CIT Doesn't Get the GE Treatment

(Update includes comments by analyst Sameer Gokhale.)

CIT Group (CIT) and General Electric's (GE) finance unit have a lot in common, but there's one critical difference between them: their status with U.S. government.

The FDIC guarantees well more than $100 billion worth of GE's debt under the Temporary Liquidity Guarantee Program. As a story by the Washington Post and ProPublica points out, it made a special exception to this emergency rule to include GE in this program, following lobbying by GE. CIT said in a press release Sunday it is still has a chance of gaining access to the program, though a Bloomberg News report cited sources within the FDIC saying the commission is unwilling to grant access to CIT. An FDIC spokesman declined comment.

According to the Washington Post/ProPublica story, GE's higher rating was an important factor in the FDIC's decision to allow it to access TLGP while freezing out CIT. If that is true, it makes little sense. The ratings agencies have come under heavy criticism for not scrutinizing financial companies and their debt securities enough, and their rating on GE is highly questionable.

A better reason for allowing GE into the program is the too big to fail argument. GE Capital, the company's finance unit, is one of the largest lenders in the world. CIT, while important, is not critical to the global economy.

One other reason for the differences in treatment between CIT and GE could be philosophical differences between Federal Deposit Insurance Corp. Chairwoman Sheila Bair, and her more finance industry-friendly counterpart, Treasury Secretary Tim Geithner. Treasury approved CIT's application for bank holding company status in December and gave it $2.33 billion through the Troubled Asset Relief Program.