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Is CIT on the Brink of Bankruptcy?

October 1st, 2009 Comments off

For the past several months, CIT, one of the most important commercial lenders to small and medium sized businesses in the United States, has been teetering on the edge of bankruptcy. Already the recipient of one U.S. government bailout, and $3 billion in emergency financing from bondholders provided in August after Uncle Sam cut off its lifeline, CIT now stands on the brink.

After suffering $5 billion in losses over a period of nearly two years, CIT management is now seeking to exchange its debt, and if that fails, having a ready-made bankruptcy plan set for filing. If CIT is left with no alternative but to seek bankruptcy protection, what will be the impact on the U.S. financial system?

When the U.S. Treasury and Federal Reserve determined that CIT was not a “too big to fail” institution, they made a calculation that its failure would not create the systemic disaster that occurred when Lehman Brothers went bankrupt. We may soon learn if the geniuses in Washington are right about CIT being expendable.