July 15 (Bloomberg) -- CIT Group Inc., the small-business lender with $1 billion in bonds maturing next month, pressed for more aid from regulators who are reluctant to use taxpayer funds for a company that may not be a risk to the financial system, people familiar with the matter said.

Treasury officials have indicated in talks that they are reluctant to deploy funds from the $700 billion bank-rescue program, and the Federal Deposit Insurance Corp. continues to balk at debt guarantees, the people said. As of late yesterday, the Federal Reserve was considering granting permission to shift some CIT parent assets to its bank, two people said. That could boost the amount New York-based CIT could borrow from the Fed’s discount window, affording more time to restructure its debt.

The course of the talks may still change, and analysts have pointed to the potential political implications of letting a lender to thousands of borrowers at smaller businesses go bust after bailouts for some of the biggest Wall Street firms. CIT’s case underscores calls for new federal powers to allow an orderly wind-down of a bank holding company.

“CIT represents a difficult policy issue for Washington as there is sentiment to punish the fat cats and greed matched by what potential damage could be done against an economy struggling to regain momentum with all of its possible political fallout,” said Scott MacDonald, head of research at Stamford, Connecticut-based Aladdin Capital Management LLC.

Fed spokeswoman Michelle Smith declined to comment. Meg Reilly, a Treasury spokeswoman in Washington, also declined to comment.

Stock Advances

CIT advanced 26 cents, or 19 percent, to $1.61 at 4:03 p.m. yesterday in New York Stock Exchange composite trading as the company pushed for aid. The lender counts 1 million firms among its customers, including the parent of Dunkin’ Donuts and 300,000 retailers.

Standard & Poor’s said this week the company, once the biggest independent commercial lender in the U.S., may face bankruptcy without federal aid.

Todd McCracken, chief executive officer of the National Small Business Association, said in an interview regulators shouldn’t underestimate the importance of CIT to smaller businesses, which account for about half the private sector U.S. workforce. The U.S. jobless rate rose to 9.5 percent in June, the highest in almost 26 years.

‘By a Thread’

“A lot of people are hanging onto some of their employees by a thread -- liquidity is really key,” McCracken said. CIT, “at a time when everybody’s focused on jobs, could have a very direct effect on these company’s abilities to pay their people.”

CIT said in November 2007 one of its units was named the No. 1 lender by the Small Business Administration, providing $882 million to 1,601 borrowers.

Some pointed to the lack of a systemic threat from CIT as a reason for Treasury Secretary Timothy Geithner to forego aid to the company.

“Any government rescue of CIT is essentially a bailout for creditors,” said Bert Ely, chief executive officer at Ely & Co. Inc., an Alexandria, Virginia banking consultant. “CIT should do a pre-packaged bankruptcy. I do not understand why this is playing out the way it is.”

CIT doesn’t deserve federal backing because its lending supports less than 1 percent of total U.S. retail and manufacturing businesses, “indicating it is not systemic to the U.S. economy,” CreditSights Inc. analysts Adam Steer and David Hendler said in a research note this week.

Other Lenders

“CIT represents a relatively insignificant amount of the overall U.S. retail volume,” Steer wrote. “Should CIT cease lending, probably a good portion of its lending done to creditworthy clients could be assumed by another bank.”

The firm employed about 4,830 people as of March 31, compared with about 116,000 for American International Group Inc., the insurer saved from collapse last year, and 309,000 at Citigroup Inc., the bank approved for $52 billion in U.S. aid.

“They’re too little to be politically relevant, and therefore too little to obtain substantial federal support,” said Sean Egan, president of Egan-Jones Ratings Co. “You’ve heard of ‘too big to fail.’ This is ‘too little to succeed.’ ”

CIT converted to a bank holding company to become eligible for U.S. bank rescue funds and received about $2.3 billion of taxpayer money from the Troubled Asset Relief Fund.

FDIC Concerns

The FDIC is concerned that standing behind CIT would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking said last week. CIT’s collapse would be the biggest bank failure measured by assets since regulators seized Washington Mutual Inc. in September. CIT reported $3 billion in deposits at the end of the first quarter.

Geithner said two days ago the government has “the authority and the ability” to make “sensible choices” on CIT.

“We have a significant interest generally in trying to make sure the financial system gets through this, adjusts where it needs to adjust and emerges stronger,” he said at a press conference in London.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net

Last Updated: July 15, 2009 00:00 EDT