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Obama is briefed on CIT Group's status

July 16, 2009|Binyamin Appelbaum | Appelbaum writes for the Washington Post. David Cho and Neil Irwin contributed to this report.

WASHINGTON — CIT Group Inc., an important lender to smaller companies, moved closer to a bankruptcy filing by failing to persuade the federal government to provide further financial assistance.

The decision by the Obama administration appears to mark the first time it has denied aid to a large, troubled financial company.

Senior administration officials are said to have concluded that the economy is now strong enough to absorb a painful failure, in part because New York-based CIT is not among the largest financial firms.

Officials also wanted to avoid the perception that bailouts were available to every troubled firm.

"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," the Treasury Department said in a statement Wednesday night.

Letting CIT fail could have political value for the administration, given the considerable public outrage over the bailouts of other firms. The decision also signals that the government is seeking to end its period of extraordinary involvement in the financial markets.

Still, a bankruptcy filing by CIT would be widely felt.

The firm provides financing to about 1 million companies, many of them already struggling to weather the recession.

In pleading for assistance, CIT said thousands of firms might be unable to survive its demise.

A collapse of the company also could wipe out the $2.3-billion investment in it made by the Bush administration in December as part of the government's $700-billion financial rescue program. CIT would be the first recipient of aid under that program to subsequently fail.

CIT said late Wednesday that it "has been advised that there is no appreciable likelihood of additional government support being provided over the near term." The company said its board of directors was reviewing alternatives.

Debt-rating firm Standard & Poor's said this week that a bankruptcy filing by CIT was inevitable if the company could not secure federal assistance.

The decision to deny aid was made after considerable debate, according to people familiar with the discussions, who spoke on the condition of anonymity.

At a time when the administration already is working on ways to increase lending to small businesses, some Treasury officials saw rescuing CIT as a necessary and obvious step. But that position was opposed by others in the administration.

The Federal Deposit Insurance Corp. was in the best position to aid CIT through a program that helps companies borrow money from investors. But the agency sat for months on CIT's application to participate in the program because of 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, as the financial crisis led big investors to stop giving the company funding to make loans 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.

Before the New York Stock Exchange halted trading in shares of CIT late Wednesday, the stock rose 3 cents to $1.64 -- down 64% this year.

The company has made few new loans in recent months, according to federal officials, because it is basically out of money. If it does fail, many of its customers will be able to borrow from other lenders, government officials and financial analysts say.

The area of greatest concern is the company's role in indirectly financing the retail industry by buying IOUs that suppliers have accepted from retailers.

A CIT bankruptcy filing could disrupt supply networks at a time when many companies are in extremely fragile condition.

In a letter sent Wednesday to the Treasury and the FDIC, Tracy Mullin, president of the National Retail Federation, wrote: "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."

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