House Majority Leader Eric Cantor’s stunning loss in his Republican primary introduced a number of potential unpredictable macroeconomic events into the 2014 calendar. But perhaps nothing stands to lose more than a bank that first came into existence in the New Deal era of the Franklin D. Roosevelt administration.
The movement toward the death of the Export-Import Bank, first targeted by conservative grassroots as a priority in 2012, has finally appeared to hit its stride. The bank provides direct loans, guarantees, and credit insurance to aid foreign purchasers in buying American-made goods. Its charter expires at the end of September, unless Congress acts to renew it.
Cantor was largely responsible in 2012 for brokering a deal to extend the Bank’s charter and raise its lending authority to $US140 billion. But on Sunday, incoming House Majority Leader Kevin McCarthy signaled a major shift when he called for the closure of the bank.
“One of the biggest problems with government is they go and take hard-earned money so others do things the private sector can do,” McCarthy, who voted for the Bank’s reauthorization in 2012, told Fox News’ Chris Wallace on Sunday.
“That’s what the Ex-Im Bank does. The last authorization with the Ex-Im Bank directed the president and the Treasury secretary to wind down the Ex-Im Bank, negotiate with the other countries to wind them down so we have a level playing field.”
When asked directly by Wallace if he thinks the bank should close, McCarthy said, “Yes, because it’s something that the private sector can be able to do.”
The “Ex-Im Bank,” as it is typically called, was established under a 1934 executive order from Roosevelt, as part of his desire to expand trade with the newly established Soviet Union and with Cuba. The bank became an independent entity in 1945.
It is the official export agency of the United States. And its mission, according to its website, is to “assist in financing the export of U.S. goods and services to international markets.”
The Ex-Im Bank has been deeply involved in historically significant projects and transactions, including the constructions of the Pan-American highway and Burma Road.
Essentially, the Ex-Im Bank assists U.S. companies in their exports to provide them with an advantage against foreign companies, particularly if those foreign companies receive their own subsidies from their governments. This includes direct loans and loan guarantees to foreign buyers of U.S. goods and services, working capital guarantees, and export-credit insurance.
Some of the biggest U.S. beneficiaries of the bank include companies like Boeing, General Electric, and Caterpillar.
In its latest annual report, the Ex-Im Bank said it was responsible for supporting up to 1.2 million jobs over the past five years. In 2013 alone, that number was 205,000, according to the bank. (The bank itself employs less than 500 people.)
Its reauthorization throughout history has not been controversial. Fourteen of the 16 times its reauthorization has come up for a vote, it has passed by either unanimous consent or voice vote in at least one chamber of Congress.
But over the last two years, the bank has come under increasingly intense scrutiny because opponents have latched on to the cause the bank provides “corporate welfare.”
The Club for Growth, Heritage Action, and other conservative groups have launched campaigns calling for it to shut down. In the House, the powerful House Financial Services Committee Chair Rep. Jeb Hensarling (R-Texas) has led the charge against reauthorization. McCarthy, soon to be the No. 2 House Republican, became the most significant member of Congress to join the bandwagon.
“We’re starting to see the Republican Party as a whole not reflexively saying, ‘If this is good for big business, I’m in favour of it,'” Dan Holler, the communications director for Heritage Action, told Business Insider on Monday.
The Tea Party-supported argument, one advocated by Heritage Action and others, centres around claims the Bank is a form of “crony capitalism” and “corporate welfare.”
In many ways, it embodies the larger fundamental dispute within the Republican Party. Though many in the establishment view the bank as a good function of government, conservatives see it as an overreach. They compare it to Fannie Mae and Freddie Mac, the two entities that were taken over by the U.S. government in 2008 amid the financial crisis.
“We had this sea change in 2012 where people saw the Bank as this perfect example of everything that’s wrong with Washington,” Holler said, referring to the 93 votes against the Bank’s reauthorization back then, the most since the administration of President Richard Nixon.
“You can have big companies going to this Bank, which is backed by taxpayers, and using this Bank to help themselves. This isn’t the proper role of the federal government. We’re kind of on the hook here like Fannie Mae and Freddie Mac, if things go wrong.”
Cantor’s shocking loss and McCarthy’s unexpected rise progressed the issue from a potentially bitter fight to one in which the Tea-Party types in the GOP seem to have the upper hand in the battle.
The campaign to save the bank
The White House and the Republican establishment-friendly Chamber of Commerce both pressed the case for the bank’s renewal on Monday, one day after McCarthy’s comments re-ignited the debate.
The National Association of Manufacturers has also been lobbying on behalf of the bank, arguing manufacturing would be crushed by the bank’s expiration. And on Monday, a group of more than 40 Republican members of Congress had signed off on a letter urging House leadership to take action to renew the Ex-Im Bank’s charter.
There are 60 other countries that have credit export agencies, which supporters of the bank say would be more than happy to scoop up sales and jobs from U.S. companies by being willing to offer similar support.
