In this week’s heated debate over the fate of the Export-Import Bank, members of Congress kept returning to the question of what the agency costs the federal government and whether the private sector could bear those costs instead.
In congressional hearings, Ex-Im President Fred Hochberg repeatedly touted the fact that the bank, which facilitates credit for exports with the government’s backing, is “self-sustaining.” He told skeptical members of Congress that the bank sent the Treasury $675 million in 2014 and nearly $7 billion over the past 20 years.
“It is the saddest day for our CFO each year as that money leaves our bank account,” Hochberg said in Senate testimony Thursday.
Conservatives, however, contested that the bank is profitable and alternately argued that if it is, then its functions could be taken over by the private sector.
Whether Ex-Im is profitable is a question at the center of the political fight that is set to roil Congress for the month and one that hinges on a much-debated convention of government accounting.
The bank’s authorization runs out at the end of the month if no action is taken. In years past, reauthorization of the Depression-era institution has been automatic. Now, however, a large number of conservatives view the bank as enabling corporate welfare, picking winners and losers and providing an advantage for companies such as aircraft maker Boeing, which receives credit for foreign sales through the bank.
Supporters of the bank, including business groups and most Democrats, on the other hand, maintain that it is necessary for the bank, with its government backstop, to step in to provide financing when the market won’t. They say that’s especially true in the case of businesses that would be placed at a disadvantage to foreign companies that receive subsidized financing from their governments or for small businesses for which no lenders would finance their sales.
Hochberg on Thursday defended the bank as a “firetruck,” a public service that kicks in during times of financial crisis or when private-sector financing is not available.
But at another point, he said that the bank was “completely self-sustaining. Last year alone, Ex-Im generated $675 million for deficit reduction.”
That line of argument, set Hochberg up for the reverse criticism: If the bank is bringing in money, a private firm could fulfill its role and turn a profit for its owners.
“You’re self-sustaining? If that’s true then I guess you don’t need to be here at all,” Rep. Scott Garrett, R-N.J., told Hochberg during questioning in the House Wednesday.
“We can separate Ex-Im Bank as a self-sustaining — your words, not mine — entity without … any U.S. government support” said Garrett, a staunch fiscal conservative who accused Hochberg of “hurting families, hurting people, hurting children” by picking winners and losers.
Hochberg responded that the fees charged by the bank cover its costs, including loan losses, reserves and administrative costs.
But the question of the bank’s self-sufficiency is complicated by a separate controversy over the accounting used for government credit programs.
Under the Federal Credit Reform Act of 1990, the budgetary cost to the government of credit programs is calculated on an accrual basis: All the future estimated returns on loans, including losses, are tallied up and then discounted to a present dollar amount using the interest rate on Treasury securities. On that basis, Ex-Im was expected to yield more than $14 billion for taxpayers over the next 10 years, then-Congressional Budget Office director Douglas Elmendorf testified in June 2014.
But the budget office and outside financial economists have argued that using Treasury rates to discount future returns on loans neglects an important risk, namely the risk that losses on the loans would come during a broader financial downturn, when loss-averse people place a higher value on investment income.
Using higher interest rates on private securities that reflect that “market risk” to discount future credit losses, Elmendorf testified, Ex-Im would be expected to cost the government $2 billion over 10 years.
Sen. Pat Toomey, R-Pa., challenged Hochberg Thursday on that point.
He argued that the bank receives a “subsidy” that comes “in the form of not being adequately compensated for the risk that taxpayers are being required to take.”
Asked specifically about fair-value accounting on Thursday, Hochberg replied, “I follow the law of the land,” meaning the 1990 accounting law. He added: “I also dispute that number from the CBO.”
Some analysts have argued that fair-value accounting is not appropriate for the federal government, which might be better positioned to sustain losses on loans that come during a downturn.
Nevertheless, that advantage would not apply if Ex-Im were a private company.
Veronique de Rugy, an economist at the Mercatus Center libertarian think tank and prominent critic of Ex-Im, added that the bank would not be self-sustaining without a government backstop because it would face pressure to drop some of its less profitable deals.
Ex-Im, she said, makes more money on loans benefiting larger companies, such as Boeing, that are used to cross-subsidize riskier and thus less profitable loans to smaller business’ customers. A private bank would likely drop the less profitable deals, she argued, saying that “the idea that it would stay exactly the same I don’t think is credible.”
