April/May 1992, Page 16

A View From the Hill

Israel's Request for Unconditional Loan Guarantees Is Unprecedented

By George Moses

Since the end of World War II, Congress has entertained a number of requests for loan guarantees to help Americans through financial difficulties. Whether the answer was yes or no, and it has been both, unrestricted guarantees, such as its Senate partisans are asking for Israel, have never before been considered. Instead, Congress has always placed stringent conditions on such financial help to borrowers. Commonly, these restrictions have included:

Ӣ Requiring that guarantees be granted only to stave off imminent financial disaster and that recipients have an approved plan to improve their condition immediately.

Ӣ Insuring that all pertinent details of the borrower's financial condition and the expenditure of guaranteed funds are closely examined by regular outside audits.

Ӣ Reducing the exposure of American taxpayers to the minimum, both in the amount and in the duration of the guarantees.

There have been several guarantee programs in the last 25 years. In 1970, Penn Central became the first major American corporation to ask for loan guarantees in the second half of the 20th century. Congressional opposition to using public money to rescue a private corporation, and one perceived to be badly run by an arrogant management, caused federal help to be denied until after the company formally declared bankruptcy. Only then was $125 million in loan guarantees made available to keep the rail network, but not the company, in operation.

The Lockheed Aircraft Corporation was next. In 1971 it approached the government for $250 million in loan guarantees. There were several reasons for Lockheed's situation: the entire aerospace industry had been hit by cutbacks in defense and airline spending; Lockheed was reeling from penalties of over $500 million assessed by the Department of Defense on various contracts; and the bankruptcy of Rolls Royce had disrupted financing arrangements for the L-1011 Tristar program, essential to Lockheed's survival.

Endorsing Lockheed's request, Secretary of the Treasury John Connally told Congress: "The failure of major business enterprises can have serious national and regional consequences, including the causing of substantial unemployment, as well as other business failures. To provide for credit to avoid such consequences, government guarantees may be warranted."

Although this loan guarantee program was approved, it was conditioned both on the inability of Lockheed to borrow money under any other circumstances, and on the likelihood of bankruptcy if credit were not available. Lockheed also was required to submit to stringent financial restrictions.

The next episode was a $1.5 billion loan guarantee to help save seven bankrupt railroads in the Northeast and Midwest. Out of this effort came the present-day Conrail.

In 1975, when New York City requested a loan guarantee package from the federal government, it discovered that the Senate Banking Committee opposed guarantees even more than it opposed direct loans. A Feb. 10, 1978 committee report stated that guarantees would "greatly increase the federal government's financial exposure while severely limiting its ability to safeguard its investment through the types of controls" direct aid programs provide.

Political Poison

The notion of subsidizing "business as usual" in New York was widely viewed as political poison. So the city changed its ways. It took drastic steps to put its financial house in order by raising taxes, cutting its payroll and clamping a wage freeze on the city employees who remained. After three years of this discipline, opposition abated sufficiently to enable the Carter administration to win the first long-term loan guarantee program ever for an American city.

Supporters and critics of the measure assured the public that this would be the last time the federal government would come to the aid of New York City, and that the bill would not serve as a precedent.

Partly to discourage other cities from seeking such help, Congress added a number of conditions. They included a requirement for annual audits of the city's books and numerous provisions extending the financial risk to the New York state government and employee pension funds, and reducing the exposure of the federal treasury.

Despite the no-precedent provision, the New York City program clearly provided inspiration for the Israeli request. The difference was that Israel, unlike every American applicant, sought to avoid imposition of conditions or restrictions. In fact, in an incredible reversal of financial good sense, the proposal by two of Israel's most faithful non-Jewish friends in the Senate, Daniel Inouye (D-HI) and Robert Kasten (R-WI), called for prepayment penalties on the guaranteed loans. This provision neatly insulates Israel from the kind of early repayment schedule which was required of New York.

If there is to be no precedent, the government must prove it now by denying the Israeli request in the Kasten/Inouye proposal. The predictable flood of requests for similar programs in Eastern Europe has begun. Poland is reported to be requesting a billion dollar "housing aid loan guarantee" program and will no doubt ask for terms as generous as those Israel has requested. And can Hungary, Serbia, Ukraine, Armenia, Azerbaijan, or, for that matter, Jordan, Algeria and Tunisia, be far behind?

Congress has always placed stringent conditions on borrowers.

If Israel or any other country needs direct American aid for emergency relief or humanitarian reasons, the need should be documented fully and accurately in the request for such aid. As many observers know, privation in Israel is not limited to Russian immigrants. Sixty percent of Israel's Arab minority live below the Israeli poverty line, the victims of official discrimination. Surely they are entitled to a fair share of any humanitarian aid in the region.

Nor is it unfair to place restrictions on a foreign applicant similar to those imposed upon American companies and upon New York City when they received this kind of help. These might include reducing public employment in Israel, freezing public salaries, and limiting or eliminating private sector subsidies, especially to those Israeli businesses which are thereby enabled to compete unfairly with American firms.

No American city or state has access to a federal loan guarantee program as generous as the one proposed for Israel. Loan guarantees were granted to New York only once, and with conditions which reflected American policies in effect at that time. That's not coercion, it's good management. Putting conditions on loan guarantees for Israel isn't anti-Semitism, but a prudent concern for the American taxpayer, and for the overriding American interest in a successful outcome in the Middle East peace process.

George Moses is the president of MENAC, a government policy information service.