The Federal Reserve and the Treasury must be patting themselves on the back today after managing to face down the finance company CIT successfully.

After being refused a further public bail-out, CIT managed at the weekend to negotiate a two-year $3bn rescue package with its lenders that keeps it out of Chapter 11 bankruptcy.

The FT points out today that, if CIT had entered Chapter 11, it would have embarrassed the Fed because it declared CIT adequately capitalised when it approved its application to become a bank. The US government also stood to lose $2.3bn in bailout funds handed to CIT late last year.

But even more important than this is the sense that the government and the Fed have regained the authority to allow financial firms to fail and not be pushed into public rescues by the fear of the consequences if such firms founder.

For the avoidance of moral hazard, it is clearly a good thing that CIT’s bondholders have had to restructure their debt and take losses. It has been hard for the government to live down not requiring bondholders of other financial institutions to take a haircut during last year’s crisis.

As part of its new resolution regime, the Treasury should set out clearly the expectation that lenders and bondholders to failed financial firms will suffer along with equity holders in any restructuring.

If Wall Street firms and finance houses find it harder to raise wholesale finance as a result, that would at least provide some disincentive to repeat their past mistakes.