Color Me Surprised

No bailout for CIT. Reserved for the 20 richest banks in the world, thank you very much.

CIT Group Inc. shares tumbled more than 75 percent Thursday morning as its inability to get emergency government funding raised expectations that the commercial lender will file for bankruptcy protection.

But it is unclear how such a filing by a company that lends to thousands of small and mid-size businesses would affect shaky financial markets hobbled by an economy in recession and bleeding hundreds of thousands of jobs a month. Small businesses are seen as keys to economic recovery.

I fully expect conservatives to rally around the President letting the free market work and allowing businesses who get themselves in trouble to fail.

Oh wait, they'll probably accuse the President of not caring about small businesses.

Simon sez:

CIT had friends, but not enough - and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking – and prominent senators – seemed otherwise engaged.

CIT’s small and mid-size customers are important to the recovery. But the reckoning is that this business can be easily sold to someone else – after all, this is exactly what bankruptcy can get right in the U.S.

So the question became: is CIT too big – on its liabilities side – to fail? And if $80bn financial firms are now “too big to fail”, what does that imply for other potential bailout conversations and for our fiscal future? [...] The bottom line: we need fewer $800bn firms and more $80bn firms. If Goldman Sachs were broken into 10 independent pieces, we could all sleep much more soundly.

Instead, something like CIT's core businesses will be absorbed by a Goldman.