– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Sometimes a failed lender is just a failed lender.

The relatively small size of CIT Group is a big reason the middle-market lender is headed to the wood chopper as soon as Friday. But the lender’s decision to move aggressively into the world of risky lending and not regroup when troubles in the credit markets first emerged is a classic case of bad decision-making and bad timing striking the mortal blow.

Indeed, one should resist the temptation to draw broader conclusions from a CIT bankruptcy in a world where the government is saving some banks and leaving others to languish.

CIT is no stranger to skirting the edge of trouble. In 2002, it had a near-death experience when problems at its scandal-plagued parent Tyco International cost it access to essential short-term financing. Tapping a credit line averted disaster then.

That lesson seemed to have been lost on Jeffrey Peek, a former Wall Street investment banker. He joined the company just a year later, becoming CEO in 2004. Peek then led the once-under-the-radar lender into the world of subprime loans, student lending and leveraged buyouts at a time when such ventures were hailed as the Promised Land for companies and executives with big ambitions.

But like others on Wall Street, he funded his aspirations through credit markets and by 2007 they had grown tired of such risky ventures and promptly shut off the financing spigot. The drought threw Countrywide Financial, the lender that fed the nation’s housing addiction with questionable loans, into the arms of Bank of America — a clear warning sign to those that relied on debt markets to start shoring up their capital with other sources of funding.

“Management should have addressed their funding problems two years ago,” said Sean Egan, president of Egan-Jones Ratings Co.

For CIT, the death blow came in March 2008 — six months before the financial firm bloodbath that spooked Congress into handing over more than $700 billion to save the financial system. Credit ratings downgrades left the company little choice but to draw on a credit facility — a sure signal of weakness from which it never recovered.

In December, the government still chose to give it a $2.33 billion infusion of TARP funds after the company converted itself into a bank holding company.

In hindsight, it’s a wonder that the government gave the lender funds in the first place, but then again it was handing out lots of funds at a time when it thought broad brush-strokes were needed to stabilize the financial system.

Times have changed and it looks like CIT’s time is up. Financial markets are stable, and earnings from JPMorgan Chase and Goldman Sachs Group this week show that the big banks are now far from failing.

The government’s refusal to give it a second shot in the arm this week isn’t surprising given the rapid deterioration of its collateral.

That CIT is expected to leave only small ripples rather than a Lehman Brothers tsunami makes a bankruptcy less ominous and easier for the government to draw the line.

But for those angry about CIT’s demise, keep your wrath focused on the company and its excessive risk-taking. It helped create a credit crunch that’s about to get worse for the little guy.

– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Reasons people give to explain the quick switch-back movements in stocks and other risky assets are becoming, well, just bizarre.

On Monday, it was the World Bank’s dire outlook for the global economy — no matter that the organization’s president already said output was likely to decline by close to three percent earlier this month.

On Tuesday, it was Moody’s Investors Service reaffirming the Aaa rating of the United States that gave stocks a brief lift, even though few expected any rating agency to make a move on its credit standing any time soon.

Investors should take these kinds of explanation and moves with a grain of salt, especially during the summer months when trading volumes are light and conviction easily undermined.

Those taking the long view shouldn’t let the noise, whether it be a World Bank report on the economic outlook or a perceived change in a data point, distract them from the fact that the financial system is still on life support and therefore susceptible in a very real way to a downturn once governments start to pull the plug.

The Federal Reserve is well on its way to purchasing $1.45 billion of mortgage-related assets in addition to $300 billion of Treasuries, which it could expand if central bankers decide they need more power to drive down interest rates.

This week, in an attempt to drive down rates even further, the European Central Bank is offering funds at a bargain basement rate of one percent for one year. The Bank of England, meanwhile, is keeping rates in that country at a record low while earmarking 125 billion pounds to buy up debt as part of its quantitative easing policy. And the list goes on.

