On Monday I wrote that I thought "the administration will certainly let CIT (NYSE:CIT) fail if it comes down to it." That now looks correct, after all. While reports of government talks to rescue the middle market lender sent shares up by 19% on Tuesday, the market's hopes were dashed yesterday afternoon once news hit that the talks had collapsed. As I write this, CIT shares have lost more than two-thirds of their value today. Where is this episode heading now?

Drawing a line in the sand
I agree with the government's decision not to support CIT -- there is no sense in throwing good taxpayer money after bad. Authorities conducted a stress test of CIT and found a $4 billion shortfall in capital in light of predicted losses; furthermore, they were unconvinced that the firm had a viable business plan. The Treasury expects to lose its full $2.3 billion TARP investment, which would amount to the first realized loss of public funds as a result of this crisis.

I don't believe that CIT's failure would pose a risk to the financial system. I expect lenders such as JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and General Electric (NYSE:GE) to step into the breach -- where they are able to do so rationally (i.e., with the reasonable expectation of making a profit).

The show's not over, folks …
CIT's predicament is a stark reminder that the credit crisis is far from extinguished, and we should expect to be dealing with its repercussions well into the next decade. It also highlights the necessity of clarifying the regulatory status of non-bank financials -- CIT only converted to a bank holding company in December in order to gain access to TARP funds.

Finally, this week's unpredictable twists clearly illustrate the speculative nature of owning (or shorting) CIT shares -- and there could yet be more to come (although, personally, I expect CIT will ultimately declare bankruptcy). If you're still tempted to punt on CIT shares, you should do so only with the knowledge that it's a gamble in which you have absolutely no edge.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.