Last night, I read that the Obama administration has refused to rescue CIT Group, a commercial lender. I'm fascinated by the decision. After bailing out the banks, credit card companies, insurance companies, auto companies and homeowners, what makes CIT unworthy? The Associated Press says:
By withholding aid, the administration is betting that CIT's likely failure won't pose a critical risk to an economy weighed down by rising unemployment.
That's right. Good bet or bad bet?
CIT, which had earlier received $2.3 billion of bailout money, is one of the nation's largest lenders to small and mid-size businesses. The company has warned that its failure could imperil about a million corporate borrowers -- from Dunkin' Donuts franchisees to retailer Dillards Inc.
So "about a million" small to mid-sized businesses will be affected, and all the administration does is shrug?
I can't help but notice a very different characteristic of CIT versus many of the other bailout recipients where tens of billions handed out: CIT doesn't cater to big businesses. Does this show that the Obama administration has a preference for big business? I sure hope not. If it believes credit drying up for "about a million" small and medium-sized businesses won't hurt the economy, I have to disagree.
AP also quotes a financial services lobbyist who gets it right:
"CIT may not be 'too big to fail,' but they are systemically important," said Scott Talbott, top lobbyist with the Financial Services Roundtable, which represents CIT and other big financial firms. "Many small businesses will be severely impacted by today's actions, and the effect could lengthen the economic crisis."
Specifically, it will make it much harder for smaller businesses to get credit. For those businesses, the credit crunch will return.
So what's the administration's reasoning? The line it seems to be sticking to is that CIT isn't systemically significant, i.e. if they fail, we'll live. The same could be said about dozens of small banks that they rescued, however.
Another theory might be the often-heard Lehman excuse. Maybe CIT was just such a disaster that the Obama administration couldn't justify throwing more money at it. Three letters disprove that one: AIG. Sure, AIG might have been more obviously systemically relevant, but clearly the government will provide as much money as it takes to rescue something that they feel is worth saving, no matter how big a disaster.
Maybe it was because CIT had problems even before the financial crisis began, so the administration felt another bailout would not help. Maybe CIT deserved bankruptcy. Only two letters to disprove this one: GM. Yes, GM went through a kind of pseudo-turbo-bankruptcy. It was probably the most painless bankruptcy of all time. I imagine the government's hand will stay much further away from CIT's, and Uncle Sam certainly won't end up a major shareholder to soften the blow.
I really hate to say it, but I wonder if maybe CIT's importance was ignored because it just didn't have the sway in Washington that other rescued firms have. Politicians didn't get millions in campaign contributions from CIT like they did from Wall Street. The influence of a powerful union certainly helped GM advance its cause in Washington. CIT lacks that benefit too.
I truly hope we get a very good explanation for why the government refused to bail out CIT. The only thing worse than bailouts is lacking consistency in bailouts. The government can't only bail out the companies it likes.
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