Tuesday, July 14, 2009

CIT Hanging on By Thread; US Considers Bailout

CIT has not given up its quest for government assistance. Although somehow FDIC Chairman Sheila Bair had no trouble guaranteeing the debt of the likes of Citi and Bank of America, she refused to risk draining the FDIC's deposit insurance fund by guaranteeing the debt of the ailing CIT. The Treasury and Fed, however, are more amenable to the idea of coming to the lender's aid, according to the WSJ. US government officials are in advanced talks with the lender to keep the lender afloat. Although CIT is not viewed as a systemic risk to the market, CIT has loans to nearly one million small businesses. According to the story, government officials believe that CIT's failure could have "many unforeseen consequences."

Why would the government be interested in bailing out a lender that is not a systemic risk to the economy? Certainly there are always unforeseen circumstances when a company collapses but why CIT? I'm not one to start conspiracy theories, but since this one is already out in the open, I might as well come right out and say it: Goldman Sachs extended CIT a $3 billion loan. Sure, in today's earnings announcement the investment bank claims it has no exposure. It is hedged. Blah blah blah. Please refer to transcript related to AIG government bailout. But it would certainly be very convenient if the government bailed out yet another company that owed GS billions of dollars. Wouldn't it?

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