CIT Group – Preferred A Shares
CIT Group (NYSE: CIT) was making all the noise in the market today. First, it was a rumor saying John Paulson, a big-shot fund manager, was considering merging the remnants of IndyMac bank with CIT Group. Then later today, reports surfaced about CIT Group possibly getting a $8-$10 billion loan facility from Bank of America (NYSE: BAC) and Citibank (NYSE: C). Both of these news are positive for CIT Group and their common stock rose 31.7% today to close at $2.20.
My take on this whole CIT Group situation is this: I don’t believe the government or the big players in the banking sector can allow CIT Group to fail. In fact, they must do everything possible to keep it solvent. At a time when the economy is teetering on the edge, a CIT bankruptcy can tip the balance of the economy the wrong way and force us back into a recession. Forcing CIT Group into bankruptcy will cause instability in the financial markets and create widespread panic. This will hurt public confidence in the economy, hurt people’s perception on the safety of banks, and hurt investor confidence in the financial institutions — particularly those connected to CIT. The stakes are simply too high. The Fed can’t let CIT become another Lehman Brothers fiasco and that’s exactly what it might become if CIT declares bankruptcy. For this reason, and this reason alone, I believe the Fed and the big banks will do anything they can to keep CIT afloat.
With that said, I would much rather buy CIT’s Preferred A stock vs. any of the other alternatives. The CIT Preferred C shares went up quite a bit today and proportionally more than the A’s — which makes the Preferred A’s seem much more attractive than the C’s. If you’re banking that CIT will go bankrupt, buy the CIT Preferred Z shares. That’s your best bet there. See my analysis on the Preferred Shares from last month here:
http://www.investcraft.com/cit-group-preferred-shares.
In any case, if the news today about the loan facility and/or merger with IndyMac are true, these would both be very beneficial to the share prices of CIT common and Preferred A or C shares. But there are never any guarantees! As always, please do your own due diligence.
