SMALL MANUFACTURERS, IMPORTERS, VENDORS TO MAJOR RETAILERS WILL BE HURT BY FAILURE OF GIANT FACTOR, CIT-TIME FOR ANOTHER RESCUE?

If you are a small manufacturer or wholesaler especially in the area of retail financing, it is likely that your financing company is CIT. This financing giant has pushed aside or acquired many so called FACTORING finance companies that is has become the major gorilla in the business.

In that position, it has become the only choice for manufactures and wholesalers who sell merchandise to retailers, and then factor their accounts. This allows CIT to purchase the invoices that are outstanding to the customers of these businesses, and provide instant advances against such invoices, thus providing fast cash to the business.

All types of manufactures use factors. some of the biggest names in the business of clothing manufacturing sell their invoices routinely to factors. Liz Claiborne, Tommy Hilfiger, etc., all factor their accounts.

The factor relies on the credit of the customer, a retailer such as WAL-MART or PENNEY or MACY is the customer on whose credit the factor relies for payment, and thus it does not care about the credit standing of its customer, who simply gets its money faster, by receiving the factor's advance.

This area of financing appeared to be solid until CIT posted large losses and turned itself into a BANK to get federal funding, like other banks.

Now what?

Just add this to all retailer's troubles already in the making, and add that to the troubles of reduced revenues of the manufacturers and importers who are already suffering.

There are other FACTORS, but where do you think that those other FACTORS get their financing from?

You guessed it, generally from banks that have themselves been recipients of the FEDERAL funds, and who may be tightening their lending to their clients, the FACTORS themselves!

The vicious circle of "lending dominoes" has stated its downward spiral.

In our own contacts with lenders and the deals that they are financing, credit remain tight for middle market businesses.

Lenders are demanding personal guarantees from principal stockholders on business debt from even well established and profitable businesses, and new loans are closely scrutinized and collateral demands have increased.

THE CREDIT PROBLEMS ARE CONTINUING MOSTLY DUE TO THE LACK OF KNOWLEDGE OR LEADERSHIP FROM THE GOVERNMENT ON HOW TO FIX THE CREDIT MARKETS.

All, emphasis added, ALL economic growth in AMERICA has been fueled and been possible due to the establishment of credit markets. The ability to borrow money to buy or expand businesses, and to finance new business ventures has been the driving force in AMERICA.

We were the leaders of developing "BUY ON TIME" pay later, etc., which fueled the economy. If you want that big screen TV set, or a new set of appliances, you simply "charged it."

Just like you "charged it", so does a business, especially small and middle market businesses.

When they get a big order, they may need to buy the materials to make the product that was ordered, and factor may be willing to advance the funds for the purchase of the materials, which a bank may not be willing to do.

So now you have the real story of why CIT may cause the collapse of many businesses and start a domino effect throughout the apparel industry, where FACTORING is the only means of financing the vital vendors.

Financial difficulties at commercial lender CIT Group Inc. will hurt small businesses that depend on credit to fund their growth and operations, though many of CIT's units serve an important function and are unlikely to disappear if the company restructures in bankruptcy court.

The company, which lends to small- and medium-sized businesses, is scrambling to devise a plan to assure clients and investors it can work its way out of a deepening liquidity crunch, the Wall Street Journal reported on Sunday.

On Saturday, the paper reported that CIT was preparing for a possible bankruptcy filing.

CIT said on Friday it is in active talks with the U.S. government to gain access to a key lending program, but there is no guarantee the Federal Deposit Insurance Corp FDIC will allow CIT to join the Temporary Liquidity Guarantee Program.

The government has made it clear that a possible bankruptcy by CIT is not seen as a systemic risk to the financial system, the Wall Street Journal reported, since other lenders including JPMorgan Chase & Co or Deutsche Bank AG can take on many of the same loans in which CIT specializes.

Oh sure, they want new risky loans like a hole in the head.

"I don't think it (a possible bankruptcy) would have a wide impact. We're not talking about a systemic issue," said on Sunday a restructuring adviser with extensive experience working with companies in the financing sector. The adviser declined to be named due to the sensitivity of the topic.

A U.S. Treasury Department spokesman declined to comment on Saturday when asked if the administration might consider coming to CIT's aid.

