Will a CIT bankruptcy hurt SBA lending?

Opposing camps in the CIT debate are arguing mainly over whether the faltering commercial lender poses systemic risk to the financial system. CIT´s supporters say its small business lending operations are crucial to keeping many businesses across the country functioning during the recession; those arguing against a bailout say its failure wouldn´t upset the markets or have a significant effect on the economy.

Both arguments have merit. There´s little indication that the firm´s demise would cause a Lehman Brothers-style panic in the markets, but a New York Post story this morning gives evidence that CIT´s exit from mid-market commercial lending would indeed hit certain industries hard (the story also says JPMorgan Chase is considering purchasing part of CIT´s lending business).

There´s a narrower area in which CIT´s importance is also up for debate: Small Business Administration lending. CIT used to rank among the top-10 SBA lenders in the country. In the 2008 fiscal year, which ended last October, CIT was the top SBA lender, making a total of 865 loans worth $525 million. But when the secondary market for SBA loans ground to a halt late last fall, CIT´s lending volume crashed. Its business model included heavy reliance on the secondary market for fresh capital to lend, and when the option to sell the guaranteed portions of SBA loans disappeared, so did CIT´s SBA lending program. Since Oct. 1, CIT has made just 92 loans worth $67 million. Its now ranks 16th on SBA´s list, but even as the top SBA lender CIT only captured 5.5% of the market share.

With more small businesses in trouble and unemployment on the rise, it wouldn´t be hard to claim that every SBA lender counts. The Obama administration has already demonstrated its interest in the SBA as a tool for affecting economic recovery; allowing CIT to go bankrupt may greatly impact that effort. So while CIT may not be too big to fail, officials could be making a mistake in their claims that it is not too interconnected.