Government says no bailout for lender CIT

updated 8:53 p.m. ET July 15, 2009

WASHINGTON - The Obama administration drew a line in the sand on financial bailouts Wednesday by denying emergency aid to CIT Group Inc., a struggling commercial lender on the brink of bankruptcy.

After days of round-the-clock talks with regulators about a possible government bailout, CIT said those negotiations had ceased. The company said its management and directors were “evaluating alternatives.”

The decision not to save CIT is a defining moment for the Obama administration’s financial rescue program, headed by Treasury Secretary Timothy Geithner. By withholding aid, the administration is betting that CIT’s likely failure won’t pose a critical risk to an economy weighed down by rising unemployment.

CIT, which had earlier received $2.3 billion of bailout money, is one of the nation’s largest lenders to small and mid-size businesses. The company has warned that its failure could imperil about a million corporate borrowers — from Dunkin’ Donuts franchisees to retailer Dillards Inc.

The Bush administration paid a price for its decision not to save investment bank Lehman Brothers, which had eight times more assets than CIT. Lehman’s collapse helped spark the financial crisis last fall.

Asked about CIT, a Treasury Department spokeswoman said in an e-mail that “even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies.”

With its assets deteriorating and dangerously little cash on hand, the news left CIT with few options outside of bankruptcy. A filing could come as early as Wednesday night, analysts said.

A bankruptcy filing would wipe out CIT’s shareholders and the government’s $2.3 billion stake. But CIT’s clients would not automatically lose their lines of credit, longtime banking analyst Bert Ely said.

Still, with other lenders to retailers already under financial strain, many CIT clients may lose their financing options.

“The industry just won’t be able to absorb the amount of volume,” said Michael Cipriani, executive vice president of Rosenthal & Rosenthal Inc., a competitor of CIT that’s considered healthy.

New York-based CIT was negotiating with officials from the Treasury, Federal Reserve and Federal Deposit Insurance Corp. for much of the week. FDIC Chairman Sheila Bair resisted lobbying by CIT and other regulators for her agency to come to the rescue.

An agreement on aid appeared close at midday, but trading of CIT’s shares was halted Wednesday afternoon. CIT said late Wednesday that negotiations had stopped.

In the last 48 hours, creditors limited the company’s access to cash, worried customers drew down their deposits at CIT’s small retail bank and investors pushed its stock price to historic lows.

Officials became increasingly concerned about CIT’s ability to right itself even with a short-term loan from Treasury or other federal aid, said two industry officials who spoke on condition of anonymity because they were not authorized to discuss the matter.

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