It’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 by a U.S. congressman. Early in the 1970s federal funds started to disappear here. The money wasn’t being stolen. Nor was it being fumbled away through incompetence. Rather, it seemed, the money was being wasted on purpose.

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). Lujan is renowned around Washington for giving stern lectures on how others are to blame for excessive federal spending. Long before it became fashionable, he was railing against “waste and inefficiency in government” and ridiculing “the belief that a better society can be created through big, costly Washington government.” Lujan’s hard-line speeches have earned him considerable notoriety, at least in New Right circles. 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.

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

Despite popular belief, it’s rare for a modern public official to take cash directly, and equally rare for one to channel a large share of the business from any government program back to himself. If nothing else, where large shares are involved, getting caught is today almost inevitable. On the other hand, a small percentage of the proceeds—a sliver—is easier to arrange, and much less likely to draw attention. For a public official to be linked to, say, one percent of a program’s expense generally does not inspire outrage.

The only catch is that for a sliver to be rewarding, the overall program must be extremely costly. Thus public officials who would like to pry a little of the budget loose for themselves, using this relatively safe strategy, have a tremendous personal interest in ever-greater government spending. And if they can create an atmosphere of overall carelessness and waste, so much the better, for their sins will seem smaller by comparison.

Most sliver strategies are relatively modest. For instance, when Congress votes an increase in the $15-billion-a-year military pension system, a little bit is slivered off to the 30 senators and representatives who receive such pensions. Other congressmen, who have agricultural holdings, derive a small benefit for themselves when they support farm subsidies. The little-known sliver strategy is thus a subtle yet powerful force behind rising government spending.

Occasionally, however, a sliver strategy becomes brazen. Manuel Lujan and the SBA bond program illustrates one such case.

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. In the early 1970s, the SBA began to encourage minority-owned or small businesses to take shares of government construction jobs. But many such contractors were tripped up by their inability to qualify for surety bonds. All construction companies must post bonds to guarantee (provide “surety”) that they can complete the jobs they begin; small or minority-owned companies, especially ones just getting started, often have trouble obtaining such bonds. So the SBA decided to go into the bonding business.

Naturally, SBA officials expected that these bonds, written mainly for young firms, would have’a higher default rate than standard commercial surety bonds. The way they designed the program, however, made it possible to turn bond failures into a booming business.

SBA surety bonds are written by thousands of local insurance agencies like MLA throughout the country. These private agents in effect decide who gets government-financed bonds. “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. 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. They are paid commissions equal to about onehalf a percent of the bond amounts written. They then pass the “paper” along to an intermediary company. 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. AFFI in turn passed the paper along to the SBA, where the bulk of the risk, 90 percent, came to rest.

The flaw in this system should have been obvious to SBA planners. There is virtually no penalty for the agent who fails to be “prudent.” Indeed, agents like M LA can make money regardless of whether they screen out undeserving applicants and regardless of what losses the taxpayers take. All they need do is sell lots of bonds— insuring that their commission sliver adds up to a tidy sum. 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. “Neither the SBA nor most of the sureties are actively attempting to prevent defaults,” a General Accounting Office study found in 1979. 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.

While this flawed program was being developed, Lujan was a member of the House Small Business Committee, which had jurisdiction over SBA affairs. Himself an insurance agent for MLA before his election to Congress, Lujan hardly could have failed to notice the opening for riskfree profit. So despite his anti-spending record in nearly every federal category, Lujan soon was voting for SBA bond appropriations. Before long MLA was selling more SBA bonds than all other New Mexico agencies combined. David McMann, who was MLA’s first (of two) chief SBA bond salesmen and who worked for the agency 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.”

Lumps there quickly became more like foothills. Lujan’s agency has compiled one of the highest default rates nationwide, a BGA examination of SBA records shows. In just ten years MLA has written more than 200 bad bonds. Defaults on these bonds have cost taxpayers more than $5 million. Averaged out, M LA’s “default rate” (the ratio of losses paid to premiums earned) is 219 percent, according to the BGA study. In other words, M LA-written bonds are losing on average twice as much as the bonds take in. This is exorbitant even by comparison to the rest of the troubled SBA bond program. The default rate for AFFI, which is the largest SBA bond carrier, is 102 percent. Balboa Insurance, the nation’s second-largest carrier, has a default rate of only 40 percent.

What sort of deals has Lujan’s agency made on the taxpayer’s behalf? In 1976 and 1977 MLA wrote 13 SBA surety bonds for a company called Paisano Nodaway. At that time Paisano Nodaway was experiencing serious management difficulties and an overextension of assets; the New Mexico Construction Industries Licensing Board received numerous complaints against the company before MLA issued its bonds. Through 1978 Paisano Nodaway defaulted on 12 of the 13 bonds, forcing the federal government to pay about $750,000 in claims.

