Shipping Industry Failures Cost Taxpayers a Hefty Sum

The bankruptcy protection sought by Global Marine, the Houston oil exploration giant, early this year came as no surprise to the offshore drilling industry. Idle $40-million oil drilling rigs already were scattered from Louisiana to Africa, world oil prices were plunging and it was no secret that Global Marine was struggling against a massive anchor-chain of debt.

Similarly, the collapse last spring of a grain barge owner, Shearson VI, and four related tax shelter partnerships, all trying to stay afloat in a Mississippi River market depressed by a barge glut, was virtually predicted by critical federal auditors three years before.

But it wasn’t until this year that it became clear how hefty a price the American taxpayer will pay for the financial failures of these and scores of other debt-swamped shipping firms.

In the final hours of the most calamitous fiscal year in U.S. Maritime Administration history, taxpayers have spent a record $1.24 billion to bail out investors in ship mortgage bonds protected by an obscure federal loan guarantee program from the Depression era--Title XI of the Merchant Marine Act.

Devastating economic conditions in the shipping industry and the lingering legacy of what congressmen, federal auditors and industry critics have called “questionable” guarantee approvals in the past have left the Title XI portfolio awash in troubled loans that will almost certainly cost the government millions more in the next fiscal year, which begins Wednesday .

“We’re looking at a disaster, and it’s not over yet,” Rep. Mario Biaggi (D-N.Y.), a longtime supporter of the Title XI program and chairman of the House merchant marine subcommittee, said in a recent interview.

Federal auditors privately warn that by the end of 1987--barring reversal of a stubborn shipping industry recession--the cumulative taxpayer cost to pay off defaulted vessel loans could approach $2.5 billion.

“The taxpayer has been gutted,” one Texas shipping executive conceded.

The U.S. Treasury pay-outs have ranged from the relatively small $519,000 to bond holders of PAWG Marine’s Lois and Delores river tug boats, to the record $232 million required to bail out Global Marine drilling rig investors. Some are controversial.

Government Guarantees

Two toxic waste incinerator ships, for example, won a pledge of $63.9 million in government guarantees, apparently without concern for potential environmental obstacles to their commercial operation. When the Environmental Protection Agency scuttled a bid for disposal permits the newly built ships went directly from the shipyard to default.

And when a Texas ship owner continued to do business with the Department of Defense after defaulting on loans that left taxpayers with a bill for $135.6 million, Biaggi threatened to draft legislation to ban the owner--and any other operators who default--from obtaining future government contracts.

Title XI, managed by the Maritime Administration, was created in 1938 to promote development of a U.S. merchant marine by ensuring financing for construction or refurbishing of ships. Occasional small defaults in the past always had been paid out of a self-sustaining fund built with fees charged to the companies that had applied for the guarantees. Years of success had kept political critics at bay.

Fund Ran Dry

Then last year the fund ran dry. And now the Reagan Administration wants a permanent halt to new Title XI approvals.

“No new (loan guarantee) commitments after 1986 are warranted given the record level of defaults . . . and the oversupply of vessels throughout the industry,” the Office of Management and Budget asserted in a letter to the Senate earlier this month.

But Biaggi, among those in Congress who want to see the program nursed back to health, calls Title XI “critical to survival of an American merchant marine,” and he advocates management reforms rather than elimination of the 48-year-old program. He also blames unforeseen conditions such as plunging oil prices, sluggish agricultural exports and the international shipping recession, in part, for the severity of the problems.

“All this blood-letting came about because everything that could go wrong did go wrong--simultaneously,” he said.

And things continue to go wrong.

$1.24 Billion Paid in ’86

For example, there seems to be little likelihood that much of the $1.24 billion paid out by the Treasury this year (and another $126 million lost in 1985) will ever be recovered. The few successful government sales of repossessed equipment have brought in only fractions of their original costs, and prospects of significant returns in the future are poor.

Maritime Administration officials say river barges, for example, that can cost $300,000 to $400,000 to build have sold in today’s depressed markets for $40,000 to $80,000. Some offshore drilling rigs have sold for as little as 9 cents on the dollar at auctions in Louisiana.

Citing such dour economics, the General Accounting Office has advised Congress that recovery of Title XI default payments “is highly questionable.”

Furthermore, the Maritime Administration often is frustrated by delays in gaining custody of defaulted vessels in the first place. Due to an apparent oversight, 1978 legislation reforming the federal bankruptcy code stripped the agency of its traditional creditor priority. Like other creditors, therefore, it is prevented from seizing the assets of bankrupt firms undergoing court-supervised corporate reorganization.

Courts Barred Seizures

At one point this year, the government was barred by various bankruptcy courts from taking possession of more than $400 million in vessels that it technically owned after paying off defaulted bonds secured by those ships.