If the company does restructure its operations in bankruptcy court, some clients could suffer, though its most important units will survive.

"CIT has been an important provider of credit to not only retailers and retail suppliers, but a vast array of businesses for over 100 years," said Scott Avila, a partner for corporate restructuring adviser CRG Partners, which is not doing business with CIT. "So whatever restructuring they go through, I expect CIT or some portion of CIT to continue in the future."

In particular, CIT's factoring business is vital to the retail industry and unlikely to disappear, but its competitors may not have as much access to the needed credit markets to provide replacement financing to all clients of CIT..

Factors buy the right to collect on the invoice of a retailer or other company at a discount to the value of the invoice. Then the factor assumes the risk that the invoice will not be paid.

Still, there could be some pain to the company's smallest clients in the retail industry.

"It's a difficult lending environment, and those small retailers that have seen sales slow to a minimum already may have a hard time securing lending sources until spending picks up," said Melinda Crump, a spokeswoman for Sageworks Inc, which tracks and collates the financials of thousands of privately held U.S. companies, in an email.

Businesses that require substantial working capital depend on credit. Changes in financing options could force small businesses into tough choices such as having to fund a portion of their growth from cash flow until other sources of lending were to become available, she said.

Among its services, CIT provides financial products and advice to small and middle market businesses. It has more than $60 billion in finance and leasing assets and operates in more than 50 countries across 30 industries.

The lender became a banking company in December and obtained $2.33 billion of funds from the federal Troubled Asset Relief Program.

But it has lost close to $3.3 billion since the end of 2007, and in a May regulatory filing said it had $10 billion of funding needs to address in the year ending March 31, 2010.

On Wednesday, Fitch Ratings downgraded CIT deeper into "junk" status, a move that affected $35 billion of CIT debt.

Another rescue in the making?

DOW JONES INDUSTRIAL AVERAGE REPLACES GM AND CITI WITH CISCO AND TRAVELERS-AVERAGE WOULD BE 300 POINTS HIGHER IF THEY WERE IN IT EARLIER

The announcement that two of the long time DOW components (GM and CITI) were going to be substituted, did not get a lot of press, but that substitution could have major implications for the calculation of the DOW AVERAGE that is so widely publicized.

Some financial analysts did a "what of" analysis to test to see if the two new member components of the DOW; CISCO AND TRAVELERS.

They discovered, that this type of substitution would have had a major effect on the DOW AVERAGE figure that is reported daily. They estimated that if those two stocks were in the DOW for the last 12 months, the DOW would be approximately 300 POINTS HIGHER than reported!

So imagine what that would be like? Is it a run away market, is it a new bull market rally?

The DOW is watched so much and reported daily on all the financial newscasts, yet it could be significantly erroneous or not based on who the components are. So by substituting the stocks, and many other throughout its long history, the distortions could have major implications.

General Motors Corp. and Citigroup Inc., crippled by the first global recession since World War II, were removed from the Dow Jones Industrial Average and replaced by Cisco Systems Inc. and Travelers Cos.

GM, which filed for bankruptcy protection today, and Citigroup, the recipient of $45 billion in taxpayer aid, became the first companies since American International Group Inc. in September to leave the 30-stock average. Their shares have lost more than 90 percent since the start of 2007.

By replacing GM with Cisco, Dow Jones & Co. has removed automakers from the best-known benchmark for U.S. stocks, saying in an e-mailed statement that computers are as central to the economy as cars were in the previous century. Citigroup, until last year the world’s biggest financial firm by assets, is being replaced by a company it jettisoned in 2002 and that was once run by its former chairman, Sanford “Sandy” Weill.

“This announcement brings front and center the challenges facing the U.S. economy as it strives to remain competitive,” said Alan Gayle, director of asset allocation at Ridgeworth Investments, which manages $60 billion in Richmond, Virginia. “The Dow Jones Industrial Average is becoming less of an industrial average. It’s trying to reflect the broader economy.”

Below $5

Citigroup has traded below $5 a share since mid-January and is in the process of converting $52.5 billion of preferred stock into common shares, giving the U.S. government a 34 percent stake. GM’s ouster was foreshadowed in May by John Prestbo, the Dow Jones & Co. editor in charge of indexes, who said it would be removed in a bankruptcy filing.

