July 16 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender running short of cash, said the U.S. government would not rescue the company, fueling speculation that it may be forced to file for bankruptcy protection.

Talks with regulators ended and “there is no appreciable likelihood of additional government support being provided over the near term,” the firm said yesterday in a statement. CIT, once the biggest commercial lender, may seek protection if no U.S. aid emerges, Standard & Poor’s said this week. The company said it is “evaluating alternatives.” CIT’s debt tumbled, the shares plunged and the risk of default soared to a record.

CIT Chief Executive Officer Jeffrey Peek failed to convince regulators that fallout from a collapse would threaten the rest of the financial system. Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp. have resisted putting more taxpayer funds at risk, on top of the $2.33 billion granted to CIT in December, to keep the lender afloat.

“Maybe they can put together a last-minute deal and try to sell themselves,” said Adam Steer, an analyst with CreditSights Inc. “The most viable alternative once the government decides to not step in is a trip into bankruptcy.”

CIT is seeking $2 billion in rescue funds from owners of its debt and has given them 24 hours to put up the money, the Wall Street Journal reported today, citing unidentified people familiar with the matter. CIT told investors that without the cash, it will probably file for bankruptcy, the Journal said.

Curt Ritter, a spokesman for CIT, didn’t reply to requests for comment.

Default Swaps, Shares

Credit-default swaps on CIT jumped as much as 17 percentage points to 51 percent upfront before falling back to 47 percent upfront at 8:16 a.m., said broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $4.7 million and $500,000 a year to protect $10 million of CIT debt for five years.

The lender gained 1.9 percent to $1.64 yesterday before trading was halted by the New York Stock Exchange. When trading resumed today, the stock plunged as much as 99 percent, and was down $1.27, or 78 percent, to 37 cents as of 10:34 a.m.

The stock, which fell 64 percent this year, sold for more than $60 in February 2007. Common shareholders typically get little or nothing in a bankruptcy unless creditors are paid first. CIT employed about 4,800 people at the end of March.

“Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the Treasury said in a statement yesterday.

Geithner Monitoring

Treasury Secretary Timothy Geithner declined to comment directly on CIT today, saying only that his team has “been working very closely with the FDIC and the Fed and monitoring” the situation.

“We’re seeing durable, very important signs of not just adjustment and restructuring of our financial system, but greater confidence in the stability of the system,” Geithner, who is in Paris today, said in an interview with Bloomberg Television.

A bankruptcy filing may be the first by a company that took money from the Troubled Asset Relief Program, the Treasury’s $700 billion fund designed to keep lenders solvent by investing the public’s money in the financial industry.

“We don’t have any prior experience with a bankruptcy filing by a TARP recipient,” said Kathleen Shanley, a Chicago- based bond analyst for Gimme Credit LLC. “It is possible the U.S. TARP investment could be wiped out.”

Cash Shortages

CIT has battled cash shortages and faces $1 billion of bonds maturing next month. Liquidity tightened over the weekend after a “run” by customers who used up all their credit lines after hearing CIT might face bankruptcy, Steer said.

The Fed carried out a stress-test on CIT on July 14 and concluded the company would need as much as $4 billion in funding under the worst possible economic scenario, the Wall Street Journal said. Government officials considering putting more cash into CIT under the Troubled Asset Relief Program, decided not to last night because of the perceived absence of a viable business plan, the newspaper reported.

The FDIC, led by Chairman Sheila Bair, is concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking said last week. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

‘Scrape For Capital’

“It’s a killer,” Sean Egan, president of Egan-Jones Ratings Co., said after the rescue talks broke down. “What’s next is that they’re going to have to scrape for capital to meet the next loan payment and it’s highly likely that they’re going to file for protection.”

Peek, 62, joined CIT in 2003 after failing to land the top job at Merrill Lynch & Co. He pushed the lender into subprime mortgages and student loans to pump up growth.

CIT’s record includes eight straight quarterly losses totaling $3.4 billion. Analysts are predicting losses the rest of this year, including $346 million when second-quarter results are reported on July 23, according to a survey by Bloomberg.

President Barack Obama was briefed on the status of CIT during his regular meeting with economic advisers this morning, administration spokesman Robert Gibbs said.

Regulators were debating whether a CIT collapse would cause a cascade of failures among other businesses, the same reasoning used to justify multiple bailouts of American International Group Inc., once the world’s biggest insurer, and Citigroup Inc., formerly the largest U.S. bank.

Barney Frank

House Financial Services Committee Chairman Barney Frank said he’s “heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem” if CIT failed.

“I was struck by the number of people who were concerned and felt that if there was a total collapse it would have very negative consequences,” Frank, a Massachusetts Democrat, said in an interview yesterday.

Supporters of U.S. aid pointed to CIT’s 1 million customers who may lose funding, including 300,000 retailers. Tracy Mullin, chief executive of the National Retail Federation, said in a letter to Treasury’s Geithner that a CIT failure “cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”

CIT isn’t big enough to be a systemic risk, said Jason Mudrick, president of New York-based investment firm Mudrick Capital Management LP and a CIT bondholder.

“Lending to small businesses wouldn’t stop,” Mudrick said, adding that CIT has valuable assets, including the unit that finances the retail industry. “Their factoring business could be sold in a heartbeat to a competitor,” he said. “It has the best technology in the industry and is CIT’s crown jewel.”

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net.

Last Updated: July 16, 2009 10:36 EDT