Update: Ding ding ding. CNBC’s Becky Quick has been reading Jeremiads from small businesses all morning — emails talking about the death of the New York Garment District, and small businesses in general.
Original post: We think letting CIT (CIT) die — it will file bankruptcy by tomorrow, reports CNBC — was the right move on the part of the Obama administration.
Large financial institutions still have an implicit guarantee from the government, but it’s a little weaker, and although it’s painful, letting insolvent firms fail is key to a functioning credit market. The solution isn’t perfect. As John Carney noted yesterday, one of the main takeaways here, is that CIT wasn’t big enough to be too-big-to-fail, meaning the incentive for other companies is to grow bigger than CIT.
Again though, we think the move was good, on balance.
But watch the backlash begin. The move will be seen as a snub towards the small businesses who rely on CIT for financing. Obama only cares about fat cats! Or critics will charge that Obama is creating “uncertainty” in the market — cause you know, the market hates uncertainty (as we’re told over and over and over again). Others who have been critical of the bailout will say that at this point, the risk of CIT’s failure far outweighs the minor cost of the bailout, given the strategy the administration has employed.
Already the market is down today, and if the selloff continues, watch the pundits howl.
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