CIT secures $3 billion financing from bondholders

"You've got private money coming in and essentially giving a vote of confidence" in banks' future profitability, said Vincent Reinhart, former director of the Federal Reserve's monetary affairs division. "It's encouraging."

"It tells me that the appetite for risk is increasing, and people are betting that a recovery is coming," said William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts.

CIT lends money to nearly a million small and midsize U.S. companies. It was forced to turn to bondholders for help after the government refused to save the company last week, a sign the administration is pulling back on costly and unpopular bank rescues.

Had CIT been allowed to collapse, some experts feared it would have dealt a crippling blow to an economy still bleeding hundreds of thousands of jobs a month despite a nearly $800 billion federal stimulus program.

The retail sector would have been hit especially hard. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing.

"If CIT had gone under, that would have left a huge hole in the supply chain," said Craig Shearman, a spokesman for the National Retail Federation, one of the trade groups that had urged the government to prevent CIT's collapse.

By not getting involved, the administration gambled that CIT was not so enmeshed with the financial system as companies like Citigroup, Bank of America and other banks that accepted federal bailout money, analysts said.

"The government's sitting there saying, 'If this doesn't set off a meltdown of the financial system, there's no rationale to bailing out creditors,'" said Daniel Alpert, managing director of the investment bank Westwood Capital LLC.

CIT, squeezed as its debt has come due and borrowers have drawn down their credit lines, has been scrambling to raise $2 billion to $4 billion. It received $2.3 billion from the government's Troubled Asset Relief Program last fall — money that could be lost if CIT files for bankruptcy.

The Federal Reserve put the company through its "stress test" last week and found it faced a $4 billion capital shortfall. It has more than $7 billion in debt due in the first quarter of next year.

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