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EXIM’s Fate Hangs in the Balance – of the Senate

Pollsters are predicting that Kavanaugh’s confirmation has - abetted by an influx of Super-PAC spending – galvanized Republicans and enhanced Sen. Mitch McConnell’s (R-KY) chances of retaining Senate control, because of and not despite McConnell’s generally unpopular strong-arm tactics.

Meanwhile, for the last three years with little attention, McConnell has deployed similar tactics to contravene the support of the President and bipartisan Congressional majorities, to all but shutter the U.S. Export Import Bank (EXIM), whose mission is to create jobs. Garnering even less attention is how the Koch Network has used the EXIM fight to advance its perceived interests and bankroll McConnell’s efforts to maintain Senate control, giving him a chance to eliminate EXIM next year.

As the official U.S. export credit agency (ECA), EXIM provides loans, guarantees, and other financial assistance (export support) to facilitate foreign purchases of goods and services from U.S. exporters. Seventy-nine countries outside the United States have ECAs. Because of McConnell’s block of board nominees, EXIM lacks the quorum needed to support deals over $10 million, which historically comprise 80% of bank lending.

Ten years ago, EXIM responded to the Great Recession by tripling export support, financing $30 billion annually of U.S. exports over a 5-year period, creating over a million jobs. Because big deals make money, EXIM made a $3.8 billion profit under Obama. But without a quorum, authorizations fell to $3.4 billion last year. Limited to small, less profitable deals, EXIM now represents a net cost to taxpayers.

McConnell’s Senate has used the Supreme Court playbook to block EXIM. Similar to the Merrick Garland nomination, with McConnell’s support, Sen. Shelby (R-AL) held no hearings on Obama nominees and nominations expired. The Senate went further when Sen. Toomey (R-PA) put holds on Trump nominees and McConnell never bothered to schedule votes to remove holds that would have passed, given EXIM’s 2/3 support in the Senate. EXIM is up for reauthorization next year. In a Republican Senate, Toomey would likely chair the Finance Committee where he could block EXIM’s upcoming reauthorization next year. The U.S. could be the only economy larger than Nigeria without an ECA.

An examination of key Senate races illuminates EXIM’s situation.

In North Dakota, Senator Heitkamp (D-ND) faces an uphill battle in a deeply red state. EXIM doesn’t look like an issue because Heitkamp and her opponent Rep. Cramer (R-ND) are bank supporters. Sen. Heitkamp spoke at EXIM’s annual conference this year. Rep. Cramer participated at a 2017 meeting where President Trump supported restoring the bank’s lending authority and co-sponsored a bill that would give EXIM full authority with a lesser quorum.

But if a Cramer win lets McConnell keep Senate control, his support won’t matter to North Dakota. EXIM supports 1/3 as many North Dakota companies as it did before EXIM lost its quorum. Export support has declined similarly in states of 65 Senators who supported EXIM, including 25 Republicans, many of whom played key roles in Kavanaugh’s confirmation, including Sen. Lindsey Graham of South Carolina, where EXIM previously supported jobs at GE facilities that recently experienced layoffs and could move more jobs to countries with ECAs.

Ironically, job losses would disproportionately affect Republican-dominated rural areas where manufacturing employment has declined. In two key Senate races, Republicans have actively worked against their states’ interests. In Tennessee, Rep. Blackburn was a minority in the House and her own party in opposing EXIM. Tennessee’s exporters include Caterpillar – whose stock just fell due to international competition – and over 100 other companies EXIM has supported. Blackburn would place Tennessee workers at a disadvantage.

In Texas, Sen. Cruz is seeking re-election in the country’s largest exporting state, beneficiary of $3.5 billion per year in EXIM support after 2008. Bank support is now a fourth that much and could fall to zero. Cruz joined McConnell and 24 other Senators in opposing EXIM.

Why would candidates vote against their state’s interests?  The answer is linked to a Koch Network that is an underestimated factor helping McConnell retain control.

Cruz and McConnell are part of the Senate’s informal Tea Party caucus. Blackburn is an informal member of a group that supports the House’s Tea Party Caucus that rose to power after the election of 2010, the year Koch Brothers’ efforts – began in the 1980’s – to gain influence by funding others bore fruit. “Republicans dominated state legislatures, controlled a clear majority of governorships, had taken one chamber of Congress, and were on their way to winning the other.”

Money from Koch’s multi-billion-dollar network is an important factor in key Senate races. Koch and McConnell’s Super-PACs have provided $20 million in the Tennessee race. Where Charles Koch does not actively support Republicans, dark money finds its way to Republican Super-PACs. Despite Charles Koch’s reported feuds, Koch money has bolstered campaigns of Cruz and Cramer, one of Koch’s largest Senate recipients. Super-PACs have helped Cramer close a funding gap with Heitkamp.

