Moral hazard at the Export Import Bank: Private gain vs. social risk

Moral hazard at the Export Import Bank: Private gain vs. social risk

Emirates Air

WASHINGTON, September 30, 2014 — Neal Asbury writes in Money News that Congress’s reauthorization of the Export-Import Bank is a good move. His chief argument in favor of the Ex-Im Bank:

This is needed because private American financial institutions will not collateralize foreign receivables or inventory. Without this, legions of small businesses and entrepreneurs that want to export their products and services would have to be independently wealthy individuals to compete. This would eliminate the vast majority of our exporters and be an incredible setback to our economy and job creation.

We might gather that lack of access to taxpayer guaranteed loan subsidies would have a major impact on, as he terms them, “legions of small businesses and entrepreneurs.” This contention is unlikely in light of the fact that 98 percent of the loans provided to exporting firms are supplied by private lenders.

Contrary to the standard story that paints the Ex-Im Bank as in the business of supporting small businesses, numbers show that despite a greater number of small businesses working with the bank recently, the bulk of the money goes to just 10 large corporations.

Most firms in need of underwriting get it from the private market. This raises questions not only about the miniscule percentage of government backed funding, but the reasons behind why only 2 percent of businesses opt for Ex-Im financing when the majority of businesses don’t.

The picture that emerges of the 2-percent cadre enjoying Ex-Im leverage is of a handful of politically well connected multi-national corporations whose operations abroad favor public underwriting, like Bechtel, the fourth largest private corporation in America, and Lockheed Martin, with $50 billion in assets. Fact: Thirty percent of Ex-Im Bank’s lending was to one large corporation: Boeing.

But, says Asbury:

Since 2009, Ex-Im Bank claims that it’s sustained 1.2 million private sector jobs. And Ex-Im Bank has supported more than $567 billion of U.S. exports, primarily to developing markets worldwide.

When acting as an apologist for Ex-Im, it would be more credible to cite independent sources rather than Ex-Im’s own claims. With regard to those 1.2 million private sector jobs, we should expect an accounting of the methods used to get that figure.

Ex-Im’s claims are subject to dispute. Boeing is an interesting example. Court records from a lawsuit filed by the Airline Pilots Association and Delta Airlines reveal this from the plaintiff’s brief:

The bank’s aggressive approach to aircraft financing allows foreign airlines to borrow at much cheaper rates than they could in the private market. Cheaper financing, in turn, leads to competitive advantages for foreign airlines … shifts industry growth abroad, and puts downward pressure on American production and employment.

“Downward pressure on American production and employment.” This isn’t exactly the kind of salutary outcome proponents of Ex-Im claim.

Ex-Im is frequently referred to by critics in financial circles as the “Bank of Boeing,” and its loans go to mostly state-owned airlines, like Emirates Air and El Al. Such foreign enterprises are not strapped for cash and are not “credit challenged.”

But another beneficiary of Ex-Im largesse, Air India, is a different story. Air India has substantial debt and liquidity issues. So what does Ex-Im do? Provide them with lower than market credit terms. Don’t try that at home.

Andrea Fischer Newman, Delta’s Senior V.P. for government affairs, writing to House Committee on Financial Services Chairman Jeb Hensarling, R-Texas, observed:

Freed from market discipline, Air India began using bank-financed planes to compete aggressively with Delta on our New York-Mumbai route, forcing us to discontinue service on a formerly profitable route that employed numerous pilots, flight attendants, ground crew and support staff. The bank’s support to Air India gave it an undeserved leg up, hurting Delta and our workers.

Supporters of Ex-Im contend that pulling the plug would harm exports and Boeing’s corporate neighbors like Caterpillar and GE, whose export model hinges on Ex-Im in markets where they say commercial lending is scarce. However, lending is not scarce. The real story is that non-government lenders offer credit at market rates that are competitive, but not cut-rate. They offer lending grounded in market capitalism, not state subsidies.

Diane Katz, a Heritage research fellow, observes:

If the bank were stepping in where private investors fear to tread, a larger proportion of its financing would be directed to Africa and Latin America, where risks are greatest. Instead, bank authorizations last year were concentrated in Asia ($9.7 billion), followed by Europe ($5.7 billion) and North America ($3.4 billion). In contrast, Latin America has received $2.9 billion and Africa a measly $600 million.

Even Ex-Im President Martin Kamarck’s statements contradict the notion that trading firms are not able to find funding elsewhere:

This decision (to not provide credits for China’s Three Gorges dam) does not in any way limit or impede U.S. companies from doing business in the Three Gorges project on private terms and with financing from other sources. Already, several U.S. companies have sold between $60 million and $100 million worth of equipment and services to this project without Ex-Im Bank support.

It’s not advantageous to point to multi-nationals like GE and CAT as being vulnerable to loss of Ex-Im credit. According to a recent report by the Senate Permanent Subcommittee on Investigations, Caterpillar off-shored $8 billion in profits to one of their subsidiaries in Switzerland, thus dodging $2.4 billion in taxes. Citizens for Tax Justice looked at 288 profitable Fortune 500 companies and found that 26 of them, including Boeing and General Electric, paid no federal income tax in the five-year period. Skirting taxes while using taxpayers to hedge their foreign bets doesn’t paint this scheme in a favorable light.

Asbury takes a third swing at the ball:

In fact, Ex-Im Bank is self-funded, making money on interest on loan guarantees and credit insurance it provides on behalf of large and small businesses that manufacturer and export American products. Ex-Im estimates it returned more than $1 billion to the U.S. Treasury in fiscal year 2013.

This “in fact” assertion is Ex-Im’s own. But Congress’s embedded Inspector General reported that Ex-Im has “insufficient policies to prevent waste, fraud, and abuse” and also finds “weaknesses in governance and internal controls for business operations.”

The GAO (Government Accounting Office) found “the bank appears to be relying on inappropriate risk modeling that could produce inaccurate estimates of both subsidy costs and potential losses.” The IG also is concerned about Ex-Im’s accounting methods that may put the bank over the $140 billion cap set by Congress.

Apart from all these concerns is a basic problem: the U.S. Constitution. FDR established Ex-Im by executive order in 1934. Executive order? That sounds familiar.

Roosevelt wanted to provide legitimacy to the mega industrialists and bankers who had propped up the insolvent Soviet Union by building factories in Russia in the 1920s, thus enabling Lenin to fulfill the U.S.S.R.’s first “Five Year Plan.” Wall Street firms and American big business bailed out the Communists throughout the Soviet Union’s history. This fact is not in dispute. The Russian’s themselves have documented it.

The broad implications of this, while disturbing, are beyond the scope of our examination of Ex-Im. But such a history brings into question the basic legitimacy of a bank that serves a function not authorized by the Constitution.

The federal government has no authority to use its citizens in an underwriting role for private businesses. The Heritage Foundation and its grass roots advocacy wing, the Sentinel program, are in the forefront of educating voters and lawmakers on the unethical and un-sanctioned breach in the separation of Business and State. In this regard, nothing symbolizes Corporate Welfare better than the Ex-Im Bank.

We hear plenty of talk these days about “Free Markets.” Now it’s time to walk the walk.

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