Balkinization  

Monday, December 08, 2008

It's morning (or perhaps 1937) in America

Sandy Levinson

Perhaps the most important story in this afternoon's NYTimes is not the one indicating probable agreement on a bailout for the Big Three automakers, but, rather, a just-posted story tellingly titled "Illinois Threatens Bank Over Siti-In," about the response by Illinois Governor Rod R. Blagojevich to the sudden shutting down and subsequent sit-in by dismissed employees of the Republic Window and Door Co, who are, among other things, demanding severance and vacation time owed them.

Many employees said they had worked in the factory for decades. Lalo Muñoz, who was among those sleeping over in the building, said he arrived 34 years ago. The workers — about 80 percent of them Hispanic, with the rest black or of other ethnic and national backgrounds — made $14 an hour on average and received health care and retirement benefits....“This never happens — to take a company from the inside,” Ms. Mazon said. “But I’m fighting for my family, and we’re not going nywhere.”

The Governor noted that the Bank of America cut off its line of the credit to the company and demands that they restore it as a condition of doing business with the state of Illinois. More to the point, perhaps is the endorsement on Sunday of the justice of the workers' claims by former community organizer Barack H. Obama.

With regard to the US Constitution, there are at least two interesting features: The first, of course, is federalism, and the ability of state leaders to do things that are harder, if not impossible, for national leaders to do, i.e., threaten the financial interests of a major bank if it doesn't comply with the political vision of the Governor. The second feature, equally obvious, is the ability of the modern state (or State) to impose all sorts of conditions on those seeking state largesse (where largesse can be given a rather broad definition, including access to state contracts). Although I applaud Gov. Blagojevich in this instance, let me say immediately that I would be, shall we say, considerably more concerned if he were threatening to cut off economic relations with the Bank of America if it didn't withdraw a line of credit to, say, Planned Parenthood in order to build a state-of-the-art abortion facility.

In any event, I confess myself exhilarated by having a president-elect who may be unafraid to recognize the existence of class conflict in America and who seems willing to put the power of the United States behind the victims of what in the 1930s would have been called capitalist exploitation (and today can be described perhaps as "the operation of impersonal economic forces"). As John McCain so aptly said, the election was a clear choice between free market ideologues and proponents of "sharing the wealth." We know who won! So whatever explanation one finds most compatible with regard to the present condition of the working class, the central question is "which side are you one?" And former community organizer Barck H. Obama is, I think, giving us an inspiring answer to that question. I don't expect unanimous agreement on this point :)


Comments:

The workers want a federal bailout. Obama says he supports them, but will he provide the money to keep a money-losing factory running? Obama has put his words behind these workers, but will he put the federal treasury behind them? And after them, what of all the other workers in the country--can we allow any of them--any of us!--to lose a job?
 

Thomas is apparently of the opinion that companies do not regularly rely on lines of credit to operate. Addressing the credit crisis does not only involve putting money in the banks; it also requires the banks to resume lending it.
 

PMS, one doesn't address the credit crisis by telling banks to lend money to companies that can't pay the money back.
 

Actually. isn't the issue one of the priority of debts in an insolvency ?

Many countries provide for back pay, accrued holiday entitlements etc to be privileged or priority debts in an insolvency and also for redundancy payments to be guaranteed by the government. There is then some initial cushion for workers made redundant when a company goes bust.

Presumably the bank hopes to take rank as a preferred creditor in the insolvency. I wonder if better insolvency protection for wages already earned, accrued holiday pay and the like might draw the teeth of many protests like these while having no more than marginal effect on the net outcome of the collapse.

And a lot of companies such as this can arise from the ashes as employee-owned co-operatives with the right sort of rescue approach.

The way the world looks, there may have to be quite a lot of innovation in corporate insolvency over the next 2-3 years failing which long dole queues with all the social evils that entails.
 

I just linked back to this in a post about this at the CA NOW blog. In it I included contact links for BOA and Illinois Governor Rod Blagojevich.
 

Read Obama's statement carefully. He said that IF the workers are entitled to unpaid salary and benefits, he supports their argument. Even Rush Limbaugh cannot argue against this cleverly crafted position.
 

PS: Can the governor alone decide that Bank of America cannot do business in the State of Illinois? That sounds pretty powerful.
 

