CIT's a Dinosaur, but Small Lenders Can Thrive - TheStreet

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

CIT Group's

(CIT) - Get Report

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) - Get Report



(C) - Get Report

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) - Get Report

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


, 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) - Get Report


American Express

(AXP) - Get Report


Morgan Stanley

(MS) - Get Report

, 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).

But what about smaller companies that rely upon wholesale funding? Some, like

NewStar Financial


appear to be struggling, and savvy observers like Cumberland Advisors CIO David Kotok are writing their obituaries.

"If CIT is too small to live, which is the opposite of too big to fail, that would mean anything which is smaller than CIT is also too small to live," Kotok says. "All of them are now living in a glass bowl and their funding costs are going up every minute as lenders and suppliers of cash, capital and debt rethink their exposures because of CIT."

Surprisingly, though, there are some apparent survivors out there, like



. The Chevy Chase, Md.-based company saw its shares trade below $1 a share earlier in the year, but is now on the rebound. Shares of subprime auto lender


( ACF), while down more than 50% from their pre-crisis levels, are nonetheless trading near 52-week highs.

Each company is a different story, in some respects. AmeriCredit, for example, benefits from the fact that consumer loans are easier to package together and use as collateral to sell bonds than the type of commercial leasing obligations that CIT has on its books, according to Chris Brendler, analyst at Stifel Nicolaus.


benefits from the fact that, after acquiring a bank last year, it has a much larger deposit base relative to its total assets than CIT does, according to Sameer Gokhale, analyst at Keefe, Bruyette & Woods.

That is not to say that life is easy these days for the small guys. It is much more costly for AmeriCredit to borrow money than it was before the crisis hit, Brendler says. And CapitalSource CEO John Delaney says about 25% of the loans the company has made in the past cannot be made using bank deposits.

But CapitalSource and AmeriCredit are starting to see an appetite for their bonds among investors for the first time since the crisis hit. Even while CIT fought for survival on Tuesday, CapitalSource was in the market selling $300 million of five-year bonds. And Delaney believes there is a future for a new crop of companies to make the loans that don't meet regulators' standards. This new breed of lender will use low leverage and will have to put up collateral. That stands in contrast to CIT, which has borrowed heavily in unsecured markets.

One example may be

Colony Financial

, an affiliate of private equity firm

Colony Capital

that filed with the SEC June 30 in preparation for an initial public offering. The company said in its filing that it intends to make commercial real estate loans, among other activities.