Trump reverses self on ExIm Bank

April 13, 2017, © Leeham Co.: President Donald Trump reversed himself and now supports the US Export-Import Bank, according to news reports. He will appoint

Donald Trump suddenly discovered the US ExIm Bank was a “profit center” for the US Treasury. Photo via Google images.

two people to long-standing vacancies to allow ExIm to approve deals more than $10m.

ExIm, Trump now says, is a profit center for the US Treasurer.

His sudden understanding on this revelation is like his eye-opening realization that dealing with the North Korean situation isn’t easy.

Supporters of ExIm pointed out for years that the Bank returns money to the US Treasury.

Tea Party, Republican opposition

ExIm became a target for closure by Tea Party and conservative Republicans during President Obama’s first term. Reauthorization by the Republican-controlled Congress was at first blocked, then granted a one-year extension and finally a five-year approval.

But by then terms of some board members expired. Obama nominated new members, but the US Senate refused to approve the nominees, denying the board a quorum. As a result, no deals valued at more than $10m could be approved.

Shelby blocks appointments

Putting a hold on nominations was Sen. Richard Shelby, a Republican, from Alabama.

Although no fingerprints can be found that Shelby is blocking ExIm because its biggest customer is Boeing, the fact is that Airbus has an A320 assembly plant in Mobile (AL), of which Shelby is a strong supporter, and Airbus right now is blocked from European Credit Agency export credit support due to problems of its own.

Shelby supported ExIm before Airbus opened the Mobile plant.

Victory for Boeing

Trump’s about face on ExIm was immediately touted as a victory for Boeing, and for GE, both of which benefitted the most from ExIm due to the sheer dollar size of their international transactions. But ExIm also supported thousands of smaller companies.

Whether Trump can get his ExIm nominees past a recalcitrant US Senate and persuade Shelby to rescind his opposition will be a test of Trump’s self-proclaimed deal-making abilities.

ExIm was derided by critics as “Boeing’s bank” and an example of corporate welfare because its airplane deals accounted for the majority of the dollar volume ExIm backed.

To be sure, credit guarantees to the likes of Emirates Airline are open to criticism. However, other deals—like an order for 201 Boeing 737NGs and MAXes—to Indonesia’s LionAir and certain African airlines buying the Boeing 787, for example, clearly pass the “need” test.

Before Airbus’s access to ECA financing was cut off due to failure to disclose certain consulting relationships in airplane deals, as required by the ECAs, shutting down ExIm put Boeing at a disadvantage.

Critics of ExIm claimed Boeing could find other means to support financing of poor credits. These critics suggested Boeing could do so through its Boeing Capital Corp. financing arm.

The answer to this is yes and no.

BCC has purchased 747-8Fs from Boeing Commercial Airplanes and leased them to cargo airlines in Russia and elsewhere. But BCC is a subsidiary of The Boeing Co. and the corporate balance sheet can accommodate only so much.

Boeing finds alternative to ExIm

However, BCC didn’t stand still. Officials worked to create a market-place financing alternative to ExIm, one that would not tap Boeing’s balance sheet.

Korean Air Lines is the first to use a new financing mechanism created by Boeing Capital Corp. in lieu of ExIm Bank financing. Photo via Google images.

Flight Global reported as far back as last June that BCC was working on a structure and in February, reported more details.

This month, Flight Global reported (behind its paywall) that Korean Air Lines is the first to use a new BCC-driven insurance structure in lieu of ExIm.

The structure is called the Aircraft Finance Insurance Consortium (AFIC). It was used for a 747-8, and two 787-9s scheduled for delivery next month and July will also be financed through AFIC, Flight reports.

“Boeing Capital is understood to have reached out to Wall Street institutions in 2016 to create an alternative structure to export credit guarantees,” Flight writes.

“The insurance under the AFIC structure is understood to carry premiums to an Ex-Im loan which is guaranteed by the “full faith and credit” of the US government.”

BCC declined comment to LNC.

27 Comments on “Trump reverses self on ExIm Bank

  1. Well, ok. Boeing was just the number 4 countributor to Sen. Shelby’s campaign thru 2016. He’s been defensive about the Alabama site for the NG (later Airbus) KC-X plans for a long time.

    Oh, and I don’t know how many narrow body export orders Exim has financed/guaranteed, but I thought it was precisely zero. Interesting how this federal ‘profit center’ was able to be replaced by the market when urgently needed.

    I think the editorializing about NoKo is a bit hyperbolic as well, especially as he’s succeeded, btw, in finally getting the Chinese to help, all the way to getting our coal to Chinese markets while they refuse NoKo coal shipments. But is this really a discussion that fits/belongs here?

    Maybe the MOAB just dropped in Afghan would be more interesting, or finally taking on WMD/war crimes in Syria with real action pertaining, again, to aerospace. I do think this site could have interesting feedback/commentary to offer regarding the pending commercialization of space launch, for instance, although this too could impact defense matters eventually.

  2. A politician reversing a stance on an issue! Stop the presses! Who knew!

    I do, however, truly appreciate Scott’s commentary over the past several years on the ExIm Bank issue as it relates the aircraft industry.

    • When it’s a politician you don’t like it’s a “flip flop”.
      When it’s a politician you like it’s his “views have evolved!”

  3. I wonder how much of the implosion in new widebody orders is a result of Exim and its European counterpart being sidelined.

  4. If something sounds too good to be true,, it usually is. If Ryanair is getting it’s 737s cheaper than commercial rates, someone, somewhere is paying or are carrying the risk of paying a huge amount if it goes wrong.

    • Ryanair took about a whole months worth out of a full years production of 737s last year

      isnt that worth a decent discount?

