CIT Talks Fall Apart, Bankruptcy Filing Likely Friday

CIT Group, is likely to file for bankruptcy Friday, a source close to the company tells CNBC. The major lender to small-and mid-sized U.S. businesses had been surprised at the failure of bailout talks.

CIT is now pursuing a plan that is likely to include a chapter 11 filing on Friday.

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"Discussions with government agencies have ceased," CIT said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term."

The announcement followed last-ditch talks in which the Treasury Department had expressed concern about a worsening liquidity crunch at New York-based CIT, and indications that government aid would not put the lender on a path to recovery.

Treasury, in a later statement, said the government needed to keep the threshold high for exceptional aid to individual companies, adding that the United States had a powerful set of financing mechanisms to help restart overall credit markets.

Founded more than a century ago, CIT's problems mushroomed in recent years in the wake of Chief Executive Jeffrey Peek's decision to expand into potentially highly profitable but riskier areas such as subprime mortgages and student loans.

• Faber: CIT Looks Set to File for Bankruptcy

If it were to go bankrupt, it would join Lehman Brothers Holdings and Washington Mutual among large U.S. financial services companies to collapse since the credit crisis accelerated last September.

It would also show the possible limits of Washington's willingness to rescue companies, after multiple bailouts for much larger companies such as American International Group and Citigroup.

"At least in the eyes of the Fed and the eyes of the Treasury, we've turned the corner, such that the systemic kinds of risks facing the economy may be well past," said Mike Knebel, a portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon, which recently sold CIT bonds.

Trading in CIT shares was halted on Wednesday afternoon, with the shares last trading at $1.65, up 4 cents. Standard & Poor's 500 stock futures were down 0.4 percent after-hours.
    
TARP Money Not Enough

CIT sought help even after it became a bank holding company in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program (TARP).

Treasury had been considering an aid package that included a temporary loan to give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, a person familiar with the matter had said.

Other options had been access to Fed's discount window, as well as asset transfers, the person said. The person requested anonymity because the talks were private.

CIT's travails were a vexing problem for the Obama administration, which had proposed that Congress give the government the authority to unwind large, troubled financial firms in an orderly fashion.

Because regulators do not have that power yet, they had to decide whether to bail out a company whose collapse, while significant, would by itself likely not pose a "systemic" risk to the financial system.

Treasury has also been supportive of the Federal Deposit Insurance Corp granting CIT access to its government debt guarantee program, the person familiar said.

Asset transfers to CIT's banking unit would have required approval from regulators such as the FDIC, which is already heavy pressure to handle dozens if not hundreds of expected bank failures in the next couple of years.

The FDIC had also been reluctant to allow CIT to join other financial companies in issuing government-guaranteed debt under an existing program, believing that such options are designed for healthy institutions.

"Not all firms have to be saved and the government has to draw the line at some point," said James Barth, an economist at the Milken Institute.

"I don't think it's going to be a catastrophe or become another Lehman Brothers, given the FDIC's apparent concern about the quality of the assets."

An FDIC spokesman declined to comment.
    
Congress, Industry Groups Concerned

While CIT has shed from some of its riskier businesses, it still faced too much debt, including some $10 billion coming due in the year ending March 31, 2010.

Barney Frank, chairman of the House Financial Services Committee, said earlier on Wednesday he hoped the government could come up with a structured aid package for CIT.

"If CIT doesn't get structured help, then it will have a very negative effect, I'm told, on small businesses around the country," he said in an interview with Reuters.

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Indeed, industry groups such as the National Retail Federation had argued that CIT's tentacles extended too far throughout the country to allow failure.

Steve Bartlett, chief executive of the Financial Services Roundtable, said 10,000 small businesses could be choked off from needed funds if CIT were allowed to collapse.

"This one is crystal clear," Bartlett said in an interview.

-- CNBC's David Faber contributed to this report.

© 2009 CNBC