CIT

Now that the government has refused to offer any form of bail out it looks as if CIT the medium sized small business lender will have to file for bankruptcy. This is a newsworthy event for a couple of reasons:

“Poor old CIT was just ‘too-small-to-save’.”

• It gives us all an indication of where the administration sees the ‘too big to fail’ line being drawn. CIT is obviously too small to pose ‘systemic risks, so everyone is comfortable with it going bust.
• It highlights the problems that a business model built around wholesale sources of funding brings. The wholesale credit market is both volatile and highly risk averse right now so both the cost and availability of funds has become an issue to CIT and similar financial organizations – GE Capital and GMAC were both funded in the same way and are trying to diversify their sources of funds for these same reasons. Banks and finance companies with retail deposit taking ability – usually branches – are the ones who have a strong advantage in the near and medium terms if not also in the long run.
• CIT used to be a middling performing and rather dull company specializing in various forms of lending and leasing to medium and small companies. Presumably its board of directors became bored with it since it hired a new CEO, Jeff Peek, in 2004 to change things up. Peek was an ex-Merrill Lynch investment banker who promptly launched CIT into new lines of business like sub-prime mortgage lending and student loans. No wonder he was passed over for the top job at Merrill – not that they did any better without him.
• Once CIT goes into bankruptcy it will be the fourth largest in American history – quite an achievement for a middle of the road place.
• Apparently there was a huge fight within the administration about whether CIT should be allowed to fail with the FDIC voting a resounding yes, and the Treasury and Federal Reserve Board wanting to help some more. Obviously the hard liners over at the FDIC won the day and the softies at Treasury have egg on their faces.

I think it is the right decision.

The taxpayers cannot provide unlimited guarantees to the entire system. There must be limits so that managers have some discipline. My beef about the big banks is that they have been exempted from any form of discipline: they are above regulatory control since they have the power to push back on reform; and they are above market power since they benefit from government bail out money. They cannot fail and, apparently, they cannot be hemmed in either.

In contrast, poor old CIT was just ‘too-small-to-save’.

RIP, CIT.