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The entrance to CIT's New York headquarters

HEARTS are definitely hardening. Anyone who read Alex Brummer’s coruscating profile of Goldman Sachs on Saturday will have been left in no doubt that we have moved beyond shock and suspicion and into downright distrust of anything financial institutions tell us.

There’s an argument that this – plots within plots, cold executives prepared to sell their own mothers into white slavery to achieve those all-important bonuses – is what many people want to hear, as they lose their jobs. And as they watch the likes of Sir Fred Goodwin disappear off into the sunset on their private yachts, sailing away from the sea of misery they helped create and on into blue waters.

What most people object to is the ‘double bubble’ – having paid for a bank’s services (often on terms they considered unsatisfactory) first time around, they are now being asked to work and bail them out, shouldering a national debt of the kind last run up to defeat the Nazis, a debt that no one is really sure where it could land the UK economy.

But as it become clear at the end of the week that another US banking group is about to hit the buffers, the doom sayers were reaching for their keyboards again, ready to pronounce more dark days, a tanking anew for the world economy, if the CIT Group fails.

There’s some justification in this: it would be the country’s fourth largest bankruptcy. Although little known outside the US, CIT’s recent history will be depressingly familiar to those who have followed Wall Street’s travails. For much of its 100-year history, it garnered a reputation for specialising in lending to small businesses. After over-extending itself on an acquisition in 1999, it was sold to Tyco International which, when hit by its own operating trouble just two years later, offloaded CIT through an IPO.

Around the same time, it joined the rush towards sub-prime, and student loans, and it didn’t take long before the bank was lending off-book. Like Northern Rock, it went to the wholesale money markets to remedy this. However, when delinquency rates among sub-prime borrowers began to rocket, and inter-bank lending rates rose as a consequence, CIT experienced the same difficulties as Northern Rock in securing fresh lending. It was also partly to blame for the rising interest rates, as it defaulted on over 5% of its commercial loans.

Last year, it converted to a bank holding company in order to successfully attract $2.3 billion in bail-outs from the Troubled Asset Relief Program (TARP). That, everyone agreed, appeared to steady the ship. The Federal Reserve was content to describe it as “well capitalised” until quite recently. Then, with around $1bn to pay out in August, it ran out of money.

By Friday, as CIT scrabbled around among investors and bondholders to find an additional $3bn to survive, Moneyweek was warning that its collapse would throw the US economy (and, by extension, the rest of the world) straight back into recession. There’s some justification in this argument, as its financing fingers stretch deep into the heart of American small business. For example, it provides factoring finance for around one million companies, including 300,000 retailers. The knock-on crunch down the supply chain is almost incalculable if this facility was withdrawn.

There was plenty of speculation that CIT will secure the funding it needs, through creditors that want to see an orderly bankruptcy. It has not asked for, nor is it likely to receive, further TARP funds from the Obama administration, which has let it be known that it is content for the bank to fail.

At least, there is an air of wisdom around this collapse. The bank itself seems to realise (unlike, say, US car manufacturers) that it cannot continue with its current trading model, that it won’t be able to tough it out in hope of better times. And the White House appears ready to dish out some tough love. Despite Brummer’s claims of Goldman Sachs infiltration at the very highest echelons of power, steps need to be taken now to steer out of moral hazard.

Only history is likely to conclude whether bailing out the banks, or leaving them to burn, would have been the best thing for the world economy. To be fair to the Federal Reserve, the Bank of England and others, they took the steps they believed were required with limited information and within an incredibly limited window of opportunity. Those that had subsequently argued that we should have all seen this coming for years do so with the luxury of hindsight.

Today, Lib Dem Treasury spokesman Vince Cable will also tell the London Stock Exchange that banking needs tough love. His suggestion that state-owned institutions like Lloyds and RBS, should be broken up and prepared to be returned to the private sector will chime a lot more with those who want real reform, rather than Tory proposals which appear, on the face of it, to amount to little more than deckchair re-organising.

We’ll have to wait some months before either party’s ideas can become reality. By that stage, CIT and perhaps another couple of financial institutions will have gone. But an ordered bank failure needs to be tested. Dinosaurs that survive a meteor strike are still dinosaurs, with no place in this much-changed world.