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Taiwan’s economy probably exited the deepest recession on record last quarter as the global recovery spurred demand for the island’s semiconductors and mobile phones, according to a survey of economists.

Gross domestic product increased 7.1 percent in the three months through December from a year earlier, the median of the Bloomberg News survey’s nine estimates shows, after contracting for the previous five quarters. The report will be released on Feb. 22 at 1:30 p.m. in Taipei.

The emergence of the world economy from the worst slump since World War II spurred businesses in Taiwan, where exports equal half of GDP, to boost production and hire more workers. President Ma Ying-jeou is negotiating a trade accord with China that would cut import duties on Taiwanese goods in the world’s fastest growing major economy and help cement the recovery.

“Taiwan is ‘out of the woods’ for as long as the global economy is — and is particularly benefitting from a surge in growth in China,” said Dariusz Kowalczyk, chief investment strategist in Hong Kong at SJS Markets Ltd. “Since inflation in bound to return, we expect the central bank to begin raising rates in April, with 50 points of tightening likely in 2010.”

Taiwan’s exports to China, its biggest trading partner and No. 1 overseas investment destination, soared 187.8 percent in January from a year earlier, after a 96.7 percent gain in December. Shipments to the U.S., the second largest export market, rose 13.7 percent after increasing 4 percent in December.

Surging Profits

Stronger demand for electronics helped Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp., the world’s largest makers of custom chips, post fourth-quarter profits that beat analysts’ estimates and boost capital spending this year.

The economy is emerging from the worst recession since records began in the 1950s. Central Bank Governor Perng Fai-nan kept interest rates unchanged at a record-low 1.25 percent on Dec. 24, after slashing them by 2.375 percentage points from September 2008 to February 2009 to revive the economy.

The unemployment rate fell for a third month in December after reaching a record 6.09 percent in September. Taiwan Semiconductor, the island’s biggest company by market value, said it plans record spending this year and will add more than 3,000 engineers.

“Local exporters have been reporting good sales figures in the fourth quarter because of rising demand from overseas,” said Lee Ming-han, an economist at Sinopac Bank in Taipei. “Domestic consumption also improved on a falling jobless rate and gains in the stock markets.”

China Accord

President Ma’s administration has been pushing for the trade agreement with China to prevent Taiwan from being “marginalized” after a Chinese accord with the 10-member Association of Southeast Asian Nations took effect this year.

China and Hong Kong combined is Taiwan’s largest overseas market, accounting for 40 percent of the island’s $203.7 billion of exports last year. Overseas shipments of flat screens, computer chips and other electronics goods made up about 28 percent of the total. Asean, which represents a quarter of the world’s population, accounts for 15 percent of Taiwan’s exports.

The government estimates the so-called Economic Cooperation Framework Agreement with China would increase GDP by 1.65 to 1.72 percentage points annually, spurring exports and creating more than 260,000 jobs. Exports would rise as much as 5 percent a year and imports by 7 percent, it says.

Opposition Rally

The opposition is against signing the accord and is calling for a public referendum. The Democratic Progressive Party on Dec. 20 rallied 100,000 people into the streets of Taichung city to protest Ma’s China policies, on concern that they will erode the island’s sovereignty.

China and Taiwan have been ruled separately since Nationalist troops fled to the island after losing a civil war to Mao Zedong’s Communist forces in 1949. China has threatened to invade Taiwan if it declares formal independence, and in 2006 carried out a weeklong series of missile tests near the island.

The risks to Taiwan “are centered around the global outlook, which is strong only in the short term,” Kowalczyk of SJS said. “By late 2010 and early 2011 we see a double dip in G-3 economies, which will trigger a slowdown. This is bound to hit Taiwanese exports and reduce its growth rate in 2011.”

Taiwan’s currency climbed 0.3 percent to close at NT$32.1 against the U.S. dollar on Feb. 12, the last trading before the Lunar New Year holiday, according to Taipei Forex Inc. The benchmark Taiex index gained 1.1 percent, after surging 78 percent last year, the best performance since 1993. Taiwan’s financial markets will resume trading on Feb. 22.

