Goldman and JPMorgan to rescue CIT to save their bonuses


This week there was a big discussion about whether the U.S. should use $6 billion of TARP money to save CIT Group (CIT) -- which provides short term financing to a million retailers like Dunkin Donuts -- from bankruptcy. Under Bush, the test case of too-big-to-fail was Lehman Brothers and under Obama it's CIT.

Bush was wrong to let Lehman fail and Obama is right to let the market handle CIT's failure. The collapse of Lehman Brothers was the final straw that broke the financial system and it now appears that all the U.S.'s major banks would have collapsed if the government had not stepped in thereafter.

What should be done about institutions that are too-big-to fail? As I've posted, the too-big-to-fail doctrine is a failed idea -- if a bank can't clean up its own mess in an economic collapse, the government should break it up preemptively or require it to carry huge reserves if it insists on remaining independent. But it's clear that CIT is not too big to fail.