One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said.

*****

Under the bankruptcy plan, senior bondholders would trade their current debt for new debt maturing later worth about 70 cents on the dollar. They would get 92.5% of the equity in a restructured CIT. Junior bondholders would get the remaining equity in a reorganized CIT, but no new debt.

The 101-year-old lender accounts for about 60 percent of fashion's factoring volume and lent the apparel industry about $4 billion last year, according to estimates.

"We believe this plan maximizes franchise value and can be executed quickly and effectively through a series of voluntary debt exchange offers or an expedited in-court restructuring process," said Jeffrey Peek, chairman and chief executive officer. "Upon completion of either alternative, CIT will be a well-funded bank holding company with a strong capital position and market leading franchises."

The group's profitable factoring business, Trade Finance, on Friday got a boost when $1 billion was earmarked to fund the operation, a move aimed at proving to vendors that CIT has the money to fund clients' needs. One source said that of the $3 billion loan facility provided by a group of CIT's major bondholders, $2 billion was made available on July 20 and the final $1 billion was made available on Friday. The parent in turn is earmarking $1 billion for its factoring arm.

In a letter to clients, John Daly, president of Trade Finance, wrote that "CIT Trade Finance is one of the nation's oldest providers of factoring and financing services. The companies that have placed their confidence in us — our clients — range from family-owned and -operated manufacturers to global publicly traded corporations. ...To demonstrate our parent company's commitment to support CIT Trade Finance and our clients, CIT Group Inc. has provided $1 billion of the proceeds from its recently announced financing to CIT Trade Finance. These funds are in addition to other available funding. We believe we have sufficient liquidity to meet our obligations and our clients' needs while our parent company implements its restructuring plan."

CIT Trade Finance "remains open for business. We are actively reaching out to and working with our clients to ensure they continue to access our services needed to run their business. Credit is being checked, invoices are being collected and funds are being remitted," Daly emphasized.

"This definitely relieves their customers' concerns that CIT doesn't have the cash to continue to support them. The factoring group is now able to pay on all of the collections and claims that come in as part of the normal course of business," said Gary Wassner, president of Hilldun Factors, who has been vocal on behalf of the Council of Fashion Designers of America about the need for federal government intervention to save CIT because of its importance to the fashion and retail industries.

Many vendors who use CIT as a factor were clearly panicked. "I've had 26 calls from garment center companies since 12 p.m. yesterday," said bankruptcy attorney Jerry Reisman, a partner at Reisman, Peirez & Reisman. "It's going to have such a ripple effect that the government doesn't understand. Tomorrow, if it's payroll day, how will these manufacturers be able to obtain money for payroll?" Steven Kolb, executive director of the Council of Fashion Designers of America, said designers were concerned. "They don't really know where to turn when the government isn't going to bail out CIT," Kolb said. "There is a level of unfairness when you look at some other industries that have been bailed out."

Fitch Ratings said there was a "high probability" that CIT would file for bankruptcy soon and also cut the firm’s credit rating on $35 billion in debt to "C" from "BB-minus." Ultimately, it might be CIT's own clients who sink the company by drawing down their credit lines, in effect making a run on the bank and soaking up its reserves. "The company's already tenuous liquidity position has been further eroded as its customer base has likely been drawing down on its availability credit lines," Fitch analyst Vincent Arscott wrote in the downgrade.

The ramifications of a failure could be both subtle and dramatic. "A lot of easy money that helped this industry for a long time is not going to be around," said David Strasser, an equity analyst with Janney Montgomery Scott. "There's going to be a product that nobody's going to expect to be big....and they're not going to be able to get it out there."

The disclosure raised the possibility of a bankruptcy filing by the financial giant and left many vendors and retailers in limbo about how they'll finance their fall shipments and finance their businesses. "This is terribly upsetting," said Gary Wassner, president of Hilldun Factors. "This will upset the entire shipping season. It will be very disruptive. I am surprised that the government would not think about the thousands of people that would be affected. This also impacts so many people on the periphery [of the apparel industry]."

Hours before the 6 p.m. announcement from CIT, there was a flicker of optimism when trading was halted on the lender's stock in the final half hour of trading, with shares up 3 cents to $1.64. Considered a likely prelude to a major announcement just as President Obama was being briefed on the situation. Hope surrendered to fear just two hours later. The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. have been discussing whether to rescue CIT, which already received $2.33 billion in federal funds.

******

Kevin Burke, president and chief executive officer at the American Apparel & Footwear Association, said members of his board estimated CIT represents about 60 percent of factoring volume within the apparel industry. A failure "would be another nail in the coffin," he said. "It would be devastating. It would have a very strong impact on the industry's ability to get products to the consumer."