Regulators at odds over CIT aid

FDIC 'very reluctant' to relieve lender through debt guarantee program, but Treasury and Fed more supportive.

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WASHINGTON (Reuters) -- A key bank regulator has been "very reluctant" to provide relief to lender CIT Group through a government debt guarantee program, a source familiar with the matter said Monday.

The source said the Federal Deposit Insurance Corp. has been cool to the idea of granting CIT access to its debt guarantee program, partly because the regulator is not satisfied with the lender's collateral, even though the Treasury Department and Federal Reserve have been more supportive of such a move.

The Treasury and Fed are exploring other ways to provide relief to the New York-based commercial lender, including possibly granting CIT's request to transfer assets to its CIT Bank unit, the source said, speaking anonymously because the government discussions have been private.

An FDIC spokesman said the agency does not comment on pending applications. Treasury and the Fed did not immediately respond to a request for comment.

CIT (CIT, Fortune 500), which provides financing to many small and medium-sized businesses, has said it is in talks with regulators about how to improve liquidity after billions of dollars in losses have resulted in a credit crunch.

It previously received government aid in December when it became a bank holding company and obtained a $2.33 billion capital injection from the government's Troubled Asset Relief Program (TARP).

CIT's request to access the debt guarantee program comes as the FDIC tries to wind it down. The program was put into place in October in a bid to boost confidence in the banking sector and unfreeze credit markets.

Many of the largest banks which previously participated in the program have been issuing large amounts of debt not guaranteed by the FDIC -- a key requirement for banks to repay government TARP funds.

The program is also designed as a program for healthy institutions, and the FDIC fears granting CIT access to it involves too much risk exposure.

The Treasury and Fed have been exploring other options for CIT, including the transfer of troubled assets from the holding company to its depository bank unit, which the source said would take a lot of pressure off CIT's financial situation.

Treasury Secretary Timothy Geithner said on Monday that the government is closely watching developments associated with CIT and is confident the government would be able to deal with the lender.

"I am actually pretty confident in that context that we have the authority and the ability to make sensible choices," Geithner said in London in response to a question about how the U.S. government might deal with the company.

CIT's deteriorating condition comes as the government is seeking the authority to resolve problems at bank holding companies in an orderly manner.

The FDIC currently has the authority to wind down troubled depository banks but does not have similar authority to resolve issues at bank holding companies that have become insolvent.

The Obama administration has proposed expanding FDIC's powers to include bank holding companies.

In afternoon trading, CIT shares were off 12 cents or 7.8% at $1.41. To top of page

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