A Good Chance CIT (CIT) Will Go Bankrupt

In a perfect example of how dangerous rumors can be for traders, CIT (CIT) has announced that its conversions with the government aimed at bailing the financial company out have failed.

Most analysts believed that CIT needed a least short term financing to get through a wave of customer credit line withdrawals of hundreds of millions of dollars due to concerns over CIT’s balance sheet. CIT has already received $2.3 billion in TARP funds.

Trading in CIT shares was halted near the end of the day, but hopes of a deal had moved the stock up from $1.13 on Monday to $1.67 today. MarketWatch observes that a bankruptcy of CIT would be the fourth largest in US history.

The federal government’s concern about a collapse of CIT is that it is a key lender to roughly one million small and medium-sized business. The access to capital caused by trouble at CIT might only be temporary, but, particularly during a recession, the ability to get short-term cash could be important for basic needs such as meeting payroll.

The government may have wanted to stay away from another bailout, but trouble at CIT could have wide enough effects to take a number of small businesses under with it.

Douglas A. McIntyre