Federal aid to competitors helps push CIT to brink

CIT Group is scrambling to avoid bankruptcy in part because the US government has now gotten in the business of picking winners and losers in the economy. It may not be the intention, but it’s the result of the uneven distribution of government aid.

The WSJ writes today about CIT Group as a test case for the Obama Administration and its resolve to help only too-big-to-fail institutions. But you could also view CIT as collateral damage in the struggle to right a teetering economy.

CIT is a major lender to mostly small businesses  and is undergoing a major liquidity crunch: $2.7 billion comes due next month and another $8 billion next year. CIT received $2.3 billion in TARP funds last year, but has been seeking help from the FDIC since January to gain access to government-subsidized lending programs. The FDIC hasn’t acted on the application.

CIT can’t gain access to the markets and is losing out to other lenders like GE and GMAC that have access to the government-subsidized lending programs. Wells Fargo and other banks that can access the cheaper funds are also picking up the slack.

Can and should the feds rush to aid every ailing business? CIT is not exactly an innocent: It got involved in the subprime mess and student lending just as standards were deteriorating. From the weekend WSJ

In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom.

When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables.

On Twitter, TraderKos warns:” If #FDIC decides 2 insure small biz & personal loans, they may just as well hav given ea consumer $100k to begin with (imo) $$”

True. But for me the troubling part of the story is that by virtue of picking winners, the government is creating losers. It’s a sticky wicket.

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6 thoughts on “Federal aid to competitors helps push CIT to brink

  1. Using tax dollars to bail out poorly managed companies is a very bad idea, when you subsidize risky decisions, you will get more of them. No intervention was needed – second tier banks would have bought the performaing assets – and the recovery would have been much quicker without the tinkering.

  2. Well the GE deal turned out fairly well for the government, even though they used a loophole to qualify and GMAC makes sense because it goes hand and hand with our new auto company. So what is CITI bringing to the table?

    I find it a little strange that Wall Street Journal which seems to hate government intervention in business would care if the market takes care of CITI. Can’t have it both ways. If the government is putting up the cash shouldn’t they decide where to invest?

    • The question isn’t whether the government should decide to put it’s money but whether it should be involved in private industry to the extent that it has. Something is terribly wrong here: GE is okay because of government intervention and because it has had an unfair competitive advantage vis-a-vis CIT Group. Some would say the feds had to do it or risk to much of corporate America going belly up. If you buy that, then CIT Group is necessary collateral damage. What seems to be happening here is that government — and the nation — doesn’t have the stomach for the unsentimental course of capitalism. Instead, we feel better if we can cast ourselves as saviors; we can conveniently overlook whatever gets sacrificed. Anyway you look at it it’s lemon socialism.

      • I love it, Lemon Socialism, please write a post on that subject. I will officially be using that term to describe our recovery effort. Has to be something about the sour taste it leaves in the mouth of capitalism. Right or is it more subtle?

        I’m not in position to argue the yada-yadas of the economic recovery, give me some time and I would be able…but for now, I ask where were all the market based economists when the shit hit the fan? Standing on their principals or whining like a two year old about “…don’t you love me America” and kicking us in the shin to remind us that if you punish us, we will punish the entire economy?

        Now let me be upfront, I am a capitalist, an enterprising son of a bitch who hasn’t worked for anyone but myself for forty or more years. I like money, profit and can find the unseen advantages of a deal with the best in my field. I have been rich and on the street poor and have perspective from both viewpoints.

        What bothers me is this flaccid argument about whether the government “should be involved in private industry to the extent that it has.”

        Come on…after the most extended period of lasse faire from Bush the Elder to Clinton to Son of a Bush lead to…oh no…the Economic Stabilization Act of 2008. WTF? They are asking the government for help? Oh shit this can’t be true. Why…it’s socialism…we can’t let that happen…no…wait..it’s only lemon socialism…maybe we can survive that.

        Let’s be perfectly clear: Capitalists fucked the economy and the citizens of this country.

        And now you are wondering if the game is rigged?
        Are worrying about government intervention, an intervention that has rescued Goldman and big banks they liked and now you are concerned about government involvement? After all of this big government intervention, you Wall Street folks have some breathing room to moan and groan about winners and losers and too much government involvement?

        I could care less if CITI survives…see I don’t have CITI shares…do you? And the fact that they loan to gasp, small business…they are also active in money laundering, Carlos Salinas, scandals in Japan, anybody, sheltering tax evaders and assorted credit card rip-offs.

        So I’m with you.

        Screw em…let the market take care of them.

      • Boy do I owe you an apology. Here I am rambling on about my most hated banking estalblishment while you are explaning CIT delimma, my wife’s bank. My wife read my response remarked about sloppy writing, mumbled something about Mad Cow and pointed out what an idiot I am.

        So as penance I am sitting her with a black wig and repeating in my best Rosanna Danna impression, “Never mind”.

      • CIT touches a nerve. I come from a family of small-business owners as does my husband. But none of us feel gung-ho about a CIT bailout. I’m watching the bondholder negotiations. But so far, everything seems to depend on a government backstop.

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