Have you ever heard of Republic Windows And Doors? Unless you live on the North Side of Chicago, you probably haven’t. But they’re at the heart of what is becoming a textbook case in government overreach and willingness to interfere in private business dealings. And no less than the Man of Destiny himself, Barack Obama, has waded into this swamp, with both feet.
Republic is a family-owned business that has been operating since 1965, and had 700 employees as recently as two years ago. On Friday, they closed their doors forever.
Republic is a small-business victim of the “credit crunch” I’ve been telling you about here for sixteen months now. Their business of making new and replacement windows fell off sharply, along with the collapse of the residential construction industry. This is a sad story, which sadly will be repeated many, many times across America in the months and years ahead.
Republic did their banking with Bank of America, which pulled a line of credit from the company late last week, forcing them to close down. That’s what happens in a credit crunch. Now there isn’t enough public information to give you a full picture on the negotiations and other dealings that led to this point, and the company’s website has vanished behind a firewall.
The bottom line is that Republic’s business has largely evaporated. That’s not their fault, nor is it BoA’s fault, but it does mean that it makes no sense whatsoever for the company to continue drawing on credit lines, and it means that it makes no sense for BoA or anyone else to continue extending the credit. You simply do not lend money when it’s not likely you’ll be repaid. If you were a shareholder of BoA, that’s the very last thing you’d want them to do. Banking isn’t charity.
(Side note for the lawyers: yes, I’m well aware that a bank line is a binding contractual obligation. If BoA chose to modify the terms of an existing agreement, they would have had to invoke a material-adverse-changes clause, or force majeure, or whatever. There’s not enough published information to answer these questions yet, although it does appear that this situation has been in negotation for nearly two months now. None of the reporting implies that BoA has broken a contract or acted in bad faith. A spokeswoman for Republic characterized it as an understandable business decision.)
Well, hold on a minute. When you’re forced to shut down a business in a hurry, you make life hell for your employees. And Republic find themselves in the evil position of having to dismiss 300 employees, right before the holidays.
Except that 260 of these employees are represented by the United Electrical, Radio and Machine Workers. Now looking back over the recent history of this company, which has included several recapitalizations and management changes, you have to figure that they had a lot of trouble matching costs to the realities of their business. This is more or less the natural state of affairs when you have a union, as the Big Three automakers could tell you.
Would this company still be in business if their workers weren’t organized? Good question, although their management don’t seem to have been prizewinners either. But leave that to the side.
What the union is doing now, is literally occupying Republic’s production facilities and refusing to allow themselves to be locked out. In effect, the company can’t shut down because their workers won’t let them.
The union is demanding 60 days’ severance and vacation pay for all the affected members of the union. They’re citing a Federal law that requires companies to give 60 days’ notice before closing a plant. But the law contains exceptions for unforseen circumstances, and I’m sure all of this will get thoroughly aired in the months of ugly legal proceedings to come.
Now, at long last, we come to the nut of the story, and why I’ve recited it all to you here.
The union has decided that Bank of America is to blame for the fact that Republic Windows And Doors is going out of business. Accordingly, they’re demanding that BoA lend enough money to Republic to pay out the 60 days’ severance and vacation pay to the unionized labor.
When I first heard this story a few days ago, I thought what you’re thinking now: boy, this is stupid. The bank isn’t liable for a business failure, and they can’t flush their own money down a rathole, for a large number of very good reasons.
But that wasn’t the end of the story. Illinois governor Rod Blagojevich said that his State does business with Bank of America that’s worth hundreds of millions of dollars in fees and commissions. And that the State of Illinois would pull their business from Bank of America unless they funded the union’s demands.
This is also incredibly stupid. You don’t poke your nose into the dealings of private businesses if no laws were broken. And Blagojevich knows that.
And then it got even more stupid yet. Barack Obama, no less, was asked about the situation in a press conference on Sunday. And he expressed support for the workers. He was quoted in various wire stories to the effect that his plans and programs would need to “get money out the door” and help ordinary people.
Fair enough, Mr. Obama. And I know as well as anyone that the ongoing efforts to stabilize the financial system have been mysteriously unsuccessful at getting banks to start lending again. (Well, it’s mysterious to some people, maybe. Not to anyone who’s ever seen the inside of a bank.)
But the President-elect of the United States has implicitly given his support to an attempt by the State of Illinois to blackmail a private corporation into modifying the way it makes business decisions.
Now this tells you one of two things about Barack Obama: either he’s incredibly unaware of the effect that his words have, now that he’s the President-elect. Or, which would be far worse, he actually believes that it’s appropriate for Illinois to strong-arm the Bank of America into flushing its depositors’ money down a toilet, in order to get an ugly but isolated situation out of the headlines.
