Let CIT fail

July 13, 2009

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.

FDIC only backs CIT Bank, which is a much smaller operation withing CIT Group.  CIT Bank has just over $3 billion worth of deposits.  WaMu had $188 billion in deposits when it failed and was sold to JP Morgan.  BankUnited had $8.6 billion when it went under.*

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.


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What was your opinion when this was GE Capital failing? Mine was same, let both fail, regardless of size and specious argument of TBTF.

Posted by Mark | Report as abusive

Mark…exactly! The fact that GE was entirely reliant on commercial paper to fund its business model indicates very clearly that the model is rather weak. Liquidity risk is a very real and important one that businesses need to account for. Those that do should benefit at the expense of those that don’t.

You know, it’s stunning to me how much of the bailout has gone to benefit GE, and h. Nearly as much as AIG and maybe more. The accounting is different, AIG got a check from taxpayers while GE got explicit backing for its paper from Fed and FDIC. The size of the bailouts are very similar. GE may even be a bigger beneficiary.

Posted by Rolfe Winkler | Report as abusive

…and how much no one is paying attention….

Posted by Rolfe Winkler | Report as abusive

Agreed on size/scope and no one caring on GE… must be something in the water up in Fairfield County.

Posted by Mark | Report as abusive

“..If the firm goes boom, investors will lose,..”

Well, not GoldmanSachs. Lucas van Praag, spokesman for GS, has said that GS has hedged its Cit exposure. Just as GS did with their AIG exposure: lots of CDS when they were still cheap. Will the taxpayer again funnel money to GS?

..”If businesses actually are good credit risks, then they shouldn’t have a problem securing a line of credit from another, stronger lender.”

As you know, a lot of lenders are not so strong anymore, and not all good businesses are being served by those still standing strong. That’s what is called the deleveraging process. Please realize that the Fed has been trying to counteract this deleveraging somewhat by its more than a trillion dollars expansion. Please also realize that some ‘new’ banks, a la GS, took this almost free money, but instead of acting like a bank, i.e. lending that money to good businesses and individuals, they took that almost free money and used it for proprietary trading, no doubt showing record profits, less than 6 months after people in the financial industry seriously feared a complete financial system collapse….
So, record profits by a ‘new’ bank, and not enough lending facilities for good businesses. A truely effective way of recovering the US economy.

To those who wonder about the free taxpayers’ support of GE, I just want to recall that GE’s CEO is one of the very few people who have the president’s ears, as Immelt is part of the White House closed door economic round tables.

Posted by carol | Report as abusive

I agree that CIT should fail, but the govt. won’t let it. And thats because of who the investors are in the debt of the company. The reason why it’s taking so long to do anything about CIT is because the administration is trying to find a way to get backing for yet another bailout of a company on the heels of the GM and Chrysler govt. funded bankruptcy to name the latest. I may be wrong, but I think it’s because many of those businesses and manufacturers that are failing are defaulting on many of those loans and it’s in turn effecting the debt securities that CIT made.

And we are soon to be going into the fall and holiday season in a few months.

Posted by Buck Johnson | Report as abusive