Why Killing The Ex-Im Bank Is Crucial To The Future Of Capitalism

Tyler Durden's picture

Submitted by David Stockman of Contra Corner blog,

The surface facts make abundantly clear that the case for the Ex-Im Bank is truly lame. In the most recent year (2013), its credit guarantees and other programs accounted for $37 billion of exports or less than 2% of the $2.2 trillion of exports generated by the US economy.  Moreover, by the bank’s own reckoning only about $12 billion of these Ex-Im deals deployed taxpayer subsidies in order to “meet competition from a foreign, officially sponsored export credit agency”.

So suppose those latter export deals which purportedly faced unfair competition from foreign governments would not have happened absent Ex-Im financing. We are talking about 0.6% of exports and 0.1% of GDP. That is, we are talking about economic “noise” that is so faint that even Janet Yellen could not detect it!

Actually, we are talking about something even more spurious. Fully $8 billion or two-thirds of this $12 billion in competitively disadvantaged exports were attributable to a single customer—the Boeing Corporation (BA). Moreover, the company’s own financial director publicly admitted that it could “find alternative funding sources” without the Ex-Im Bank.

So the issue is not $8 billion of commercial jet sales or nothing. Its about the marginal cost of export finance, and whether any incremental costs needed to offset the dumb subsidies of foreign governments should be absorbed by the taxpayers of America or the shareholders of the Boeing Corporation. And the answer to that question is not very hard to ascertain.

Even if the present value of foreign credit subsidies amounted to 10% of the purchase price—a level well beyond current practice—there would be nothing to prevent Boeing from discounting its selling prices by enough to make up the difference. That would be about $800 million in the most recent year. Yet such a “painful” discount would amount to less than 13% of Boeing’s LTM pre-tax income or about $0.75 per share on a net income basis.

At the end of the day, that’s what its all about—-whether BA would earn $6 per share or $5.25 during its most recent LTM reporting period. Needless to say, that modest spread has no bearing on the pubic interest whatsoever. And the loss of $0.75 per share of taxpayer largesse most likely would not even crimp the style of the fast money traders who move in and out of BA’s stock, either.

In fact, during the last 18 months Boeing’s LTM earnings have posted in a narrow band between $5.30 and $6.00 per share, but it stock price has fluctuated widely between $70 and $130. The far greater amplitude of the latter, in turn, reflects the short-run trading games among the hedge funds, which have caused Boeing’s PE multiple to swing wildly between 13X and 25X. Stated differently, its market cap has ranged from $50 billion to $100 billion based on huge fluctuations in it capitalization rate, not its bottom line.

So let Boeing fund its own concessionary export credit where it is needed and let the hedge funds figure outs its appropriate capitalization multiple. But since the taxpayers of America have no dog in either of those hunts, there is absolutely no reason for the continued existence of the Ex-Im Bank.

Indeed, as this core Boeing example makes clear, the fundamental issue is the incidence of Ex-Im Bank subsidies, not the level of US exports, jobs or GDP. And it is here where the dirty crony capitalist secret hides. Last year the top ten beneficiaries of Ex-Im subsidies accounted for 75% of the total, but virtually all of this largesse went to American exporters of heavy capital equipment and projects—including Boeing, General Electric, Caterpillar, John Deere and Bechtel.

The common characteristic of every one of those suppliers of airframes, jet engines, power plants and oilfield, construction and mining equipment is that they incur heavy fixed costs—including amortization of the substantial research, development, testing and engineering costs(RDT&E)—in the process of bringing these goods to market. Accordingly, Ex-Im’s core customers are maniacally focused on variable profit contribution. That is, at the competitive margin they do not hesitate to discount their lists prices in order to make a sale that provides positive variable contribution to their heavy burden of RDT&E overhead and fixed manufacturing and supply-chain costs.

Needless to say, these discounts—which are aimed at a host of competitive threats and which would include offsets to foreign government export subsidies if they were required—come straight out of variable profit contribution, and therefore flow directly into earnings per share. Accordingly, there can be no doubt that the discounts avoided owing to Ex-Im subsidies accrue to the shareholders of the handful of giant, global corporations that absorb the overwhelming share of its taxpayer funded largesse.

