Bank of America Extends More Credit to a Bankrupt Enterprise

BofA to Offer Loans to Illinois Factory

Bank of America Corp. (BAC) said it will provide a “limited amount” of additional loans to an Illinois door-and-window factory, just a day after sit-in protests escalated into an intense labor-relations fight that threatened to have financial ramifications for the banking giant.

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.

President-elect Barack Obama offered support for the employees, saying at a news conference that they are “absolutely right.”

A factory in Chicago declares bankruptcy and the employees stage a sit in for back wages that were allegedly unpaid. The company was forced to close after Bank of America refused to extend further credit to a bankrupt enterprise. State and local politicians roundly condemn Bank of America and the president elect states that the workers were “absolutely correct”.

Result - Bank of America extends more credit to a bankrupt enterprise.

It’s bad enough that the politicians are using taxpayer money to bailout enterprises that perhaps do not deserve anything better than bankruptcy court. Is this the new simpler method of bailout mania - forcing the insolvent banking system to further fund bankrupt companies? Does this remind anyone of central government planning, the same methods that the former USSR employed?

The precedent set here will only lead to further destruction of capital. If the politicians want to become lenders, let them start their own banks with their own capital; they can be certain that they will have many customers and many write downs.

Bank of America should have resisted the political pressure and maintained what little they have left of underwriting standards.

Questions:

How do you say no to the next 1,000 companies that close their doors?

Was this factory the “victim” of a poor economy and Bank of America, or was it just another poorly managed, overleveraged enterprise?

Could the money lent to this bankrupt company have been better employed elsewhere?

Will the government’s vastly increased control over the banking industry (due to bailout funds and equity ownership) result in capital allocation being based on political pressure rather than sound business judgment?

Disclosure: Long BAC.

Comments

[jamesa40:]

Love how the governor of Illinois was calling BofA a corrupt, greedy organization the day before he gets arrested. Classic.

2008 Dec 10 08:41 AM

[wakeupnow:]

The President Elect is wrong. It is not right for a bank to give a non preforming lone to to a bankrupt company. I am sure that the non secured creditors of that company will not see any kind of a return on their receivables. As their companies go belly up are their banks going to come to the aid of thier workers as well? I think not!

2008 Dec 10 09:17 AM

[USER 118677:]

This is what got the banks in trouble with housing. They didn't have the backbone to just say no to people they knew couldn't pay back the loans. Now they are going to support companies that are out of business just to help the unions. DUH

2008 Dec 10 10:40 AM

[Buccephalus:]

I heard Republic bought a similar Glass and Window factory in Iowa a few weeks ago. I also heard their owners bought a multi-million dollar mansion in Chicago last year. If either/both of these rumors are true I wish the media would post some pictures of the house and factory.

2008 Dec 10 10:42 AM

[An Investor:]

Does this mean the federal bank examiners will have to rewrite their handbook on bank exams to include this scenario in future audits? What a crock! As a BAC stockholder (3000 shares) I am writing a letter of protest to BofA about this.

2008 Dec 10 10:56 AM

[athena:]

Simply outrageous!
Time to move, atlas shrugged.

2008 Dec 10 12:20 PM

[Cheryl Cott...:]

Bank of America has a good future. Their stock will make a come back.

The other financials don't understand yet.

2008 Dec 11 12:35 AM

[btlowery:]

I understand the purpose of the wall street bailout was to loosen credit. But do we really want to loosen credit for failing companies? What good is it to extend funds to an already bankrupt firm? Isn't that what got us into this mess, that is, lending money to people who couldn't possibly pay it back? These policy decisions simply drive me batty.

Alternative Analysis through looking at the Dicta.

2008 Dec 11 12:52 AM

[User 317367:]

You ask: "Does this remind anyone of central government planning, the same methods that the former USSR employed?" No, actually, it doesn't. It does remind me of fascism, that other, pragmatic, socialism, which leaves ownership nominally in private hands but strips private property of any rights that the government deems expedient at any given time for any given reason. Ad hoc rather than dogmatic, fascism wisely leaves private owners in place to run enterprises so as to avoid the kind of systemic failure that would result if it abolished private property and markets outright and put its own apparatchiks and intellectuals n charge. These people are unable and unwilling to do the job. Fascism employs a more efficient division of labor than communism: it allows each group to focus on its strengths: politicians and apparatchiks on demagoguery and coercion, intellectuals on elaborate justifications and utopian fantasies, and private owners on profit and survival. It's easier for the government to focus on its areas of expertise--rewarding friends, punishing enemies, creating ever-increasing dependence on itself--and let the private sector (i.e., suckers like us) do the dreary and difficult work of actually producing the goods and services that people want and need in exchange for whatever the government decides to let us keep. Fascism, not communism, has become America's socialism of choice. The people have spoken, for now.

2008 Dec 11 08:16 AM