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July 17, 2009

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CIT looks likely to file for bankruptcy

CIT Group Inc's inability to get emergency government funding raises expectations that the commercial lender will file for bankruptcy.

But it is unclear how such a filing by a company that lends to millions of small and mid-size businesses would affect shaky financial markets hobbled by an economy in recession and bleeding millions of jobs a month. Small businesses are seen as keys to economic recovery.

CIT said late on Wednesday that negotiations with regulators about a possible rescue had broken off after days of round-the-clock talks.

The move marked a defining moment for the Obama administration and showed it's drawing a line in the sand on federal rescues for troubled financial firms.

The early reaction to the collapse of the talks was subdued.

Futures on the Dow Jones industrial average and the Standard and Poor's 500 index dipped on the announcement. But after a stronger than expected earnings report from JPMorgan Chase yesterday, the Dow Jones industrials and S&P 500 futures edged higher.

The muted response to CIT's woes suggests investors are more focused on signs that the economic slump may be easing, said Paul Baiocchi, senior market strategist at Delta Global Advisors in San Francisco.

"The market may simply scoff at this news," Baiocchi said. "We're seeing more optimism with the earnings outlook this quarter, so that could outweigh CIT's problems."

CIT's small size relative to other big commercial banks may also ease worries of a ripple effect. Though a major lender to small and mid-size United States business with about a million clients, CIT is one-eighth of the size of Lehman Brothers when credit losses forced the investment bank into bankruptcy last fall.

CIT had also begun cutting back on lending in recent months, diminishing the risk a possible bankruptcy could cause significant damage to the broader economy. The lender had US$5.3 billion in credit lines to customers as of March, down from US$6.1 billion at the end of 2008.

"That shows they were pulling back and should lessen the immediate blow of this," said Kathleen Shanley, an analyst at Gimme Credit. "I don't see a real contagion effect here."

And neither, it seems, does the Obama administration's financial rescue program, headed by Treasury Secretary Timothy Geithner. By withholding aid, the administration is betting that CIT's likely failure won't pose a critical risk to an economy weighed down by rising unemployment.

CIT, which got US$2.3 billion of bailout money in December, has warned that depriving it of more federal aid could imperil about a million corporate borrowers - from Dunkin' Donuts franchisees to retailer Dillards Inc.

The Bush administration paid a price not saving Lehman Brothers, whose collapse helped spark the financial crisis last fall.


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