MLA also bonded the Brame Construction Co., only to see it default and its principal, Richard Brame, flee to Mexico. Then there was the Frank Sherman Construction Co., which Lujan’s agency bonded at a time when Sherman was attempting a job too large for its resources and too expensive to qualify for the program, which had a $500,000 contract limit. In order to evade the limit, MLA split the Sherman job into two smaller bonds. Both defaulted. SBA auditors eventually found MLA “apparently negligent” in the Brame and Sherman cases, but no disciplinary action was taken.

Another shining example of “prudent suretyship” involves Northern Pueblos Enterprises, a firm M LA bonded while it was being run by a man named Marvin Montgomery. Northern Pueblos under Montgomery was, in the words of the company’s own lawyer, J. H. Buttram, “the most poorly run business I have ever seen.” Montgomery had stolen company property and loaned company equipment to friends; Lujan’s agency bonded him anyway. After Northern Pueblos defaulted its government bonds, Montgomery was fired. He promptly formed a new contracting firm, MM Co., and Lujan’s agency promptly bonded him again. M M Co. then defaulted. 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.”

In conjunction with writing bonds for nearly all corners, Lujan’s agency has managed to corner the New Mexico market on SBA transactions. 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. David Mc Mann says that this, too, is no coincidence. 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. Mc Mann says he called clients with the introduction, “This is Manuel Lujan’s office,” and would admit the distinction only if they caught on.

Prudence Doesn’t Pay

While Lujan sits in Congress, MLA is being run by his brother, Edward Lujan. (Manuel and Edward Lujan each own 45 percent of the agency; a nephew owns the remaining shares.) It is Edward Lujan’s name that appears on most of the defaulted bonds. He says that since firing Mc Mann in the mid-1970s, he personally has handled the firm’s government bond business.

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. He admits, for example, that he never checks with the state construction licensing board before approving bonds. “I wait for them [material suppliers, the bellwether of a contractor’s ability to pay its bills] to call me,” Edward Lujan said. When I told him default-prone Marvin Montgomery had described getting a government bond from MLA as “the easiest thing to do,” Edward Lujan replied, “Well, we try to be of service to our clients.”

How much is the Lujan agency’s sliver? According to a complex commission formula Edward Lujan explained to me, the agency has made at least $345,000 on its SBA bond sales, a guaranteed commission unaffected by later defaults. The agency also receives a share of a profit pool administered by AFFI—how much, Edward Lujan wouldn’t say. 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. 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 to about $1 million.

MLA also profits by selling several lines of standard insurance to its bond clients. Richard Brame, for instance, bought $150,000 in life insurance for himself and his wife; Northern Pueblos bought workers’ compensation insurance. Such “account development” is, by itself, a conventional and completely ethical business practice. But in the case of SBA-guaranteed bonds, it provides another incentive to sell a large volume and not worry about the consequences. 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.

What portion of the $1 million sliver eventually will settle in Manuel Lujan’s pocket is harder to say. 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. Edward Lujan states, however, that all income from MLA activities is retained within the firm. If this is so, Manuel Lujan is merely mincing words—the cash as well as the stock value of his holdings is steadily increasing. In his most recent disclosure statement, Lujan reported the value of his MLA shares as “more than $250,000″—the highest category on the form.

Lawmakers usually turn somersaults trying to deny they have any interest in government spending programs, and Lujan is no exception. Manuel Lujan’s official claim is that he knows “absolutely nothing” about the activities of MLA, and he refused requests to be interviewed on the subject. 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. Through the spokesman Manuel Lujan described himself as “just a minority stockholder” in a business that bears his name.

Out in Albuquerque Edward Lujan paints a very different picture. 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. (The salary is small, usually around $8,000, but happens to correspond to the maximum allowed congressmen under outsideincome laws.) Contact between the brothers is regular; 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. Do the Lujans “never” talk business? 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. “I’ve just been talking to Manuel about the same thing,” Moore says Edward Lujan told 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 faults and temptations, continues largely as it did when the “big, costly Washington” program was started in 1971. “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. All told, the SBA has guaranteed $10.6 billion worth of bonds since the program began and paid out $178 million in losses. In fiscal 1982, even with Reagan’s cutbacks, it put $1.1 billion into the bond program. Soon SBA will begin “taking its lumps” for those bonds, too—while public officials like Manuel Lujan take their slivers.

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Gregg Easterbrook has published three novels and eight nonfiction books, mostly recently It’s Better Than It Looks: Reasons for Optimism in an Age of Fear. He was an editor at the Washington Monthly from 1979 to 1981.