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.