In a general sense, the true evil of crony capitalist subsidies—whether through credit, grants or tax breaks—is that the incidence of the benefits rarely accrues to the greater public good of jobs and GDP, as advertised. More often than not they are captured by upstream factors of production such as suburban land bank owners in the case of subsidies to buy or build homes. But in the case of Ex-Im Bank, the route of subsidy capture is crystal clear: it goes overwhelmingly to the shareholders of Boeing and GE, and to the respective bonus and stock option pools of their top executives.

And therein lies the deeper stakes in the currently raging legislative battle over extension of the Ex-Im Bank’s authorization after September. Yes, Boeing, GE and the handful of big cap clients of the bank have considerable beltway clout through the usual channels of PACs, K-Street lobby operations and targeted mobilization of local suppliers and unions.

In truth, however, the constituency and money politics base of the Ex-Im is exceedingly narrow. Preservation of the bonuses and prerogatives of even GE’s Jeff Immelt, the nation’s most unabashed crony capitalist, does not automatically confer a winning hand in a beltway food fight. So there is something beyond mechanical interest group politics involved here.

Indeed, the magnitude of the beltway mobilization in behalf of Ex-Im leaves no doubt that what is really at stake is the modern bipartisan predicate that American capitalism is a fragile flower that requires constant state interventions and inducements in order to stay on the path of growth and prosperity. Accordingly, job #1 in the beltway is everywhere and always bucking up the GDP and boosting the job count. Extending the Ex-Im bank authorization, therefore, is just another project in pursuit of business as usual.

Not surprisingly, therefore, the entire machinery of bipartisan influence peddling is being mobilized, as aptly described in a recent Wall Street Journal update:

With the 80-year-old agency’s charter expiring Sept. 30, the battle over its future has intensified. Its backers are redoubling their efforts, which include showing members of Congress how the agency benefits their districts.


“There’s a full inside-the-Beltway, outside-the-Beltway push,” said Christopher Wenk, senior director of international policy at the U.S. Chamber. “We’re burning up shoe leather.”


Lawmakers at a recent House hearing on the future of the Export-Import Bank were given an extra piece of reading material: a personalized index card laying out exactly which companies in their districts benefit from the financing agency and how many people they employ.


The cards, which supporters of the bank plan to give to every member of Congress in coming weeks, are part of a lobbying push by corporations such as Boeing Co.


The business groups have brought in big names such as former House Majority Leader Dick Gephardt, a Democrat, and former Mississippi Gov. Haley Barbour, a Republican, to promote the bank’s worth. Hamilton Place Strategies, hired to lobby on the issue for the manufacturers, has created a “war room” to provide rapid response to counter critics via email and social media.

Here’s the thing, however, The overpowering and incessant statist economic management of the American economy, as reflected in the Ex-Im extension mobilization now underway, is causing the engines of capitalist prosperity to shutdown. The main culprit, of course, is our monetary central planners in the Eccles Building. But they are only the leading edge—–the exemplar that tells Washington day in and day out that without constant ministrations by agencies of the state, our capitalist economy would continuously under-preform and tumble into the ditch.

In the years since the unfortunate arrival of Alan Greenspan at the Eccles Building, the Fed have systematically destroyed decentralized, spontaneous  “price discovery” in the financial markets and replaced it with a regime of “price administration” operated according to the writ of 12 economic overlords. Now all market participants chase the Fed’s unrelenting emission of liquidity and word clouds; interest rates are pegged, bond prices are propped; and Wall Street gamblers are showered with endless free money for the carry trades.

But the Fed’s parlous regime has only intensified the statist assault on market capitalism that has been underway for nearly a century. At the center of this assault is the wrong-headed notion that capitalism is an economic cripple that is inherently prone to drastic cyclical instability, and that absent enlightened  management and intervention from Washington— society would be constantly in harm’s way.

