Is CIT Too Medium To Fail?

Treasury Bets U.S. Financial System Can Weather CIT Collapse
(from Bloomberg)
By Scott Lanman and Vivien Lou Chen

July 16 (Bloomberg) -- The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender.
“I hate to say this, but it was probably expendable,” said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. “It may have just missed the boat” on federal rescues, Santiago said.
Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT.
Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.
A Treasury official said the department anticipates losing the $2.3 billion of taxpayer funds that it had already injected into the company from the Troubled Asset Relief Program should it file for bankruptcy.
‘Disruption’ and ‘Anger’
There will be “a lot of disruption and anger among voters, particularly among people who rely on firms such as CIT for funding,” said Sean Egan, head of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates CIT below investment grade.
A major provider of capital in the middle market is likely to be out of business in the near future,” and investors will be concerned, at least in the “short run” about CIT, Egan said.
CIT, whose stock trading was halted by the New York Stock Exchange before the close, said late yesterday it was told “there is no appreciable likelihood of additional government support being provided over the near term.” CIT added that it was “evaluating alternatives” with its advisers.
The Treasury then highlighted in a statement that the government has enacted “powerful” mechanisms to revive credit markets. “Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the department said.

We shall soon see if the "powerful mechanisms" will revive credit markets. The previous article is this blog suggests otherwise. Perhaps the reason CIT does not qualify for a bailout is a lack of the right political connections.