Bailout CIT? Hell, No! (Well, Maybe)

Can one midsize company be too big to fail?    If it's CIT Group, maybe.

On the heels of AIG, GM and taxpayer billions dumped into banks one thing is clear: America is sick of bailouts.   It's also clear there is little public support for any taxpayer-funded bailout of struggling CIT Group.    But a closer look reveals that the once little-known lender may be more important to the economy and job market than many other previously rescued companies.

Unlike AIG and its mysterious derivative contracts that were often attached to little but someone's imagination, CIT's business - lending to small and midsize companies - involves real companies and real jobs that are put at risk by a failure of the company.   The company claims it has lent to more than 1 million customers, making it the largest single lender to small businesses in America nine years in a row.

The company is perceived as vital enough to the retail industry that both the National Retail Federation and the American Apparel & Footwear Association have made comments about the possible destructive nature of a CIT Group failure.  The NRF's fear is that a failed CIT will leave a gaping hole not only in direct lending, but also in the 'factor' market (providing retailers  short term financing to buy goods).   This negatively impacts retailers because many stores may not be able to line up financing to stock inventory.    NRF CEO Tracy Mullin wrote a letter to the President saying “If CIT were to fail, a chain reaction would be set off that could very well leave retailers with a shortage of merchandise during the crucial holiday season this fall."  Fewer goods in stores means less to sell.    Less to sell means fewer shoppers and less money.    Less money means weaker retailer balance sheet, potentially leading other banks to refuse a loan.   This is the self-fulfilling death-spiral that has doomed many stores.   Just ask this year's retail RIPs of Circuit City, Goodys, Gottschalks, Sharper Image and thousands of independent stores around the country.

CIT's pain could ultimately be a boon for other lenders looking to pick up some of its business.    But that would be the longer term outlook and not solve the current lending crisis in the small business segment.   Moreoever, as with AIG's impact on insurance, the sheer size of CIT's loan book makes it extremely difficult, at least  in the near term, for other banks to make up the loss.    Even some of CIT's competitors say there is simply not enough money to fill the lending hole if CIT goes down.

Many argue, maybe rightly, that it's simply not worth it to put in more taxpayer money to save a few already struggling retailers.    Why is preventing a couple more empty stores at the mall worth taxpayer billions?    The answer is that a few empty stores may result in many more empty stores, empty shopping centers and lost jobs.

Many large, national retail chains have clauses in their lease agreements with malls and shopping centers that allow them to break their lease if occupancy falls below a certain threshold, often 80-85%.    For example, in a mall with 100 stores, if 15 of them close and stay empty, other retailers at the mall may have an automatic 'out' on their lease, enabling them to pack up and leave.    They are smart enough to know that malls with empty stores don't attract shoppers.   As stores close, more stores may close, the mall gets emptier and that death-spiral begins.    Closed malls and empty stores mean thousands of jobs lost.    And those of you with empty malls in your area know what a blight they can be on looks, real estate value and crime.

Does this merit taxpayer billions?    Maybe.   Maybe not.   And a bailout of CIT is unlikely anyway.   But given the massive job losses already in retail, one wonders if a few billion given to CIT wouldn't save more jobs and more small stores than all the billions more given to banks and AIG.    Those billions went in part to help bail out obsure derivative contracts.    Nor are impacted retail workers the highly paid bankers of other bailout recipients.    They often are the same group that is struggling the most with keeping their current job and finding a new one.

CIT's outcome is uncertain, but its certainly clear the CIT story has a bigger impact on mom and pop than AIG ever will.