Export Growth

Taiwan is aiming for 22 percent growth in exports in 10 markets this year, including China, India, Japan, Russia and Brazil, the Ministry of Economic Affairs said last month. The island’s statistics bureau forecast in November that exports would increase 15.4 percent this year.

Nanya Technology Corp. last month reported NT$211 million ($6.6 million) profit in the fourth quarter, after posting losses in the previous 10 quarters, as demand for computers rebounded and prices of semiconductors rose. Smaller rival Powerchip said Jan. 20 that its fourth quarter profit exceeded NT$1.6 billion.

Taiwan Semiconductor, the island’s biggest company by market value, plans record spending of $4.8 billion on equipment and factories this year after reporting fourth-quarter profit more than doubled to NT$32.7 billion.

Prime View International Co., the screen supplier to Sony Corp.’s Reader and Amazon.com’s Kindle e-book readers, plans to triple its capacity in the U.S. and China this year on rising orders, Chairman Scott Liu said in an interview last month.

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Spending by U.S. consumers increased in December for a third consecutive month, signaling the biggest part of the economy will contribute more to growth in coming months.

The 0.2 percent increase in purchases was less than anticipated and followed a 0.7 percent gain in November that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes climbed 0.4 percent, exceeding expectations.

Retailers such as Amazon.com Inc. are posting profits on increased sales as Americans spent more this past holiday season than the year before. Employment is key to propelling bigger gains in spending, one reason the Obama administration is proposing a fiscal 2011 budget today that calls for $100 billion in additional stimulus focusing on jobs.

“Consumers have the wherewithal to support good spending, however they are going to be reticent until they see a few good months of job gains,” said Craig Thomas, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly forecast the gain in spending. “2010 is lined up to be a moderately good year.”

Stock-index futures held earlier gains following the report. The contract on the Standard & Poor’s 500 Index rose 0.6 percent to 1,076.5 at 9:10 a.m. in New York. Treasury securities fell.

The median estimate of 65 economists surveyed called for a 0.3 percent increase in spending, after an originally reported gain of 0.5 percent the prior month. Projections ranged from no change to 0.7 percent.

Income Gains

The gain in incomes followed a 0.5 percent increase in November and exceeded the 0.3 percent median estimate in the Bloomberg survey. Wages and salaries climbed 0.1 percent in December after increasing 0.4 percent the prior month.

Today’s report showed prices were stabilizing. The inflation gauge tied to spending patterns rose 2.1 percent from December 2008, less than the survey median forecast.

The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent in December from the previous month and was up 1.5 percent from a year earlier.

Adjusted for inflation, spending climbed 0.1 percent following a 0.4 percent rise the prior month.

Because the increase in spending was smaller than the gain in incomes, the savings rate rose to 4.8 percent from 4.5 percent the prior month.

Disposable income, or the money left over after taxes, increased 0.4 percent.

Better Sales

Amazon, the world’s largest Internet retailer, posted profit and sales that beat analysts’ estimates and said revenue growth may accelerate this quarter as consumers start spending more following the recession. Sales may rise as much as 43 percent to $7 billion in the first quarter, more than last year’s 18 percent growth, the Seattle-based company said last week in a statement. Analysts surveyed by Bloomberg had estimated sales of $6.42 billion.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, climbed 0.2 percent in December after rising 2.3 percent the prior month.

Purchases of non-durable goods decreased 0.8 percent, and spending on services, which account for almost 60 percent of all outlays, increased 0.4 percent.

The economy grew at a 5.7 percent annual rate in the fourth quarter, exceeding the median forecast of economists surveyed, figures from the Commerce Department showed last week. Consumer spending, which accounts for 70 percent of the economy, climbed at a 2 percent pace, also exceeding expectations.

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Some of the economists who anticipated the U.S. job market would see marked improvement in November now project job gains are around the corner, and possibly in the rearview mirror.

