Warren Buffett on CIT Group's failing business model


CIT Group (CIT), the lender to small and mid-size businesses, has seen plenty of trouble lately -- something that puts it in good company with other financial institutions. But CIT Group is unique in one sense, and that is the company's lack of a deposit base. That financing strategy is killing the company, Warren Buffett said on Fox Business News. "[T]he problem with CIT is that their raw materials, which is money, costs them far, far, far more than their competitors. So the banks have access to money at average rates that are really very tiny now. And CIT's money cost them way more."

Instead of mainly taking in deposits and loaning that money out, CIT Group borrows on the debt markets and uses the capital it receives to finance its customers. That strategy collapsed in the wake of Lehman's failure, as the cost of borrowing for companies like CIT soared enough to make spreads, or the difference between borrowing cost and lending revenue, unprofitable. The company has struggled to access the liquidity it needs to pay off near-term debt maturites, and the market's confidence in the company has been shaken.