Monday, November 14, 2011

Banks Need More Taxpayer Guarantees, Eh?

Tim Carney doesn't like the Ex-Im bank.  We'll disagree on that for the time being.

But there's a new--somewhat similar--program which covers banks.  Hmmmm. 

....Imagine I'm a shoe exporter. I ship shoes to stores in Europe, and then I wait a few weeks to get paid by the stores. But what if more orders come in, and I need to restock the shoes right away, before I get paid for my last shipment? I could just borrow from a bank. But another option is that I can just sell my invoices, in effect, to the bank. If the shoe stores owe me $1,000, I might sell Citibank, for $950, the right to be paid by those shoe stores. That's called supply-chain finance, and it's a quintessential capitalist arrangement.

But in the midst of this commerce among banks, exporters, and importers, Barack Obama has inserted the unwitting U.S. taxpayer. As part of his Export Initiative aimed at doubling U.S. exports in five years, the Supply-Chain Finance Guarantee Program to guarantees 90 percent of the banks' exposure. In our hypothetical example, if the European shoe stores welched, the U.S. taxpayers would cover 90 percent of Citibank's loss.

What's being described is "A/R financing," usually quite expensive to the borrower compared to typical working-capital lines of credit.

So the question:  if there's a 90% reduction in Bank risk, will there be a 90% reduction in the A/R-to-W/C interest rate spread?


1 comment:

Tim Morrissey said...

Factoring recievables. What a wonderful place to insert some government. NOT.