Will business lender CIT Group
Waiting for a lifeline
CIT has already received $2.3 billion in TARP funds. However, with a debt repayment due in August and $2.7 billion to repay this year, the key to CIT's survival may be an FDIC authorization to issue debt with a government guarantee. The FDIC's Temporary Liquidity Guarantee Program (TLGP) has enabled banks including JPMorgan Chase
CIT has been waiting for the Federal Deposit Insurance Corp.'s approval for several months. However, at $75 billion in assets, it falls shy of the $100 billion level that qualifies a financial institution as "systemically important" (too-big-to-fail, in plainer language) and, at this stage in the financial crisis, there is little congressional support for propping up failing institutions unless absolutely necessary.
Furthermore, extending the list of TBTF institutions would send a very unhealthy message; the repercussions of a CIT failure are unlikely to match those that followed Lehman's bankruptcy.
CIT shares are now officially a speculation
Owning CIT shares isn't in the mad hatter category of owning "old GM" shares (where a total loss is certain), but it has clearly become a speculation: The risk of substantial (or even total) capital loss is not insignificant. My sense -- but it is no more than an educated guess -- is that the administration will certainly let CIT fail if it comes down to it.
Caveat emptor, indeed.
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Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. Moody's is a Motley Fool Stock Advisor recommendation. Moody's is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.