Should CIT Group be saved?
Posted in :
By the time of this writing, CIT Group (NYSE: CIT) fate is still unknown. A while ago (Apr 24 2009) I wrote about CIT Group because I traded it on that day. I felt the situation looked more an more like WaMu as that afternoon the rating agency downgraded the rating of CIT bond to “junk” or “default” (I can not remember exactly).
CIT Group is an interesting financial company. I first got to know them because my Dell Financial credit line was issued by them. Recently I learned a lot of small business got credit from them. In other words, many small to middle business can only borrow from them (other banks won’t lend to them because lack of collateral, credit history etc). CIT Group probably does not belong to the “too big to fail” league (e.g., Citi Group, Bank of American, Goldman Sachs), as it has only $60 billions of debt outstanding. Some of the small business probably will fail regardless in this downturn, some of them probably should not have borrowed at the first place. The US consumer based economy got too much bubble in last few years, just like the baseball got steroid. The correction is necessary to weed out the bubble. Some argue those small business could get credit from other places (B of A, Wells, GE Capital etc.), if CIT indeed fails.
On the other hand, I can think of the following argument for supporting CIT Group:
1) If Citi and B of A are saved by tax payers, although they don’t necessarily lend whole a lot bailout money. Why not use tax payers money bailing out CIT and have them lend to the small business in the community?
2) It will be very hard those small business to borrow from other banks, as they usually could not borrow from them at the first place.
3) CIT Group may have made some mistakes to get into this situation, but they did not do exotic things like CDS. Remember AIG and $6 billion tax payer money flowed from AIG to Goldman as AIG CDS bet goes sour and we the tax payers are on the hook? The biggest mistake CIT made was lending too loosely to small business (remember back then cheap money was everywhere). If the government still want to support small business and jobs (half of the jobs are created by small business in this country), they should support some sort of small business lending initiatives. The existing infrastructure of CIT is an option. This is like student loan, home loan, the government has its moral obligation or public policy to support it. At the same time, those initiatives will bring return to the greater society in general.
So, what’s your take?