Stephen Foley: Why CIT should not be bailed out

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The Independent Online

US Outlook: You've got to feel a twinge of sympathy for the bosses of CIT Group, the New York-based small business lender which was fighting for its survival yesterday.

The day that Citigroup and Bank of America, which received tens of billions of dollars in bailout money and hundreds of billions more in government guarantees, were reporting better-than-expected results, CIT was appealing to the mercy of its own lenders, struggling to reverse a run on the bank and repair its finances.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, has said no to simply guaranteeing CIT's debts, something that might have allowed it to refinance, but which she believes would have exposed the taxpayer to too much risk. This despite pleas from CIT's 950,000 customers, which rely on the bank for short-term funding of their businesses.

The government is right to be standing back. This is no Lehman Brothers, no General Motors.

CIT's customers, retailers and their suppliers do face real inconvenience if the bank goes under. Instead of waiting for customers to pay their invoices, these businesses usually get the money upfront from CIT, who collects from the customer later. There will be some short-term pain from cutting CIT out of the equation, and some imprudent managers might find they have a funding gap that is too large to bridge.

But many businesses have been calling customers to arrange payment directly, and most customers have little interest in seeing their suppliers go under just as they are stocking up for Christmas. They will find creative ways to cope and, when they can't, CIT's rivals may step into many breaches. For the financial system and for commerce, this is a headache rather than a heart attack.