Updated to include Reuters report, additional context, closing price.



) -- Shares of

CIT Group

(CIT) - Get Report

soared Tuesday, even as reports conflicted over the future of the troubled lender.

The initial spike higher in the stock appeared to be triggered by a report in the

New York Post

of a possible merger with IndyMac Federal Bank.

The story cited unnamed sources and was far from definitive in its tone, noting the merger idea was "one of several options being bandied about to help fix CIT." Around midday,


disputed the report, citing unnamed sources, but stating CIT was in talks for a credit line of up to $10 billion. The stock extended its gains following this news, finishing the session up more than 31% at $2.20. It was the first time the shares closed above $2 since July 1. Volume of more than 358 million was more than three times the issue's three-month daily average of 91.3 million.

While the news of the loan talks could conceivably have been the catalyst for the further move upward in the shares, it was not exactly news. Bond research firm


wrote something similar Sunday, in a report picked up the following day by


, but the shares barely budged in Monday's trade.

CIT has been reeling since July when it became clear the company was effectively shut out of the capital markets and would not be able to convince regulators to guarantee its debt, as the federal government had done for large banks like

Bank of America

(BAC) - Get Report


Wells Fargo

(WFC) - Get Report

, as well as for giant lender

General Electric

(GE) - Get Report

. The company had already received $2.3 billion in TARP funds in December 2008.

CIT was able to stave off bankruptcy at that time by securing an emergency loan of up to $3 billion at more than 10% interest from a group of hedge funds and bond manager PIMCO, and convincing bondholders to take less than they were owed on a subsequent debt exchange. The lending group, however, gave CIT a deadline of this Thursday, Oct. 1, to come up with a restructuring plan.

CIT shares have been trading for weeks as if bankruptcy were a likely outcome, even as the action in the bond and

credit default swaps

markets was indicative of steady improvement in sentiment about the company's future.

While CIT does have a serious funding problem, it also has some valuable businesses, which have been eyed by many savvy people with deep pockets, from

Berkshire Hathaway

Chairman Warren Buffett to PIMCO. Those people would almost certainly like to avoid the extra time and expense associated with a bankruptcy filing.

From that perspective, Tuesday's rally makes sense. The only question is what took so long.


Written by Dan Freed in New York