The crisis at CIT, one of the largest US middle-market lenders, worsened on Monday with the company talking to regulators about ways to stave off failure while its credit ratings were cut deeper into junk territory.
Its shares tumbled 11.76 per cent after a 17.7 per cent drop on Friday. Bonds issued by CIT and maturing in August were trading at 77 cents on the dollar.
A failure at CIT could result in losses for Goldman Sachs and Wells Fargo. Goldman last year agreed to a $3bn secured financing facility for CIT and Wells Fargo provided $500m in secured financing.
Goldman said: “We either hold collateral or have hedges in place to mitigate our potential exposure.” Wells declined to comment.
CIT’s plight has sparked a rift between its regulators, with the Federal Deposit Insurance Corporation believed to be taking a tougher stance than the Federal Reserve and Treasury over whether to provide support.
CIT has been pressing the FDIC to end a six-month delay and allow it to issue government-backed bonds in an effort to bolster its balance sheet and allay concerns over its financial health.
The FDIC has not ruled on CIT’s application, in spite of pressure from the Fed and Treasury to relent, say people familiar with the situation. A number of senior officials within the agency believe CIT should not be helped because its failure would not pose a risk to the financial system.
The regulators declined to comment on Monday. However, Tim Geithner, US Treasury secretary, told a press conference he was confident the government had the authority and the ability to address the crisis at CIT.
CIT is also trying to win regulatory permission to transfer assets into its bank subsidiary to improve liquidity, it said Monday, adding that it could make no assurances that either avenue would prove to be successful. Failure to obtain access to fresh liquidity could prompt government intervention.
CIT is the only big financial group to receive bail-out funds that has not been given the go-ahead to issue debt guaranteed by the FDIC, in spite of having applied in January.
Moody’s on Monday downgraded CIT to B3 from Ba2, while Standard & Poor’s cut CIT’s ratings to CCC+ from BB-.
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