Federal loans…the next buble to burst?

That bank currently has a portfolio of more than $3 trillion in loans, the bulk of them to about 8 million homeowners and 40 million students, the rest to a motley collection of farmers and fishermen, small businesses and giant exporters, clean-energy firms and fuel-efficient automakers, managed-care networks and historically black colleges, even countries like Israel and Tunisia. It has about 120 different credit programs but no consistent credit policy, requiring some borrowers to demonstrate credit-worthiness and others to demonstrate need, while giving student loans to just about anyone who wants one. It runs a dozen unconnected mortgage programs, including separate ones targeting borrowers in need, Native Americans in need, veterans in need and, yes, Native American veteran borrowers in need. Its problems extend well beyond deadbeat shipbuilders.

That bank, of course, is the United States government—the real bank of America—and it’s unlike any other bank.

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For starters, its goal is not profit, although it is profitable on paper, and its loans are supposed to help its borrowers rather than its shareholders, better known as taxpayers. Its lending programs sprawl across 30 agencies at a dozen Cabinet departments, with no one responsible for managing its overall portfolio, evaluating its performance or worrying about its risks. The closest it gets to coordination is an overwhelmed group of four midlevel Office of Management and Budget employees known as “the credit crew.” They’re literally “non-essential” employees—they were sent home during the 2013 government shutdown—and they’re now down to three, because their leader is on loan to the Department of Housing and Urban Development. When I suggested to OMB officials that the crew seemed understaffed to oversee a credit portfolio 25 percent larger than JPMorgan Chase’s, someone pointed out that it’s hiring an intern.

These unregulated and virtually unsupervised federal credit programs are now the fastest-growing chunk of the United States government, ballooning over the past decade from about $1.3 trillion in outstanding loans to nearly $3.2 trillion today. That’s largely because the financial crisis sparked explosive growth of student loans and Federal Housing Administration mortgage guarantees, which together compose two-thirds of the bank of America. But even after the crisis, as a Washington austerity push has restrained direct spending, many credit programs have kept expanding, in part because they help politicians dole out money without looking like they’re spending. In 2012, Congress boosted funding for a transportation loan program called TIFIA eightfold, while launching a similar initiative for water projects called WIFIA. There’s now talk of a new credit program for public buildings—naturally, BIFIA.

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But the financial and political risks associated with federal credit have not yet registered with most policymakers, much less the public, even after credit controversies like the solar manufacturer Solyndra’s default on its clean-energy loan, the escalating student debt crisis and the high-profile effort by congressional Republicans to kill the low-profile Export-Import Bank. “The depth of ignorance is stunning,” says Brookings Institution fellow Douglas Elliott, a former investment banker who wrote a book called Uncle Sam in Pinstripes about the government as a financial institution.

Some of the federal government’s credit operations produce failure rates no private bank would tolerate. The Department of Agriculture’s loan programs promoting biofuel refineries, rural broadband and renovations of rural apartment buildings have all performed even worse than MarAd’s, recovering less than 40 cents per dollar, the kind of return you might expect lending to your brother-in-law. The average default rate for private bank loans is about 3 percent; by contrast, the State Department’s “repatriation” loans to Americans who get stuck without cash abroad have a 95 percent default rate. USDA’s main mortgage program for rural families retrieves just 3 cents on the dollar from borrowers who default, suggesting it barely tries to collect when loans go bad.

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But federal credit skeptics still see two big problems. The first is that government expectations of future loan costs can be—and sometimes have been—wildly wrong.

Take the FHA. It tripled its loan portfolio to $1 trillion after the private mortgage market collapsed, exactly as it was created to do during the Depression, and its defenders have argued that its $1.7 billion Treasury bailout was a tiny price for taxpayers to pay to keep credit flowing during another epic housing crisis. But that well-publicized $1.7 billion figure ignored tens of billions of additional dollars in unpublicized budget re-estimates after FHA mortgage losses repeatedly turned out worse than expected. Re-estimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their “permanent indefinite authority” to stick the shortfalls on the government’s tab. “That’s real money!” Criscitello says. “They forecast bogus profits every year, and when it turns out they’re way off they just say, ‘Oh, well.’” Re-estimates of FHA losses have produced $73 billion worth of “oh, well” since credit reform, most of it since the housing bust. That still might be a reasonable price to pay, but it is certainly not a tiny price, amounting to nearly one-sixth of the current budget deficit.

“The government accounting is unfathomable. I never saw anything like it as a banker,” says former Capitol One chief financial officer Gary Perlin, who served as an adviser to the Obama Treasury on risk management issues. “It’s just: ‘Gee, we thought it would cost X, but guess what, it cost more. Oh, well.’”

Reporting this story, I heard a lot of “oh, well.”

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Washington is increasingly nervous about the explosion of student debt, which has tripled in a decade and now exceeds credit card or auto debt; the rising default rate, now 18 percent overall and nearly 50 percent for two-year for-profit programs; and the damaging effects on younger Americans, who often find themselves drowning in red ink without a diploma or a job to show for it. The Obama administration has tried to give them a break, in part by allowing some overstretched borrowers to reduce their payments based on their income, even forgiving some loans after 10 or 20 years. But the credit hawks say the administration is hiding the fiscal costs of its generosity, continuing to project more than $15 billion in annual profits from student loans. A report by Barclays Capital analyst Cooper Howes concluded the program is more likely to incur well over $10 billion per year in costs. That’s a major discrepancy, equivalent to almost the entire federal budget for fighting AIDS—and more than the budget for Pell Grants for low-income students, a program many experts consider more effective than loans at easing the soaring cost of college.

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In 2012, the CBO reviewed 38 credit programs scored as moneymakers and found 33 of them would be money-losers under fair-value accounting. Overall, the government expects to earn $45 billion on the $635 billion in loans it backed in 2013; fair-value rules would estimate $11 billion in costs instead. The difference would add as much to the deficit as the hotly debated package of tax breaks that Congress passed in December.

“It’s financial alchemy,” Lucas scoffs.