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Econwatch
July 16, 2009 9:49 PM

Why Not Bail Out CIT? Some Lessons Learned

By
Declan McCullagh
Topics
Bailouts
(AP Photo/Bebeto Matthews)
After Lehman Brothers collapsed last fall, it seemed as though the Feds were unwilling to let any reasonably-sized financial institution fail.

No longer. The federal government has rebuffed pleas from CIT Group, which lends to small and midsized companies, for more bailout cash.

The result has been a scramble for dollars on the part of CIT's clients and reports of a possible bankruptcy filing as early as Friday. CIT recently hired the Skadden Arps law firm, which is known for its work on mergers and bankruptcies.

CIT already received $2.33 billion in tax dollars as part of a bailout in December. It's not clear if that money will ever be repaid. (Meanwhile, CIT shares fell 75 percent on Thursday.)

While few people would call CIT too big to fail, the Obama administration was facing some pressure to write another ten- or eleven-figure bailout check. The National Retail Federation asked the White House for a CIT bailout, saying it lends to retailers, and "the retail industry is too important to the economy to be placed under additional stress."

One of CIT's problems is timing. After the embarrassment that the AIG bailout caused Washington, including last month's report of still more bonuses, the nation's capital may be experiencing a mild case of bailout fatigue.

Another may be -- and we'll probably never know for sure -- that CIT CEO Jeffrey Peek likes to give money to Republican politicians instead of Democrats. (When you have a politicized financial system, as we now do, it's at least a question worth raising.)

The downside of the CIT non-bailout? The post-Lehman, post-AIG lesson to companies is simple: become too big to fail. Look for more mergers and consolidation as a result. After all, if Lehman and CIT had merged, as had been contemplated in 2002, this story likely would have a very different ending today.

  • Declan McCullagh is the chief political correspondent for CNET. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.

Add a Comment See all 17 Comments
by truth_police July 19, 2009 3:43 PM EDT
Let's debunk the myth of "Too big to fail," for several vital reasons, namely, because it is anti-capitalist, anti-democracy and anti-American. Whenever someone concludes a business entity is "too big to fail," what you really have is an outright unequivocal, lock & load, slam-dunk case of (and admission to) an egregious Anti-trust Violation. In fact, it embodies the very definition of an anti-trust violation. Anti-trust offenses haven't been prosecuted for many years now, and this is the ugly, destabilizing result. When it was rigorously prosecuted "in good faith" long long ago, it was for the purpose of protecting the economy against perilous, unhealthy reliance on too few economic players for this country's economic health and stability. Anti-trust laws were enforced because responsible economists understood that it was profoundly dangerous and unhealthy for our country's economic survival to depend on so few extortion-prone business entities. It was a "don't put too many eggs in one basket" philosophy that protected America from extortionist corporate giants that sought to institutionalize themselves forever as "too big to fail" mammoth business entities whose survival is irreversibly tied to the country's survival. Is there anyone with half a brain who cannot see how perilous this practice is? Dump the myth about "too big to fail" and start prosecuting anti-trust cases in dead earnest, with "the pedal to the metal."
Reply to this comment
by truth_police July 19, 2009 3:39 PM EDT
Let's debunk the myth of "Too big to fail," for several vital reasons, namely, because it is anti-capitalist, anti-democracy and anti-American. Whenever someone concludes a business entity is "too big to fail," what you really have is an outright unequivocal, lock & load, slam-dunk case of (and admission to) an egregious Anti-trust Violation. In fact, it embodies the very definition of an anti-trust violation. Anti-trust offenses haven't been prosecuted for many years now, and this is the ugly, destabilizing result. When it was rigorously prosecuted "in good faith" long long ago, it was for the purpose of protecting the economy against perilous, unhealthy reliance on too few economic players for this country's economic health and stability. Anti-trust laws were enforced because responsible economists understood that it was profoundly dangerous and unhealthy for our country's economic survival to depend on so few extortion-prone business entities. It was a "don't put too many eggs in one basket" philosophy that protected America from extortionist corporate giants that sought to institutionalize themselves forever as "too big to fail" mammoth business entities whose survival is irreversibly tied to the country's survival. Is there anyone with half a brain who cannot see how perilous this practice is? Dump the myth about "too big to fail" and start prosecuting anti-trust cases in dead earnest, with "the petal to the metal."
Reply to this comment
by the_keeper03 July 18, 2009 2:01 PM EDT
"Audit the Federal Reserve"
http://www.campaignforliberty.com/campaigns/hr1207home.php

Since its inception in 1913, the Federal Reserve has helped to devalue our dollar by 95%. During the recent economic crisis, it has poured trillions of dollars into the economy with no oversight, made secret agreements with foreign banks and governments, and has refused to tell Congress who is getting the money or to give it the details of what deals are being made.