Payrolls fell by 11,000 workers, while the unemployment rate dropped to 10 percent. Jobs were forecast to decline 125,000, according to the median estimate of 82 economists surveyed by Bloomberg News. Estimates ranged from decreases of 30,000 to 180,000.

The drawdown in inventories and rising corporate profits are the most compelling reasons for payrolls to begin showing sustainable increases as soon as this month, these economists said. What’s more, the recent trend of upward revisions will probably continue, signaling the worst employment slump in the postwar era may have already ended.

“We could see a positive number for November next month,” said Stefane Marion, chief economist at National Bank Financial Inc. in Montreal, whose forecast of a 30,000 payroll drop was the closest. “Firms now are beginning to redeploy some of their cash flows” by hiring new workers, he said.

Revisions added 159,000 jobs to payroll figures previously reported for October and September, a report from the Labor Department showed yesterday in Washington. The previous month’s report added 91,000 for September and August.

Profits, Inventories

Corporate profits climbed 21 percent from January through September, the biggest three-quarter gain in five years, while inventories plunged at a record pace, according figures from the Commerce Department. Leaner stockpiles set the stage for recovery in production.

“If you run down your inventories hard, you also cut your labor force,” said Peter Possing Andersen, an economist at Danske Bank A/S in Denmark who projected a decline of 50,000 jobs for November. He said the ramp up in production means the manufacturing industry, which has cut workers for the past two years, may stabilize and begin hiring in “a couple of months.”

Still, some economists say that even if November’s figures are revised into positive territory, payrolls may not have reached their low point yet. “Revisions lately have been in the favorable direction,” said Neal Soss, chief economist at Credit Suisse in New York who forecast a 50,000 drop in payrolls. “We shouldn’t take that as evidence that we’re at the bottom.”

The improving labor market indicates the deepest U.S. recession since the 1930s may have ended, said the head of the group charged with making the call.

Yesterday’s report “makes it seem that the trough in employment will be around this month,” Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee, said in an interview.

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In an aggressive effort to highlight their growth and health at a time of challenge for all publishers, Houston Business Journal and the 39 other papers in the American City Business Journals group this week took a novel approach to tell their story: All 40 business journals printed a four-page “wrap” around their papers filled with statistics and testimonials from readers in their local markets, detailing the niche their papers fill in each of their communities.

The testimonials highlighted ways that their papers have connected them to new sales, new jobs and new ways to grow their businesses, and most recently, ways to tap government stimulus dollars. The national campaign cites statistics that include recent numbers for paid circulation, time spent reading business journals and event attendance.

Collectively, the papers grew circulation by 3.85 percent between 2005 and 2009 while daily newspapers in those same markets lost 29 percent; from 2007 to 2009 alone, the ACBJ circulation growth totaled 2.7 percent, according to figures tallied by the Audit Bureau of Circulations.

Nationally, ACBJ readers spend an average of 50 minutes reading their local business journal each week, according to media audits.

And through 2009, about 175,000 business leaders have attended business journal events across the country.

The campaign has linked the papers together under a single message that asks, “Who Do You Want To Meet Today?” That message centers on the way each paper connects business leaders with each other, via print, in person, at events, or online through the bizjournals paydayloans.com network of local business journal sites.

ACBJ newspapers reach 4 million readers each week with in-depth coverage of their business communities. ACBJ cites recent research as evidence of the sweet spot it occupies in the media: 83% of all business news is local. Further, the company attributes it commitment to exclusive, top-quality journalism as vital to its success.

“No one in the local business community is more connected, more aware, more in touch than business journals are,” said ACBJ CEO Whitney Shaw, in a Q&A offered in each paper’s four-page wrap. “We're giving vital, up to the minute information to corporate executives, small business owners, community leaders, to virtually anybody who has a stake in the economy. And we're giving that information with a depth they can't get anywhere else.”

ACBJ is a unit of Advance Publications Inc., which also operates Conde Nast Magazines, Parade magazine, Fairchild Publications, the Golf Digest companies, Newhouse Newspapers and cable television interests.

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Facebook Inc. stock's price on private exchanges has jumped up to 42 percent in the past four months as membership of the social networking site topped 300 million and the company turned cash flow positive, according to Bloomberg News.

