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Investigative Reporters Tackle the Small Business Administration

Written by Tad DeHaven, a budget analyst at the Cato Institute. Posted with permission from Cato @ Liberty.

When it comes to reporting on the Small Business Administration, it seems to me that most journalists simply assume that if a government agency exists to “help” small businesses then it must be good. So I was pleased to read a weekend piece from two investigative journalists with the Dayton Daily News that challenges the conventional wisdom on the SBA.

As the reporters explain, the SBA’s main job is to back loans issued by private lenders to small businesses that couldn’t get financing on market terms. The result is that taxpayers end up holding the bag when these naturally riskier loans go bad.

And quite a few go bad as this Cato essay on the Small Business Administration explains.

Lenders have little skin in the game so for them it’s heads they win, tails they win. Thus it was shocking – absolutely shocking – that a representative from the SBA and the head of the Ohio Bankers Association provided the reporters with the most favorable quotes.

The entire piece is worth reading, but the authors did a particularly good job of turning the spotlight on the racket that exists between the SBA, lenders, and national franchisors:

It’s time to end Ex-Im: This New Deal relic costs too much, doesn’t boost exports, and is rife with cronyism

President Barack Obama and Big Business have teamed up with politicians from both sides of the aisle to push reauthorization of the Export-Import Bank, a New Deal-era federal agency that makes billions of dollars worth of taxpayer-backed loans to politically-connected businesses.

In a new video from Reason TV, Nick Gillespie gives three reasons why Congress should end the crony Export-Import Bank.

The first reason, Gillespie explains, is expensive. “In 2012 alone, Ex-Im authorized $36 billion in loans, guarantees, and insurance,” he says. “The bank can carry a portfolio of up to $150 billion, meaning that taxpayers could be on the hook that much money.”

Reagan was right! The Ex-Im Bank subsidizes cronies on the backs of taxpayers, and that’s why Congress should end it

Cronyists in big business are ramping up their efforts to save Export-Import Bank from extinction. They’ve begun a big PR campaign months ahead of a vote in Congress to reauthorize the Bank and are trying to appeal to Republicans by invoking Ronald Reagan in their messaging.

The U.S. Chamber of Commerce has trotted out a 1984 letter signed by Ronald Reagan congratulating the Export-Import Bank on its 50th anniversary, in which he wrote that the New Deal-era agency “continues to be a valuable part of the international financial structure.”

Reagan is revered by conservatives and Republicans and the Chamber is, obviously, trying to play this letter up to win support in Congress to keep one of its favor factories around. The Bank’s supporters are feverishly trying to set a narrative that reauthorization “is good for business.” But that line isn’t working.

Cronyism — the collusion between big business and big government — has come under greater scrutiny. Sen. Mike Lee (R-UT), Rep. Jeb Hensarling, and many other conservatives and Congress understand that free enterprise doesn’t mean taxpayer-funded handouts that allow the government to pick winners and losers in the marketplace — it means creating an atmosphere in which businesses can succeed on their own.

Try as they may to invoke Reagan, the Export-Import Bank’s crony friends would like conservatives to ignore that the Great Communicator criticized the Bank on various occasions.

Cronyists are freaking out that conservatives in Congress may kill the Export-Import Bank

The “face of cronyism” is staffing up as it faces intense scrutiny from conservatives in both chambers of Congress. The Export-Import Bank — which really cares about what the Internet says, according to our Google Analytics reports (hey, guys!) — has made two new communications hires ahead of a reauthorization vote:

The bank announced two new hires Friday for its communications team, including an official who most recently headed press relations for the White House’s Domestic Policy Council.

Brad Carroll joins the independent federal agency from the Obama administration as a senior vice president. The bank also announced it had hired Dolline Hatchett as a vice president in its communications office.

Hatchett comes from a nuclear energy provider, and previously put in stints at the Energy Department and the Labor Department.
[…]
The hires, which are filling existing vacancies at the bank, come as its existence is under increasing danger from the right. Congress needs to pass legislation extending the bank by the end of September. Business groups are pushing for another extension, arguing it provides critical loan guarantees to foreign purchasers of U.S. exports.

Big businesses are Export-Import Bank’s biggest clients

One of the driving arguments behind authorization of the Export-Import Bank is the agency helps American businesses promote their goods across the global. This, supporters argue, includes helping smaller firms which would otherwise be able to compete.

In its statement of support for the 2012 Export-Import Bank Reauthorization Act, the U.S. Chamber of Commerce argued that that the federal agency is “especially important to small- and medium-sized businesses, which account for more than 85 percent of Ex-Im’s transactions.”

“Failure to enact this bill,” the Chamber ominously warned, “would put at risk the nearly 300,000 American jobs at 3,600 companies that depend on Ex-Im to compete in global markets.”

But a recent look at the Export-Import Bank’s finances in FY 2013 finds that the biggest beneficiaries of the agency’s largess were larger business, in fact, some of the United States most recognizable names.

“[T]he Bank truly lives up to its nickname, ‘Boeing’s Bank.’ Boeing was by far the biggest exporter beneficiary of all Bank activity, raking in over $8 billion in assistance during FY 2013,” wrote Veronique de Rugy, a senior research fellow at the Mercatus Center. “The Bank’s second top overall exporter beneficiary is alarming: the Bank’s data simply lists several exporters as ‘Unknown.’”

