CIT Group Heads Toward Bankruptcy

Analysts say CIT Group could file for bankruptcy as early as Friday after the failure of talks between the company and government officials. CIT, a major lender to small and mid-sized businesses, needs at least $2 billion to solve an immediate liquidity crisis.

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From NPR News this is ALL THINGS CONSIDERED. I'm Madeleine Brand in California.

ROBERT SIEGEL, host:

And I'm Robert Siegel in Washington.

If you were wondering when the government would decide a financial institution was not too big to fail, we have an answer. CIT, a major lender was asking for an emergency loan, and yesterday, talks with the government fell apart. Now CIT is headed for bankruptcy.

As NPR's Jim Zarroli reports, the question now is whether the lender's demise will cause a huge disruption or just a small one.

JIM ZARROLI: The federal government bailed out CitiGroup and AIG. It bailed out Fannie Mae and Bank of America. This time around it's decided to sit on the sidelines and watch CIT go under. Treasury Department officials issued a brief statement saying there's a high threshold for exceptional government assistance to individual companies. A threshold, they implied, that CIT hadn't met.

Mike Kneble of the investment advisory firm Ferguson Wellman says with the economy beginning to improve, the government no longer seems to face as much pressure to save embattled lenders.

Mr. MIKE KNEBLE (CFA/Senior Vice President, Ferguson Wellman Capital Management): There must have been a high degree of comfort on the part of Treasury in that the economy has turned the corner; that financial conditions have normalized to the degree that they can do that.

ZARROLI: Still, plenty of people think the government is running a terrible risk. Michael Cipriani is executive vice president of Rosenthal & Rosenthal, a lending company that competes with CIT.

Mr. MICHAEL CIPRIANI (Executive Vice President, Rosenthal & Rosenthal Inc.): I don't think they have a solid handle on the devastation, the impact it would have throughout the retail industry.

ZARROLI: The problem he says has to do with the economic model that the retail industry has built up over the years. Let's say an apparel company has sold a shipment of shoes or dresses to a department store. The department store typically doesn't have to pay for them for 90 days. So while it waits to get paid, the apparel company turns to a finance company and takes out a loan on the money it's owed.

Mr. MALLORY DUNCAN (General Counsel, National Retail Federation): That provides the supplier with operating capital, so they can continue production and then supply the next retailer, and the process is continued.

ZARROLI: Mallory Duncan is general counsel for the National Retail Federation, a trade group. He says CIT is by far the biggest and most sophisticated of the companies that lend money to the industry. And if it goes under, retailers won't have many other places to turn.

Mr. DUNCAN: They're going to turn to the other big companies, like GMAC. But, as you know, GMAC has been tightening its lending in the last several months.

ZARROLI: And with their sources of credit drying up, apparel companies will have to be a lot more careful about whom they sell to. There will be fewer goods on store shelves later this year, and that will have a ripple effect throughout the economy.

But not everyone is so pessimistic. CIT's stock price plummeted today and its bonds have been weakening for days. But Mike Kneble, of Ferguson Wellman, notes the financial markets as whole have been doing well this week.

Mr. KNEBLE: Judging from the reaction in the stock market and in the bond markets, it would seem that we're going to get through this without a lot of drama.

ZARROLI: Still, this has been an especially tough year for retailers. With unemployment up and consumer confidence down, people are buying less. Retailers say the collapse of a major lender like CIT could be what finally pushes a lot of stores out of business.

Jim Zarroli, NPR News, New York.

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