Monday, October 19, 2009

CIT -- Fair Value Clashes with Distress Pricing

CIT Group (CIT) received an offer from Carl Icahn. CIT is clearly in trouble in more ways than can be counted. The drama is high. Enter Egan-Jones an independent credit rating service which also has a proxy service and counter-party surveillance services is publicly recommended that the Carl Icahn’s offer is not fair value.

OK I have a problem here with the word independent. Egan-Jones is taking a position in a problematic credit. They are relying on their own models to arrive at conclusions of value. But in this case who hired them and why? The reality is that CIT is bankrupt. Their own board drove them into bankruptcy. The concept of fair value does not dovetail with the concept of financial distress.

It’s all about buy low sell high. CIT has screwed its own shareholders and stakeholders. Is the board looking for cover when their own incompetence led them into deals that destroy wealth?