When Marion Barry announced that he wanted to borrow $215 million from the Federal Financing Bank as part of his plan to put the District's jumbled, finances back in order, he probably caused more than a few eyebrows to arch quizzically.
The Federal Financing Bank, after all, is hardly a household name.
But the seven-year-old brainchild of Federal Reserve Board Chairman Paul A. Volcker (then an undersecretary of the Treasury) has amassed a loan portfolio of $76 billion since it opened its doors.
If it were a commercial bank, it would rank second behind the Bank of America in the volume of loans outstanding.
But it is not a commercial bank. It is an arm of the Treasury Department, set up originally to make it easier for federal agencies like the Export-Import Bank or quasi-governmental organizations like the U.S. Postal Service to market their securities.
But the Federal Financing Bank has mushroomed far beyond the original expectations of its founders -- Nixon administration and Congress.
It does make loans to federal agencies -- that otherwise would have to market their securities to the general investment community -- and supposedly tidies up federal finance activities.
As the bank's secretary Roland Cook noted, small government agencies had difficulties selling their own securities to finance their programs and often complicated the fund-raising activities of the treasury.
"Back in 1973, there was one or another federal agency in the market three out of every five days," Cook said.
Usually the agencies were selling a small amount of securities, paying more to sell them than the Treasury paid to sell its own securities. "The Treasury found this disconcerting," according to a former congressional expert on federal credit programs.
The Federal Financing Bank was designed to clean up the clutter, loaning money to the small agencies rather than having the agencies themselves "go to the market."
"But what Congress didn't notice," the former congressional expert said, were provisions in the law setting up the FFB were provisions that permitted the bank to purchase loans made by federal agencies and to make direct loans to individuals, corporations or local governments that were guaranteed by some federal agency.
If an agency such as the Rural Electrification Administration wants to replenish its lending capacity without going to Congress for more money, it can sell to a financing bank loans it has made and use the proceeds of the sale to finance new loans. If a company or a local government gets a loan guarantee from a federal agency, it can borrow directly from the Federal Financing Bank. Both types of credit extension are out of the purview of the federal budget and not subject to congressional -- and to a large part executive -- control.
The Federal Financing Bank takes no deposits. Since 1974 it hasn't even sold a security of its own to come up with funds to lend out (it has the authority to issue up to $15 billion of its own securities). Instead, the bank borrows directly from the U.S. Treasury, tacks on an eighth of a percentage point finance charge, then relends the money.
The bank also makes money. Cook, a Treasury Department debt management official and secretary of the bank, said the Federal Financing Bank turned over about $250 million of profits to the Treasury last year.
The bank, however, has become a source of concern both to the Treasury Department and to the congressional budget watchdogs: the House and Senate Budget committees, House Ways and Means and its oversight subcommittee, and the Congressional Budget Office.
As the Congressional Budget Office noted in a recent study, the "volume of new direct loans by off-budget entities such as the Federal Financing Bank grew by 70 percent between 1976 and 1979, or twice the rate of growth in total budget outlays. New loan guarantees grew even faster during the same period -- by 108 percent.
The District hopes to cash in at the Federal Financing Bank window by convincing Congress to grant it loan guarantees. If Congress does so, the District merely turns to the Federal Financing Bank and borrows $215 million. If it wants a 10-year loan, the Federal Financing Bank figures out what the Treasury must pay to borrow money for 10 years, then loans the money to Washington with an eight of a percentage point premium tacked on.
Cook said that about $20 billion of the loans on his books are made to corporations governmental or quasi-governmental groups that have federal loan guarantees.
Say an agency is authorized by Congress to make loans up to $1 billion and has done so. Like all bureaucratic organizations, the agency wants to make more loans but knows it cannot get any more money from Congress. What does it do?
It sells some of the loans on its books to the Federal Financing Bank. On its books, then, the agency has been repaid and it can use the proceeds from the sale of assets to the Federal Financing Bank to make more loans.
The only trouble is, while the agency has been repaid, the federal government has not. The credit activity merely has been transferred from an on-budget agency that must account to Congress to an off-budget agency that does not.