The President-elect needs to stand up and clarify which of these two possibilities is the truth.
But still, all of this is in the realm of the stupid and un-noteworthy. I’m about to tell you why it’s not stupid at all. Instead, it’s something that should frighten the heck out of you.
The reason you need to be frightened about the behavior of a grandstanding Governor and a clueless President-elect, is to be found in the rationale being given for why Bank of America should be required to pay severance to the workers who lost their jobs.
It goes back to the TARP financial bailout plan. Bank of America is one of the companies who, on October 13, were informed by Treasury Secretary Paulson that they would be required to sell big chunks of preferred stock to the government. The point of this was to ensure that the key players in the banking system had adequate capital. (In fact, many of the biggest are now overcapitalized, far beyond historical norms.)
Bank of America was forced to take about $15 billion in new capital at that time, and had to submit to a raft of new restrictions on its business, including limits on executive pay. (According to a timeline published by Republic Windows and Doors, this was just two days before the negotiations began, that finally led to Republic’s failure.)
It’s the position of the State of Illinois that, because Bank of America has received taxpayer funding, they ought to make and/or modify ordinary business decisions according to the wishes of the State.
Ok, look. I’ve always been a strong proponent of free markets. But free markets are no longer something we should expect to continue in America. We had this debate during the Presidential election, and our side lost the debate.
Elections have consequences. Barack Obama promised so many times to interfere in free markets, that we simply have to live with the fact that free markets in America are a thing of the past, and perhaps of the future, but not of the present. This is what Americans voted for.
And what of the Bank of America, and all the other banks that have accepted Federal assistance and are watching this case with their eyes peeled?
Well, put yourself in their position. You base your whole business on decades of experience in managing risk. The cost (and therefore the price) of credit depends on the risk in each situation. But now, a new risk has appeared: the risk that entities of government will step up and tell you to extend credit to people you wouldn’t otherwise have done.
How do you react? No excrement, Sherlock! You raise the price of credit sharply to compensate you for the increased risk of loss. And at the margin, you’ll curtail your existing books of business, and you’ll stop expanding credit.
Go back and look at the history of the Great Depression. State legislatures enacted all kinds of statutes throughout the Thirties to make it harder for banks and other financial intermediaries to sieze collateral and do other normal things to manage their risk. There’s ample evidence that these statutes, well-intentioned as they were, exacerbated the fundamental problem that remained in the US economy after the financial crises of the early Thirties were quelled.
In short, from about 1933 until the war, credit formation by private banks ran well below historic and sustainable levels. That’s the true reason the Great Depression lasted as long as it did.
Again, the only word I can think of for Barack Obama’s response to this situation, is clueless. He’s supporting government behavior that, if sustained widely, is exactly the kind that can easily turn the current recession into something far, far worse.
Neil Stevens
Steve Maley
He's also tacitly supporting Rod Blagojevich's play.
Moe Lane (Diary) Tuesday, December 9th at 5:31AM EST (link)Which says volumes about the possibility that anti-corruption efforts in Illinois are about a month and half from coming to an abrupt stop.
The Kim Kardashian of blogging.
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That's the way I read this too (nt)
kowalski (Diary) Tuesday, December 9th at 9:03AM EST (link).
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The first thing I thought when I saw this story on TV was....
JadedByPolitics (Diary) Tuesday, December 9th at 6:41AM EST (link)those protestors are going to be a lot more poor if they continue to protest and not look for another job! The smart person of that group will be at a competitior or pounding the pavement looking for gainful employment while the other 199 continue to whine!
Unified Patriots – How-To:
Activists Taking Action
No, Jaded, that's how conservatives would handle the situation.
Vegas_Rick (Diary) Tuesday, December 9th at 10:53AM EST (link)These folks are “entitled”!
“God is great, beer is good and people are crazy.”- Billy Currington
“Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘press on’ has solved and always will solve the problems of the human race.” Calvin Coolidge.
You are right about that because I would have...
JadedByPolitics (Diary) Tuesday, December 9th at 11:01AM EST (link)been the one out of two hundred that was going to find the next job. These idiots wasting their time protesting and then they will be begging for handouts for Christmas!
Unified Patriots – How-To:
Activists Taking Action
A couple of thoughts struck me
bk (Diary) Tuesday, December 9th at 7:08AM EST (link)* One of the workers we were supposed to feel sympathy for was a woman from Cicero who told a reporter in Spanish that she only had enough savings to cover a month in her home with its $1,800/mo mortgage payment. What? That means the house must be worth at least $250K, which is well above the price of the average house in Cicero. Can’t they come up with a better sob story than that?
