Treasury Says, 'No Siree, CIT!'

Small business and franchise lender CIT Group announced late Wednesday that it had failed in its bid for U.S. Treasury Department aid, setting it on the likely path to bankruptcy. The firm surprised Wall Street late Wednesday afternoon announcing that “there is no appreciable likelihood of additional government support being provided over the near term.

Yesterday, the International Franchise Association issued a memo to the Obama administration. It’s CEO, Matt Shay, said, “Providing critical assistance to a substantial SBA lender such as CIT that has had positive lending outcomes seems a prudent use of government assistance during this challenging time.” He continued, “We believe that one of the fastest ways to kick start the American economy into a sustainable recovery is to target categories of businesses that can create and sustain the most jobs, such as franchising.”

But BusinessWeek reported slightly over an hour ago on the poor position that CIT Group is now left in.

With its own lenders pulling funding and its small business borrowers drawing down credit lines as fast as they could, CIT's inability to secure government help leaves the New York-based firm with few options other than bankruptcy.

Why the government didn't come through with a lifeline isn't entirely clear. While Administration officials negotiated around the clock with CIT, the Treasury Dept.'s only public comment afterward was a cryptic statement noting that "Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies."

The administration just didn’t see how more money given to franchise lender CIT would help.

One Administration official told BusinessWeek after CIT's bombshell announcement that regulators from Treasury and the Federal Reserve explored various options for stabilizing CIT. But in the end, sources say, CIT executives weren't able to convince regulators that they could revamp the lender's business plan or balance sheet enough to remain viable. "It would really have been throwing good money after bad," said an Administration official.

The Wall Street Journal ($$) also reported this evening that the firm is now scrambling for rescue financing.

On Wednesday night, CIT representatives were scrambling to line up at least $2 billion in rescue financing from some of its existing debt holders, which include many hedge funds and distressed debt funds, according to people familiar with the matter. CIT offered to pledge some of its receivables as collateral against those emergency loans and has given debt holders 24 hours to decide if they will come up with the cash.

News firms and their quoted experts had been speculating throughout the week on whether a federal government bailout for CIT was going to happen. The Wall Street Journal thought it likely. But BusinessWeek correctly reported early on that a bailout was unlikely.