Warren Buffett Isn't The Answer For CIT (CIT, BRK-A, LUK)

Here comes another weekend, and here comes another round of questions about the fate of CIT Group, Inc. (NYSE: CIT).  While there were reports that Warren Buffett via Berkshire Hathaway Inc. (NYSE: BRK-A) and Leucadia National Corp. (NYSE: LUK) may have made offers for some CIT assets, it seems that Buffett is not the right fit.  In fact, he even laid out the case where a bank should own those assets.

As far as the gains for CIT today, these shares are up 15% at $0.85.  But this is more on CIT amending its debt offer for creditors and then on asset sales.  But back to Buffett…

Buffett told Fox Business News this morning that CIT serves a business function but its raw material — money — costs them far too much.  He then noted that the business has to be transferred to someone who has low funding costs.  He also noted CIT has been trying to find cheap funding but has failed to do so.

Buffett thinks that this business should go to essentially who gets government guaranteed money, and he noted how any bank with FDIC funding gets cheaper funds to borrow than Berkshire Hathaway.  He noted how some get money now at 1%, while CIT’s latest funding came around 13%.  As far as the business, Buffett thinks the CIT assets are not the problem, it its liabilities, and those assets need to end up at a place with a lower cost of borrowing.

We have our own take on this, and it we think it is not a Buffett or Berkshire Hathaway solution.  The obvious answer and solution is regional banks and some of the larger community banks that are closer to the bulk of the small and mid-sized CIT customers.  Those are the groups which can can absorb this business, but the issue is that it means there will be dozens or hundreds of lenders that ultimately replace CIT.  Investors love to look for “who wins if this group fails”….  In this case there is no single winner.

We would also go back to a prior notion that still holds true regardless of what Buffett or other might or might not be interested in.  The common stock of CIT Group is effectively nothing more than a long-term warrant on a very troubled company.  There are three alternative NYSE-listed securities, two preferred shares and one equity unit tied to senior notes, that at least give investors a higher spot in the food chain if CIT ends up in bankruptcy.  There is no assurance there will be much value left for them either, but you already know how much value a common shareholder has left after a bankruptcy.  Zero.

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JON C. OGG
JULY 24, 2009