(BN) CIT Calls Bailout Unlikely, Fuels Bankruptcy Concern (Update1)

By Linda Shen
July 16 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender running short of cash, said it probably won’t receive a federal bailout, fueling speculation the company is on the verge of bankruptcy.
Talks with regulators have broken off and "there is no appreciable likelihood of additional government support," the New York-based firm said yesterday in a statement. CIT, once the biggest independent commercial lender, may seek court protection if no U.S. aid emerges, Standard & Poor’s said this week. The company said it is "evaluating alternatives."
CIT Chief Executive Officer Jeffrey Peek failed to convince regulators that fallout from a collapse would threaten the rest of the financial system. Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp. have resisted putting more taxpayer funds at risk, on top of the $2.33 billion granted to CIT in December, to keep the lender afloat.
"Maybe they can put together a last-minute deal and try to sell themselves," said Adam Steer, an analyst with CreditSights Inc. "The most viable alternative once the government decides to not step in is a trip into bankruptcy."
CIT is seeking $2 billion in rescue funds from owners of its debt and has given them 24 hours to put up the money, the Wall Street Journal reported today, citing unidentified people familiar with the matter. CIT told investors that without the cash, it will probably file for bankruptcy, the Journal said.
Messages to CIT spokesman Curt Ritter weren’t immediately returned. Andrew Gray at the FDIC declined to comment.

First for TARP?

"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," the Treasury said in a statement.
A bankruptcy filing may be the first by a company that took money from the Troubled Asset Relief Program, the Treasury’s $700 billion fund designed to keep lenders solvent by investing the public’s money in the financial industry.
"We don’t have any prior experience with a bankruptcy filing by a TARP recipient," said Kathleen Shanley, a Chicago- based bond analyst for Gimme Credit LLC. "It is possible the U.S. TARP investment could be wiped out."
The lender gained 1.9 percent to $1.64 yesterday before trading was halted by the New York Stock Exchange. The stock, which dropped 64 percent this year, sold for more than $60 in February 2007. Common shareholders typically get little or nothing in a bankruptcy unless creditors are paid first. CIT employed about 4,800 people at the end of March.

Cash Shortages

CIT has battled cash shortages and faces $1 billion of bonds maturing next month. Liquidity tightened over the weekend after a "run" by customers who used up all their credit lines after hearing CIT might face bankruptcy, Steer said.
The Fed carried out a so-called stress-test on CIT on July
14 and concluded the company would need as much as $4 billion in funding under the worst possible economic scenario, the Wall Street Journal said. Government officials considering putting more cash into CIT under the Troubled Asset Relief Program, decided not to last night because of the perceived absence of a viable business plan, the newspaper reported.
The FDIC, led by Chairman Sheila Bair, is concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking said last week. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

‘It’s A Killer’

"It’s a killer," Sean Egan, president of Egan-Jones Ratings Co., said after the rescue talks broke down. "What’s next is that they’re going to have to scrape for capital to meet the next loan payment and it’s highly likely that they’re going to file for protection."
Peek, 62, joined CIT in 2003 after failing to land the top job at Merrill Lynch & Co. He pushed the lender into subprime mortgages and student loans to pump up growth.
CIT’s record includes eight straight quarterly losses totaling $3.4 billion. Analysts are predicting losses the rest of this year, including $346 million when second-quarter results are reported on July 23, according to a survey by Bloomberg.
President Barack Obama was briefed on the status of CIT during his regular meeting with economic advisers this morning, administration spokesman Robert Gibbs said.

Cascading Failures

Regulators were debating whether a CIT collapse would cause a cascade of failures among other businesses, the same reasoning used to justify multiple bailouts of American International Group Inc., once the world’s biggest insurers, and Citigroup Inc., formerly the largest U.S. bank.
House Financial Services Committee Chairman Barney Frank said he’s "heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem" if CIT failed.
"I was struck by the number of people who were concerned and felt that if there was a total collapse it would have very negative consequences," Frank, a Massachusetts Democrat, said in an interview yesterday.
Supporters of U.S. aid pointed to CIT’s 1 million customers who may lose funding, including 300,000 retailers. Tracy Mullin, chief executive of the National Retail Federation, said in a letter to Treasury Secretary Timothy Geithner that a CIT failure "cannot be allowed to happen at a time when retailers are already struggling to survive the national recession."

Systemic Risk

CIT isn’t big enough to be a systemic risk, said Jason Mudrick, president of New York-based investment firm Mudrick Capital Management LP and a CIT bondholder.
‘Lending to small businesses wouldn’t stop,’’ Mudrick said, adding that CIT has valuable assets, including the unit that finances the retail industry. "Their factoring business could be sold in a heartbeat to a competitor," he said. "It has the best technology in the industry and is CIT’s crown jewel."

I copy-pasted here what I posted in another thread so profound I found the implications of this.

As seen on CIT's website [/size]]http://cit.com/about-cit/vital-role/index.htm

"It may not be a household name, but CIT has a million business customers that rely on the company"

"We are talking about business that make up the backbone of the economy"

"CIT plays a vital lending role to over 1,000,000 small and mid cap businesses"

The Vital Role of CIT

Over 1,000,000 business customers depend on CIT to provide the financing they need to run their businesses. And for more than 100 years, CIT has remained committed to the lending needs of the small and middle market – providing needed capital to markets that other larger and smaller financial institutions often don’t.
The current financial challenges in the market haven’t wavered our commitment to the businesses that count on us. To get a sense of the vital role CIT plays to small and middle-market businesses throughout the US, let’s look at the role it plays in two important sectors at thecenter of the current credit crisis.

The importance of CIT to the retail industry

CIT is the leading factoring company in the US. Factoring is a crucial part of ensuring the retail industry can fill their shelves with the products they sell. If, for example, a small dress manufacturer delivers a shipment of dresses to a retailer, CIT “factors” their invoice, taking on the responsibility of procuring payment from the retailer – providing them with the capital they need to continue their business. Without CIT as a factoring partner, manufacturers would find it more difficult to maintain the capital they need to produce the products that US retailers need.

The importance of CIT to small businesses

According to the SBA, small businesses make up more than 99.7% of all employers and create 75% of net new US jobs. And for nine straight years, CIT has been the #1 SBA 7(a) lender in the US – and the top lender to women, minorities, and veteran entrepreneurs for the last six. CIT provides the vital capital that mid-size and small businesses – from private schools to restaurants to veterinary hospitals – depend on to keep their company’s dreams alive – including commercial real
estate financing, construction loans, franchise financing and more.