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Memo to Team Biden: Rein in the Export-Import Bank
It leads to cronyism, fights battles it’s not equipped for and may undermine your goals
By Veronique de Rugy
The Biden administration inherits challenges from COVID-19 to China. Amid these urgent problems, it may be getting signals from Capitol Hill and the corporate world that an issue from the last administration, the Export-Import Bank, has been resolved. It may be tempting for the new White House to believe this.
Biden’s team may regard any critique of the bank as left over from the fights waged by market-oriented congressional Republicans against the Obama administration. Indeed, the battle over the bank apparently ended in 2019, when it was reauthorized for seven years and a new board was appointed. That allowed the bank to resume financing its largest loans—which account for 84% of its activities—after a four-year suspension.
The new administration, however, would be wrong to ignore the Ex-Im Bank’s deep-seated problems. It shouldn’t think that the bank is ready to help tackle some of the country’s strategic and economic challenges. To the contrary, unless administration officials examine the bank’s extremely close relationships with large corporate interests, it is virtually certain that the bank will undermine some of President Biden’s goals.
To fund an ambitious agenda and redistribute income to the less well-off, the White House is likely to take aim at what the Democratic Party’s progressive wing calls the “one percent.” It’s not likely that an economic policy based on redistribution will achieve its goals, but there is a serious problem in the U.S. of the government granting privileges to powerful and well-connected companies, often the same ones that make large and regular contributions to political campaigns.
This small group of insiders manipulates the political system to win legislative loopholes, subsidies to favorite exporters, tariffs to protect favored industries, government contracts and other advantageous treatment. Progressives should understand that this cronyism harms everyone, but especially the poor, who don’t have the money to buy political influence. And they should understand that this is what Ex-Im is all about.
While the bank touts its support for small businesses, it’s heavily skewed toward a handful of big corporations. In fact, before the bank went dormant in 2015, 65% of its activities benefited only 10 companies. Just 27.5% of the total dollar value of its loan and other authorizations for the fiscal year ended Sept. 30, 2019, went to small businesses, according to its annual report. This is more than the 25% minimum that Congress mandated at the time for small-business lending but less than the 30% statutory minimum that took effect Jan. 1. Last year, as the pandemic wrecked small businesses, the dollar value of the bank’s small-business authorizations declined by $177 million, to $2.1 billion for fiscal 2020.
The issues with the Ex-Im Bank have been decades in the making. It began during the 1930s and today it provides loans and loan guarantees on preferential terms, as well as working capital and credit insurance, to help U.S. companies sell goods abroad. Its total exposure at the end of fiscal 2020 was $46.9 billion, and this financing is backed by the “full faith and credit” of the federal government. This means taxpayers are on the hook for losses that the bank’s reserves fail to cover. This exposure rate is low compared with its pre-2015 levels because of the lengthy period when the bank wasn’t able to extend large loans.
The Bank of Oil and Gas
Some $12 billion of this exposure—26% of the bank’s portfolio—subsidizes the oil and gas industry, and Biden might want to look at this if he’s committed to taking strong action on climate change. Consider the Mexican state-owned oil company Petróleos Mexicanos, which has been hammered for years by mismanagement, underinvestment and low oil prices. For at least 15 years until 2017, the bank had more loans outstanding to Pemex than to any other borrower. (It’s hard to confirm whether that’s still true because the bank stopped disclosing the identities of its largest borrowers.) In 2015 these loans totaled nearly $7 billion. Shortly before last November’s election, the bank’s board pushed through an additional $400 million in financing for Pemex. Among the critics of this deal was Friends of the Earth.
The Ex-Im Bank has been funding Pemex for 76 years, and advocates for maintaining that financing say it’s needed to boost U.S. exports of oil and gas equipment, which Pemex is supposed to purchase with its loans. However, the bank’s board cast doubt on this at its December public meeting when it changed the bank’s “reach-back” policy. Previously, a foreign buyer had to apply for financing no more than 12 months after making a purchase from a U.S. supplier.
Under the new policy, it appears the buyer can apply for a loan any time after the exports take place. The longer it takes a foreign buyer to decide that it needs an Ex-Im loan to finance a purchase from a U.S. supplier, the less likely it is that the financing is actually needed. During the meeting, the bank’s staff noted the “high incidence of exceptions” to the previous policy. A board member, former Rep. Spencer Bachus, referred to questions about a “Mexican oil company.”
This raises two concerns: that Pemex was on the minds of the staff and leadership as they weakened the connection between bank financing and export sales, and that if this change allows Pemex to get U.S. taxpayer-backed loans long after any U.S. exports have been purchased, then the loans may not be justified. Whatever the bank’s motive, its lending to Pemex ends up keeping a large, troubled client afloat.