New Orleans-based Marsea Marine Inc., for example, operated tugboats and offshore supply ships for nearly 2 1/2 years after 1983 when taxpayers paid off about $52 million in defaulted vessel mortgage bonds. Competitors complained that Marsea was able to undercut their prices because the company no longer was making payments to bond holders.

“Those who honor their Title XI obligations have to compete with those who do not (and they) cannot long survive under that competition,” Maritime Administrator John Gaughan told a Senate subcommittee last March. He warned that the situation aggravates the industry recession, a problem Gaughan now hopes will be improved by the recent passage of a bankruptcy bill restoring the government’s priority as a creditor.

If that legislation gives friends of Title XI hope for better days, there are other reasons for its critics also to take some comfort. This year, new loan guarantees were held to a 20-year low of $12 million, a marked contrast to the annual billion-dollar commitments of the early 1980s.

Born in Great Depression

The program has never reached its congressionally authorized ceiling of $9.5 billion in total guarantees. Today, that portfolio contains about $6 billion in government-backed bonds--nearly $2 billion of which cover vessels in troubled oil-related businesses--and obligate taxpayers into the next century. Over the life of the program, it has guaranteed more than $13 billion in loans on more than 7,400 vessels.

Title XI was born in the Great Depression, a time when long-term commercial bank credit generally was unavailable. The Maritime Administration, charged with the role of promoting a healthy American merchant marine in the days before transocean jetliner service, managed what in 1938 was simply a mortgage insurance program for existing cargo and passenger ships.

But it was seldom used. Through the mid-1950s, only 12 ship mortgage insurance contracts were issued worth a total of $6 million. Title XI subsequently was expanded to cover financing for new construction as well.

Through its first 33 years--into the 1970s, when the program was dramatically restructured--Title XI guaranteed a total of $1.2 billion in vessel loans, ironically equivalent to the amount it just lost to defaults in the past year alone.

Seeds of Disaster

The seeds of today’s Title XI disaster were planted in a Maritime Administration decision to aggressively promote expansion of loan guarantee applications in 1972 and to extend those guarantees to offshore drilling rig and river barge construction--vessels previously excluded from Title XI protection.

According to Robert J. Blackwell, the maritime administrator from 1972 to 1979 who directed that expansion, the decision was a political one. He said it was aimed at preventing Title XI from falling under the control of critics in the Treasury and Office of Management and Budget. That would have meant “you could kiss the Title XI program goodby,” Blackwell said.

“We met in my office and mapped out a strategy for bringing the offshore drilling people and the domestic waterway people into the (program), and I went out on a campaign all over the country for three months to sell this program. . . .These were regular dog-and-pony shows,” Blackwell said in blunt testimony before a House subcommittee hearing last fall.

“We were extremely concerned that . . . there would be a massive attack on the Title XI program from the political side, and we were seeking out political allies” among the major industrial operators in the Gulf and inland waterways, he testified.

Wielding Political Clout

“We wanted those people in the program not only because the program looked good at the time, but we wanted them in there so that they could provide their clout politically when the program was attacked,” Blackwell said.

The strategy was a success initially. In the next two years more than $2 billion in guarantees were approved. Title XI remained under Maritime’s management. And in the next decade its guaranteed loan portfolio boomed to more than $8 billion, nearly 40% of it for newly covered vessels like barges and drill rigs.

But what Blackwell and his advisers had not foreseen back in 1972 was the impending energy crisis and the harrowing roller coaster ride that the economy in general--and the shipping and oil industries in particular--were about to endure in the aftermath of the 1973 Arab oil embargo.

And that ride may be far from over.

Tankers built to carry expected oil imports of 15 million barrels a day were not needed when conservation and new domestic oil production steadied imports below 5 million barrels until only recently.

Soaring Fuel Prices

Many of the huge and complex liquefied natural gas tankers came out of the shipyards as $100-million white elephants when gas exploration successes spurred by soaring fuel prices, wiped out projections of domestic gas shortages.

Shipping operators scrambled to find the right niche to fill in a fast-changing economy. Federal agencies rallied around the flag of “energy independence” and for the Maritime Administration that meant encouraging development of oil and gas drilling rigs, coal barges and related vessels.

Then came the oil price bust. Since 1983, oil exploration and support vessels alone have accounted for nearly $1 billion in federal payments on defaulted bonds.

Andrew Gibson, the maritime administrator who preceded Blackwell, defended Title XI loan policies before a congressional hearing, however, saying it was not the only victim of “cataclysmic economic events.” He cited commercial banks and businesses that invested heavily in the oil industry and “office buildings in Houston.”

“An awful lot of people bet billions of dollars in this country that (a 1980s oil surplus) would not happen,” Gibson said.

