EXIM’s Fate Hangs in the Balance (of the Senate) – A Story of Koch Network Rhetoric and Power
“Love and work are cornerstones of humanness.” – Sigmund Freud
The Export-Import Bank of the United States (EXIM) is fighting for its life. Less than a decade ago, following the Great Recession, the bank nearly tripled its activity to $30 billion/year and created over a million jobs in a five year period. But for the last three years, Senate Majority Leader McConnell, a member of the Senate’s informal Tea Party Caucus, has worked with other Tea Party members to undermine the will of bipartisan majorities in Congress to block Obama and Trump nominees to EXIM’s board of directors. Without a necessary board quorum, the bank has lacked the authority to make loans over $10 million, which have historically comprised 80% of EXIM’s business. Authorizations have fallen to $3.4 billion. Because big deals make money, a $3.8 billion taxpayer profit under Obama has become a cost under Trump.
As the official export credit agency (ECA) of the United States, EXIM provides loans, guarantees, and other financial assistance (“export support”) to facilitate foreign purchases of U.S. exports. EXIM’s official mission is to level the playing field for U.S. workers competing with 79 other countries that are backed by a total of 94 ECAs, accounting for 94% of global economic activity.
Without an ECA, small businesses, manufacturers, and workers are at a competitive disadvantage.
EXIM’s Dilemma – Key Questions
EXIM has endured many attacks that are described in this article, but for the last three years and likely through next year, the “crocodile closest to the EXIM boat” has been the Senate and Majority Leader Mitch McConnell (R-KY). To prevent EXIM from restoring a board quorum, McConnell’s Senate has followed a playbook similar to the one used to stall Merrick Garland’s nomination. With McConnell’s support, nominations expired because Sen. Shelby (R-AL) held no hearings on Obama nominees. The Senate went even further when Sen. Toomey (R-PA) put holds on Trump nominees as well. McConnell never scheduled votes to remove holds that, given EXIM’s 2/3 support in the Senate, would have passed. The lack of quorum continued.
Next year, if FiveThirtyEight is correct and Republicans keep hold of the Senate, Toomey would likely chair the Finance Committee where he could block EXIM’s upcoming reauthorization next year. EXIM’s authorization would expire in late 2019 and the U.S. would be the only economy larger than Nigeria without an ECA supporting its exporters in international markets.
How could this have happened? What has inhibited the President from bringing back an agency he presumably supports? What can be done to revive the bank?
The answers to all three questions have common roots – the Koch Network, which has used the EXIM battle to launch a web of unprecedented corporate influence, which dictates priorities and action in McConnell’s Senate, and commands the President’s attention. For the public good, the long odds in the Senate and huge resources of the Koch Network must be taken on.
Rhetorical Roots and Political Vulnerabilities
The above questions may appear to be rhetorical, but useful answers cannot be. Ironically, the basis of JLS Capital’s non-rhetorical answers is an examination of anti-bank rhetoric that the press never properly dissected and the public has never understood.
The conventional wisdom is that the Tea Party’s ideological concerns are at the root of the anti-EXIM campaign. The Tea Party made first EXIM its mark following sweeping Congressional victories in 2010 because of free market ideology seeking to shrink government and limit distortions of private markets.
But making EXIM a priority appears out of proportion with such goals and even illogical. A small agency of fewer than 400, EXIM makes money. Far from distorting markets, it counters ECA support overseas.
But since 2010, logic has taken on Orwellian qualities in what former EXIM Press Vice President Phil Cogan – with whom I worked closely – called the beginning of the “alternative fact” campaigns that have since dominated news and social media. In one notable episode of my work with Phil, in 2012 the Washington Examiner erroneously charged that EXIM loan were helping solar manufacturer First Solar sell solar panels from its Ohio plant to its own solar farms in Canada, a violation of EXIM’s self-dealing policies. EXIM had announced in 2011 that the loans were for exports to Canadian companies—not First Solar—and within 24 hours Phil successfully rebutted the Examiner’s claims in the press. But by then, the Examiner’s original story had circulated to the FOX News evening broadcast. Three years later the Examiner was still publishing opinion pieces making the same incorrect claims.
