One of John Thain's challenges as the new chairman and chief executive of CIT Group will be persuading regulators to let the commercial finance company become more bank-like.

The blemishes to Thain's reputation from his tenure as CEO of Merrill Lynch — the bonuses, the expensive office renovation, the losses Bank of America Corp. took after buying the brokerage — could complicate that task.

"He's certainly a big name, but he's also a very controversial figure," said Kathy Shanley, a senior analyst at the bond research firm Gimme Credit. "It's somewhat of a surprising choice and a risky choice."

But Thain will benefit from CIT's status as a major lender to small businesses — a business sector the administration wants to make sure has access to credit.

"I think most regulators realize that CIT does fill an important role in the economy, especially with the president focusing on small businesses," said James Angel, an associate professor in the McDonough School of Business at Georgetown University.

CIT, which emerged from bankruptcy protection in December, announced Thain's appointment Monday.

Last year, with the capital markets that CIT traditionally relied on largely frozen, the company said it would try to gather deposits from commercial lending customers as an alternative funding source and eventually build a retail branch network. But the company's $9 billion-asset Salt Lake City bank faces regulatory roadblocks.

In July, a few months before CIT filed for bankruptcy protection, the Federal Deposit Insurance Corp. and the Utah Department of Financial Institutions issued the bank a cease-and-desist order, restricting lending by the bank to CIT or other affiliates and capping brokered deposits.

Curt Ritter
, a CIT spokesman, said Thain is "a proven leader and highly respected financial executive," noting his work at the helm of the New York Stock Exchange (which several observers also lauded). Thain "has begun the process of analyzing the company and how to implement our bank-centric model," Ritter said.

Observers said whoever leads CIT would have a hard time winning regulators' support — especially considering that the $2.3 billion the Treasury Department invested in the company through the Troubled Asset Relief Program was lost in the bankruptcy.

"I think regulators are going to be very reluctant to give the company a green light," Shanley said.

Expanding CIT's deposit business alone will be challenge. "You have a large, nonbank finance company with a very small bank subsidiary," said Christopher Whalen, a senior vice president and managing director of Institutional Risk Analytics. "Growing a deposit base, writing down bad assets and reviving a business model that generates profits will be very daunting."

President Obama has pledged $30 billion in TARP funds to community banks to increase lending to small businesses, and wants to expand Small Business Administration lending. In that context, Thain may have found himself in the right place at the right time to reclaim his standing, Angel said.

"I think he's got the extra motivation to show that he really can do it and undo the bad press that he got out of the Merrill deal."

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