US agencies' $14 billion side-door lender: a squeeze play

"Scapegoat. Fall guy. Pinned with the rap and left holding the goods." Huddled in the mutant Greek temple of the Treasury Building, officials of a little-known government agency must be muttering about the injustice of their reputation.

The body in question is the Federal Financing Bank. Instead of toasters and NOW accounts, the bank dispenses off-budget credit to federal agencies.

Critics like Citibank have called it "the sugar daddy of federal credit." Newsweek magazine labeled it "an inflation machine." David Stockman, director of the Office of Management and Budget, has promised to be "fierce on the Federal Financing Bank."

But an examination of its methods shows the bank may not be the villain in the piece after all. Instead, it may be just a helpless front man for the agencies themselves -- an unwitting conspirator in the hidden spending and fancy numbers of off-budget financing.

It all began with a good idea. Until 1974, federal agencies in need of credit would issue their own securities. The amounts involved were small and the agencies were inexperienced at borrowing, so they often had to pay premium interest rates.

In 1974, the Federal Financing Bank was launched to coordinate this borrowing , and thus reduce its cost.

"We were created to finance federal- agency credit programs more cheaply and efficiently than they could do it themselves," says Peter Mackey, the manager.

The bank is administered by the Department of the Treasury. By law, its outlays are not included in the budget of the federal government. This year, the outlays will top $14 billion, accounting for most of the government's off-budget spending.

Specifically, the bank has been charged with three duties:

1. Its original purpose. Federal agencies (such as the Small Business Administration, the Export-Import Bank, and the Tennessee Valley Authority) can borrow from it instead of from private sources, to keep their costs down.

2. Buying up outstanding loans. Agencies that lent out money (to small businesses or farmers, for instance) can sell the IOUs they hold to the Financing Bank. Thus they have money available for new loans.

3. Lending directly to the public. The bank is authorized to make loans directly to borrowers whose obligations are secured by a federal agency.

Critics charge that the bank is, in effect, a spending machine unfettered by federal control. It doesn't have to report its spending on the budget, they say , so its operations are concealing the true cost of many federal programs, distorting budget figures and making the paper deficit smaller than the real one.

Will being fierce on the bank solve the problem?

"Any idea that you remove the FFB and costs go down is just ridiculous," says Irving Auerbach, a vice-president and economist at Aubrey Lanston Inc., a bond house. It is the agencies themselves that are at fault, Mr. Auerbach says. The bank is just a bystander.

"The FFB, in essence, is the scapegoat here," says Tony Brush, an analyst at Bradley Woods, a brokerage firm.

The bank's relative innocence can be established by a careful look at its duties, experts say.

Its original purpose, lending money to federal agencies, is essentially an example of "a government activity that works well and saves money," according to one close observer.

It's with the next two duties that the fun begins.

By buying up outstanding loans, the bank can indeed distort budget figures. An on-budget agency, such as the Tennessee Valley Authority, can sell its loan assets to the off-budget Federal Financing Bank and chalk the cash up on its budget as a net gain -- even though the government hasn't been paid back yet.

But it's not the bank doing the distorting, the experts say. It's an accounting system narrowly focused on net loans.

"If these sales were treated properly -- as borrowing -- the offsets to outlays would not be allowed," reads a report on federal credit written by Ron Boster, a House Budget Committee staff member.

By lending directly to the public, the bank can also account for a hidden increase in government spending. In fact, it narrowly missed becoming the lender of record for the Chrysler loans.

But according to the fiscal-year 1982 budget, these loans are made at "agency request." In other words, the bank does not make policy; it just does what it's told.

"The bank's outlays do not result from programs it runs; the bank serves only as a financial conduit for other federal agencies and their programs," Mr. Boster's report says.

"I haven't heard anyone say, 'This is how the FFB creates credit,'" echoes Mr. Mackey, the manager.

The Boster report does not call for the bank to be abolished. Instead, it recommends that the bank's activities be brought on-budget and that federal agencies not be allowed to write off their sale of loan assets to the bank.

"It is important to note that off-budget loans are no different than budget loans in terms of their economic impacts and government involvement," the report says. But the highly visible effect might spur so me political action.