The truth of the matter, however, is just the opposite. During the last 100 years it has been the misguided projects and interventions of the state that have caused capitalist prosperity to be interrupted and eroded. The Great Depression, for example, was the step-child of the economic and financial havoc caused by World War I, and the phony prosperity stimulated by the Fed and other European central banks during the 1920s. All of this was designed to paper over the legacy of wartime inflation and debt and the destruction by the combatant governments of the pre-1914 regime of sound, gold-anchored national currencies.

Likewise, all ten of the post-war business cycle downturns reflected either the temporary cooling off from war-fueled booms—such as after the Korean and Vietnam wars—or central bank induced credit booms that had to be curtailed with monetary restraint, most notably the “Volcker cure” for double-digit inflation in the early 1980s.  And most recently, as the Fed has become a serial bubble machine, macro-economic dislocations have been directly attributable to the liquidation of malinvestments and economic bloat induced by speculative excesses during the bubble inflation period.

So what is at stake in the Ex-Im battle is the future of market capitalism itself. If Washington lacks the capacity to say no to the shareholders of a few big US corporations that can be counted on one hand, then the statist predicate will triumph finally and for ever more.

Unfortunately, the script is already evident. When push-comes-to-shove during the run-up to the fall congressional elections, Speaker Boehner can be counted upon to come to the rescue of GE in his home state, and sell-out the tea party insurgents yet again.

And this time it will be game over. If the Ex-Im is given a new lease on life there will be no place for free market conservatives in the Republican party at all. Going forward, crony capitalism will be readily managed by the statist politicians who dominate the beltway regardless of notional party affiliation and banquet speech ideologies.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fedaykinx's picture

yet another example of a government program that sounds good on paper but gets coopted by crony capitalists with powerful lobbies

there are some legit concerns that will be hurt by not having access to credit facilities for overseas sales but they're swamped by the likes of boeing, who obviously doesn't need any help.

Greenskeeper_Carl's picture

"Killing the ex-I'm bank is vital to preserving capitalism"
Which is exactly why it ain't going anywhere....

suteibu's picture

You'll have to be more specific about those "legit concerns."  Sitting here, I can't think of a single one that would be a responsibility of American taxpayers.

i_call_you_my_base's picture

Right, there are private institutions for this. Put the debt in private hands where it should be and let the interest rate reflect the risk. Almost everyone in the US could agree with that, except for the people taking money, like that Dick.

Urban Redneck's picture

So you grant Jamie Dimon ANOTHER market monopoly (and make him even TBTFer) on top of tri-party repo?

Urban Redneck's picture

There aren't any really good alternatives, short of getting all governments out of the subsidized interest rate racket.

Buyers are price sensitive and interest expense is a huge component of price once one gets outside of the USSA/EUSSR.

A few of the lesser steps that would at move in the right direction.

1) setting on limits based on firm size and industry market share

2) restructuring the institution/charter so there is actual or implication of a taxpayer backstop in the event of a capital call

suteibu's picture

"2) restructuring the institution/charter so there is actual or implication of a taxpayer backstop in the event of a capital call"

And, thus, why Jamie Dimon has a monopoly instead of being the ex-CEO of a bankrupt TBTF bank.

Urban Redneck's picture

That was a typo, there should have been a bolded "no" in there (when manually typing html - ">" and "<" are problematic).

suteibu's picture

Gotcha.  Sorry there's no way for either of us to edit our comments.  That said, we are not so far apart after all.

Urban Redneck's picture

Unlocking my browser would probably cut down me coming across a pure lunatic who can't even spell (this keyboard layout doesn't help) but I don't trust the rest of the interweb tubes.

I would love a simple solution, but I haven't found one, and it's not as if I'm not looking...

Last quarter we were sourcing equipment for a production line. Our desired supplier came in at 1.5M (no export assistance and domestic borrowing costs are well over 20% for a five year loan). A 1 billion market cap company (so not even TBTF) came in with a bid of 3.0M and a rate under 7%. The "TBTF-like" firm that came it at twice the price was actually cheaper and saved us substantial time and headache of securing a loan ourselves, so they got the contract.