Sandy:

Although I applaud Gov. Blagojevich in this instance, let me say immediately that I would be, shall we say, considerably more concerned if he were threatening to cut off economic relations with the Bank of America if it didn't withdraw a line of credit to, say, Planned Parenthood in order to build a state-of-the-art abortion facility.

Good lord man!

Blagojevich is proposing to deny government contracts to a bank unless the bank makes a loan which will not be paid back to pay off his union political supporters. I am pretty sure I could make a pretty good bribery or government corruption prosecution out of that shake down.

This is coming fast on the heels of that corrupt committee baron, Chris Dodd, calling for the firing of the GM CEO and his effective replacement with a government auto czar as the price for a government bailout of GM. Here we have a slimy politico, who received a sweet heart mortgage deal from Countrywide for providing poltical cover for the Countrywide's mortgage scams, planning to use a government loan to take over and run GM.

When the Dems promised "change," they sure as hell were not kidding. We apparently can look forward to the Chicago machine version of the scene from the movie Goodfellas, where the gang makes a loan to the Bamboo Lounge and then proceeds to run it into the ground and loot it.

Now the guy's got Paulie for a partner.

Any problems, he goes to Paulie.

Trouble with the bill? He can go to Paulie.

Trouble with the cops? Deliveries? Tommy? He can call Paulie.

But now the guy has got to come up with Paulie 's money every week, no matter what.

Business bad? Fuck you, pay me.

You had a fire? Fuck you, pay me.

The place got hit by lighting? Fuck you, pay me.

Also, Paulie could do anything. Especially, run up bills on the joint's credit. Why not? Nobody's gonna pay for it anyway...

And, finally, when there's nothing left, when you can't borrow another buck from the bank or buy another case of booze, you bust the joint out.

 

I don't think the Governor said "in" the state of Ilinois, but "with" the State of Illinois.

I don't know about Illinois state law, but would there not be a duty on the Governor to maximise public revenue? If so, the freedom not to bank with BOA might be contingent on him obtaining equivalent value banking facilities elsewhere.
 

PMS, one doesn't address the credit crisis by telling banks to lend money to companies that can't pay the money back.

Maybe not, but you learn quickly in the mortgage industry that when a bank begins to pull lines of credit, something has gone seriously wrong with the bank. Given the amount of money that we've just injected into the banking industry, one would hope that such actions would be rarer than they are.
 

PMS, I see banks pull lines of credit on distressed/insolvent companies all the time. And we shouldn't hope that they stop doing it--or else we'll need to recapitalize the banks yet again. The point wasn't to turn them into charities, but to allow them to continue to operate.
 

I hope investors will now think twice or three times before buying any Illinois or Chicago bonds; it's pretty clear this corrupt Illinois governor will do whatever will save his political bacon at the moment.

Sandy, if it's such a neat idea to extend a line of credit to an insolvent company, maybe the University of Texas endowment would be happy to give them a couple hundred million to keep going and show support for the working folks. You guys got (or at least had, what with the current collapse) $7.2 billion in endowment funds. But of course, that is liberalism at it's core--think of something good to do and make someone else pay for it and then call yourself a good person. You gonna take a collection at the UT faculty lounge to keep the company going?
 

Oh this is absolutely priceless!

"U.S. Attorney's office says Illinois Gov. Rod Blagojevich is arrested on arrested on corruption charges stemming from the selection of the successor to Obama's seat."

From the WSJ!
 

In an apropos coda to this post, the FBI has arrested Illinois Governor Rod Blagojevich and his chief of staff for trying to sell his appointment to fill Obama's open Senate seat.

In one charge related to the appointment of a senator to replace Barack Obama, prosecutors allege that Blagojevich sought appointment for himseld as Secretary of Health and Human Services in the new Obama administration, or a lucrative job with a union, in exchange for appointing a union-preferred candidate.

Another charge alleges Blagojevich and Harris conspired to demand the firing of Chicago Tribune editorial board members responsible for editorials critical of him in exchange for state help with the sale of Wrigley Field, the Chicago Cubs baseball stadium owned by Tribune Co.

Blagojevich and Harris, along with others, obtained and sought to gain financial benefits for the governor, members of his family and his campaign fund in exchange for appointments to state boards and commissions, state jobs and state contracts, according to the charges.

