(RTTNews) - Hedge fund manager John Paulson is considering the idea of merging troubled commercial lender CIT Group, Inc. (CIT), with failed mortgage lender IndyMac Federal Bank (IDMCQ.PK), the New York Post reported, citing people familiar with the matter. Shares of CIT are currently trading higher by around 11% on the New York Stock Exchange following the reports. IndyMac shares spurted more than 34% in OTC trading.

Paulson and his hedge-fund firm, Paulson & Co., was part of a group that purchased the failed Pasadena, California-based IndyMac from the Federal Deposit Insurance Corp. earlier this year. IndyMac's failure was reported as the second-biggest by a U.S.bank. Paulson also holds substantial debt and equity stakes in CIT.

According to the daily, the merger has not been part of any formal discussions between CIT and IndyMac, but a plan that some creditors including Paulson have floated. It was also indicated that a merger between the two banks as one of the several options to help bailout CIT, which came very close to declaring bankruptcy. The merger would also help IndyMac with plans to diversify its portfolio away from mortgages to commercial loans, since the CIT Group is one of the largest lenders to small and medium businesses in the U.S.

Earlier in July, in an effort to avoid bankruptcy, CIT had secured a $3 billion loan facility from a group of its major bondholders. The lender at that time said that the deal with bondholders would enable it to reduce debt load, strengthen its capital position and alleviate pressure to pay down $1 billion in debt that was due in August.
CIT had received a $2.3 billion capital infusion from the federal government after it was granted a bank holding company status in December. Although the company sought additional help from the government, the Obama administration declined to help the lender, saying it had set high standards for granting aid to companies, leaving private investors as the lone alternative for the company to avoid a collapse. CIT was also refused access to the Federal Deposit Insurance Corp.'s debt-guarantee program.

On August 18, 2009, CIT reported a net loss for the second quarter that narrowed from the year-ago period, and included a hefty loss from discontinued operation. The results reflected heavy impairment charges and a significant increase in provision for credit losses. The company indicated that it intends to pursue restructuring plans outside of the bankruptcy court. The company, however, may need to seek relief under the U.S. Bankruptcy Code if its restructuring plan is unsuccessful.

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