Bailout, Then Bankruptcy

CIT Group, a commercial lender, has filed for bankruptcy, 10 months after it received $2.3 billion in bailout money.  The bankruptcy means that the federal government — and, ultimately, taxpayers — are unlikely to recover any of the bailout funds.  With the bankruptcy, the preferred stock and warrants that the federal government acquired in exchange for the bailout money will be pretty much worthless.

I think it is fair to ask what the American taxpayer received in exchange for the bailout.  In this instance, the answer appears to be “not much.”  CIT staved off bankruptcy for 10 months, and its bankruptcy will be of the “prepackaged” variety that will allow the company to shed certain liabilities — like the warrants and common stock held by the federal government — but continue to do business like it has been doing business.  Bondholders will still have an interest in the company and, most notably, the CEO who joined CIT in 2003 and apparently pushed CIT to get into subprime mortgages and student loans still has his job.   Thank goodness!  No doubt that will help to make every taxpayer feel better that their share of the $2.3 billion has vanished on the wings of the wind.

I recognize that a case can be made that the federal government had to step in and help banks and other financial companies to ensure that the crisis of confidence that occurred after the fall of Lehman Brothers did not result in a general collapse of the financial markets.  Still, we shouldn’t kid ourselves that the bailouts were without cost.