The Bank of Boeing
Boeing is America’s largest manufacturing exporter, so the breadth of political support for the aircraft-maker is not surprising. Boeing has taken full advantage, becoming the Ex-Im Bank’s largest exporter client and accounting for roughly 40% of the bank’s loan portfolio. The bank’s support for Boeing swelled during the boom in aircraft demand as the global economy emerged from the 2008 crisis, and it continued even as commercial lenders became more willing to lend to Boeing’s customers without the benefit of an Ex-Im guarantee.
The bank came to be seen as too chummy with Boeing, and that apparent coziness became a political liability for the bank. It helped spark the congressional opposition to the bank’s reauthorization in 2015, as well as the Senate’s refusal to confirm a new board until 2019. But during the time when the bank was prevented from supporting Boeing’s customers, the aircraft-maker still posted record sales.
The thing about handouts to companies is that it’s hard to find a company that doesn’t say it needs the help—that is, until it’s asked for something in return. Early in the pandemic, Boeing turned down $17 billion earmarked in the CARES Act because it did not want to meet the government’s conditions, such as a pledge of stock or warrants, restrictions on stock buybacks or executive compensation, and a commitment to limit layoffs. Boeing raised $25 billion on its own, but still said it plans to cut 30,000 jobs. And it still got government help: Of the four programs that the Ex-Im Bank put forward as economic relief for exporters during the pandemic, at least two appear designed to assist Boeing.
The bank isn’t the only federal agency that may be too friendly with Boeing. The investigations into the two crashes of its 737 MAX aircraft, which cost a total of 346 lives in 2018 and 2019, demonstrated the corrosive effect of cozy relationships for both the regulator and the company being regulated. House and Senate reports on the incidents, led by Democrats and Republicans, respectively, arrived at similar conclusions: that a “culture of concealment” by Boeing, “inherent conflicts of interest” between Boeing and the Federal Aviation Administration, and Boeing’s “regulatory capture” of the FAA were at least partly responsible for putting an unsafe plane into service.
Even during the process to recertify the grounded 737 MAX fleet, the aircraft-maker and the FAA continued to dissemble, attempting to “cover up important information that may have contributed to the ... tragedies.” The incident was the latest in a pattern of corrupt behavior: The Project on Government Oversight, an independent watchdog group, has catalogued 80 instances of Boeing misconduct in connection with government contracts since 1995, resulting in nearly $1.5 billion in fines.
The Bank of the Big Banks
Democrats and Republicans who view Wall Street as having excessive sway in Washington should get to know the Private Export Funding Corp. A lobbying group representing large banks came up with the idea of PEFCO 50 years ago and handed it off to the Ex-Im Bank to wrap it in government guarantees. Last year Ex-Im renewed its mandate for another 25 years. This should disturb the new administration. This hypothetical example in a New York Times op-ed illustrates the problem:
Boeing wants to sell airplanes to China Air. Boeing asks the Export-Import Bank to guarantee a loan to China Air so it can purchase the aircraft. JPMorgan Chase originates what becomes a loan from the Export-Import Bank—guaranteed by taxpayers—for China Air. (The bank earns interest at no risk because, even if the borrower defaults, taxpayers will cover it.)
Then JPMorgan Chase turns around and sells the loan to PEFCO, which buys the loan using debt raised from investors that is separately guaranteed by the Export-Import Bank (again, American taxpayers). JPMorgan Chase is also a major shareholder of PEFCO, and PEFCO can pay its shareholders dividends.
So JPMorgan Chase makes money off these transactions while sustaining zero risk.
And the PEFCO business ‘model’ protects its shareholders from any possible loss because all risk from the original Export-Import Bank loan and the new debt issued by PEFCO falls onto taxpayers.
Banking on Economic Alchemy
Another problem with the Ex-Im Bank is that its use of data sometimes appears to be fast and loose and seems intended to defend a business model that serves itself and its corporate clients. This is evident in the bank’s flagship publication, the annual Report to the U.S. Congress on Global Export Credit Competition (the “Competitiveness Report”), which focuses on what the bank regards as “competition” from other countries’ export-credit agencies. This report is filled with unsubstantiated claims, such as this one:
There is a broad consensus among foreign governments around the globe that supporting exports and providing official export financing benefits a country’s overall economy, as evidenced by the now 115 known official export credit providers around the world.
Hardly. These “115 known official export credit providers,” which include scores of bit players (think Belarus, Swaziland and Zimbabwe), are all fighting over the single-digit percentage share of global trade that is financed by governments rather than private sources. The biggest giveaway about the bank’s misplaced priorities is the cover of the most recent report, which lists the pecking order of export-credit agencies according to their books of business, suggesting that more financing leads to more exports and more jobs.
The report, however, provides enough evidence to prove the contrary. For example, it shows that in 2019, the world’s largest provider of export-credit-agency financing after China was Italy. And it portrays Italy’s use of export credits as potentially threatening to U.S. interests while not acknowledging Italy’s chronically poor economic performance, which undercuts the argument that export credits are an effective policy tool.
