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Loan Money, Assume Responsibilities of Borrower?   December 9th, 2008
Labor dispute in Chicago highlights silly logic       


More observations...

As the sit-in at Republic Windows & Doors continues, it really appears that this is an example of absurdity. I've refrained from commenting on it because I was sure I must be understanding it wrong. But it appears I'm correct: Bank of America stopped lending money to a company they were not confident would pay back the loan, the company laid off a lot of its employees, and now those employees (and politicians) are somehow blaming Bank of America.


While it's easy to blame Bank of America for the plant closing, especially in this environment of corporate greed and bailout fatigue, some industry observers said its not the lenders role to ensure the employees get paid.

'I think we would all like to see these people get paid,' said Robert Topel, an economics professor at the University of Chicago. But it's not Bank of America's responsibility to monitor which loans the company pays back, he said, noting it's likely that others didn't get paid from the company. 'Bank of America's responsibility is to its shareholders and to the economic system more broadly.'

What's more, given Bank of America is a recipient of TARP funding, it's in the best interest of taxpayers to make sure Bank of America uses that funding responsibly and doesn't continue to extend credit to a company that will end up failing anyway. Commercial banks have been restricting lending for months now as the financial crisis makes its way from Wall Street to the broader economy. 'Isn't it how we go there,' said Topel of the economic crisis. 'People extending credit to those who couldn't pay it.'

The economics professor really hit the nail right on the head. We got into the current crisis because money was loaned to people that couldn't reasonably be expected to pay it back. Now Bank of America is, apparently, wisely refusing to make a bad loan and now the insinuation is being made that it's their responsibility to make sure that their customer, Republic Windows & Doors, fulfills its obligations?

Certain politicians seem to be suggesting that because Bank of America received TARP funds that it should throw that money away on bad loans so that the employees of this company can get paid. While it's appropriate that the company fulfills its obligations, it can only do that if it has money. Holding Bank of America responsible for their customer's labor relations is just absurd.

Yet the State of Illinois and the City of Chicago are apparently both considering suspending all business with Bank of America--even going so far as to withdrawal all funds from the bank. Under what kind of twisted logic does it make sense to punish a bank because one of its customers isn't fulfilling its obligations? Is the bank that holds my mortgage responsible if I don't pay a contractor for some work I have done on my car?

Update: After posting the above, Bank of America apparently caved to pressure to make a "limited" loan to resolve the labor crisis:


Bank of America says it will extend credit to a Chicago window and door manufacturer whose workers have occupied the factory for five days.

The bank says it's willing to give the Republic Windows and Doors factory "a limited amount of additional loans" so it can resolve claims of employees who have staged a sit-in since Friday...

The bank has been criticized for cutting off the plant's credit after taking federal bailout money.

So the bank took bailout money and then refused to make an irresponsible loan, and then was pressured to make an irresponsible loan because it took the bailout money. It'll be interesting to see if the loan is ever repaid or if this actually becomes the poster child that "personifies" the type of bad loans that led to the credit crisis.

Update #2: Two banks came through with loans to help end the sit-in: http://www.cnn.com/2008/US/12/10/illinois.labor.protest/index.html

Bank of America agreed Wednesday to approve $1.35 million in loans to pay those obligations. Another $400,000 came from J.P. Morgan Chase, union officials said...

"The company told us very clearly they are shutting down, shutting their doors because Bank of America refused to continue their credit and their financing," she said.

So the company is shutting down but Bank of America and J.P. Morgan Chase both loaned the company a total of $1.75 million? Is there any expectation the loans will be repaid? If so, how? If not, did the banks just 'give' this money away to avoid further bullying by a union and to avoid the threats of the State of Illinois?

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