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Strategies & Market Trends : Value Investing
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To: Paul Senior who wrote (29350)12/20/2007 11:40:49 PM
From: Spekulatius  Read Replies (2) of 78704
 
I sold my CIT recently as I simply lost confidence (probably at the worst possible time). Here is my reasoning:

CIT has pledged 7.2B$ in mortgages for 5.1B$ in cash. this is a non recourse deal which means that the worst case scenario is that CIT keeps the cash it has already but looses all economic will loose all mortgage assets. this of course would mean that CIT will have to write off another 2.1B$ in equity.

Besides that CIT still holds 2.5B$ in mortgage receivable. I suspect that those are lower quality than the ones mentioned in the pool above. I think we have quite a bit of additional writeoffs for those mortgage assets ahead of us. My best guess is 2B$. This would reduce CIT book value/share by roughly 10$/share. After that they would have an 78B$ balance sheet with only 4.5B$ in equity, which looks undercapitalized. So very likely they will turn around and find an rich Uncle in the far east who kicks back the lost 2B$ (a 30% dilution for current owners) just like UBS, ETFC, MS or C did to replace the lost capital and keep a decent rating.

Not a very enticing scenario and it will not be pretty for current equity holders but i think it's fairly reasonable based on what we see unfolding at UBS and MS recently.
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