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The Washington Post has a story today about the effect of the bankruptcy of CIT, a century-old firm that specialized in small-business lending.

Most of the story focused on how the federal government stands to lose all (or most) of its $2.3 billion TARP investment in CIT.

Buried deep in the story is the interesting fact that CIT drastically reduced its small-business lending after receiving the TARP bailout.

Why this sucks, on many levels, below.

First and foremost, the economy (and millions of unemployed and underemployed Americans) is starving for new jobs, which are overwhelmingly produced by small businesses.

Small businesses need access to fairly priced credit to start and grow, and CIT is the leading provider of such credit.

Or was.

About three-quarters of the way into the story, we learn that CIT had used precious little of its TARP largesse to help small businesses create jobs.

Yet despite officials' hopes, CIT made few new loans. The firm made only 142 loans backed by the Small Business Administration in the 12-month period that ended Sept. 30, down from 1,195 loans in the previous year.

And most of those loans were evidently to larger small businesses:

Already, CIT has already begun cutting back on its lending through the SBA. In fiscal year 2009, the company backed 142 SBA loans worth $105 million, compared with 2008 when CIT supported 1,195 loans for $575 million.

CIT has been in trouble for a while, with its non-performing loans growing as the Great Recession deepens.

But even so, it does not appear to be technically bankrupt, since its assets are greater than its liabilities:

CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion.

So who's picking up the slack as CIT cuts back lending?

Who will pick up the CIT pieces? Those might fall on GMAC, which offers car financing, mortgages and other financial services, (Motely Fool analyst James) Early says. Or it might fall to the smaller and regional banks, he says.

The problem there is that these banks, in some cases, are overwhelmed by commercial real estate loans and subprime mortgages. Five of these smaller and regional banks have closed this month.

Another problem is that GMAC has received "$12.5 billion of federal funds and access to cheap debt," and "is in talks with the U.S. Treasury to get a third infusion of up to $5.6 billion in TARP funds."

I'm no economist, but it seems to me that at a time when the government is bailing out banks AND providing them with essentially free money, those banks (and CIT is a bank, now) should be doing the basic business of banks -- lending money to credit-worthy customers and making money on the spread.

The economy, stupid, is not just the major political issue for 2010 -- it is always the major political issue.

And jobs are, on a micro and macro level, the main way most people judge the state of the economy.

Adequate credit for small businesses is essential to job creation, and Obama and the Democrats in Congress had better concentrate on that.

Starting yesterday.


Originally posted to devtob on Sun Nov 15, 2009 at 08:20 PM PST.

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