The recent brouhaha over Bank of America’s denial of a line of credit is a precursor of things to come. Late last year B of A, refused to extend a line of credit to the Republic Windows and Doors company of Chicago. Immediately there were howls of protests. Now disgraced Illinois governor Rod Blagojevich threatened to suspend all state business with the bank. Jesse Jackson – as usual – showed up protesting and passing out turkeys to workers who had started a sit in at the factory because they had been laid off without adequate notice as required under the law. Jackson stated that “This is the beginning of a larger movement for mass action to resist economic violence.” Even more ominously Barack Obama voiced support of the workers saying that their actions were justified in demanding their benefits and pay.
So what was all the fuss about? B of A had received $25 billion in federal bailout money which in the minds of Blagojevich, Jackson, Obama and the workers meant that it was obligated to support the company. Never mind that B of A said that the company was not viable. Never mind that this was a bad loan. Never mind that the company apparently could not tap other sources of funds. B ob A was obligated to make the bad loan because it itself was bailed out.
What was interesting is that the B of A and not the company was the object of the protestors. The company said that it could not pay the workers the benefits and pay required by the law because it was out of money. It asked B of A to extend the credit line which Bo A rightly refused to do. So in essence, the company cannot pay back its debt to the bank and the bank is vilified for not making a bad loan.
Bank of America issued the following statement “As a creditor of the company, we continue to honor all of our agreements with the company and have provided the maximum amount of funding we can under the terms of our agreement. By any objective measure, Republic Windows and Doors is unable to operate profitably given the challenges of the current economic climate and its industry. Public statements by management of the company have made this clear. When a company faces such a dire situation, its lender is not empowered to direct the company's management how to manage its affairs and what obligations should be paid. Such decisions belong to the management and owners of the company. Bank of America has worked with the company and shared our concerns about the company's situation and its operations for the past several months. It is unfortunate that the company has been unable to reverse its declining circumstances.”
Well B of A blinked. One week later it announced that it would extend loans to the company to settle the employee claims. It also announced that the loan would not be large enough to reopen the factory. In other words, the bank just knowingly threw money away. Stockholders should rise up and protest. Executives should be fired. But this is simply a precursor of things to come. If you accept the government’s money you are subject to this type of nonsense. Get used to protests, cave-ins, and ultimately the government telling the banks to make bad loans. I know some will say that “weren’t bad loans what got us into this mess in the first place?” The answer is yes and no. Yes the loans were bad ex post. Those loans when granted were good loans. Its hard to make a bad loan in a market that is appreciating by 20 percent per year. The difference is that now the banks will be forced to make loans that are bad when they are made.
Don't get me wrong. I have little sympathy for the bank for taking the government's money in the first place. I have less sympathy for them now. However, this is a warning shot across the bow of all the banks.