It comes as hardly a surprise – CIT Group, Inc. filed for Chapter 11 bankruptcy protection on Sunday.

The New York-based commercial lender was a funding lifeline to hundreds of thousands of small and medium-sized U.S. businesses – some estimates put its number of business clients at one million – but the financial giant saw that funding dry up with the credit crisis as bad loans riddled its portfolio.

Although the company’s bankruptcy has been expected for months now, mainstream media is calling the collapse “one of the largest in U.S. corporate history” – fifth in magnitude after Lehman Brothers, Washington Mutual, Worldcom, and General Motors.

According to the New York Times, banking regulators concluded over the summer, as CIT struggled to keep its head above water, that even though CIT was a vital channel of financing for many small businesses, the company’s problems did not pose the type of systemic risk that warranted the administration’s emergency rescues of such firms as Citigroup and Bank of America.

The 101-year-old CIT did receive a $2.3 billion bailout from the federal government last December. Under the company’s bankruptcy restructuring plan, that taxpayer investment, as well as all other existing common and preferred stock, will be completely wiped out, the Washington Post reported. The crash of CIT marks the first failure of a government-bailed-out firm.

CIT’s operating subsidiaries, including CIT Bank, are not included in the bankruptcy filing, and according to a “corporate statement”: http://www.businesswire.com/portal/site/cit/index.jsp?ndmViewId=news_view&newsId=20091101005053&newsLang=en, the company lending to its small and mid-sized business customers during legal proceedings.

CIT says it has received approval from its board and “overwhelming support” from debt holders to proceed with a prepackaged reorganization plan that will reduce the company’s debt by $10 billion, significantly reduce liquidity needs, and return the company to profitability – a proposal that company officials contend will allow it to emerge from bankruptcy by the end of the year.
“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small-business and middle-market customers, two sectors that remain vitally important to the U.S. economy,” said Jeffrey M. Peek, the outgoing chief executive of CIT. “This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence.”
CIT Group will be controlled by debt holders after the reorganization. According to the company’s bankruptcy filing, CIT has $71 billion in finance and leasing assets and total debt of $64.9 billion.