“Critics would make arguments based on an alternate reality, where . . . trade unencumbered by government would flourish. But that world didn’t exist and shutting EXIM would just mean unilateral disarmament by the U.S. By assigning junior reporters to cover the bank who simply reported arguments, alternative facts were never critically examined.”
Rather than any ideological sins EXIM may have committed, the agency’s institutional vulnerability is a better explanation for why EXIM was targeted, as a few, including David Weigel, saw. As a sunset agency, EXIM’s “automatic expiration create[d] a situation where you can . . . end a . . . program through inaction—which . . . is a whole lot easier than accomplishing something that required legislation.” Indeed, EXIM was deauthorized in June 2015 when House Finance Chair Rep. Jeb Hensarling (R-TX) refused to report a bill for a vote. While a rarely used discharge petition allowed bipartisan majorities in Congress to reauthorize EXIM by December, the need for a Board quorum – another vulnerability – has since allowed Senators Shelby, Toomey, and McConnell to keep the bank from authorizing deals over $10 million.
“The Tea Party needed a win to assert its political strength and the bank’s vulnerabilities made it an easy target”, said John Hardy of the Coalition for Employment through Exports (CEE). Even for the vast Koch Network, cutting corporate taxes, exiting climate agreements, and gutting the CFPB required the election of a Republican President. Halting EXIM was, for a while, its sole national victory.
But EXIM’s vulnerabilities cannot fully explain its plight. Other agencies have sunset provisions and boards, as explained one bank official. “You could fail to confirm a Board for the Federal Reserve, but practically you wouldn’t want to.”
A more helpful analysis – one that answers relevant questions – must dissect alternative facts of anti-EXIM rhetoric that the media never did, focusing on the three main themes of anti-bank rhetoric.
Ironic Rhetoric – Political Power of Would Be “Losers”
The first key theme of Reform Caucus criticism has been that “EXIM picks winners and losers.” a charge intended to label EXIM the arbiter of which companies succeed and which fail. To trade experts, the charge is quizzical, because exporting is a win-win proposition. EXIM supports small and large business to sell products the world wants by leveling the playing field with other ECAs. If that makes business winners, then kudos to them and their workers who use profits to invest in new businesses and wages to make purchases in the U.S. economy. Where’s the harm?
While this mantra was repeated and EXIM Chairman Fred Hochberg and others effectively and repeatedly rebutted the claim, few understood or explained what the “winners and losers” argument really meant. Ironically, anti-EXIM forces openly explained themselves, but the press never dissected it. The Washington Examiner proclaimed that for every EXIM winner there is a loser. In opening hearings on EXIM’s reauthorization, House Finance Committee Chair Jeb Hensarling (R-TX) cited findings from “a chief government auditor” that programs like EXIM “shift production among sectors . . . rather than raise the overall level of employment ” and conclusions of Professor Boudreaux of the Mercatus Institute, that “… at best EXIM creates jobs in export industries by destroying jobs in non-export industries.”
In other words, there is a zero-sum economy where export support comes at the direct expense of non-exporters – EXIM makes some winners only by making others losers.
This assertion appears illogical and inconsistent. How can a bank often criticized as unimportant because it supports only 2% of U.S. exports do so much harm? Accepted economic theory asserts that government influences activity only marginally through taxes or subsidies. There are very few direct transfers from winners to losers and no zero-sum economy where supporting one party hurts another.
But the Tea Party and Koch Network ideologues clearly believe that support for one means harm for another, which is bad if their interests aren’t served. This same zero-sum view has affected Koch activity elsewhere, including in the transportation sector where Koch has targeted public transportation, which doesn’t serve its interests as a producer of gasoline, asphalt, seatbelts, tires and automotive parts.
Analysis by JLS Capital dissects the argument and quantitatively explains Koch’s perspective.