“What do we want to do? Give this business to the Europeans and the Chinese?” Tom Donohue, the president of the Chamber of Commerce, told reporters in a conference call on Monday.
Added a spokesperson for Caterpillar in a statement: “For the U.S. to close the Ex-Im Bank in this environment is surrendering export markets and economic growth in the U.S.”
The bank says it provided $US27 billion to support an estimated $US37.4 billion in U.S. export sales in fiscal year 2013, which helped sustain the more than 200,000 jobs. And it says it is a self-sustaining agency, claiming it has sent $US1.6 billion back to the U.S. Treasury since 2008 in excess revenue.
‘No clue what they’re talking about’
One of the leading advocates for the bank is Tony Fratto, a former Bush administration White House and Treasury official who is now a partner at Hamilton Place Strategies. Fratto was described by a NAM official on Monday’s conference call as one of a “dream team” of advocates for the bank, along with former House Majority Leader Dick Gephardt and former Mississippi Gov. Haley Barbour.
Fratto told Business Insider on Monday that about three-fourths of Ex-Im Bank critics have “no idea what they’re talking about.”
Why? The single biggest thing every critic gets wrong, Fratto said, is the claim McCarthy made Sunday — that the private sector can and will pick up the slack. That’s because no one in the private sector is currently structured to do what the Ex-Im Bank does.
“That is flat-out wrong,” Fratto said. “That will not happen. There is no private-sector response to what Ex-Im does. There are structural problems with our financial system and the needs of small and medium exporters. They will not do that business. Not because it’s not good business, but because it’s not their business. They can’t do it.”
The problem is twofold. Using the bank SunTrust as an example, Fratto said smaller banks don’t have the expertise to do what the Ex-Im Bank does. It doesn’t have enough knowledge of the global landscape to facilitate deals in countries as diverse as Venezuela, Nigeria, Turkey, and Vietnam at the same time.
(For reference, the Ex-Im Bank’s portfolio includes a range of 170 countries, and the Bank says about 90% of its transactions are to small businesses.)
The second problem, according to Fratto: The big banks and insurers that do have that expertise have no interest in facilitating the small transactions that are the bread-and-butter of the Ex-Im Bank.
“In no one’s imagination is SunTrust going to come in and cover 40 countries just to do some trade finance deals. And it will never be profitable for Bank of America, or HSBC, or these other global firms who do possess the knowledge and reach and scope to do these one-off, little deals for some U.S. exporters,” Fratto said.
One real-world example cited by representatives from the Chamber and from NAM on the conference call Monday was FirmGreen Inc., which makes equipment used to purify biogas. Donohue said on the conference call that its CEO, Steven Wilburn, told lawmakers in April that his company lost a $US57 million contract to a South Korean company because of the Ex-Im Bank’s uncertain future.
“We are hearing from large and small companies alike who are realising that the numbers of competitive offers on big projects and on small ones would fundamentally change if this type of financing is not available,” Donohue said.
And the big beneficiaries of the bank, like Boeing, are worried about the possibility of its charter expiring. The company told Business Insider in a statement it would “be placed at a competitive disadvantage” to companies like Airbus, which has similar backing from export-credit agencies in France, Germany, and the United Kingdom.
“The aeroplane market is highly competitive, and every deal is won or lost by the slightest of margins. Any uncertainty in financing availability could unnecessarily tilt the field against Boeing, putting thousands of manufacturing jobs at risk,” the company said in the statement.
In all, the vast majority of companies want the Ex-Im Bank to continue. Delta, which has been a corporate outlier on the issue, says it wants the charter to be renewed, even as it presses for reforms to be on more of a level playing field with Boeing.
What happens now?
Opponents of the bank are already declaring near-certain victory ahead of the Sept. 30 deadline. The incoming No. 2 House Republican, McCarthy, has now announced his opposition. A spokesman for House Speaker John Boehner told Business Insider he has made clear the debate should be left to members and, especially, the Financial Services Committee, which is chaired by Hensarling.
“Folks laughed at me when I was talking in March and April that, yes, the Ex-Im Bank was going to expire this year,” Heritage Action’s Holler said. “And each and every month since, we’ve gotten more and more momentum. There’s no doubt that in the past couple weeks, things have really accelerated. And you’d be hard-pressed to find somebody who’s talking optimistically about the Bank being reauthorized.”
About the only source of optimism left for backers is the fact the Ex-Im Bank supports more than 3,000 small businesses, which are included in every single district in the U.S. But on the contrary, there have been a number of recent Chamber-supported issues that haven’t found their way through the House, including one of its biggest — immigration reform.
When asked if there would be “consequences” for lawmakers who resisted extending the Ex-Im Bank’s charter, Donahue demurred. And he knew it.
“I suppose you have to ask the voters. And if you think I ducked your question, you’re exactly right,” Donahue said.
For its part, a spokesperson from the Ex-Im Bank said it didn’t have a reaction to McCarthy’s comments, other than that it was still “optimistic that Congress will do what it has always done and reauthorize the Export-Import Bank.”
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