The Sliver Strategy

...In fiscal 1982, even with Reagan’s cutbacks, it put $1...

...But in the case of SBA-guaranteed bonds, it provides another incentive to sellalarge volume and not worry about the consequences...

...Looking back on his entrepreneurial career, Montgomery told a BGA investigator that obtaining government-guaranteed bonds through Lujan’s agency was “about the easiest thing to do...

...Edward Lujan maintains that he could not possibly have known about the true condition of the firms he bonded, but it seems he made little attempt to find out...

...Naturally, SBA officials expected that these bonds, written mainly for young firms, would have.a higher default rate than standard commercial surety bonds...

...Sometimes the cost of insurance “sweeteners”can be written into the contract being bonded, and thus, since nearly all SBA bonding is for government construction jobs, ultimately passed along to the taxpayer, too...

...But many such contractors were tripped up by their inability to qualify for surety bonds...

...words-the cash as well as the stock value of his holdings is steadily increasing...

...SBA has historically delegated virtually all discretion [in bond awards] to surety companies and their agents,” the SBA’s then-inspector general, Paul Boucher, told Congress in March 1982...

...Lujan is renowned around Washington for giving stern lectures on how others are to blame for excessive federal spending...

...Himself an insurance agent for MLA before his election to Congress, Lujan hardly could have failed to notice the opening for riskfree profit...

...Lujan hardly could have failed to notice the openingfor risk-free profit . . . . Before long, his company was selling more SBA bonds than all other New Mexico agencies combined...

...Thedefault rate for AFFI, which is the largest SBA bond carrier, is ,102 percent...

...The moneywasn’t being stolen...

...Through a spokesman, Lujan claimed to have had “no involvement whatsoever” in MLA since joining Congress, having left all authority to his brother, with whom he “never” talks business...

...small or minority-owned companies, especially ones just getting started, often have trouble obtaining such bonds...

...While this flawed program was being developed, Lujan was a member of the House Small Business Committee, which had jurisdiction over SBA affairs...

...There is virtually no penalty for the agent who fails to be “prudent...

...SBA surety bonds are written by thousands of local insurance agencies like MLA throughout the country...

...Most sliver strategies are relatively modest...

...He says that since firing McMann in the mid-l970s, he personally has handled the firm’s government bond business...

...Of course, this inflates the total cost of the bond program and leads to needless defaults, but none of that is the agent’s concern...

...Lujan’s agency has compiled one of the highest default rates nationwide, a BGAexamination of SBA records shows...

...Of this, according to a wellinformed former MLA employee, Lujan’s agency has received about $465,000 plus interest, bringing its total SBA bond revenue toabout $ I million...

...I billion into the bond program...

...congressman...

...Indeed, agents like MLAcanmakemoneyregardless of whether they screen out undeserving applicants and regardless of what losses the taxpayers take...

...The flaw in this system should have been obvious to SBA planners...

...Thus public officials who would like to prya little of the budget loose for themselves, using this relatively safe strategy, have a tremendous personal interest in ever-greater government spending...

...AFFI in turn passed the paper along to the SBA, where the bulk of the risk, 90 percent, came to rest...

...Soon SBA will begin “taking its lumps” for those bonds, too-while public officials like Manuel Lujan take their slivers...

...So despite his anti-spending record in nearly every federal category, Lujan soon was voting for SBA bond appropriations...

...When I told him default-prone Marvin Montgomery had described getting a government bond from MLAas “theeasiest thing todo,” Edward Lujan replied, “Well, we try to be of service to our clients...

...David McMann, who was MLA’s first (of two) chief SBA bond salesmen and who worked for theagency for several years, indicated in an interview that the sliver strategy had been chosen: McMann said he was instructed to “write a large volume of loans, and let the SBA take the lumps...

...Manuel Lujan and the SBA bond program illustrates one such case...

...Such “account development” is, by itself, a conventional and completely ethical business practice...

...Edward Lujan states, however, that all jncome from MLA activities is retained within the firm...

...Early in the 1970s federal funds started to disappear here...

...A BONDAGE FETISH Lujan’s company specializes in construction “surety” bonds underwritten by the SBA as an adjunct to the agency’s minority-contractor program...

...Occasionally, however, a sliver strategy becomes brazen...

...Other congressmen, who have agricultural holdings, derive a small benefit for themselves when they support farm subsidies...

