After years of doggedly defending the maritime industry in Congress, Rep. Mario Biaggi (D-N.Y.) was furious.
Top officials of the Maritime Administration had assured him time and again that their Title 11 ship financing program was in good shape. But Biaggi had just discovered that the agency had been withholding a 1983 internal report that predicted the record-breaking wave of shipping defaults that has nearly sunk the program.
"It's incredible, just incredible," Biaggi, chairman of the House merchant marine subcommittee, said at a hearing last month. "If it was a commercial bank, anyone doing that would be thrown out on their ear . . . . If it was your money or my money, I'd be after them with a pistol."
For three decades after its debut in 1938, the Title 11 program worked reasonably well. The Maritime Administration guaranteed private bonds floated to build big fixed-route cargo ships -- each vessel set up as a separate company -- and its reserve fund absorbed the losses from the few that went bankrupt. In 1970, however, the program was opened to tugs, barges, tankers, even incinerator ships designed to burn hazardous wastes at sea. In the next dozen years, the agency guaranteed $10 billion in loans, or 10 times as much as in its previous history.
Now the bills are coming due. The Maritime Administration has paid out $400 million for more than 400 shipping defaults in the last three years, and on Friday its Title 11 reserve fund was wiped out for the first time since the 1960s. The agency had to borrow $25 million from the Treasury to pay off defaults on 50 inland barges and two offshore oil rigs.
Nor is the end in sight. The General Accounting Office recently estimated that $300 million to $500 million in loans will be in default by the end of next year.
Experts say the next to go will be four idle natural gas tankers that the maritime agency has taken over through a series of paper corporations. And the GAO says it is "highly unlikely" that the agency will be able to repay the taxpayers.
The agency recently tightened up the program's rules. But with $7 billion in loans outstanding on more than 6,000 vessels, some tough questions are being asked.
"There was a drive to keep the shipyards operating without too much concern for whether the projects were sound," a former agency official said. "These ships were built on speculation, on very thin financial information."
The report that angered Biaggi was a 1983 study by the Transportation Department estimating that $900 million in loans were at significant risk and that agency officials made loans to companies they knew were in "questionable financial condition." The agency helped produce a glut in offshore oil rigs while its analysts were warning that at least 100 such rigs had been idled by an oil industry slump, the report said.
Although then-Maritime Administrator Harold E. Shear assured Congress that the program was sound, the agency had to advance $101 million to troubled companies last year to stave off defaults.
Critics also say that Title 11 lured many inexperienced boat operators into the business. "The principal motivation was a tax shelter with lucrative Title 11 financing," said John Laforde, chairman of Tidewater Inc., a New Orleans shipping company.
Even when the operators go bankrupt and their federally guaranteed loans are paid off, the Maritime Administration, under a quirk in the law, must wait years to seize the ships. In the meantime, the bankrupt ships -- temporarily freed from repaying creditors -- are cutting rates and making competitors miserable.
Laforde said his ships are being undercut by one New Orleans firm in Chapter 11 bankruptcy, Marsea Marine, that no longer has to repay its federally guaranteed loans.
Herbert Christenberry, vice president of Marsea Marine, said his firm is trying to keep its boats working so it can repay the loans. He said it is unfair to criticize his company's plight when other firms built their ships (without subsidies) in Japan and South Korea.