12/08/2008

Politicians, Reporters and Unions...Oh My!

Last week Chicago manufacturer Republic Windows & Doors closed down for good, citing the withdrawal of a credit line by its main lender, Bank of America, as the death blow to a business brutalized by the housing depression. Ordinarily in a crappy economy, it's entirely unremarkable that a manufacturer of a commodity product would lose its credit lifeline and suffer a sudden irreversible shock and close. But these aren't ordinary times and this isn't an ordinary story:
  1. The lender is Bank of America, a recipient of TARP funds.
  2. Republic's workforce is unionized.
  3. Republic is located in Chicago which is, for now, one of America's media capitals.
Terminated employees are staging a sit-in to force Republic to make good on severance and vacation pay. Congressman Luis Guiterrez and (entering stage left) Rev. Jesse Jackson are "supporting" the workers, trying to get BofA to free up credit for Republic, arguing that lending in this scenario is precisely what TARP was created to foster. Employee unions are claiming that Republic violated its obligation to give 60 day warning of plant closure and alleging that equipment was hustled off the premises in advance, presumably to start up the company elsewhere. Good summary of the players and plot lines here. Governor Rod "This Orange Jumpsuit Is A Little Baggy" Blagojevich has also inserted himself, turning off all state business with BofA until it frees up credit for Republic.

If severance and vacation pay for employees were promised then it's the union's fault for not negotiating escrowed funding. But if Republic is a bad credit risk (I have no clue if it is, but the lender is entitled to decide for itself) BofA should not be forced to extend credit. Thus the peril of TARP, and political investing generally. Extending credit to Republic because politicians can embarrass the lender is bad business but good politics. But as an Illinois voter and taxpayer I'm opposed to forcibly extending credit to the uncreditworthy. This is a classic David vs. Goliath story over which political grievance mongers salivate. BofA's obligation is to lend to the creditworthy, and if Republic isn't creditworthy then lending to them crowds out loans to those who are. When a creditworthy company goes under because Republic got its loan, what will Guiterrez, Blagojevich, Jackson, et al be saying then? I love this from my Gov.:
If the taxpayers who do all the work in our country have already been asked to bail out these big banks, then we expect those big banks to bail out businesses like this ... to keep these workers working.
First, depending on the income level of these workers, there's a good chance they don't pay income taxes, so they didn't bail out the banks that aren't bailing them out. Second, if Republic is a dying or dead business a lender should not be expected to keep them alive. Who's looking out for BofA's shareholders or the taxpayers if BofA is knowingly making bad loans? Should politicians be deciding credit models? Would they even know how? Would G/B/J even care if this didn't fit into the dream narrative: good hearted workers screwed by the Man right before Christmas? When we insist on bailing out dead businesses because it's politically useful, it will never end. Where have I heard that before?

2 comments:

Steven L. Baerson said...

Didn't making loans to those who weren't credit worthy get us in this jam in the first place?

Rational said...

As a lender to businesses owned by private equity firms, I happen to be one of the few that is still open for business. Even we, the beneficiary of a AAA balance sheet, will only be lending to businesses that are of top quality. Two industries that are off of the unofficial approved list: construction of any sort but especially residential; auto. There are others that we view as marginal but those two have been strictly off limits for almost 2 years now.

My firm did not take any government money specifically for this reason. I think it is a very dangerous precedent for the Federal Reserve to strong-arm banks to take bailout funds (people seem to forget that there were a number of banks that did not want the money) and then use that money as a bludgeon to get them to do things that would not otherwise be done. This is why my parent did not take the money. The price was just way too high.