Bankruptcy Threat amid Investor Loss

CIT Group Inc. failure to secure a second government bailout has prompted renewed bankruptcy fears. The New York based lender who traditionally looked to institutional investors for capital is coming under increased scrutiny from retail investors for its offering of corporate notes marketed under the name, “InterNotes.”

Some have wondered what a company that traditionally looked to institutional investors for capital was doing looking to retail investors for capital. The reality is, CIT Group needed capital badly, and the institutional investors that customarily were the source of CIT’s business were wary of the U.S. lender. While under CEO Jeffrey Peek, CIT went from a profitable entity to one that has seen nine quarters of consecutive loss totaling more than $3 billion.

Unfortunately for investors, third party broker-dealers were given the task of selling the CIT-backed debt, InterNotes. Trusting investors, not knowing what many institutional investors had known for quite some time, were sold this debt by their brokers while CIT was already heading for trouble. When the troubles facing CIT became more public, InterNote investors looking to sell were faced, and continue to face, difficulty in find buyers and negative returns when they do.

Though the U.S. lender was able to secure $2.3 billion in TARP funds in the last weeks of President Bush’s administration, it has still failed to emerge from the red. With the recent failure of the company to gain additional taxpayer funds from the government, many are certain that bankruptcy protection is in the foreseeable future. Though small and medium-sized businesses could loss a longtime lender if such an action took place, the damage to InterNote holders has already been done.