banks on the skids again

http://www.marketwatch.com/story/citto-file-for-bankruptcy-after-rescues-fail-2009-11-01 AN FRANCISCO (MarketWatch) -- CIT Group Inc.'s board of directors said Sunday that they had approve the filing of a prepackaged bankruptcy reorganization plan.

The formal filing in U.S. Bankruptcy Court was expected to follow within hours,.

CIT (CIT 0.72, -0.23, -24.21%) , a major lender to small and midsize businesses, has
struggled to avoid collapse since the recession triggered billions of dollars in loan losses and the financial crisis cut the company off from its main source of financing.

With roughly $60 billion in assets, CIT's filing is probably the fourth-largest bankruptcy in U.S. history, ranking between General Motors (MTLQQ 0.59, -0.02, -3.28%) and Enron.
The bankruptcy of Lehman Brothers (LEHMQ 0.12, -0.01, -6.92%) , which collapsed last
year, was the U.S.'s largest ever.

CIT asked the U.S. government for a bailout earlier this year, but despite the company's large business-lending operations, it wasn't deemed too big to fail. See story on government rejecting CIT.

That contrasts with other financial-services companies like American International Group (AIG 33.62, -2.63, -7.26%) , Citigroup
(C 4.09, -0.22, -5.10%) and Bank of America
(BAC 14.58, -1.15, -7.31%) , which have received more than $100 billion of government
support since last year.

In October, CIT unveiled two different reorganization plans. One involved exchanging some debt, while the other was a voluntary pre-packaged bankruptcy restructuring. On Friday, activist investor Carl Icahn, a big CIT debt holder, said he was voting for the pre-packaged reorganization plan. That made such a filing more likely. See story on CIT's agreement with Icahn.

CIT was hit hard by the global financial crisis in two main ways. As the economy ground to a halt and unemployment surged, more of the company's loans went bad and it reported billions of dollars in losses over multiple quarters.

More importantly, CIT was one of the largest nonbank lenders in the world, a big part of the so-called shadow banking system that collapsed when the financial crisis erupted last year.

Roughly three-quarters of CIT's funding came from the unsecured debt market, but the company was shut out of this market as the crisis deepened. Bank deposits, considered a more stable source of money, made up 0% to 5% of CIT's funding.

CIT became a bank-holding company and got $2.3 billion from the government's Troubled Asset Relief Program in December. But that didn't solve its long-term problem: how to borrow money at competitive rates so it could continue lending.

CIT applied for a debt guarantee program run by the Federal Deposit Insurance Corp. but was rejected. Efforts to shift more of its assets to its banking unit, CIT Bank, have also hit hurdles.

CIT's bankruptcy will likely mean that the Treasury Department loses the $2.3 billion it invested in the company -- the biggest loss from TARP so far.

Alistair Barr is a reporter for MarketWatch in San Francisco.