February 18, 2012
By John F. Di Leo
Acting without any legal authority, President Obama has overridden the federal charter of the Export-Import Bank, and turned it into a competitor for domestic loan business, in utter defiance of the law. Hardly anyone has noticed or seems to care. Speaking at a Boeing assembly plant in Everett, Washington Friday, President Barack Obama announced a bold new plan to help American exporters: he would broaden the services of the Ex-Im Bank to help grow our exports.
Now, that sounds good on the face of it. The Ex-Im Bank is chartered as an export-funding source with a very narrow, specific charter. It exists in an odd area of commerce that requires some background.
When a US manufacturer wants to sell to a foreign country, the local banking regulations and currency controls of that destination government sometimes make it difficult or impossible for the buyer to pay a US vendor promptly. Local interest rates may be too high; the local banks may be untrustworthy or otherwise unable to cooperate smoothly with a US bank; the destination country may simply have rules that only allow payments occasionally, so the timing of the shipment may cause the customer to be unable to pay for a year or two, or ever.
In view of this problem, many foreign countries have their own export finance banks -- government-chartered agencies that produce short term financing on good risks -- only on good risks -- so that the peculiarities of the (usually third world) destination country don't kill a good transaction. Sometimes they're paid immediately, sometimes in six months, or a year or two... the idea is that the government is better off if its manufacturers are not scared out of exporting to such countries by banking issues. And again, barring unforeseen revolutions or currency collapses, these deals should only be about good investments.
Since so many other countries provide such a service for their manufacturers, the US government created the Ex-Im Bank in the 1930s to provide the same service for ours. The larger the project, the more important such financing becomes. Without such a credit agency, US manufacturers would lose sale after sale to foreign competitors whose governments could offer this financing tool as part of the deal. The Ex-Im Bank is therefore a tool for leveling the playing field in export sales. It lends to good credit risks in problematic countries, that's all... and helps keep the US export sector strong as a result.
To ensure that the Ex-Im Bank doesn't step on the toes of private US banks, it operates under several constraints. It must not compete with other US lenders; if a private bank wants to make the loan, the Ex-Im Bank must step aside (and happily does!). It must not provide this taxpayer-supported service on foreign products; since the whole point is to support US manufacturers, it sets minimum percentage requirements for US content on the goods being sold. And since its whole point is to support exports, it can only make loans attached to export shipments, not just any old loan for any old US company. It's not there to compete with the private sector!
Well, if there's one thing we've learned from watching the Obama Administration in action for three years, if there's anything they despise, it's pesky laundry lists of rules that limit executive desires.
There is a case to be made for tweaking the activity of the Ex-Im Bank. It sometimes runs up against its capital limitations, so to ask Congress to increase its funding ability could be a worthwhile discussion, with valid points on both sides. And as our economy grows ever more global, the content percentage requirements could perhaps be more flexible. The Ex-Im Bank has, for example, already largely eliminated the need for US-flagged vessels being used on export shipments, a rule that became archaic when the last of the major US-flag container-ships fell under foreign ownership. So yes, times change, and the Ex-Im Bank has to an extent changed with them.
But these aren't the kinds of changes that the Obama Administration is ordering.
He has announced that he will break with 80 years of history and a clear bank charter to direct the Ex-Im Bank to provide loans for domestic (USA-to-USA) sales if a foreign government might offer export financing to the manufacturer's foreign competitors. They all do! By definition, export financing agencies abroad provide this service on their international sales; it's not normally restricted by industry or product. The American banking industry can provide sufficient financing for a domestic company to compete with a more costly foreign import (for which you have transportation, duties, and other import costs as well, presumably making the importation undesirable).
He has also announced that he will order the Ex-Im Bank to begin making short-term financing loans of six to twelve months -- not necessarily connected to any export sales! -- to small domestic firms who want to increase their exporting activity. That's so open-ended, it can mean anything and include any company. Not that there's anything wrong with loans to small businesses; it's just that this is not the job of the Ex-Im Bank. Short-term loans to domestic businesses are for normal domestic banks to offer; that's what the business department of every bank in the country is for!
He did throw in the mention that he supports reauthorizing the Ex-Im Bank when its funding authority comes up in May, just to include something legitimate in this basket of excesses, but the big story is his overreach in tearing up a charter from 1934 and dismissing it as irrelevant. Will he even be called on it? Will anyone even notice this particular overreach, after three years of losing count of such things?
