CIT is reeling due to its venture outside its comfortable helm and reliance on securitization for funding

When Jeffrey M. Peek took the helm of CIT Group Inc. in 2004, the company had a reputation as a sleepy, but reliable, lender to small and midsize businesses. Today, CIT is reeling. The situation, some say, has its roots in Mr. Peek's attempts to rejuvenate the New York company. A veteran Wall Street investment banker, Mr. Peek steered CIT into investing heavily in subprime mortgages. It bought a student-loan company. And instead of holding many of its loans on its books, CIT sold them to outside parties. But last week, after ratings firms downgraded its debt, the company lost access to the funding that normally finances its day-to-day operations. CIT had to drain a $7.3 billion backup credit line, igniting fears that the company was headed for bankruptcy court. By selling more of CIT's loans to outsiders, executives figured the company would free up capital that could be used to make new loans. But when loan and securitization markets ground to a halt last year, the strategy came under mounting pressure. In addition to selling its loans, CIT also gets its financing from raising short-term and long-term debt via the capital markets. But, with investors worried about the declining values of lenders' assets, those sources have largely evaporated in recent months. The reliance on securitization "has contributed to the difficulty they are in," says Sean Egan, managing director at Egan-Jones Ratings Co., an independent credit-rating firm. "Because there's very little securitization being done right now, a major issue is whether the company will be successful in raising long-term capital sources." Meanwhile, in 2005, CIT jumped into student loans by purchasing Educational Lending Group Inc. CIT also started making more mortgages to people with weak credit histories. After decades of slow growth, CIT "ventured outside of its comfortable realm and aimed into higher-profit markets," Mr. Hofmann says. "They timed that very badly."