Recent calls for tighter control of the global financial market look stronger as another American bank goes to the wall

As economic leaders in the Middle East call for tighter regulations in the financial markets ahead of a latest G20 meeting, the US has suffered another financial setback.

CIT Group, a lender to hund-reds of thousands of small and medium-sized US bus-inesses, has filed for bank-ruptcy, as the global crisis left it unable to fund itself.

Its bankruptcy is the fifth largest failure in US cor-porate history but had been widely expected for months and is unlikely to provide a massive near-term shock to the financial system.

However the bankruptcy is a blow for the US government, which invested $2.33 billion in CIT in December through the Troubled Asset Relief
Programme (TARP) and is likely lose most of it.

Taxpayers will only receive money after bank debt and bond investors are repaid.

The CIT bankruptcy would therefore translate to the first realised loss for the government from TARP, although it may recover some funds over time.

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

“The longer a financial insti-tution 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 US-based bankruptcy law professor.

CIT does intend to stay in business, and its operating subsidiaries were not part of the New York bankruptcy court filing.

Once CIT emerges from bankruptcy proceedings, it hopes to move businesses including vendor finance, which companies then use to offer financing to their customers, and factoring, which helps firms finance unpaid bills to customers, into its bank subsidiary.

If regulators approve the move, CIT hopes to fund new loans and leases for those businesses which have bank deposits with it.

As of the middle of this year, CIT and its operating units had $71 billion of assets and $64.9 billion of debt.

This makes CIT’s bankrup-tcy one of the largest in US history, although most of the assets are not at the holding company that filed for prot-ection from creditors.

Under the bankruptcy plan approved by CIT’s lenders, creditors will end up owning the company.

Preferred shareholders, including the government, will get money only after lenders are paid back. The US Treasury ack-nowledged it will likely end up with little.

“We will be following dev-elopments very closely with an eye towards protecting taxpayers,” Treasury spokes-man Andrew Williams said.

CIT was founded in 1908 and became one of the US’ best known lenders. However, the current recession left CIT with piles of bad loans.

As of mid-year, nearly ten per cent of loans in its corp-orate finance unit were bad.

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