How John Thain is Leading CIT Group Out of the Ashes

(MoneyWatch)  CIT Group (CIT) is turning into one of the most impressive comeback stories in financial services. Since going bankrupt in November, the commercial lender has put together two consecutive profitable quarters. It's bringing costs under control. Capital-deprived small and midsize businesses, CIT's core customer base, badly need the company's services.

Moral of the story? The free market can work just fine if banks aren't too big to fail.

Things looked grim for CIT last fall when the company turned out to be too small for the government to save. CIT, which focuses on commercial lending, vendor finance, transportation leasing and factoring, had gotten into trouble after a tide of risky corporate and consumer lending.

Its operations were also financed largely through wholesale funding, which dried up during the financial crisis when credit markets seized up. But a quick five-week trip through Chapter 11, along with CIT's new status as a bank holding company, is giving the company a fresh start.

CIT earlier this week announced a blowout quarter, more than doubling analyst expectations with net income of $142.1 million. The company is also working hard to shed high-cost debt and refinance existing obligations. Down the road, that will lower its cost of capital and improve borrowing terms.

And while CIT is getting smaller, selling more than $3 billion worth of non-core assets since exiting bankruptcy in early December, it's getting far more efficient by battening the hatches on costs and refocusing on profitable segments. Those divestitures have also helped push the company's cash reserves to more than $10 billion, giving CIT enough liquidity to continue paring debt. CIT is also doing something that many banks isn't -- lending; in the second quarter it originated more than $1 billion in loans.

The next major hurdle for CIT is getting the green light from banking regulators to make loans out of its banking unit and to boost its deposits, which is cheaper than raising money in the credit markets. But that appears likely. FDIC chief Sheila Bair and Federal Reserve officials took a risk last year in effectively tipping CIT into bankruptcy by rejecting CIT for a second round of TARP money. They're unlikely to erect any more roadblocks now that CIT is recovering.

Much of the credit for CIT's turnaround must go to former Merrill Lynch CEO John Thain, who took over at CIT in February after being squeezed out at new Merrill parent Bank of America (BAC). Shrinking a large company is often harder than growing it.

But Thain is pulling the right levers without sacrificing some of CIT's main strengths, validating CIT shareholder Carl Icahn's assessment of him as an executive with a "pretty good history of operations and making things happen."

Thain's most important move may have been to quickly revamp CIT's leadership. In recent months, he strengthened the company's management by adding a new CFO, chief risk office, corporate controller and other seasoned execs. Investors are pleased. Although CIT's stock price obviously had nowhere to go but up after the company's bankruptcy, shares are up nearly 29 percent since it exited.

Of course, the new CIT remains a work a progress. It has significant challenges, including an unresolved funding model. More broadly, the stuttering U.S. economy threatens to pound smaller businesses, which would further weaken demand for CIT's loans. Financial industry consolidation also means mounting competition for midsize lenders.

Still the company's revival offers important lessons for banks, as well as non-financial companies, trying to rebound from bankruptcy:

• Move decisively. After leaving court supervision, it's critical to have the right strategy in place and the personnel to execute it. Goals must be ambitious, but achievable.
• Make good loans. A hallmark of the financial crisis is that loan officers were poorly supervised. Lenders need to overhaul their credit and risk-management practices before gearing business up again.
• Save every nickel. Liquidity is paramount for banks. That requires keeping a close eye on all discretionary spending.
• Get smaller fast. All corporate turnarounds require scaling down the organization -- unfortunately, that almost always means layoffs. But the more streamlined operation will be nimbler and better positioned for growth.
• Unleash the CEO. The chief executive must be involved in every aspect of restructuring, with a particular focus on setting clear goals tethered to realistic objectives.

Image from Flickr user Zen1121
Related:

• CIT, John Thain Plan Escape Route
• How to Interpret the Fuss Over CIT Group
• CIT: Too Small to Save -- or Not