  5. The Exim question really comes down to one question; who is better to determine risk/interest rate, (or any/market of) bankers, or the government? I’d posit that Venezuela, Noko, Soviet Union, Cuba, etc., indicate the latter, long term, are a poor bet.

    There’s some cognitive dissonance between simultaneously arguing in favor of (tax/confiscation backed) lending subsidies, but against tax subsidies for jobs/manufacturing.

    Exim has generally disproportionately subsidized the ME3, and Chicom Boeing widebody purchases. Not sure how that really helps/appeals to the middle class American tax payer. But again, it’s shocking how complicated the world really is from a moral perspective, to both the left and right.

  6. Big Surprise. I shocked, just shocked I say.

    A man clearly stuffed with manure.

      • Well as one of Trumps congressional supporters put it
        “We wanted you to drain the swamp not to make it a hot tub’

      • Geo:

        For the IE I don’t care so much. Maybe I should,

        Its all the U turns and lies.

        I would rather have a woman in charge with a brain than a bag of wind.

  7. Note that China is no longer a currency manipulator.

    Looking forward to the mid terms and how his base responds to all the U turns.

    • Well it worked for Obama and every President before him (except Bush the elder) so I wouldn’t hold my breath…

      • Sorry Trans misread your post.
        President’s parties almost always lose seats in midterm elections In fact their has been only one midterm since 1935 where the President scored gains in both houses, 2002. From Politifact…:”In midterms since 1862, the president’s party has averaged losses of about 32 seats in the House and more than two seats in the Senate.”
        So it’s probably not a question of if but rather how many.

  8. I feel any institution, bank or political decision can become a positive, honest, justified investment by determing if it in the end helps Boeing. Forget the level playing field you were defending shortly before. Flexibility is key.

  9. The idea of ExIm becoming a profit centre is when you suspend all the normal accounting rules, yes they have special rules written for them.
    Its real name should Boeing Bank , which exists to borrow at government rates to provide credit at less than market rates for select exporters, mostly corporate behemoths.
    Forbes does a good job at showing how this is done.

    A bailout happened in 1987 and will almost certainly be required again
    “NEW YORK — The Export-Import Bank will seek a $3-billion bailout from Congress next month[ Dec 87] to counter the loss of hundreds of millions of dollars in capital, the federal agency’s president said in a report published today.”- LA Times

    Its really called crony capitalism, but lets not pretend that its some sort of ‘profit centre’

  10. Let me inject some “balance” into the above barely passing mention of the ECA financing scandal. The european legal authorities didn’t totally shut down this financing just for some reporting technicalities involving consulting firms. They’re looking–at least subrosa–for some big euro/dollar corruption payoffs. [Edited]

    • What an astonishing coincidence, both Airbus and Boeing subsidised loan scheme’s out of action at the same time.

      • The EU shut down started with the UK Serious Fraud Office Investigation. It looks like the US pushed the British and they the EU to halt the mainly French and German Export credit banks while the US worked its problems.

        There is a chance that “the normal EU 5-7% bribes in dealing with non-EU government controlled entities” got into the wrong hands at least one time and financed the wrong guy’s activity and the US got pissed off. Statistically it points to the A330Re deal with Saudia…

        The US gouverment looks to put pressure on AA, DAL and UAL to stop buying Airbus widebody jets until a deal with the French and Germans are done on who is US qualified to get the 5-7% in each country…

  11. I can think of at least three economic reasons why it makes sense for the ExIm bank to finance deals that Boeing (or another private sector company) isn’t willing or able to finance.

    1) The government can borrow at a much lower cost than Boeing.

    2) The government can better enforce its contracts. International borrowers (many of which have some kind of links to their home state governments) will probably think twice before defaulting on a loan from the U.S. government.

    3) The government has an economic interest in promoting exports. Even if the loans only break even, the government still comes out ahead insofar as higher exports lead to higher income tax and corporate tax receipts.

    Aside from these economic reasons, there are also potential political benefits from fostering economic interdependence. For example, economic linkages can foster greater cooperation on security issues (though the evidence on this point is mixed).

    • I think your idea that the government can better enforce ist contracts with foreign airlines . Its naive. Its technically a government corporation so has no more rights than any other corporation. As it operates outside of US its ability to recover loans is limited
      eg’Ex-Im in 2012 authorized a $280 million loan for Australian firm NewSat’s purchase of a satellite from U.S.-based aerospace group Lockheed Martin. NewSat earlier this year was placed in administration.’
      Ex Im loss on that deal was $100 mill. Bankrupcy occurs when their isnt enough money to pay the creditors, the US government doesnt jump the queue in foreign courts.

      With a booming avaition market most fairly new planes can find a home. An unexpected slump will leave a lot of Ex Im financed planes parked and their owners walk away, especially since the standard business technique is to create a separate ‘shelf company’ for each plane. This shelf company has no assets other than the plane.
      Ex-Im hides its losses in the current climate by just extending the term of the loan as the problem goes away with small numbers

    • In 9 of the last 15 years Boeing has had a negative tax return,the government has paid Boeing! Now that the 787 losses have stopped they are lobbying hard for corporation taxes to be lowered. There is a very interesting article in the Seattle Times. No programme accounting here, losses are claimed immediately.

  12. Ex-Im puts pressure on Wall street airliner financing. Without Ex-Im they make more money. So not surpricing big Money don’t want it.

  13. Further Ex-Im is credit garantueed by the taxpayer. That works well as long as there is no crisis. If the market doesn’t want to finance an aircraft deal, he usually has reasons.
    Although done by both USA and EU, I consider Ex-Im finance as a dubious subsidy which might appear cheap (or even “for free”), but might backfire quite big in times of crisis and as such act as “bubble promoter”.

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