Bailout talks between the US Treasury and major business lender CIT Group have collapsed, potentially driving the company into bankruptcy.
The move late on Wednesday was the first time since the economic crisis exploded late last year that the Treasury refused to bail out a company of this size.
CIT Group, which specializes in financing for nearly a million small and medium-sized businesses, said it had been informed there would be “no appreciable likelihood of additional government support being provided over the near term.”
The commercial lender’s failure would be the sixth-largest bankruptcy in the US since 1980, after US automaker GM, which has just finalized swift bankruptcy restructuring, and energy giant Enron.
The decision to leave the company to its own devices confirms the intent of US authorities to limit bailout operations to the biggest financial firms, just as the Republican opposition blasts US President Barack Obama’s administration for expanding government control.
“Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the Treasury said.
CIT Group said in a statement that its board of directors and management “are evaluating alternatives” in consultation with its advisers.
A US administration official said the decrease in the level of loans granted by CIT Group over the past year indicates that the firm, which has already received billions of dollars in government assistance, was not too big to fail.
But there were calls for Washington to reassess its position, with dire warnings about the impact of any CIT Group bankruptcy on small businesses.
The National Retail Federation (NRF) said bankruptcy of the major lender could have severe consequences on the retail industry and the nation’s economy.
“A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation’s economy,” NRF president Tracy Mullin said. “That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”
In a sign of the importance given to the Treasury’s decision, Obama was said to have been updated throughout the day on the status of the talks.
Trade in the firm’s stocks was halted on Wednesday, as reports of a breakdown in talks with the government emerged.
In December, CIT Group won approval to change its charter to a bank holding company and received US$2.33 billion in capital injection from the US Treasury as part of an emergency rescue package.
The company said late on Sunday that talks with the Treasury would focus on its application to participate in the Federal Deposit Insurance Corp’s Temporary Liquidity Guarantee Program, which offers low-cost funding to banking firms.
But US officials were concerned about how quickly the company’s finances were deteriorating. Saving CIT Group from bankruptcy “would mean throwing good money after bad,” an official told AFP.
CIT Group this week claimed assets of US$60 billion, mostly in loans and leasing contracts.