CIT Group files for bankruptcy

By Dan Wilchins and Elinor Comlay

NEW YORK (Reuters) - CIT Group CIT.N, a lender to hundreds of thousands of small and medium-sized businesses, filed for bankruptcy on Sunday, as the global financial crisis left it unable to fund itself and the recession clobbered its loans.

The bankruptcy, one of the largest in U.S. corporate history, has been widely expected for months and is unlikely to provide a massive near-term shock to the financial system. But CIT's trouble could further weigh on the fragile U.S. economy.

The bankruptcy is also a blow for the U.S. government, which invested $2.33 billion (1.4 billion pounds) in CIT in December through the Troubled Asset Relief Program and will likely lose most of it.

Taxpayers will receive money only after bank debt and bond investors are repaid. The bankruptcy would translate to the first realized loss for the government from TARP, although it may recover some funds over time.

CIT had fought activist investor Carl Icahn, who said he was CIT's largest bondholder, over its future plans. But late last week the two resolved their differences. Most of CIT's creditors have already approved its reorganization plan, and the company said it hopes to emerge from bankruptcy by the end of the year, around when Chief Executive Jeff Peek is slated to resign.

Getting through bankruptcy quickly is crucial for CIT if it wishes to keep its customers, which include Dunkin' Donuts franchisees and film producer Dark Castle Entertainment.

"The longer a financial institution stays in bankruptcy, the more the value of the business dissipates. It's faith and trust and perception that are so important for a financial institution," said Jack Williams, a bankruptcy law professor at Georgia State University College of Law.

CIT does intend to stay in business, and its operating subsidiaries were not part of the New York bankruptcy court filing. CIT is still making new loans and honouring commitments to fund customers, people familiar with the matter said.