* I read that Jesse Jackson was passing out turkeys to the squatters. If they’re sitting in, how can they take them home to put them in the fridge, and why in the hell isn’t PETA there to protest on behalf of these poor slaughtered turkeys? Just because you’re upset over losing your job shouldn’t mean you can get someone to brutally murder an innocent turkey on your behalf, right?
nice manifesto, but not shocking at all
Marcus_Traianus (Diary) Tuesday, December 9th at 7:09AM EST (link)So, truth be told I was in some of the comment sessions when CRA and the Clintonian FHA were being formulated. The representatives told us our credit models were prejudiced against people with lower incomes. The retort was obvious- “no, they were based on an ability to repay and were grounded in real experience”. So the government tossed in Fannie-Freddie guarantees for the mortgages and we
were coercedtried to put a smiley face on the dung pile.With CRA, the Fed’s also essentially legislated extortion. During a time of substantial branch expansion they mandated institutions to make a large amount of “investment” if they wanted to operate in a particular community. These fiats not only kept banks out of certain communities, but also increased credit risk on locally mandated portfolios.
Now our economy is in the tank, thanks largely to their intervention. Yet the knee-jerk reaction is to trust them to fix it? Oh, sure- it’s all those evil bankers. If anybody buys that, I have a subprime loan for you.
The stories above were all before the government actually owned a stake in the financial institution business. Now, not only do they own a stake in that industry but are set to destroy other sectors of the economy. It may take many years for the ripples to be felt in our economy, but get ready to see the gates of hell.
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
Socialist Starts out small then grows and grows
Greg (Diary) Tuesday, December 9th at 7:43AM EST (link)http://www.outsidethebeltway.com/wordpress/wp-content/uploads/2008/04/che_obama_1.jpg
Hehe...
mikefisk (Diary) Tuesday, December 9th at 8:36AM EST (link)After all, if there’s somebody that knows a thing or two about breaking laws, it’s Blagojevich…
“Once within the maw of Leviathan, degree of digestion is irrelevant.” – Michael Fisk
9.25, -4.77
One more aspect of the BofA case
tankertodd (Diary) Tuesday, December 9th at 9:01AM EST (link)Don’t forget that not only was BofA forced to take the government capital, but it’s also forced to hold onto it for three years and they are also forced to pay interest on the money. I believe either 5-8%. So in effect the bank is obligated to make a return on the money. So it’s then obligated to get the same return on it. So how will they do that by lending to this outfit?
People call the financial investments from the government a bailout, but that’s not accurate in the sense that a bailout is a gift. This absolutely was not a gift to banks. Money to GM, that would be a gift, given that gifts are not expected to be repaid.
———————————
The way to stop discrimination on the basis of race is to stop discriminating on the basis of race – Chief Justice Roberts
I wonder if Obama would be so quick to interevene
kowalski (Diary) Tuesday, December 9th at 9:11AM EST (link)I wonder if Obama would be so quick to intervene if the plant closure was happening in … Montana, say? Or Georgia?
I have the feeling that this is a political grandstand for Blagojevich and Obama in their own back yard. It’s called “to the victor goes the spoils.” It’s going to be interesting to see how often and where else things like this are repeated, because it’s quite clear from what you’ve said in this post that they cannot simply force banks to lend to companies that have no prospect becoming profitable, even if they restructure — without creating massive and deleterious side-effects.
Defend Liberty — Join the NRA | Live in Massachusetts? Join GOAL.
Honestly, I see no surprise in any of this
Shoebox (Diary) Tuesday, December 9th at 9:15AM EST (link)Look at what Obama said over the weekend about how anyone getting govt bail out assistance should “share benefits and burdens.” There’s no doubt that Obama does believe that BofA is now required to perform “social dogooditness” based upon the whim of any Democrat politician anywhere.
BofA should pull out of Illinois...
izoneguy (Diary) Tuesday, December 9th at 9:58AM EST (link)…and then you will see what idiots Blagojevich and Obama are.
This looks like crap that used to go on in eastern europe.
The window company was a victim of the times. Companies go out of business. People lose jobs. I think you are going to see more & more of this. The government’s grandstanding will only make it worse.
Between now and Jan 20th I would bet we are going to see this story played over & over. Those workers can demand all they want but you cannot squeeze blood from a stone, even though Obama will try.
Those workers need to file for unemployment and start applying for jobs elsewhere. This factory is gone and they all need to move on.
The point cannot be made often enough: Modern liberalism, as embodied in the Obama presidency, is the defender of the status quo. And the status quo is a road to economic ruin. Political forces cannot redistribute the wealth that the economic system does not produce.
I'm a shareholder of BAC
Darin_H (Diary) Tuesday, December 9th at 12:40PM EST (link)And I don’t appreciate a bank being forced to pay severance to a bankrupt company. Loan out money so they can shut down and not repay the loan? Pass.
