But there is no guarantee they will be
able to save the ailing company, which teeters on the brink after
failing to get emergency government funding. CIT
said late Wednesday that talks with regulators about a possible rescue
had broken off after days of round-the-clock negotations.

The
move marked a defining moment for the Obama administration and showed
it’s drawing a line in the sand on federal rescues for troubled
financial firms.

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, two sources familiar with the
talks told The Associated Press. They requested anonymity because they
weren’t authorized to speak publicly.

CIT
bondholders discussed their options Thursday in a conference call that
involved restructuring firm Houlihan Lokey, according to the sources.
Another conference call with the largest bondholders was expected later
in the day and was to be organized by bond manager Pimco, the sources
said. Houlihan Lokey and Pimco didn’t return calls seeking comment.

If CIT
can improve its liquidity, either through debt restructuring or by
getting an injection of private equity, that could give it better
leverage to reopen talks with regulators. The most likely avenue for
survial would be getting permission to transfer assets to the company’s
bank. The bank could then borrow against that money at a discount if
the Fed allows it.

Such transfers require approval from the Fed
and the FDIC because regulators don’t want banks — whose deposits are
insured — to risk insolvency by bailing out their parent companies.

Regulators resisted CIT’s
earlier plea for permission to make a transfer because they didn’t
think the company was strong enough, and worried it would default on
any loans from the Fed. With a stronger balance sheet, CIT may make a better case.

But investors were acting as if bankruptcy were unavoidable, sending CIT shares skidding $1.23, or 75 percent, to close at 41 cents after sinking as low as 31 cents earlier in the session.

Both Fitch Ratings and Moody’s further downgraded CIT’s debt Thursday following the company’s announcement that it expects no further federal support.

“I think it makes a bankruptcy filing a near certainty,” banking analyst Bert Ely said of the refusal to bail out CIT.

Meanwhile,
shares in the broader market traded higher. According to preliminary
calculations at the market’s close, the Dow Jones industrial average
rose 95.61, or 1.1 percent, to 8,711.82. The Standard & Poor’s 500
index rose 8.06, or 0.9 percent, to 940.74.

The muted response by the overall market to CIT’s
woes suggests investors are more focused on signs that the economic
slump may be easing, said Paul Baiocchi, senior market strategist at
Delta Global Advisors in San Francisco.

CIT’s
small size relative to other big commercial banks may also ease worries
of a ripple effect. Though a major lender to small and midsize U.S.
business with about a million clients, CIT is one-eighth of the size of Lehman Brothers when massive credit losses forced the investment bank into bankruptcy last fall.

CIT
had also begun cutting back on lending in recent months, diminishing
the risk a possible bankruptcy could cause significant damage to the
broader economy. The lender had $5.3 billion in credit lines to
customers as of March, down from $6.1 billion at the end of 2008.

“That
shows they were pulling back and should lessen the immediate blow of
this,” said Kathleen Shanley, an analyst at corporate bond research
firm Gimme Credit. “I don’t see a real contagion effect here.”

CIT,
which got $2.3 billion of bailout money in December, had warned that
depriving it of more federal aid could imperil about a million
corporate borrowers — from Dunkin’ Donuts franchisees to retailer
Dillards Inc.

The Bush administration paid a price for its decision not to save Lehman Brothers, whose collapse helped spark the financial crisis last fall.

Asked about CIT,
a Treasury Department spokeswoman said in an e-mail that “even during
periods of financial stress, we believe that there is a very high
threshold for exceptional government assistance to individual
companies.”

A bankruptcy filing would wipe out CIT’s shareholders and the government’s $2.3 billion stake. But CIT’s clients would not automatically lose their lines of credit, longtime banking analyst Bert Ely said.

Still, with other lenders to retailers already under financial strain, many CIT clients may lose their financing options.

“The
industry just won’t be able to absorb the amount of volume,” said
Michael Cipriani, executive vice president of Rosenthal & Rosenthal
Inc., a competitor of CIT that’s considered healthy.

The
company in April posted a larger first-quarter loss than expected and
has seen funding options disappear as investors shy away from
purchasing all but the safest forms of debt. The lender has $7.4
billion in debt coming due in the first quarter of 2010, plus other
obligations.

Though a fraction of the size of big commercial banks, CIT’s holdings are substantial. The company had $75.7 billion in assets as of March 31, according to a corporate filing.

Lehman
Brothers, which collapsed after former Treasury Secretary Henry Paulson
declined to save it, listed $639 billion in assets when it filed for
bankruptcy Sept. 15.