Koch Industries Not a Winner – Koch Industries may be justified in not seeing itself as a “winner” of EXIM support. As shown in the graph below, EXIM’s activity and Koch’s business are like two ships passing in the night. In the bank’s six largest sectors, comprising 62% of disbursements from 2007 to 2015, Koch’s U.S. businesses generate virtually no revenue. Conversely, Petroleum and Paper Products account for 80% of Koch’s U.S. revenues and only 0.5% of EXIM finance. Apart from Communications Equipment (10% and 3% of Koch’s US revenues and EXIM finance, respectively), there is virtually no overlap.
Perceived Losers – In the world of alternative facts, that Koch is not an EXIM “winner” must mean it has been targeted to lose. Exactly how Koch Industries can lose is a matter of conjecture, but the likely and only realistic channel would be through EXIM’s support of foreign buyer-borrowers that compete with Koch’s overseas businesses, which account for nearly 50% of Koch’s workforce.
Koch’s broad perspective may be shown in the map below, which superimposes Koch’s overseas employment and selected EXIM loans. The bank’s largest borrower, Pemex of Mexico, received $10 billion in guaranteed loans between 2007 and 2015, and operates in Koch’s largest sector, Petroleum Products, where Koch Supply and Trading is establishing a new fuel export route to Port of Veracruz. Koch’s Invista, acquired from DuPont, manufactures nylon, spandex, and polyester in Europe, which is a target market for EXIM borrowers that include Sadara, recipient of the bank’s largest single loan, and Reliance of India. While Koch’s Molex company does not list EXIM semiconductor borrowers among its competitors, Molex is expanding into integrated technology solutions.
That Koch’s opposition to EXIM is partly motivated by how the bank affects its perceived economic interests has been well hidden by Koch’s secretive business practices. Koch produces no shareholder reports and is considered notoriously opaque – described as “literally and figuratively a black box.” Only through painstaking analysis of Koch’s business activity has JLS Capital discerned how Koch might perceive EXIM to be counter to its interests. This also explains why Koch has less vigorously opposed more costly and distortionary government crop subsidies, which may lower feedstock costs to Koch’s many ethanol facilities.
Koch’s secretive business practices also preclude eligibility for EXIM support and supports Koch’s perspective that it is not one of EXIM’s “winners”. The Bank requires financial statements from its borrowers, exporters, and sponsors. Oil/gas, coal mining, and other companies operating outside core EXIM sectors have nonetheless been among its beneficiaries, but only because of a willingness to show financial statements.
The Irony of Corporate Welfare
As the country’s second largest private corporation, Koch was uniquely positioned to launch a campaign of unprecedented scale that ironically labeled EXIM “corporate welfare”, the second principal theme of anti-bank rhetoric left unexamined by the media. The corporate welfare tag was applied by right and left, including by candidate Barack Obama and Senator Bernie Sanders, partly because Boeing and GE were bank supporters. While U.S.-made products of the two companies – and other companies – provide eligibility for EXIM loans, critics mistakenly stated – and the press repeated – that loans go to GE and Boeing. They don’t.
The charge has been made ironic by the vast corporate funds raised in the EXIM fight, starting with Koch Industries.
Koch Industries’ private company status has allowed it to remain committed to the family’s causes as controlling members see fit, embracing such causes as EXIM and abandoning civil liberties and other libertarian priorities as expediency warrants. In public companies, boards change and political priorities change with them. Under Richard Anderson, Delta’s EXIM opposition was a priority but became less important with his departure.
Starting with its own deeply rooted corporate network of institutions that included the Cato Institute and the Heritage Foundation, the Koch Brothers used the EXIM fight to expand. While following the money is challenging because donations have been in the form of unreported “Dark Money”, the anti-bank strategy provides a trail of breadcrumbs leading to corporate and Wall Street money.
