Move along. Nothing to see here. That appears to be the view of the Obama administration as it allows CIT Group Inc. to desperately look for other financing, or slide quietly into bankruptcy, possibly as early as today.

This is not Lehman Bros. Part 2, and besides, another bailout is a political nonstarter, go the assumptions. The damage, even to those businesses that rely on CIT for regular infusions of cash, will manage, according to much of the financial punditocracy. And isn't the administration planning to pump billions more dollars into small-business loans anyway?

Lloyd Chapman, president of the Petaluma-based American Small Business League, is not so cheery. "I fear an avalanche of bankruptcies," which may hit California hard because of the concentration of retail and import clothing businesses in the state tied to CIT, Chapman said. As to the supposed ease of replacement, many of the loans are long-term credit lines given to business owners "that had been turned down repeatedly by other lenders." The Obama administration, he added, is going to have come up with a "much bigger pot of money" than is currently on offer to replace what businesses will lose with CIT's disappearance.

Noting that Goldman Sachs Group Inc., which reported boffo quarterly profits this week, benefited from a Federal Deposit Insurance Corp. program guaranteeing newly issued debt that was denied to CIT, Chapman added, "I'm not predicting it, but I wouldn't be surprised if Goldman Sachs somehow benefits from this."

Ripple effect?: Matthew Anderson isn't especially sanguine about CIT's bankruptcy, either. "Credit quality is still a big issue. I don't see how CIT's failure helps the situation," said Anderson, a partner at Foresight Analytics, an Oakland research firm.

Anderson and his colleagues recently analyzed CIT's $75.6 billion worth of loans at the request of the Wall Street Journal. They found CIT's delinquency rate - spread across commercial, industrial and consumer, including student loans - close to double that of other lending banks. Unlike those other banks, CIT doesn't have depositors, its operations relying exclusively on financing from the debt market, which began shutting down for CIT earlier this year, Anderson explained. That was one of the whammies hitting CIT at the same time as more of their borrowers were defaulting. Getting shut out by the Obama administration makes three.

Anderson believes that a CIT bankruptcy will be disruptive to many of its borrowers, especially those already experiencing liquidity problems. He agrees that CIT is not central to the financial markets as was Lehman Bros., but is concerned about other banks' potential exposure to CIT, and the impact a Chapter 11 will have on the company's bond holders, and the bond market in general.

"I hope regulators are at least looking hard at the situation, and figuring how to help out without appearing to bail out CIT," Anderson said.

"It's a delicate political balance. And a financial one."

Twittering at twitter.com/andrewsross. Tips, feedback: E-mail bottomline@sfchronicle.com.

This article appeared on page C - 1 of the San Francisco Chronicle

Source:  http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/07/16/BU7118P6PQ.DTL

An advocate for small businesses has launched a war of words with the U.S. Hispanic Chamber of Commerce, publicly assailing the organization for refusing to support a bill that aims to stop corporate giants from snatching up federal contracts meant for small businesses.

Lloyd Chapman, president of the California-based American Small Business League, insists that the bill, introduced in May by sophomore Congressman Hank Johnson (D-GA), champions a cause that is in the best interests of many Hispanic-owned businesses. Chapman says the bill thus far has about 45 organizational supporters, many of them regional minority chambers.

Over the past couple weeks, Chapman -- whose star as a shout-'em-down pundit on Fox News and CNBC is on the rise -- has sent out press releases to chambers across the country strongly criticizing the U.S. Hispanic Chamber and others for their lack of support. Late last week he used his regular column in the Huffington Post to challenge U.S. Hispanic Chamber leaders to "put up or shut up."

"The USHCC has never objected to the diversion of billions of dollars in federal small business contracts to Fortune 500 firms in any way, shape or form," he wrote on Friday. "If the U.S. Hispanic Chamber is such a big small business advocate, show me."

Specifically, the bill, called the Fairness and Transparency in Contracting Act (H.R. 2568), aims to ensure that no publicly traded company can vie for federal contracts meant for small businesses.

Few deny this phenomenon has been problematic. By law, the federal government has a legal obligation to try to set aside 23 percent of its contracts for small businesses. In 2002, the federal Small Business Administration released a report stating that about 4.4 percent of 1,000 contractors receiving federal small-business contracts should not have gotten them, citing Hewlett Packard as an example.

U.S. Hispanic Chamber officials say they are not opposed to the bill, they just aren't endorsing it.

