Whos' Watching the Kronie Store at America's "Real" Bank?

from Politico

David Matsuda had never been a mariner or an administrator before he became the head of the U.S. Maritime Administration in 2009. He had been a government lawyer and a congressional staffer, focusing on railroad issues; the ringtone on his phone was the choo-choo of a train. Matsuda had never been a banker, either. This was relevant because MarAd, in addition to its basic duties involving vessels and ports, ran a perennially troubled $2 billion credit program that had propped up U.S. shipbuilding since the Great Depression. When Matsuda took the helm, the program was sinking again, heading for its worst defaults since a massive loan to help the billionaire investor Sam Zell build cruise ships had gone bust in 2001. Whatever Matsuda’s Washington career had prepared him for, it hadn’t prepared him to be Uncle Sam’s repo man on the high seas.

“It was like walking into a nightmare,” says Matsuda, 42, a former transportation adviser to the late Democratic Senator Frank Lautenberg. “I looked around and said, ‘Guys, what’s happening?’”

The Bush administration’s last MarAd loan guarantee, a $140 million deal to help a politically connected firm build two “superferries” to shuttle passengers around Hawaii, imploded shortly after Matsuda arrived. MarAd got stuck with the ferries, which it eventually offloaded to the Navy. Then a marine services outfit with a MarAd loan went bankrupt, prompting panicky meetings about whether seizing its collateral—a supply boat at work in Nigeria’s offshore oil industry—would spark an international incident. Then another dying shipping company missed a payment on a loan secured by four double-hulled oil tankers. After weeks of confusion, MarAd’s lawyers informed Matsuda he needed to arrest the four football-field sized ships.

“Honestly, I didn’t even know you could arrest ships,” he recalls.

MarAd struggled just to locate the tankers, which were scattered around the Gulf of Mexico and the Eastern Seaboard. One captain apparently turned off his transponders to evade detection. “They were moving from port to port to avoid us,” an official recalls. “We’d go looking for a ship, they’d be gone before we got there.” The four ships were finally tracked down in three states; federal marshals had to board them, place them under arrest and claim them for the government. MarAd ended up selling them for scrap, recovering just $7 million of the $88 million it was owed.

This is what can happen, Matsuda says, when a little marine agency like MarAd is assigned to evaluate big-money credit deals. “It’s never going to lure financial talent away from Wall Street,” says Matsuda, who left the government in 2013 and is now a transportation consultant in Washington. “It’s not a bank.”

No, MarAd is not a bank. It’s more accurate to say it runs the shipbuilding-loan division of a much larger bank—in fact, America’s largest bank.
That bank currently has a portfolio of more than $3 trillion in loans, the bulk of them to about 8 million homeowners and 40 million students, the rest to a motley collection of farmers and fishermen, small businesses and giant exporters, clean-energy firms and fuel-efficient automakers, managed-care networks and historically black colleges, even countries like Israel and Tunisia. It has about 120 different credit programs but no consistent credit policy, requiring some borrowers to demonstrate credit-worthiness and others to demonstrate need, while giving student loans to just about anyone who wants one. It runs a dozen unconnected mortgage programs, including separate ones targeting borrowers in need, Native Americans in need, veterans in need and, yes, Native American veteran borrowers in need. Its problems extend well beyond deadbeat shipbuilders.

That bank, of course, is the United States government—the real bank of America—and it’s unlike any other bank.

For starters, its goal is not profit, although it is profitable on paper, and its loans are supposed to help its borrowers rather than its shareholders, better known as taxpayers. Its lending programs sprawl across 30 agencies at a dozen Cabinet departments, with no one responsible for managing its overall portfolio, evaluating its performance or worrying about its risks. The closest it gets to coordination is an overwhelmed group of four midlevel Office of Management and Budget employees known as “the credit crew.” They’re literally “non-essential” employees—they were sent home during the 2013 government shutdown—and they’re now down to three, because their leader is on loan to the Department of Housing and Urban Development. When I suggested to OMB officials that the crew seemed understaffed to oversee a credit portfolio 25 percent larger than JPMorgan Chase’s, someone pointed out that it’s hiring an intern.

These unregulated and virtually unsupervised federal credit programs are now the fastest-growing chunk of the United States government, ballooning over the past decade from about $1.3 trillion in outstanding loans to nearly $3.2 trillion today. That’s largely because the financial crisis sparked explosive growth of student loans and Federal Housing Administration mortgage guarantees, which together compose two-thirds of the bank of America. But even after the crisis, as a Washington austerity push has restrained direct spending, many credit programs have kept expanding, in part because they help politicians dole out money without looking like they’re spending. In 2012, Congress boosted funding for a transportation loan program called TIFIA eightfold, while launching a similar initiative for water projects called WIFIA. There’s now talk of a new credit program for public buildings—naturally, BIFIA.

One reason for the bank’s explosive growth is old-fashioned special-interest politics, as beneficiaries of credit programs—the real estate industry, for-profit schools, the farm lobby, small-business groups, even shipbuilders—push aggressively to grow them. A Washington money spigot, once opened, is almost never turned off. Since fishermen in the Northwest Halibut/Sablefish and Alaska King Crab fisheries got their own $24 million loan program, it’s a good bet that nobody’s paid closer attention to it on Capitol Hill than their lobbyists. But the federal credit boom has just as much to do with arcane budget politics. Critics believe the unorthodox government accounting system for credit programs dramatically understates their costs, encouraging Congress to spend hundreds of billions of dollars in expected savings that might never materialize. It’s not just a theoretical risk: The FHA has already received a series of unpublicized quasi-bailouts since the financial crisis, amounting to more than the $45 billion government bailout the corporate Bank of America received in 2008. Some critics believe student loans, budgeted as a government moneymaker, could be heading for a far worse fiscal disaster.

But the financial and political risks associated with federal credit have not yet registered with most policymakers, much less the public, even after credit controversies like the solar manufacturer Solyndra’s default on its clean-energy loan, the escalating student debt crisis and the high-profile effort by congressional Republicans to kill the low-profile Export-Import Bank. “The depth of ignorance is stunning,” says Brookings Institution fellow Douglas Elliott, a former investment banker who wrote a book called Uncle Sam in Pinstripes about the government as a financial institution.

Some of the federal government’s credit operations produce failure rates no private bank would tolerate. The Department of Agriculture’s loan programs promoting biofuel refineries, rural broadband and renovations of rural apartment buildings have all performed even worse than MarAd’s, recovering less than 40 cents per dollar, the kind of return you might expect lending to your brother-in-law. The average default rate for private bank loans is about 3 percent; by contrast, the State Department’s “repatriation” loans to Americans who get stuck without cash abroad have a 95 percent default rate. USDA’s main mortgage program for rural families retrieves just 3 cents on the dollar from borrowers who default, suggesting it barely tries to collect when loans go bad.