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Kickbacks for crony capitalists

June 27, 2014 J,

By Mallory Carr

Earlier this week, The Wall Street Journal reported four officials at the Export-Import Bank were under investigation and put on leave for alleged corruption. One employee in particular, Mr. Johnny Gutierrez, is under investigation for accepting cash payments in exchange for granting the Florida company Impex Associates millions in loans and guarantees.

Impex, a construction supplies company, has reportedly been receiving coveted deals since 2002. In 2007, the Export-Import Bank eagerly helped Impex complete multi-million dollar construction projects in sunny Mexico and the Dominican Republic — while allegedly also helping themselves to generous kickbacks. Meanwhile, recession clouds gathered over the United States, ultimately destroying a total of 2.2 million jobs in the construction industry here at home. But, thanks to generous help from the Bank, Impex was able to continue financing construction jobs abroad through 2011.

Members of Congress and the American people are right to be outraged, but they shouldn’t be surprised. What these officials allegedly did – which is illegal – is merely a microcosm of what the bank itself does on a daily basis.

The whole purpose of the Export-Import Bank is to pick winners and losers. The Bank provides sweetheart financing arrangements for foreign corporations that do business with well-heeled American companies. This financing, backed by American taxpayers, is well below market rates, which allows the chosen American companies to do business for much cheaper than their competitors who lack political access or friends at the Export-Import Bank (like Mr. Gutierrez, for example). Thus, the favored companies (those with political connections) receive an unfair advantage, creating an uneven playing field.

When the job description of unaccountable bureaucrats at the Export-Import Bank is to pick who will be the winners, it’s almost inevitable that those decisions will involve whims and personal preferences.  Indeed, the Bank’s inherent responsibility makes the possibility for fraud and outright corruption practically unavoidable.

After the Bank decides they want to fund a certain industry to promote a selected product in foreign markets, it is up to individual bureaucrats within the Bank to decide which company inside the well-connected and politically favored industry gets the contract. Obviously, these bureaucrats can be influenced.

The process of choosing which company will receive a deal that gives them a competitive advantage over another company is, by definition, not based on prevailing market conditions or which company is the most efficient or effective – those things would be determined by consumers, not government. The decision could be based on fraud, or any other random variable. Regardless of the basis, the Export-Import Bank creates an arbitrary distortion that alters the outcome that would occur were the government intervention absent.

Corruption at the Export-Import Bank stems directly from this process, which is inseparable from the very structure of the Bank, making it a pervasive problem. As recently reported, there were dozens of fraud cases referred to the US Department of Justice over the past five years. An FBI investigation in 2009 found a sitting Congressman, Representative William J. Jefferson of Louisiana, guilty of taking hundreds of thousands of dollars in bribes to help companies willing to pay receive Export-Import Bank financing.

Officials at the Export-Import Bank, if the allegations prove true, clearly acted outside the scope of the law.  But, they also did exactly what the bank was set up to do—pick winners and losers.

The Export-Import Bank has earned its reputation for crony capitalism and this is why it should not be reauthorized. Unless policymakers want to continue reading about bank employees accepting gifts, cash payments and kickbacks in exchange for loans and contracts well into the future, they should put an end to their patronage game, and break the bank.

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