Has the alphabet soup of bailouts strengthened the financial system or simply put a band-aid over a festering wound?
That’s really the question that’s being faced by the Treasury, the Fed and the FDIC as they consider whether or not to rescue CIT Group.
If our financial system was strengthened, it should be able to withstand the collapse of a company with just $68 billion of liabilities. Some of the bigger creditors, such as Goldman Sachs, would take a hit. But Goldman hardly sounds panicked: it says it is fully hedged or collateralized. Other creditors must have learned the lessons of last fall and have hedge their own loans to CIT too.
The company wasn’t systemically important to begin with. It lends to plenty of small businesses, true. But CIT’s failure should just open up that opportunity to rivals or invite new entrants.
Unfortunately, the possibility exists that we’ve made the system less healthy. Many of CIT’s creditors may have figured that lending wasn’t risky because they assumed it was a citizen of Bailout Nation. In short, the bailouts may haved sowed confusion about the difference between unhealthy companies and healthy ones.
So, Secretary Geithner, you’re one of the founding fathers of Bailout Nation. How much do you really trust it to survive the failure of this one company?
Peter Eavis at Heard On The Street offers a more positive take along the same lines.
“What does Washington really think about the condition of the financial system? … Indeed, if CIT’s problems did hurt creditors, and the system shrugged it off, it might actually boost confidence in financials,” he writes. “Could CIT be the case where capitalism makes a comeback?”
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