This isn't the first time that this president has attempted to politicize the Ex-Im Bank and meddle with its rules. The administration quietly issued an edict in 2009 that the Ex-Im Bank was to give greater support to green projects, and to deny outright projects that involve fossil fuels, no matter how deserving the project or how compliant with the bank's charter. This exploded into a political debacle in the run-up to the 2010 election, when ex-Senator-to-be Russ Feingold of Wisconsin had to intervene and plead with the administration to remove the political hold intended to kill a $600 million sale for suburban Milwaukee's Bucyrus International.
The resulting embarrassment -- discovering that the Democratic Party would rather kill thousands of American union jobs than participate in a coal mine project in India -- likely contributed to the November victory of now-Senator Ron Johnson.
But even that was just an internal guidance, improper, but arguably not a violation of the Ex-Im Bank's charter.
This 2012 initiative is different. This 2012 initiative turns the concept of export finance on its head. It directly orders a bank to disregard its ban on domestic loans, and sell domestically. The initiative orders the Ex-Im Bank to disregard its requirement to loan only on export shipments, and instead to loan operating cash to put companies in a better position to export (a goal with no substance whatever). It orders them to break their cardinal rule against competing with private domestic banks. And by definition, it likely means that these expanded offerings will crowd out the very kind of loans -- to foreign purchasers of American export goods - that the Ex-Im Bank was created to provide.
This administration is making a habit of directing government agencies to change their very jobs without congressional authority. The military isn't there to fight wars, but perhaps to help with disaster assistance. The Department of Education is to issue guidelines on children's diets. NASA is to stop flying into outer space, and instead is to propagandize about the scientific contributions of Islam through the ages. The Department of Energy is to thwart energy independence by denying permits that would produce domestic energy.
And now the Export-Import Bank is to loan money to domestic customers engaging in domestic transactions.
This administration is abusing government, by using agencies for purposes other than their constitutional or statutory functions. This government by executive fiat grows ever more random, ever more disconnected from the reality of the legislation that chartered these departments and agencies as they wander ever farther afield.
By John F. Di Leo
Acting without any legal authority, President Obama has overridden the federal charter of the Export-Import Bank, and turned it into a competitor for domestic loan business, in utter defiance of the law. Hardly anyone has noticed or seems to care. Speaking at a Boeing assembly plant in Everett, Washington Friday, President Barack Obama announced a bold new plan to help American exporters: he would broaden the services of the Ex-Im Bank to help grow our exports.
Now, that sounds good on the face of it. The Ex-Im Bank is chartered as an export-funding source with a very narrow, specific charter. It exists in an odd area of commerce that requires some background.
When a US manufacturer wants to sell to a foreign country, the local banking regulations and currency controls of that destination government sometimes make it difficult or impossible for the buyer to pay a US vendor promptly. Local interest rates may be too high; the local banks may be untrustworthy or otherwise unable to cooperate smoothly with a US bank; the destination country may simply have rules that only allow payments occasionally, so the timing of the shipment may cause the customer to be unable to pay for a year or two, or ever.
In view of this problem, many foreign countries have their own export finance banks -- government-chartered agencies that produce short term financing on good risks -- only on good risks -- so that the peculiarities of the (usually third world) destination country don't kill a good transaction. Sometimes they're paid immediately, sometimes in six months, or a year or two... the idea is that the government is better off if its manufacturers are not scared out of exporting to such countries by banking issues. And again, barring unforeseen revolutions or currency collapses, these deals should only be about good investments.
Since so many other countries provide such a service for their manufacturers, the US government created the Ex-Im Bank in the 1930s to provide the same service for ours. The larger the project, the more important such financing becomes. Without such a credit agency, US manufacturers would lose sale after sale to foreign competitors whose governments could offer this financing tool as part of the deal. The Ex-Im Bank is therefore a tool for leveling the playing field in export sales. It lends to good credit risks in problematic countries, that's all... and helps keep the US export sector strong as a result.
To ensure that the Ex-Im Bank doesn't step on the toes of private US banks, it operates under several constraints. It must not compete with other US lenders; if a private bank wants to make the loan, the Ex-Im Bank must step aside (and happily does!). It must not provide this taxpayer-supported service on foreign products; since the whole point is to support US manufacturers, it sets minimum percentage requirements for US content on the goods being sold. And since its whole point is to support exports, it can only make loans attached to export shipments, not just any old loan for any old US company. It's not there to compete with the private sector!
