CIT shares drop 75% on bankruptcy fears as bailout talks fall apart

ByABC News
July 16, 2009, 8:38 PM

— -- CIT Group shares tumbled 75% Thursday as its inability to get emergency government funding raised expectations that the commercial lender will file for bankruptcy protection.

The largest lender to small businesses, CIT Group, facing a huge cash crunch, has gone into crisis mode.

In a last-ditch effort to avoid bankruptcy, CIT is trying to line up $2 billion to $4 billion in rescue financing from its debtholders within the next 24 hours, a source familiar with the talks told the Associated Press. The person requested anonymity because they weren't authorized to speak publicly.

But investors were acting as if bankruptcy were unavoidable, sending CIT shares skidding $1.23 to close at 41 cents Thursday after sinking as low as 31 cents earlier in the session

Thousands of small retailers and manufacturers rely on CIT for loans. That put a lot of pressure on the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department to help it. However, the government seems to have decided that CIT doesn't threaten the financial system and that credit markets have recovered enough for other lenders to pick up CIT's loans. The Federal Reserve, the FDIC and the Treasury didn't comment for this story.

In walking away from CIT, the government seems to be prepared to lose the $2.3 billion that it gave CIT in bailout funds in December. Ratings agency Standard & Poor's warned earlier this week that CIT "may attempt to restructure its debt, perhaps in bankruptcy," and that CIT has more than $1 billion in debt coming due by the end of 2009. If CIT fails, it would be the first financial firm to do so that has taken taxpayer money.