Stephen Foley: Why CIT should not be bailed out

The day that Citigroup and Bank of America, which received tens of billions of
dollars in bailout money and hundreds of billions more in government
guarantees, were reporting better-than-expected results, CIT was appealing
to the mercy of its own lenders, struggling to reverse a run on the bank and
repair its finances.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, has said
no to simply guaranteeing CIT’s debts, something that might have allowed it
to refinance, but which she believes would have exposed the taxpayer to too
much risk. This despite pleas from CIT’s 950,000 customers, which rely on
the bank for short-term funding of their businesses.

The government is right to be standing back. This is no Lehman Brothers, no
General Motors.

CIT’s customers, retailers and their suppliers do face real inconvenience if
the bank goes under. Instead of waiting for customers to pay their invoices,
these businesses usually get the money upfront from CIT, who collects from
the customer later. There will be some short-term pain from cutting CIT out
of the equation, and some imprudent managers might find they have a funding
gap that is too large to bridge.

But many businesses have been calling customers to arrange payment directly,
and most customers have little interest in seeing their suppliers go under
just as they are stocking up for Christmas. They will find creative ways to
cope and, when they can’t, CIT’s rivals may step into many breaches. For the
financial system and for commerce, this is a headache rather than a heart
attack.

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