HR 1207 & HR 2424 Bills to "Audit the Federal Reserve ," and S 604, its Senate companion, will demand full transparency from the Federal Reserve for the first time in history by removing all restrictions from Government Accountability Office (GAO) audits of the Fed and mandating an audit by the end of 2010.

Help turn up the heat on Congress. Your petitions, e-mails, letters and phone calls have already made a huge impact, but more of your help is needed right away. Please take a few moments to tell your Congressman to support HR 1207, HR 2424 and urge your Senators to cosponsor S 604. Our tools below make it quick and easy to make a difference today!

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Reply to this comment
by debinok1 July 17, 2009 7:21 PM EDT
IF CIT files for bankruptcy we will see a lot of small business chains filling right behind them. That will be followed by all of those employees from all those chains filling for unemploment. That will be followed by delinquent credit card payments, car payments, and mortgage payments. Which will then be followed by even more repos and foreclosures. This is one bank that deserves the help and should get it. To bad that congress and the fed cannot see the domino effect that will come from this.
Reply to this comment
by tautomer July 18, 2009 12:13 AM EDT
Why do you think that's the case? Do you think that just because CIT files for bankruptcy protection all the loans will suddenly become due? That's very doubtful. In all probability,the assets (loans outstanding) will remain in place as CIT restructures. They may be sold, but term loans should be fine. Revolvers and unsecured lines may be an issue.
by Kuei1248 July 17, 2009 12:52 PM EDT
Maybe the real issue here is whether or not to keep flushing money down the toilets of companies that are run by incompetant boards. You get a $2+ billion handout and you still can't make ends meet? You really have to be a complete fvckup if you can't come up with a better plan. These banks need to be parted out on ebay. The ceo's need to be prevented from doing business in the US again. They need to be stripped of all their personal belongings the same way they do their customers who are behind on payments. I don't feel sorry for these banks at all. Sorry, no tears here.
Reply to this comment
by eferrell2 July 17, 2009 12:15 PM EDT
I'm willing to bet none of you would be whining if that senile illiterate Bush had bailed these guys out. You only care because Obama is black. You are all disgusting racist pigs who don't know your head from your a$$ hole!
Reply to this comment
by hellosopo July 17, 2009 8:11 AM EDT
It is very amusing to watch a "Libertarian" whine because Obama isn't doling out a few more free billions to a company led by a Republican. In all this bellyaching from the Wall St. press about the lack of a second bailout for CIT, I see no accounting for the first $2.3 billion we gave them. Even a brainless commentator like McCullagh realizes that we may never get that back, but his ilk still think we should give 'em another chance and more money to lose.
Reply to this comment
by american_11-2009 July 17, 2009 7:54 AM EDT
Like every banana republic President Obama knows how to play the corruption game! He got on the Job training in Chicago and helped train ACORN!
Reply to this comment
by limaurs July 17, 2009 7:48 AM EDT
Declan McCullagh's illogic and lies are so outrageously simplistic that he must be delusional , his central delusion being that it is a good thing to be Republican ,not realizing that the word has a different meaning here than in the old country.
Reply to this comment
by brianbwb-2009 July 17, 2009 6:36 AM EDT
"...(When you have a politicized financial system, as we now do, it's at least a question worth raising.)..."

Perhaps Mr. McCullagh would deign to explain to this "Black" American just when has the US financial system not been politicized?

When it was only excluding us, mayhap?
Reply to this comment
by declanm-2009 July 17, 2009 9:28 PM EDT
If you're arguing that the creation of the Federal Reserve nearly a century ago was the start of Wall Street politicization, I won't argue with you. But even if it was politicized before, I presume you'll agree the last year or so has seen a substantial strengthening of the NYC-DC nexus.
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