Opening Bell: Ripple Effect

CIT Group follows Bear to the brink; small homebuilders default; Murdoch targets Newsday; etc.

Commercial-finance firm CIT Group said it’s in trouble yesterday, having had to tap more than $7 billion in emergency loans from its backup credit line, and forced to sell off up to $7 billion in assets. After its credit ratings were cut a few days ago, the century-old company, which has $83 billion in assets, hasn’t been able to get the short-term debt that had been no problem just weeks ago. Its shares fell as much as 45 percent before settling down 17 percent.

The New York Times on C3 says it illustrates that “the credit troubles that felled Bear Stearns this week continue to spread, despite efforts by the Federal Reserve to encourage banks to lend to other financial companies,” though it sort of contradicts that thesis a couple of paragraphs later by noting that CIT, unlike banks or Wall Street (as of this week) can’t borrow from the Federal Reserve.

CIT’s bonds plunged and the price of insuring against its default soared, Bloomberg reports. The wire service notes that the company’s four big emergency lenders can’t be happy with having to lend to the struggling CIT. That ties up much-needed capital in a firm markets are increasingly betting won’t make it.

C it stumble

The Wall Street Journal’s Heard on the Street column on C1 says “Main Street is about to feel another tremor from Wall Street” as CIT is forced to dial back its lending.

The funding squeeze is likely to make it harder and more expensive for businesses of all sizes to borrow from CIT. Given CIT’s large size, shrinking the amount of available credit also could drive up borrowing costs for companies generally.

“It’s a ripple effect,” says Michael Taiano, an analyst at Sandler O’Neill & Partners. “CIT gets squeezed, the people they lend to get squeezed and end up maybe defaulting on their loans. It kind of goes down the food chain.”

CIT’s problems are the latest sign of tightening credit for small and medium-sized businesses. Mounting defaults on mortgages and other consumer loans have made many banks increasingly cautious about all types of lending, a trend that threatens to aggravate the U.S. economy’s slowdown. A Federal Reserve survey in January showed that about a third of banks had toughened standards on commercial loans, while about 40% said they were charging higher interest rates on such loans.

The papers note the firm could be forced into a distressed sale.

Little banks, big problems

The Journal reports on page one that small homebuilders are getting nailed and threatening to spread the effects of the housing bust to the small and medium-sized regional banks that lent to them.

Muscled out of the mortgage business by large national lenders, many of these banks flocked to construction lending as the housing market boomed. Though these institutions were generally less exposed to the subprime-backed securities that have generated billions of dollars in losses for national banks, they are the front-line casualties when builders and developers can’t make their payments.

The WSJ quotes an analyst saying the current estimate of about 150 bank failures through 2011 could be far too conservative. Delinquency rates on single-family home construction loans are at a huge 7.5 percent, nearly quadrupling the pace of a year ago, and a number the paper says is likely to get worse. A trade group says as many as one in five homebuilders in Atlanta is delinquent on payments.

The upshot?

Analysts worry that losses from home-construction loans could contribute to a possible credit squeeze in small towns and cities across the U.S. “You are going to see a contraction in lending not just for construction, but for auto loans and credit cards,” says Gerard Cassidy, a banking analyst at RBC Capital Markets. “In our view, it’s the big shoe to drop on the banking industry this year.”

When the housing market emerges from its fetal position in what’s likely to be years from now, the WSJ says the homebuilding industry will be more consolidated, dominated in major markets by national companies like Toll Brothers and Pulte Homes, which have more of a cash cushion.

Recession, from sea to shining sea

The NYT leads its front page with a look at signs of recession across the country as the financial crisis spreads to the economy. There’s nothing particularly new here except for a couple of anecdotes, one of which provides our Quote of the Day.

In Oklahoma City, Aunt Pittypat’s Catering has lost one-fifth of its business in the last two months, as $25,000 weddings are scaled down to smaller affairs.

“People are just being a lot more conservative,” said Maggie Howell, a co-owner. “They want crab and seafood, but they’re settling for cheese displays.”

