Monday, July 20, 2009

CIT Group Inc.'s reported deal in which it will secure $3 billion in financing and ensure temporary survival will be a boon to the struggling small-

But in the long run, what appears to be the efficient working of the free markets, is really a gentle euthanasia for a company that stood as an alternative to the big banks and GE Capital, a unit of General Electric Co. /quotes/comstock/13*!ge/quotes/nls/ge (GE 11.67, +0.02, +0.17%) . See full story.

For it is unlikely the CIT Group will be able to survive at its current size and pay down double-digit interest on its debt without selling assets. The highest valued loans on its $80 billion balance sheet are likely going to competitors that benefited from the government assistance CIT was never allowed to tap.

GE Capital, CIT's /quotes/comstock/13*!cit/quotes/nls/cit (CIT 1.34, +0.64, +91.43%) chief rival in the marketplace, alone tapped Federal Deposit Insurance Corp. guarantees on more than $40 billion of its debt. GE was second only to Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 12.43, -0.46, -3.55%) which not only used FDIC guarantees, it received $52 billion in taxpayer funds.

Jeffrey Peek, CIT's chief executive, and his management team and the board of directors may have been naive to think that the government would come to the lender's assistance. CIT's business model also was deeply flawed because it was far too dependent on the securitization markets that have stalled.

But CIT's mistakes are hardly greater than those of Citigroup Inc. or American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 13.48, -0.04, -0.30%) , financial firms deemed too important and too interconnected to fail. CIT ultimately fell to market forces, not its poor investments or acceptance of too much risk.

The lesson of the CIT fiasco may be that by failing big, CIT's competitors not only secured their own survival, but a future without prudent competition.

No comments: