Chicago Standoff, Redefaults Bode Ill for Bank Shares

Illinois Governor Rod Blagojevich's decision to suspend all state business with Bank of America (BAC) on Monday was disturbing enough for those who believe that political appointees have no business micro-managing lending at the street level. But President-elect Barack Obama’s endorsement of the labor sit-in at Republic Windows and Doors may well qualify as a sharp, early warning to managements of banks who are part of the $8 trillion government aid package: you must lend tax-payer dollars to protect jobs.

It appears that Bank of America canceled Republic’s credit line after key borrower warranties were breached; and that Republic, in turn, informed its workers that it could no longer comply with pay and benefit obligations. Neither Governor Blagojevich nor Barack Obama expressly stated that their demand to fund Republic to ensure compliance with labor contracts was linked to the inclusion of Bank of America in the first $700 trillion bailout package; but several Illinois spokespersons and Washington lawmakers have been touting the standoff at Chicago’s Republic as just one key example of how the Troubled Assets Relief Program (TARP) is helping Wall Street and not Main Street.

Bank of America received $15 billion as TARP capital; Merrill Lynch (MER), which Bank of America is in the process of buying, has been allocated $10 billion. But does this money come with a must-lend condition? And is the Illinois Governor aware of the most-recent results of the rush to lend in the housing sector?

More than half of troubled borrowers who have already had their payment terms adjusted (eased) six months ago are still at risk of losing their homes. “I do have a concern about money for loan modifications, particularly with such a high rate of re-default,” said John Reich, director of the Office of Thrift Supervision on Monday at a Washington conference. “Focusing on job creation is a better way to focus federal dollars than on a loan modification process which may only be partially effective.”

According to statistics released by the Office of Comptroller of the Currency (OCC), which studied loans modified in the first two quarters of 2008, the proportion of “re-defaulters” reached a high of 58% over an 8-month timeframe. Regulators now publicly acknowledge that banks will foreclose on 2.25 million homes this year, more than double the one million annual foreclosures before the housing crisis began, despite intense efforts by lawmakers and regulators to remedy the situation. The OCC statistics include data provided by Citigroup (C), Bank of America and Wells Fargo (WFC).

With respect to the Chicago sit-in, Republic’s own announcement on Monday clarifies that the company commenced an “orderly” winding down, triggered by deteriorating business conditions alone, in mid-October and that the request to Bank of America to release funds for employee vacation payments was made only after two company liquidation proposals were formally rejected. To further complicate matters, persons affiliated with Republic bought a similar plant in Iowa last month through Illinois-incorporated Echo Windows & Doors; in 2007, the owners of Republic bought a $2.6 million condominium in an elite Chicago neighborhood.

Quite clearly, regardless of the fact that 300 workers are being denied pay and benefits, injecting pro-worker (socialist) politics into bank lending practices signals the start of a dangerous trend. Jessie Jackson is just one of the several high-profile politicians who have visited the workers at Republic’s factory and declared that, following receipt of billions of tax dollars, Wall Street banks have an obligation to protect jobs. As the facts show, the aggressive drive to protect defaulting homeowners is turning into a counterproductive exercise. Now, this determination to protect jobs in failing businesses is bound to have serious repercussions on the ability of banks to restructure their balance sheets.

Even before the Chicago standoff, this writer has been decidedly bearish on banking and finance shares. Monday’s developments in Chicago, and the OCC statistics, only serve to further bolster the dynamics of a sell-on-rallies strategy.

Disclosure: Author holds a short position in C

Comments

[1worldcurrency:]

Pro-worker does not mean socialist just as pro-business does not mean fascist. You ask whether TARP money comes with "a must-lend .condition".

I doubt it. Paulson and Congress want to just steal from the taxpayer and give to banks. Great job by the Illinois governor, saying f#ck you to big fat Bank of America.

2008 Dec 09 02:56 AM

[James Wilson:]

Bank of America says: We will enjoy the Bush Tax Cuts funded by the money you pay into Social Security Bush used to off set his Tax Cuts but when it come to helping a business stay in business forget you !!!!!!!!

2008 Dec 09 05:53 AM

[Kingnukem:]

Amazing. Who really believes that pumping money into any failed business saves anyone's job? Unless the business is Amtrak.

2008 Dec 09 08:11 AM

[john in mad...:]

I agree with '1 world currency' above. You are a prejudiced idiot if you think a policy that is pro-worker is socialism. The purpose of the TARP was to buy up troubled bank assets in order to free up capital so banks will lend. This is exactly the scenario discussed by congress prior to the TARP funding, that is, if Congress did not act banks would stop lending to business, cutting or reducing lines of credit that are the lifeline of businesses whose business is cyclical. Congress may have left out specific requirements in the legislation but the banks know what was expected from them in exchange for this money.

2008 Dec 09 08:45 AM

[john in mad...:]

II disagree with 'Kingnukem" above. Many businesses that have a cyclical business depend on lines of credit to cover daily business expenses (rent, salaries, utilities etc.) while the wait for their yearly income. I used to be in the window business, and try as we might, winter is a very big slow down in sales. Nobody wants his or her windows removed in the dead of winter. The consequence is that window companies have a severe slowdown in sales in winter, which causes them to rely on lines of credit until their busy spring/summer/fall season. They spend the time building product for spring installations and accumulating materials for the big installation season. This is not a failed business, but it did fail because Bank of America apparently cancelled a line of credit. The bank decided to keep the tax money we gave them to pay dividends and buy other banks.

2008 Dec 09 08:55 AM

[john in mad...:]

I disagree with 'Kingnukem" above. Many businesses that have a cyclical business depend on lines of credit to cover daily business expenses (rent, salaries, utilities etc.) while the wait for their yearly income. I used to be in the window business, and try as we might, winter is a very big slow down in sales. Nobody wants his or her windows removed in the dead of winter. The consequence is that window companies have a severe slowdown in sales in winter, which causes them to rely on lines of credit until their busy spring/summer/fall season. They spend the time building product for spring installations and accumulating materials for the big installation season. This is not a failed business, but it did fail because Bank of America apparently cancelled a line of credit. The bank decided to keep the tax money we gave them to pay dividends and buy other banks. Reply |Report abuse

On Dec 09 08:11 AM Kingnukem wrote:

> Amazing. Who really believes that pumping money into any failed business
> saves anyone's job? Unless the business is Amtrak.

2008 Dec 09 08:57 AM

[sumosama:]

Minor point...The Reverend Jackson is not a politician in the true sense of the word...he has never been elected to anything.


So a bank making a transactional loan decision, one that seems intelligent given the limited facts, warrants the wrath of the state of Ill? That is ridiculous!

Is the mantra now, "Make only good loans, unless they are too our friends or constituents!".

2008 Dec 09 10:05 AM

[Still Renting:]

"Illinois Governor Rod Blagojevich's decision to suspend all state business with Bank of America (BAC) on Monday was disturbing enough for those who believe that political appointees have no business micro-managing lending at the street level. "

More importantly, right now the gov is in police custody.

2008 Dec 09 11:57 AM

[sumosama:]

how funny is this!!!

www.azcentral.com/news...

2008 Dec 09 12:17 PM

[Dayton Cooper:]

Don't blame Bank of America. Blame the executives of Republic Windows and Doors who probably made millions. If they are concerned that much about the workers severance and vacation time, let the executives pay back enough money to cover it. Illinois Gov. Rod Blagojevich is probably upset that the executives of Republic Windows and Doors won't donate to his reelection campaign or political party unless he performs for them.

2008 Dec 09 06:07 PM