CIT's a Dinosaur, but Small Lenders Can Thrive

Includes information about GE's planned withdrawal from the Temporary Liquidity Guarantee Prorgam.)

CIT Group's (CIT Quote) business model may have been exposed as obsolete during this crisis, but there are signs of hope for similar companies.

CIT, which narrowly staved off bankruptcy this week, is one of several lenders that became bank holding companies last year to gain access to the Troubled Asset Relief Program, but which do not get as much of their funding from customer deposits as more traditional banks like JPMorgan Chase (JPM Quote) and Citigroup (C Quote) do. They use what is known as a wholesale funding model, which means they fund themselves primarily by issuing debt.

While wholesale funding used to be cheaper and more efficient than gathering deposits, it has become much more difficult during the financial crisis. That has been less of a problem for General Electric's (GE Quote) GE Capital unit, which also relies almost exclusively on wholesale funding, because the government has shown a willingness to stand behind GE's debt via the Temporary Liquidity Guarantee Program, from which it excluded CIT.

GE announced on Wednesday that it was beginning to withdraw from the TLGP, meaning the government will no longer explicitly stand behind its debt. However, the company still benefits from a perception that the government will not let it fail, allowing it to raise debt more cheaply.

Other companies that rely heavily on wholesale funding, like Goldman Sachs (GS Quote), American Express (AXP Quote) and Morgan Stanley (MS Quote), have been beefing up their deposits, and also benefit from government support, both explicit, via the TLGP, and implicit (they are widely seen as too big to fail).