Washington Report: The Eda Loan Sell-off

 

Small businesspeople often applaud when Reagan Administration officials talk about "privatizing" parts of the federal government, bureaucratese for returning it to the private sector. But when presidents of 50 small companies learned that the Commerce Department had put their Economic Development Administration loans up for sale to private investors and debt collectors, they expressed first shock, then outrage as they became aware of the behind-the-scenes dealing involved in the process.

As part of its budget-cutting effort, the Administration disclosed last summer that a sealed-bid loan sale would be held for 73 delinquent loans to 50 companies in the EDA's portfolio. That action, by itself, wasn't terribly surprising: Reagan officials have targeted the EDA for elimination for the past two years, and in order to phase out the agency, the Commerce Department must first dispose of the 10-year notes it holds for loan recipients, many of whom are in such distressed sectors as textiles, footwear, and metals.

The surprise came when Commerce Secretary Malcolm Baldrige testified in congressional hearings last December that he couldn't rule out a "highest bid" sell-off of EDA nondelinquent loans as well. At the hearings, Carlos Campbell, Assistant Secretary of Commerce for the Economic Development Administration, testified: "We made a decision to get tough with these loans. I will make no apology for that." And when it was learned that officials at the Office of Management and Budget are floating similar proposals for a wide range of other government loans, alarm bells began to ring.

"EDA wanted to keep these sales as quiet as possible, " says Bo Jernigan, president of Cornwall Industries Inc., a South Paris, Maine, wooden-housewares manufacturer, which holds a nondelinquent EDA loan. Jernigan, active in the fight to preserve the EDA, began to investigate the methods Commerce officials were using to dispose of the delinquent loans. "They were not providing the borrowers with any information at all," Jernigan says. "They were selling the notes to the highest bidder," even in cases where companies had reached "work out plans" with lower-level EDA loan officers and had met their repayment schedules.

Jernigan learned that the Commerce Department sold only two loans through the public bidding process but had peddled eight more through private negotiations. Negotiations were under way on several other loans as well. In one case, Commerce sold off the loan of a small Maine shoe manufacturer to a private investor, even though the shoe company itself had offered a higher bid on its own loan. In another instance, a handbag manufacturer in New York City wasn't allowed to bid on its own loan. Instead, Commerce sold the $290,000 note to a New York attorney for $30,000 in cash. Within a week, the attorney had settled the note for $80,000 in cash and $5,000 in merchandise.

Through a coalition called the Public Works and Economic Development Association, Jernigan and executives of other small businesses managed to win the attention of Sen. George Mitchell (D-Maine); Rep. Olympia Snowe (R-Maine); Rep. Joseph McDade (R-Pa.); and Rep. James Oberstar (D-Minn.), chairman of the House Subcommittee on Economic Development. In the waning days of the past Congress, they managed to push through an amendment to the continuing budget resolution for EDA, halting the Administration's loan sell-offs temporarily. They are seeking permanent congressional action that would allow borrowers to bid on their own loans or locate third-party investors.

Senator Mitchell, in a letter to Secretary Baldrige, charged that EDA's cloak of secrecy on the sales left the presidents of the 50 companies involved "particularly vulnerable to misinformation and mistreatment by third-party investors" and collectors. He also criticized the agency's refusal to let borrowers bid on their own loans. "The presidents of the affected firms have the long-term interests of their firms and their employees in mind," Mitchell noted. "Short-term investors, on the other hand, do not have the creation or preservation of jobs as their primary aim."

The Maine senator also sent a lengthy list of questions to Baldrige asking why no federal regulations have been published on the EDA sales, seeking the Administration's legal basis for precluding borrowers from bidding on their loans, and asking for information on the amount of money recovered on the 10 loans already sold.

By mid-January, Baldrige hadn't responded to Senator Mitchell's letter of December 8. Officials at the EDA say there was "no question" that the agency had the legal authority to place the loans up for sale. But questions were being raised in Congress about what Mitchell called the "seriously flawed" method used to sell the loans and the "blatant indifference" of top EDA officials to both the impact of their actions and "the original purpose" of their agency.