The deteriorating health of CIT Group Inc., a major lender to small businesses, is shaping up as a gut check for the Obama administration, which may be forced to decide whether to let the company fail.
Most analysts agree that the failure of CIT would have relatively modest consequences for the financial system. But the New York company has grabbed the administration’s attention because of its focus on small-business lending, an area of outsized political importance. CIT is arguing that its failure would crumple thousands of fragile firms.
Administration officials met late Monday to consider possible responses to CIT’s problems, according to a person familiar with the matter.
Some officials would like to leave CIT alone, to show that the economy is strong and that the government will not rescue every faltering firm.
But at a time when the administration already is working on ways to increase lending to small businesses, other officials see rescuing CIT as a necessary and obvious step.
Treasury Secretary Timothy F. Geithner said in London on Monday that the situation was being watched closely.
CIT used to rely on Wall Street and other investors to buy the loans it made. Many other lenders with that business model have collapsed since the financial crisis dried up their source of funding.
Shares of CIT, already down 94% since the start of last year, tumbled 18 cents, or 12%, to close Monday at $1.35 on reports that it was considering a bankruptcy filing. The company has billions of dollars in long-term debts that are starting to come due.
Debt rating firm Moody’s Investors Service downgraded CIT by four notches Monday, citing “growing concern with CIT’s liquidity position and prospects for survival of the franchise.”
CIT said in a statement that it “remains in active discussions with its principal regulators on a series of measures to improve the company’s near-term liquidity position.”
The firm’s plight is putting a spotlight on the Federal Deposit Insurance Corp., which so far has not allowed the company to participate in a program that helps companies sell debt to investors by guaranteeing its repayment. FDIC officials are concerned about CIT’s ability to repay such debt, sources said.
In a similar recent case, administration officials pressured the FDIC, an independent agency, to guarantee debt issued by GMAC, another lender long dependent on Wall Street. They prevailed after agreeing to a broader aid package to ensure the firm’s survival, including a direct investment from the Treasury Department.
Government officials have discussed a similar approach to CIT’s problems, but the talks remain preliminary, sources said. Spokesmen for the FDIC and the Treasury declined to comment.
Appelbaum writes for the Washington Post.