"There is not a single small business organization that believes that large contractors should be getting small business awards," David Ferreira, Vice President of Government Relations for the Chamber, told HispanicBusiness.com. "Nevertheless, it is misleading to say that our organization is opposing legislation by virtue of not endorsing it."

Ferreira said the bill simply re-states current law that already prohibits publicly traded companies from landing federal small business contracts. What's more, he said the chamber is focusing its efforts on a more comprehensive piece of legislation that is developing in the Senate small business committee.

"We appreciate their enthusiasm for wanting to push the issue," Ferreira said. "We're working on the larger contracting reform bills from the Committees on Small Business - these are the bills that will very likely be approved by Congress, and these will deal with a larger set of substantive changes to the federal marketplace."

Ferreira is referring to a bill being drafted by Sen. Mary L. Landrieu (D-La), chair of the Senate small business committee, which is resurrecting a piece of legislation introduced in 2007 by Sen. John Kerry that never passed. Early this month, the U.S. Hispanic Chamber responded to Landrieu's request for feedback on Kerry's bill with a comprehensive critique.

In the critique, the chamber said it wants to see the bill address small-business busters such as contract bundling, in which the federal government puts together single monster contracts when they could issue many small ones, precluding small businesses from competing. It also mentions the importance of prohibiting large companies from landing small-business contracts.

Meanwhile, in a weird twist, Johnson -- the author of the bill exalted by the Chapman's ASBL -- is distancing himself from Chapman's feverish advocacy.

"It seems to me abrasive and grossly misleading," Johnson's communications director, Andy Phelan, told HispanicBusiness.com. "We want to make sure it's clear: We are separate from the ASBL. ... We do not want to get into any war of words between the ASBL and the U.S. Hispanic Chamber of Commerce."

For his part, Chapman insists that he wrote the bulk of the bill himself, shopped it around to different legislators and found a taker in Johnson, who was elected to Congress in November 2006.

In any case, for all the U.S. Hispanic Chamber's efforts to appear aloof to Chapman's tactics, the organization appears annoyed by the criticism.

Earlier this month, responding to a press release sent by Chapman to regional chambers across the country titled "U.S. Hispanic Chamber Opposes Bill to Help Small Businesses," the U.S. Hispanic Chamber fired off a press release of its own that took on a defensive tone, and added a not-so-subtle jab.

"The United States Hispanic Chamber of Commerce (USHCC), the national advocate for nearly 3 million Hispanic-owned businesses, reaffirms its longstanding commitment to comprehensive and substantive federal contracting reform," it said. "Today, an obscure organization criticized the USHCC ... on the commitment to such reform."

Johnson's bill, despite not being as comprehensive or wide-ranging as Landrieu's, does boast some supporters, most of them regional minority chambers, such as the California Hispanic Chamber of Commerce, the Hispanic Chamber of Commerce of Minnesota, the Greater Kansas City Hispanic Chamber of Commerce, the California Black Chamber of Commerce and the Georgia Black Chamber of Commerce, according to Johnson.

Val Vargas, founder and board member of the Hispanic Chamber of Commerce of Minnesota, said she doesn't know the details of the bill, but appreciates how it strives to stop a practice that shouldn't be happening.

"I'm not an attorney and I'm not a politician," she told HispanicBusiness.com, but "increased opportunity is a wonderful thing for small business."

Steve Gandola, President and CEO of the Sacramento Hispanic Chamber of Commerce, told HispanicBusiness.com that the bill sounds like something he would support, though as of this week he had not done so officially.

"We certainly support the intent of it, but given that the U.S. Hispanic Chamber has opposed it, we want to do due diligence" in researching it, he said.

(In contradiction to this, the ASBL provided HispanicBusiness.com a copy of a January letter from the interim executive director of the Sacramento Hispanic Chamber formally endorsing the bill.)

Gandola added that he appreciates how the bill seeks to ensure that the law is upheld.

Even under the law as written, he said, "the majority of contracts still go to large businesses. To take that small portion and redirect it to large businesses already getting the lion's share of contracts goes against the intent of the measures put in place."

As for Chapman, he insists that the Fairness and Transparency in Contracting Act would inject more money back into the middle-class economy than President Obama's $787 billion stimulus package.

"Here's the Lloyd Chapman plan: the bill could be passed and signed into law by Friday, and take effect Monday morning" he told HispanicBusiness.com. "That would start putting $40 million a day back into the middle-class economy."