...In the Lujan agency’s case the intermediary was until recently a “specialty” insurer, American Fidelity Fire Insurance of Woodbury, New York, which also received a commission on volume but was at risk for only ten percent of the bond amount...

...The sliver is substantial, but 1 because it doesn’t look I conspicuous, it generally doesn’t inspire outrage...

...T he onlv catch is that for a sliver to be rewarding, the overall program must beextremelycostly...

...Lawmakers usually turn somersaults trying to deny they have any interest ingovernment spending programs, and Lujan is noexception...

...The salary is small, usually around $8,000, but happens to correspond to the maximum allowed congressmen under outsideincome laws...

...In his most recent disclosure statement, Lujan reported the value of his MLA shares as “more than $250,00O’-the highest category on the form...

...The ‘sliver strategy’ 1 involves a politician taking a small percentage of the proceeds...

...Balboa Insurance, the nation’s second-largest carrier, has a default rate of only 40 percent . “Lujan hardly could have failed to notice the openingfor risk-free profit . . . . Before long, his company was selling more SBA bonds than all other New Mexico agencies combined...

...Gregg Easterbrook is a staff writer for The Atlantic and a contributing editor of The Washington Monthly...

...McMann says hecalled clients with the introduction, “This is Manuel Lujan’s office,” and would admit the distinction only if they caught on...

...Averaged out, MLA’s “default rate”(the ratio of losses paid to premiums earned) is 219 percent, according to the BGA study...

...Before long MLA was selling more SBA bonds than all other New Mexico agencies combined...

...I wait for them [material suppliers, the bellwether of a contractor’s ability to pay its bills] tocallme,”Edward Lujan said...

...I’ve just been talking to Manuel about the same thing,” Moore says Edward Lujan told him...

...But Lujan seems blissfully unconcerned-perhaps because, by means of something that might be called “the Sliver Strategy,”a share of the wasted money goes to him...

...Manuel Lujan has since moved off the Small Business Committee and so perhaps does not consider himself responsible for the fact that the SBA bond program, with all its faultsand temptations, continues largely as it did when the “big, costly Washington” program was started in 1971...

...This is exorbitant even by comparison to the rest of the troubled SBA bond program...

...The agency also receives a share of a profit pool administered by AFFI-how much, Edward Lujan wouldn’t say...

...In other words, M LA-written bonds are losing on average twice as much as the bonds take in...

...They then pass the “paper” along to an intermediary company...

...a staff aide who worked in Lujan’s Capitol Hill office for many years says she often placed “three or four calls a day” between the two...

...He says Manuel Lujan receives an annual salary from the agency and is fully briefed on its operations at an annual board of directors’ meeting...

...He admits, for example, that he never checks with the state construction licensing board before approving bonds...

...Long before it became fashionable, he was railing against “wasteand inefficiency in government” and ridiculing “the belief that a better society can be created through big, costly Washington government...

...Manuel and Edward Lujan each own 45 percent of the agency...

...These private agents in effect decide who gets government-financed bonds...

...Ronald Reagan nearly chose Lujan over James Watt for secretary of the interior, and, six times in succession, Lujan has won an award called “Watchdog of the Treasury,” given by a conservative business association for anti-spending crusading...

...So the SBAdecided to go into the bonding business...

...If nothing else, where large shares are involved, getting caught is today almost inevitable...

...Richard Brame, for instance, bought $150,000 in life insurance for himself and his wife...

...The Silver Strategy HOW NEW MEXICO CONGRESSMAN MANUEL LUJAN MAKES THE TAXPAYER'S LOSS HIS GAIN BY GREGG EASTERBROOK I t’s a plain, squat building on a billboarded Albuquerque boulevard, the office of an insurance agency called MLA-entirely unremarkable except perhaps to those who know it is owned bya U.S...

...In the early 1970s, the SBA began to encourage minority-owned or small businesses to take shares of government construction jobs...

...Injust ten years MLA has written more than 200 bad bonds...

...The way they designed the program, however, made it possible to turn bond failures into a booming business...

...Something has to be done about [bond] underwriting, coming up with standards so that our participants can know what’s expected of them, know what types of bonds ought to be written,” Boucher told Congress...

...David McMann says that this, too, is no coincidence...

...All construction companies must post bonds to guarantee (provide “surety”) that they can complete thejobs they begin...

...Defaults on these bonds have cost taxpayers more than $5 million...

