When you're not too big to fail

Struggling insurer CIT's real problem? It doesn't owe enough billions to Wall Street

Published July 13, 2009 3:20PM (EDT)

Pity the poor financial institution that doesn't make the "too big to fail" cut. CIT, the struggling small- and medium-size business insurer facing a liquidity squeeze, is "not a systemic risk to the financial system," according to government officials, reports the Wall Street Journal. Therefore: Tough luck. Have fun filing bankruptcy.

CIT, reports Bloomberg News, says its own failure would "put 760 manufacturing clients at risk of failure and 'precipitate a crisis' for as many as 300,000 retailers."

But that's not how you go about securing your ongoing government bailout. You need to be in hock up to your neck to Wall Street investment banks, or a credit swap specialist in insuring against bond defaults, or a domestic automaker, to get the gravy. And in that regard, CIT just doesn't qualify.

At least for now, Geithner and Bernanke seem convinced that Wall Street won't melt down if CIT goes kaput. There's even a line of argument that suggests that if CIT went bankrupt without a market panic, that could spur ongoing market confidence. Win win!

But the Obama administration can't be feeling all that complacent. Last week, the administration floated a plan to spend TARP money supporting loans to small businesses -- a key engine of job creation. While Wall Street's best-of-breed, Goldman Sachs and JPMorgan Chase, are expected to announce enormously profitable quarterly earnings results, small and medium-size businesses are getting hammered by the collapse of the real economy. CIT may be self-interestedly exaggerating how hard it will be for its own customers to find insurance elsewhere, but it still seems reasonable to assume that a CIT bankruptcy will deliver another solid hit to a stumbling economy, even if Wall Street creditors hardly get scratched.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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