What's The Deal With CIT?

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Less fun than this, but probably more important.

The CIT story is one of those big deals wrapped in a very boring package, the kind of headline many of us are happy to skip right over. "CIT Says It Won't Get More U.S. Aid." Got that?

CIT is a giant of the American financial system, lending money to the small- and medium-sized businesses that employ millions of people and keep the economy humming. But the economy hasn't exactly been humming lately. Like so many banks, CIT has hit the skids. The company got one of the federal bailout packages, $2.33 billion worth, in December. It hasn't been enough, and the government has signaled that there won't be more coming. Now CIT is looking at stark choices: Find a buyer, or head for bankruptcy.

This would be the largest banking failure since the Bush administration allowed Lehman Brothers to go under in September, sending shock waves through the economy. When economists these days talk about the latest unemployment numbers or consumer price figures, they tend to speak in terms of the situation before Lehman failed and the situation after. Officials have tried to avoid a repeat of Lehman ever since.

With assets of just under $80 billion, CIT is roughly twice as big as the largest hedge fund but outside the range of the top 20 publicly traded financial services companies, notes Simon Johnson, former chief economist of the International Monetary Fund. Today Johnson sums the situation up on his Baseline Scenario:

"CIT had friends, but not enough - and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking — and prominent senators — seemed otherwise engaged."

Johnson notes that the question is whether CIT is too big to fail, meaning its collapse would cause serious collateral damage to the financial system. In a separate column on the New York Times' Economix, Johnson teams with Peter Boone of the London School of Economics to call for the federal government to continue its work of buying equity stakes in banks in order to give them enough capital to weather the economic crisis. They write:

CIT might be the last financial firm to request a bailout or face bankruptcy but, most likely, we will see further large, medium-sized and small financial institutions run into trouble. It is a mistake to treat CIT in isolation. We urgently need contingency plans for a complete recapitalization of our financial system.