TARP - It's who you know

CIT Financial, financier to a large number of small to medium businesses, is on the brink of collapse, despite having received TARP funds during the recent round of bank bailouts.

July 13 (Bloomberg) -- CIT Group Inc., the century-old lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers.

A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.

CIT executives spoke with regulators during the past two days, according to a person familiar with the talks, after its bonds and shares tumbled on concern that the Federal Deposit Insurance Corp. won’t allow the lender into its bond-guarantee program created last year to unfreeze debt markets. CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.

CIT is not small. If it were to fail, it would represent the biggest bank collapse since Washington Mutual last year.

The FDIC is concerned that standing behind CIT debt would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking, who declined to be identified because the talks are private, said last week. Since Nov. 25 the FDIC has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program, designed to give creditworthy borrowers access to funds after debt markets seized up following the failure of Lehman Brothers Holdings Inc.

The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said.

The TARP bailouts were poorly thought out, and poorly executed. The poor execution continues. Even though TARP was a bad idea, it is done. The money is set aside to bail out failing banks. Perhaps CIT does not meet the federal means tests. It doesn't matter. This is not about CIT. CIT could fail catastrophically for all it matters to me, if they made bad banking decisions. Remember, recessions are a necessity - they weed out inefficient companies and undesirable business practices - they should be allowed to happen. CIT may have made some terrible decisions and should be allowed to fail. Or maybe they made good decisions. Again it doesn't matter because it's not about CIT.

It's about the 760 manufacturing clients and 300,000 retailers. That's a lot of jobs. That's a lot of GDP dollars. Unless you want to put all of that at risk, wouldn't this be a bank worth taking a second look at rescuing? If rescue is required, and now the law of the land (TARP), then who more worthy than a bank that is the lender of choice to so many employers? What about those lost jobs, or missed payrolls? And what of the ripple effect caused by allowing it to fail?

If you aren't trying to deliberately shoot the economy in the foot, doesn't it seem counter-productive to create a TARP fund and then not use it in this case? Unless of course, rescuing the economy is not your goal - damaging it is. Or perhaps the real goal is to line the pockets of friends of the victorious. Maybe it's just who you know. Friends of the President get free taxpayer bailout money. If you aren't on that list then too bad for you.

I'm anti-bailout. But TARP is a done deal. Since those funds are already allocated for bank rescues, since that's a sunk cost at this point, it begs the question - if not this type of situation, what exactly are they saving those funds for anyway?