Fed's CIT bailout refusal a smart move

People walk by the CIT Group headquarters in New York City.

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Kai Ryssdal: CIT was in a tough spot. Too small to be too big to fail. Too big to vanish without some kind of ripple effects for the small and medium-sized businesses it lends to. So when the White House said no chance to a federal bailout, everybody assumed Chapter 11 was the next step. Think back to Lehman Brothers for the relevant example. Earlier today the company announced a $3 billion deal with its bondholders that'll keep it out of bankruptcy. And, in the process, make the White House look pretty smart. Tamara Keith reports from Washington.


TAMARA KEITH: A big financial firm is in trouble, and the government opts not to step in. Then disaster. That's what happened when the Bush administration allowed Lehman Brothers to fail. Ever since, the ghost of Lehman has haunted the halls of Washington. Until now.

DOUGLASS ELLIOT: The administration believed that CIT just wasn't Lehman. That you can't rescue everybody.

Douglass Elliot is a fellow with the Brookings Institution. He says the fact the CIT didn't fall into the abyss, that its bondholders are stepping in, suggests the markets have stabilized enough that regulators can take some chances.

ELLIOT: They don't have to basically stamp out any little fire, just because it might turn into a forest fire. They can afford to let some things go and see what happens.

Elliot says it gives the administration the political capital to say "no" next time if they think that's the right thing to do.

ELLIOT: They can not only make the arguments that they did that this isn't big enough that we have to save, but they can also say, "Look, the creditors will probably work something out here."

Maybe, just maybe, this means larger financial institutions could be left to their own devices says Dennis Santiago. He's CEO of Institutional Risk Analytics in Torrance, Calif.

DENNIS SANTIAGO: We could get back to the normal state of affairs where companies come and go and do their thing in the normal free market process. Geez, that would be kind of nice wouldn't it?

CIT's story is far from over. Even though it may have avoided bankruptcy this week, analysts say it's going to take quite a restructuring for CIT to survive in the long term.

In Washington, I'm Tamara Keith for Marketplace.

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