"The breadth of corruption laid out in these charges is staggering," U.S. Attorney Patrick Fitzgerald said in a statement.

"They allege that Blagojevich put a 'for sale' sign on the naming of a United States senator; involved himself personally in pay-to-play schemes with the urgency of a salesman meeting his annual sales target; and corruptly used his office in an effort to trample editorial voices of criticism."

Blagojevich is scheduled to appear before U.S. Magistrate Judge Nan Nolan later today, according to Randall Samborn of the U.S. attorney's office.


Now if the FBI would look into Senator Chris Dodd's bit of mortgage bribery and President elect Obama's sweetheart house deal provided by felon Toy Rezko.
 

Given the circumstances of the credit crisis (note the name), I find it peculiar that some just assume the company had "failed" absent the credit problem. Most companies use revolving lines of credit for their operations. If that line of credit gets pulled, even a perfectly viable company will go out of business.

Now, it may be that Republic was not actually a going concern. I'd probably make that assumption myself in ordinary times. But these are NOT ordinary times and what BofA did here is entirely consistent with the spillover of Wall Street's problems to Main Street. It may very well be that credit has dried up (that being the whole problem the Treasury is trying to solve) and that Republic and its employees are innocent bystanders.
 

Now if the FBI would look into Senator Chris Dodd's bit of mortgage bribery and President elect Obama's sweetheart house deal provided by felon Toy Rezko.

# posted by Bart DePalma : 10:29 AM


Baghdad, they'll probably get to that when they're done looking into the war crimes committed by the current administration.
 

Mark, the company is Chicago Windows and Doors. Don't you think it's pretty likely with the new construction collapse there is a lot less need for windows and doors?
 

Mark, the company is Chicago Windows and Doors. Don't you think it's pretty likely with the new construction collapse there is a lot less need for windows and doors?

# posted by Scott : 11:21 AM


It really sucks that the entire window and door industry is dying. Apparently from now on any houses that are built will be windowless and doorless.
 

From the "kick them while they're down" department:

It's beginning to look a lot like Fitzmas?
 

This is getting a bit off topic, but new residential housing sales are down 40.1% year to year from 10.07 to 10.08 and are if anything heading lower. So yes, there will presumably be 40.1% fewer doors and windows sold meaning if you are a door and window company you are in very deep poop, and you are unlikely to be able to keep operating without major layoffs and restructuring. If anything, things are even worse in new construction since the current inventory is building up from already started homes just being completed.

http://www.census.gov/const/newressales.pdf

Having sit-down strikes is not going to change this fact. I would imagine most of these companies will be bankrupt in the next year or two or maybe more until residential construction comes back. But thanks for showing your lack of knowledge Bartbuster.
 

Oh and here from the indictment, Rod did demand firing of editorial writers in exchange for state aid to the Tribune Company:

b. being agents of the State of Illinois, a State government which duringa one-year period, beginning January 1, 2008 and continuing to the present, received federal
benefits in excess of $10,000, corruptly soliciting and demanding a thing of value, namely,
the firing of certain Chicago Tribune editorial members responsible for widely-circulated
editorials critical of ROD BLAGOJEVICH, intending to be influenced and rewarded in
connection with business and transactions of the State of Illinois involving a thing of value
of $5,000 or more, namely, the provision of millions of dollars in financial assistance by the
State of Illinois, including through the Illinois Finance Authority, an agency of the State of Illinois, to the Tribune Company involving the Wrigley Field baseball stadium; in violation of Title 18, United States Code, Sections 666(a)(1)(B) and 2.

So the Levinson hypothetical is actually a reality! This just gets better and better . . .
 

I would imagine most of these companies will be bankrupt in the next year or two or maybe more until residential construction comes back. But thanks for showing your lack of knowledge Bartbuster.

# posted by Scott : 11:59 AM


You're not assuming that MOST will bankrupt, you're assuming they are ALL going bankrupt.
 

Scott, as Bartbuster suggests, you're simply making assumptions that the general condition of the industry necessarily means that a specific company is broke. The auto industry demonstrates the problem -- GM is insolvent, Ford isn't.

You might very well be right about this particular business, but so far you've just assumed it.
 

