CIT bailout talks fall apart, bankruptcy may loom for lender

— -- CIT Group shares tumbled more than 70% 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 $1.18, or 72%, to 46 cents in morning trading Thursday after sinking as low as 31 cents earlier in the session. CIT stock had been halted on Wednesday, last trading at $1.64 a share.

On Wednesday, CIT cit said its board of directors, in "consultation with its advisers, are evaluating alternatives," after the government denied it any help with its liquidity crisis. CIT had been in talks with top government regulators in the past week. However, talks broke down Wednesday, and CIT said in a statement that "there is no appreciable likelihood of additional government support being provided over the near term."

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.

"The market tremors being felt by talk of bankruptcy for CIT Group are mild," said Christopher Whalen of Institutional Risk Analytics, in a report. However, he added that Wall Street won't be laughing when "retailers and vendors shut their doors for good."

CIT was certainly not helped by the fact that its debt is rated "junk" from all the three major rating agencies: S&P, Moody's and Fitch, all of which further downgraded its debt this week. FDIC Chair Sheila Bair said in a recent statement that government guarantees for debt issuance are designed for "healthy" banks and "to relieve the crisis in the credit markets."

CIT said that it was trying to "enhance its liquidity" by asking the FDIC to let it issue debt guaranteed by the government. Unlike most banks, it is not financed by deposits; it relies on the debt markets to raise cash to lend.

When the financial markets seized up last fall, CIT's ability to raise cash was sharply curtailed. Also, it had moved aggressively into subprime lending and student loans right before those markets collapsed. With $75 billion in assets, CIT is the 26th-largest bank in the U.S. If it does fail, it would be the largest failure after Washington Mutual last year.