News Analysis July 13, 2009, 9:53PM EST

CIT: Not Too Big to Fail

The lender's problems stem from high costs of borrowing, not bad loans. Critics say a prepackaged bankruptcy is the answer to its woes

Story Tools

For taxpayers who have seen the government prop up one financial service giant after another, the story line was a familiar one: Caught in the throes of a liquidity squeeze, executives at CIT Group (CIT) spent the weekend frantically huddling with Washington policymakers in hopes of securing a bailout that would ensure the $75 billion firm—a key lender to nearly a million small and midsize businesses—could stay afloat.

CIT seemed to be following a script that had won similar firms a bailout. Late last week, CIT retained a law firm to prepare a possible bankruptcy filing, and for good measure, prepared an internal memo—leaked to the media—that its demise would put 760 manufacturing clients at risk and "precipitate a crisis" for as many as 300,000 retailers.

With the economy still fragile and the financial markets weak, it would seem a good bet that the Obama Administration would provide the 101-year-old lender with the financial support it needs to keep the credit flowing. But Washington insiders are betting that this time the Administration won't yield to CIT's demands for a full-blown bailout—and will instead try to push the New York-based lender into an orderly bankruptcy that will enable it to emerge in short order as a stronger, more profitable lender. "I think CIT Group would be a perfect candidate for a prepackaged bankruptcy, and I think the government could help play a role in providing the financing to help it emerge from Chapter 11," says Bert Ely, a veteran financial-services industry consultant in Alexandria, Va. A CIT spokesman did not respond to a request for comment, but on July 12 the company issued a statement confirming that it "remains in active discussions with its principal regulators on a series of measures to improve the company's near-term liquidity position." Among the measures CIT says it's discussing is access to federal loan guarantees—which CIT wants but which regulators are reluctant to grant, an Administration official told BusinessWeek.

Backing Away from Bailouts

If regulators prove willing to stand their ground this time, it's because few in the Obama Administration see a CIT bankruptcy as the kind of threat to the financial system that Bear Stearns and American International Group (AIG) represented, the Administration official said. Nor is CIT's role in the economy truly central: Small business lending remains highly fragmented, and despite its heft, CIT Group originates only a few percentage points of the $1 trillion-plus in loans that are made each year to entrepreneurs and other small business owners.

Equally important, some analysts think that regulators now fear that conducting further bailouts hinders the ability of the private markets to fully function on their own again. "My inclination is that the Administration does as little as it needs to for CIT because it wants to get the banks and financial markets working again," says Karen Petro Shaw, managing partner of Federal Financial Analytics, a Washington (D.C.) financial-services consulting firm.

And despite the well-publicized reluctance of commercial banks to make new loans at the moment, experts say there is no shortage of regional banks and nonbank lenders willing to provide financing to creditworthy businesses. "If CIT disappeared tomorrow, it wouldn't be the end of the world," says Stephen Bush, chief executive of AEX Commercial Financing Group , a Leesburg (Ohio) loan broker that matches borrowers with dozens of lenders nationwide. "It might create an inconvenience for its current clients, but there are scores of reliable lenders that would fill the void in a second."