Saying no to CIT a big gamble for Team Obama

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - In leaving CIT CIT.N to sink or swim on its own, U.S. officials are gambling that financial markets and the economy are now strong enough to withstand the possibility a big lender collapses.

On Wednesday, ten months to the day after the bankruptcy of Lehman Brothers exacerbated the global credit crisis, CIT said bailout talks with the government had ended, a development which may push the 101 year old company closer to failure.

Judging from the calm reaction in credit and stock markets on Thursday, it appears investors think leaving CIT to fend for itself is a safe bet.

But the broader economic impact may be far more damaging, particularly for already struggling retailers that rely on CIT as a major source of financing.

"The company's collapse would certainly ripple through thousands of small and medium businesses that rely on CIT for trade financing and lending," Gail Dudack, chief investment strategist at Dudack Research Group, told clients.

"This raises the risk of more bankruptcies and more unemployment and would be a significant negative for an already fragile economy," she said.

Indeed, that is what makes CIT's situation particularly tricky for President Barack Obama and his economic team.

CIT probably needs about $6 billion (3.66 billion pounds) to avoid bankruptcy, after reporting eight quarterly losses in a row, analysts said. It only has assets of about $75 billion, making it only about one tenth of the size of investment bank Lehman when the government allowed it to file for bankruptcy last September.