December 10, 2008 7:53PM

Banks Adjusting to New Political World

By Ray Hennessey

Chicago, in addition to being the home of one of most delightfully scandalous political dramas in some years, is also the stage where the first act of the new world order for banks seems to be playing out.

At issue are the workers of Republic Window and Doors, which shut its own windows and doors and went belly up after its bank, Bank of America, cut off its credit because, well, it was a bad credit risk. But the workers -- unionized ones, you should note -- refused to budge and were able to attract the media and politicians (including now-indicted Illinois Gov. Rod Blagojevich) to their cause.

The villain, though, turned out not to be Republic, but rather than bank, so much so that Blago himself, a day before sporting handcuffs, said the state would no longer do business with B of A. (Perhaps B of A CEO Ken Lewis should have made a financial offer to the governor. He may have ended up with a Senate seat. But that story is for another time.)

Yesterday, Bank of America caved to the political pressure and decided to offer "limited" loans to Republic. The bank was in an impossible position. On the one hand, it faced criticism that it had received taxpayer money, the union workers who lost their jobs were taxpayers, and, ergo, B of A had bitten the hand that bailed it. On the other hand, B of A received taxpayer funds with the understanding that it wouldn't make boneheaded loans to risk borrowers like -- you guessed it! -- Republic.

Bank of America extending credit should have been enough to end the story. Workers will get severance, Republic will slide from the news, and we should all be able to go back to trying to decipher the redacted, and no doubt delicious, language the governor used when trying to fill the Obama Senate seat.

But there's a coda to this symphony that shows the new political world banks operate under post-TARP.

J.P. Morgan Chase entered the mix, saying it would extend loans to Republic, too. Chase, it turns out, lent $12 million to Republic last year to keep it in business and even got a minority stake for its trouble. (Those loans are now worthless.) Now, it will throw another $400,000, earmarked specifically for worker severance. Those who didn't sleep through Economics 101 see the dilemma here: a company without revenue cannot hope to repay a loan. Therefore, Chase will not recoup its latest loan, nor will Bank of America.

What does Chase have to say to justify the move? Funny, that: company representatives are silent in the Chase press release announcing the move. BUT, there are two people quoted in the release: Illinois Rep. Luis Gutierrez and state Attorney General Lisa Madigan.

Fitting spokespeople for a semi-private enterprise in a post-bailout world.