Economist Joseph Schumpeter wrote, “Our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustments, 12new maladjustments of its own which has to be liquidated in turn, thus threatening business with another crisis ahead.” [Depressions: Can We Learn From Past Experience?]
While it is easy for us to argue that the economy should be allowed to run its course and failing companies should be allowed to fail, the finance company CIT presents more personal challenge. You see, one of our nonprofit clients holds a relatively large stake in CIT unsecured debt (no, not our recommendation, nor the preference of the current nonprofit leadership). Given the nature of their business structure, they could not sell the CIT bonds at a loss, and they have been trading below par for years now, thus causing the current dilemma. The bonds have been trading in the 50s and 60s for the past many months, and are now trading in the 30s-40s as the government decides whether or not to provide the billions required to keep CIT afloat.
Fundamental questions raised by the CIT situation:
- CIT’s collapse would hit Main Street, as the lender provides financing for franchises, clothing manufacturers and other small businesses. If the Government is willing to bail out AIG in part so that AIG can pay billions back to Goldman Sachs and JP Morgan, then why not bail out a Main Street financial entity so that it can keep lending to small business?
- If CIT’s collapse hits Main Street and causes small businesses even greater stress than they are already facing, then won’t there be a significant financial impact on society by that failure via higher unemployment, lost tax revenue, and reduced consumer spending?
- Some argue that other lenders will step in where CIT used to lend, but what if they do not? Can/should the Government force lenders to pick up CITs slack?
- If CIT’s business model proves not to work, then is that an indication that the broad customer base to which CIT lends is not desirable? What would that say then about the role of small business in our society? (and yes, Syntrinsic is a small business with a modest commercial line of credit)
- If the government intervenes to the tune of billions of dollars, have we really saved any money or have we just reallocated the cost of a failed business? That is, should CIT’s stakeholders (e.g. bondholders, equity holders, employees, managers, customers, vendors, etc.) bear the cost of CIT’s failure or should that cost be allocated across society and to future generations?
- Just because we know people who would be adversely affected by the collapse of CIT, does that mean that we should support any effort to keep it afloat? At what cost?
- Is it ethical to compel future generations to pay for this generation’s failed businesses?
Feel free to substitute GM, Chrysler, AIG, Citibank, Goldman Sachs, or others for the above questions. Soon enough, we may have to ask these questions about airlines and healthcare providers. But for now, CIT provides a window into a society confronting its values and priorities.
As much as we want the CIT bonds to be redeemed at par in 2015 because it affects people about whom we care, we also believe that such a result should come from the authentic results of a viable business, not the compelled borrowing against a future generation’s work and wealth.