How Fumbling the Bailout Led to the Chicago Sit In

Over the last couple months I’ve warned that one main reason banks aren’t lending, and are cutting off credit lines to businesses and individuals, is because they are hoarding money in order to buy competitors. In the Chicago factory sit in, the key moment which caused Republic Windows to shut down was when Bank of America cut off their line of credit, which they did just before they approved a $50 billion takeover of Merrill Lynch.

Bank of America has bought out LaSalle Bank and Countrywide, and bank shareholders just approved a $50 billion buyout of Merrill Lynch. B of A has recently settled the largest suit against Countrywide.

Meanwhile, according to a source familiar with the nature of the bank’s finances, Bank of America has issued $9 billion of secured debt insured by the FDIC. Yet, as with almost all banks, it has been tightening its credit to businesses and consumers.

A lot of banks still have plenty of money. Bank of America has plenty of money. The amount of money required to keep Republic Windows open is trivial to them—$10 million, perhaps.

But right now, they as with other banks, are keeping their powder dry. Money loaned out can’t be used to buy up competitors at cents on the dollar.

If the Feds are serious about getting banks to lend again they have to make it clear that failed banks will no longer be sold to their competitors at fire sale prices but will instead be put in receivership and held for years before any sale is considered. This needs to be explicit policy. Until they do, banks will horde cash, looking for their chance at once in a lifetime buying opportunities. All that will happen to the money being given to the banks is that they will use it for more buyouts.

And more businesses like Republic Windows will go under because their lines of credit were withdrawn.

Related posts:

1. Bank Bailout: When a Bonus Exceeds Earnings, How is It Not Fraud?
2. Oversight Done Right: Judge Rakoff Rejects SEC-BofA Settlement
3. The Next Big Taxpayer Bailout? IMF Could Get Hundreds of Billions for European Banks
4. Jim Cramer: “There’s Too Much Democracy in This Country”
5. Barofsky Report: What Happened to All That TARP Money?