Chapman said his bill would prohibit companies from self-certifying themselves as small businesses, thereby putting the onus of approval on the federal government. It also would require the federal Small Business Association to make public which companies are receiving small business contracts.

"The Hispanic chamber is saying my bill is weak, it's just the opposite: my bill is bulletproof," he said. "If the chamber's got something better, show it to me."

Chapman spent a majority of his career in sales, most recently as a sales manager for a small IT company in Navato, California, which he left in 2003. While a salesman, he also took an interest in federal contracting disputes.

Chapman later founded a niche advocacy organization called the Micro Computer Industry Suppliers Association. After broadening its scope, he would eventually rename it the American Small Business League.

Chapman does say that although he initially wanted to create the league as a non-profit organization, he changed his mind when he learned that such companies cannot lobby lawmakers.

Over the years Chapman has donated tens-of-thousands of dollars to elected officials. He gave Obama $2,300 in the last election, and in 2007 contributed $10,000 to U.S. Senator Barbara Boxer, D-California.

And although Chapman does say the ASBL gets money from its member businesses, he declines to reveal the names of any members, or even how many paying members there are.

Chapman's criticisms are not confined to the U.S. Hispanic Chamber. On a recent CNBC appearance, he sparred with Giovanni Coratolo, vice president of small business policy at the U.S. Chamber of Commerce, whom Chapman blasted for refusing to support his bill.

"Giovanni doesn't represent small business any more than McDonald's represents cows," chided Chapman, who claims that the U.S. Chamber's board of directors includes 15 members representing Fortune 500 companies.

Coratolo shot back: "You use the cloak of small business to make people think you have this great organization. It's a sham! Let's face it Lloyd, it's a sham."

In response to this, Chapman's ASBL sent HispanicBusiness.com a list of its accomplishments, which, according to the organization, includes forcing the federal Small Business Administration to remove 600 "of the largest companies in the world" from the federal government's database of small businesses.

Source:  http://www.hispanicbusiness.com/news/newsbyid.asp?idx=159525&page=1&cat=&more=

NEW YORK (CNNMoney.com) -- The small business credit market is about to take another major hit. Six weeks after Advanta abruptly froze all of its 1 million credit-card accounts, lending giant CIT Group faces potential bankruptcy.

Following a flurry of media speculation, the ailing company announced late Wednesday that it would not receive government assistance. CIT said on its Web site that it is "evaluating alternatives."

Over the past nine months, the one-time financial services powerhouse has all but ceased making new loans, which left small business advocates and owners with mixed feelings about whether CIT should be left to fail.

CIT was historically the biggest issuer of Small Business Administration-backed loans, topping the agency's lender list year after year. Last year, it made 1,195 loans through the SBA's 7(a) program, totaling $766.6 million.

But in the wake of the credit crisis that followed Lehman Brothers' September collapse, CIT's lending came to a standstill. Since October, CIT (CIT, Fortune 500) has funded fewer than 100 SBA loans, totaling $65.7 million.

"In order to service its debt and meet obligations, [CIT] has been cutting back on new originations," explains David Chiaverini, research analyst at BMO Capital Markets.

CIT CEO Jeffrey Peek said in November that his company was "the bridge between Wall Street and Main Street," and "one of the few significant sources of liquidity for small and mid-sized businesses who are struggling to survive." But by then, CIT was already burning down its bridge, turning away many of the small businesses that had come to rely on the company.

Craig Moore is president of CiCi Enterprises, a pizza franchisor based in Coppell, Texas. CIT Group was CiCi's go-to lender for financing new franchises.

"We had used them quite a bit in the past years because they made the process easy to get through. But at the end of last year, they tightened so quick they almost stopped lending to us overnight," Moore says.

Moore had 300 franchise candidates in the pipeline. Very suddenly, half of them couldn't get loans and became non-viable, including 16 that had been working with CIT. Moore says some are still hanging on, hoping the credit markets loosen up, while other potential owners are tapping family and friends for startup money.

"We had a goal of building 80 stores this year and we may end up with 40. That drop is due to the financing issues," says Moore. "On a bigger scale, that's 40 stores which each could have hired 35 employees."
Diverse financial services

CIT wasn't just known for its startup loans. It also provided loans and lines of credit to existing small businesses. If the company falls into bankruptcy, those credit lines may vanish.

