Tuesday, December 09, 2008

The tyranny of the proletariat

Let’s hope that this is a not a sign of things to come in the Obama administration….

CHICAGO -- Sit-in protests after job layoffs at a local door-and-window factory here have escalated into an intense labor-relations fight that could have financial ramifications for Bank of America Corp.

On Monday, Illinois Gov. Rod Blagojevich, at a news conference in front of the Republic Windows & Doors factory, called on state agencies to suspend business with Bank of America, based in Charlotte, N.C.

The city of Chicago also threatened to stop doing business with the bank.

Gov. Blagojevich's comments came a day after President-elect Barack Obama offered support for the employees, saying at a news conference that they are "absolutely right."

Last week, the factory notified its nearly 300 employees, of which about 80% are unionized, that it would close by Friday because Bank of America had told the company it would be cutting off all financing.

In a statement, Bank of America said that it is "reaching out" to Republic management "to see what they can do to help resolve this issue." But the bank noted that "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."

What we have are former employees of a firm illegally occupying private property and the state of Illinois blackmailing a private company to try to force Bank of America to take responsibility for the collapse of a company. What sort of precedent does this set? If someone with the right connections in labor has their home in Michigan foreclosed by Chase, will the state of Michigan be pressured to suspend doing business with Chase unless the home foreclosure is revoked? This amounts to a heavy handed interference by the state of Illinois in a politically charged situation. How many other businesses that are credit worthy in Illinois do business with Bank of America? Banks are in the business of risk, but that risk is a measured one within carefully constructed parameters. Banks don’t withdraw credit because they are meanies, old white guys sitting around in a boardroom smoking cigars and capriciously withdrawing credit to ruin Christmas. Banks make money by making loans, but banks lose money when they make bad loans. Now the city of Chicago is getting in on the act…

Also on Monday afternoon, 15 Chicago aldermen said they were planning to introduce a city ordinance next week that would require the city of Chicago to stop doing business with Bank of America, including a requirement that the city withdraw all funds and deposits with the bank or any of its subsidiaries.

"It is outrageous for Bank of America to cut off credit, a company's lifeblood, after receiving $15 billion of taxpayers' money as part of the federal government's Troubled Asset Relief Program," said Alderman Joe Moore, of Chicago's 49th Ward.

The fact that BoA received funds from the TARP program (an ill-fated venture from the start) is irrelevant. The TARP program was not intended to force banks to extend credit to non-creditworthy borrowers. TARP does not give the government underwriting authority for private lenders. In fact, it is exactly that sort of government meddling in underwriting that has to a great extent led to the current crisis as borrowers were extended credit that they had no reasonable chance of repaying.

When commercial borrowers are in distress, they are shifted to a specialized group within a bank (often called “special assets groups”) where they are monitored far more closely than normal. I would assume that what has happened in the case of Republic Windows & Doors was that their financials showed a disturbing trend as far as cash flow, debt ratios, profitability etc. was concerned, leading BoA to deduce that they would be unable to continue to make their payments (i.e. “service their debt”). Because of that, BoA exercised their clause that allowed them to cut off credit to the company, which is perfectly legal and is a sound business practice. In fact, to continue to extend credit to a company that is unable to repay that debt is corporate malpractice. If Illinois stops doing business with BoA, that will hurt BoA and help one of their competitors like Chase and Chase has the same business practices, they are also cutting off credit to companies and moving business out the door. It is a reality of the world we live in, credit worthy consumers and businesses will continue to have credit extended to them and non-credit worthy borrowers will not. That is the way it should be. No one is going to, and no one should, give me $500,000 in credit because I can’t pay it back.

The fact that someone has a job at an employer doesn’t obligate, in a free society, that employer’s bank to continue to make credit available to a company that clearly cannot pay that credit back. Despite the ignorant claims of solidarity, the truth of the matter is that for whatever reason this company was in financial trouble (perhaps due to inflated union wages? Hmmm…) and as much as I sympathize with those who are losing their jobs, as I have in the past due to circumstances outside of my control, there is no justification for the extortionist tactics being employed by the state of Illinois and the city of Chicago. This is simple political grandstanding and class warfare at its most grotesque. So much for change...

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