US refusal to bail out lender CIT leaves retailers in jeopardy

The CIT Group headquarters in New York. Photograph: Bebeto Matthews/AP

The Obama administration has refused to rescue one of America's leading lenders to small and medium-sized businesses, CIT, raising the prospect of bankruptcy which could imperil thousands of shops' ability to stock their shelves for Christmas.

Negotiations over a government bail-out of CIT broke down last night, leaving the future of the New York-based finance company hanging in the balance. Although a little-known name to the public, CIT has lent more than $60bn (£37bn) to shops, restaurants and manufacturers, many feeling the pain of the recession.

Trading in CIT's shares was suspended on Wall Street yesterday afternoon. Shortly afterwards, the company issued a terse statement saying it had been advised that "there is no appreciable likelihood of additional government support being provided over the near term".

Financial regulators had been in round-the-clock talks as the US treasury, the Federal Reserve and the Federal Deposit Insurance Corporation weighed up whether CIT was sufficiently "systemically important" to prop up with public money.

The 101-year-old moneylender appealed for emergency assistance last week. It provides day-to-day finance to more than 760 manufacturers and 300,000 retailers, many of which rely on short-term loans to smooth seasonal bumps in trading.

Analysts had warned of harmful consequences to companies strapped for cash if CIT was allowed to fail. David Strasser, an analyst at Philadelphia-based Janney Montgomery Scott, cautioned that shelves could be bare if CIT failed. "We could see significant inventory issues for the [Christmas] holidays."

With $80bn of assets, CIT is only a fraction the size of Wall Street banks such as Goldman Sachs or Citigroup.While it does not fit into the government's usual definition of "systemically important" organisations, its demise could leave thousands of businesses strapped for cash. Its clients range from Dunkin' Donuts franchisees to vendors dealing in Toshiba and Microsoft products.

Bert Ely, an independent banking analyst, said the timing of CIT's difficulties was "terrible", coming just as concern mounted about a double-dip recession. "It's a very large lender to small and medium-sized businesses and there's a lot of legitimate concern about what would happen if it's allowed to shrink further."

Worsening CIT's difficulties, customers have been drawing down millions of dollars on credit lines in fear that the money may not be available much longer.

The US treasury secretary, Timothy Geithner, is thought to have been reluctant to set a precedent by bailing out a company of relatively modest scope, with little at risk in deposits from high-street customers.

James Barth, an economist at the Milken Institute, said the treasury had to stop intervening somewhere. "Not all firms have to be saved and the government has to draw the line at some point. By and large, I don't think it is going to be a catastrophe, or become another Lehman Brothers," Barth said.

by Andrew Clark in New York