Save CIT or Let it Fail? Obama, Geithner Navigating a "Slippery Slope"
Posted Jul 13, 2009 12:21pm EDT
by Peter Gorenstein
Time is running out for CIT. Shares of the diversified lender are in freefall as investors doubt whether they can pay-off its mounting debts without filing for bankruptcy. Government officials say a CIT failure would not cause system risk to the financial markets. But that doesn't necessarily mean the firm won't receive a bailout.
Speaking in London Monday, Treasury Secretary Tim Geithner left the door open for a rescue of CIT: "I am actually pretty confident in that context that we have the authority and the ability to make sensible choices," he said in response to a question about how the U.S. government might deal with CIT, the AP reports.
In the accompanying video, Aaron and Henry discuss the 'slippery slope' facing the government. On one hand, you have a taxpayer base unenthused (to put it mildly) about helping another large financial institution. Besides, this is the second time CIT has come to Uncle Sam with hat in hand. They already received $2.3 billion in TARP finds in December.
On the flipside, CIT is one of the oldest and largest lenders to small and mid-sized businesses. CIT's future impacts Main Street America in a way other firms don't. "There's definitely political risk if they don't bail them out," Henry says.
And, if CIT were to fail, the likely benefactors will be "Wells Fargo and GE Capital, who by the way, are huge banks that have been bailed out by the government," Aaron notes.
If a bailout does happen, it will likely come in the form of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. The program - used by General Electric and others – would ease investor fears by allowing CIT to issue short-term debt guaranteed by the FDIC. The alternative is for CIT to issue higher yielding debt without government backing. Investors might be attracted to the potential for higher yield but the cost might be prohibitive and may only postpone the inevitable — and that assumes CIT would be able to sell enough paper to cover its estimated $2.7 billion of debt coming due this year and another $8 billion in 2010.
At press time, CIT was reportedly still in negotiations with the Obama Administration, which can add CIT to its long list of tough assignments.
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