In CIT Woes, Some See Restart of Financial Crisis

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CIT Group headquarters in New York City

Will CIT's failure relight the financial crisis?

On July 15, one of the nation's largest lenders to small businesses, CIT, said the government was unlikely to save it from bankruptcy. The company could still find a private investor to swoop in and rescue the firm. By some estimates, CIT has to find as much as $6 billion in new capital — and fast — to keep the lights on, and in this economy, most investors are betting that's not likely. CIT shares have fallen 90% this year, and traded around 40 cents on Thursday. A bankruptcy, some say, could come before the weekend. And that has many people for the first time in months getting nervous that the simmering financial crisis could heat up again.

"A CIT failure will mean to Main Street what Lehman Brothers meant to Wall Street," says Van Haroutunian, a lawyer at Ballon Stoll Bader & Nadler who represents small apparel firms — many of which have borrowed money from CIT. Haroutunian says he has gotten calls this week from more than 40 of his clients who are nervous about what a CIT bankruptcy would do to their business. "It's going to be a tremendous problem."

If you have followed the 10-month crisis even minimally, you will know the fears that CIT's failure are fanning again. Analysts say insurers and other large investors could be hit with hundreds of millions of dollars in losses. Small businesses say they could be cut off from credit. That could cause more layoffs and further delay an economic recovery. Massachusetts Representative Barney Frank, a Democrat who heads the House Committee on Financial Services, said he has heard from a lot of people who say it will be a big problem for the economy, small businesses in particular, if CIT fails.

"Surveys show that, despite concerns, most small businesses say that the access to credit has not been a problem for them in the financial crisis," says economist Edward Yardeni. "Now it will be."

Few are predicting that a CIT failure would cause as much havoc in the financial market as the bankruptcy of Lehman Brothers did last fall. CIT, which was founded 101 years ago, lends to hundreds of thousands of small businesses and also provides money to other firms, called factors, that help small businesses finance their day-to-day operations. In late 2008, the Treasury Department gave CIT $2.3 billion in federal assistance from TARP funds. But apparently, the Treasury Department's bar for bailouts has risen, and CIT isn't tall enough anymore. And while some bank stocks traded down on Thursday, investors mostly shrugged off news of CIT's possible collapse. The Dow Jones industrial average rose nearly 100 points.

Indeed, analysts who follow a number of different industries rushed out reports about how CIT would affect the companies they watch. The biggest areas of concern were for the insurers that hold a large amount of CIT debt and retailers, which rely heavily on the type of short-term lending that CIT provides. The consensus was that CIT's failure alone was not likely to bring down any other firm.

"CIT in and of itself is not a material issue for any of the large publicly traded life-insurance companies," says analyst Jeffrey Schuman, who follows that sector at investment bank Keefe Bruyette & Woods. "But these guys have taken a lot of hits, so we continue to watch their investment portfolios."

After a number of months of relative calm, the likely CIT bankruptcy serves as a reminder that a number of issues of the financial crisis have yet to be resolved. Among the things that analysts and economists are still worried about are the hundreds of billions of dollars in commercial real estate bonds that face defaults, a continued stream of small-bank failures and the rising unemployment rate.

"We shouldn't kid ourselves that the financial crisis is over," says Yardeni. "We're not back to normal."