In addition, a longer view shows that the U.S. Ex-Im Bank provided more export financing a year on average from 2008 to 2018—which includes three of the four years when it couldn’t back large loans—than any other export-credit agency except China’s, according to Organisation for Economic Co-operation and Development data. At one point, the bank’s financing reached $30 billion annually, which was roughly double the peak amount provided by next-ranked Germany, betraying the argument that the bank is losing what the Competitiveness Report frames as an export-credit arms race. The bank also downplays data on the declining level of export financing from China, making it difficult to assess how the bank should respond to that.
Banking on a New Cold War
Under the Trump administration and with the support of congressional Republicans, the Ex-Im Bank tried to position itself as a key component of the government’s response to challenges posed by China. When the administration and congressional allies attached an unprecedented seven-year reauthorization of the bank to a package of spending bills needed to avert a government shutdown at the end of 2019, they included a Program on China and Transformational Exports. This “China Program” directed the bank to counter Beijing-backed export financing and to promote U.S. competitiveness in high-tech sectors, allocating 20% of the agency’s lending authority, or $27 billion, to the program. The bank is required to report on the results at the end of 2023.
While the best economic outcomes are generated by free markets, national security concerns occasionally outweigh other considerations. But it is critical that any government intervention be designed to achieve at least some of its purpose, while minimizing unintended consequences. The China Program, however, appears highly unlikely to achieve any of its stated objectives.
Late last year, the National Journal published a pair of deep dives into the China Program, pointing out fundamental flaws in its design and implementation that are likely to render it ineffective. The Journal’s Brendan Bordelon relayed the views of anonymous government officials who described the program as “little more than smoke and mirrors meant to appease an administration and Congress willing to back anything that pays lip service to combating Beijing’s rise.”
Bordelon highlighted the program’s misplaced focus on emerging technologies such as quantum computing and artificial intelligence, which don’t need bank financing because their foreign sales would attract commercial financing without government support or would be subject to export controls. In short, the bank is not the right tool to promote U.S. leadership in these sectors, let alone to counter advances being made by Chinese companies.
Even more concerning, Bordelon’s investigation exposed a high level of bureaucratic infighting as the bank attempted to implement the China Program. This threatened to frustrate rather than support a coherent U.S. strategy toward China. In one example of a power grab by the bank, it wrested control of a “tied aid credit fund,” a grant-making facility, from the Treasury Department, ostensibly to sweeten U.S. export contracts in competition with Beijing-backed companies. At only $114 million, however, the fund is too small to make a difference against Chinese megadeals. The fund might be large enough, however, to serve as a slush fund for the bank’s preferred clients.
A Bank for the Many, Not for the Few
It might be easy to dismiss the Ex-Im Bank as not worth fixing or abolishing in light of other challenges that confront the Biden White House. A hands-off approach to the bank certainly would suit its cadre of corporate interests. This would mean that Pemex keeps getting the U.S. taxpayer support that it has enjoyed since 1944. And Boeing would continue getting federal export help despite the corrosive consequences of the influence it wields with the government. With the bank doing business as usual, the one percent get what they want, while everyone else foots the bill.
The bank is not equipped to advance Biden’s priorities across a range of issues, from helping small businesses recover from the pandemic to addressing the strategic challenges posed by China. But addressing the bank’s failings need not dominate the administration’s agenda. Here are some recommendations that should not be a heavy lift but could pay dividends by aligning the bank’s interests with those of the administration and the public:
Do not rush to appoint a new president and board members. From listening to a few board meetings in recent years, it’s clear that board members are an obstacle to reform. From the press releases, it appears that every board decision is unanimous, including the PEFCO renewal and the extra Pemex financing. Once a new board is appointed, the administration’s leverage with the bank is substantially diminished. Without a board quorum, the bank can’t support loans of more than $25 billion, which would force it to focus on small businesses. Instead, the Senate should confirm an inspector general to fill a vacancy that has remained even as the bank has returned to approving large loans.
Mandate that the portfolio be diversified. A portfolio that earmarks 40% for loans to purchasers of Boeing aircraft and another quarter to the oil and gas sector could use some diversification. This would not only reduce the corporate coziness but also taxpayer risk.
Examine the relationship between Ex-Im and large commercial banks. Long-standing arrangements such as PEFCO’s, which benefit big banks while serving no useful policy purpose, should be ended.
Review the China Program. The administration needs to determine whether the program can achieve its purpose. Above all, the White House should make sure that Trump officials haven’t “burrowed in” or that Trump loyalists haven’t filled the program’s leadership positions.
There is no such thing as a harmless government agency. The Ex-Im Bank, like every other government institution, represents the potential either to address a challenge or to make things worse. The bank warrants enough attention immediately to make sure it doesn’t make things worse and, perhaps, actually makes things better.