On Wednesday, the federal government refused to rescue the CIT Group, and refused to extend anymore financial support to America's largest specialist in lending to small manufacturers and retail stores.
David Hendler, a research analyst at CreditSights told The New York Times, that "even though it [CIT] was a large company, it was 'small enough to fail'...He said the 'Treasury Department's message was clear: 'firms not vital to the inner workings of the financial system 'will probably be shut out' of the government's rescue efforts.'"
What that means is that the government is willing to bail out large banks and other major financiers, but will not extend a hand to companies and people who actually make things. Small manufacturers have depended on CIT for credit and factoring for a century. Most people don't understand CIT's most important contribution to small business. When a small business manufacturer or retailer needs money immediately, CIT will "factor" his invoices. Typically, CIT gives him 80% of the gross invoice, then it waits for his customer to pay, and it profits from the 20% spread between the cost of invoice and the final payment. The manufacturer retailer often needs the money immediately, just to survive.
Now CIT will be gone, and I don't think there's anyone else to take its place. Hundreds, maybe thousands, of small manufacturers all over the United States will shut down, but they are not, according to Hendler's reading of the Treasury Department, "vital to the inner workings of the financial system."
I don't pretend to be an expert on small manufacturers. I don't think I've ever met anyone who's ever borrowed from CIT, but I do deal with people who know the manufacturing and retail areas, and one of the savviest of those guys, a man whose made a fortune manufacturing goods, both in the United States and in China, tells me that if CIT goes under, whatever's left of manufacturing in America may go down with it.
President Obama was personally briefed on the situation Wednesday morning, but even after that the Federal Deposit Insurance Cooperation (FDIC) will refuse to permit CIT to use its debt guarantee program. They thought the risk was too great, and apparently doomed CIT.
The Administration continues to proclaim that we will create new jobs through small business and entrepreneurship. That's going to be very hard to do with CIT gone. In the real world, under current conditions, national banks are loath to loan money to small businesses and start ups. Most local banks are not stepping up to the plate, and with CIT gone, it's going to be very tough for the small guy.
I'd recommend that employees of companies that have been relying on CIT for financing begin looking for new jobs. Maybe they should try Wall Street, where they know the FDIC will take good care of them.