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Is US poised to bail out another financial institution?

CIT is one of America’s largest lenders to small businesses. It also made many subprime mortgage loans and is now seeking US assistance.

By Ron SchererStaff writer / July 14, 2009

CIT Group has offices in New York. Several credit-rating agencies have chopped CIT’s bond rating to junk status as news has spread that the lender is in trouble.

Brendan McDermid/Reuters

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New York

Just when it seemed that the US government had finished bailing out America’s financiers, along comes CIT Group, palm turned up.

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CIT is one of the nation’s largest lenders to small businesses. It also made many subprime mortgage loans.

For the federal government, the issue is whether a CIT collapse would cause systemic risk to the fragile US economy. According to the Federal Reserve, CIT is the 26th largest US financial institution, with $75 billion in assets. This is small compared with Bank of America and Citigroup, both bailed out by the government.

So far, some banking analysts say, the Federal Deposit Insurance Corp. (FDIC), which insures deposits at banks, thinks that CIT’s failure would not cause a catastrophic tremor in the banking world. To date, FDIC has decided not to guarantee CIT’s senior debt under the Temporary Liquidity Guarantee Program.

But Treasury Secretary Timothy Geithner may have other ideas. He says the government has the authority and the ability “to make sensible choices” in the case of CIT. The Treasury has already invested $2.33 billion in preferred stock with warrants in CIT under the Troubled Asset Relief Program (TARP).

“My guess is that someone in the government will do something,” says Douglas Elliott, a fellow at the Brookings Institution in Washington and a former investment banker. “I am sure the Treasury will be thinking about whether [the CIT crisis] raises fears to a level they don’t want raised.”

Indeed, the government will have to save CIT to avoid another Lehman-like meltdown in confidence, says Doug Roberts, director of research at Channel Capital Research in Shrewsbury, N.J. “If the Treasury were to let CIT go down, the cost of repairing the entire system might be higher,” he says. “The system is still not functioning normally.”

CIT has found itself in a crisis because it has some debt coming due and has not been able to refinance it. CIT booked large losses in 2008, and like many financial institutions, it is still operating in the red. Aware of these issues, federal regulators have been examining CIT for the past several weeks.

The CIT crisis came to a head last weekend, after The Wall Street Journal reported that the company had hired a bankruptcy law firm.

As soon as news spread that CIT was in trouble, several credit-rating agencies chopped CIT’s bond rating to junk status.

Many small businesses are worried about the prospect of CIT going into bankruptcy. According to the National Federation of Independent Business (NFIB), some 200,000 to 300,000 retail stores count on CIT for capital and inventory financing.

“If CIT just stopped lending, like Advanta [another lender], a few hundred thousand businesses would have to find a new source of credit," says William Dunkelberg, chief economist for the NFIB.

On Monday night, the International Franchise Association added its muscle to the push to save CIT. In a letter to Secretary Geithner, IFA’s president, Matthew Shay, pointed out that CIT is the No. 1 originator of Small Business Administration-backed franchise loans.

“The volume of CIT’s small business lending is down dramatically this year, and we are very concerned that allowing CIT to enter bankruptcy will send the wrong signal to small businesses on Main Street,” Mr. Shay wrote.

On the other hand, Mr. Elliott at the Brookings Institution says that saving CIT is a lose-lose situation. “Even if it’s the right decision, they will be criticized if they save them and criticized if they don’t,” he says.

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