Business

Denied aid shows bailouts have limits

Rejecting pleas to save CIT Group Inc., the Obama administration decided that the possible loss of the nation's biggest lender for entrepreneurs and minority-owned businesses did not warrant tapping a politically unpopular bailout program financed by taxpayers.

In the end, the administration said CIT did not meet the standards for aid. It was financially hobbled after a weeklong downward spiral of borrowers drawing down credit lines and creditors pulled their backing. The firm's solvency also was in doubt as the loans on its books lost value.

Unlike Detroit automakers that were bailed out, CIT was not backed by powerful labor unions that could mobilize voters ahead of midterm congressional elections next year. And CIT's lobbying push for federal help paled in comparison to big Wall Street firms that received a taxpayer handout last fall.

CIT, whose borrowers include restaurant franchises, airlines and clothing stores, had already received $2.3 billion from the government's $700 billion Troubled Asset Relief Program. In recent months, it had already begun cutting back on lending. Absent a deal with private equity or bondholders to strengthen the firm's equity, CIT will likely file for bankruptcy protection.

A Treasury spokeswoman said regulators had hoped to rescue CIT with the same lifelines it had offered other firms, including money from the financial bailout or a brokered deal with another lender. But she said the company failed to shore up its position, including raising private capital.

"The president, when he came into office, was clear that he would have a very high standard for what companies received assistance from the federal government, from American taxpayers," White House spokesman Bill Burton said. "A lot of that had to do with whether or not they could show themselves to be sustainable in the long term."

Still, cutting off CIT from more federal aid marked a "significant turning point" in the government's policy, said Douglas Elliott, a fellow at the Brookings Institution and a former investment banker.

"It sends a message," he said. "There will be plenty of other lenders that will feel they have to raise capital as quickly as possible and that they have to be less picky about the terms. You don't feel that pressure when you think the government will rescue you."

  Comments