Facebook shares are currently selling for about $21 each at SecondMarket, up from $14 .77 in July.

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Sri Lanka’s central bank has room to cut interest rates should inflation remain “persistently low” as it seeks to support the island’s economic recovery after a 26-year civil war, Governor Nivard Cabraal said.

The economy may grow as much as 6 percent next year after expanding about 3.5 percent in 2009, Cabraal said yesterday in an interview in Istanbul, where he is attending the annual meetings of the World Bank and the International Monetary Fund.

The South Asian nation’s benchmark stock index, Asia’s best performer this year, closed at a record high yesterday on optimism that lower interest rates will boost earnings as the economy grows. Borrowing costs are already at a three-year low.

“If we see persistently low inflation, then we’ll see some reason to make some adjustments in the months ahead,” Cabraal said. “We don’t need to do any changes right now because we are on the right track. We don’t need to have a knee- jerk reaction.”

The central bank on Sept. 11 lowered the reverse repurchase rate to 10.5 percent from 11 percent, and cut the repurchase rate to 8 percent from 8.5 percent. Commercial banks are increasing lending at a “reasonable” rate as borrowing costs fall, Cabraal said.

Consumer prices will probably climb between 3 percent and 5 percent this year, and inflation may accelerate to between 5 percent and 6 percent in 2010, Cabraal said.

“Naturally, we are worried about a possible resurgence in inflation but at the same time our demand management has been so good that to some extent, it offsets the possible increases that may arise in the supply side,” he said. “We are confident we will be able to manage that.”

Civil War

Sri Lanka’s growth is expected to be driven by domestic demand including infrastructure development and construction activity as the end of the civil war spurs rebuilding in areas formerly controlled by the separatist Liberation Tigers of Tamil Eelam. Output in the fisheries and agricultural industries will also show “strong growth,” Cabraal said.

Sri Lanka may resettle 100,000 ethnic Tamil civilians stranded in transit camps in the country’s north by the end of this year, Deputy Finance Minister Sarath Amunugama said in Istanbul yesterday.

There is little risk of asset bubbles forming in the economy even as funds pour into the country’s stock market and investment increases, the governor said. The Colombo All-Share Index rose as much as 1.9 percent to 3,156.37 yesterday, the highest-ever for the measure of 238 companies on the Colombo Stock Exchange.

“We are not too worried about asset bubbles because what is being taken up is the slack that has been around for a long time,” Cabraal said. “It hasn’t reached that stage as yet.”

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Senate Banking Committee Chairman Christopher Dodd’s plan for a single bank regulator may set up a fight with House colleague Barney Frank and the Obama administration and might slow the overhaul of financial rules.

Dodd, leading efforts to rewrite regulations, will suggest combining the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency into one agency, the senator’s office said yesterday.

“Establishing a single regulator is a very bad idea,” Camden Fine, president of the Independent Community Bankers of America, a Washington-based trade group with 5,000 members, said yesterday in an e-mail. “When you have a cyclopic regulatory system, it only takes one stick in the eye to blind it.”

Dodd’s proposal goes further than recommendations by President Barack Obama that are backed by Frank, chairman of House Financial Services Committee that resumes hearings on the issue this week. Dodd’s plan embraces ideas of Democratic Senators Charles Schumer of New York and Mark Warner of Virginia and has elements from measures introduced by House Republicans. Any differences must be resolved before the rules become law.

Obama in June recommended combining OCC, regulator of national banks including New York-based Citigroup Inc., and OTS, which regulates savings and loans including Paramus, New Jersey- based Hudson City Bancorp Inc.. His proposal leaves intact oversight powers of the Fed and FDIC.

The multiple-agency system has produced “some real costs ranging from inefficiencies and redundancies to the lack of accountability and regulatory laxity,” Dodd said at an Aug. 4 Senate Banking Committee hearing to consider the issue. “We are now paying a very high price for those shortcomings.”

No Panacea

FDIC Chairman Sheila Bair and Comptroller of the Currency John Dugan support Obama’s proposal.

