NEW YORK, July 20 (Reuters) - Why did shares of CIT rally as much as 100 percent today? Presumably investors saw headlines with the word "rescue" and thought it made sense to take a flyer. This is foolish.
It looks like CIT has once again narrowly escaped falling over the edge after a group of bondholders agreed to extend $3 billion to the troubled lender in exchange for high-quality collateral and juicy interest rates. The thing is CIT still needs to sort out its failed business model based on borrowing in credit markets to provide financing to small and medium-sized businesses. But as we’ve seen again and again in this credit crisis, relying overwhelmingly on markets can sink even well established banks – think Northern Rock.
Though, I’m not sure if it would have been better for the talks between CIT and the government to break down last week either. The pairing of almost certain bankruptcy of the little guy lender with the blow-out earnings of Wall Street giants, JP Morgan and Goldman Sachs, makes a strong argument for smaller financial institutions to beef up their operations so they, too, can be too big to fail.
That’s the message from the government’s reluctance to swoop in and bail out one of the nation’s biggest commercial lenders, CIT Group Inc, as it struggles to stay afloat. But even though CIT doesn’t have the firepower to take down the global financial system, its failure would certainly be felt by some of the struggling small businesses that rely on its financing.
from Rolfe Winkler:
As CIT hangs by a thread, some news outlets are reporting that it would be the biggest bank to fail since WaMu. Measured by total firm assets this is true, but measured in terms of deposits, CIT is a fraction of WaMu's size. That's why Sheila Bair is willing to let CIT go under. And she's right.