Last week, we wrote about the culture clash at the heart of the dispute between private-equity firms (PEs) and the FDIC.  However, there’s another example of culture clash:  the large corpse of what’s left of CIT. CIT is a latter-day BHC, unaccustomed to what regulators expect of even the most ornery or arrogant of their charges.  As a result, its hard luck comes at least as much from what it failed to do before going hat in hand to the Feds as from what befell it before it did.

When PEs go to the FDIC to make a deal, they often swagger with the same insouciance   long used to enter a target’s board room.  This is understandable – swagger has worked well for years – but it doesn’t move most regulators.  CIT may not have swaggered, but it apparently used the same less-than-sweet demeanor long deployed to considerable effect in factoring.  It said it wanted its money and it wanted it now.  Unfortunately, CIT did not use the more than generous grace period provided by regulators when it became a BHC to restructure or reform itself, and this – as much as anything – contributed to its come-uppance.

Was the come-uppance correct?  We don’t think so, and it’s not because we aren’t bloody-minded when it comes to closing big banks.  We have long advocated tough action for troubled banks, starting with early – and public – enforcement actions and proceeding quickly to meaningful disciplinary action.  The law calls this prompt corrective action (PCA) and it works, but only when done early and with force.

CIT, though, wasn’t subject to PCA.  In fact, when it became a BHC on the spur of the moment and with barely a second look from the Fed, the first thing that happened to it was relaxation of a lot of rules that ordinarily bind BHCs.  The FRB’s list of recent interpretive letters is larded with exemptions for CIT.  These track many given to Goldman Sachs, Morgan Stanley and GMAC – also sudden converts to BHC charters – but that’s where the comparison stops. 

Unlike CIT, these other newfound BHCs have gotten billions from the Fed, Treasury and FDIC.  GMAC got what it needs even though – unlike the others – it’s a mess.  If the rationale for cutting companies off is their condition, then GMAC at least as much as CIT should have been left to fend for itself.  That it wasn’t speaks to the heart of the problem – policy is still being made on a case-by-case basis relying on factors – favored advocates, preferred industry sectors? – unknown and, worse, unknowable because they are always subject to change.

We are left to conclude that CIT has one way to the public purse – it needs to get into the auto-finance business as quickly as possible.  GMAC is no better or worse than CIT, but it’s in a sector supported by a Treasury industrial policy that bank regulators have decided to endorse.  Small business isn’t so blessed, and so goes CIT.