Bloomberg News

How the U.S. Ex-Im Bank Landed on Republicans’ Death Row

June 27, 2014

EXPORT IMPORT BANK

U.S. Vice President Joe Biden during the U.S. Export-Import Bank annual conference in Washington, D.C. on April 5, 2013. Photographer: Andrew Harrer/Bloomberg

A day before U.S. House Republicans were to vote on a new majority leader, lawmakers aligned with the limited-government Tea Party movement delivered a message to the leading candidate, Kevin McCarthy of California.

They made clear to McCarthy at a June 18 private candidate forum that the Export-Import Bank must go, according to one of the participants.

Republicans had tried to kill the little-known U.S. agency before. And House leaders -- including McCarthy -- always had stepped in to protect its authority to foster billions of dollars in overseas sales by companies as big as General Electric Co. (GE:US) and as small as Hartzell Propellers Inc. of Ohio.

This time was different. Three days after McCarthy won the election, he went on “Fox News Sunday” and announced he no longer supported the bank, shocking business groups that have spent years and millions of dollars lobbying to preserve it.

The switch by McCarthy was the latest in a cascade of events that threaten the survival of an agency born in the New Deal and that last year backed $37.4 billion in exports. The story of how Republicans came to part ways with their frequent corporate allies features the rise of a free-market Texan, a historic electoral upset in Virginia and the Tea Party’s search for a rare legislative win before this year’s midterm elections.

September Deadline

With the bank’s lending authority set to expire September 30, the lobbying and public relations battle has intensified. Among supporters are some of the largest U.S. corporations such as Boeing Corp., as well as Wall Street banks and former top Democratic and Republican lawmakers. While the other side has just one big company in its ranks, Delta Air Lines Inc. (DAL:US), it also counts the Republican-leaning Heritage Foundation and the Club for Growth, and groups backed by the billionaire Koch brothers.

“Ex-Im represents both a policy and political target because it’s do-able,” said Diane Katz, a Heritage research fellow. “We’re not trying to take down the Federal Reserve here. We’re starting with an agency that is ripe.”

On the surface, the 80-year-old bank isn’t an obvious target. Rather than costing taxpayers money, it regularly returns a profit to the Treasury -- more than $3.4 billion since 2005. The bank says its programs generated about 2 percent of the $2.3 trillion the U.S. exported last year.

FDR’s Program

The bank helps foreign companies buy U.S. goods by providing loans, guarantees and insurance. It was established in 1934 under President Franklin Delano Roosevelt and initially focused more on advancing U.S. foreign policy than aiding the economy. It financed the Pan American Highway, authorized $2 billion for European reconstruction under the Marshall Plan and approved $100 million in credits for Israel in 1948. The bank also issued $5.6 million in guarantees to post-Soviet nations.

To its backers, the bank’s primary benefit these days is to protect manufacturing jobs and counter the advantages of competitors in other countries backed by their government subsidies, including Airbus Group NV (AIR) in France, and Mitsubishi Corp. (8058) in Tokyo. The bank says that its financing has created or maintained an average of 231,000 U.S. jobs every year since 2009, though a Government Accountability Office report last year said the calculation has limitations.

‘Export Opportunities’

“Every industrialized country has its own version of Ex-Im, and each is tasked with supporting the domestic exports of their respective nations,” Fred Hochberg, the bank’s president, told Congress this week. “The mission of Ex-Im Bank is to empower U.S. companies -- large and small -- to turn export opportunities into sales that maintain and create U.S. jobs and contribute to a stronger national economy.”

Questions about whether the bank offers the best path to those goals haven’t been limited to the Tea Party. At a private meeting of House Republicans in April, Representative Paul Ryan, the 2012 vice presidential nominee, said the bank was an example of corporate welfare and should be eliminated, according to an aide who spoke on condition of anonymity.

Even Barack Obama called the bank “little more than a fund for corporate welfare” during a 2008 campaign speech in which he promised to go page-by-page through the federal budget to eliminate programs that don’t work. As president, he has backed the lender, and has proposed to raise its lending limit to $160 billion from $140 billion.

Picking Winners

Opponents of the bank say that even if it doesn’t absorb federal spending, its commitments could hurt taxpayers in the event of catastrophic losses, as happened when Fannie Mae (FNMA:US) and Freddie Mac were seized in the 2008 credit crisis. Export financings should be left to the private sector rather than having a government agency pick winners and losers, they say.

“Who benefits? Overwhelmingly and indisputably it’s some of the largest, richest, most politically connected corporations in the world -- like Boeing, General Electric, Bechtel and Caterpillar,” Jeb Hensarling, a Texas Republican who is chairman of the House Financial Services Committee and the leader of the opposition to the bank, said at a committee hearing this week.

