Published: Tuesday, 14 Jul 2009 | 10:48 AM ET

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In a sign the financial crisis isn't over, CIT Group, the No. 1 lender to small and mid-sized U.S. businesses, is scrambling to get help from the federal government.

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[CIT  Loading...      ()   ] shares have been on a wild ride over the last few sessions as the ailing company tries to avoid a bankruptcy filing. On Tuesday the stock climbed as much as 31 percent to a high of $1.77 in morning trading, but later fell back to $1.50, up 11 percent on the hopes that regulators will support the company.

"People are speculating that CIT is going to get government assistance," David Chiaverini, analyst with BMO Capital Markets in New York, told Reuters.

The Treasury Department and the Federal Reserve are exploring aid options for the lender, a source familiar with the matter said on Monday. A CIT spokesman did not respond to requests for comment.

The government may have good reason to talk with CIT. Some analysts suspect a collapse of the company, whose 1 million clients include big names from the franchisee of Dunkin' Donuts to retailer Dillard's, could deal a devastating blow to the economy by cutting off financing just as businesses need it most.

That in turn could force thousands of small and medium-sized companies to drastically cut costs or shut down — driving up unemployment and dashing hopes for a swift economic recovery.

"They'd have to lay people off, downsize and maybe shut their doors," independent banking analyst Bert Ely said of CIT's clients. "It would hardly be positive for the economic recovery."

CIT's crisis brought back memories of the brutal losses suffered by fallen Wall Street firms like Bear Stearns and Lehman Brothers. It also posed yet another challenge to the Obama administration, which is struggling to right to the economy despite an $787 billion stimulus and a raft of federal bailout programs.

Companies that depend on CIT for financing are already weighing the consequences of possibly losing the lender.

"If CIT were to go away, it would take a financing option away from our franchisees who want to buy stores or expand their networks," said Michelle King, spokeswoman at Dunkin' Brands, parent company of the Dunkin' Donuts chain.

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For the apparel industry, a collapse of CIT would have "near cataclysmic," consequences for its small to mid-sized clients, said Andrew Jassin, co-founder of Jassin-O'Rourke Group an apparel consulting company.

The retail and apparel industries, which also include CIT clients like Dillard's and Bon-Ton Stores, is preparing for the critical back-to-school selling period and is in the midst of ordering merchandise for the holidays.

"This could affect the lifeblood of the flow of goods to the stores," said Vincent Arscott, senior director of Fitch Ratings.

Apparel industry insiders say it would be very difficult for rivals to absorb CIT's clients because other lenders are already under financial strain, leaving many orphaned suppliers potentially without any access to financing.

Michael Cipriani, executive vice president of Rosenthal & Rosenthal Factors, a rival of CIT that's considered healthy, said the "phone has been ringing off the hook" from CIT clients looking to have their receivables covered.

But Cipriani said there's a limit to how much more business he can take. "I don't think the industry can handle it," he said.

CIT, which got $2.3 billion in bailout cash in December, said it's talking with regulators about receiving more government help. One possibility is including CIT in the Federal Deposit Insurance's Temporary Liquidity Guarantee Program, the firm said.

The program would let the New York-based financier, which converted into a bank holding company last year, issue government-backed bonds to raise capital at a lower cost. As of June 8, the program has backed $335.4 billion of debt.

Speaking in London, Treasury Secretary Timothy Geithner suggested help could be on the way but gave no specifics.

"I am actually pretty confident in that context that we have the authority and the ability to make sensible choices," Geithner said.

Investors unsure about the company's future sent its stock down as much as 29 percent to $1.08 a share following an 18 percent drop on Friday. CIT finally closed with a loss of nearly 12 percent Monday at $1.35.

The uncertainty came as CIT said it has retained the law firm Skadden Arps, a bankruptcy specialist. CIT spokesman Curt Ritter declined to say if Skadden Arps was advising CIT on a bankruptcy filing.

Some analysts likened CIT's dilemma to a high-stakes game of chicken. They suggested that hiring the bankruptcy law firm was designed to pressure the government to step in with help.

But by rescuing CIT, the administration may have to rethink whether to commit more taxpayer money to other firms that get into trouble or simply let them fail.

If the government turns its back on CIT, "what does that say for ... other companies that the government has given the backstop to?" said Jesse Litvak, a trader at Jefferies.

CIT, which in April posted a bigger-than-expected first-quarter loss, has been hit hard by the ongoing credit crisis as investors have shied away from purchasing all but the safest forms of debt, leading to a near disappearance of funding options.

Unlike banks that rely on deposits for money, CIT gets funding by selling commercial paper and other types of debt.

Without access to the TLGP program, CIT would have to find alternative funding that would likely need to be secured by its assets. The lender has $7.4 billion in debt coming due in the first quarter of 2010, plus other obligations.

CIT's troubles will make it harder to refinance that debt in coming months, raising fears that it could default.

The company, which has faced a series of downgrades by ratings agencies recently, including two Monday by Standard & Poor's and Moody's, said there is no guarantee its discussions with regulators will result in any action.

Lower credit ratings make it more expensive to borrow money and can make it difficult to attract investors.

Though government officials have said other lenders could step in to provide loans and services to CIT's clients, analysts said such financing won't come easy for all businesses.

Christopher Whalen, managing director of Institutional Risk Analytics, said the prolonged recession will make many commercial banks leery of lending to small and mid-sized businesses.

"If you let entities like CIT fail, there won't be anyone jumping into that slot for a while," he said. "People will turn to banks, but banks are sitting there with their arms crossed."

• Slideshow: Largest Bank Failures of 2009

-Reuters contributed to this report.

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