Let CIT fail
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.
CIT Group’s balance sheet is plenty big ($76 billion of assets as of 3/31/09), but it’s funded primarily with debt, not deposits. If the firm goes boom, investors will lose, not FDIC’s deposit insurance fund.
So from FDIC’s perspective, CIT clearly isn’t too big to fail, which is likely why it doesn’t want to give the company access to TLGP. The debt guarantee program is a bit of a scam to rescue the deposit insurance fund, which would buckle if most of the big banks it protects went under. The ones FDIC can’t handle closing, those that are “too big to fail” it offers an implicit guarantee against failure. CIT Bank isn’t in that category.
The argument that CIT needs to be rescued because small businesses rely on its lines of credit is a bad one. Similar arguments are made in favor of prospective homebuyers who are judged good risks, but who can’t get credit to buy a house.
The issue isn’t creditors, it’s lenders. Lenders like CIT simply don’t have sufficient capital to make new loans. Creditors that complain they can’t get other people’s money to fund their operations are missing the point: Other people don’t have money to lend.
If businesses actually are good credit risks, then they shouldn’t have a problem securing a line of credit from another, stronger lender. If they can’t get another line of credit despite being a “good” risk, it’s because the system doesn’t have enough capital to support the creation of new loanable funds.
Business models that rely totally on borrowing in order to fund working capital aren’t as robust as those that can fund themselves with cash from earnings. Many will, and should, fail.
*For more details, do a quick search for “CIT Bank” in FDIC’s bank find tool. You’ll find CIT Bank on page 2 of the search results.