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The Free Markets Are Dead, Long Live The New Free Markets

Written by A Forex View From Afar on Thursday, July 23, 2009

CIT’s success to find someone to lend it $3bn and (temporarily) avoid the bankruptcy filing was seen as a staggering victory of the free market, a market that does not need any more help from the Fed or anyone else.

However, just a day after the new free market was crowned, the details of the transaction came to light, showing a rather painful picture: the price of survival. After being rejected by the F.D.I.C. (which until now was the financial system’s last resort) CIT managed to strike a deal with 6 of its bondholders to provide a $3bn loan.

The cost of the loan is huge, since the 6 creditors require the loan to be paid back at a 13% interest rate (14 times more than the interest rate the government pays for a similar loan), a 5% commitment fee and assets as collateral worth more than three times the size of the loan. Let’s just put this into perspective for a moment; if a person from main street goes to a bank, requests a loan, and then tomorrow he defaults, he would get better terms….

However, even these funds are not enough for the company to survive, TheLFB-Forex.com Trade Team said. In addition to the $3bn, the company will need bondholders to accept a 17.5% reduction of the $1bn debt that will expire next month. Moreover, the company’s total debt is around $60 billion right now, from which $10 billion is expected to mature over the coming months, TheLFB-Forex.com Trade Team said.

Taking a closer look, this does not look like a good deal, but rather as a desperate attempt to survive and therefore avoiding entering the bankruptcies’ hall of fame. The new free markets might be here, but they look like rough ground, on which many corporations are expected to trip over. Interestingly though, the economy is recovering, China grows by 8%, so we are told by the People’s Republic, and the banks keep failing.

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  1. 2 comments: Responses to “ The Free Markets Are Dead, Long Live The New Free Markets ”

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