Goodbye CIT? Hello Job Losses

CIT Group Inc. (CIT) has announced that, insofar as it's prospects of receiving some sort of Government aid/backing/assistance are concerned, "there is no appreciable liklihood". This development occurs after a week long speculation concerning the likely fate of the middle market lender, largely focused on the question of whether the FDIC will guarantee the Company's debt. The issue managed to create a divergence of opinion amongst ratings agencies S&P and Moody's, which had the former stating it's expectation that CIT would receive FDIC assistance, while the latter argued otherwise. More significant we believe, was the bifurcation of opinion that occurred amongst market commentators, economists, and the like. It seems that some folks are against further government bailouts on principle alone, while others perceive the cost/benefit to be in favor of saving the lender. Although we would concur with the view that a CIT failure will not pose a systemic risk to the financial system as a whole, we would argue that a CIT bankruptcy filing will serve to further deteriorate both the labor market, and the economic condition of Main Street.

First of all, we consider it an entirely presumptuous notion that other financial institutions will be able to step in and pick up CIT's "slack". Frankly, many small businesses that rely on credit lines from companies like CIT do not have the wherewithal to simply wait for help. They will choose to lay off workers first, and evaluate the situation later. Many will simply close their doors in lieu of burning through cash reserves while waiting for replacement financing.

Ultimately, allowing CIT to fail does not make sense in light of the Administration's aspirations to create a small business lending program. We know that the Treasury will immediately book a >$2B loss on the TARP funds it has already injected into CIT, and that a bankruptcy will be a major setback to small business funding. Thus, any SB "rescue" measure will have to be all the more expensive just to get us back to where we currently stand. We aren't completely sure as to what the Government must be thinking, however, it is likely that the agency turf war between the Fed, Treasury and FDIC has managed to obfuscate the real issue at hand. What a surprise.

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