Bankruptcy for CIT Group Inc. is more likely after denial for additional relief from the Federal Reserve, Treasury, and FDIC. Linda Shen at Bloomberg reported that regulators were not convinced that the bank posed any systemic risk and resisted adding more taxpayer risk in addition to $2.33 billion already given to the bank. CIT needs $2 billion in rescue funds from its debt owners and has given them 24 hours to put up the money. Lacking sufficient cash, CIT will probably file for bankruptcy.
Treasury Secretary, Timothy Geithner, did comment directly on the CIT situation, but said “greater confidence in stability” is returning to the financial system. Other government officials cited the lack of a viable business plan for rejecting additional funds.
A stress test by the Federal Reserve concluded CIT would need as much as $4 billion in funding to withstand the worst economic conditions. The FDIC worried additional funds would put taxpayer money at risk due to the company’s declining credit quality. The agency’s main purpose is to protect depositors and not bank holding companies and their investors.
If CIT files for bankruptcy it maybe the first for a company that received TARP funds to keep lenders afloat. Credit default swaps for CIT were at 47% today, in addition to 5% a year. A CDS for CIT would require $500,000 a year, and $4.7 million up front, to insure $10 million of CIT debt.