CIT Group Applies to Become Bank Holding Company

CIT Group said Thursday it has applied to the Federal Reserve to become a bank holding company, a move which would make the commercial finance firm eligible for funding under the government's $700 billion bank rescue program.


Shares of CIT skyrocketed 26 percent Thursday.

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Many financial services companies have changed their operating status in recent months amid the ongoing credit crisis, including Goldman Sachs , Morgan Stanley and American Express . The change in operating structure allows the companies to create large deposit bases to help fund their operations and to provide insulation from the fall-out of massive investment losses.

It also allows them to tap into more financing options offered by the Fed and other government agencies, since bank holding companies—like commercial banks—have permanent access to financing from the Fed. But the change in status also likely means tighter regulations and oversight from the Fed.

CIT said in a statement it is requesting the change so it can expand its funding options and have greater access to capital to help further stabilize and diversify its funding model. If the Fed approves that status change, CIT will apply to receive funds as part of a $700 billion government package aimed at helping banks.

The government investment, administered by the U.S. Treasury Department, is part of a broader program to invest in banks amid the ongoing credit crisis in an effort to stabilize the financial services sector and spur lending between banks and to consumers and other businesses.

Many banks have been hit hard over the past year-and-a-half by a sharp rise in mortgage defaults and a freezing of credit markets. As some financial firms collapsed in recent months, banks shied away from lending to each other and to customers for fear that losses would mount.

The program calls for the U.S. Treasury Department to receive preferred stock and warrants in return for the investment.

CIT was hit especially hard by the mortgage downturn as it was a large lender of subprime mortgages, or loans given to customers with poor credit history. As mortgages increasingly defaulted beginning in 2007, nearly all lenders took large losses on those businesses.

CIT exited those operations and sold some of its mortgage assets at hefty losses.

Along with the application to change its operating structure, CIT said its Utah-based unit, CIT Bank, filed an application to convert its charter from an industrial bank to a state bank.