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End Ex-Im Bank’s Wild Ride – A Proper Budget Review Will Help Ex-Im Bank Get America to Work

Export-Import Bank employees and supporters had a real roller coaster ride last week. Following a February 9, 2019 announcement by Senator Heitkamp of North Dakota, that President Trump, had agreed to restore full lending powers to the Export-Import Bank, there was speculation that President Trump would use his February 17 speech to Boeing workers at its South Carolina plant to announce a new board member and a return to business for Ex-Im Bank.  His speech even noted that U.S. exporters would soon again be on a “level playing field” with foreign competitors, borrowing a key phrase from Ex-Im Bank’s mission statement. 

But the speech ended with no mention of Ex-Im Bank, leaving its supporters puzzled.  That same day, news broke that Ex-Im Bank was on a list of programs facing the ax under Trump’s first budget, which seemed illogical given that Ex-Im Bank has sent money to the Treasury for years.  Were the two events related?  Did the President intend to restore Ex-Im Bank’s full lending authority, but back down because of dissident chords from his executive team or congressional leaders?  Has Ex-Im Bank and a job creation mission that the President supports become vulnerable because of his Office of Management and Budget (OMB) Director’s perspective on Ex-Im Bank? 

OMB Director Mick Mulvaney was a member of the Freedom Caucus while in Congress, and an opponent of Ex-Im Bank. At OMB, he will put his conservative stamp on administration initiatives.   However, as discussed below, there is no sound basis that should lead any reasonable analyst to conclude that Ex-Im Bank incurs a cost to taxpayers.   This argument should resonate both to President Trump as a businessman and to Director Mulvaney, who now has a responsibility to implement sound budgetary policy and who like me, is the beneficiary of a Georgetown education.  Words we saw each time we entered the library should guide him - “you shall know the truth and the truth shall set you free.”

Since Ex-Im began formal implementation of a budget based on its profitable lending experience, I have heard many arguments – especially from the Freedom Caucus – questioning the Ex-Im Bank’s profitability and asserting alternative approaches that find a net budget cost to the taxpayer. 

The most popular approaches have not involved formal budget analysis, but rather qualitative assessments that replace Ex-Im Bank’s profit and loss data with assumptions of loss. Arguments supporting this approach are replete with rhetorical appeal, but ultimately not sensible.  Ex-Im Bank operates in risky country markets relative to commercial banks.  Ex-Im Bank’s interest rates and fees are lower than commercial rates and this difference is an economic loss to the taxpayer.  A variant of this argument is that because Ex-Im Bank makes loans that commercial banks do not, its loans are not commercial, and thus must be nonperforming, and therefore result in losses relative to those booked in the commercial market. 

Ignoring for a moment that most Ex-Im Bank loans are made in response to foreign export credit agency competition rather than because private banks won’t lend, the argument sounds appealing.   Ex-Im Bank lends mostly in riskier, lesser developed countries, and often charges lower than commercial rates.

Arguments for this approach collapse when one considers that no household, government, business, or bank does or should do its budgeting based on hypothetical alternatives.   Whether a family makes ends meet at the end of the month depends on whether it spends more than it brings in and doesn’t flip from positive to negative because a wage earner could have worked elsewhere.  Government outlays on roads depend on dollars spent and don’t change if one learns of a more efficient way later.  A business’s profits depend on its revenues and costs – again doesn’t become a loss because a sales manager thinks the company’s prices last quarter could have been higher.  In the case of Ex-Im Bank, its transactions have a very low default rate that is much less than its fees and other revenue sources; thus it generates net profit.

The second type of argument that opponents have made to negate Ex-Im Bank’s profitability relies on actual profit and loss data.  Rather than assuming data or a conclusion, this approach makes adjustments – usually to the discount rate, which opponents argue should be higher due to the riskiness of the countries where Ex-Im Bank does business, and thus turn a positive budget to a negative one.

As head of OMB, with responsibilities to implement policy in line with sound budgetary principles, Director Mulvaney will likely follow this second approach, which is a big step forward and one suggested by many people I respect.  There are, however, some serious limitations in using higher discount rates to turn a budget surplus to a deficit.

The biggest problem is that, given the way it conducts business and the fact that Ex-Im Bank has had substantially more money come in than go out, there may not be a discount rate high enough to change profits into losses.  Most of Ex-Im Bank’s business involves guarantees of commercial loans, where the Ex-Im Bank collects fees up-front as loans are made and only pays out money if loans default and can’t be worked out.   Given average fees of about 5%, and an average loss rate of 0.1%, there would be 50 times more money collected than paid out.  Even for direct loans, where loans are disbursed from the Treasury, money is ultimately repaid at the government’s cost of funds (the Treasury rate) plus a premium plus financed exposure fees.  Much more comes into the government than goes out.

So, even with astronomically high discount rates, surpluses may not turn into deficits.  Director Mulvaney and his OMB staff will have the tools, information, and cooperation of Ex-Im Bank staff to figure this out.

Not only will profits not turn negative, profits will not likely be much lower for at least two reasons.  First, a major basis for any bank’s discount rate is its rate of “loss after recoveries.” A low level of losses translates into a low discount rate.  Typically, other than for very high risk category deals where the bank’s discount rates are already very high, Ex-Im Bank doesn’t incur many losses. 

Second, discount rates already reflect added risks to account for potentially risky countries and circumstances.  When Director Mulvaney and the OMB Staff recommend any discount rate changes or other adjustments to the Ex-Im Bank budget model, they will be following in the footsteps of OMB predecessors and bank staff and leadership in doing so.   Even with many adjustments over the years, Ex-Im Bank has a loss reserve that is many times potential losses (which Congress saw fit to increase in Ex-Im Bank’s latest reauthorization), and still continues to send money to the Treasury.

So, Director Mulvaney, like your predecessors before you, please review Ex-Im Bank’s performance carefully.  All Americans care about their dollars being spent efficiently and effectively and it is OMB’s role to ensure this is indeed the case.    

President Trump should have confidence that once his OMB Director has completed a responsible review worthy of his university’s integrity and works conscientiously with OMB and Ex-Im Bank staff, who have a demonstrated level of concern for the U.S. taxpayer, there should be no budget costs to cut.  Appoint members to the board and implement an agenda we all support – putting America to work.

Miki FlamenbaumComment