CIT talks fall apart, bankruptcy looms

By Karey Wutkowski and Jonathan Stempel

WASHINGTON/NEW YORK (Reuters) - CIT Group Inc, a major lender to small- and mid-sized U.S. businesses, said on Wednesday that bailout talks with the government had ended, a development that heightened the chances the company would file for bankruptcy.

"Discussions with government agencies have ceased," CIT said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term."

CIT said its management, directors and advisers were evaluating alternatives.

The announcement followed last-ditch talks in which the Treasury Department had expressed concern about a worsening liquidity crunch at New York-based CIT, and indications that government aid would not put the lender on a path to recovery.

Treasury, in a later statement, said the government needed to keep the threshold high for exceptional aid to individual companies, adding that the United States had a powerful set of financing mechanisms to help restart overall credit markets.

Founded more than a century ago, CIT's problems mushroomed in recent years in the wake of Chief Executive Jeffrey Peek's decision to expand into potentially highly profitable but riskier areas such as subprime mortgages and student loans.

If it were to go bankrupt, it would join Lehman Brothers Holdings Inc and Washington Mutual Inc among large U.S. financial services companies to collapse since the credit crisis accelerated last September.

It would also show the possible limits of Washington's willingness to rescue companies, after multiple bailouts for much larger companies such as American International Group Inc and Citigroup Inc.

"At least in the eyes of the Fed and the eyes of the Treasury, we've turned the corner, such that the systemic kinds of risks facing the economy may be well past," said Mike Knebel, a portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon, which recently sold CIT bonds.

Trading in CIT shares was halted on Wednesday afternoon, with the shares last trading at $1.65, up 4 cents.

Standard & Poor's 500 stock futures were down 0.4 percent after-hours.

TARP MONEY NOT ENOUGH

CIT sought help even after it became a bank holding company in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program (TARP).

Treasury had been considering an aid package that included a temporary loan to give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, a person familiar with the matter had said.

Other options had been access to Fed's discount window, as well as asset transfers, the person said. The person requested anonymity because the talks were private.