U.S. Considers Rescue of Major Small-Business Lender
Tuesday, July 14, 2009
The deteriorating health of CIT Group, a major small-business lender, is shaping up as a gut check for the Obama administration, which may be forced to choose between allowing a painful failure or conducting a rescue that would underscore just how fragile the economy remains.
While CIT has about $75 billion in assets, it was not included in the government's stress tests of major financial firms, and most analysts agree that its failure would have relatively modest consequences for the financial system. But it has grabbed the administration's attention because of its focus on small-business lending, an area of outsized political importance. The New York company is mounting an increasingly public case that its failure would crumple thousands of fragile firms.
Administration officials met yesterday afternoon to review CIT's problems and to consider possible responses, according to a person familiar with the matter. Some officials would like to leave CIT alone, to show that the economy is strong and that the government will not rescue every faltering firm. But at a time when the administration already is working on ways to increase lending to small businesses, other officials see rescuing CIT as a necessary and obvious step.
Treasury Secretary Timothy F. Geithner, traveling in London, said yesterday that the situation is being watched closely.
"I'm actually pretty confident in that context we have the authority and the ability to make sensible choices," Geithner said.
CIT is one of the dying breed of lenders that relied on Wall Street for funding. Many have collapsed since investors stopped buying their loans almost two years ago. CIT was too big to go quickly, but it is facing a crisis as billions of dollars in long-term debts are starting to come due, and its vital signs are flagging.
Stock in CIT has lost 94 percent of its value since the beginning of 2008, falling 11.76 percent yesterday to close at $1.35 amidst media reports that it is considering a bankruptcy filing. Its bonds plunged on the news. Its credit ratings have been slashed by all three firms that evaluate the likelihood that a company will repay its debts. Moody's cut its rating by four notches yesterday, citing "growing concern with CIT's liquidity position and prospects for survival of the franchise."
The company's plight is putting a spotlight on the Federal Deposit Insurance Corp. The independent agency so far has not allowed CIT to participate in a program that helps companies sell debt to investors, something CIT desperately wants to do. The agency guarantees to repay investors if the companies default, and officials are concerned about CIT's viability, sources said.
In a parallel case, the administration pressured the FDIC to guarantee debt issued by GMAC, another lender long dependent on Wall Street. Senior officials argued that the FDIC was placing its own interests above the needs of the economy. They prevailed after agreeing to a broader aid package designed to ensure the company's survival, including a direct investment from the Treasury Department and an agreement from the Federal Reserve to waive standard restrictions on company's lending activities.
Government officials have discussed a similar approach to CIT's problems, but the talks remain preliminary, sources said.
Spokesmen for the FDIC and Treasury declined to comment.
CIT said in a statement that it "remains in active discussions with its principal regulators on a series of measures to improve the company's near-term liquidity position."