CIT, U.S. Treasury: Collateral Damage

NEW YORK (TheStreet) -- The U.S. Treasury's $2.33 billion preferred stock investment in CIT Group(CIT Quote) stands a good chance of being wiped out entirely in what would be the biggest loss to date for the Capital Purchase Program (CPP) launched in October under the Bush administration and largely defended by the Obama administration.

The loss would highlight the risk inherent in the investment of such a large sum in a teetering company, a risk for which the government did not demand appropriate compensation, according to Linus Wilson, finance professor at the University of Louisiana and an outspoken critic of the bailout.

Wilson notes that CIT's preferred stock offered a yield of nearly 20% a day ahead of the Treasury's Dec. 31 investment. As the value of the underlying stock rallied in the wake of the news, the yield declined to 14.2%.

"That, of course, is much higher than the measly 5 percent dividends taxpayers were offered for taking on that risk," Wilson wrote in an email message to TheStreet. He reckons the Treasury subsidized existing CIT investors by 65.4%, paying $2.33 billion for securities worth $805 million. A Treasury spokeswoman did not respond to a phone call or e-mail messages requesting comment.

As of late Wednesday, media reports said the most likely resolutions expected to come of Thursday's deadline for CIT to restructure more than $30 billion in debt were a swap to eliminate at least 30% of that debt load by giving bondholders new equity, or else seeking bankruptcy protection, either through a prepackaged plan, which the company has reportedly already put in place, or a conventional filing that would put the reorganization in the hands of the courts.