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White House Cold-Shoulders CIT


Allowing CIT to fail sends message of strength to citizens.

It looks like CIT Group (CIT) may be the first failed financial institution to actually fail in a very long time.

Although the situation is, as they say, fluid, the Wall Street Journal reported that talks between CIT executives and government officials broke down, forcing the small-business lender into a fire-drill attempt to avoid bankruptcy. The company needs around $2 billion to roll over maturing debt -- which it's urging existing debtors to cough up in short order.

Of acute concern the effect CIT's failure would have on small businesses, particularly retailers. CIT not only provides small business loans, but also offers retailers cash advances to pay for inventory. The Journal points out that California may be hit particularly hard, since the state has a sizable apparel-import industry. The Golden State, embroiled in a nightmarish budget crisis, could do without another blow below the belt.

Taxpayers, too, will be smarting. The Treasury Department's $2.3 billion TARP investment into CIT is as good as gone, and any further government investment would be plowed into a company that's bleeding cash with little hope of turnaround. And although CIT is an important player in the US economy -- especially for thousands of small businesses around the country -- it certainly poses no systemic threat to the American economy.

In Washington, on Wall Street, and on Main Street, the debate rages over how the CIT situation should be handled. And now that the White House and Treasury Department have made it clear that CIT's pleas for a taxpayer-funded bailout are likely to go unheeded, Monday morning quarterbacks can begin in earnest to peddle their after-the-fact analysis.

And here's mine.

The White House had to let CIT fail. Although it risks angering Main Street, being seen as rescuing "fat cats" like AIG (AIG), Citigroup (C), and Bank of America (BAC), while small businesses are left out in the cold, the Obama Administration can do damage control by blaming those bailouts on the previous administration.

In refusing assistance to CIT and letting the natural course of bankruptcy take its course, Obama can proclaim -- as did his Chief of Staff Rahm Emmanuel -- that the financial crisis has entered a new phase of getting back to normal.

If instead the government were to step in to save CIT from the brink, the bailout floodgates would be truly flung open. CIT is no small fish, to be sure, with a balance sheet of around $75 billion, but it's no Washington Mutual (JPM) or Merrill Lynch, either -- the failure of which would have had potentially catastrophic effects on the entire world financial system.

Consumer confidence in the economy remains exceedingly weak. And if the President and his minions (not Minyans!) can argue that the country is at least strong enough to absorb the failure of CIT, we'll appear to be on the right track.

Whether we really are, of course, is an entirely different story.
No positions in stocks mentioned.

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