Oct. 13 (Bloomberg) -- CIT Group Inc., the 101-year-old lender that may file for bankruptcy protection, said Chairman and Chief Executive Officer Jeffrey Peek plans to resign.

Peek, 62, joins Bank of America Corp. chief Kenneth Lewis and Morgan Stanley head John Mack, who have said they will step down in the past month. CIT’s board formed a search committee to find a new CEO, the New York-based company said in a statement today.

The U.S. government rejected a second bailout for CIT after committing $2.33 billion in taxpayer funds in December to keep the lender afloat. The company turned to bondholders in July after it was denied access to the Federal Deposit Insurance Corp.’s program to sell U.S.-backed debt.

“Peek misjudged a major strategic area of the company,” said Sean Egan, president of Haverford, Pennsylvania-based Egan- Jones Ratings Co. “He continued to rely on the capital markets for funding. The lack of stable low-cost funding sources killed him.”

Peek joined CIT in 2003 after being denied the top job at Merrill Lynch & Co. in 2001 and spending 19 months as head of the asset-management unit at Zurich-based Credit Suisse Group AG. CIT lost $5 billion in the last nine quarters as the collapse of the market for subprime mortgages sparked the worst financial crisis since the Great Depression and cut off CIT’s short-term funding.

Swap Prices

CIT has asked bondholders to exchange unsecured obligations for new secured debt maturing in four to eight years and preferred shares. Bond and credit-default-swap prices show that investors are speculating the offer to exchange about $29 billion of debt won’t prevent the company from filing for bankruptcy.

“It’s very telling he left now,” Egan said. “You have to assume there are some problems with the exchange offer.”

CIT fell 12 cents, or 12 percent, to 92 cents on the New York Stock Exchange at 4 p.m. The stock has lost 80 percent of its value this year.

CIT, which finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc., will seek court protection through a pre-packaged bankruptcy should the debt exchange fail, according to an Oct. 1 filing. The company posted a second-quarter loss of $1.62 billion as more customers defaulted on loans.

CIT bonds have tumbled and the cost to protect the debt climbed on speculation the exchange will fail.

CIT Notes

CIT’s $500 million of 4.125 percent notes due Nov. 3 fell 3 cents to 66 cents on the dollar as of 12:04 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes have fallen 14 cents since the exchange was announced on Oct. 1.

Credit-default swaps on five-year CIT debt rose 1.3 percentage point today to 42 percent upfront, according to broker Phoenix Partners Group. That means it would cost $4.2 million initially and $500,000 annually to protect $10 million of CIT debt from default for five years. The swaps have risen from 36.7 percent upfront since Oct. 1, CMA DataVision prices show.

The bond prices “are telling you the distressed debt exchange won’t work and they will need to use the prepackaged bankruptcy” option, Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said last week in an interview.

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net

Last Updated: October 13, 2009 16:10 EDT