The Times quotes economists who say the economy’s probably not going to slow that much, though in its own analysis the paper gets at why this downturn is likely to be worse than the last.

What is shaping up as the second recession of the 2000s is the product of declines in home values, which play a far bigger role in most Americans’ personal finances than the stock market. Households have borrowed against the increased value of their property to buy cars, send their children to college and add home theater systems.

“This is the bedrock asset for the lion’s share of the population of the United States,” Mr. Barbera said. “It’s not like dot-com stocks, where I bought Webvan for 1,000 times the imaginary earnings, and now it’s worth nothing but I go and have a beer. You’re talking about the value of people’s houses.”

The story does note the drop in economic bellwether FedEx’s profits and outlook. The WSJ’s incomplete story tells us FedEx’s profit fell but not by how much. That’s kind of a key piece of info there.

France invades Spanish utilities

The WSJ fronts and leads its Business & Finance column with a scoop today that the French state utility company and a Spanish construction giant are teaming up to bid more than $100 billion for two Spanish utilities.

The paper says regulators are likely to raise serious questions about the cross-border deal, but if completed it would “reshape the European energy landscape”

Thank God it’s (Good) Friday

The Dow whipsawed—again—gaining 261.66 points (2.2 percent) this time on huge jumps in financial-sector stocks, which were up about 7 percent. Nasdaq was also up 2.2 percent while the S&P 500 popped 3.2 percent.

But there will be no huge swings today, mister! Markets are closed in observance of Good Friday, something Bloomberg says has been observed since the (other) Panic of ’07.

Fed meds do the trick

Bloomberg says “the biggest commodity collapse in at least five decades” may mean the Fed has really removed much of the doubts about Wall Street’s solvency. A commodity-price index fell more than 8 percent this week.

“Clearly they’ve gotten some stability,” said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets.

“You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.”

The WSJ says Wall Street is unloading its junk debt on the Fed quickly. So far they’ve borrowed more than $13 billion a day from the new program. The paper implies the Street isn’t being totally forthright (shock!) about the extent of its borrowing:

Some Wall Street executives have suggested they were using the overnight-lending program to borrow small amounts, but the size of the total borrowing suggests broader interest from the 20 securities dealers eligible for the loans.

The Europeans were also forced to dump money into the markets on problems with German giant IKB Deutsche Industriebank and further “rumors about banks’ creditworthiness proliferating and banks hoarding cash,” the WSJ says.

Short-term Treasury yields fell to fifty-year lows as investors sought the safety of government money.

Who, me?

Alan Greenspan continues his worldwide “I Didn’t Do It” tour, telling The Washington Post he’s not to blame whatsoever for the state of the financial system just a few days after absolving himself (or at least not implicating himself) on the Financial Times’s opinion pages.

Murdoch in talks on Newsday? Oy.

Tribune Company reported a $79 million fourth-quarter loss and sharply lower revenues yesterday and said it may have to sell assets because its position has deteriorated faster than it expected. Papers also report that barons including Rupert Murdoch, Mort Zuckerman, and Cablevision’s beloved Dolan family are in talks about purchasing Newsday, something that could bring about $400 million dollars.

The Chicago Tribune reports that Trib revenues were down 7 percent from a year ago.

We’re shocked, shocked!

The WSJ on C6 reports that a Penn State study finds that Wall Street analysts routinely overestimate companies’ future earnings, something researchers say reflects bias “by their employers, who want them to hype stocks so that the brokerage house can garner trading commissions and win underwriting deals.”

The report, which examined analysts’ long-term (three to five years) and one-year per-share earnings expectations from 1984 through 2006 found that companies’ long-term earnings growth surpassed analysts’ expectations in only two instances, and those came right after recessions.

Over the entire time period, analysts’ long-term forecast earnings-per-share growth averaged 14.7%, compared with actual growth of 9.1%. One-year per-share earnings expectations were slightly more accurate: The average forecast was for 13.8% growth and the average actual growth rate was 9.8%.

Unemployment: the next big thing

In economic news, first-time unemployment claims jumped last week by 22,000 to 378,000, the highest in two and a half years.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.