Despite the tough talk about CIT Group not being systemically important enough to be bailed out by the government, it looks like the bailout is coming.
Tim Geithner all but telegraphed this today when he said he was closely monitoring the situation from his trip abroad. Now the Wall Street Journal reports that U.S. government officials are in “advanced talks” about aiding CIT Group.
The Journal caveats that the discussions are fluid. CIT seems to lack the political connections to force a bailout from Capitol Hill, where support for the bailout is said to be “lukewarm.” What’s also unclear is how big a bailout of CIT would have to be. It has billions of debt it must roll soon. That number could grow if a goverrnment rescue triggers covenants in other debt agreements or scares away others from providing short-term financing.
The market through up all over CIT today, sending its bonds plunging and credit default swaps on its debts soaring. Moody’s waded in by cutting CIT’s credit ratings by four notches to the brink of highly speculative territory.
Here’s what’s likely happening right now. The guys at the Treasury and the Fed are talking with CIT and the FDIC. The Fed and Treasury think the FDIC should guarantee loans to CIT, but the FDIC is hesitating.
According to the Journal, some accounting changes are being considered as well:
Government officials are considering a package including a regulatory waiver that could make it easier for CIT to pass assets from its parent company to its bank division and a separate way to borrow from various government programs. It is unclear whether the FDIC will soften its position and allow CIT to issue debt guaranteed by the government.
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