CIT Group, an important lender to smaller companies, said last night that it had failed to persuade the federal government to provide further financial assistance to help it avert a likely bankruptcy filing that could hurt thousands of clients ranging from small clothing manufacturers to retailers such as Dunkin' Donuts and Dell.
The decision, which appears to mark the first time that the Obama administration has denied aid to a large, troubled financial company, reflects the judgment of senior officials that the economy is now strong enough to absorb a painful failure, in part because New York-based CIT is not among the very largest financial firms.
The consequences of a bankruptcy filing still could be severe. CIT provides financing to roughly 1 million companies, many of them already struggling to weather the recession. CIT estimated in its pleas for assistance that thousands of firms might be unable to survive its demise.
A bankruptcy filing also could wipe out the $2.3 billion that the Bush administration invested in the company in December as part of the government's $700 billion financial rescue program. CIT would become the first firm bailed out by the government to subsequently fail.
An administration official said that those concerns were thoroughly discussed but that officials decided the larger problem was the perception that bailouts were available to every troubled firm.
"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," the Treasury Department said in a statement last night.
CIT said last night that it "has been advised that there is no appreciable likelihood of additional government support being provided over the near term." The statement added that the company's board of directors was reviewing alternatives.
CIT has hired the law firm Skadden Arps Slate Meagher & Flom, which often helps companies file for bankruptcy protection. Standard & Poor's said earlier this week that a filing was inevitable if the company could not secure federal assistance.
The decision to deny aid was made after considerable debate, according to sources familiar with the discussions who spoke on the condition of anonymity. At a time when the administration already is working on ways to increase lending to small businesses, some Treasury officials saw rescuing CIT as a necessary and obvious step. But that view was opposed from several quarters.
The Federal Deposit Insurance Corp. was most easily in position to aid CIT through a program that helps companies borrow money from investors. But the agency has sat for months on CIT's application to participate in the program due to concerns that the company would not survive and the FDIC would be stuck with the bill. The agency remained reluctant to provide help in recent days, an administration official said.
Other officials shared the FDIC's reluctance because they wanted to demonstrate that the government would not rescue every troubled firm. Making an example of CIT could have political value for the administration, given the considerable public outrage over the bailouts of other firms. The decision also signals that the government is starting to end its period of extraordinary involvement in the financial markets.
CIT's troubles began two years ago, as investors fleeing subprime loans decided that the entire financial sector was fundamentally rotten, rendering obsolete the company's traditional model of borrowing from investors to lend to small businesses. CIT survived for a time by burning its own fat, but its long-term debts now are coming due, beginning with about $1 billion in August. Investors finally lost patience, dumping CIT stock and bonds. Trading in the company's shares on the New York Stock Exchange was halted yesterday afternoon, as speculation mounted about the CIT's future.
Federal officials note that the company has made few new loans in recent months, because it is basically out of money. And if the company does fail, government officials and financial analysts say that many of its customers will simply move their accounts elsewhere.
"We believe that any of its lending done to creditworthy clients could be assumed by a bank," analysts for CreditSights wrote in a note to clients this week. "Further, we believe a major bank could lend at better terms than CIT."
The area of greatest concern, however, is the company's role as an intermediary between retailers and their suppliers, a business known as factoring. Suppliers generally accept IOUs from retailers, which they sell to firms such as CIT in exchange for a portion of the money upfront and the rest when the payment is collected from the retailer. In effect, that means many suppliers are relying on CIT for payment on goods that they already have sold. A bankruptcy filing could freeze those flows of money and disrupt supply networks at a time when many companies are in extremely fragile condition.
"CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress," Tracy Mullin, president of the National Federation of Retailers, wrote in a letter sent yesterday to the Treasury and the FDIC.
Staff writers David Cho and Neil Irwin contributed to this report.By Binyamin Appelbaum