Well, if there's one thing we've learned from watching the Obama Administration in action for three years, if there's anything they despise, it's pesky laundry lists of rules that limit executive desires.
Poof! goes the charter...
There is a case to be made for tweaking the activity of the Ex-Im Bank. It sometimes runs up against its capital limitations, so to ask Congress to increase its funding ability could be a worthwhile discussion, with valid points on both sides. And as our economy grows ever more global, the content percentage requirements could perhaps be more flexible. The Ex-Im Bank has, for example, already largely eliminated the need for US-flagged vessels being used on export shipments, a rule that became archaic when the last of the major US-flag container-ships fell under foreign ownership. So yes, times change, and the Ex-Im Bank has to an extent changed with them.
But these aren't the kinds of changes that the Obama Administration is ordering.
He has announced that he will break with 80 years of history and a clear bank charter to direct the Ex-Im Bank to provide loans for domestic (USA-to-USA) sales if a foreign government might offer export financing to the manufacturer's foreign competitors. They all do! By definition, export financing agencies abroad provide this service on their international sales; it's not normally restricted by industry or product. The American banking industry can provide sufficient financing for a domestic company to compete with a more costly foreign import (for which you have transportation, duties, and other import costs as well, presumably making the importation undesirable).
He has also announced that he will order the Ex-Im Bank to begin making short-term financing loans of six to twelve months -- not necessarily connected to any export sales! -- to small domestic firms who want to increase their exporting activity. That's so open-ended, it can mean anything and include any company. Not that there's anything wrong with loans to small businesses; it's just that this is not the job of the Ex-Im Bank. Short-term loans to domestic businesses are for normal domestic banks to offer; that's what the business department of every bank in the country is for!
He did throw in the mention that he supports reauthorizing the Ex-Im Bank when its funding authority comes up in May, just to include something legitimate in this basket of excesses, but the big story is his overreach in tearing up a charter from 1934 and dismissing it as irrelevant. Will he even be called on it? Will anyone even notice this particular overreach, after three years of losing count of such things?
Misrule by Mismanagement
This isn't the first time that this president has attempted to politicize the Ex-Im Bank and meddle with its rules. The administration quietly issued an edict in 2009 that the Ex-Im Bank was to give greater support to green projects, and to deny outright projects that involve fossil fuels, no matter how deserving the project or how compliant with the bank's charter. This exploded into a political debacle in the run-up to the 2010 election, when ex-Senator-to-be Russ Feingold of Wisconsin had to intervene and plead with the administration to remove the political hold intended to kill a $600 million sale for suburban Milwaukee's Bucyrus International.
The resulting embarrassment -- discovering that the Democratic Party would rather kill thousands of American union jobs than participate in a coal mine project in India -- likely contributed to the November victory of now-Senator Ron Johnson.
But even that was just an internal guidance, improper, but arguably not a violation of the Ex-Im Bank's charter.
This 2012 initiative is different. This 2012 initiative turns the concept of export finance on its head. It directly orders a bank to disregard its ban on domestic loans, and sell domestically. The initiative orders the Ex-Im Bank to disregard its requirement to loan only on export shipments, and instead to loan operating cash to put companies in a better position to export (a goal with no substance whatever). It orders them to break their cardinal rule against competing with private domestic banks. And by definition, it likely means that these expanded offerings will crowd out the very kind of loans -- to foreign purchasers of American export goods - that the Ex-Im Bank was created to provide.
This administration is making a habit of directing government agencies to change their very jobs without congressional authority. The military isn't there to fight wars, but perhaps to help with disaster assistance. The Department of Education is to issue guidelines on children's diets. NASA is to stop flying into outer space, and instead is to propagandize about the scientific contributions of Islam through the ages. The Department of Energy is to thwart energy independence by denying permits that would produce domestic energy.
And now the Export-Import Bank is to loan money to domestic customers engaging in domestic transactions.
This administration is abusing government, by using agencies for purposes other than their constitutional or statutory functions. This government by executive fiat grows ever more random, ever more disconnected from the reality of the legislation that chartered these departments and agencies as they wander ever farther afield.
John F. Di Leo is a Chicago-based Customs broker and international trade compliance lecturer. His columns are regularly found in IllinoisReview.com.
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