Saying no to CIT a big gamble for Team Obama

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - In leaving CIT Group Inc to sink or swim on its own, U.S. officials are gambling that financial markets and the economy are now strong enough to withstand the possibility a big lender collapses.

On Wednesday, ten months to the day after the bankruptcy of Lehman Brothers exacerbated the global credit crisis, CIT said bailout talks with the government had ended, a development which may push the 101 year old company closer to failure.

Judging from the calm reaction in credit and stock markets on Thursday, it appears investors think leaving CIT to fend for itself is a safe bet.

But the broader economic impact may be far more damaging, particularly for already struggling retailers that rely on CIT as a major source of financing.

"The company's collapse would certainly ripple through thousands of small and medium businesses that rely on CIT for trade financing and lending," Gail Dudack, chief investment strategist at Dudack Research Group, told clients.

"This raises the risk of more bankruptcies and more unemployment and would be a significant negative for an already fragile economy," she said.

Indeed, that is what makes CIT's situation particularly tricky for President Barack Obama and his economic team.

CIT probably needs about $6 billion to avoid bankruptcy, after reporting eight quarterly losses in a row, analysts said. It only has assets of about $75 billion, making it only about one tenth of the size of investment bank Lehman when the government allowed it to file for bankruptcy last September.

On the other hand CIT has about one million customers who may lose funding, including about 300,000 retailers.

Politically, it looks like a lose-lose. While the administration was keen to show that it would not bail out every struggling company, refusing CIT, which is a big lender to small businesses, makes it look like the White House is turning its back on Main Street.

It is hard to argue that CIT's collapse would pose a systemic risk on the scale of Lehman Brothers, yet it may threaten the consumer spending that drives the economy.

Even in the first quarter of 2009, when U.S. real gross domestic product fell at a 5.5 percent annual rate, consumer spending growth tempered the decline by almost a full percentage point.

Nearly 15 million people worked in the retail trade as of June, according to the U.S. Labor Department data, representing more than 10 percent of the labor force.

Jerry Reisman, a bankruptcy attorney at law firm Reisman, Peirez and Reisman, said he was "deluged" by panicky calls from apparel companies worried about losing access to credit.

"The government's decision will result in many companies being unable to make payroll on Friday and inability to pay suppliers," he said. "Many of these companies and their suppliers will be forced to file bankruptcy themselves, causing a further decline in the economy."