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Is CIT Group "Too Big To Fail'?

Written By Brian Hicks

Posted July 14, 2009

beached whale

On a day when analyst Meredith Whitney spoke well of the big banks, one whale was still headed squarely for the beach.
According to the Wall Street Journal yesterday  CIT Group (CIT), a venerable century-old lender, is on the brink of collapse and is currently scrambling to survive.
Meanwhile, CIT executives have been meeting with regulators, members of Congress and anybody else that will listen since these fears may cause a run on the bank following reports that company has hired a prominent law firm in advance of a possible bankruptcy filing.
Here’s more on the brewing story from Bloomberg as the Feds decide whether or not CIT qualifies as “too big to fail”.
It’s in an article by Pierre Paulden and Caroline Salas entitled: CIT Bonds Fall on Concern it Won’t Meet Debt Payments
CIT Group Inc. bonds plunged on concern that the century-old lender, which has been unable to persuade the government to back its debt sales, won’t be able to meet its credit obligations.
A CIT collapse would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.
CIT executives spoke with regulators during the past two days, according to a person familiar with the talks, after its bonds and shares tumbled on concern that the Federal Deposit Insurance Corp. won’t allow the lender into its bond-guarantee program created last year to unfreeze debt markets. CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.
“A CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn’t doing trade finance and lending, its customers will look to other banks for replacement and from what I’ve seen, they aren’t willing to step up.”
A failure of CIT, run by Chief Executive Officer Jeffrey Peek, would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter.
A failure would ripple across the “small and medium-sized businesses who rely on CIT to operate — to pay their vendors, ship goods to their customers and make their payroll,” according to the documents.
A ‘substantial portion’ of clients ‘would not have easy access to additional revolving credit without CIT,” the company said in the presentation. “This could lead to business failure for those who lack additional liquidity.’”
The madness continues….
Either way, the insolvent at this point simply need to fail.
Like it or not, failure is an indespensible facet of the free market. 
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