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  WRAPUP 1-CIT talks fall apart, bankruptcy looms
Wed Jul 15, 2009 8:18pm EDT


CIT says talks with government have ceased

* Bankruptcy possible

* CIT stock halted (Adds comments, details throughout)

By Karey Wutkowski and Jonathan Stempel

WASHINGTON/NEW YORK, July 15 (Reuters) - CIT Group Inc (CIT.N), a lender to hundreds of thousands of small and mid-sized U.S. businesses, said on Wednesday that bailout talks with the government had ended, a development that could ultimately drive the company into bankruptcy.

The announcement followed last-ditch talks in which Treasury officials had expressed concern about a worsening liquidity crunch at the 101-year old lender and indications that government aid would not put it on a path to recovery.

It also showed the possible limits of Washington's ability and willingness to rescue companies, after multiple bailouts engineered by Treasury, the Federal Reserve and the Federal Deposit Insurance Corp for larger companies such as American International Group Inc (AIG.N) and Citigroup Inc (C.N).

"At least in the eyes of the Fed and the eyes of the Treasury, we've turned the corner, such that the systemic kinds of risks facing the economy may be well past," said Mike Knebel, a portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon, which recently sold CIT bonds.

In a brief statement, New York-based CIT said "discussions with government agencies had ceased" and that "there is no appreciable likelihood of additional government support being provided over the near term." CIT said its management, directors and advisers were evaluating alternatives.

A Treasury official said the talks ended after it became clear that CIT's liquidity had deteriorated too much, and the company had failed to show that it could raise private capital to stay solvent. A CIT bankruptcy, nonetheless, is not a foregone conclusion, the official told Reuters.

The Treasury Department also said there were limits to its ability to help troubled companies.

"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," it said in a statement.

CIT's travails were also a vexing problem for the Obama administration, which had to assess the risk of failing to bail out a large company whose collapse would, by itself, likely not pose a "systemic" risk to the financial system.

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