WASHINGTON (Reuters) - The U.S. Treasury Department wants to find a "responsible" way to provide government aid for troubled lender CIT Group Inc, Representative Barney Frank said on Wednesday.
"I've spoken with (Treasury) Secretary Geithner, and I understand they're working hard to try to come up with something responsible to try to prevent the failure," Frank, chairman of the House Financial Services Committee, told Reuters in an interview.
If CIT is allowed to fail, Frank said, "I think there would be a great deal of harm to the overall economy."
CIT, a lender to thousands of small businesses, has said it is in talks with regulators about how to improve liquidity after billions of dollars in losses have severely limited its ability to raise money.
Treasury has been working to devise an aid package that could include a temporary loan that would give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, according to a source familiar with regulators' thinking.
Other options include access to the U.S. Federal Reserve's discount window and asset transfers, said the source, who requested anonymity because the plans could change.
Treasury has also been supportive of the Federal Deposit Insurance Corp granting CIT access to its government debt guarantee program, the source said. The FDIC has been reluctant to do so, however, because the program is designed for healthy institutions, and it believes CIT's participation involves too much risk.
Frank said Congress needs to design a system that allows for the orderly unwinding of large, troubled financial companies. In the meantime, he said, policymakers need to prevent widespread fallout from the failure of financial companies.
"If CIT doesn't get structured help, then it will have a very negative effect, I'm told, on small businesses around the country."
CIT finances airlines, railways, retailers and manufacturers. It is struggling to refinance its own debt as the two-year financial crisis has cut off access to the corporate bond market.
CIT previously received government aid in December when it became a bank holding company and obtained a $2.33 billion capital injection from the government's Troubled Asset Relief Program (TARP).
Separately, the National Retail Federation on Wednesday called on the Obama administration to provide more government assistance to CIT.
"CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress," NRF President Tracy Mullin said in a letter to Geithner.
Steve Bartlett, chief executive of the Financial Services Roundtable, said CIT is clearly a systemic firm that provides credit to 10,000 small businesses, which could be choked off from needed funds.
He said CIT has sufficient assets and capital, and is solvent, but is facing a short-term liquidity problem that could be relieved through government assistance.
"Those four of five regulatory agencies that have jurisdiction over this should meet in a room, lock the door, and figure out the liquidity answer and don't come out until they get the answer," Bartlett told Reuters.
Shares of CIT were trading down 2 cents at $1.59 on the New York Stock Exchange.
Additional reporting by Rachelle Younglai and Brad Dorfman; Editing by Derek Caney and Steve Orlofsky