In the same June 2014 speech cited above, Rep. Hensarling lists other companies allegedly harmed in the zero-sum game affecting non-export industries. Among those listed, no company has been as visible as Delta Airlines in opposing EXIM. Ironically, the two companies have side-by-side billboards along right field in Nationals Park.
While unjustified in opposing the bank’s existence, Delta and other airlines do have valid concerns with OECD rules that bar ECAs from supporting U.S. and European carriers – a way of avoiding having the U.S. export support help sell Boeing planes in Airbus’s European backyard and European ECAs from doing the same for Airbus in the U.S. Delta charged that low-cost loans to foreign airlines, averaging $7 billion per year, made Delta’s long-distance routes uncompetitive and cost the airline industry jobs. Delta lost all of its suits against EXIM and only made headway by joining Tea Party opposition.
Koch, Delta, and other companies increased political and lobbying expenditures dramatically after 2009, offsetting much of the efforts of Boeing and GE. While companies on both sides of the EXIM debate have equal rights to influence the process, there is an important difference between the groups in terms of U.S. jobs, as shown below. While the largest users and supporters of the bank, Boeing and GE are just two of many firms whose exports are supported by the largest part of EXIM finance going to manufacturing – a segment comprising 11% of U.S. workers that is also important to the creation of service sector jobs comprising 36% of domestic employment and thus supported indirectly by EXIM. A smaller but substantial portion of EXIM finance goes to other sectors comprising 52% of U.S. workers. Together, these sectors comprise over 99% of the labor force. Employment by companies not benefiting from and allegedly hurt by EXIM – in the airline industry, at Koch Industries, and a few mineral mining companies comprise 0.4% of U.S. jobs, which has so far been able to stymie the 99.6%.
The EXIM issue has also been strategically important to Koch Network expansion because of the Finance Committee nexus between EXIM and financial deregulation. The Finance Committee heads in the House and Senate were attractive to Rep. Hensarling and Sen. Shelby because of their connection to financial deregulation and the money that would bring from Wall Street. Support from the Koch network was arguably critical to obtaining these positions, upon which their first mission and – throughout the Obama Administration – only political success was stopping EXIM.
Wall Street and investor money has been critical to the Koch Brothers, according to information obtained by Mother Jones. The destination of much of that money was the Freedom Partners, an organization founded in 2011 to counter U.S. Chamber of Commerce support on the EXIM issue, whose growth surprised even its own supporters, deploying nearly $240 million in its first reported year of 2012, greatly surpassing GE and Boeing spending, as shown below. Since then, Freedom Partners expenditures have been on a par with total spending of the well-established U.S. Chamber of Commerce.
With a huge and dedicated network, groups funded by the Koch Brothers “put the obscure agency on the political radar and turned it into a litmus test on Capitol Hill”. By 2016, of the seventeen original candidates for the Republican Presidential Nomination, only Sen. Lindsay Graham of South Carolina, where GE has large manufacturing facilities, supported EXIM.
Understanding the President – The Bank Makes Money
As candidate and President, Trump never used anti-bank rhetoric and specifically disputed a third major theme of anti-bank criticism never analyzed by the press – that the bank didn’t make the billions it claimed to and even lost money. Some profitability attacks were anecdotal muck-raking, but the main claim was that the bank should rely on fair value accounting as used in a CBO Study, which re-estimated earnings using discount rates based on private bank market premiums. In June 2014, Rep. Hensarling called the approach “the accepted accounting method for almost every bank and private company in America”.
Except that it wasn’t.
Ignoring GAO findings that this approach isn’t applicable to government agencies, it’s not applicable to private entities either. Market risk discounting may be appropriate for theoretical analysis – as the Kennedy School authors of the CBO paper likely intended – and for projects, but for going concerns, the correct rate for assessing profits is an enterprise’s cost of capital. At EXIM, that meant using Treasury Bill rates and bank loan experience, which is broadly how it was done.
President Trump understood how the cost of capital affected his businesses and far from adopting this logic enthusiastically said the bank is “going to make a lot of money”. In 2017, the President Trump supported restoring the bank’s lending authority.
