FDIC resisting calls to help bail out troubled lender CIT Group, negotiations continue

FDIC resisting calls to aid lender CIT Group

WASHINGTON — With government officials locked in negotiations about a possible bailout for business lender CIT Group Inc., the Federal Deposit Insurance Corp. is resisting calls to open a key subsidy to the troubled firm, according to people familiar with the matter.

Despite fears that problems at CIT could imperil perhaps a million small- and mid-sized businesses from the franchisees of Dunkin’ Donuts to retailer Dillard’s Inc., the FDIC maintained that its loan guarantee program was the wrong prescription for the company.

CIT applied to the program in January, but the FDIC remains concerned that backing the company’s debt would put at risk the insurance fund that is used to repay deposits when banks fail, according to industry and government officials who spoke on the condition of anonymity because the negotiations are still in flux.

Shares of CIT added 26 cents, or more than 19 percent, to $1.61 Tuesday on hopes that the government would throw the company a financial lifeline. The stock approached $1 a share on Monday as investors fearing a bankruptcy court filing unloaded the shares.

CIT has been in talks with the Treasury Department, Federal Reserve and FDIC about possible solutions to a liquidity crisis. CIT faces a looming debt payment, investors and customers have begun to lose confidence in the firm.

Several solutions have been proposed, including access to the FDIC’s Temporary Liquidity Guarantee Program. But the FDIC has resisted that, arguing that the move would expand it beyond its original purpose of unfreezing credit markets last fall.

The temporary program is due to be wound down this fall, and banks that have repaid federal bailout money are no longer eligible to participate.

FDIC spokesman Andrew Gray said the agency can’t comment on pending applications. Curt Ritter, a spokesman for New York-based CIT, would say only that negotiations are ongoing.

If granted access, the FDIC would guarantee CIT’s new debt, enabling it to raise money to meet its immediate cash needs.

But analysts say the company’s problems are deeper than a short-term cash crunch. “We believe CIT’s funding model is broken and have our doubts over whether an additional capital injection would cure the problem,” the research firm Creditsights Inc. wrote in a research report early Tuesday.

The FDIC must remain focused on its obligation to safeguard its reserves in case of future bank failures, said Wayne Abernathy of the American Bankers Association.

“I don’t think we want to do anything to cause depositors to doubt the effectiveness of the deposit insurance system,” he said. Abernathy spoke generally about the FDIC, but did not refer to any particular bank’s situation.

Another option is an additional allocation of bailout money. CIT received $2.3 billion from the $700 billion financial bailout in December.

But Treasury is reluctant to open that door at a time when banks are repaying the money and the program is being billed as targeted to healthy companies, industry and government officials said.

CIT also has explored a transfer of assets and cash between the parent holding company and CIT’s smaller bank. But that move would require FDIC approval. The FDIC must ensure that the bank is trading cash for overvalued assets, which could save the parent company but leave the FDIC on the hook for deposits if the bank fails.

The government also could broker a deal between CIT and another company. Under that plan, CIT would fail and another firm would step in to make sure its borrowers still have access to credit. Such a move might require the Fed or Treasury to guarantee the new firm against losses on CIT’s loans.

The Fed is considering exercising the same emergency powers it has drawn on throughout the financial crisis to rescue ailing firms.

Because CIT is among the largest lenders to small- and mid-sized businesses, its failure could pose a major threat to the economy, industry representatives warned.

“Their role in the market rises to the systemic level,” said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents CIT and other large finance companies.

The question of whether to bail out CIT could mark a milestone in the Obama administration’s response to the financial crisis, as officials wrestle with the question of which firms truly are too big to fail.

“The administration is closely monitoring” the situation, said White House spokeswoman Jennifer Psaki.

If it gets access to the FDIC’s debt-guarantee program, CIT could issue government-backed bonds to raise capital at a lower cost. As of June 8, the program has backed $335.4 billion of debt.

A collapse of CIT could cut off financing just as businesses need it most, analysts warned. That could force thousands of small- and medium-sized companies to drastically cut costs or shut down — driving up unemployment and dashing hopes for a swift economic recovery.

CIT’s crisis brought back memories of the brutal losses suffered by fallen Wall Street firms like Bear Stearns and Lehman Brothers.

Among the other companies CIT has worked with is Dell Inc., the No. 2 computer maker in the world. In 1997, Dell and CIT founded Dell Financial Services, which lends money to businesses and consumers to finance their computer purchases.

Dell has since acquired CIT’s stake in the venture — a strategic move, not prompted by concerns about CIT, said Dell spokesman Jess Blackburn. In the U.S., Dell’s exposure to CIT is “negligible,” Blackburn said, though CIT still finances some loans Dell makes.

CIT also offers financing in Dell’s name in several countries outside the U.S., and Dell Chief Financial Officer Brian Gladden said Tuesday that CIT owed the PC maker about $33 million as of May 1, or about 2 percent of the $1.6 billion owed by customers at that point.

AP Business Writer Stevenson Jacobs in New York and AP Technology Writer Jessica Mintz in Seattle contributed to this report.