The WSJ has a story up (HT to Calculated Risk) about the impending bankruptcy at CIT.

The company plans to file for bankruptcy in New York as soon as Sunday night or early Monday, said people familiar with the matter. CIT is poised to enter bankruptcy with enough creditor support to approve its reorganization plan and shorten its stay in Chapter 11 ...

... CIT asked bondholders to vote on a prepackaged bankruptcy plan, which would give most bondholders new debt it values at 70 cents on the dollar, and all the equity in a restructured company.

On the up side, it great that this thing is going into a prepackaged bankruptcy. We've seen this at GM and Chrysler. It allows them to emerge stronger. So in the long term the economy will be better off for this, but.....

As Keynes said, in the long term we are all dead.

Last summer, I wrote about the dangers inherent in a CIT bankruptcy.

Something like 70% of our economy is based in consumer spending. One of the things that keeps this running smoothly is a process called factoring.

Basically factoring works like this. Let's say that I am a shoe store. I buy shoes from the factory and sell them to customers. When I buy shoes I have a period of time (let's say 60-90 days) to pay shoe factory.

If you are the shoe factory, you don't really want to wait 60-90 days for payment. But you have an option, rather than waiting 60-90 days for me to give you cash, you can sell that obligation to a third party. So you get cash from the factoring company, and I pay that factoring company the money instead of you. You are going to get less than the full amount of money that I owe you, but you are going to get that money now. This means you can buy supplies to buy more shoes now with money in hand instead of having to take out a loan. This is the factoring process.

This is what CIT Group does for thousands of small retailers, including franchisees (like Dunkin' Donuts). CIT Group has a serious problem, they are on the verge of bankruptcy.

What would this mean?

In an environment where there is little credit available to retailers, it would mean that they would be unable to get product into stores. So basically empty shelves, potentially into the holiday season. And, of course empty shelves will mean that many businesses will be forced to close. That means more people out of work in the retail industry.

Look, it's great that CIT is entering a prepackaged bankruptcy. It will likely mean that this process will be resolved in a little over a month instead of a year. The problem is the timing. Which sucks...... seriously.

We know from what happened at GM and Chrysler that even prepackaged bankruptcies involve shutting down parts of the business while the books are sorted out, and the reorganization plan is put into place. At GM the process from start to finish took 40 days, but the shutdown at factories ran just under twice that.

If CIT is forced to cut volume on their factoring business, that is going to make Christmas this year interesting. It would be interesting to know if retail stores have their inventories for Christmas in. I can't say for certain, but I doubt it. Also GE Capital could pick up some of this business. The bottom line is that total collapse is unlikely, however it is likely that this will create difficulties for smaller retailers. And that ripples out.

We are nearly through the worst of the collapse in residential real estate, but a second bubble in commercial real estate is just beginning to burst.

Just today, guidance came out from the FED, FDIC, and other agencies that commercial real estate is a problem for smaller banks that were less laden with crap mortgages in the residential sector.

Now if we have a situation were retail sales are already weak, and small stores start going out of business. That will put pressure on the owners of these properties who rent them out. If they find that they can't keep paying the mortgage, then they default, and it becomes the banks problem.

Load the banks down with that, and suddenly they're insolvent. So it becomes the FDIC's problem. And the FDIC is bankrupt, and wants to up rates for solvent banks.

There's a whole load of problems here, and we are about to see how far things ripple out from CIT, into commercial real estate markets, and the smaller banks that are loaded down with them.