Last Updated: April 15, 2008: 4:11 PM EDT
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CIT is everyone's headache

Instability at the century-old finance firm could bring Wall Street's pain to Main Street businesses that depend on it.

By Marcia Vickers, contributor

"At CIT, we are Capital Redefined."
Downgrades on Main Street
CIT may be the largest finance company, but others are feeling its pain.
Intervest Bancshares
Analysts cite concerns over nonperforming assets, fewer loans being originated, and general tightening of credit markets.
NewStar Financial
Citigroup recently downgraded the Boston-based firm, and Goldman reiterated its neutral stance, pointing to the difficulty of obtaining funding in a tight credit market.
The Maryland-based company's biggest woes are credit weakness in corporate finance and commercial mortgage loans to the mid-market.

(Fortune Magazine) -- CIT Group's advertising slogan may sum up its problem: "At CIT, we are Capital Redefined." Thanks to its recent foray into subprime mortgages, CIT's capital has been radically redefined. On March 20 it was forced to draw down a $7.3 billion backup credit line. Its stock has plunged from around $60 a share a year ago to $13 on April 9, and CIT shuttered its student loan business and is trying to sell off non-core businesses to keep afloat.

The decline of the century-old finance company has not gotten as much attention as the Bear Stearns bailout, but its instability could bring Wall Street's pain to Main Street. How? Factory owners, car dealers, dry cleaners, and many other businesses depend on specialty lenders like CIT for capital.

"Small and medium-sized companies struggling with cash flow are in for a hard time. Lenders may want them to shut down and liquidate their assets rather than work with them to refinance as in the past," says Kenneth Posner, a Morgan Stanley analyst.

When Jeffrey Peek became its CEO in 2004, CIT (CIT, Fortune 500) was a stodgy $9.5 billion (market cap) lender to the small businesses historically eschewed by Wall Street. (Its market cap is now $2.8 billion.) CIT obtained capital mostly from raising unsecured debt, using the integrity of its loans as collateral. Its steady performance was based on the loyalty its service commanded from its customers.

Peek, who headed the investment managers division at Merrill Lynch (MER, Fortune 500) and later financial services at CSFB, almost immediately started gussying up the company for growth. He created a health-care financing group and began lending to technology and media companies. But CIT also started selling mortgages to credit-risky folks, and it bought a student loan company right before the government cut subsidies last year. Also, CIT had increasingly been securitizing its loans and selling them off, making a sizable profit, but that market has now dried up. And its ability to raise debt from the capital markets has been deeply eroded as investors fret about CIT's borrowers' stability.

"Peek wanted to even out CIT's cyclicality by diversifying into consumer vs. commercial businesses," says Michael Taiano, an analyst at Sandler O'Neill & Partners. "His timing was obviously bad."

Mortgage fallout. CIT's problems didn't really come to light until last summer, when the mortgage meltdown began. Wall Street analysts say the company was slow to react, and some say it now needs to be bought by a company with ample liquidity if it's going to survive. GE Capital and community banks including Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500) are the suitors most frequently mentioned.

On April 4, two Chinese banks said they had backed off from purchasing CIT because of concerns that it couldn't continue to finance itself. A CIT spokesman declined to comment on that point, but told Fortune, "Our decision to draw down our bank lines ensures that our clients have the financing they need to operate and grow their businesses successfully."

Even CIT's direct competitors are rooting for it. Says Mark Sunshine, president and chief operating officer of First Capital: "We're hoping someone comes in and buys it. If it fails, it could take 3,000 or 4,000 businesses down. No one wants to see lives destroyed. It would be a train wreck." To top of page