The system itself is waaaaay fucked up.

Tapeworm's picture

That is a stunning admission. Your company has so little capital tht it cannot afford to place an order at half of the price.

 I have not borrowed from anyone or any bank for fifteen years and was able to load up on machine tools back when the companies making them were dying to sell at just about any price to get some cash.

Urban Redneck's picture

This contract is about 10% of the total financing for the expansion, and is getting rolled into turnkey contract where the lead contractor has responsibility for integration, so it's not quite that straight forward. But you're right - I don't have 20M in digital fiat to finance this out of pocket, and yet this is exectly the time to be going counter cyclical on CapEx and acquiring assets outside of the banking system at a fixed cost.

MeelionDollerBogus's picture

At an unleveraged cost. No wonder leverage is collapsing everyone left, right & center: it's not just in trading on wall street, it's supplying the equipment & filling the warehouses.
A giant house of cards with every card actually painted with nitroglycerin.

MeelionDollerBogus's picture

Dimon can't keep in business without the Fed's assistance.
Morgue would collapse in short order. As would Nuttman Sachs.

Fedaykinx's picture

what private institutions would those be?  chase, bank of america, citi?

small time exporters can hope for credit from those "private" institutions in one hand and shit in the other, i guess we'll see what happens.  i mean, overseas customers just love paying up front while they wait on the slow boat to arrive with their goods.  

oh well.  just more fodder to enlist in the FSA.  i mean, at this point what difference does it really make.

MeelionDollerBogus's picture

Honestly relying on credit to run a business is a foolish endeavour. It's just building weakness into the core of its existence.

Urban Redneck's picture

That would be the 80+% percent of the transactions that account for less than 20% of the dollar volume.

"Responsibility" of the taxpayers is a strawman argument. International trade is debt driven, just like domestic trade is debt driven, what would happen to the market share if one of the big three US automakers closed down its finance arm?

I'm all for killing ExIm and replacing it with something more appropriate, but the bullshit of there being "no consequences" to such an action sounds like something out of an Obozo stump speech meant to feed the feeble minds of the retard legions.

suteibu's picture

Sorry, not my responsibility.  But, the land of liberty certainly gives you the opportunity to gather up some like-minded friends and associates willing to put up your own money to help these folks out.  If it is such a good deal and provides profits back to the Treasury, as the proponents are quick to claim, sounds like a good risk for you.  In fact, take it public.  I'd buy the stock on the news and sell it before the euphoria wears off.

Urban Redneck's picture

There's a much simpler alternative. Neither I, nor any of my clients, buy American anymore. It's only nine figures a year of US goods purchased, not like there would be any US jobs associated with that.

in fairness less than half of the total is US sourced now, and the stuff from TBTFs (GE/Caterpillar can be or is already routed through offshore captive finance subs)

The IPO sounds like a good idea though.

poor fella's picture

Any time is interesting times when Obama and the Chamber of Commerce hold hands behind closed doors and sing choom-bah-yah...

Love to see a complete list of what exactly has bi-partisan support, and weigh that against public support.

Tapeworm's picture

+1 for the humor of the first sentence and +1 for the second sentence on the soundness of the suggestion.

 If nothing happened with the mass outpouring of the hoi-polloi on the TARP bailout votes no1 and no2, I doubt that anything will stop the cronyism until it all blows up.

 200/1 opposition from the largest outpouring of correspondence from the mundanes of all time did not sway the republicrats from the bailouts. Even the supposed voice of Capitalism, the WSJ, gave Paul Ryan their nod for the single greatest power behind TARP as the savior of the entire economy.

Reaper's picture

Judge them by how they vote, not what they say.

Dr. Engali's picture

I have news for you David, capitalism has no future. It's a dead man walking. It was killed in 1913 and it's currently in its death throws. But hey, thanks to the free fiat it's easy to make coin in this fascist system...... For now.

Remember :

I had to abondon the free market in order to save it.

