CIT Group must regroup on its own
Written on July 18, 2009
Rejecting pleas to save CIT Group Inc., the Obama administration decided the possible loss of the nation’s biggest lender for entrepreneurs and minority-owned businesses did not warrant tapping a politically unpopular bailout program financed by taxpayers.
In the end, the administration said CIT did not meet the standards for aid. It was financially hobbled after a weeklong downward spiral of borrowers drawing down credit lines and creditors pulling their backing. The firm’s solvency also was in doubt as the loans on its books lost value.
Unlike bailed-out Detroit automakers, CIT was not backed by powerful labor unions that could mobilize voters ahead of midterm congressional elections next year. And CIT’s lobbying push for federal help paled in comparison with big Wall Street firms that received a taxpayer handout last fall.
"The reason CIT didn’t get rescued is because it didn’t have enough clout," said Jonathan Macey, deputy dean of Yale Law School and author of a book on Sweden’s bank bailout. "If they had just had a few more labor unions and special interest groups, they might have (been saved), and that’s extremely discouraging."
CIT, whose borrowers include restaurant franchises, airlines and clothing stores, had already received $2.3 billion from the government’s $700 billion Troubled Asset Relief Program. Absent a deal with private equity or bondholders to strengthen the firm’s equity, CIT will likely file for
bankruptcy protection.
News that rescue talks had broken off sent CIT stock tumbling 75 percent, to 41 cents, on Thursday.
After the administration had spent tens of billions on banks, automakers and insurance firms, its decision marked the first time it set a limit on the types of institutions it deems too big and too interconnected to be allowed to fail cash advance.
"You have to be glad for any line at all — that the government and the taxpayers are not prepared to rescue any financial institution under all circumstances," said Rob Shapiro, a former economic adviser to President Bill Clinton and chairman of Sonecon, an economic-consulting firm.
Still, cutting off CIT from more federal aid marked a "significant turning point" in the government’s policy, said Douglas Elliott, a fellow at the Brookings Institution and a former investment banker.
"It sends a message," he said. "There will be plenty of other lenders that will feel they have to raise capital as quickly as possible and that they have to be less picky about the terms."
But denying CIT help could backfire if small and midsize businesses are forced to lay off workers and drive unemployment even higher, Elliott said.
The decision came amid growing antipathy toward the administration’s financial policies from both liberals and free-market conservatives, who say government interference has either perpetuated risk-taking or failed to unclog credit. Moreover, large earnings reports by firms that had received government assistance, such as Goldman Sachs and JPMorgan Chase, were creating an even more sour environment.
"CIT going belly up is obviously a bad thing," said Rep. Jeb Hensarling, a Texas Republican who sits on the House Financial Services Committee and on a panel that oversees the bailout program. "But the only thing worse than not bailing out CIT is bailing out CIT."