CIT Group Inc. (CIT) leaked an internal report to Bloomberg indicating that 760 manufacturing firms may be at risk if the FDIC doesn't back its debt and the lender is allowed to fail. But so far the FDIC is taking the position that CIT is not a systemic risk. The internal report from CIT also states that its demise would precipitate a crisis for as many as 300,000 retailers. Obviously, CIT is trying to build support for an FDIC bailout.

CIT says in its report that its collapse would impact "small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship their goods to their customers and make payroll." If CIT files for bankruptcy and cuts off small and medium-sized businesses, these businesses likely would have no place to turn to because commercial lending markets are still frozen.
The FDIC is in talks with CIT to develop a plan to improve the company's financial position. CIT wants backing from the FDIC's Temporary Liquidity Guarantee Program, but it needs to develop measures to improve its near-liquidity position. CIT became a bank in December to qualify for TARP funds and it received $2.33 billion from the Treasury.

CIT took one step closer to filing bankruptcy when it hired Skadden, Arps, Slater Meagher & Flom, which is known for handling corporate bankruptcy filings. The company has already cut back on arranging new loans.

"Absent a change of heart on the part of the FDIC, it is difficult to see how CIT can survive," bond analyst Kathleen Shanely, told Bloomberg. "Fixed income investors have lost confidence in the viability of CIT's business model, which will make it extremely difficult for the company to fund its upcoming debt maturities and ongoing operations."

So now the FDIC has to determine which is the greater risk to taxpayers: allowing CIT to fail or backing the lender's bonds. CIT reported $3 billion in losses in the past eight quarters. In September, CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits. If the FDIC lets CIT fail it would be the largest bank failure since the seizure of Washington Mutual.

At some point, the government will have to stop bailing out banks. The country just can't afford to keep propping up poorly managed financial institutions. Will the FDIC let CIT fail or determine it's too big to fail? If CIT's estimates that 300,00 retailers and 760 manufacturing firms could be at risk is correct that's hundreds of thousands of more jobs that could be lost. Could letting CIT fail risk even higher unemployment? Or is guaranteeing more bad loans the greater risk to taxpayers?

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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