Mark:

If the company cannot meet payroll out of its current operating income and is not considered creditworthy to pay back a loan out of future income, it is broke.
 

is not considered creditworthy to pay back a loan out of future income

# posted by Bart DePalma : 1:37 PM


Do you know this to be the case?
 

If the company cannot meet payroll out of its current operating income and is not considered creditworthy to pay back a loan out of future income, it is broke.

That brings us back to my point. Companies regularly use lines of credit to meet payroll, and lines of credit are often pulled for reasons other than creditworthiness. The problem is that pulling those lines can cause more problems economically than keeping them in place would, depending, of course, on the specific circumstances. That's the primary lesson of 2007, and I'm surprised it's taking more than a year for people to learn it.

In a perfect economy, yes, businesses wouldn't have to borrow because they would be flourishing. But in reality, many businesses borrow even in the best of times, and this doesn't make them categorically "broke."

Look at the spending patterns of the 107th-109th Congresses for confirmation of this concept!
 

PMS:

Congress has the power to compel income through taxation to ensure the creditworthiness of the United States. Businesses like the Illinois window company do not have this advantage.

There is nothing barring the Illinois window company from shopping among banks across the nation for a line of credit. I have three lines of credit for my firm from different lenders, one of which is out of state. The difference between my firm and the window company is that I have a stream of income from which to pay back any amounts I take from the lines of credit.

The Illinois window company is obviously broke.
 

I have three lines of credit for my firm from different lenders,


Baghdad, is your DWI business so bad that you had to open a window and doors business?
 

The Blagojevich indictment has some fascinating references to Blago having discussions with unnamed "Washington DC Based advisors" angling for an appointment in the Obama Administration while trying to sell the appointment of Obama's vacant Senate seat.

Who exactly are these "Washington DC based advisors?"

US Attorney Fitzgerald certainly did not dampen the speculation that these "advisors" are Obama people at his presser:

QUESTION: [W]ould you address the fact -- and I know you referred to this -- would you just address whether or not President-elect Obama was aware that any of these things were taking place?

MR. FITZGERALD: OK. I'm not going to speak for what the president- elect was aware of. We make no allegations that he's aware of anything. And that's as simply as I can put it.


That was a neat Clintonesque sidestep.

The fact that the Blago indictment did not allege that Obama was aware of Blago's sale of the Senate seat hardly means that Fitzgerald is not aware of evidence of such knowledge gained during the investigation.

Why not a flat denial? Interesting.
 

Overheard: "Why not a flat denial? Interesting.

Overheard elsewhere: ""Why do you keep clapping your hands?" asked a passerby. "To keep elephants away." "But sir," replied the passerby, "we're in the middle of the city; there are no elephants around here." Exactly," said the man as he continued clapping. "It must be working."

On Self-sealing prophecies, where evidence and lack of evidence are taken as probative. A favorite of conspiracy nuts on all sides of the political divides.

Insinuation when we've run out of substantive comments? Boring.
 

Why not a flat denial? Interesting.

Maybe he doesn't presume to have affirmative knowledge. I realize that might be a difficult idea for you to understand.
 

Mr. Obama and is team had better be EXTREMELY CAUTIOUS about what they say concerning their roles in the Blago Senate seat sale.

The indictment makes it clear that Blago tried to sell the Senate seat to Team Obama for favors, but did not receive what he demanded.

The indictment is based upon recorded phone calls which very likely include one or more members of Team Obama, including possibly Obama himself.

Last month, Axelrod told the press that Obama had spoken with Blago about several candidates to fill the Senate seat.

Today, Obama claimed: “I had no contact with the governor or his office and so I was not aware of what was happening."

Now, Team Obama claims that Axelrod was mistaken.

Either Axelrod or Obama was lying and Axelrod had no reason to lie during his press interview.

If it was Obama, does the US Attorney have a tape of Obama speaking with Blago?

This latest example of the Chicago Way where you pay to play is a perfect setting for a perjury trap.

Let us say that Obama and/or his team turned down Blago as they should have done, but failed to tell law enforcement. This probably is not a crime, but it is politically embarrassing.

Now let's say that the US Attorney has the FBI interview the undisclosed "Washington DC Based advisors" - which may refer to Obama and his team members - about what they discussed with Blago. In order to avoid political embarrassment, Obama and/or his team members lie to the FBI in contradiction of the taped telephone calls. Now we have obstruction of justice.

