Nobody set out to create the bank of America or make it this big

Nobody set out to create the bank of America or make it this big

Its $3.2 trillion in debt doesn’t even include another $15 trillion worth of pension insurance, deposit insurance, Fannie Mae and Freddie Mac mortgage insurance, and other government exposures that aren’t officially considered credit programs. I interviewed about 50 sources inside and outside government about the bank of America, and few of them think it is well-designed, well-managed or well-understood, even if much of what it does is well-intentioned.

Ultimately, loans and loan guarantees of the sort that have proliferated in recent years are merely tools in Washington’s kit. They can address national priorities, like expanding access to homeownership and higher education, and finance major projects, like America’s first new nuclear plant in decades and the widening of the Washington Beltway. But they’re more complex tools than direct government grants or tax breaks, creating more risks and unintended consequences. Federal agencies, uniquely insulated from the market pressures faced by private lenders, aren’t usually well-suited to underwrite, originate, service, monitor and foreclose on loans. Their employees don’t get fired when their loans go bad, or rewarded for good decisions. They’re not even bound by the federal regulations governing risk management at other financial institutions.

“The government is a gigantic financial institution, operating in a black box,” says Deborah Lucas, a former Congressional Budget Office official who now runs MIT’s Center for Finance and Policy. “People should understand what it’s doing. They really don’t.”

In 2013, the Federal Housing Administration had to draw $1.7 billion from the U.S. Treasury, because a spike in defaults on mortgages it had guaranteed during the Great Recession had burned through its reserves. The move was widely reported as FHA’s “first-ever taxpayer-funded bailout.” But Douglas Criscitello, the former chief financial officer at HUD, told me that in fact the FHA had been receiving silent taxpayer-funded bailouts throughout President Obama’s first term, bailouts that went unnoticed because of the odd process the government uses to calculate the budget costs of credit programs. It’s actually a more sophisticated process than it used to be, but it still helps explain the bank of America-and the anxiety the bank’s growth has inspired among green-eyeshade types like Criscitello.

It’s an outgrowth of the classic Washington instinct-arguably an American instinct-to max out the credit card now and worry about the risks later

When the U.S. government simply spends money to do stuff, it’s usually clear how much the stuff will cost to do. But that’s not true when the government lends money or guarantees loans by private lenders. It depends how much of the money gets paid back and when. It depends on interest rates, default rates and collection rates after defaults. It depends what value is placed on a dollar today compared to a dollar in the future, an almost metaphysical question for a government that can raise taxes or print money. And personal loans Minnesota in Washington, how stuff gets “scored” in the budget often determines what stuff gets done.

And their credit programs, generally devoid of oversight or accountability, tend to fly under the radar

The scoring process for credit used to be simple but stupid, a cash approach that made direct loans look insanely expensive while financially equivalent loan guarantees looked almost free. The Federal Credit Reform Act, tucked into the 1990 budget deal that broke the first President Bush’s read-my-lips-no-new-taxes pledge, made the process more complex but also more sensible, requiring loans as well as guarantees to be budgeted according to their expected costs over time-and “re-estimated” every year according to their actual performance. This was a real victory for the congressional budget committees, which wanted costs to reflect reality, over the committees overseeing agriculture and other specific issues, which liked hiding the costs of their lending programs.