Is CIT’s demise an opportunity for the Republican Party to score some quick political points? Not really. Here’s why: The Obama administration’s decision to withhold a federal helping-hand from the lender comes with few political risks. The millions of small and mid-size CIT customers that will have to scramble for new credit lines may well curse the Democratic president and his advisers. But the Republican Party won’t be able to attack Obama for damaging the nation’s precious entrepreneurial fabric by neglecting to bail out CIT. Doing so would put them at odds with the GOP’s “moral hazard” and small government planks. The principle risk to the Democratic president and party is if a CIT bankruptcy has unforeseen ripple effects by 1) unexpectedly weakening the U.S.’s financial system due to some presently-unknown interdependence between the lender and other banks or 2) driving too many small firms out of business, thereby aggravating already dismal unemployment levels. One hopes that the Federal Reserves so-called stress test of CIT, conducted earlier this week, was broad enough to include a measure of the damage a CIT collapse would do to apparel firms, retailers, restaurants and others which depend on the lender’s credit to pay their bills. Should the Republicans attack the administration for inconsistency in its handling of failing companies (financial, automotive or otherwise) the criticism could rebound on them. Consider that some of the most haphazard decisions occured in the final months of the Republican Bush administration when then-Treasury Secretary Henry “Hank” Paulson chose to save AIG but let Lehman Bros. die. As DJN colleague Emily Barrett recently wrote: “Consistency is already a problem for officials accused of conducting industrial policy in their allocations of government support. The distribution of congressionally approved funds under former Treasury Secretary Henry Paulson drew heavy criticism for a lack of transparency and potential favoritism. The current Treasury must tread carefully, as the tally of bank failures this year alone climbs above 50.” Conclusion: The politics of CIT are fairly benign for the Democratic administration and offer few hay-making opportunities for the Republicans.
Bankruptcy, Democratic Party, Politics, Republican Party, Washington
7 Comments to Political Impact Of CIT’s Demise
Steve FleischerJuly 16, 2009
Washington has gotten a reputation as a promiscuous dispenser of taxpayer money; this is an opportunity for the Obama administration to look like a steely guardian of the budget.
As Ms. Stern noted, the administration can do this at little cost to themselves.
Unfortunately, the price will be paid by small businesses around the country who will have less access to capital.
That is a price that Mr. Obama feels that he can afford; after all, they are not his natural supporters.
GK LipmanJuly 16, 2009
Small business will be effected by a collapse at CIT. Note that small business leans heavily Republican. Complaints in accessing credit for equipment and operations have been a problem and will continue to grow. Explaining to voters in 2010 that GM was more important than the thousands of small businesses effected by CIT’s collapse will have enormous traction in a bad economy.
Mike HarmonJuly 16, 2009
What am I missing. Per the labor dept, unemployment at the end of June was 14.7 million people.
CIT factors and loans money to 900,000 businesses. If those 900,000 businesses employee 10 people on average, that is 9,000,000 employees that depend on CIT in some form or fashion. If you assume 1/3rd of those Companies are running hand to mouth, that means that you could have 3,000,000 people added to the unemployment ranks in a matter of weeks, if not the week after CIT files bankruptcy. If so, that would increase unemployment by 20%. What would that do to consumer confidence? Yes there may be other lenders to loan to the 900,000 businesses but those 900,000 businesses have assets tied up with CIT that they need to use to refinance. Secondly, refiancing is not happening fast now, what will happen if you add 900,000 companies that need to refinance to the list. I can tell you, only the best credits will get financing.
If the government is not going to bail CIT out, I pray the bondholders convert debt to equity and give CIT another $2- $4 billion for breathing room to run an orderly restructing process or it looks to me like we are going to have mass increases in unemployment. Hopefully, I am missing something.
Personally, all the companies that I am aware of that use CIT employee 100 to 3,000 people.
Surely our government is too smart to allow this to happen. So I am hoping that something is going on behind the scenes to prevent this from happening. It could be the government will step in. If could be the bondholders will act. If could be someone will finance CIT in an orderly bankruptcy reorganization.
Surely, we will not just let CIT be liquidated.
D LawrenceJuly 16, 2009
Regardless of the political ramifications, this is terrible policy. The government is now in the business of picking winners and losers, and I fail to see how such a policy can have a positive impact in the long run (granted, I may be long dead).
Stephen TockJuly 16, 2009
So … your position is that the Republicans already provided haphazard leadership in deciding which companies to support and which to let die (namely, AIG and Lehman Bros.), so the Democrats should get their shot at the same haphazardness? Are you a politician, too?
R MurphJuly 17, 2009
The arrangement of a new line of credit is not the issue. CIT holds a large amount of receivables in excess of available credit lines as “collateral.” It could be 30% or more of recorded income for the borrower. What happens when that collateral is taken into Chapter 11 and the reserve against income has to be taken?
July 16, 2009
Also, it was under the Bush / Paulson watch that the federal government provided CIT with more than $2 billion in TARP funds, which will likely go down the drain if CIT files for bankruptcy.