The Federal Deposit Insurance Corp, which insures deposits at US banks, opposed an attempt by the Treasury Department and Federal Reserve to rescue the lender by granting it access to a government debt-guarantee program, according to a source familiar with the matter.
The prices of CIT shares and bonds tumbled as investors worried the commercial lender would not be able to meet its obligations to bondholders, perhaps pushing the company into bankruptcy and disrupting the financing on which its corporate customers depend.
CIT’s difficulties are “going to make funding more expensive all around”, said Dan Brown, Chief Economist for Euler Hermes, a unit of insurer Allianz.
The lender’s failure would be the biggest collapse of a financial firm since regulators seized Washington Mutual in September.
It is not the first time in recent months that there has been a disagreement between the FDIC and the Treasury and Federal Reserve. FDIC Chairman Sheila Bair, who is well-liked by key congressional leaders, and Treasury Secretary Timothy Geithner have battled over policy and turf, according to numerous reports.
FDIC is wary of granting CIT access to its debt programme partly because it is not satisfied with the lender’s collateral, said the source.
Unlike other government aid programmes, the debt guarantee facility does not rely on taxpayer money.
The FDIC would have to absorb any losses that result from the facility, and would have to recoup the funds by taxing the bank industry.
As a result, the Treasury and Fed are exploring other ways to provide relief to CIT, the source said, speaking anonymously because the government discussions have been private.
Speaking on a trip to Britain, Geithner said he was confident the government would be able to deal with CIT. But the possibility of government aid for CIT – which became a bank holding company last year to qualify for $2.33 billion (Dh8.5bn) of bailout funds – would also raise questions for lawmakers and taxpayers wondering just how far the government should go to save companies.
Much of CIT’s business could be taken on by other lenders such as JPMorgan Chase and Deutsche Bank.
CIT has hired top law firm Skadden, Arps, Slate, Meagher and Flom to explore a possible bankruptcy filing, The Wall Street Journal reported.
A CIT spokesman confirmed that Skadden, Arps had been retained but declined to elaborate.
A delay in getting approval for the debt-guarantee programme – which CIT applied for in January – and tight credit markets have caused a liquidity crunch for the company. It has lost close to $3.3bn since the end of 2007 and says it faces a $10bn funding gap in the year to March 31, 2010. Moody’s cut CIT’s senior unsecured credit rating four notches to B3 from Ba2, citing “growing concerns with CIT’s liquidity position and prospects for survival of the franchise”.
Standard and Poor’s downgraded CIT by one notch to CCC-plus from BB-minus, noting in a statement that if the company does not get access to the FDIC’s debt programme or is unable to obtain liquidity elsewhere, “we believe it might attempt to restructure its debt, perhaps in bankruptcy or through an exchange offer we would view as distressed”.
Analysts warned that the company could face a rush from borrowers to draw down credit lines.
“The likelihood of borrowers drawing down on their lines has definitely increased,” said David Chiaverini, analyst with BMO Capital Markets in New York.
To boost liquidity, CIT said it was discussing a transfer of assets such as its vendor finance and trade finance businesses into its CIT Bank unit by obtaining a waiver of a Federal Reserve rule that limits such transactions. This is one of the possibilities the Treasury and Fed are exploring, according to the source.
The lender could also step up attempts to sell assets, such as its $4.5bn railcar leasing unit, said analysts.
CIT shopped the railcar unit last year for several months before shelving the plan after its capital position improved and commercial lender GATX Corp, which had been seen as a potential buyer, offered more than $3bn for a similar business owned by General Electric.
Quick asset sales now, however, are unlikely to fetch top prices without government support in the form of either access to the FDIC’s programme or a waiver to transfer assets to its bank.
Asset sales are CIT’s best hope for improving its capital position.
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