Bair said merging the four agencies is “no panacea” for effective oversight, according to Banking committee testimony Aug. 4. “One of the advantages of multiple regulators is that it permits a diversity of viewpoints to be heard,” she said.

Fed officials including Chairman Ben S insurance quotes. Bernanke and Governor Daniel Tarullo, who is leading efforts to overhaul the Fed’s bank supervision, have testified that the central bank should retain its authority over U.S. banks.

The administration recognizes “many ideas” will be offered and will “work with the leadership” in the House and Senate committees “to get a bill done” this year, White House spokeswoman Jennifer Psaki said yesterday in a statement.

‘Big Mistake’

Frank, the Massachusetts Democrat leading his chamber’s efforts, supports Obama’s merger. Stripping the Fed and FDIC of their oversight powers would be “a big mistake,” Frank said.

Representative Spencer Bachus of Alabama, top Republican on the Financial Services panel, has proposed consolidation as a step to reduce duplication and avoid the separate Consumer Financial Protection Agency proposed by Obama.

“If structured like the House Republican plan, streamlining and consolidating the functions of the four bank regulatory agencies will address consumer protection without the need for a new and costly government bureaucracy,” Bachus said in a statement. “It will create smarter regulation, and will benefit both taxpayers and consumers.”

Schumer and Warner, along with Republicans on Frank’s committee, support a single regulator.

“It does not make sense for up to four different federal regulatory bodies to retain oversight over the safety and soundness of banks,” Schumer wrote in June to Treasury Secretary Timothy Geithner. This system “preserves the regulatory arbitrage that allows institutions to pick the oversight scheme that benefits them the most.”

Warner told Bloomberg News July 1 that the Fed and FDIC should cede their bank oversight role to an “end-to-end” supervisor.

Jonathan Graffeo, a spokesman for Senator Richard Shelby, top Republican on Dodd’s committee, in an e-mail yesterday said “we continue to review” Dodd’s proposal.

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The world’s top cellphone maker Nokia said on Monday it would start to make laptops, entering a fiercely competitive but fast-growing market with a netbook running Microsoft’s Windows operating system.

Nokia had earlier this year said it was considering entering the laptop industry, crossing the border between two converging industries in the opposite direction to Apple, which entered the phone industry in 2007 with the iPhone.

Nokia has seen its profit margins drop over the last quarters as handset demand has slumped, and analysts have worried that entering the PC industry, where margins are traditionally razor-thin, could hurt Nokia’s profits further.

“We are fully aware what has the margin level been in the PC world. We have gone into this with our eyes wide open,” Kai Oistamo, the head of Nokia’s phone unit, told Reuters.

“There’s really an opportunity to bring fresh perspective to the PC world,” he said, adding that Nokia would introduce extended battery life and continuous connectivity.

Nokia has produced PCs before, but divested the unit in 1991 when it started to focus on the mobile phone industry.

But Nokia’s first netbook, the Nokia Booklet 3G, will use Microsoft’s Windows software and Intel’s Atom processor to offer up to 12 hours of battery life while weighing 1.25 kilograms. Netbooks are low-cost laptops optimised for surfing the Internet and performing other basic functions. Pioneered by Asustek with the hit Eee PC in 2007, netbooks have since been rolled out by other brands such as HP and Dell.

“The question is: How will Nokia differentiate? This is already a crowded market. If they manage to differentiate it’s going to give them competitive advantage,” said Gartner analyst Carolina Milanesi.

CUT-THROAT SEGMENT

Research firm IDC expects netbook shipments this year to grow more than 127 percent from 2008 to over 26 million units, outperforming the overall PC market that is expected to remain flat and a phone market which is shrinking some 10 percent.

“Nokia will be hoping that its brand and knowledge of cellular channels will play to its strengths as it addresses this crowded, cut-throat segment,” said Ben Wood, director of research at CCS Insight.

“At present we see Nokia’s foray into the netbook market as a niche exercise in the context of its broader business.”

