CIT doomed by PE

July 16, 2009

The most compelling argument for saving CIT Group from collapse is the impact it would have on small- and mid-sized business that depend on the New York-based lender for financing. But it’s increasingly looking like that argument is more hype than anything else.

First of all, CIT pretty much hasn’t been doing any new lending for the past six months, when its financial troubles really began to mount. Most of the lines of credit the firm has out to hundreds of thousands of small companies were arranged long before the collapse of Lehman Brothers.

Second, and maybe the best reason for letting CIT fail, is that a good number of CIT’s financing deals are with companies owned and operated by private equity firms. Our sister publication PEHub reports that in recent years, CIT has moved aggressively to provide financing to mid-sized companies that were taken over in leveraged buyouts. PEHUB has found at least 36 PE-owned companies that CIT is the primary lender to.

For instance, CIT has provided the bulk of the financing to Texas-based chain CiCi’s Pizza, acquired by Canadian private equity firm Onex in 2007. CIT’s financing has been provided the fuel for the chain’s rapid expansion.

Sure, the PE-owned companies are small- and mid-sized businesses. But this isn’t mom and pop we’re talking about here.

And CIT hasn’t just been a lender to PE-owned companies, it’s also arranged deals through its investment banking arm.

The case for saving CIT becomes a lot less compelling when you realize that an indirect beneficiary of keeping the lender afloat will be the strip-and-flip crowd. The idea of bailing out CIT to save the investment returns of PE funds isn’t too compelling. In fact, it would make for bad public policy.

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[...] It turns out that CIT Group (CIT) really was too small (and lent to the wrong firms) to get bailed out. (Baseline Scenario, Matthew Goldstein) [...]