Yet, a President who embraced fair trade and jobs as pillar issues has not made restoring the bank’s authority a priority. In 2017, Trump nominated Rep. Garrett (R-NJ), a Reform Caucus member publicly intent on destroying the bank, as Chair, a position in which Garrett could control EXIM’s agenda and effectively undercut its credibility. After the Senate Finance Committee voted against Garrett and Sen. Toomey responded by placing holds on the other four nominees, President Trump waited a year to appoint one of the four – Kimberly Reed – to fill the Chair and has clearly not made EXIM a point of contention with Majority Leader McConnell and ask for cloture votes that would surely revive EXIM. Why?
Some insiders on the EXIM debate have speculated that a President, out of his depth on bank details, has unwittingly allowed his Vice President to thwart his agenda. Indeed, there is evidence that his orders have been impeded by what bank officials and others in Washington call the “Short Pence Fence,” a reference to Tea Party adherents Marc Short, the Administration’s Legislative Director and Vice President Pence.
That explanation ignores that the President chose both Short and Pence to begin with and why.
The same Koch Brothers influence that led Republican Presidential contenders to oppose EXIM was instrumental to Trump’s selection of Pence as Vice President, which was seen as key for uniting with the Koch wing of the GOP. Koch donations accounted for two of Pence’s top campaign sources. Pence’s former Congressional Chief of Staff Marc Short, who ran the Freedom Partners Chamber, joined the campaign and would become Trump’s head of legislative affairs, noted “the Kochs were very excited about the Vice-Presidential pick.”
In explaining this behavior, one bank official compared the President’s lack of priority for EXIM with other important items in the Koch Agenda, where the President has clearly “hit it out of the park”. Publicly, the President sometimes appears to be at odds with Charles Koch. But his Administration has relied on Koch Network personnel and according to the Heritage Foundation, has embraced 64% of the Koch agenda of tax cuts, deregulation, and partial Obamacare roll-back. During this election season in which the President is clearly engaged, Koch money was slated to fund more than four out of every 10 television ads broadcast by outside groups this year. In the context of the Koch Network resources available for Republicans, reports of any Koch-Trump feud are irrelevant.
EXIM’s Fate Hangs in the Balance of the Senate
JLS Capital is a financial advisory firm that does not engage in political advocacy. However, our deep commitment to export finance in support of the U.S. worker, the highly partisan actions by the Koch Network and the Republican Tea Party Caucus to target EXIM, and the specific actions by Sen. Mitch McConnell to block an EXIM Board quorum lead to the conclusions critical of Republican leaders and partisan in support of those opposing them.
EXIM’s immediate future is linked to electoral outcomes in the Senate. If the Senate remains in Republican hands, McConnell will likely keep holds in place and EXIM’s reauthorization – scheduled for next year – is in doubt given that Sen. Toomey would likely chair the Finance Committee and block EXIM’s reauthorization. EXIM staff who are hoping for better have informed me that Toomey staff members claim that the Senator would allow a vote. But that Toomey has considered allowing a vote means he’s considering not allowing one. At a minimum, Toomey would likely only advance authorizing legislation that severely limits EXIM’s authority.
So, the only short-term strategy seems to be to hope for a Democratic takeover of the Senate, an outcome to which FiveThirtyEight accords a 17.5% chance. Without giving up, one should admit the obvious – hope is not a strategy.
Thus, the near-term path forward has far more questions than answers.
If the House changes parties and the Senate doesn’t, can Democrats broker a deal for reauthorization? Given that Toomey’s alternative to a deal may be not to report a bill an let EXIM die, deals will be challenging.
If EXIM remains without a board quorum and a weaker EXIM is reauthorized next year, what capabilities would EXIM have? Too many experienced professionals have left EXIM during its 3-year period without a board quorum. While strong professionals remain, even if the Senate also “flips” the loss of professional talent thus far presents challenges. If the Senate doesn’t change hands, how many more will leave?
