Dec. 22 (Bloomberg) -- CIT Group Inc., the commercial lender that ran short of cash this year, won federal approval to convert to a bank holding company, a step toward getting an investment of as much as $2.5 billion from the U.S. government. The stock rose 7.7 in extended trading.

The Federal Reserve Board’s approval allows CIT to retain some non-banking subsidiaries, the Fed said in a statement today. The New York-based lender sold shares and bought back debt in order to raise enough cash to meet the government’s financial targets.

CIT joins financial firms including American Express Co. and Discover Financial Services in the rush to collect retail deposits and get access to the U.S. Treasury’s rescue fund. The government has earmarked $700 billion to prop up companies hobbled by the worst financial crisis since the Great Depression. CIT has said it may seek $2.5 billion by selling preferred shares to the Treasury’s Capital Purchase Program.

“Today’s announcement is an inflection point in CIT’s 100- year history,” Chief Executive Officer Jeffrey Peek said in a separate statement. “Bank holding company status is expected to provide us increased access to funding and a new platform from which we will serve our middle-market and small-business clients.”

Other firms seeking bailout money include auto and home lender GMAC LLC and insurers Genworth Financial Inc. and Hartford Financial Services Group Inc. The two insurers announced plans to acquire lenders to qualify for federal funds.

Shares Gain

CIT advanced 32 cents to $4.55 at 4:49 p.m. in New York.

CIT said last week it expected to win federal approval of its application to become a bank, and said it may have to discontinue portions of its insurance business if it doesn’t also get financial holding company status within two years. The lender raised $300 million in a secondary share sale that was contingent on the firm getting the Fed approval announced today.

CIT is seeking cash after $2.9 billion in net losses since the second quarter of last year. The lender’s stock has lost more than 80 percent of its value in 2008. Peek is making fewer loans, tightening lending standards and raising borrowing costs for customers amid the worldwide credit crisis, which has cost global financial companies more than $1 trillion.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: December 22, 2008 17:00 EST