Nokia’s choice of Windows software surprised some analysts who had expected the company to use Linux in its first laptop.

Analyst Neil Mawston from Strategy Analytics said the technology choices were a good win for the U.S. companies.

“We believe ARM and Symbian are among the main losers from the Nokia Booklet announcement,” he said. 

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Intel Corp. said Tuesday that its second-quarter sales fell compared to the same quarter a year ago, but that business is picking up fast.

Even as revenue declined from last year, sales figures were better than what analysts had expected. The company reported profits of 18 cents a share, excluding a one-time fine from the European Commission.

Sales fell $1.4 billion to $8.02 billion from $9.47 billion in the second quarter of 2008. Analysts were looking for revenue of $7.28 billion, according to a consensus estimate of analysts polled by Thomson Reuters.

Sales pick up: From the first quarter of 2009, sales surged $879 million as personal computer sales picked up. "Intel’s second-quarter results reflect improving conditions in the PC market segment with our strongest first- to second-quarter growth since 1988 and a clear expectation for a seasonally stronger second half," said Paul Otellini, Intel president and CEO in a written statement.

In particular, sales from Intel’s Atom chip, which are the units that go into smaller netbooks, spiked 65% from the first quarter.

Shares rose 34 cents to close at $16.83 during regular session trade on Tuesday, but surged as much as 8% in after-hours trading.

Intel expects that sales will continue to improve. For the third quarter, the microprocessing giant expects sales of $8.5 billion, plus or minus $400 million, according to the statement. However, the company also says that the overall economic climate could impair its ability to meet its guidance.

The company’s sales will be driven more by consumer demand, like back-to-school shopping, than businesses replacing their computers, according to Otellini. He predicts that businesses will begin to evaluate their technologies toward the end of the summer, but won’t begin their purchases this year.

Intel’s dependence on the consumer concerned one analyst. "Over the past 5 months, oil prices have doubled and if oil prices continue to be where they are today, I think Intel may miss the guidance because the consumer is going to hit the breaks on buying new PCs," said Trip Chowdhry, senior analyst with Global Equities Research.

Antitrust charge hurts profits: In May, European regulators charged Intel with a record fine of $1.45 billion for violating antitrust laws by unfairly paying computer makers to delay or even cancel products that contained chips made by AMD, Intel’s primary rival. Intel disagrees with the ruling., Advanced Micro Devices (AMD, Fortune 500) will report its second quarter results in one week.

Taking into account the one-time charge, the Santa Clara, Calif.-based company’s net income was $1 billion, or 18 cents per share, for the three months ended June 30, compared with net income of $1.6 billion, or 28 cents per share, for the same quarter one year ago online health insurance.

Intel easily beat analyst forecasts. A consensus estimate of analysts polled by Thomson Reuters, which typically excludes one-time charges, had forecast a profit of 8 cents per share.

Without adjusting for the one-time charge from European regulators, Intel posted a loss of $398 million, or 7 cents per share.

A good sign for tech: Intel (INTC, Fortune 500) is something of a bellwether for the tech sector. Investors watch its results as an indicator of spending on personal computers and servers. Intel makes the chips that power PC, and when manufacturers anticipate more consumer demand, they increase their purchasing with Intel.

"While the global economic environment is still recovering, our customers signaled increased confidence for a seasonal second half with their ordering patterns," said Otellini in the conference call after the report was released.

Consumers and businesses have been looking to get the extra mile out of their computers — and put off buying a new one — as they try to save money in the recession.

Demand in Asia was the quickest to recover. "Globally, we saw strength in Asia-Pacific, particularly China, where their stimulus programs continue to generate meaningful growth in their PC market," said Otellini on the conference call. "The U.S. also had a strong quarter while Europe’s recovery lags that of the U.S. and China."

One of the contributing factors to a recovery in demand was the decline in inventories, which fell $240 million in the second quarter. "The supply chain began refilling inventory positions that had been depleted over previous quarters," said Stacy Smith, CFO, on the conference call.

Reaching outside the PC market: Sluggish PC sales have stung Intel, and investors are waiting to see whether a rebound in PC sales will be enough to revive Intel.

