Friday, July 17, 2009

Let CIT Die

There has been much handwringing regarding CIT's imminent demise, amidst discussions with the federal government for yet another rescue package.

According to Tuesday's Wall Street Journal, CIT has suffered heavy losses in its lending to small- and medium-sized businesses, but is not really considered a lynch-pin of the overall banking system.

Still, federal administration members worry about the signal that would be sent if a major lender to small business goes bankrupt.

Honestly, how hard is this one to figure out?

CIT has lost money doing its business. It's evidently not very good at making credit risk and/or funding decisions, which are the two most important aspects of a lending business.

If there is sufficient profitability in well-made small business loans, some other firm will enter the market as CIT vacates it with its collapse. Hopefully, doing the business better than has CIT.

But why in God's name would anyone wish to prop ups a badly-run lender that isn't crucial to the nation's financial system?

This is really a no-brainer. The loans which are outstanding will be assumed or bought by some entity. New credit will flow if it's viable and profitable.

If it's not, then these borrowers were not the ones we should want to have receiving loans in the first place.

Things generally work better when you leave market forces to figure them out. The mere fact that the administration has been discussing bailing out CIT tells you they don't really understand the dynamics involved in this matter.

Rather than clear out an incompetent source of business lending, to make room for better ones, administration officials are seriously contemplating aiding idiots who have run their own business into the ground.

This is no way to recover an ailing economy, nor, for the long run, promote efficient economic activity in the US.

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