CIT shows us what can happen if you are a finance company not in the the Fed Club. Other examples are Thornburgh and Countrywide and of course, Bear Stearns. Commercial banks had access to liquidity from the Fed. Last week, the investment banks were given free membership to the Fed’s liquidity club via the PDCF. But not every financial institution can come to the discount window and CIT is suffering that fate. Maybe it’s only a matter of time before Chairman Bernanke and Secretary Paulson find some creative way to resolve this issue.

When CFC had no choice before going bankrupt, they cut a deal with Bank of America. Does anyone still wonder how involved the government was to put that one together? When Bear Stearns had no choice before going bankrupt, a deal was cut with JPM. Does anyone wonder how involved the government was in that one? They shouldn’t. After all, it’s the Fed’s Club of liquidity so it seems they have the right to decide who gets to come in. But there are rules even though they are bent lately.

So for now, CIT is not allowed in. But here’s the problem, they drew down their lines of credit to the tune of about $7 billion from JPM, C, BCS, and BAC. This tells you that the ABCP market is not fixed despite all the previous attempts by the Fed Club of liquidity. And more importantly, if all these finance companies start to draw down whatever they can, it is going to put a tremendous stress on the commercial banks, investment banks and the Fed. The banks have to make good on their existing commitments. But I suspect they will be avoiding renewals on any unused facilities when they come due. If they do, that means a constriction on the economy and if they do not, they will most certainly have to deal with the impacts on their reserves. Maybe the Fed has a plan or it just has a never ending commitment to being the lender of last resort. That may be true, but there are consequences to this behavior.