CIT RIP

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There's been a great deal of coverage of the woes of CIT in the business pages, but as far as I can tell, almost no one outside of the business press has taken much notice.  CIT is one of the many firms that got TARP funds last year, but it's not a big, sexy investment bank; the firm makes loans to small and medium-sized businesses, particularly retailers.  It's on the rocks, which is not quite surprising; retail is shakier than it's been for decades, and though the company became a bank holding company last year, right along with Goldman Sachs and Morgan Stanley, it's primary business model involves extracting funds to loan from suddenly skittish investors. 


CIT had applied for a government bailout, but after some deliberation, the administration decided that the firm simply wasn't too big to fail. At this point, bankruptcy seems inevitable, and it's expected that trading in CIT shares will be halted sometime today or tomorrow.

I think the government made the right decision--the decision it should have made with GM and Chrysler.  But that doesn't mean there won't be painful fallout from this failure.  CIT is particularly prominent in the factoring business, which is how most smaller garment manufacturers finance their operations, but it's also a major player in the broader retail sector.  Its demise is going to mean that a lot of smaller retailers will have trouble making payroll, and a lot of smaller garment firms simply won't be able to carry on at all.  Come winter, a lot of retail shelves are going to be barer, or at least less interesting, places.

Other firms will take up much of the slack, of course.  But it's not clear how much extra capacity they have.  When you look at the mess in the mortgage industry right now, with banks simply unable to cope with the volume of modification requests on top of record foreclosures, it's clear that it's not so easy to simply expand your operation when volume spikes.  Especially in tough times--and you can be sure that other people in CIT's space are not exactly going to find investors lining up to give them money.

Given how key the retail network is to economic recovery, the failure of CIT probably will prolong the downturn.  That doesn't mean it wasn't the right thing to do--we need to start making it clear that financial firms, even sizeable ones, can and will fail.  But it does mean the economic outlook just got a little gloomier.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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