Jeffrey Peek, CEO of CIT, has held this post since 2003. Peek has tried to transform CIT from a boring lender to "mom and pop" businesses to a Wall Street player.
He installed CIT's top brass in a glitzy office building on Manhattan's Fifth Avenue, eschewing the company's historical base near a big shopping mall in Livingston, N.J., and brought CIT into his high-society orbit as well. CIT became a sponsor of the New York City Opera. Its role as a donor to the Metropolitan Museum of Art may have helped Mr. Peek win a prestigious spot as a museum trustee in 2008.
Mr. Peek threw parties both at the office and in his home. At an Edwardian-themed fete at his home on Valentine's Day 2008, male guests donned top hats provided by the Peeks.
It wasn't enough for Peek to lend to franchisees in Columbus, Ohio or that small manufacturer in Rockford, Illinois. He needed more. So, in order to achieve higher returns and achieve this transformation he obviously needed more risks.
Mr. Peek expanded CIT's presence in subprime lending, repackaging and selling some of the loans in line with Wall Street practices, and acquired Education Lending Group, a student-loan company. The moves eventually backfired, producing losses when debt markets fell in the past two years.
He began shaping CIT into a boutique investment bank, purchasing a small mergers-and-acquisition team that featured in CIT's 2007 annual report. Like Merrill Lynch and other bigger banks, CIT began doing so-called "leveraged lending" to riskier corporations that were bought in leveraged buyouts.
This strategy worked for a while particularly when the credit was cheap and plentiful. But then the "unthinkable" happened. CIT's business model already relied on heavy leverage because it was not a "traditional" bank. It had no deposit base. Adding the high risk practices of Peek to the old existing business model was too much.
In many ways, CIT was a beneficiary of this credit environment. In 2003, it carried $33 billion of debt. By 2007, that figure had risen to $55 billion as investors, largely insurers and big investment managers, bought CIT debt. CIT took this money and lent it to others at higher rates.
Loan losses were minimal, Mr. Peek said at a December 2006 investor conference. "Our credit people are doing a terrific job," he said. The next quarter, the company reached its all-time high in market valuation -- about $10.9 billion.
By early 2008, with credit markets in turmoil, CIT was struggling. Ratings companies downgraded CIT's bonds. It was forced to sell assets and raise money through stock sales.
The biggest threat facing CIT was limited access to new funding, the lifeblood of any finance company. Both short-term and long-term markets for such funding began seizing up, and CIT drew down a $7.3 billion credit line. Though the company owned a bank, it could not fund all of its operations from customer deposits. CIT later received funds from Goldman Sachs Group and Wells Fargo & Co. to tide it over.
After receiving $2.33 billion from TARP, CIT lobbied hard to access FDIC's Temporary Liquidity Guarantee Program. The same program that Goldman Sachs used to help them with their "profits". FDIC said no.
Now comes word that Peek, the man who gambled and lost, may actually get his money before we do.
Peek is owed $14.7 million if he’s terminated or there’s a change of control at CIT. A compensation claim would put him ahead of shareholders -- including the U.S. Treasury -- in the event of liquidation, Scott Peltz, managing director of the corporate restructuring group at RSM McGladrey, said in an interview.
“He’s an employee, and employees in bankruptcy have a priority,” Peltz said. Peek’s compensation claim “would be before the preferred and common and probably with some of the bondholders.”
Peek’s employment contract is among agreements that would end up in court in the event CIT files for protection, and the amount of a payout would depend on a judge. The 101-year-old commercial lender, which has failed to convince the government to provide it with another federal bailout, is short of cash and may need $6 billion, according to CreditSights Inc.
Nice. Peek's case is the same for any CEO of a financial conglomerate,who received TARP, that may fail (although they won't under the Obama Administration). Bankruptcy laws allow for employees with contracts to have priority over preferred shareholders (except for Citigroup where we are common shareholders) which we are under TARP.
File this story under "Bail out the Financial Oligarchy". It is the same old story every week. Nothing will change until we clip the wings of the financial oligarchy.
Income inequality + Financialization + Globalization = Destruction of middle class = Rise of financial oligarchy