US regulators in talks to rescue troubled lender to small businesses

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The US government is locked in talks to try to save one of the country's most important lenders to small business, CIT Group, as the bank faces a funding crisis.

In an echo of the desperate meetings aimed at saving some of the nation's largest investment banks and insurers at the height of last year's financial panic, the Treasury department and regulators were yesterday hammering out a rescue plan, fearing that failure could harm up to a million companies that rely on CIT for loans.

Although the talks were constantly shifting, it seemed that the government would stop short of offering a guarantee of CIT's debt. Solvent banks have been able to issue new bonds backed by a federal guarantee since last autumn, but the Federal Deposit Insurance Corp, which runs the scheme, has been resisting CIT's request to take part because its finances are so perilous.

The company's clients include hundreds of thousands of retailers, Dunkin Donuts franchise owners and other small businesses, and many of them have been drawing down credit lines promised by CIT, fearing they could be closed off if the bank fails. That draw down is adding to the financial pressure on CIT, and increased the urgency of the talks with the government.

Barney Frank, chairman of the House of Representatives financial services committee, said he was hoping for a deal. "They're working hard to try to come up with something responsible to try to prevent the failure," he said, adding that if CIT were allowed to fail, "I think there would be a great deal of harm to the overall economy."

Regulators have been arguing among themselves about whether CIT is big enough or systemically important enough to justify risking taxpayer money to save it. Under one rescue deal being discussed, the CIT parent company will transfer assets to its Utah-based banking operation, which would then be used as collateral for loans from the Federal Reserve.