According to a June 3 report by the independent Congressional Research Service, about 65 percent of the $37.4 billion the bank issued in loans and guarantees last year involved sales of Boeing aircraft, whose model planes are displayed in Hochberg’s office at the bank’s headquarters three blocks from the White House. The agency’s supporters say that while Boeing, the world’s largest plane-maker, looks like the main beneficiary, thousands of other firms would be hurt if financing dried up and Boeing lost sales abroad.

Boeing’s Bank

“What people lose sight of is, you are looking at a large company that makes airplanes for example, but there are thousands of suppliers that go into making that product,” said Chris Wenk, senior director of international policy for the U.S. Chamber of Commerce, the nation’s biggest business lobbying group.

Boeing-related sales got the largest amount of money from the bank. By the number of transactions, though, nearly 90 percent -- or 3,413 -- went to support exports by small businesses and their supply chains. Among them are firms like Hartzell Propellers, in Piqua, Ohio, a town of 20,600 people about 90 miles west of Columbus.

The company has reaped the benefit of the agency’s support for overseas purchases of crop-dusting planes, said Joe Brown, Hartzell’s president. The boom in sales has helped him increase his work force by 13 percent to 300 people in the past three years.

‘Jobs Problem’

“If you take Ex-Im away from my customers, you might as well bring unemployment checks to their offices, because you’re going to put people on the street,” Brown said in a phone interview. “If they’re not building as many airplanes, then I’m going to have a jobs problem.”

Since 2007, records show, 18 percent of the bank’s loans have benefited exporters in Texas, more than in any other state. That hasn’t deterred Hensarling, who has seen his star rise within the Tea Party movement as he’s focused on eliminating the agency.

The Dallas-area congressman, 57, has long pushed a free-market agenda that has put him at odds with House Republican leaders on issues including federal insurance against floods and terrorism. Hensarling presents his opposition as integral to his political identity.

In April, Hensarling told constituents at a senior center in Athens, Texas, that the bank is a “boondoggle” that “puts taxpayers at risk in order to lower costs for a few big corporations to sell their goods overseas,” according to a report in the Chandler Brownsboro Statesman newspaper.

Cantor Defeat

Having opposed the export bank’s reauthorization in 2012 when he was chairman of the House Republican conference, Hensarling was given a more direct role last year when he took over the financial services committee, which oversees the agency. Still, he faced an obstacle in Virginia Republican Eric Cantor, the House majority leader and an ally of the bank.

Then Cantor was ousted on June 10 by a primary challenger - - the first majority leader to lose his seat that way. The Tea Party, the limited-government political movement advocating a reduction in the U.S. national debt, was responsible for Cantor’s loss to economics professor David Brat.

That set the stage for McCarthy, 49, to move up in leadership. Justin Amash, a Michigan Republican who has proposed terminating the bank, said after the June 18 candidate forum that Tea Party lawmakers had used the opportunity to press McCarthy on one of their top priorities.

“Ex-Im Bank is one that government does not have to be involved in,” McCarthy said in the June 22 TV interview. “The private sector can do it.”

‘Continue Discussions’

Asked to comment on the candidate forum and McCarthy’s change in position, his spokesman, Mike Long, issued a statement yesterday saying the administration has “blatantly ignored” a provision in the 2012 reauthorization requiring it to open global negotiations with the goal of ending all export subsidies. “The Financial Services Committee will continue discussions on how best to move forward,” Long said.

Among those McCarthy took by surprise was Wenk, the U.S. Chamber’s point man on the issue. The business lobby had been determined not to be napping again after what happened in 2012, when the Hensarling-led assault presented the first serious threat to the bank’s reauthorization since its inception. While it passed the House with 147 Republicans in favor, there were 93 Republicans against it. The Chamber and its allies immediately began a two-year campaign to head off similar opposition this time, said Wenk.

Sunday Breakfast

With four kids, Wenk has given up watching Washington Sunday talk shows. He had just finished giving his five-month-old twins breakfast when his phone buzzed with the news that McCarthy had changed his mind.

“It was a setback,” said Wenk. He says, however, that the move may ultimately help to galvanize the supporters of the bank.

Just three companies were paying attention to the bank’s status during the 2003-2004 congressional session, according to lobbying disclosure records compiled by the Center for Responsive Politics. This time, it’s more than 50.

