Marketplace Scratch Pad

Test case for TBTF

Scott Jagow Jul 13, 2009

If you believe what lender CIT is saying, the bank is another Lehman Brothers. It’s Too Big To Fail, and it’s in deep trouble. But this time, the government seems to be looking the other way.

CIT shares plummeted today on the news that the FDIC has refused to let CIT into its bond-guarantee program. Bloomberg says the FDIC is “concerned that standing behind CIT debt would put taxpayer money at risk because the company’s credit quality is worsening:”

A CIT collapse would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy…

“A CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn’t doing trade finance and lending, its customers will look to other banks for replacement and from what I’ve seen, they aren’t willing to step up.”

A failure of CIT… would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September.

Although CIT isn’t a household name, it’s been around for about a hundred years:

CIT, which says it was the first to offer credit to help consumers nationwide buy Studebaker cars, funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. CIT says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier.

And finally, there’s this:

CIT became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the U.S. Treasury.

Analysts seem divided on whether a CIT failure will be crushing. One says CIT has cut back on arranging new loans, and a collapse won’t cause big problems. Another says we’re skating on thin ice if CIT is allowed to fail because so many small businesses will go down with it.

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