Koch loyalists wield real power. Vice President Pence, a Tea Party congressman, has controlled personnel appointments and thus policy-making, along with his former aide and Freedom Partners President Marc Short, who until recently was White House Legislative Affairs Director. Together they erected what was known as the “Short-Pence Fence” that has inhibited Trump from acting on his stated EXIM support. The Heritage Foundation claims the Administration has embraced 64% of the Koch agenda of tax cuts, deregulation, and partial Obamacare roll-back. Reports of any Koch-Trump feud are irrelevant.

Much of this is fairly well-known. Less well-known is Koch’s connection to EXIM and how Koch has advanced its interests through the EXIM fight. Koch is more committed than anyone would suspect to closing EXIM.

Koch’s perceived economic interest in EXIM is complicated but not a secret. Tea Party leaders laid interests bare during 2014 House Finance Committee hearing. Citing Koch ideologues, they proclaimed that programs like EXIM’s “shift production among sectors rather than raise overall employment” and “EXIM creates jobs in export industries by destroying jobs in non-export industries.”

This zero-sum view is incorrect. Government influences activity marginally through taxes or subsidies. But Koch ideologues believe support for one means harm for another, which is bad if Koch isn’t helped. In the transportation sector Koch has targeted public transportation, which doesn’t serve its interests as a producer of gasoline, asphalt, seatbelts, tires and automotive parts.

JLS Capital Strategies analysis shows that, while EXIM helps most U.S. companies, Koch Industries might be correct to think EXIM doesn’t help Koch, which produces commodities that generally don’t need finance. Even if finance might help Koch sales, its unwillingness to share financial statements that EXIM requires precludes use of EXIM finance. Koch perceives foreign companies that use EXIM finance buy U.S. exports as threats to businesses that employ half of Koch’s workforce.

Politically, Koch’s reasons for targeting EXIM are clearer, but require a review of recent history. Despite Koch’s success today, when the anti-EXIM campaign ramped up from 2012 and 2015, the Tea Party had few national successes. “The Tea Party needed a win to assert its political strength and (two of) the bank’s vulnerabilities made it an easy target” said John Hardy of the Coalition for Employment through Exports (CEE). First, as a “sunset agency”, EXIM faced “automatic expiration (and could) end through inaction.”  In June 2015 Rep. Hensarling deauthorized EXIM by not reporting a bill, similar to how a McConnell Senate might kill the bank next year. When a bipartisan coalition managed to reauthorize the bank later that year, a second vulnerability – the need for a Board quorum –has allowed McConnell to prevent EXIM from making large loans.

The anti-EXIM crusade has paid dividends to the Koch Network that are easily seen at Freedom Partners, founded in 2011 to counter U.S. Chamber of Commerce (the “Chamber”) support of EXIM. Fueled by the EXIM debate, Freedom Partners deployed $240 million in its first year of 2012. Ironically, Koch groups labeled EXIM “corporate welfare” while spending amounts – raised from large donors – that greatly surpassed that of alleged corporate welfare recipients, GE and Boeing, approximating the Chamber’s total spending.

If McConnell remains Majority Leader and succeeds in closing EXIM next year, the economic damage may be permanent. As Scott Schloegel, former Acting EXIM Chair put it, “with each passing day that EXIM isn’t fully functional, it is like waves eroding under the foundation of American exporters. When an economic storm blows in, the once-strong EXIM will be significantly weakened – if not completely collapsed – and unable to assist American exporters when commercial bank liquidity dries up.”

A growing economy makes such peril seem far off, but in rural America with manufacturing’s share of overall employment at an all-time low, the economy seems weak. This year’s stock market gains are gone and the Economist is warning of recession. Those not perceiving a threat are overlooking the facts and the lessons of the Great Recession ten years ago when EXIM helped save U.S. jobs.

John L. Schuster, President of JLS Capital Strategies and former Vice President of EXIM’s Structured Finance Division

This piece on the peril facing the Export-Import Bank of the United States (“EXIM”) represents a departure from the financial and technical content that JLS Capital typically provides to the readers of its Thought Leadership by taking a decidedly partisan position in support of the Democratic Party in the upcoming U.S. Senate elections.  JLS Capital is not a political firm and I have been very proud of the close personal and professional friendships I have made over the years with political appointees and career professionals on both sides of the aisle.  However, the decision to become partisan was made long ago by the Tea Party Caucus of the Republican Party and particularly by Sen. Mitch McConnell (D-KY) in his actions to block an EXIM Board quorum and his refusal to consider the will of bipartisan majorities in Congress and the stated support of Presidents Obama and Trump.  To quote Freud, “Love and work are cornerstones of humanness.”  JLS Capital’s sole concern is for EXIM’s mission to support the U.S. worker in competitive export markets.

As a follow-up to this piece,  JLS Capital will present a detailed analysis of the rhetoric and the motivations of the Tea Party and the Koch Network that supports it in pursuing its long campaign against EXIM.

John Schuster