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    Bailout Nation: CIT's on Deck

    07/14/2009

    CIT Group Inc. is too big to fail. Or so says historical precedent.

    Well, sort of. We think. Er, perhaps?

    Amid growing fears that the country's primary lender to small and midsized U.S. businesses is on the verge of a run, the ailing company's stock fell to a meager $1 Monday as investors braced for the worst. Monday's analysis of the group's liquidity crunch hinted that the company could be on deck for a federal bailout as mentioned in an AP article:

    "Speaking in London, Treasury Secretary Timothy Geithner suggested help could be on the way but have no specifics."

    And the secretary added,

    "I am actually pretty confident in that context that we have the authority and the ability to make sensible choices"

    Given his short-stint as treasury secretary, Mr. Geithner's uncompromising confidence is not surprising. These days the company-hawking federal government can do what it so deems best for its never-ending spend and tax spree.

    The New York-based financier, which converted into a bank holding company last fall along with its competitors, received $2.3 billion in TARP cash last December and is now scrambling to make ends meet, which could come in the form of FDIC debt backing. Under the FDIC's Temporary Liquidity Guarantee Program, CIT would issue government-backed bonds to raise capital at a lower cost. According to the Wall Street Journal,

    "[T]he discussions are fluid. It remains unclear whether a final debt deal can be brokered and, if so, how expansive it might be."

    Thus, Messrs Obama and Geithner have some decisions to be made. They can let CIT file for Chapter 11 and all but squash hopes of getting unemployment under raps as such a fold would inevitably be deleterious for CIT's 1 million clients by cutting off financing. (Although, at this point there's no way they can whittle a 9.5% unemployment rate that continues to drive upward to anything close to their "misread" 8% projection.) Option number two is also quite alarming: they can continue to spike deficit clouds. The whole situation stirs up memories of the desperate situations experienced by Bear Stearns and Lehman Brothers before they were sent packing in the spring and fall of 2008, respectively. But CIT Group's profile reaches much further throughout our economy than Bear or Lehman ever did. It's massive. Question is, with the economy in much worse shape than we think, is it time for the U.S. Coast Guard Government to throw its buoy once again?

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    Besides Mr. Geithner's off the cuff remarks on the CIT developments, little has been mentioned publicly either for or against another bailout. Or as Jaret Seiberg, a policy analyst at Concept Capital's Washington Research Group, observed,

    "It seems like official Washington is just coming to grips with what would happen if the largest small-business lender went belly up."

    But what would happen if we bailed them out?