The trillions of dollars injected into the global financial system have helped bolster short-term lending markets to such an extent that few are even talking about such hot-spot gauges as Libor/OIS that flashed beet red last year when banks balked at lending to one another.

By driving down short-term borrowing costs, this money, among other things, encourages banks and investors to invest in higher-yielding, riskier assets that had been beaten down by the crisis.

The return of risk appetite has in turn bred comfort that things are returning to normal. But they’re not, yet.

That’s why the timing of when governments begin to mop up this excess liquidity will be key to where markets go from here. There will be plenty of trading opportunities between now and then, to be sure, but it will be some time before we’ll see anything that we can call normal. Yet, normalcy is what many crave.

Many had hoped that the run-up in stocks and other risky assets since March was the real deal — a sustained rebound, in the manner of 2003.

Real money had been moving into stocks and risky corporate debt not because of isolated headlines but a growing, and I would argue misplaced, belief that the stabilization of financial markets held out the possibility of a rapid rebound, and the opportunity to rebuild 401(k) accounts and other investments pancaked by last year’s crisis.

After taking out $31.5 billion in March, investors rechanneled funds back into equities, adding approximately $36 billion to stock funds since then, according to AMG Data Services, which tracks mutual fund activity.

This isn’t surprising, as it’s hard to turn your nose up at 32 percent gains in the S&P 500 since it hit rock bottom in early March or the even more impressive 36 percent returns seen in the Merrill Lynch Master II high-yield corporate bond index.

But these returns are being juiced by easy money, which means the picture could look much different when cheap funding is harder to find.

– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.

As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.

There’s a way to placate both camps, at least in the near-term, and that’s for Ben Bernanke and his colleagues to retire some of the temporary short-term lending facilities put in place at the height of the financial meltdown last year.

It would show good faith that the U.S. is serious about exiting some of those emergency facilities, and it would give the central bank breathing room to keep its ultra-easy monetary policy in place until it’s ready to call the all clear.

Bernanke, as a scholar of the Depression, is all too aware of what can happen should the central bank move too quickly and forcefully in removing stimulus.

One program in particular is a ripe candidate - the Commercial Paper Funding Facility.

Introduced last year, the CPFF made sure that highly-rated companies could get access to short-term funding at a time when traditional commercial paper lenders like money market funds, spooked by losses caused by the Lehman Brothers bankruptcy, shunned such borrowing. By the end of 2008, the Fed’s commercial paper lending added $334.1 billion to its balance sheet.

Since then, the demand for short-term government financing has waned. For one, the program bought companies precious time to cut their dependence on short-term markets as they found financing elsewhere, such as the longer-term corporate bond market. The sharp slowdown in the economy also curbed companies’ need for short-term borrowing, which was often used to cover payrolls, rent or other basic expenditures.

In the latest week, the Fed reported that its facility had shrunk by $6 billion to $132.1 billion in a sign that companies were choosing to pay down their debt before next July when a good portion of the loans begin to mature.

Barclays Capital money-market strategist Joseph Abate expects the commercial paper facility, along with another facility that gives loans to banks so they’ll buy certain types of commercial paper from money market mutual funds, could fall below $50 billion by the time the programs are due to expire in October.

These programs have already been extended once, so they are still in play despite the stated end date.

While practically speaking there would be no harm in keeping facilities like the CPFF open indefinitely just in case financial markets should swoon again, there are pragmatic considerations that should be taken into account.

It’s better to show a commitment to exit strategies with a program that has largely run its course than to start tinkering with interest rates and quantitative easing that can have an outsized impact on the U.S. and global economy, which are still by no means out of the woods.

The World Bank reiterated on Monday its forecast for world economic slump this year, with output contracting by 2.9 percent rather than the 1.7 percent decline predicted in March.

The rise in Treasury yields earlier this month and the quashing effect they had on mortgage lending activity also should be a reminder that the Fed needs to stay flexible when it comes to its unorthodox policies. But it’s time to show the world that it’s also ready to put aside some weapons in its arsenal when the time is right.