A GSE By Any Other Name

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Sprawling. Out of touch. Too big to fail.

While watchdogs describe the Farm Credit System (FCS) in a number of ways, there’s one label in particular that the FCS seems to dislike and avoids calling itself at all costs: government-sponsored enterprise, or GSE.

Whether calling itself the “privately, cooperatively-owned Farm Credit System” in letters, or referring to itself as “a different kind of GSE” on its website, there are compelling reasons grounded in self-interest that explain why the FCS makes a concerted effort to distance itself from its actual entity name. But first, let’s take a look at what constitutes a GSE.

For starters, a GSE is a privately-owned and publicly-backed lender established by Congress. The  handful of existing GSEs were created throughout the last century, the product of a trend among lawmakers who believed that these entities could operate with the combined benefits of the private and public sectors while minimizing the inherent risks for each of them.

Today, the once-fashionable GSE classification has – for two primary reasons – become toxic within FCS circles.

First, the FCS was the recipient of the first-ever federal government bailout, a $4 billion golden parachute in 1987 that shattered any illusion that GSEs were grounded in sound economic modeling. Nowadays, the GSE label most often conjures up thoughts of mortgage lenders Fannie Mae and Freddie Mac, both of which infamously failed, were subsequently rescued by the federal government – thanks to precedent set decades earlier by the FCS – and could go under once again, according to a recent internal report.

Second, FCS activities today don’t align with those allowed by GSE standards. Unlike its GSE brethren Fannie Mae and Freddie Mac, the FCS can make direct loans to consumers.  For its part, the FCS was established with the intended purpose of serving rural America’s farmers and ranchers. Notwithstanding the fact that the private sector has more than enough capacity to carry the credit needs of this community, the FCS underwrites loans to entities like Verizon and Cracker Barrel that cannot be reasonably justified under its status as a GSE or the scrutiny of proper oversight.

The FCS deflects its GSE standing by misleadingly referring to itself as a “private” cooperative, when, in reality, it has the implicit backing of taxpayer money. Meanwhile, the FCS operates like a bank – if it were a bank, it would be the thirteenth largest in the country – by doling out publicly-backed lines of credit to major corporations.

With this in mind, might it be time for oversight? We certainly think so.