January 28, 2015 •Anthony Curcio
Michael Grunwald’s January 6, 2015, article, "The Real Bank of America", published in the POLITICO magazine, raises some thoughtful questions about Federal Credit but requires clarification.
While a few specialists at the Office of Management and Budget (OMB, I used to be one of them) set standards and approve default estimates in the President’s Budget, they do not solely manage the $3 trillion portfolio of loan risk. Dozens of OMB examiners, hundreds of staff, and many contracted experts at agencies across government provide support. The Federal budget re-estimates default risk regularly and loss reserves change annually in the President’s Budget. Additionally, Grunwald tells a disturbing tale of obfuscated risk. While methods can and should be improved, it is important to measure Federal lending risk estimating success against the performance of similar, regulated private lenders and it's logical to expect comparable accuracy. When compared to private lenders, the Federal Government performed quite well across the “Bank of America” portfolio.
As the data demonstrate, since 1992 increases in reserves have been less than 1 percent of the entire outstanding portfolio in a given year, even during the Great Recession. That means that even during the latest financial crisis, defaults against government loans caused the government to add less than 1 percent to its reserves annually because of unexpected default. Even the reference to a multi-year, $73 billion transfer of a housing program’s reserves leans toward the sensational. The total transfer amounts to less than 4 percent of the trillion-dollar plus principal at risk for the program during the worst housing bust in 75 years. In comparison, private mortgage lenders at the epicenter of the housing crisis fared far worse, some of them much worse.
A dispassionate, quantitative assessment of Federal risk estimating skill reveals a pretty stable reserve and respectable performance when compared to private lenders.
Finally, the author failed to mention that almost all Federal loan default estimates are subject to an outside audit by law. The same large private audit firms that check the books of private lenders often perform the Federal audits. They apply the same rigor to Federal and non-Federal lenders alike.
A clearer view of Federal lending, supported by the data, just doesn’t support the notion that default risk is hidden, arbitrary, bizarre and in need of a “bail-out." As we rightly hold Federal lenders accountable, let’s make sure we are using real data to judge them.
