The bailout Lords of Washington D.C. have decided to stop handing out free lunches. After giving out a few trillions, they seem to be saying “enough is enough”.
The government has decided that the failure of CIT Group is not a systemic risk to the U.S. and world economies and will go into bankruptcy if necessary. The Federal Reserve believes that the bankruptcy of CIT Group will not create a domino effect of other failures and/or generate a panic. Whether that’s true or not, we’ll find out.
Who’s CIT Group?
Here is an excerpt from their website:
CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets. For more than 100 years, CIT has provided lending, advisory, and leasing services to small and middle market businesses guided by unparalleled industry expertise and focus. Headquartered in New York City, CIT is a Fortune 500 company and member of the S&P 500.
…
CIT Small Business Lending Corporation has been designated the #1 SBA [Small Business Administration] 7(a) lender for the 9th consecutive year in a row!
All in all, CIT Group is one of the biggest lenders to American small businesses. One of the biggest services they provide is factoring:
A financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.
In general, CIT provides up-front money to small businesses so they can keep operations running smoothly.
What’s the concern?
The debate revolves around the “too-big-to-fail” concept. It’s the idea that if CIT Group goes bankrupt it will dramatically short-cut credit to small businesses that are already going through tough times. This could thus create a wave of small business failures due to the lack of credit.
Here is an excerpt from The Wall Street Journal:
Disrupting the flow of cash to this important sector would be catastrophic. Small businesses employ about half of all private-sector workers, represent half of the nation’s payroll and are responsible for 28.9% of U.S. exports, according to the U.S. Small Business Administration.
And, of course, small businesses have created 60% to 80% of all the new jobs created in the last decade.
So, there’s no doubt that a CIT bankruptcy would be disruptive, but should they get a bailout?
Probably not. The financial system (seems) to have stabilized and a CIT bankruptcy would not break the system. This is different from September/November 2008 when everything was going down the drain and multiple failures of multiple big financial institutions would have probably collapsed the financial system.
We’ll wait and see.
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