The lobbying has been led by the U.S. Chamber and the National Association of Manufacturers, which has spent $35.6 million advocating in Congress since 2010, according to the center. The day after McCarthy’s interview, the two groups coordinated a letter with 865 companies to Congress urging reauthorization of the bank. The same day, 42 of the Republican House members who backed the bank in 2012 sent a letter to McCarthy and House Speaker John Boehner expressing their continued support for the agency.

Building Arsenal

Also that day, the business lobbies announced they had teamed up to hire three more veteran lobbyists: Haley Barbour, a former Mississippi governor and ex-chairman of the Republican National Committee; Dick Gephardt, the former House Democratic leader; and Tony Fratto, who served in President George W. Bush’s White House.

“This is an absolute top priority,” said Linda Dempsey, the manufacturing association’s vice president of international economic affairs.

The export agency also has allies among financial institutions including JPMorgan Chase & Company (JGASX:US), HSBC Holdings Plc (HSBA), PNC Financial Services Group Inc. (PNC:US) and Wells Fargo & Co. (WFC:US), all of which make loans to exporters who have secured U.S. guarantees.

Lynn Durning, executive vice president and western division manager for Wells Fargo Global Banking Group, said that losing the export agency would imperil such deals. While banks could fill some of the lending void, she said, that would come at a cost of higher collateral requirements for companies. Some importers in markets facing economic and political insecurity might not be able to get assistance at all, she said.

‘Limited Appetite’

“The private sector will have a certain limit on the amount of foreign exposure they will take and the amount of tenure they will take,” Durning said. “Smaller banks in particular may have a more limited appetite to take foreign risk.”

Among the 20 companies and groups that have lobbied Congress most often about the bank since 2008, just one -- Delta -- opposes the bank’s reauthorization, according to a report this month from the Sunlight Foundation, a Washington-based group that advocates for government transparency. Delta has asked for changes in the rules to limit the ability of its foreign competitors to buy wide-body Boeing jetliners more cheaply.

Still, opponents have a couple of powerful allies on their side: Charles and David Koch, the billionaire brothers who run Koch Industries and finance much of the Tea Party movement.

Koch Groups

At least five groups opposing the bank’s renewal, including Concerned Veterans for America and the 60 Plus Association, received nearly all of their funding over an 18-month period ending in December 2012 from the Kochs’ political network -- a total of $47.4 million, according to an analysis by the Center for Responsive Politics researcher Robert Maguire. Another group, Americans for Prosperity, founded by the Kochs in 2004, is also lobbying against the bank.

For the Tea Party, which has come up short in fights over higher-profile issues such as eliminating Obama’s health care law and ousting House Speaker Boehner, the bank presents the chance to chalk up a win going into the November elections.

“Its demise would clearly be one of the few achievable victories for the Main Street competitive economy left in this Congress,” Hensarling said in a May 20 speech at the Heritage Foundation.

‘Crony Capitalism’

Stephen Myrow, who was vice president and chief of staff at the Ex-Im bank from 2006 to 2008, said the threat to the agency’s existence comes from a larger group than the Tea Party alone.

“There’s a strain of Republicans who are concerned about this branding of being this party of big business, and there are a lot of groups on the right that have pushed this concept of crony capitalism,” said Myrow, now a managing partner at Beacon Policy Advisors LLC in Washington. “So what Hensarling and others decided to do was use the bank as the face of crony capitalism.”

While the House wrangles over the bank, the Democratic-controlled Senate has also been boxed in. The Senate Banking Committee has been able to produce bipartisan bills on some issues, usually co-sponsored by Chairman Tim Johnson, a South Dakota Democrat, and Mike Crapo of Idaho, the top Republican on the panel.

McCarthy’s public opposition in the House may have undermined the ability of Senate Republicans to compromise. “That is a new barrier that we have to work through,” Crapo said in an interview. “We are gathering information to try to come up with a way to proceed.”

Fincher’s Switch

If the bank’s authority isn’t renewed by the end of September, it couldn’t make new loans but could still manage its existing business.

The political cross-currents were on display at this week’s House hearing. Representative Stephen Fincher, a Republican from Tennessee who two years ago voted against reauthorizing the bank, said he now favors revamping the agency instead. He said it would be difficult to explain its disappearance to companies and workers in his district who benefit from its work.

“My constituents say, ‘Congressman, have you balanced the budget?’ And I’m going to say, ‘Well, we’re working on it,” Fincher said. “And they are going to say, ‘Well, congressman, did you get rid of Fannie and Freddie?’ And I’m going to say, ‘Well, we’re working on it.’ ‘Well, congressman, the only thing that you’ve done is you’ve gotten rid of an investment that was creating 1,000 jobs in our district.’”

To contact the reporters on this story: Michael C. Bender in Washington at mbender10@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net Lawrence Roberts


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