J.P. Morgan's analysts estimate that CIT had $1.5 billion in unfunded commitments in March, primarily comprising untapped credit lines and other guarantees that customers could draw down if they chose. That's a big deal for affected business, but it's a comparatively small amount in the overall lending landscape. When Advanta froze its small business credit cards, it had about $5 billion in outstanding balances.

CIT is also a major player in factor financing. Factoring companies buy invoices from manufactures and retailers, immediately paying them a portion of the invoices' face value and assuming the task -- and the risk -- of collecting payments from customers. For businesses that can't afford to wait, factoring offers fast access to operating cash.

CIT Trade Finance processed a factoring volume of $8.3 billion in the first quarter of 2009, but there too, signs of the company's cutbacks are showing. CIT's factoring volume dropped 21% from the same quarter a year earlier, which the company attributed to the weakened retail environment.

If CIT now falls into bankruptcy, its factoring clients will need to find a new lender. Some may also be left chasing CIT for unpaid balances. As of March 31, CIT held $2.7 billion in credit balances for its factoring client, according to an SEC filing.

Robert Saquet, president of Eggers Furniture, a retail store in Middleboro, Mass., is wondering how his shop will be affected if CIT disappears from the factoring market.

"Many manufacturers would not be able to stay in business without a factor creating immediate cash flow," Saquet says. Three of his largest suppliers use CIT as a factor. "Without a source of cash, they would have to demand pre-payment from retail stores. Retail stores are struggling and are not able to get the credit to raise more cash, so they would have to stop buying from factories that are not able to extend terms."
Soaring defaults

Small companies have been hit hard by the recession, and CIT is suffering in tandem with those it serves. Defaults and delinquencies are rising as cash-strapped business owners fall behind on their bills. Meanwhile, the value of the collateral pledged against CIT's loans is deteriorating, as home and commercial real-estate prices plunge.

"The weak economic environment had a much greater impact on certain segments of our corporate loans portfolio than we have anticipated previously," CIT CEO Peek told analysts in a conference call to discuss the company's most recent quarterly results.

CIT received $2.3 billion in TARP money in December and converted itself into a bank-holding company. But other help from the federal government has been elusive. CIT applied in January for access to a debt-guarantee program run by the FDIC, but its application has been left languishing. Analysts say there's little chance at this point that it will be approved.

BMO Capital Markets' Chiaverini sees bankruptcy as CIT's most likely next step.

"The best case for CIT is to get its liquidity issues resolved -- bankruptcy could actually get things back to normal on the lending front," he says. "If it does go into bankruptcy, I think what will happen is unsecured debt holders will convert their debt into equity and it will emerge stronger without the overhang of debt coming due. Then, it can start lending again."

Some small business advocates had been crossing their fingers for a bailout. In a letter to Treasury Secretary Timothy Geithner, the International Franchise Association said that "we are very concerned that allowing CIT to enter bankruptcy will send the wrong signal to small businesses on Main Street."

CIT's financing volume is way down this year, but in past years it has been "one of, if not the, top lenders to the franchise industry," says IFA spokeswoman Alisa Harrison.

Lloyd Chapman, president of the American Small Business League, also issued a statement urging government assistance. "CIT's unique ability to work with new entrepreneurs and small business owners trying to expand their businesses will be impossible to duplicate," he said. "If our hard-earned tax dollars are going to be used to save financial institutions, we should use those funds to save firms like CIT that have a 100-year track record of helping those small businesses where most Americans work."

CIT's role in small business financing will be hard to fill, but for many companies, the damage is already happening. Saving CIT would only help Main Street businesses if the company became healthy enough to resume making loans.

CiCi's President Moore is pleased that the government will not prop up CIT. Still, he realizes that his company's fortunes are tied to those of CIT and its Wall Street brethren.

"A business will last only if it learns to live within rules," he says. "But I hope they come back alive, because then there's a better chance we will flourish."

Source:  http://money.cnn.com/2009/07/15/smallbusiness/cit_group_small_business_lending.smb/?postversion=2009071610

The collapse of small business lender CIT Group seems all but inevitable, after the company said on July 15 that “there is no appreciable likelihood” that it will get additional government support to help it weather a liquidity crisis.

The news sent shockwaves down Main Street. There’s a palpable fear that Washington doesn’t realize the role CIT plays in the economy, and groups, including the National Retail Federation and the International Franchise Association, have been urging the administration to keep it in business.

