Is CIT worth saving?
Things have gotten worse for CIT, one of the country's largest lenders to small and mid-sized businesses. Some customers are drawing down their credit lines, and the government is trying to figure out if CIT is too big to fail. Jeremy Hobson reports.
CIT Bank logo. (CIT Wen site)
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Kai Ryssdal: We started off this week worrying about CIT. It's one of the country's biggest lenders to small and medium-sized businesses. As of Monday morning it was holding on by a thread. There was talk of a run on the bank amid serious liquidity problems. Two days later things haven't gotten any better. There were meetings all day in Washington trying to figure out what to do. Policy makers from the Federal Reserve, the Treasury Department and the FDIC must be thinking of last Fall and Lehman Brothers, as they find themselves asking once again is this company too big to fail. Marketplace's Jeremy Hobson reports from New York.
JEREMY HOBSON: The cries for help sound familiar. Trade groups and analysts who cover CIT say a failure would be devastating for the economy. But Edward Altman, a finance professor at NYU's Stern School of Business, doesn't agree. He says a CIT failure would be a far cry from the meltdown the nation's biggest banks experienced last fall.
EDWARD ALTMAN: This is not, in my opinion, a systemic risk issue. And I don't think they should be bailed out, but that doesn't mean that they won't be.
Altman says the bar has been lowered for "too big to fail." The new standard appears to be "big enough to be annoying." And, he says, CIT is nothing like Lehman Brothers -- the one bank that the government did allow to collapse. A decision many now regret.
ALTMAN: I don't see how this company is going to be saved in the long run, which was not the case for Lehman. Lehman had just too much debt and not enough friends out there. Whereas CIT has a business model problem, which Lehman did not.
KAREN PETROU: I think there's a lot of political pressure to finally not rescue one, but this would be a difficult first case.
That's Karen Petrou, managing director of Federal Financial Analytics in Washington. She says a bailout of CIT would mean the government is doubling down on a bet it made months ago.
PETROU: CIT has $2 billion in TARP money out, and if it failed to pay that back, that cost would come from the taxpayers.
But so would any additional money. And with many more small businesses expected to fail this year, CIT's still in trouble. More than $7 billion of the company's debt comes due next year.
In New York, I'm Jeremy Hobson for Marketplace.
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From Chicago, IL, 07/15/2009
I hate to say it, but I can't help but feel Treasury's indifference to CIT owes at least a bit to CIT's lack of importance to Goldman Sachs.
Salon's Glenn Greenwald has a good piece up about yesterday's big story of Goldman's surprise profits that touches on the special ticket they've been given through the recession and their former employees in Washington that have helped in the process: http://www.salon.com/opinion/greenwald/2009/07/13/goldman/index.html
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