Next the lying interviewee gets hauled in front of a grand jury and repeats the lies he told the FBI, but this time under oath. Now we have perjury.

There is no underlying crime, but all the sudden Team Obama has a major criminal scandal on its hands which may reach the new President.

This is how Clinton was impeached.

This is why Martha Stewart went to prison.

This is how the same US Attorney Fitzgerald obtained a felony conviction of Scooter Libby, although he could not prove that Libby committed the underlying crime of disclosing the identity of a CIA agent.

If he had any contact with Blago on this matter, the best thing for Obama would be to publicly come clean, especially if he turned Blago down. However, during the campaign, Mr. Obama demonstrated a Clintonesque pattern of lying about his politically embarrassing past in Chicago. If he continues to follow that path, it could lead to his downfall.
 

Mark Field: That's a bit of wishful thinking on your part. Most banks do not close down a credit account without reason. BOA did not do this to hurt 300 people in Chicago. This happened because the company's revenue was plunging and because it lacked cash reserves. The fact that without a line of credit, it cannot even pay workers demonstrates its dire economic state. Furthermore, most home renovation companies are performing terribly at the moment. It should not surprise anyone that this company is doing badly.
 

Wow. This Mr. De Palma is some soothsayer!

An idiot savant perhaps?
 

De Palma said: "If the company cannot meet payroll out of its current operating income and is not considered creditworthy to pay back a loan out of future income, it is broke."

Agreed. The problem does not lie with BOA. It's the economy. This is a sector like the financial services industry. A lot of layoffs have happened in banks, real estate agencies, mortgage brokerages, home supply stores, etc. But this one store, having been politicized as representing "good" versus "evil," requires that we toss aside logic.

When Lehman Bros and other financial services companies died, I do not recall liberals saying "please save them." There were secretaries, janitors, messengers, drivers, delivery people, cafeteria staff, and other "working class" people at Lehman Bros. as well -- probably even more than the number of people at this one Chicago store. They lost their jobs because their company's sector declined substantially; the same is happening in this situation. Why the disparate treatment?
 

Darren, you're making the same mistake as Scott did. You just assume that the general problems in the homebuilding industry have affected one particular business. That's possible, but you need to come up with some evidence. As it happens, I personally just bought a new front door. That company is doing still here, and I live in LA.

What's odd about your assumption here is that you're unwilling to apply similar reasoning to BofA's decision to cut off credit. That's exactly the current problem in the financial industry -- credit markets have seized up regardless of the status of the borrower. Despite that, you're unwilling to make assumptions from the general state of that industry to this particular case.

IOW, the assumptions game cuts both ways.
 

Bart,

Any chance you could at least wait until Obama is inaugurated before you start impeachment proceedings?
 

This comment has been removed by the author.
 

Bart cut and paste that last post from his own blog. He's just using this site to increase the audience for the propaganda he posts on his blog.
 

EL:

I just provided legal advice to Obama as to how to avoid impeachment. There is no evidence that Obama provided the bribe which Blago was seeking. The only way Obama can get into trouble is a cover up of his relationship with the slimy Illinois governor.

BB:

Actually, I wrote the first drafts of my commentary on Blago and Obama here and then summarized them with videos and links over at my blog last night.
 

Baghdad, there is no practical difference between copying from here to there and vice versa.
 

It's too bad that little Lisa's bro wasn't around to give similar legal advice to Richard M. Nixon back in the days of Watergate; Tricky Dickie really needed it. But President Elect Obama can take care of himself without this unsolicited legal advice.
 

Baghdad's "legal advice for Obama" looks remarkably similar to "smearing Obama".
 

Bartbuster: Given LSR Bart's extreme right wing political views, it is wholly unsurprising that he should seize every possible opportunity to smear your President-elect - he does not wish the Administration to succeed.

Returning to the real matter at issue, it is undeniable that many businesses will become technically insolvent during the present recession and the banking sector can operate very effectively to make the recession very much worse. A lending bank will often extend credit on the basis that it is repayable on demand and at the same time it will take security over the assets of the business so that in the event of insolvency it recovers whatever there is to be recovered out of the assets in preference to unsecured creditors and with small businesses a bank may also hold the personal guarantees of the principals and charges over their homes as well.

