Target practice
Another summer in Washington, another Republican campaign against something so obscure that even the Congressional staffers hanging out at the Dubliner near Union Station had to check Wikipedia on their iPhones when the story bubbled up. This time, it's the Export-Import (Ex-Im) Bank, a Federal agency established in 1934 to serve as the official export credit agency of United States federal government. There, saved you the Wikipedia search. One step ahead of the staffers.
Located across the street from the Treasury Department, Ex-Im might be the most convenient political target in Washington. It's old, obscure, and a bank -- everything mainstream American voters despise. It's also immersed in a scandal involving four officials who were suspended for accepting kickbacks. Best of all, its charter needs to be reauthorized in September. It doesn't get any juicier than that.
Kickball
It's field day for the conservative establishment. Everyone, from Congressional representatives to market commentators to policy analysts, is lining up to whack Ex-Im like a red rubber kickball on the Washington mall. There is no question that Ex-Im has to institute major reforms before Congress should renew its charter, but the agency is not "the perfect example of corporate welfare, crony capitalism, fraud and corruption" that some commentators would have you believe.
The Bull Case for Ex-Im
On the contrary, Ex-Im is a self-sustaining organization that serves a vital American interest by helping firms of all shapes and sizes compete internationally. I believe Congress should continue to support the agency for three mains reasons: (1) It generates money for taxpayers; (2) It solves an important institutional void, and; (3) It moves the American economy in the right direction.
1. Ex-Im makes money
Since 2009, Ex-Im has generated $2 billion for American taxpayers. Over the next 10 years, Ex-Im is expected to generate an additional $14 billion. How do they do it?
Three ways: low costs, strong risk management, and volume.
Unlike traditional commercial banks, Ex-Im maintains an extremely lean cost structure. It pays employees public sector wages, maintains extremely low overhead (these are its headquarters), and avoids lavish expenditures. Ex-Im also enjoys inexpensive funding thanks to its relationship with the Treasury Department.
Strong risk management frameworks also abet Ex-Im's profits. Since 1934, Ex-Im has kept its default rate below 2 percent -- a testament to strong and disciplined underwriting practices. Today, the default rate stands at 0.221% and Ex-Im maintains a $4 billion loan loss reserve. Because it focuses purely on international trade and country risk management, Ex-Im also benefits from global diversification.
Finally, Ex-Im operates a high volume business. The agency currently has more than $114 billion in loans and loan guarantees outstanding, including everything from working capital loans to export credit insurance.
2. Ex-Im solves an institutional void
Could the private sector do what Ex-Im does? The answer is no, for at least 3 reasons. First, very few banks have both the balance sheet flexibility and scale to finance the type of transactions that require Ex-Im support. This is not necessarily a permanent condition, but, in reality, it represents an important institutional constraint for businesses trying to access trade financing.
The second reason is funding. Because Ex-Im sources funds directly from the Treasury Department, it can finance these risks at lower cost than traditional lenders. Finally, Ex-Im enjoys economies of scale in underwriting these types of risks, whereas another commercial bank without the same history and processes would struggle to provide underwriting services while maintaining its operating margins.
3. Ex-Im moves our economy in the right direction
Critics of the Ex-Im Bank assert that small businesses benefit little from Ex-Im because a few large companies (including Boeing and General Electric) account for most of the agency's financial support. They conveniently omit the fact that 85% of Ex-Im's transactions involve small businesses. Of course companies like Boeing and GE are going to take out bigger loans than small businesses!
But while we're on the subject, we should note that issuing loans to companies like Boeing and GE benefits Ex-Im in 3 critical ways: first, it enhances the quality of Ex-Im's loan book (GE and Boeing are extremely good credits); second, it indirectly supports massive supply chains (GE has 700,000 vendors), and; third, it increases the agency's profits, which flow right back to the taxpayer.
While Ex-Im alone won't solve our competitiveness challenges, strengthening our export sector, particularly when other countries continue to subsidize theirs, is a critical priority. President Obama has already invested in this notion through the National Export Initiative, and the growing share of exports in US GDP (from 9.6% in 2004 to 13.5% in 2013) shows we're moving in the right direction. Promoting American exports reduces our reliance on borrowed money from abroad and promises to cultivate new sources of demand for American products.
Bruised, not broken
Watching Thirteen Days last night reminded me that some politicians just love extreme solutions. Thank goodness JFK wasn't one of them. Remember when Acheson recommended attacking Cuba? Closing the Ex-Im Bank probably wouldn't lead to WWIII, but there are reasonable solutions that stop short of atomic weapons.
Clearly, the agency needs to launch a massive campaign to understand the institutional deficiencies that led to the recent breakdown in accountability. This is a lay-up for John Boehner. With Tea Party extremists threatening to gain more seats in Washington, Boehner should lead a bipartisan effort, in partnership with the Chamber of Commerce and other business groups, to come up with reforms that Ex-Im would need to embrace before it is rechartered in September.
Help American businesses compete internationally while cleaning up an old, dusty Washington institution? Sounds like a slam dunk to me, Mr. Speaker.
Here's an even bolder move: Ex-Im should come out and say that it hopes not to exist by 2050. Hopefully, by then, the financial system will have evolved to a point where we no longer need Ex-Im, and countries like China will have stopped subsidizing their own export sectors. Like any worthwhile government agency, Ex-Im exists because we need it today. Maybe tomorrow will be different.
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