Between 2004 and 2009, the U.S. Maritime Administration, or MARAD, a federal agency that supports the U.S. shipbuilding industry and merchant marine, made just one loan from its troubled Federal Ship Financing Program, also known as Title XI. The borrower was Hawaii Superferry Inc., a politically connected company that hired a former chief counsel and deputy administrator of MARAD, among others, to lobby the agency. In 2005, Hawaii Superferry got a taxpayer-guaranteed loan for $139 million to build and operate a pair of high-speed ferries in the fiftieth state. Just four years later, the company filed for bankruptcy, listing assets of a mere $1 million.

The failure was par for the course for a program that even the business-friendly administration of George W. Bush branded as an “unwarranted corporate subsidy.” As of August 2009, the Title XI portfolio of outstanding loans totaled $2.4 billion.

According to its Web site, the U.S. Maritime Administration supports the merchant marine and the U.S. shipbuilding and waterborne transportation industries. It does so in part by prohibiting foreign shippers from accessing many American waterways. It provides U.S.-flagged ships and domestic shipyards direct funding, tax shelters and tax breaks, as well as financing programs. The agency has also managed, according to reports from Inspectors General and the Government Accountability Office, to leave taxpayers on the hook for billions of dollars for projects that have gone bust.

Consider Title XI, the Federal Ship Financing Program that granted Hawaii Superferry the loan guarantee. Title XI has been plagued by loan defaults for decades, losing close to $3 billion since the 1980s due to multiple loan defaults. After 1986, when defaults caused losses of a record $1.2 billion, the program was suspended, only to be reinstated in 1993. In 1999, American Classic Voyages, owned by Chicago real estate billionaire Sam Zell, launched an ambitious, plan to expand its operations beyond its New Orleans and Hawaiian routes with $1 billion in Title XI funding. When the plan failed and the company went bankrupt, taxpayers ended up on the hook for $330 million.

The high profile failure of American Classic Voyages led to new scrutiny of MARAD’s Title XI program. Then-Sen. Trent Lott, R-Miss., had supported American Classic Voyages’ bid to win the taxpayer-guaranteed loan because he wanted a shipyard in his state, run by Northrop Grumman , one of Lott’s largest career campaign contributors, to build the company’s cruise ships.

Sen. John McCain called the program a waste of taxpayer money and an “egregious example of pork barrel spending.” President Bush took the unusual step of providing no new funding for the program in his 2002 budget. The director of the Office of Management and Budget, Mitch Daniels, labeled the program an “unwarranted corporate subsidy.”

Transportation’s Inspector General launched an audit, completed in 2003, which found that “MARAD needs to improve administration and oversight in all phases of the Title XI loan process.” The report also identified a number of areas where MARAD could improve its practices to limit the risk of default, and reduce losses to the government.  A second audit, completed in 2004, reported that MARAD had created policies that would address the concerns of the inspector general; the agency still had considerable work to do to implement them.

Loan guarantees issued by Title XI slowed drastically in years following the default of American Classic Voyages. Hawaii Superferry received the only guarantee issued in 2005 and the last one until 2009. Disclosure records show the company lobbied Congress and MARAD in 2005 regarding ship financing and Title XI amid the program slow down.

The company hired Blank Rome LLP to push its interests in Washington; among the firm’s lobbyists that represented Hawaii Superferry was Joan Bondareff , who served as chief counsel and acting deputy administrator for MARAD during the Clinton administration . She’d also served as the majority counsel to the House Committee on Merchant Marine and Fisheries. Blank Rome reported receiving $20,000 in fees from Hawaii Superferry in 2005; the company got a taxpayer-guaranteed loan for $139 million to pay for construction and operation of a pair of high-tech catamarans.

Construction of the ferries was completed in 2007, but before they could begin operations, Hawaii Superferry ended up in a fight over whether it needed to complete an environmental impact survey assessing, among other things, the impact that a high-speed, 107-meter long catamaran would have on marine mammals. The ferry company refused to do the assessment, setting up a battle between island politicians and environmental activists.

Gov. Linda Lingle, who backed the project, shepherded a law through the legislature in 2007 that would allow the ferries to operate without completing the environmental impact statement, and further stated that the boats could operate no matter what the survey found, even if they had completed it.

In March 2009 the Hawaii State Supreme Court struck down the law exempting Hawaii Superferry from completing an environmental impact statement, and forced the company to suspend service. The company then filed for bankruptcy in May 2009, raising the prospect of a major default that could leave taxpayers holding the bill.

According to court documents, after liquidating all assets, Hawaii Superferry, Inc. will only have about $1 million available to distribute to creditors. Though MARAD has little to no chance of recovering any of the money it has guaranteed and the company is in bankruptcy, as of this writing the agency hasn’t officially recognized the loan as being in default. When that does happen, an official at MARAD said, plans will be made to start making payments on the $139 million loan.

The two ferries have a book value of only $2.8 million, and were delivered to MARAD. They were used recently to aid the relief effort in Haiti. In the past, MARAD has had trouble maintaining foreclosed ships it has possession of, thus limiting the chances of recovery even further. For example, the 2003 inspector general reports notes that MARAD didn’t monitor the physical condition of a ship it intended to sell for nearly $800,000. The ship was stored in a wet berth and exposed to hurricanes causing extensive damage. The sale price of the ship had to be reduced from $793,000 to $100,000. The payout on the loan guarantee was $1.8 million.

“[MARAD is] concerned about the future of the vessels and hope that they will be put to good use,” an official with the agency told us. Another MARAD official said that, in cases like this in the past, the ships were either sold or attempts were made to put them back to their original use. 

MARAD doesn’t believe the bankruptcy by Hawaii Superferry, Inc. will have any impact on the future of Title XI.

Calls to Lehman seeking comment regarding the bankruptcy were not returned.

A third IG audit is currently underway.