The Treasury Department, however, has taken the position — at least for the moment — that CIT does not meet its “too big to fail” criteria to warrant additional aid. That may be true by numbers alone. But a strong argument can be made that CIT is “too critical to the economy” to fail.

“If the criterion for whether a financial institution should receive government assistance is whether it is ‘too large to fail,’ CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress,” argues Tracy Mullin, president and chief executive of the National Retail Federation.

How CIT got mired in a liquidity crisis is complicated, but like what happened on much of Wall Street, its CEO steered the company into risky subprime mortgages and student loans with disastrous results. In this case, the CEO is Jeffrey Peek, a denizen of Wall Street, who joined CIT in 2003 after failing to land the top job at Merrill Lynch, which collapsed last year.

The company has posted eight straight quarterly losses totaling $3.4 billion. Analysts are predicting losses the rest of this year, according to a survey by Bloomberg. CIT has about $1.5 billion in unfunded commitments, primarily untapped credit lines, which is small peanuts compared to banking giants that have received bailouts, such as Citigroup and Bank of America.

But the company plays a critical role in the economy because it has been one of the biggest lenders to small businesses that can’t get traditional financing elsewhere. Not only has it been one of the biggest originators of Small Business Administration (SBA) loans, it’s also been a critical supplier of short-term cash through what’s known as “factoring.”

As any small or big business owner knows, cash flow is king, whether it’s to meet a payroll, buy inventory, or simply pay bills. That’s especially true for tens of thousands of businesses that are cyclical and face uneven cash flow.

To meet short-term needs, small businesses could turn to a “factor” like CIT to exchange their receivables for short-term cash or credit. The company has more than 500,000 trade vendor customers out of its 1 million total customers, a large percentage of which are small businesses, according to a recent regulatory filing.

As the nation’s largest factor company, CIT literally provides the grease that keeps the wheels of thousands of Main Street businesses and manufacturers turning.

“CIT’s unique ability to work with new entrepreneurs and small business owners trying to expand their businesses will be impossible to duplicate,” says Lloyd Chapman, president and founder of the American Small Business League, who also favors a bailout.

Without CIT, suppliers could be forced to shut their doors, or retailers would be required to pay up front and draw down on their own credit lines at a time when credit remains difficult to obtain, Mullin says.

“If CIT were to fail, a chain reaction would be set off that could very well leave retailers with a shortage of merchandise during the crucial holiday season this fall,” Mullin explains. Indeed, most retailers do almost half their business during the critical window between Thanksgiving and Christmas.

Likewise, the International Franchise Association is urging the Obama Administration to take immediate action. IFA President and CEO Matthew Shay says allowing CIT to fail will not only send the wrong political signal to Main Street, it will exacerbate a credit crisis that has left small business borrowers with few other options.

Banco Popular, Comerica, and UPS Capital have all exited the SBA lending business nationally; GE Capital has halted virtually all franchisee lending; and banks such as Wells Fargo and PNC have also cut back or significantly tightened lending standards, the IFA notes.

Even CIT, the largest originator of SBA-backed franchise loans in fiscal year 2008, has been forced to take itself out of the game. Since October, CIT has funded fewer than 100 SBA loans, totaling $65.7 million, according to a CNN/Money analysis. That compares with 1,195 loans, totaling $766.6 million, in 2008.

In its factoring business, CIT processed $8.3 billion in the first quarter of 2009, but the volume is down 21 percent from the same quarter a year earlier. Its dwindling business has led some to argue that the company is already among the walking dead. Bankruptcy, they say, could only help it by letting it reorganize.

But that would also leave tens of thousands of small businesses in the lurch. They would become creditors because CIT is holding their invoices as collateral for lines of credit. According to some estimates, a CIT bankruptcy could trigger a cascade of as many as 300,000 small business bankruptcies.

The situation led to a recent run on CIT that, in part, contributed to its liquidity crisis. Small businesses scrambled to draw down their credit lines ahead of a feared bankruptcy, pulling out more than $750 million this week alone, according to The Wall Street Journal.

If CIT fails, it’s unlikely to upset the financial system like the collapse of Citigroup or insurer American International Group. But there is no question that it will prolong and deepen the recession — just what we don’t need at a time when there is some hope that the economic downturn is slowing.

Source:  http://www.allbusiness.com/company-activities-management/financial-performance/12393969-1.html