CIT Is DOA

CIT Group officially filed for bankruptcy this afternoon, as widely expected.

CIT, which filed for bankruptcy protection in the Southern District of New York, plans to reduce its total debt by about $10 billion. The company had about $65 billion in liabilities as of mid-June and $800 million of debt is coming due next week.

Under the bankruptcy plan approved by bondholders, creditors will end up owning the company. Most bondholders will also end up with new CIT debt worth about 70 percent of the face value of their old debt. Preferred shareholders, including the U.S. government, will get money only after other creditors are paid back. Current common shareholders will receive nothing.

The U.S. government invested $2.33 billion in CIT preferred shares in December 2008 through the Troubled Asset Relief Program.

CIT financed itself mainly by borrowing from bond markets, which has proven to be a flawed strategy as the credit crunch that began in 2007 has made it much more expensive for troubled companies to fund themselves.

Yeah, that was $2.33 billion well spent, wasn't it? As CalcRisk notes:

CIT provides financing for about one million small businesses, so the key question is how will this impact the ability of many small businesses to obtain financing.

Monday's not going to be pretty at all.