by Caitlin Kenney

The Wall Street Journal (sub req'd) is reporting that U.S. officials are in "advanced talks" about providing government aid for CIT Group, a lender to small and midsize businesses. The Obama administration is reportedly concerned about how a possible bankruptcy would further damage businesses who are struggling to get credit.

Simon Johnson of Baseline Scenario says a possible bailout has implications for the future of "too big to fail." Johnson writes:

At the end of 2008, CIT had total assets around $80bn, which was about 1/10th the size of Goldman (and about 1/25th the size of Citigroup) and puts it just outside the top 20 publicly traded financial services company. Presumably, it just missed the cut for inclusion in the government's recent "stress tests".

 

Its assets are between 2 and 3 times those of the largest "hedge funds" — although obviously what gets that label these days is somewhat arbitrary, and the leverage in any individual fund could mean system risks roughly of the same scale as for CIT.

CIT's bailout possibilities are now in the realm of political choice. The rest of the financial sector, including hedge funds and the American Bankers' Association (ABA), should be lobbying for it not to get bailed out — otherwise the bar for "too big to fail" will be lowered (by roughly an order of magnitude), and there will be many more voices arguing that even medium-sized banks/funds need to be broken up or otherwise severely constrained.

CIT has been trying for months to take advantage of the FDIC's Temporary Liquidity Guarantee Program, which guarantees newly issued debt, but the FDIC has been reluctant to let them participate. The company received $2.33 billion in TARP funding in December.