...Yet when it comes to his own affairs, the watchdog appears to be snoozing...

...Do the Lujans “never” talk business...

...He maintains he was instructed to establish a monopoly for MLA and led clients to believe that Lujan’s congressional staff, rather than his business concern, handled SBA bonding...

...They are paid commissions equal to about onehalf a percent of the bond amounts written...

...It is Edward Lujan’s name that appears on most of the defaulted bonds...

...bonded himagain...

...The congressman who owns the office is Manuel Lujan Jr., a conservative Republican and 14-year representative of New Mexico (MLA stands for Manuel Lujan Agencies...

...According to congressional disclosure forms, Lujan takes no dividends from MLA, and Lujan has been quoted as saying the agency is not saving up money to present to him when he leaves Congress...

...And if they can create an atmosphere of overall carelessness and waste, so much the better, for their sins will seem smaller by comparison...

...Don Moore, a New Mexico insurance agent and former SBA bond writer, puts it a little differently: “It takes about an hour to figure out how to make money off this program, and you don’t have to do anything right,” he says...

...Lujan’s hard-line speeches have earned him considerable notoriety, BY GREGG EASTERBROOK ai least in New Right circles...

...All they need do is sell lots of bondsinsuring that their commission sliver adds up to a tidy sum...

...An investigation conducted jointly by this magazine and the Better Government Association, a nonprofit government monitoring group, shows that Lujan’s company, which places Small Business Administration-guaranteed bonds, has cost taxpayers millions in waste, losing money at remarkable levels even for the often lax SBA...

...Information obtained by the BGA from Murray Lemonik, AFFI’s chairman, indicates that over the years MLA’s profit pool has held $1.3 million...

...M M Co...

...Out in Albuquerque Edward Lujan paints a very different picture...

...Contact between the brothers is regular...

...Neither the SBA nor most of the sureties are actively attempting to prevent defaults,” a General Accounting Office study found in 1979...

...thendefaulted...

...In conjunction with writing bonds for nearly all comers, Lujan’s agency has managed tocorner the New Mexico market on SBA transactions...

...For a public official to be linked to, say, one percent of a program’s expense generally does not inspire outrage...

...What portion of the $1 million sliver eventually will settle in Manuel Lujan’s pocket is harder to say...

...How much is the Lujan agency’s sliver...

...Local agents are supposed to exercise “prudent suretyship,” to weed out spurious applicants and find those young contractors who are both deserving of a break and able to handle one if it is offered...

...Northern Pueblos bought workers’ compensation insurance...

...Lujan says he now has ‘no involvement whatsoever’ in MU, but one of his aides says she often placed ‘three or four calls a day’ for him to his brother at MU.;’ MLA also profits by selling several lines of standard insurance to its bond clients...

...All told, the SBA has guaranteed $10.6 billion worth of bondssince the program began and paid out $178 million in losses...

...If this is so, Manuel Lujan is merely mincing...

...PRUDENCE DOESN’T PAY While Lujan sits in Congress, M LA is being run by his brother, Edward Lujan...

...On the other hand, a small percentage of the proceeds-a sliver-is easier to arrange, and much less likely to draw attention...

...For instance, when Congress votes an increase in the $15-biIlion-a-year military pension system, a little bit is slivered off to the 30senatorsand representatives who receive such pensions...

...Nor was it being fumbled away through incompetence...

...The little-known sliver strategy is thus a subtle yet powerful force behind rising government spending...

...Lumps there quickly became more like foothills...

...Rather, it seemed, the money was being wasted on purpose...

...Moore, the New Mexico insurance agent and an acquaintance of Edward Lujan, once heard a rumor of a pending change in the SBA bond program and called Lujan’s agency to find out if it was true...

...Through the spokesman Manuel Lujan described himself as “just a minority stockholder” in a business that bears his name...

...MLA writes, or serves as broker for, some 96 percent of all SBA loans in New Mexico, a level not approached by any other company in any other state, the BGA has found...

...Manuel Lujan’s official claim is that he knows“absolute1y nothing” about the activities of MLA, and he refused requests to be interviewed on the subject...

...a nephew owns the remaining shares...

...According to a complex commission formula Edward Lujan explained to me, theagency has made at least $345,000 on its SBA bond sales, a guaranteed commission unaffected by later defaults...

...Despite popular belief, it’s rare for a modern public official to take cash directly, and equally rare for one to channela largeshare of the business from any government program back to himself...