S&P Downgrades CIT Group To Junk, May Cut Again

Even if CIT is eventually accepted into the temporary liquidity guarantee program, it's unclear how much it might benefit, Pressman said, but it could be less than the $10 billion it might have gotten if it converted to a bank before October. "We also believe that the transfer of assets to CIT Bank has thus far yielded only limited benefits for the company's funding profile," he wrote. "To date, CIT has received permission to transfer only $5.7 billion in government-guaranteed student loans to CIT Bank. We are unclear as to how receptive regulators are to additional transfers and at what pace those transfers might occur."

CIT's commercial banking strategy depends on its ability to obtain and diversify its deposits. "Although CIT Bank has had some success in raising brokered deposits, its deposit-raising potential is untested," he wrote. S&P thinks deposits will have to be higher and more diversified to benefit the company.

Concerns about loans going unpaid and S&P's expectation CIT will continue to operate at a loss also contributed to the downgrade. "We also believe there is a heightened risk of conversion to common equity for CIT's outstanding preferred stock instruments, although management has given no indication that it is contemplating such a move," Pressman said.

S&P will assess the impact of the FDIC's decision and additional funding and liquidity issues in order to resolve the CreditWatch negative.