The Obama administration has stated that banks and lending institutions must begin lending again. The failure of CIT Group will cause further concern that lending to small and mid-sized businesses will continue to be an issue.
In their filing, CIT Group said that the the plan includes a so-called prepackaged bankruptcy plan that reduce total debt by $10 billion while allowing the company to continue to do business. The plan, it is assumed, will enable CIT to emerge from court protection by the end of the year.
CIT Group hoped to avoid a bankruptcy filing through a bond-exchange offer. However, that hope fell by the wayside on Saturday when it could not convince sufficient bondholders to sign onto the plan.
CIT Group is among the largest corporate bankruptcies on record. It pales into comparison with the likes of Lehman Brothers and Washington Mutual, but the move will wipe out current shareholders of its common and preferred stock.
This most likely means the U.S. government will lose the $2.3 billion it propped up CIT with last year. It will thus be the first definitive loss in the government’s bailout of the financial system, but it should be noted that the rescue of CIT group came during the Bush administration.