OPEC of Coal

“We were going to be the OPEC of coal. We were going to feed the world with our grain. There was no reason to doubt the projects,” Gaughan, maritime administrator for a year, said in an interview. “The (default) payoffs aren’t the result of bad decisions going in, but of unexpected economic conditions.”

Some of the agency’s strongest critics come from the very industries its loan guarantees were intended to serve. Donald R. Yearwood, president of a New York-based tanker ship company that has used Title XI financing successfully, said the government should have let private industry finance the expansion into oil exploration equipment.

“I appreciate that energy independence was a pressing priority back in the ‘70s and that the Maritime Administration was trying to aid the search for oil, but I happen to believe that Title XI wasn’t necessary to do that,” Yearwood said. “The oil companies could have handled the financing themselves.”

The river barge industry also complained that Title XI guarantees were approved without regard for whether there was sufficient demand for more barges in grain and coal hauling markets. Some operators complained that government guarantees and favorable financing terms also attracted inexperienced newcomers and tax-sheltered investors while encouraging excess barge-building.

‘A Terrible Depression’

“Our industry is in the midst of a terrible depression caused primarily by a significant overcapacity of barging equipment . . . a result of speculative building and much of it financed by loans guaranteed under Title XI,” J.H. Pyne, president of Dixie Carriers in Houston, told Congress.

But Maritime Administration records show that even after the agency became aware of the economic risks, it continued to approve millions of dollars in new loan guarantees in both river barge and oil-related industries. For example:

--In the summer of 1981, agency analysts reported a “softening” of barge freight rates due to excess barge capacity in the river grain-hauling markets. Yet, six months later, a $2.9-million guarantee was approved for Shearson VI to fi nance 15 river barges. The Shearson VI partnership was one of several related tax shelter enterprises that had already reported substantial operating losses in prior months, an inspector general audit later discovered.

Defaulted on $19.1 Million

This year Shearson VI and four other Shearson partnerships defaulted on $19.1 million in government-backed bonds.

--After suffering a record $91 million in defaults during 1983, mostly in oil-related shipping loans, the agency signed a loan guarantee in March, 1984, for oil supply vessels to be operated by National Fleet Corp. Barely 19 months later, National Fleet defaulted and taxpayers picked up a $19.5-million tab.

Not surprisingly, some of the most controversial default cases involve the costliest failures. Among them:

--At-Sea Incineration, a $63.9-million default in 1985. The company, a subsidiary of Tacoma Boatbuilding Co., built Apollo I and II in 1982 for about $46 million each. The two ships were designed to incinerate toxic wastes offshore, but environmental concerns prevented the vessels from operating. The EPA, disregarding lobbying efforts by the Maritime Administration, refused last year to issue permits for disposal of toxic materials aboard the ships.

Soundness Questioned

--Phoenix Companies, a $135.6-million default in 1985. Despite staff analysis raising questions about the proposal’s economic soundness, the Maritime Administration in 1981 approved a plan by Houston shipowner C.C. Wei to buy three existing LNG tankers and convert them to super-freighters for coal and grain. One sank en route to the shipyard and the others, too big to enter most U.S. ports and unable to find steady charter, never were profitable.

After Wei’s default, however, he continued to profit from the federal government, operating separately owned ships under charter to the Navy’s Military Sealift Command. Biaggi called it “something immoral” and said he wants to “debar” government contractors who default on government-backed obligations.

However, former Maritime Administrator Blackwell, a private attorney who represents Wei, said the shipowner should not be penalized for a bad business deal that involved no fraud or illegality, as was charged with other debarred Pentagon contractors. Blackwell told Congress that Wei “had an arm’s-length transaction with the Maritime Administration that went sour.”

‘Good Money After Bad’

--GEN Marine, a $219.8-million default this year. The Maritime Administration formed this shell corporation in 1983 in order to take over ownership of four LNG tankers abandoned by their owner. The agency continued to make principal and interest payments to bond holders, which some critics blasted as “throwing good money after bad,” while trying unsuccessfully to sell the ships. They are still for sale.

--Global Marine, a $232-million default this year. The largest default in Title XI history features three drilling rig guarantees that alone amount to nearly $100 million. They were signed in November, 1983, well after the drilling rig industry had gone into its tailspin.

C. Russell Luigs, president of the company, had earlier saved a Brownsville, Tex., shipyard from closing by taking a 20% interest in a drilling rig under construction there. Business Week magazine reported at the time that aides for Vice President George Bush, then head of a task force trying to aid financially ailing border towns, helped win the federal loan guarantees in apparent response to Global Marine’s help in Brownsville.

Loans Being Litigated

A Maritime Administration spokesman would not discuss the loans, which are now the object of litigation, except to say, “We never worked directly” with the Bush aides.

Times researcher Douglas O. Conner in Los Angeles contributed to this story.