WASHINGTON (AP) — Rejecting pleas to save CIT Group Inc., the Obama administration decided that the possible loss of the nation’s biggest lender
for entrepreneurs and minority-owned businesses did not warrant tapping
a politically unpopular bailout program financed by taxpayers.

In
the end, the administration said CIT did not meet the standards for
aid. It was financially hobbled after a weeklong downward spiral of
borrowers drawing down credit lines and creditors pulled their backing.
The firm’s solvency also was in doubt as the loans on its books lost
value.

Unlike Detroit automakers that were bailed out, CIT was
not backed by powerful labor unions that could mobilize voters ahead of
midterm congressional elections next year. And CIT’s lobbying push for
federal help paled in comparison to big Wall Street firms that received
a taxpayer handout last fall.

“The reason CIT didn’t get rescued
is because it didn’t have enough clout,” said Jonathan Macey, deputy
dean of Yale Law School and author of a book on Sweden’s bank bailout.
“If they had just had a few more labor unions and special interest
groups, they might have (been saved), and that’s extremely
discouraging.”

Sen. Evan Bayh, an Indiana Democrat who serves on
both the Senate banking and small business committees, said in an
Associated Press interview that the decision may not look so good
politically, but he defended the administration’s action.

“While
it may have appeared to some that they were helping the big guys, it
was actually their concern for the broader economy and the little guy
that was driving their decision,” Bayh said. “Now the optics here a bit
more difficult, but I’m sure it’s still the merits that are driving
this decision. You’ve got to remember that taxpayers are the little
guy, too.”

CIT, whose borrowers include restaurant franchises,
airlines and clothing stores, had already received $2.3 billion from
the government’s $700 billion Troubled Asset Relief Program. In recent
months, it had already begun cutting back on lending. Absent a deal
with private equity or bondholders to strengthen the firm’s equity, CIT
will likely file for bankruptcy protection.

A Treasury
spokeswoman said regulators had hoped to rescue CIT with the same
lifelines it had offered other firms, including money from the
financial bailout or a brokered deal with another lender. But she said the company failed to shore up its position, including raising private capital.

Giving
CIT more money after its initial capital injection in December would
have meant throwing good money after bad, she said, adding that
Treasury is exploring options for recovering some of the taxpayer money
should CIT file for bankruptcy protection.

After spending tens of
billions of dollars on banks, automakers and insurance firms, the
administration’s decision marked the first time it set a limit on the
types of institutions it deems too big and too interconnected to be
allowed to fail.

“You have to be glad for any line at all — that
the government and the taxpayers are not prepared to rescue any
financial institution under all circumstances,” said Rob Shapiro, a
former economic adviser to President Bill Clinton and chairman of
Sonecon, an economic-consulting firm.

“The president, when he
came into office, was clear that he would have a very high standard for
what companies received assistance from the federal government, from
American taxpayers,” White House spokesman Bill Burton said. “A lot of
that had to do with whether or not they could show themselves to be
sustainable in the long term.”

Still, cutting off CIT from more
federal aid marked a “significant turning point” in the government’s
policy, said Douglas Elliott, a fellow at the Brookings Institution and
a former investment banker.

“It sends a message,” he said. “There will be plenty of other lenders
that will feel they have to raise capital as quickly as possible and
that they have to be less picky about the terms. You don’t feel that
pressure when you think the government will rescue you.”

The
decision came amid growing antipathy toward the administration’s
financial policies from both liberals and free-market conservatives,
who say government interference has either perpetuated risk-taking or
failed to unclog credit. Moreover, large earnings reports by firms that
had received government assistance, such as Goldman Sachs Group Inc.
and JPMorgan Chase & Co., were creating an even more sour
environment.

“CIT going belly up is obviously a bad thing,” said
Rep. Jeb Hensarling, a Texas Republican who sits on the House Financial
Services Committee and on a panel that oversees the bailout program.
“But the only thing worse than not bailing out CIT is bailing out CIT.”

Some
financial analysts said CIT’s failure to get a bailout shows the
government is still picking winners and losers in the economy.

Goldman
Sachs, for instance, has benefited greatly from having access to a
Federal Deposit Insurance Corp. program that guarantees newly issued
debt. That’s the same program that CIT had sought and was ultimately
denied access to.

The result: By protecting large institutions
and not small ones, “the too-big-to-fail problem gets worse,” said
Simon Johnson, a former chief economist with the International Monetary
Fund and now a professor at the Massachusetts Institute of Technology’s
Sloan School of Management.

“We can expect to see is that the big
guys are going to keep getting bigger and the small guys are going to
have to clean up their acts or go bankrupt,” he said.


Only subscribers are eligible to post comments. Please subscribe or to participate in the conversation. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.