CIT, Not Too Big To Fail?

"If CIT were to go away, it would take a financing option away from our franchisees who want to buy stores or expand their networks," observes Michelle King, spokesperson for Dunkin' Brands. She is referring to one of the largest franchise and small business lenders, CIT that lends to millions of small businesses, is seeking government help to stop it from entering bankruptcy proceedings at the end of this month. So reports the Associated Press. Here's what the other major media reports this morning about the possible failure of the $75 billion lender.

“Fat chance”, weighs in BusinessWeek, observing that CIT is not too big to fail and that failure may actually be a good thing for the lender. Its problems stem from high costs of borrowing, not bad loans. Critics say a prepackaged bankruptcy is the answer to its woes.

… few in the Obama Administration see a CIT bankruptcy as the kind of threat to the financial system that Bear Stearns and American International Group represented, the Administration official said. Nor is CIT's role in the economy truly central: Small business lending remains highly fragmented, and despite its heft, CIT Group originates only a few percentage points of the $1 trillion-plus in loans that are made each year to entrepreneurs and other small business owners.  Equally important, some analysts think that regulators now fear that conducting further bailouts hinders the ability of the private markets to fully function on their own again. "My inclination is that the Administration does as little as it needs to for CIT because it wants to get the banks and financial markets working again," says Karen Petro Shaw, managing partner of Federal Financial Analytics, a Washington (D.C.) financial-services consulting firm.

The Atlantic blogger, Daniel Indiviglio, writes how everyone now wants a piece of the TARP, including CIT.

Instead of the originally intended program seeking to buy ugly assets from banks, the Treasury decided to essentially give them big loans instead. Then they decided to expand who could get it, considering insurance companies, credit card companies and of course auto companies. Now it looks like even small businesses are welcome to party under the TARP.

Bloomberg observes how CIT’s Chief Executive Jeffrey Peek pushed the company into risky subprime bets. He also physically moved the century-old company from a more humble New Jersey office complex to a 28-story glass tower on Manhattan’s 42nd Street. Three years later the CEO is fighting to keep the doors open.

And Rob Cox, writer for the New York Times, asks if GEC will be another CIT.

From the numbers, it sure is hard to spot the difference between General Electric’s financial arm and CIT, the lender facing a refinancing crisis as soon as next month. Indeed, CIT’s struggles to keep afloat may give the best idea of what life would be like for GE Capital without the benefit of a deep-pocketed corporate parent and the extraordinary largess of the United States government. Both CIT — which hired the law firm Skadden, Arps, Slate, Meagher & Flom last week to advise it on its financing options — and GE Capital cling to business models that no longer work. Like banks, they make longer-term loans to customers. But they depend heavily on short-term financing through the capital markets to finance their assets. The market for such financing has essentially dried up.

Honorable mention: New York Times small business blogger Robb Mandelbaum explains how CIT’s troubles aren’t Wall Street’s troubles but rather big trouble for America’s small businesses.

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