Icahn's attempt to throw out CIT's board in order to take control didn't work. Neither did CIT's effort to exchange debt for equity. The debt holders just didn't buy the story.

Instead, with a $1 billion DIP loan from Icahn, CIT has filed for bankruptcy. The debt holders didn't want to do it voluntarily, and now CIT will try to force the exchange in court. They plan to stuff the current debt holders with new notes (of lower face value) and equity as part of the restructuring plan. But those who owned CIT CDS protection should be happy - they will now get paid out.

CIT claims it will emerge from bankruptcy in a couple of months. But it's unclear their business model is viable at all, even if they reduce their outstanding debt. It is likely the current debt holders will put up a fight to push for a liquidation.

In any case, with debt recovering at 60-70 cents on the dollar, the $2.3 billion of TARP money CIT received as preferred equity is likely gone.

The event has been widely anticipated. The market reaction on Monday will likely be positive as the uncertainty has been somewhat taken out. But the longer-term mess this will create can not be overstated. CIT has liens on hundreds of thousands of businesses via loans the firm had extended. Many of those businesses are stuck because the liens prohibit them from additional indebtedness. That means they can not take out new loans from others (without fully repaying CIT) in their attempt to replace CIT as their lender. The process of replacing CIT will be painful and chaotic, taking it's toll on the middle market companies over the next few years.