American taxpayers funding Russian companies, conservative group says

Ex-Im Bank

The Club for Growth has waded into foreign policy, an unusual area for an organization that exclusively emphasizes free market policies, by urging on the U.S. Chamber of Commerce to join its call for an end to taxpayer-subsidized loans to Russian companies, amid escalating tensions between the United States and Russia.

In a statement on Wednesday, the Club for Growth pointed to a January 2013 story from Reuters on discussions between the Export-Import Bank and Gennady Timchenko, a Russian billionaire, for “U.S. government-backed funding to buy luxury aircraft.” Timchenko was described as “a long-time associate of Russian President Vladimir Putin.”

Another story highlighted in the statement was an August 2000 report from the Center for Public Integrity which noted that the Export-Import Bank had “guaranteed $489 million in credits to a Russian oil company whose roots are imbedded in a legacy of KGB and Communist Party corruption, as well as drug trafficking and organized crime funds

“We don’t think that the Export-Import Bank should exist at all, let alone even consider giving loans and loan guarantees to Russian oligarchs and companies with ties to the Russian mob,” said Club for Growth President Chris Chocola.

Mike Lee, Justin Amash Introduce Legislation to Repeal Export-Import Bank

Export-Import Bank

There are countless examples of cronyist policies passed by Congress. Some would point to bailouts for Wall Street and automakers, while others would remind us of the loans and subsidies for green energy companies. While these are all good examples of cronyism and corporate welfare that are frequently mentioned by critics, the Export-Import Bank is frequently overlooked.

Authorized by Congress in 1945 to promote goods and services produced in the United States to be sold across the world, the Export-Import Bank (Ex-Im Bank) has become a source for bureaucrats to pick winners and losers in the market place and politically-connected businesses to take advantage of taxpayers.

Back in December, Pete Sepp, Executive Vice Chairman of the National Taxpayers Union, noted the Ex-Im Bank has a history of subsidizing failed firms — with a $10 million loan to Solyndra serving as an example — as well as giving money to profitable businesses, including Boeing, General Electric, Caterpillar, and Dell.

“In order to keep its portfolio from sagging and putting taxpayers on the hook for future Solyndras, the bank must often invest in large, established firms that are already highly profitable. Over the years this has included firms such as General Electric, Caterpillar, and Dell,” wrote Sepp. “Another example is aerospace giant Boeing. In 2012, nearly 83 percent of the loan guarantees issued by the Ex-Im Bank benefitted Boeing, meaning of the $14.7 billion in loan guarantees, $12.2 billion helped bolster the company’s sales.”

An example of cronyism in government

Via Veronique de Rugy comes video of a May 16th hearing where Rep. Jim Jordan (R-OH) questions John Woolard of BrightSource Energy about a $1.6 billion loan his company received from the government.

Jordan directly asked Woolard whether the loan was based on the merits of the project his company was working on or some sort of political influence with the Obama Administration. Woolard, of course, says that it was the merit of the project. But in his questioning, Jordan shows an e-mail from Woolard to a Department of Energy official where he notes that there was indeed a direct conversation with President Barack Obama himself about the project.

There is more. Here is video:

The hearing was part of a push by House Republicans to look into the actions of the Obama Administration over green energy loans, many of which have went to politically connected companies, like Solyndra, which would later go bankrupt. Rep. Darrell Issa explained in a recent interview that there has to be some accountability in these loan programs, after all, this is taxpayer money that the Obama Administration has been handing out:

Unsurprising Fact of the Day: Bailouts encourage risky loans

Many of us that opposed TARP, the 2009 bailout of financial institutions, for a couple of different reasons. The main reason being that bailing out business for is counter to the belief in free markets. In other words, we don’t believe in the concept of “too big to fail.”

The other reason being is that it was bad policy. Once you’ve put the concept of “too big to fail” into public policy, you’ve set that as a precedent for the future. It doesn’t discourage bad lending behavior, so when the next crisis comes along — and it will, taxpayer-funded bailouts will again be the answer for politicians. And this is what a new study from the Federal Reserve Board shows via James Pethokoukis:

The Troubled Asset Relief Program involved a major infusion of government funds into the U.S. banking system in an attempt to stabilize financial markets. The program was developed by congressional mandate; however, the purpose of the program was not entirely clear from the beginning. The program was originally portrayed as an effort to reduce the risk profile of banks by increasing bank capitalization.
[…]
However, the public response to the program also generated a significant push for banks to convert the funds into loan originations. Based on this purpose, banks were being encouraged to make more loans in an economic downturn which may have induced looser lending standards (Guner, 2008).

The results from the event study illustrate that the average risk rating at large TARP recipients increased more than at large non-TARP recipients following the capital infusions. Conversely, the risk of loan originations by small TARP recipients appears to have decreased relative to non-TARP recipients.

Time to Reevaluate the Concept of Mortgages

We all know that one of the major causes of the current economic situation is the decline of home values and the subsequent turmoil this reigns upon the financial system. I’m not going to quote any numbers here or research. If you want to read more details, then go read this.


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