Though taxpayer money has thus far kept embattled financial institution CIT Group, Inc. alive, the government is faced with the reality that it has made a bad investment. The company has finally filed for bankruptcy after unsuccessfully attempting to generate capital from the government, and generating capital from individual investors.
The reality that the government has lost over $2 billion in taxpayer TARP funds though its investment in CIT Group is regrettable. What is increasingly disturbing is the loss that individual investors have taken in this entire debacle. As noted in other articles on this site, CIT had traditionally looked to institutional investors for capital. As their finances become more and more questionable, institutional funds dried up and CIT was forced to look to other venues for much needed capital. That venue was retail investors, and third party broker-dealers are how investors were convinced to invest their funds.
Third party broker-dealers did an exceptional job at convincing individuals, especially those in and reaching retirement, to invest in CIT InterNotes. These notes were marketed as investment grade products, and had a much publicized, “death put,” or “survivor’s option,” feature. This feature, in theory, allows the beneficiary of a recently passed bondholder to sell that bond back to the lender at face value. InCapital, the firm who underwrote CIT InterNotes, even put a feature on its website allowing prospective clients to zoom in on the content of the offering.
The positive characteristics of this investment product were touted to investors by broker-dealers. The possible drawbacks of CIT InterNotes, however, were often left out. This marketing strategy worked and more than $800 million in CIT backed debt was sold to clients.
Even with the capital raised through broker-dealers, CIT was unable to stave off bankruptcy. With this bankruptcy filing, millions in individual investors’ funds are virtually guaranteed as being lost. With such a large loss, many are looking to their brokers and asking, how did this happen?