The disastrous foray into subprime lending and student loans should have resulted in a house cleaning. But it goes further. The WSJ reported that approximately 16% of CIT's commercial mortgages were non-accruing, a staggeringly bad number by any measure, and the overall delinquency rate was 4.7% compared to an average of 2.8% for other U.S. lenders. So, I will take a loss at some point on my two CIT senior bonds, maturing in just a few months. I will give myself a kudos of sorts in only buying 2 of this companies bonds prior to 2008, which was 2 too many but better than a more normal 5 or worse 8 or 10, and for trying to sell them unsuccessfully several times prior to the recent bad news. Maybe the Board will reward CIT's management by giving them incentive bonuses to stay on as the firm screws its creditors during the bankruptcy proceeding.
Update 8:25 P.m.: I read a story late this evening from the WSJ., which had just been updated, that CIT was in a last minute effort to raise 2 billion from its debt holders, offering to pledge some receivables, and giving those firms 24 hours to decide. It is hard to see how this would buy much time for CIT, with the strain on its resources coming from customers drawing down their lines of credit and debt constantly coming due which will have to be repaid. This is a link to the CIT debt maturities at the FINRA site: Search Results
Randall Forsyh has a column in Barrons.com tonight that a CIT bankruptcy "would have a massive ripple effect". The unwillingness of the government to extend further assistance was apparently linked to CIT's reduction of lending, as its liquidity issues increased, which reduced its importance in the economy further in the government's opinion.
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