The Obama administration has refused to provide government backing for outstanding debt or other emergency aid to CIT, a New York-based bank that finances nearly one million small and midsize companies in the US.
The administration’s decision...stands in sharp contrast to its policy of providing unlimited bailouts to major banks that cater to large corporations and big investors. It is of a piece with its decision to drive General Motors and Chrysler into bankruptcy... its opposition to bailing out auto dealerships slated for closure, and its rejection of any federal aid to California or other states facing fiscal insolvency.
It is also in line with the... policy of allowing weaker and smaller financial institutions to fail in order to effect a further consolidation of the banking system in the hands of a few giant Wall Street firms.
As the country’s largest factor, CIT buys the receivables of thousands of manufacturers and suppliers, mainly to retail businesses. For a fee, it pays its clients cash up front, so they do not have to wait 30 to 90 days for retailers to pay for their supplies and inventory. It also guarantees suppliers that they will be paid even if retailers whom they supply go bankrupt.
Jerry Reisman, a bankruptcy attorney at the law firm Reisman, Peirez and Reisman, told Reuters that he was “deluged” with desperate calls from apparel companies concerned about losing access to credit. “The government’s decision will,” he said, result in many companies being unable to make payroll on Friday and inability to pay suppliers. Many of these companies and their suppliers will be forced to file bankruptcy themselves, causing a further decline in the economy.”
An administration spokesman said the decision to deny CIT emergency support demonstrated that Obama has “a very high standard” as to which firms can receive government assistance...
Since the financial crisis erupted last year, the government has engineered the disappearance of Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual, immensely increasing the economic power of the strongest mega-banks, particularly Goldman Sachs and JPMorgan Chase.
There are a host of smaller regional banks that are sliding toward bankruptcy, further increasing the dominance of the biggest Wall Street firms. At a Senate Banking Committee hearing on Thursday, Senator Jim Bunning, Republican from Kentucky, said Federal Deposit Insurance Corporation Chairman Sheila Bair had told him another 500 banks could fail “unless something dramatic happens.”
The decision to deny aid to CIT came amidst spectacular second-quarter earnings reports by Goldman Sachs and JPMorgan Chase. Goldman reported record earnings of $3.44 billion and JPMorgan reported a sharp rise in profits to $2.7 billion for the quarter.
They are benefiting from the demise of competitors and the ongoing troubles at Bank of America and Citigroup, which gives them greater access to fees generated by underwriting stocks and bonds, while they take advantage of market volatility to place their own bets on stock and bond price fluctuations. Neither these, nor other major banks, are using the lifeline provided by government cash and other subsidies to significantly increase lending to businesses or consumers.
They continue to hide an estimated $2 trillion in toxic assets on their balance sheets, refusing to sell the nearly worthless assets at market prices or write down their value. JPMorgan, even as it reported higher profits, noted large losses in consumer loans and commercial real estate. Citigroup and Bank of America, in their earnings reports released on Friday, similarly reported growing losses in these sectors. These assets will continue to deteriorate as the impact of mass unemployment leads to more defaults on consumer loans and prime mortgages, and the recession further depresses commercial real estate values.
Goldman set aside nearly half of its quarterly revenues of $13.8 billion for salaries and bonuses, setting the stage for record compensation packages for executives and senior employees. This is in line with a general resumption by the banks of seven-and-eight-digit windfalls for top executives.
White House Chief of Staff Rahm Emanuel implicitly alluded to the bumper earnings reports by Goldman and JPMorgan in justifying the decision to cut off CIT. “Given the sense of calm,” he said, “it is a symbol of a different phase” in the government’s rescue of the banking system.
Similarly, Obama’s top economic adviser Lawrence Summers in a speech in Washington DC declared that the US financial system was “back from the abyss,” and Treasury Secretary Timothy Geithner said the financial markets were sending “important signs of recovery.”
http://www.wsws.org/articles/2009/jul2009/citb-j18.shtml
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