If you’re curious just what kind of risks the US government is taking with its $3.3 trillion in loan programs — a portfolio considerably larger and significantly stranger than any private bank’s — the best place to start is the Federal Credit Supplement, an obscure batch of tables stashed in the back of the annual White House budget proposal.
But the weirdest number lurking in this year’s credit supplement was in Table 3, where the White House budget office explains the assumptions behind its cost estimates for various loan programs. What caught my eye was the default rate for an Agriculture Department program called Broadband Treasury Rate Loans: 116.37 percent.
A default rate above 100%? Was that a typo?
It was not a typo.
So what was it? The average default rate for bank loans is about 3 percent. The troubled student loan program has lifetime default rates around 25 percent. How on earth could a credit program, even a risky one, get to 116 percent? Were the recipients defaulting en masse, then stealing an extra 16 percent from the Treasury?
The explanation I eventually got from the Obama administration was not that damning. But it wasn’t exactly comforting, either. The crazy number was apparently produced by flawed execution of a flawed model of a flawed program. In reality, the Agriculture Department expects to recover about 80 cents of every dollar it lends to telecoms to extend high-speed Internet to undeserved rural areas. Administration officials couldn’t pinpoint the actual default rate, but it’s much lower than 116%. They say the main culprits for that wrong number were a radically overbroad definition of “default,” as well as some inappropriate double-counting.
Basically, it’s complicated, which is true of all federal credit programs—which is a problem with federal credit programs.