CIT lost in gamble to pressure FDIC

By Karey Wutkowski - Analysis

WASHINGTON (Reuters) - A key U.S. bank regulator had clearly indicated to CIT Group weeks ago that it would not be eligible for a government debt guarantee program, and even gave the troubled lender the opportunity to withdraw its application, say sources familiar with the matter.

CIT, which is scrambling for a private deal after talks over government financing collapsed on Wednesday, took a gamble by launching a public campaign to pressure the Federal Deposit Insurance Corp into giving it access to the liquidity facility.

The New York-based lender even got the Treasury Department on board with the idea of it issuing government-backed debt, sources have said.

But the FDIC refused to budge, contending that CIT's plea was a last ditch effort involving too much risk exposure for the agency, said one of the sources, speaking anonymously because the discussions with CIT were private.

CIT issued a press release last Friday, saying that it "continues to be in active dialogue with the government," after reports surfaced that the FDIC was concerned about the lender's credit quality.

In the following days, trade groups issued a series of statements and press releases, arguing that CIT's failure could cause serious harm to hundreds of thousands of small businesses and that government should rescue the lender.

CIT also issued more press releases that said the government debt guarantee option was still on the table.

"I think they needed to at least calm the market and say they still had an opportunity to get government assistance," said Gil Schwartz, a former lawyer at the Federal Reserve who now works in private practice at Schwartz & Ballen in Washington D.C.

APPLIED IN JANUARY

CIT had applied in January to the debt guarantee program, also known as the Temporary Liquidity Guarantee Program, or TLGP. The facility was put in place in October and was designed as a way to shore up confidence in the banking sector and inject liquidity into the credit markets.

FDIC Chairman Sheila Bair has in the past said the TLGP is a program designed for healthy institutions hit by temporary market disruptions.

The agency is trying to wind down the program now that credit conditions have eased. And being able to raise non-guaranteed debt was included as a key condition for institutions to exit other government bailout programs.

The FDIC did not see CIT as a good candidate for the program because it thought the lender's problems went a lot deeper than short-term liquidity.

The agency did not issue a formal denial, but it made clear to CIT that its fundamental business problems compounded by escalating bad loans would make it ineligible for the TLGP, sources said.

CIT was given the opportunity to withdraw its application before the lender's recent crisis became public.