CIT shares rally as firm seeks federal aid

Shares of CIT Group Inc. rebounded today amid optimism that the top lender to small and mid-sized U.S. businesses may get a lifeline from the federal government.

The company’s shares rose 33 cents, or 24.4 percent, to $1.68 in morning trading after falling to a 52-week low of $1.08 during Monday’s trading session.

CIT is holding advanced talks with the government about receiving emergency federal assistance, officials said Monday.

A main focus of the negotiations, which involve the Treasury Department and other agencies, is CIT’s request to receive help through a Federal Deposit Insurance Corp. program that would guarantee the ailing lender’s debt, two sources briefed on the talks told The Associated Press. They spoke on condition of anonymity because the negotiations are ongoing.

But the FDIC has so far resisted the idea, the sources said, citing concerns about expanding the Temporary Liquidity Guarantee Program beyond its original purpose as well as the risk of backing CIT’s debt should the company fail.

FDIC spokesman Andrew Gray said CIT’s application to the program is still pending but would not elaborate.

New York-based CIT did not return calls seeking comment.

If it gets access to the FDIC’s debt-guarantee program, CIT, which got $2.3 billion in bailout cash in December, could issue government-backed bonds to raise capital at a lower cost. As of June 8, the program has backed $335.4 billion of debt.

The company’s stock approached $1 a share on Monday as investors fearing a bankruptcy court filing unloaded the shares.

A collapse of CIT, whose 1 million clients include big names from the franchisees of Dunkin’ Donuts to retailer Dillard’s Inc., could deal a devastating blow to the economy by cutting off financing just as businesses need it most, analysts warned.

That in turn could force thousands of small and medium-sized companies to drastically cut costs or shut down — driving up unemployment and dashing hopes for a swift economic recovery.

“They’d have to lay people off, downsize and maybe shut their doors,” independent banking analyst Bert Ely said of CIT’s clients. “It would hardly be positive for the economic recovery.”

CIT’s crisis brought back memories of the brutal losses suffered by fallen Wall Street firms like Bear Stearns and Lehman Brothers. It also posed yet another challenge to the Obama administration, which is struggling to right to the economy despite an $787 billion stimulus and a raft of federal bailout programs.

Companies that depend on CIT for financing are already weighing the consequences of possibly losing the lender.

“If CIT were to go away, it would take a financing option away from our franchisees who want to buy stores or expand their networks,” said Michelle King, spokeswoman at Dunkin’ Brands Inc., parent company of the Dunkin’ Donuts chain.

For the apparel industry, a collapse of CIT would have “near cataclysmic,” consequences for its small to mid-sized clients, said Andrew Jassin, co-founder of Jassin-O’Rourke Group Inc. an apparel consulting company.