So the CIT Group, the commercial lender, isn’t getting a government rescue.
CIT had sought permission to borrow with government backing, but was turned down. More recent negotiations were over a plan to permit CIT to transfer assets from its holding company to its bank in Utah. The Federal Reserve would open the discount window to CIT, allowing the bank to borrow money by pledging some of those assets at collateral.
Government officials reportedly worried that these moves may not be enough to stave off CIT’s demise. As early as yesterday, there was word that CIT might be pretty much unrescuable. The company already has $2.3 billion in TARP funds, but has still found itself on the brink of bankruptcy. CIT has $1 billion in bonds due in August and another $10 billion by the end of 2010. By that point, the government plans to have cancelled theTemporary Liquidity Guarantee Program, the FDIC guarantee on the bonds of financial firms.
“Even if CIT receives another round of support, we believe bondholders are not out of the woods,” David Hendler, an analyst at CreditSights in New York, wrote prior to the news of the bailout tonight. “We believe CIT’s funding model is broken and have our doubts over whether an additional capital injection would cure the problem.”
Many people (including us) argued that the lender should be allowed to fail, as a sign that the government would not continue to prop up failed companies. Others worried that a CIT bankruptcy would hurt the businesses that depend on CIT for financing.
Reportedly, a struggle had broken out between Treasury Secretary Tim Geithner and FDIC chair Sheila Bair. Geithner favoured the rescue, citing dangers to small businesses. Bair opposed extending FDIC credit to the weak firm that many believe could fail without causing major systemic upheavals.
While CIT and U.S. regulators spent worked through the night discussing details of a potential recue, a bank run was underway. Customers reportedly drained hundreds of millions of dollars from the lender in the past few days, drawing down on credit lines they had with CIT. The run seems to have been prompted by news over the weekend that CIT had hired lawyers to prepare for a bankruptcy filing.
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