Conservatives Coalescing Against TRIA, Ex-Im

By R.J. Lehmann, R Street

It has been the general Washington consensus of recent years -- voiced, most recently, by my colleague Reihan Salam -- that the conservative movement is inalterably riven between two fundamentally opposed camps: the insurgent tea party movement, with its single-minded focus on purging government spending, particularly cronyist bailouts, and the more staid Republican establishment, loath to upset the apple cart that is its long-standing relationship with big business, particularly the financial services sector. The jockeying of these factions for control and influence, the story goes, will do much to determine the future of the Republican Party.

That's why it's particularly heartening to see the charge to end -- or, at the very least, significantly scale back -- two of Wall Street's favorite federal programs (the Terrorism Risk Insurance Program and the Export-Import Bank) led not by some tea party backbencher, but by a six-term veteran who chairs the very committee that wrote the now-infamous $700 billion Troubled Asset Relief Program bailout in 2008: House Financial Services Committee Chairman Jeb Hensarling, R-Texas.

Hensarling has made no secret of his disdain for both programs. Of the Terrorism Risk Insurance Act, he said in a September 2013 hearing, that members "must recognize that in just five years TRIA has leapt in scope and quadrupled in length, neither of which I think could be mistaken for facilitating a transition to a viable market for private terrorism risk insurance." While not ruling out legislation that would extend the $100 billion federal reinsurance backstop beyond its scheduled Dec. 31 expiration, he added that: "I have an open mind. It is not an empty mind. It remains a skeptical mind."

The way forward on TRIA remains somewhat murky, a situation no doubt complicated by this week's indictment of the primary sponsor of legislation to extend the program, Rep. Michael Grimm, R-N.Y. In the Senate, a bipartisan contingent has agreed in principle to support a seven-year TRIA extension that phases in an increase to the insurance industry's TRIA co-payment to 20 percent from the current 15 percent and would gradually raise how much the industry would have to repay the government to $37.5 billion from the current $27.5 billion.

Hensarling and his deputies -- notably subcommittee chair Rep. Randy Neugebauer, R-Texas -- are at work crafting their own response that builds on the Senate bill and takes the changes a bit further. An increase in the program's so-called "trigger level" from the current $100 million to $1 billion now seems likely. For our part, we at R Street have been recommending the legislation also drop entirely the backstop for commercial liability risks, which as a matter of public policy, currently amounts to subsidizing companies to be reckless in preparing for terrorism.

But the biggest difference between the House and Senate bills is likely to be the length of the extension, rather than the terms. Hensarling and company will hold firm on a short-term (no more than three years) extension, so that they can really take a hacksaw to the program next time around. For now, they are really keeping their powder dry for the more immediate fight: to ensure that the Export-Import Bank’s pending Sept. 30 expiration is its last.

Created during the New Deal era, the Export-Import Bank supports U.S. exporters of goods and services with a variety of direct loan, loan guarantee and export credit insurance products, although its charter ostensibly prohibits it from competing directly with the private sector. Of course, "not competing" doesn't in any way preclude financial institutions from profiting handsomely from Ex-Im's operations. As the Mercatus Center's Veronique de Rugy has calculated, Ex-Im's guarantees to private sector lenders over the 2007 to 2013 period included $5.1 billlion to J.P. Morgan Chase, $1.9 billion to TD Bank, $1.5 billion to Citibank, $1.1 billion to PNC Bank, $971 million to HSBC USA Inc. and $811.3 million to Norddeutsche Landesbank.

Given the general credit crunch that accompanied the recent financial crisis, demand for Ex-Im products has skyrocketed in recent years, with authorizations rising from $14.4 billion in 2008 to $35.8 billion in 2012.  Over that same period, aircraft-related authorizations more than doubled from $5.7 billion to $11.9 billion (one common nickname for Ex-Im is "Boeing's Bank," as Boeing sales alone accounted for $7.6 billion of Ex-Im's $12.2 billion in long-term loan guarantees in 2013), while authorizations for new project and structured finance transactions grew nearly ten-fold from $1.9 billion to $12.6 billion, representing almost half of the bank's growth.

exim authorizations

The task of monitoring and reviewing that growth falls to Congress, which in 2012 passed reauthorization legislation that raised the bank's exposure cap from the previous $100 billion to $120 billion in 2012, $130 billion in 2013 and $140 billion in 2014. As part of the reauthorization fight, the bank is seeking yet another hike in its exposure cap, this time to $160 billion.

Alas, given the continued growth in authorizations, even when repayments and cancellations are subtracted, the bank's actual exposure continues to run perilously close to those caps, rising to $106.6 billion at year-end 2012 and $113.83 at year-end 2013, with projected growth to $134.9 billion (just $5.1 billion short of the statutory cap) by year-end 2014. As this chart from the non-partisan Government Accountability Office makes clear, there isn't much daylight left between its actual and allowed exposure.

exim exposure

What's more, a May 2013 GAO report found weaknesses in Ex-Im's forecasting process such that, when analysts used historical data rather than the assumptions that are key to the bank's modeling, Ex-Im was (surprise, surprise) projected to blow through its statutory exposure limits. Moreover, GAO found Ex-Im did not regularly perform sensitivity analysis to reassess its assumptions and the business plan Ex-Im submitted to Congress in 2012 offered no conclusions on the bank's overall risk load or risks by industry, and offered only limited analysis for how changes in its portfolio -- including in its congressionally mandated sub-portfolios of loans for small business, renewable energy and investments in sub-Sarahan Africa— would change its risk profile.

The dodgy accounting doesn't end there. GAO's conclusions merely built on the findings of the Treasury Department's Office of the Inspector-General, which issued a scathing September 2012 report that found:

• Ex-Im Bank lacks a systematic approach to identify, measure, price and reserve for its portfolio risk.

• Ex-Im Bank lacks formal policies and procedures for its loss reserve forecasting model which clearly define roles and responsibilities, and provide for independent validation of the model's integrity.

• Ex-Im Bank does not conduct portfolio stress testing in a systematic manner to assess potential exposures under challenging economic conditions.

• Ex-Im Bank does not self-impose portfolio concentration sub-limits or thresholds either by industry, geography, or asset class as internal guidance to inform management on risk and determine exposure fees in new transactions.

• Ex-Im Bank's current risk management framework and governance structure are not commensurate with the size, scope, and strategic ambitions of the institution.

The bank's apologists -- like former Virginia Sen. George Allen -- will wave away these concerns by pointing to the bottom line, noting that the bank now regularly returns surplus from its operations to the federal Treasury, including $1 billion in 2012 alone. But of course, if Ex-Im is capable of sustainable profits, that’s an argument for, not against, completely privatization. Indeed, simply allowing the institution to sunset arguably wouldn’t even be noticed within the context of international trade, as roughly 98 percent of the $2.2 trillion in U.S. exports manage to find financing that doesn't really on Ex-Im.

For his part, Hensarling has been perfectly clear about his intentions on Ex-Im reauthorization:

I believe Ex-Im does pose risks to taxpayers and it could be doing more to mitigate those risks, many of which have been identified by the Inspector General.  I want to thank the Inspector General and his team in particular for the important work that they have been doing to identify weaknesses in the Bank's management of its portfolio.

By inserting political considerations into the market, the Bank's activities do expose taxpayers to risks while producing a less efficient economy than would otherwise occur in a free market without the Bank's interference.

I have long believed that many taxpayers feel that it is indeed time to EXIT the EXIM.

We couldn't agree more.

R.J. Lehmann is senior fellow, editor-in-chief and co-founder of the R Street Institute. This piece originally appeared on the R Street blog.

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