George W. Bush

Greenskeeper_Carl's picture

Also remember 'deficits don't matter' from dick Cheney in the Reagan administration. Still drives me nuts to hear republicans reverently refer to him as some kind of patron saint of free markets and limited govt.

falak pema's picture

Reagan changed "everything" so that "nothing" would really change.

Inflation remained but in debt and asset pumping not in salaries.

The welfare state gave way to the Oligarchy pyramid.

trader1's picture

do you think it was planned all the way back then to happen as it is now?

or, is it all random?

overexposed's picture

It's too bad EX-IM isn't on the OTC markets -- There's no way the politicians are going to let that beast die, it's odds of getting renewed are well over 9,000%.  Would be monkey-hammering the BUY button on that probability for sure, if it existed.

Ah well.  Can always dream of ZHLD hitting the moon tomorrow!

schrodingers-cat's picture

EX-IM is a crappy contraction/nickname... EXPIMP is much better.

falak pema's picture

lol, kill the banks and replace capital by "i owe yous"

Make_Mine_A_Double's picture

Good luck with that.

I was just at a Chamber meeting with the our state Communist congressional delegation. Libtard moonbats each and every one of them.


Falling all over themselves to suck Boeing cock. I presume they rinse and repeat with every state delagation they have suppliers in.

And what Boeing wants......Boeing gets in Congress.

davelis's picture

This a rather academic argument about how capitalism functions best without any form of government interference and croney capitalism is the inevitable result.  Sure the big companies (that don't need the subsidy)  have a way of usurping the best intentions of lawmakers, even when they are not on the take. The facts on the ground when you work in a vital  technology company that must compete in the China market to survive are quite different.  Returning on Tuesday from Shanghai on the 15 hour economy class nightmare ride I could think anout this as I was served poor food on a hard seat. 

The fact is just about all companies that do business in China must open the 51% Chinese owned subsidiary and fork over all their code, technology and help train their Chinese counterparts get up to speed. The subsidiary can receive government funding, steal most of their software licences and put 10 times the number of people on the job at less cost  (working 12 hour days, free noodles and rice for lunch and dinner) . So if you walk into one of our high tech labs in France or the USA you will notice the scale has been pushed in their favor by a big fat finger. While we and the the French team have one TMxxx piece of equipment costing $750,000 US they have 14. How did that happen?

Software? Price is cheap when you have cracked Flexlm. One of our US  tool vendors charges $25,000 per seat per year in the west. Not so China.  When he visited them they were running the PC version they never bought and had hundreds of workers but only a handful of paid licenses. At least they told him it was a crack. Why do any work in the US or the EU?  

Why do our companies do it?  Well if you win part of China Mobile you get 500 million customers. The US has 320 million people total! You go on your knees and pay tribute.  Don't go in go out of business. 

Sure the Chinese politicians get their kids cushy jobs and do a certain amount of croney capitalism. But, they are targeting key industries for eventual domination. They are jump starting a backward rural economy as Alexander Hamilton tried in the U S. Just as Hamilton stole  British textile techology the Chinese are going to take every technology crumb they can get. And are we are going to sleep and let them do it. No we are going to help train them to replace us.  

 Seeing it for yourself in China is an eye opener. At the Bund you can see a spectacular skyscraper backdrop (if the smog does not shut your eyes) where giant new skyscrapers are rising while workers toil night and day as witnessed by the sparks at night from their torches cascading down the inky, smoggy backness.  Property bubble, sure, but this was a rice paddy 20 years ago. These people are going places. We are going nowhere fast. Once all our technology is gone we can go back to our rural roots and cook moonshine. 

The hands off approach practiced by our politicians will lead us to the dawn on the new Chinese century. Perhaps you kids will be lucky to be one of their doormen or valets. 

Tapeworm's picture

I find nothing to dispute your take on the situation.

 But we do need illiterate scabies and lice infested parasites to get our schools up to speed in educating to compete with Orientals that openly hate the natives of the host country.

 I think that I have got it now and am on board with TPTB.