The Corner


How the Cronyism Sausage Is Made

Fred Hochberg, chairman and president of the Export-Import Bank of the United States, testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington on January 28, 2014. (Joshua Roberts/Reuters)

It is rare that we taxpayers get to see how crony deals are made in Washington. But what follows is an example provided to us by the Export-Import Bank.

Bear with me while I give you some background. In January, ExIm announced a deal extending a 90 percent guarantee of a $50 million supply-chain-finance facility from Greensill Capital to Freeport LNG Marketing, LLC, a Texas-based company. The loan was extended through supply- chain-finance (SCF) provider Greensill.

This came on the tail of a massive $4.7 billion ExIm deal to support the development and construction of an LNG project in Mozambique. Leading up to this project, the U.S. Liquefied Natural Gas (LNG) industry warned it would be hurt by its own government giving a leg up to a foreign LNG projects, and ExIm analysts warn the agency of security concern in the country that could lead to the demise of the project (that means the loss of taxpayers’ money). That didn’t matter, as the ExIm press release makes clear:

As the Mozambique LNG project marks further milestones, we want to underscore EXIM’s continuing commitment to this project,” said EXIM President and Chairman Kimberly A. Reed. “This project continues to serve as a great example of how a revitalized EXIM can help ‘Made in the USA’ products and services compete in a fierce global marketplace and counter competition from countries like China and Russia.

Two projects, two milestones, as the ExIm chairman loved to say — and two examples of the utter lack of due diligence performed by the agency when it is committed to serving powerful special interests.

This has become obvious in the wake of the Greensill’s collapse into insolvency only a few weeks after ExIm announced the deal and the Mozambique project’s operator Total had to declare force majeure, which allows the company to cancel contracts and withdraw all its staff because of a jihadist attack.

Indeed Greensill Capital was already under investigation last year by the German financial regulator, an investigation that led to a criminal complaint in March. Then, as the FT reports, “Greensill had been notified last September that its insurer would not extend cover for its lending, a move that ultimately led to its collapse.” (I wrote and testified about the lack of due diligence at ExIm here). A good summary is here:

When Exim directors approved the loan arrangement in September 2020, Greensill was already embroiled in controversy.

Credit Suisse had announced in June that it would review its Greensill-linked funds after clients withdrew more than $1.5bn when a string of debtors defaulted. The same month, a report revealed that Greensill’s borrowers included a company that runs a hotel in Mogadishu and a coal miner whose owner had settled several legal actions over alleged nonpayment of bills. In August it emerged that Greensill was under scrutiny from German regulators.

As for the Mozambique deal, the FT notes that “Exim Bank’s own analysis warned of security concerns that have since caused the project’s operator Total to declare force majeure following jihadi attacks.”

But beyond the lack of due diligence from ExIm staff, its board of directors, and its chairman, there is a serious cronyism at play here. It is not simply the type of cronyism that we are so used to with ExIm, such as the fact that many of the companies involved and getting preferential borrowing terms and rates through ExIm, like Freeport LNG, are large firms with no problem accessing capital.

As it happens, we just learned that it wasn’t in ExIm’s interest to figure out if the Greensill deal was even a good one, because the real reason for its existence was to placate the U.S. LNG industry and to get it to withdraw its opposition to the Mozambique deal.

This is how the FT describes the trade that took place at ExIm:

The Freeport LNG deal came after lobbying from the US LNG industry, including trade association LNG Allies, which had initially opposed Exim Bank’s Mozambique loan and pushed for ways in which the agency could help domestic producers.

LNG Allies withdrew its opposition to the Mozambique loan after an August 2019 meeting between groups representing the LNG industry and Exim Bank, according a letter released under transparency laws and provided to the FT by Source Material, a non-profit investigative journalism organisation.

According to the letter, LNG Allies pointed to the “active engagement” by Exim Bank “in developing creative financing solutions” to create opportunities for the LNG industry.

For the details on how that trade was made, read this.

The bottom line is this: ExIm extended the deal to Freeport LNG through Greensill (after being lobbied by former British prime minister David Cameron, apparently) in order to temper the anger of the U.S. LNG industry and to make it withdraw opposition to the Mozambique deal. In that context, due diligence over how sound lenders are is small potatoes.

And that, my friends, is how the crony sausage is made in Washington.


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