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CIT's Reprieve Heralds New Market Phase

The near-collapse of CIT Group ( (CIT)) signals the markets are entering a new phase, which might be called "too small to save." The Fed's May stress tests put an end to speculation about whether the central bank would allow the country's 19 biggest banking institutions to fail. It won't. But on July 15, CIT—a mid-market lender that primarily makes loans to small and midsize businesses—announced that it would not receive access to the Temporary Liquidity Guarantee Program. This would have allowed it to issue bonds backed by the Federal Deposit Insurance Corp., and CIT said it would prepare for bankruptcy. This development came after arguments that it was too important to the U.S. economy to be allowed to go under. However, after a weekend of negotiations, on July 20 CIT's board approved a deal with bondholders for a rescue loan, according to the Associated Press. CIT did not comment. No. 1 Small Biz Lender The argument that CIT should receive government backing is straightforward: Small business can't live without it. CIT was the No. 1 lender to small businesses for the past nine years, according to the Small Business Association of America. It is also the largest provider of financing between suppliers and retailers. "About 70% of CIT's retailing clients do less than $50 million in sales; they do not have alternative sources of capital," said Jonathan Lucas, executive vice-president of CIT Trade Finance, according to a Macro Risk Advisors report. But so far, at least, the markets have accepted the government's decision to withhold aid to CIT. Stocks are up nearly 8% since news broke on July 9 that the FDIC might balk at funding CIT. On Monday, CIT's short-term bonds jumped 20.6%, while its long-term debt more than doubled, to 14¢ on the dollar. Rather than causing a systemic collapse, CIT's problems have been met with a shrug. But with CIT's crisis resolved, at least momentarily, the market can be expected to target other companies, experts say. GE Capital ( (GE)), which pursues a similar model of lending, would be a likely target, except that it's embedded within General Electric, says Steve Czech, head of SJC Gottex, a hedge fund that does asset-backed lending. CIT's other main competitor, , as its name implies, has the backing of Wells Fargo ( (WFC)), one of the 19 "too-big-to-fail" institutions. Lack of Liquidity to Blame But what ultimately nearly did in CIT was its funding mechanism, which generally involved borrowing short term and lending long term. When the credit markets dried up, so did much of its funding, leaving it with no ready source of liquidity. That's a practice that's been replicated throughout Corporate America, where companies have liabilities that stretch well into the future, but funding that expires in the next few years. Those institutions—perhaps a credit-card company, suggests David Kotok, chief investment officer at —could also be prime targets. "CIT is the current target," Kotok says. "Next week there will be another one."
Ben levisohn photo
Levisohn is a staff editor at BusinessWeek covering finance and personal finance.

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