New York, Nov. 2 (Reuters): CIT Group Inc, a lender to small and medium-sized businesses, filed for bankruptcy as the global financial crisis left it unable to fund itself and the recession clobbered its loans.

The bankruptcy, which is one of the largest in US corporate history, has been widely expected for months and is unlikely to provide a massive near-term shock to the financial system. But CIT’s trouble could further weigh on the fragile US economy.

The bankruptcy is also a blow for the US government, which invested $2.33 billion in CIT in December through the troubled asset relief programme and will lose most of it. Taxpayers will receive money only after the bank debt and bond investors are repaid. The bankruptcy will translate into the first realised loss for the government from TARP.

CIT had fought activist investor Carl Icahn, who said he was CIT’s largest bondholder, over its future plans. But late last week the two resolved their differences. Most of CIT’s creditors have already approved its reorganisation plan, and the company hopes to emerge from bankruptcy by the end of the year, around the time when chief executive Jeff Peek is slated to resign.

Getting through bankruptcy quickly is crucial for CIT if it wishes to keep its customers, including Dunkin’ Donuts franchisees and film producer Dark Castle Entertainment.

“The longer a financial institution stays in bankruptcy, the more the value of the business dissipates. It’s faith and trust and perception that are so important for a financial institution,” said Jack Williams, a bankruptcy law professor at Georgia State University College of Law.

CIT does intend to stay in business and its operating subsidiaries were not part of the New York bankruptcy court filing.