A visionary coward says that anger can be power, as long as there’s a victim on TV – Flat Top, Goo Goo Dolls
Francis, you are a generous person
The_Gadfly (Diary) Tuesday, December 9th at 1:03PM EST (link)referring to Obama as clueless. I think he is quite cluefull and intends to remake our economy as far along socialist lines as his Marxism will permit without getting himself impeached.
I concur with your analysis of what will happen if Blagojevich’s directive to state offices stands.
I disagree with you about whether or not Americans voted against the free market system in the election, or at least, whether or not they THOUGHT they were voting against the free market system. I’m quite certain it wasn’t debated. The One campaigned on Hope and Change, and the MSM deigned it Double-Plus Good for us to enact that Hope and Change to improve the lot of Citizens of The World, and hence also even the plight of the typical citizen of the united states. There was no debate on the issues, only endless platitudes and memes.
My other thought is: Is what Blagojevich did actually legal? I thought states could only ban business with companies that were in violation of federal or state laws. Since it isn’t illegal for banks to not loan money to companies in or on the brink of bankruptcy, the state has no basis for following the directive. I was actually expecting BofA to be drawing up a counter suit right about now.
BoA made a decision to support funding...who's putting on the pressure?
ekevlar11 (Diary) Tuesday, December 9th at 5:53PM EST (link)http://news.yahoo.com/s/ap/20081209/ap_on_re_us/workers_takeover
This is just wrong on so many levels. Here, let me give money to this failing lemonade stand…take that those of you BoA shareholders. It’s time to purchase other financial instruments than BoA stocks.
Erik
You have to figure that company was already crossthreaded
Achance (Diary) Thursday, December 11th at 1:18PM EST (link)with the State of Illinois. Good union companies stay union in union states for only one reason; that gets them the Project Labor Agreements, the bidder preferences for public work, and the Davis-Bacon wages. If this one was hurting, they hadn’t paid their dues and were being punished. Now Blago et al. are just grandstanding to show “solidarity.”
In Vino Veritas
Even if Obama is truly "clueless,"
Flagstaff (Diary) Tuesday, December 16th at 1:26AM EST (link)he has advisors who can’t possibly be described that way.
One has to assume they’re all purposeful.
“The press is so powerful in its image-making role that it can make a criminal look like he’s the victim and make the victim look like he’s the criminal. If you aren’t careful, the newspapers will have you hating the people who are being oppressed and loving the people who are doing the oppressing.”– Malcolm X, Audubon Ballroom, December 13, 1964
Embrace the power of AND
Joliphant (Diary) Wednesday, December 17th at 10:00AM EST (link)He has no clue about the power of his words and he really believes them.
And yes no matter how this turns out the democrats will be spun as the heroes of the working or if it becomes to egregious the story will be buried
“Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it.”
-Thomas Paine: The American Crisis, No. 4, 1777
I got to this one late and have some questions
charliehall Wednesday, December 17th at 6:31PM EST (link)regarding the causes of the Depression:
(1) Didn’t the Smoot-Hawley tariff have a lot to do with turning the Crash into the Depression? IIRC, Britain and other European countries retaliated and trade just about dried up.
(2) Didn’t the fiscal conservatism of the time that insisted on balanced budgets for all government agencies result in reduced government expenditures at a time when they should have been increasing? To be fair here, John Maynard Keynes’ most important work hadn’t yet been published.
(3) I’m not a Fed basher and don’t believe the pundits who blame the fed for everything bad that has happened since 1913, but didn’t the Federal Reserve miscalculate and fail to expand the money supply adequately?
Thanks!
Charlie
Charlie Hall
Yes. No. No.
Diogenes314 (Diary) Thursday, December 25th at 5:45AM EST (link)1) Yes.
2) Hoover should have listened to Mellon and let the then recession run it’s course. Actually he was New Deal before the New Deal-trying to spend his way out of trouble. Of course he was followed by a fellow big spender who believed in meddling in the economy just as much as he did-who created the mythology of Hoover being a uber-capitalist.
I hate Deja vu.
The 1987 market crash was actually sharper than the 1929 crash. Fortunately we had a POTUS who understood economics, and did the exact right thing-nothing.
3) No. The crash was a reaction to excessive deliberate inflation of the money supply in the 1920s. It was actually predicted ahead of time by both Mises and Hayek.
The best book on the subject I’ve run across-America’s Great Depression by Murray Rothbard
Warning to readers-
Diogenes314 (Diary) Thursday, December 25th at 6:04AM EST (link)The above is in PDF form. For an asp version-Table of contents.
Go buy a copy. Just don’t read it and current financial gongs-on together if there are pills or sharp objects around.
52 have already created a Depression...
Rod_Patrick (Diary) Thursday, December 25th at 4:19AM EST (link)and that depression is called Obamanation.