Can the new United States International Development Finance Corporation (“USIDFC”), which has expanded the mission of the Overseas Private Investment Corporation (“OPIC”) fill in the gap for U.S. exporters? Given that the Better Utilization of Investments Leading to Development (“BUILD”) Act of 2018 that creates USIDFC consolidates authority of other agencies into USIDFC rather than expanding OPIC’s prior finance mission, which did not include support for U.S. capital equipment purchases, USIDFC’s export support options are limited.
The questions facing the U.S. workers that EXIM supports are more sobering, as noted by Former Acting Chair Scott Schloegel. “With each passing day and week 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 bank will be significantly weakened – if not completely collapsed – and unable to assist American exporters when the commercial banks’ liquidity dried up.”
A strong economy may make such peril seem distant, but in rural America, with manufacturing’s share of overall employment at an all-time low, the economy seems weak. The year’s stock market gains are gone and the Economist is warning of recession. Those not seeing a threat are overlooking the facts and the lessons from ten years ago when EXIM helped save U.S. jobs.
Hopefully, these lessons won’t be learned in the aftermath of a crisis. But, regardless of whether a change in the Senate can save EXIM, the longer term challenges will be to restore EXIM’s capabilities and insulate it from attacks of a multi-billion Koch Network that has realized substantial political and economic gains from crippling the bank.
Our conclusions about the long-term way back stress broad themes about how EXIM, its supporters, and U.S. workers must address the underlying problems described above.
Reduce vulnerabilities – If EXIM must remain a “sunset” agency, Congressional majorities must be allowed to vote on reauthorization. A lone Representative or Senator cannot be allowed to “scuttle” the bank. However many members are on the board at a given time, should constitute a quorum.
Improve press coverage – that this piece is being published on JLS Capital’s website rather than being carried in a journal is endemic of the scant coverage EXIM has received. Those covering EXIM and other trade issues should obtain the expertise to scrutinize arguments rather than simply parrot rhetoric.
Ensure accountability – the President has sought to appeal to rural working-class voters hurt by EXIM’s loss. As is the case with the rest of the Koch’s agenda that the Administration has embraced (corporate tax cuts, environmental deregulation, Obama-care roll-back), rural and other U.S. workers are not benefiting.
Unify constituencies – Senator Bernie Sanders (D-VT) has been a bank critic and has contributed to the bank’s erroneous tag of corporate welfare. Sen. Sanders, EXIM is not corporate welfare. Loans don’t go to corporations but are made to support U.S. jobs. Sen. Sanders should extend his concerns about equality to the more than 99% of U.S. workers that benefit from EXIM who are being deprived of export support because of the perceived interests of companies employing fewer than 1% of workers. Labor has been a quiet constituency focused on restricting EXIM from extending similar levels of support for foreign content that other ECAs can and do extend in support of competing exports. Labor needs to step up and focus on the big picture of U.S. jobs in a competitive world.
Size matters – Foreign content restriction is but one of the rules that has made EXIM more onerous to work with than other ECAs. The prevailing view in EXIM has been that by “keeping its head down” and restricting support, EXIM can avoid political attack. That is obviously wrong. Restricting support has had the opposite effect of restraining EXIM beneficiaries to whom EXIM is less relevant than it should be. Again the big picture – as shown below – without a quorum, the U.S. provides less export support than any other major country. Even before 2015, EXIM’s support per unit of GDP was among the lowest in the world.
Especially in today’s political climate, the size and strength of one’s supporters mattes. According to Hardy of CEE, “this town is about money much more than ideas. You can be totally right but if the money is on the other side, there are plenty that will ignore what is right for the country and do what keeps them in power.” EXIM’s programs should be expanded to enlist support comparable to the Koch Network that has opposed it. A bank that has prided itself for being apolitical can no longer be so. The corporate rhetoric and resources of the Reform Caucus and Koch Network have changed everything. For the good of U.S. workers, they must be countered.
John Schuster, President, JLS Capital Strategies LLC