Why Not Bail Out CIT? Some Lessons Learned

(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.

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    Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. 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.