GEC or CIT?

CIT: From the numbers, it sure is hard to spot the difference between General Electric’s financial arm and CIT, the lender that just called in the bankruptcy lawyers. Indeed, CIT’s struggles to keep afloat give an excellent idea of what life would be like for a GE Capital bereft of a deep-pocketed corporate parent – and the extraordinary largesse of the United States government.

Both CIT – which hired law firm Skadden Arps last week to advise it on its financing options – and GE Capital cling to business models that no longer work: financing longer-term loans to customers largely with short-term funding in the capital markets.

Such financing is almost entirely unavailable these days. Lucky for GE Capital, it has a rich industrial parent, which has helpfully diverted a chunk of its dividend payments and capital to the financial business. Not so CIT, which was spun off from a rival industrial conglomerate, Tyco, a few years back.

And GE Capital has also availed itself mightily of the government’s Temporary Liquidity Guarantee Program. This has allowed GE Capital to issue a whopping $109 billion in bonds backed guaranteed by Uncle Sam – making it the single biggest user of the scheme administered by the Federal Deposit Insurance Corp.

Oddly, CIT’s application to participate in the TLGP has been pending since January. Yet, CIT and GE Capital look like birds of a feather – arguably CIT looks like the prettier of the two ugly ducklings of finance. In the first quarter, CIT had shareholders’ equity equal to 10 per cent of its $76 billion of assets - higher than GE Capital’s 9.6 per cent.

Moreover, CIT was less dependent than its far larger rival on short-term funding. GE Capital, which had $636bn of assets, qualified $176 billion, or 28 per cent, of its assets as short term. CIT said $17.1bn of its funds were due to be repaid within 12 months – equal to 22.5 per cent of its total assets.

CIT may yet gain access to the TLGP and get through its short-term refinancing crunch. But the lender’s travails should make a compelling case for GE to begin winding down, and getting out, of the financial business for the long-term good of its shareholders.