FDIC Tells CIT Drop Dead

Sheila Bair Protecting Depositors

Many of the biggest banking and financial concerns in the country still face potential collapse as loan defaults escalate rapidly.  Consider FDIC Said to Withhold CIT Debt Guarantees Due to Risk:

The Federal Deposit Insurance Corp. is unwilling to guarantee CIT Group Inc.’s bond sales because the commercial lender’s credit quality is worsening, according to people familiar with the regulator’s thinking.

The FDIC, which has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25, is concerned that standing behind CIT debt would put taxpayer money at risk, said the people, who declined to be identified because the application process is private.

“Sheila Bair is watching the purse,” said Mark Calabria, a director of financial regulation at the Cato Institute in Washington. “If an institution isn’t systemically important, the FDIC’s first and last viewpoint is protecting the deposit insurance fund.”

CIT, the century-old lender to 950,000 businesses, became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the U.S. Treasury. The lender has reported more than $3 billion of losses in the last eight quarters, faces $10 billion of maturing debt through 2010 and hasn’t had access to the corporate bond market in more than a year, according to data compiled by Bloomberg.

Without the TLGP, CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.

The TLGP program opened a channel of funding for financial institutions unable to borrow in U.S. markets after the September collapse of Lehman Brothers Holdings Inc. By paying the FDIC a fee to back their bonds, banks are able to sell debt with top credit ratings. The TLGP expires Oct. 31. Issuers must have applied by June 30.

A failure of CIT would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter.

“The FDIC has resolved failed institutions before and not seen the world end,” said Calabria, who before joining Cato in 2009 spent six years as a member of the senior staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

Fitch slashed CIT to junk in April, then lowered the lender’s rating again on June 1 to BB and cut it to B+ this week. Moody’s cut CIT three levels to Ba2 from Baa2 on April 24. S&P downgraded CIT three grades to BB- on June 12.

FDIC Chairman Sheila Bair is doing her job and is probably one of the few regulators in Washington who seems to care about the fundamental soundness of the US banking system.  The FDIC has already extended guarantees on almost a quarter of a trillion dollars of debt for banking concerns.  CIT became a “bank” only for the purpose of receiving TARP bailout funds and does not hold large amount of consumer deposits.

CIT has already received billions of taxpayer funds and has not been able to turn itself around.  CIT continues to report large losses due to risky lending and its debt securities are ranked junk.  If CIT cannot raise private capital, the American taxpayer should not be subsidizing what is a failed business enterprise.

Let the failure or success of CIT be determined by CIT’s ability to operate profitably.  CIT is not too big to fail – if they cannot raise private capital, that is a strong indication that private investors have no faith in CIT’s future.  CIT’s losses should not be added onto the backs of American taxpayers.

More on this topic:

CIT Debt Plunges as Traders Bet Lender Isn’t Too Big to Fail

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