Thursday, July 16, 2009, AM | 1 Comment
CIT Group, an important lender to smaller companies, said last night that the federal government has refused to provide further financial assistance to help it avert a likely bankruptcy filing that could hurt thousands of clients ranging from small clothing manufacturers to retailers such as Dunkin’ Donuts and Dell.
What CIT does
CIT provides financing to roughly 1 million companies, many of them already struggling to weather the recession. CIT estimated in its pleas for assistance that thousands of firms might be unable to survive its demise.
Government’s Reason for refusal
The decision, which appears to mark the first time that the Obama administration has denied aid to a large, troubled financial company, reflects the judgment of senior officials that the economy is now strong enough to absorb a painful failure, in part because New York-based CIT is not among the very largest financial firms.
FDIC remained reluctant to provide help
The Federal Deposit Insurance Corp. was most easily in position to aid CIT through a program that helps companies borrow money from investors. But the agency has sat for months on CIT’s application to participate in the program due to concerns that the company would not survive and the FDIC would be stuck with the bill. The agency remained reluctant to provide help in recent days, an administration official said.
CIT’s troubles began two years ago
CIT’s troubles began two years ago, as investors fleeing subprime loans decided that the entire financial sector was fundamentally rotten, rendering obsolete the company’s traditional model of borrowing from investors to lend to small businesses.
CIT survived for a time by burning its own fat, but its long-term debts now are coming due, beginning with about $1 billion in August. Investors finally lost patience, dumping CIT stock and bonds.
Trading in the company’s shares on the New York Stock Exchange was halted yesterday afternoon, as speculation mounted about the CIT’s future.
Bankruptcy filing could wipe out
A bankruptcy filing also could wipe out the $2.3 billion that the Bush administration invested in the company in December as part of the government’s $700 billion financial rescue program. CIT would become the first firm bailed out by the government to subsequently fail.
Moral of the story
In my opinion, it’s the perception not only of individuals, and the Government as well, of a situation aside from the fact that the Government and others have to look at some hard core financial data of the company.
“CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress,” Tracy Mullin, president of the National Federation of Retailers, wrote in a letter sent yesterday to the Treasury and the FDIC.Facebook.com/doable.finance