There often comes a time when the purveyor of a falsehood, regardless of the nature of said falsehood, is simply no longer able to maintain the lie. Bernie Madoff's moment came as the world's financial markets crashed in unison, triggering redemption requests that he could not Ponzi away.
Many parents, determined to shield their children from unpleasant aspects of the world, are able to construct a fantasy world for the child that is devoid of any true responsibility. The problem is, the wonderland will inevitably be crushed by some inescapable reality of life.
Similarly, the government has for several months now treated Americans as if they were small children - too fragile or weak to be told the truth about the state of this economy. The woes of CIT Group Inc. (CIT) however, represent inexplicable evidence that, contrary to the Administration's propaganda, all is not well with the economy.
Throughout 2009, we have been told repeatedly that credit markets are "thawing", and that things in general are starting to return to normal. Such statements hold water only if one is referring to the top few percentiles of corporations as determined by creditworthiness and, more importantly, sheer size. The market has understood this distinction quite well, and the past several months have largely been a discovery process, whereby the market has attempted to discern the precise location of this Administration's proverbial line in the sand.
Ideally, the government's implicit backing of the financial system would hold the market at bay. What has happened however, is that participation in a vast swath of government programs has been interpreted as an explicit government guarantee. The consequences of being denied participation in these programs can be seen with startling clarity, as CIT Group has rapidly descended to the precipice of bankruptcy.
That a company the size of CIT group is unable to access its traditional funding sources, absent an explicit government guarantee, is a direct blow to the government's assertion that the financial markets have recovered. The market has decided to test the government's willingness to support an institution of CIT Group's size, daring the Obama Administration to let this company fail. Such represents the Catch-22 that the federal government faces: to allow a failure of this size signals to the market that all corporations smaller than CIT are effectively on their own.
To save CIT however, simply drags Geithner et al further into the business of guaranteeing literally every segment of the economy and the financial system.
Most importantly, we think, is the message that the market is sending with its denunciation of CIT Group. This company is the primary lender to thousands of American small businesses - in other words, Main Street. When the market loses faith in CIT, it is essentially losing faith in the ability of thousands of small businesses to service their obligations to CIT Group.
Many of these business owners, preoccupied with the immense job of running a business, may not be aware of the troubles at CIT Group. In the event of a CIT bankruptcy however, this reality will be immediately apparent, it will disrupt a large segment of Main Street in abrupt fashion, and most importantly, it will render useless the government's ability to maintain its lie that "everything is ok".
Disclosure: no position in CIT