By suddenly withdrawing lines of credit, the banks can do a lot to ensure that a recession turns into a depression. That is why the UK government - faced with much the same problems that you have in the USA is taking powers to limit the powers of the banks to act too precipitately and also directing all banks who have been provided with government funding to direct lending towards small businesses.

There are, of course, two views on the wisdom of so much central direction of the economy and if one looks carefully, the conservative approach tends to favour the services sectors (banks especially) while the progressives tend to favour the manufacturing sectors and would say that much of the health of the services sectors depends on the underlying health of the industrial sectors that actually make and sell things.

Interestingly, LSR Bart said this:-

"There is nothing barring the Illinois window company from shopping among banks across the nation for a line of credit. I have three lines of credit for my firm from different lenders, one of which is out of state. The difference between my firm and the window company is that I have a stream of income from which to pay back any amounts I take from the lines of credit."

Implicit in that is the assumption that Bart's practice income stream will continue unaffected by the recession. While those who indulge in drunk driving will go to almost any lengths to avoid the loss or suspension of their licences, will their ability to pay be unaffected by recession? I wonder. While there is generally an increase of all kinds of crime in a recession, in the UK it is generally the firms who have criminal legal aid franchises who get the benefit. Privately funded criminal defence work falls away because the unemployed do not have the means to pay.
 

PMS:

Congress has the power to compel income through taxation to ensure the creditworthiness of the United States. Businesses like the Illinois window company do not have this advantage.


Revenue, whether income or taxation, doesn't ensure creditworthiness, although obviously it helps. Having secured debt and paying your bills on time does far more for your creditworthiness than your raw income.

However, creditworthiness doesn't ensure credit. The brokerage I work in is often forced to turn away stellar borrowers because increased restrictions in the lending rules have made it extremely difficult to obtain loans. Second mortgages, for example, are almost an anachronism, even for borrowers who make 7 figures and have assets exceeding the amount of the loan!
 

Back to the point, it's not as if the workers are demanding continued employment through the indefinite future from this company. They are asking for unpaid severance pay and claiming a violation of the WARN Act.

They are also claiming that the company is trying to pull a fast one -- close and reopen under another name to avoid obligations to the workers (what's called "alter ego" in labor law).

These allegations may or may not be true, but it would be better to respond to the actual facts here rather than do general tut-tutting about how insolvent companies can't stay in business.
 

jslater:

No one is discussing the motives of the workers or the company. Rather, the subject raised by Sandy was whether it was proper for the now indicted governor of Illinois to shakedown a bank to pay the obligations of the company.
 

PMS_Chicago said...

BD: Congress has the power to compel income through taxation to ensure the creditworthiness of the United States. Businesses like the Illinois window company do not have this advantage.

Revenue, whether income or taxation, doesn't ensure creditworthiness, although obviously it helps. Having secured debt and paying your bills on time does far more for your creditworthiness than your raw income.


I did not mean to imply that income is the only consideration in obtaining a loan, but you cannot get a loan without present or prospective income to repay the loan.

Second mortgages, for example, are almost an anachronism, even for borrowers who make 7 figures and have assets exceeding the amount of the loan!

I amy be mistaken, but isn't a lender's only recourse to recover on a defaulted mortgage is to foreclose and take possession of the house? If my understanding is correct, the amount a prospective borrower makes is not nearly as important as the value of the home because the lender cannot go after the borrower's income.
 

" If my understanding is correct, the amount a prospective borrower makes is not nearly as important as the value of the home because the lender cannot go after the borrower's income."

Maybe I have been too inactive in my semi-retirement from practice, but are residential mortgages, whether first or second, customarily written on non-recourse terms?
 

Mark - I did more than just assume. The company could not obtain credit from BoA or presumably any other source until the political mayhem occurred. It is not the case that no company can receive credit; otherwise, there would be far more bankrupt companies.

Also, the problems of the company are confirmed by events that were happening at the time, but submerged for some reason. The supposedly innocent-company-victim of evil bank actually purchased and consolidated its operations with another struggling company in Iowa. Basically it dumped its Chicago employees to relocate to a cheaper terrain, while "we" progressives secured financing to make them escape any liability for their misdeeds. http://dissentingjustice.blogspot.com/2008/12/made-in-iowa-did-company-in-chicago-sit.html
 

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