CIT is in a lose-lose situation

What if neither bankruptcy nor a bailout is enough to save CIT Group (CIT)?

Overshadowing the $3 billion in losses that the troubled lender to fast-food franchisees and retail chains has posted over the past two years is an even bigger problem: Its business model looks obsolete. And efforts to remake itself may be falling short.
CIT hasn't been able to sell bonds in more than a year, according to Bloomberg News. That's a big problem for a financial company that funds the lion's share of its lending business with short-term borrowing. And it's the chief reason it's desperate to gain access to a government program that guarantees banks' debt. Without it, a bankruptcy filing could be right around the corner.

Don't count on that to save the company, says CreditSights bond analyst David Hendler. "A bankruptcy is not a cure-all for CIT," he wrote in a note to clients yesterday.

"We question the ability of the company to emerge from bankruptcy with a viable ongoing business. . . . [It] needs a a viable funding model and a trip to bankruptcy does not help on that front.," Hendler wrote.

In other words, CIT needs to find another way to raise money if it wants to survive. It took a step in that direction late last year, remaking itself as a bank and working to accumulate deposits. But unlike its biggest competitors, CIT has yet to see that strategy really pay dividends.

Sure, legally reclassifying itself as a bank gave it access to $2.3 billion in capital from the Treasury's Troubled Asset Relief Program, or TARP. But it has only amassed $3 billion in deposits, a tiny amount compared to its $75.7 billion in assets.

It hasn't been nearly as aggressive as rival GMAC in courting banking customers. (In fact, GMAC has been so bold in its efforts to bolster deposits its Ally Bank that it has drawn the ire of other financial institutions.) And another big competitor, GE Capital, has parent General Electric (GE), one of the world's biggest industrial corporations, to support it.

With a relatively small amount of deposits, the FDIC likely doesn't see CIT as a company it's obligated to bail out, according to Gimme Credit bond analyst Kathleen Shanley.

"We don't view CIT as meeting the 'too big to fail' test, especially since there is a long list of other troubled banks awaiting regulatory attention, some with more insured deposits at risk than at CIT," Shanley wrote in a research report.

Another factor that's likely weighing on the FDIC: The bank debt guarantee program expires at the end of October. What happens to companies like CIT then? Without a new business model, it may find itself in the same position its in today.
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