Will CIT Be Allowed to Fail?

Does the Government Only Save "Too Big to Fail" Firms?

It appears that the CIT Group (CIT) is on the verge of filing for bankruptcy as it has been unable to reach a deal with the government for emergency funding. The fate of the ailing business lender will provide a crucial clue into the Obama Administration’s future stance on the bailouts for financial firms.

While CIT is much smaller than other firms that received frequent bailouts -- such as Bank of America (BAC), Citigroup (C) and American International Group (AIG) -- it is not exactly small. However, there appears to be a view in the administration now that it is the type of company that should be allowed to fail since the economy is now strong enough to absorb a failure of company that is not "too big to fail."

If CIT collapses, it will be the first time since the collapse of Lehman Brothers that the administration has declined to bail out a struggling financial company of significant size. The company is a source of funding for thousands of small and mid-size businesses. It is also a big player providing cash advances to clothing manufacturers and suppliers, and credit to retailers.

The impact of its failure could be particularly severe in California because of the state's large apparel-import business. If the company were to file for Chapter 11 protection, it would probably be the fourth-largest bankruptcy by assets.

A bankruptcy filing would also wipe out $2.3 billion of taxpayers’ money that the administration invested in the company in December from TARP, and CIT would become the first firm bailed out by the government to subsequently fail.

The collapse of the government talks also shows the disagreements among regulators on the rescue plan for the company. CIT is one of the companies that have no clear regulatory supervision under the current complex and uneven regulatory system, which gave way to gaps -- and obviously there was no clarity as to which regulator should be dealing with CIT.

Read the full analyst report on CIT

Read the full analyst report on BAC

Read the full analyst report on C

Read the full analyst report on AIG