Geithner "Burned Billions," Shafted Taxpayers on CIT Loan, Prof. Bill Black Says

Another one of the nation's largest lenders has filed for bankruptcy.  On the brink for months, CIT filed for Chapter 11 protection on Sunday.

The prepackaged plan allows CIT to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses. The plan keeps CIT's operations alive and makes it possible for the company to exit bankruptcy by year's end.

But here's the bad news:  While senior debt holders will only lose 30% of their investment, we, the U.S. taxpayer, will lose the entire $2.3 billion we lent the company this summer.

William Black, professor at the University of Missouri-Kansas City School of Law is dumbfounded.  "We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers."

Black, a former top federal banking regulator, blames Treasury Secretary Timothy Geithner for negotiating such a bad deal on behalf of the American public.

His argument goes as follows: 

The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds.  More importantly, being the lender of last resort, the government should have guaranteed we'd be the first to get paid if CIT eventually filed Chapter 11. By failing to do so,  "it's like he [Geithner] burned billions of dollars again in government money, our money, gratuitously," says Black.

Black believes the problem stems from regulators' fears that if the banks recognize a loss on the bad assets it will create a domino effect that will wipe out the entire financial system.

"If that's true we've got to get rid of capitalism," he warns, "because if we can't recognize losses in a capitalist system we have no future."