How CDS is complicating loans to 70% of small businesses

CIT Group, you never heard of them, provide financing to roughly 70% of small businesses. They've been on the verge of bankruptcy for over a year. Won't bore you with all the details, but under TARP we loaned them $2B to keep them afloat.

They now need more money or they're history. Which would be incredibly complicated for the small businesses that depend on them for financing. More economic chaos would result and one can only guess how these businesses could get alternative financing to help them weather the worst economy in decades.

They have a plan to restructure their debt outside of bankruptcy, but CDS holders have an incentive to have them file bankruptcy.

Complicating negotiations trying to keep them out of filing is the amount of outstanding Credit Default Swaps[CDS].

From FT.com:

They suspect that some of the largest holders still have significant enough holdings of the credit default swaps that they would gain more on the value of their credit protection than they would lose with the loss on the debt if the company filed for bankruptcy protection.

But one of the frustrating things for advisers to companies trying to stay out of the bankruptcy court is that it is virtually impossible to have an exact understanding of the dynamics of the creditors.

From NYTimes.