I was interrupted yesterday morning with news that CIT Group, a commercial lender to hundreds of thousands of small and medium-sized businesses in the US, filed for bankruptcy (Note CIT is not the same entity as CitiGroup) on Sunday.

CIT’s bankruptcy has been partially expected as they have been repeatably trying to raise more and more capital for the past few months without much success. With a default rate in excess of 10% in their current loan portfolio, it appears that SMEs are still in pretty much of a struggle, never mind what the economic numbers say.

While this seems like just another bank failure out of the 115 that have failed in US so far this year, note that this is the fifth largest bankruptcy in US history, behind Lehman Brothers, Washington Mutual, WorldCom and General Motors.

However, CIT was considered not to be “too big to fail” as the US government did not eventually bail out the company. The US government actually gave CIT US$2.3 billion last fall as part of a rescue of other banks and lenders, although there is now little hope of that money being recovered.

Under the proposed prepackaged plan of reorganization, all existing common and preferred stock will be cancelled upon emergence. The effectively means that all existing shareholders will be wiped out. Apparently, some people are still hopeful of recovering something for the shareholders as the share price of CIT was trading at $0.25 yesterday (compared to $0.72 on Friday).

It remains to be seen what is the spillover effects on the businesses who depend on CIT for loans, but it is reported that the operating entities (subsidiaries) of CIT Group remain unaffected and will continue lending to small and middle market businesses.

I have actually been monitoring the CIT news for quite some time. With its bankruptcy and the recent increased volatility in the market, I will stay clear of any short-term bargain hunting trades for the time being.

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