By  on July 17, 2009

The CIT Group Inc. crisis adds another nightmarish facet to California’s economic woes.

The apparel business is a key industry in the state, which has hundreds of small and midsize firms of the kind that CIT services, and the impact of a failure of the commercial lender would be a major blow.

“It’s deadly for the shmata business,” said Dov Charney, founder and chief executive officer of Los Angeles-based American Apparel Inc., who was a client of CIT between 2002 and 2004. “For the apparel industry as a whole, it’s very serious. For the ordinary apparel company, it’s like they can’t function, they can’t buy or sell.”

Retail analyst Lynn Gibson of Roseville, Calif.-based Gibson Retail Advisors, said while CIT’s bankruptcy would cause turmoil throughout the industry, the impact may be decidedly worse in California because of the cumulative impact of the state budget crisis, retail liquidations, increased sales taxes, frozen credit and the housing market collapse.

“This is panic-inducing,” Gibson said. “There’s an across-the-board lending crisis — if you’ve got a lot of debt, you are somebody else’s hostage. Nobody is immune. Down the road, some of the big guys may be able to find other means of financing, but the small guys will just be forced down the drain. It’s really disheartening.”

The stalemate over closing California’s $26.3 billion budget deficit has crippled the state government, while 11.5 percent unemployment and high home foreclosure rates have continued to erode consumer confidence.

“California is a weak market right now, clearly,” said Marc Crossman, ceo of Los Angeles-based Joe’s Jeans Inc. “The budget deficit to the unemployment rate, to the housing collapse — all of these metrics are far worse than the average of the rest of the country, so if all the economic indicators are worse than the rest of the country, it’s definitely going to be tough to buck that trend.

“We’re being forced to have a fiscally balanced life at home — use cash, not debt, pay off your credit cards — so why can’t they do that in Sacramento?” he said.

California’s credit rating is the worst in the country, having been downgraded again this week by rating firms to just two notches above junk status. Major banks have stopped recognizing the IOUs the state has been issuing.

“I’ve been shopping for a new factor lately because our contract was up, and I’m shocked at how the landscape has changed,” said Josh Houmann, chief operating officer of Los Angeles-based eveningwear label Sue Wong. “It’s so tight out there, major labels and major retail chains are not able to get factored these days, especially if they don’t already have a lot of cash. Many factors are not interested in lending against the receivables.”

CIT’s potential failure would affect other sectors of the state economy, as well — the company’s largest bondholder, Pacific Investment Management Co., is based in Newport Beach.

Some economists believe the long-term impact of the state’s economic mess will be significant.

“People will absolutely be much more cautious in the way they spend, and for a lot longer than some people are predicting, and this may last for years,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “What you have is a situation where state government, which theoretically should act as an economic stabilizer, is acting as a complete destabilizer.”

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