GM, whose shares will be suspended on the New York Stock Exchange by the end of the day, closed unchanged at 75 cents. Citigroup fell 0.8 percent to $3.69.

“The parlous state of GM has left us with no choice but to remove it from the Dow,” said Robert Thomson, managing editor of the Wall Street Journal, in a statement announcing the change. The newspaper’s editors decide the makeup of the average. News Corp., the media company headed by Rupert Murdoch, has been its publisher since acquiring Dow Jones in 2007.

Travelers Merger

Citigroup, based in New York, was formed in 1998 from the merger of Travelers Group Inc. and Citicorp. In 2002, Citigroup gave up control of Hartford, Connecticut-based Travelers Property Casualty Corp. through an initial public offering and subsequent spinoff. The bank earned $1.6 billion in the first quarter of 2009, ending five straight quarters of losses totaling $37.5 billion.

“We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake,” Thomson said.

Thomson said Citigroup may be considered again after it has “refashioned itself,” according to the statement.

Cisco, the world’s largest maker of computer-networking equipment, joins Microsoft Corp., International Business Machines Corp., Intel Corp. and Hewlett-Packard Co. in the Dow, boosting its technology weighting from about 17 percent. With the addition of San Jose, California-based Cisco, computer companies will close the gap with industrials including 3M Co., the largest category with about 18.5 percent.

Cisco gained 5.4 percent to $19.50, outpacing a 2.6 percent advance by the Standard & Poor’s 500 Index.

Bank Shares

Travelers, the second-biggest U.S. commercial insurer, joins JPMorgan Chase & Co., American Express Co. and Bank of America Corp. among financial companies in the Dow. Its higher price than Citigroup’s will boost the benchmark’s financial weighting to about 10 percent from about 7 percent. Financials make up about 14 percent of the S&P 500, a broader benchmark.

The choice of New York-based Travelers restored an insurer to the Dow average, which had lacked one since the removal of AIG. Travelers rose 3.1 percent to $41.91.

Kraft Foods Inc. was named to replace AIG in the Dow average on Sept. 18, the day after the nation’s biggest insurer was taken over by the U.S. government to avert its collapse.

GM, which had its last profitable year in 2004, was the worst-performing company in the average last year, losing 87 percent, and 77 percent this year through May 29. Its shares fell below $1 on May 29, putting them below the minimum normally required to trade on the NYSE. GM, based in Detroit, entered the 113-year-old index in 1915, replacing preferred shares of U.S. Rubber.

GM has been in the Dow average continuously since 1925. Only General Electric Co., a component since 1907, has been in the index longer. Travelers joined in 1997, and the company’s name changed to Citigroup in 1998.

Biggest Bankruptcies

GM, the fourth-biggest bankruptcy in U.S. history after Lehman Brothers Holdings Inc. and Washington Mutual Inc. in September and WorldCom Inc. in 2002, had been the lowest-priced company in the average for most of the past year. Citigroup closed at lower prices than GM on 27 days this year, mostly in March. The Dow average is price-weighted, meaning the lower a company’s share price, the less influence it has.

GM and Citigroup were taken out from News Corp.’s 150-stock Global Dow in April, less than five months after that index was introduced.

“The issues facing GM have been widely known and disseminated for some time,” said Jonathan Armitage, head of U.S. large-cap equities at the American unit of Schroders, the U.K.’s largest independent money manager. “It was less a question of if but of when” this day would come.

The Dow average was devised in 1896 by Charles H. Dow, co- founder of Wall Street Journal publisher Dow Jones & Co. Originally containing 12 stocks, it expanded to 20 companies in 1916 and to 30 in 1928.

Reputation, Growth

There are no rules for inclusion in the gauge, according to the Dow Jones Web site. Usually, a stock is added only “if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sectors covered by the average,” the Web site says.

Changes in the composition of the average “are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component’s core business,” the site says. “When such an event necessitates that one component be replaced, the entire index is reviewed,” and “multiple component changes are often implemented simultaneously.”

Three companies left the Dow last year, including AIG. Altria Group Inc. and Honeywell International Inc. were replaced by Bank of America and Chevron Corp. Those changes were the first since 2004.