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Will CIT Take Retail With It?

WillCIT Group'stroubles provide a body blow to the already stressed retail industry?

As CIT , a lender to many small and medium-sized businesses, rushes to avoid a bankruptcy filing, many who track the retail industry are concerned that CIT's troubles will set off a chain reaction that will leave retailers in the lurch during the critical Christmas holiday selling season.

Retailers ring up the biggest portion of their annual sales during the holidays, and these companies have already begun to place their orders. Without the crucial financing, many retailers may find the shelves bare when they need to the merchandise the most.

The threat was great enough to send retail stocks into a swoon on Thursday and prompt two of the largest retail and clothing trade groups to send pleas for help to the government on CIT's behalf.

The National Retail Federation argues that CIT is "too large too fail" and sent a letter to Treasury Secretary Timothy Geithner and Federal Deposit Insurance Corporation Chairwoman Sheila Bair asking for government assistance.

"CIT is most certainly too important to the retail industry to be allowed to fail," Tracy Mullin, CEO of the Washington, D.C.-based trade group, said in the letters, "and the retail industry is too important to the economy to be placed under additional stress."

Meanwhile, on the supply side, the American Apparel and Footwear Association, said a bankrupt CIT would have a "crippling impact on manufacturers."

The trade group estimates CIT accounts for 60 percent of the factoring servicesin the clothing and shoe industry. A factoring firm buys receivables from apparel manufacturers and gives them cash immediately. The practice is key to keeping goods flowing from manufacturers to retailers.

"In a time when the U.S. apparel and footwear industry is experiencing the most gripping credit crunch in memory, I fear this may only further hinder any opportunity for economic recovery," says AAFA President and CEO Kevin Burke. He has sent letters to Senator Christopher Dodd, Representive Barney Frank and Treasury Secretary Timothy Geithner urging them to help CIT.

Standard & Poor's retail apparel analyst Marie Driscoll estimates CIT lent about $4 billion to apparel manufacturers and retailers in the U.S. last year.

Although very few large retailers deal directly with CIT, many of their smaller vendors do. While some of the larger retailers may be able to step up and help provide financing for their vendors, or pay for their merchandise ahead of time, smaller retailers are unlikely to be able to do so.

"The positive news for some bigger retailers is that there will be consolidation amongst mom and pop retailers driving further opportunities for market share gains as smaller retailers can't get financing for holiday inventory buildins," Janney Montgomery Scott analyst David Strasser wrote in a research note. "Similarly, there could be consolidation within the vendor community, providing an opportunity for larger players."

Strasser identifies fashion as one area that may be at the greatest risk because some of the more creative manufacturers will be unable to design and ship product for the holidays. This in turnwill further hinder holiday sales as these some of these smaller vendors are responsible for building consumer excitment.

Driscoll says retailers such as TJXand Ross Stores may benefit in this environment because they deal with numerous manufacturers, buy merchandise each week and pay in cash.

"This is likely to further differentiate them and even give them more fashion credibility," Driscoll says.

There are other companies that provide factoring services that could eventually fill the void, Driscoll says. These include GE Capital, which is a unit of CNBC parent General Electric , and GMAC as well as smaller factoring firms, many of which are located near New York's fashion district.

Among the retail stocks losing ground on Thursday were:

Macy's

J.C. Penney's

Limited Brands

Wal-Mart Stores

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