Friday, March 09, 2007

Banking On Bankruptcy

"Employees would be paid before bankers if a business goes bankrupt under a bill introduced this week by Sen. John Lehmann, D-Racine."

Sounds great at first but let us think this one through. Lehmann's bill would make lending to businesses a more risky proposition. Banks tend to be conservative lenders, insisting on such things as collateral. If loaning to businesses becomes unacceptably risky for banks, they will invest elsewhere. In other words, Wisconsin businesses will not have the same access to capital relative to businesses in other states. This will put Wisconsin businesses at a competitive disadvantage. With less access to capital, more Wisconsin businesses will more likely go bankrupt.

Will this be a good thing for Wisconsin's workers?

7 comments:

Conscious Thought said...

Is this a good thing? Its excellent. Your scenario will hardly ever be a reality for a few reasons...

1. Banks are no longer the monoply when seeking capital, they're actually becoming the minority.

2. Banks will still offer loans to higher credit risks, and of course the businesses will pay for this.

3. Businesses or anyone for that matter, can access capital from any source, practically anywhere in the world.

4. Banks need to invest, thats how they stay in business. No investing = no bank.

5. If you as a business owner still rely only on banks as a means to capital, your business most likely doesn't have longevity anyways.

Denis Navratil said...

The bill proposed by Lehmann would result in higher rates and less borrowing options for businesses. Why would less access to capital at higher rates be good for businesses or their employees? Why is this excellent, unless you harbor some hatred for the banking industry and the customers that they serve?

Conscious Thought said...

One word. Competition is why its excellent. If banks see that existing and potential customers are getting capital from other lending sources, to the point its effecting their bottom lines, changes will take place to make themselves more competitive, hence loosening up guidelines a bit to compete. Banks need to accomodate businesses, not the other way around.

Denis Navratil said...

Remember CTW, this proposed law is supposedly about protecting workers. If businesses go elsewhere (other than banks) for cash, and those other sources of cash are not subject to Lehmann's new law, then the problem (of creditors being paid before workers) will remain. Bottom line is that if laws are written that increase the risks associated with lending money, then less money will be available to borrowers. Again, how is this good for businesses or workers?

Anonymous said...

The workers cleary shoudl be paidd for their labor. The banks accept risk as part of their lending decision. If this means that some poor credit risks dont get loans, why si bthat a bad thing?

Denis Navratil said...

anon, when a business goes bankrupt, someone, perhaps everyone is going to lose money. If a business accepts a loan with strings attached (ie, collateral) then they should lose the collateral to the bank during a bankruptcy. If loan collateral is sold to pay off whatever may be owed to employees, then you can be sure that banks will not loan to businesses under those circumstances. My point is that neither businesses nor employees will be better off if banks stop lending money to businesses.

Peter said...

The workers cleary shoudl be paidd for their labor. The banks accept risk as part of their lending decision. If this means that some poor credit risks dont get loans, why si bthat a bad thing?

Clearly a product of our gummint-run skoolz. Try learning how to spell and use proper grammar or risk appearing to be a functional illiterate.

That said, should contractors who do work for business who go BK get stiffed? They have bills to pay, payrolls to meet, families to support. Why should a business that goes BK be allowed to take care of its own people first?

Besides, it's the federal government that sets BK law. I doubt seriously that this would be upheld without a change in federal BK law.