On June 13, the House Financial Services Committee's Subcommittee on Monetary Policy and Trade, presided over by the substitute Bill Huizenga, R-Mich., held a hearing titled "Assessing Reform at the Export-Import Bank." The panel consisted of Fred Hochberg, a former executive at Lillian Vernon, reportedly a bundler for the Obama campaign who has served four years as chairman of the Export-Import Bank (Eximbank); Osvaldo Gratacos, the inspector general of Eximbank; and Matthew Scire, a director at the Government Accountability Office (GAO). Huizenga had hoped to force the administration to defend Eximbank, but the Treasury Department refused to supply a witness.
Eximbank is a government-sponsored enterprise that is owned entirely by the federal government and was chartered in 1934 with a mission to support exports in the name of job creation. In general it is supposed to "fill the gap" created when exporters cannot obtain financing from the private sector, and to "level the playing field" versus export credit programs offered by countries that compete with the United States. In a classic case of mission creep, it also has mandates from Congress to lend to small business, sub-Saharan African and renewable energy firms.
Several Republican measures suggested that Eximbank represents a repetition of the case of Fannie Mae and Freddie Mac. Hochberg sought to refute this notion without seeming to realize that most of the points he made worked against his argument.
The context of the hearing was that Eximbank had been reauthorized last year, and plans called for another reauthorization next year, and the members are eager to get started with this process.
In his opening statement, Huizenga noted that as part of the reauthorization last year, conditions were added that called for monitoring of the bank's default rate, to establish a business plan and to submit to a GAO audit of the bank's risk-management practices. Yes, evidently this huge, "too big to fail" federal enterprise had no business plan.
It also has no chief risk officer, even though agencies like it are required by Office of Management and Budget guidance to have one. Six months have gone by since the guidance was adopted, but Eximbank still does not have one, but Hochberg has promised to appoint one "real soon now." An obvious question no one asked is whether Hochberg should hold the combined positions of chairman and CEO.
The ranking Democrat, Wm. Lacy Clay of Missouri, touted the bank's reported low default rate of about one-third of one percent as well as record loan volume to small business, while making $1.6 billion over the past four years.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, found a quote from President Obama calling the bank "little more than a fund for corporate welfare." He cited the presence of Boeing, GE and Caterpillar on the list of the leading borrowers, and another member later noted that just two borrowers account for 65 percent of the bank's exposure.
Hensarling called it "inconceivable that these companies would be in need of a government dole." (When I served on the committee staff, the bank was referred to derisively as the "Boeing Bank.")
Hochberg bragged that Eximbank's lending has supported 144,800 jobs and that this represents approximately 1,000 for each working day, as if such a statistic would be meaningful even if it is true. He also asserted that "more than 80 percent of our portfolio is backed by either collateral or the sovereign guarantee of a foreign government." He appeared not to appreciate the irony of that statement, given the fragility of the eurozone where sovereigns enjoyed ready access to global capital markets just a few years ago.
He seemed impervious to warnings from the bank's inspector general, sitting next to him, that the bank's exposure has spiked by 82 percent since 2008, while its loan loss reserves have shrunk from 8 percent to 4.3 percent.
GAO's Scire followed with a statement that Eximbank's rapid rate of growth "would present challenges to any organization, and [Eximbank] is no exception."
Among the challenges he identified are that the bank's forecasts of future growth have been based on outdated assumptions, and that the bank lacks and understanding of the exposure it faces, because its data is outdated and it is placing excessive reliance on historical data. (What he's trying to say, as every investor should know, is that "past performance is no guarantee of future results.")
The dominant sentiment at the hearing, among virtually all of the Democrats and many of the Republicans, was "Damn the Torpedoes, Full Speed Ahead" and that the current policy is schizophrenic. Congress supposedly put Eximbank on a short leash by extending its authorization for only two years and imposing a bunch of conditions, but by increasing its lending authority 40 percent, it allowed the bank to continue to grow at an unsustainable pace.
Several of the members made aggressive statements on behalf of the bank, and Hochberg seems confident that he can beat back any resistance on the part of a vocal minority of Republicans who want to terminate the bank on the ground that it represents indulgent crony capitalism. His position is bolstered by endorsements from the U.S. Chamber of Commerce, the National Association of Manufacturers and the American Bankers Association, three powerful mainline lobbies. The debate is a microcosm of the larger contest over whether and when to wind down the extraordinary measures the authorities put in place in the name of spurring the economy after the 2008 episode of the ongoing financial crisis.
At a minimum, reformers want to put in place some limits on the power of a strong executive to put the institution through a boom and bust like the one that through Fannie and Freddie into conservatorship.
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