With the government stepping in to fund nearly everyone, why isn't it moving to aid CIT? One reason may be that many of the small businesses that CIT lends to aren't organized into politically influential unions such as the United Auto Workers, and their employees may not be high-earning campaign contributors or fundraisers like those at Goldman Sachs or JP Morgan.
The framing of the CIT issue in the press is that the government will not give the lender a "second bailout." As the headline of this Associated Press dispatch put it, "Government will not give lender CIT 2nd bailout." The wires quoted a treasury spokeswoman as saying, "even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies."
But at this point, what is exceptional isn't government assistance to CIT. It's the denial of government assistance that is exceptional.
You don't hear much about Goldman Sachs or JP Morgan having gotten a "second bailout." But in addition to the $10 billion in TARP funds that Goldman repaid, Goldman reportedly issued $29 billion of government-guaranteed debt under the same FDIC Temporary Liquidity Guarantee Program that is being denied to CIT. Bank of America issued $44 billion and JP Morgan $38 billion. The FDIC announced the program back in October 2008 at a press conference with the treasury secretary and the chairman of the Federal Reserve. CIT applied to participate in the program back in January, but the FDIC has been sitting on the application, meaning that that federal agency bears a significant share of the blame if CIT goes bankrupt. The FDIC has been unwilling to explain in public why Goldman, Bank of America, and JP Morgan qualify for this program but not CIT.
If anything, approving CIT's application might be a good financial move for the U.S. Treasury, which already has $2.33 billion in TARP funds invested in CIT. CIT has $30 billion or so of unencumbered assets that the government could have used as collateral for a secured loan. Some of the proceeds of the loan could then have been used to redeem the preferred stock. Instead, the taxpayers will end up losing their TARP investment of $2.33 billion in CIT, along with whatever interest it would have accrued, when they could have lost nothing. On top of that, a failure of CIT will cause companies with a lot of employees who make little money to pay higher fees, if they stay in business, to the companies that pay their employees millions – i.e., JP Morgan, Bank of America.
Capitalism and a free market depend on the government treating competing companies equally, not arbitrarily or preferentially. This is a case where the government regulators, instead, seem have to picked the winners and the losers by deciding who to help and who to allow to fail based on some non-transparent, unannounced criteria. Meanwhile, investment decisions increasingly involve bets on who the government is going to prop up (and under what terms), and who the government is going to push under. It's less financial or business analysis than political punditry. And the message sent to those considering investing in financial firms (or, for that matter, automakers) that are anything less than giant is that the federal government is going to prop up the big competitors while denying smaller firms the same help that the big ones get. Call this crony capitalism or oligopoly or regulatory capture or lemon socialism or whatever you want to call it, but it sure seems like a departure from American norms.