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Save CIT or Let it Fail? Obama, Geithner Navigating a "Slippery Slope"
Posted Jul 13, 2009 12:21pm EDT by Peter Gorenstein in Investing, Recession, BankingTime is running out for CIT. Shares of the diversified lender are in freefall as investors doubt whether they can pay-off its mounting debts without filing for bankruptcy. Government officials say a CIT failure would not cause system risk to the financial markets. But that doesn't necessarily mean the firm won't receive a bailout.
Speaking in London Monday, Treasury Secretary Tim Geithner left the door open for a rescue of CIT: "I am actually pretty confident in that context that we have the authority and the ability to make sensible choices," he said in response to a question about how the U.S. government might deal with CIT, the AP reports.
In the accompanying video, Aaron and Henry discuss the 'slippery slope' facing the government. On one hand, you have a taxpayer base unenthused (to put it mildly) about helping another large financial institution. Besides, this is the second time CIT has come to Uncle Sam with hat in hand. They already received $2.3 billion in TARP finds in December.
On the flipside, CIT is one of the oldest and largest lenders to small and mid-sized businesses. CIT's future impacts Main Street America in a way other firms don’t. "There’s definitely political risk if they don’t bail them out," Henry says.
And, if CIT were to fail, the likely benefactors will be "Wells Fargo and GE Capital, who by the way, are huge banks that have been bailed out by the government," Aaron notes.
If a bailout does happen, it will likely come in the form of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. The program - used by General Electric and others – would ease investor fears by allowing CIT to issue short-term debt guaranteed by the FDIC. The alternative is for CIT to issue higher yielding debt without government backing. Investors might be attracted to the potential for higher yield but the cost might be prohibitive and may only postpone the inevitable — and that assumes CIT would be able to sell enough paper to cover its estimated $2.7 billion of debt coming due this year and another $8 billion in 2010.
At press time, CIT was reportedly still in negotiations with the Obama Administration, which can add CIT to its long list of tough assignments.
Yahoo! Finance User - Monday July 13, 2009 01:10PM EDT
CIT won't fail.It will just be bought up by GS,or someone.The only thing I see happening is a consolidation of financial institutions.How many are trying to become "to big to fail."?
Whit Chambers - Monday July 13, 2009 01:11PM EDT
Next bubble to burst.... The OBAMA factor. All talk... no substance.
snow - Monday July 13, 2009 01:15PM EDT
bunch of crap bail everyone out what a waste of money and tax payers money
Paul - Monday July 13, 2009 01:18PM EDT
There is nothing you or I can do about it. They are doing what they are told to do by the world leaders, not us. There is no constitution, there is no single government that is in charge, there is no primary currency, there is no stock market movement, and there is no decision, that hasn't been laid out and discussed by the world leaders and either approved or denied to take place. We are nothing and will become even less important as this continues. In the end, worldwide, there will be only the incredibly rich and the people fighting to survive. There will only be Soylent Green.
Yahoo! Finance User - Monday July 13, 2009 01:20PM EDT
The choice on CIT is not only save or fail. There is another called RESTRUCTURE. Before the Government gives CIT a penny they should aks for a exit plan which includes repayment. But first the CEO from Merrill obviously must go. CIT was a good business finaning the middle market until they went and tried to play the structured finance game with the Merril boys.
Ray - Monday July 13, 2009 01:23PM EDT
The government tells you CITI is to big to fail and invest billions. Then they can tell you CITI can't be saved and they will lose billions. Then they tell if the economy is failing they can barrrow billion more to keep it stimulated. Its a sure sign that things are getting better.
Brian - Monday July 13, 2009 01:25PM EDT
They are bailing themsevles out, which is really easy with other people's money. When Obama got up in front of the bankers in Feb and said 'We want you guys to do what you do', knew we were doomed.
Soonernow - Monday July 13, 2009 01:32PM EDT
At this point, who cares...our crooked government is going to continue doing what they have been doing (screwing things up royally) regardless of what we (the taxpayers) think...remember folks, this is no longer a democracy!!!
WolfTalk101 - Monday July 13, 2009 01:33PM EDT
Time to wrap up its business and close its doors. Don't let get absorbed by the bigger banks. Sell it off state by state to private investors.
Len T - Monday July 13, 2009 01:35PM EDT
Bail them out too. The too big too fail banks and AIG have been bailed out. There's just too much lobbying power behind the financial institutions to think that the government is not being manipulated by the likes of Goldman Sachs and other superweights. It is to the point that it just doesn't matter anymore. The chance to CHANGE the banking system has come and gone, its business as usual.
SKC - Monday July 13, 2009 01:36PM EDT
CIT needs to fail just like others has. There are plenty of players can fill the gap for SBA lending. Let the others who recvd funding can fill the gap quickly. By the way, who is really lending to Small Business during this time. WE as tax payers should ask the banks to report new lending period--Many small business owners cant get any funding these days--that includes everyday folks who owned business for long time.
HughC - Monday July 13, 2009 01:43PM EDT
CIT - "Slippery Slope" or “Golden Opportunity” If handled effectively this can be a “Golden Opportunity” for the Obama Administration to differentiate itself in how it handles CIT versus how the Bush Administration handled AIG. The Obama Administration should consider the approach it took with GM and Chrysler, i.e. split CIT like it did the auto companies, with a good bank/bad bank scenario. If no good bank succeeds CIT, GE and Wells Fargo gets to cherry-pick and potentially gouge CIT’s better credit risk borrowers.
yousedummy - Monday July 13, 2009 01:47PM EDT
"Citi must fail " "bail out Citi" "CITI is to big to fail" Such well-informed investors. NOT! It's unfortunate such, ummm, "intelligent" people are allowed to vote.
carey_jim43 - Monday July 13, 2009 01:50PM EDT
Voices dripping with irony means that the little guys who are the 'engines of the economy' will be 'allowed' to fail. Why? Little guys are supposed to fail. Big guys aren't supposed to fail. It's simple. And yes Virginia we the sheeple are NOT the government. The government is the government. Speculators make money listening to the tone of voice of midsized analysts who listen to the tone of voice of big sized analysts who listen to the tone of voice of big size financial players who listen to the tone of voice of speculators who listen to ... Has American become a giant Ponzi scheme?
j2n272 - Monday July 13, 2009 01:50PM EDT
Step up to the Bailout Merry-go-round. CIT is about to grab the second gold ring. The taxpayers are very generous this year, or should I say the Obama administration and the Congress. Let's get serious and send them on they way.
Jack Hollister - Monday July 13, 2009 01:56PM EDT
Read my lips...no more bailouts. The well is drying up quickly and taxpayers have had it with giving their grandchildren's money to unethical, greedy cohorts of the present administration.
Yahoo! Finance User - Monday July 13, 2009 02:03PM EDT
Johhny Ike you sound li\ke a lobotomized chimp
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Jack - Monday July 13, 2009 01:09PM EDT
My view is CIT is the beginning of the end of bailout nation. The public will not tolerate another bailout. When they don't bailout CIT, we will finally start the road back to a market economy.