Yesterday, I wrote that the Obama administration would allow CIT Group
What's all the fuss about?
At $76 billion in assets, CIT doesn't meet the minimum $100 billion that would qualify it as "too big to fail" (TBTF). The trouble is that CIT is a lender to nearly one million small and midsize businesses, and the administration may fear that any disruption in lending -- even if the void were eventually filled by firms like JPMorgan Chase
Unfortunately, a rescue of CIT would set a terrible precedent in extending the TBTF policy beyond firms whose demise presents a risk to the entire financial system. Admittedly, this crisis creates an extraordinary set of circumstances. The government is surely anxious to avoid any big blows to confidence at a time when we are just emerging from the talons of panic -- the March 9 market low of 676.53 is not far behind us (and that level might not be too far in front of us, either!) and the VIX, Wall Street's "fear gauge," only recently returned to pre-Lehman bankruptcy levels.
All the same, "too big to fail" was never about ordinary circumstances.
Warning: These shares remain speculative
Discussions on the proper role of government in the economy are important, but in the immediate future, investors need to keep their eye on the ball. CIT's fate is in the government's hands. Although the odds of a favorable outcome have increased, owning (or selling short) CIT shares remains, at present, entirely speculative, which, to quote Warren Buffett from his 1992 Berkshire Hathaway
Looking for a financial-industrial conglomerate with a balance sheet like the Rock of Gibraltar at a great price? Morgan Housel has one for you.
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