Let me start with full disclosure: I am on the Export-Import Bank’s Advisory Board, and during my career in the US Treasury and the think-tank world I have advocated Ex-Im Bank’s vital role in promoting US exports.
Naturally the Ex-Im Bank has its critics (myself included), and some of the criticisms are justified. But in the current debate over reauthorization of the Ex-Im Bank, the Americans for Prosperity Foundation (AFP) has struck a truly low blow—not only low but without foundation. In its “Need to Know” brief [pdf], AFP highlighted the headline above, a claim subsequently trumpeted by other conservative groups.1
As disclosed in its 2013 annual report, the Ex-Im Bank returned $1,057 million to the US Treasury, representing profits from outstanding loans and guarantees of $114 billion. How can AFP assert a loss of $200 million when the Ex-Im Bank returned over $1 billion to its sole shareholder and paid claims of just $49 million, a default rate less than one-quarter of one percent? Before delving into the details, it’s worth exploring the broader context of this year’s anti–Ex-Im Bank campaign.
On its website, AFP declares its mission: “AFP is an organization of grassroots leaders who engage citizens in the name of limited government and free markets on the local, state, and federal levels.” The foremost “grassroots leader” behind AFP is the billionaire David Koch. AFP opposes nearly all federal credit and loan guarantee programs. While the biggest targets are student loan and federal housing programs, AFP, Heritage, Cato, and other conservative organizations believe that the opportune place to attack is against “corporate welfare”—exemplified by the Export-Import Bank. So, in 2014, as the Ex-Im Bank seeks a 5-year reauthorization, the bank has become the political poster for a far larger agenda. The goal is to close down the Ex-Im Bank and then move on to other targets.
Now the details. The $200 million loss claim is rooted in “Fair Value Accounting,” a concept promoted by Deborah Lucas when she served in the Congressional Budget Office (CBO).2 The concept was subsequently embraced in a CBO publication that draws heavily from the original Lucas paper.3
The core idea of Fair Value Accounting (FVA) is that federal credit and loan guarantee programs should not be scored, for budget purposes, by their annual profits and losses as normally recorded. Instead the question should be asked: “What would the loans or guarantees cost, over their lifetimes, if provided by the private market?” According to FVA, the difference between the assumed private market interest rate and the cost of Treasury funds over the same period represents this year’s “loss” resulting from a federal loan that extends over several years. The “loss” from a federal guarantee is calculated in a similar fashion: The difference between the assumed private market guarantee rate and the guarantee fee collected by the federal agency, again cumulated over the life of the guarantee, represents the FVA “loss.”
Whatever its merits as a general tool for federal budgeting, the FVA concept has severe weaknesses when applied to the Export-Import Bank. Off the bat is the startling fact that AFP’s $200 million “loss” figure cannot be found either in the cited Lucas paper or the CBO report.4 Perhaps AFP did its own calculations, but if so the assumptions as to alternative private market loan rates and guarantee fees are nowhere explained.
More fundamentally, an FVA calculation requires both faith in the accuracy of the risk assessments embedded in private market interest rates and guarantee fees and, in many cases, assumptions about the comparable rates and fees. Private market interest rates and guarantee fees reflect guesses about future financial risks. We know from recent US and EU financial crises that private investors often guess wrong, both underestimating and overestimating future risks.
Moreover, comparable private market interest rates and guarantee fees seldom exist as benchmarks for Ex-Im Bank financing. Default rates on Ex-Im Bank loans and guarantees have been extremely low, even during the Great Recession, much lower than Small Business Administration loans and far lower than student loans. While actual Ex-Im default rates are very low, the essential rationale for the Ex-Im Bank is that private loan and guarantee markets are highly imperfect, both for the long-lived capital assets financed by the Ex-Im Bank (aircraft, locomotives, and power plants) and for many small business firms. Consequently reliable private market benchmarks are not to be found.
When they can’t find remotely comparable private lending and guarantee rates, FVA practitioners invoke convoluted assumptions to carry out their arithmetic.5 The ensuing calculations are at best judgmental and speculative—and they work in the direction of exaggerating risk. To be fair, the cited publications by Lucas and the CBO recognize these limitations. But qualifications are tossed aside by the AFP when it claims losses of $200 million. What should be tossed aside is the AFP claim, not the Export-Import Bank.
4. Nor does the figure appear in another study by Lucas and Phaup, “The Cost of Risk to the Government and Its Implications for Federal Budgeting” [pdf], in Lucas, ed., Measuring and Managing Federal Financial Risk (University of Chicago Press, 2010).