Commercial Lender CIT Faces BankruptcyCIT Group Inc. may be facing bankruptcy after the federal government has turned down its requests for more money to keep the 101-year-old commercial lender afloat. CIT is an important lender to smaller companies and retailers.
Negotiations with regulators, including the Federal Deposit Insurance Corp., have ended and the New York company says in a statement on Wednesday that "there is no appreciable likelihood of additional government support being provided over the near term." (Press Release) CIT, at one time the largest independent commercial lender, says it is evaluating alternatives.
CIT's CEO Jeffrey Peek didn't budge regulators who were hesitant to give the company more money. CIT received $2.33 billion in TARP funds in December. Regulators see that the fallout from a collapse would threaten the rest of the country's financial system.
Bankruptcy may be the company's only option, observes analysts. CIT says it needs $2 billion in rescue funds from its investors. CIT told investors that without the money it will probably file for bankruptcy.
Treasury Secretary Timothy Geithner told reporters in Paris today that he wouldn't comment directly on CIT, but adds that his team has been working very closely with the FDIC and the Fed in monitoring the situation. Geithner, quoted in an interview says, "We're seeing durable, very important signs of not just adjustment and restructuring of our financial system, but greater confidence in the stability of the system."
CIT has battled cash shortages and $1 billion of its bonds matures in August. Its stock price has dropped 64 percent this year. It sold at $60 a share in February 2007, and its stock was at $1.64 yesterday before trading was halted by the New York Stock Exchange. CIT's liquidity was stretched over the weekend after customers began using up all of their existing credit lines after hearing CIT may face bankruptcy. CIT employed 4,800 people at the beginning of the year.
A stress test carried out by the Fed on CIT on July 14 showed the company would need as much as $4 billion in funding under the worst possible economic scenario. The federal regulators backed off putting more cash into CIT under TARP because CIT didn't produce a viable business plan to get out of trouble.
CIT had petitioned to become a bank holding company last year to receive the TARP funds. The company recorded eight quarterly losses in a row totaling $3.4 billion. Peek, when he joined CIT, pushed the lender into student loans and subprime mortgages to create growth. A collapse of the company may cause a domino effect of failures among other businesses, and regulators are looking at this scenario as the same reasoning was used in the multiple bailouts of AIG and Citigroup.
Those on CIT's side cite the 1 million customers who would lose funding, including 300,000 retailers. The National Retailer Federation pleaded in a letter to Geithner not to allow CIT to fail. "It cannot be allowed to happen at a time when retailers are already struggling to survive the national recession," wrote Tracy Mullin, the federation's CEO.