Intel and Advanced Micro Devices have the market cornered for the chips that go into standard personal computers, while Samsung and Texas Instruments (TXN, Fortune 500) have most of the market share for mobile-phone processors. At the end of June, however, Intel started working its way into the cell phone business by announcing a deal with the number-one cell phone maker, Nokia (NOK).

At the time of the announcement, Nokia and Intel would not provide any product details other than saying that they would collaborate to developer a new line of "mobile computing devices."

Intel is the first of three major technology companies to report its second-quarter financial performance this week: Google (GOOG, Fortune 500) and IBM (IBM, Fortune 500) are both set to report on Thursday after the bell.  

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A self-styled bridge between Wall Street and Main Street is showing some cracks. Now the question is whether Washington might try to shore it up.

CIT Group (CIT, Fortune 500), the New York-based lender to small and midsize companies that got $2.3 billion in taxpayer funds in December, has been reportedly in discussions to get additional government assistance. As of late Tuesday, those discussions were still ongoing.

Though CIT’s shares gained nearly 20% Tuesday, they have plunged some 60% since the beginning of June, to just $1.60 each. And the cost of insuring against a default on its bonds has skyrocketed. The company has also reportedly hired lawyers to explore a possible bankruptcy filing.

The problems at CIT mark the administration’s first brush with financial crisis since the spring’s stock market rally.

While CIT is much smaller than Lehman Brothers, which failed last September with disastrous consequences, the debate in Washington hasn’t changed: Policymakers must weigh the health of the financial system against holding the private sector accountable.

"It’s a balancing act. Everyone has been worrying about bailouts creating moral hazard," said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution. "At the same time, they’re still trying to rebuild confidence in the economy."

Speaking in London Monday, Treasury Secretary Tim Geithner said of CIT, "I’m actually pretty confident in that context we have the authority and the ability to make sensible choices."

Cash crunch

The immediate problems at CIT, which says it has been the top Small Business Administration lender nine years running, center on the company’s lack of access to funding.

Like many finance companies, CIT funded its operations by borrowing in the debt markets. But the collapse of Lehman all but closed those markets to finance companies — prompting CIT and bigger players, ranging from Goldman Sachs (GS, Fortune 500) and American Express (AXP, Fortune 500), to hurriedly convert themselves to banks.

But unlike those firms, CIT has not gotten access to a program that allows financial firms to issue debt backed by the Federal Deposit Insurance Corp cash advance. CIT applied in January to join that Temporary Liquidity Guarantee Program, under which banks and finance companies have issued some $285 billion of guaranteed debt since November.

But CIT’s application is still pending. And an analyst at Fox-Pitt Kelton said last month approval now appears unlikely, given the long lag since the application was filed and the agency’s desire to wind the program down. The program is scheduled to expire in October.

An FDIC spokesman said the agency has been having evaluating the exposure it would take on were it to allow CIT to issue FDIC-backed debt. The Fed said it couldn’t offer any guidance on the CIT situation.

At the same time, CIT’s finances have been weakening. It lost $438 million in the first quarter, as revenue dropped 35%. Moreover, it has $1 billion in maturing debt to pay off next month, as well as $10 billion through the end of 2010.

As a result, all the major ratings agencies have downgraded the company’s bonds over the past week. On Monday both Moody’s and S&P cut CIT’s ratings, with Moody’s citing the firm’s "inadequate progress" in boosting liquidity.

The CIT crisis comes just seven months after the firm sold stock, swapped some new debt for old bonds and submitted to regulation by the Federal Reserve in hopes of regaining its access to funding markets. Executives claimed the moves would be an "inflection point" for CIT, but events haven’t played out as they might have hoped.

"As the bridge between Wall Street and Main Street, CIT remains one of the few significant sources of liquidity for small and mid-sized businesses who are struggling to survive in today’s challenging environment," CEO Jeffrey Peek said in a statement last November, when CIT applied with the Fed to become a bank holding company.

Now, it seems, CIT is struggling to survive as well. 

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