Check the Record – Farm Credit’s Systemic Risk

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Note: This is the final post in a series examining the Farm Credit Administration’s (FCA) responses to questions submitted for the record by members of the House Committee on Agriculture following its oversight hearing of the Farm Credit System (FCS) in December 2015.

The Farm Credit System (FCS) is no stranger to bailouts. And before the last bailout in 1987, the FCS had gone on an irresponsible lending binge.

Does it come as any surprise that the FCS is doing the same thing now?

In a prior blog post, Reform Farm Credit shed light on the FCS’ investment in mortgage-backed securities, the same securities that contributed to the insolvency of Fannie Mae and Freddie Mac, and their eventual taxpayer bailout.

But Ken Auer, former president of the Farm Credit Council, has said that the FCS already went through reform after the last bailout, and that it doesn’t need reform now.

Mr. Auer couldn’t be farther from the truth.

But to understand just how wrong he is, it’s important to know how the FCS is structured.

In brief: Farmers, ranchers and other eligible borrowers are members of each association. Each association is under the jurisdiction of one of four major banks. The four banks receive funding from the Funding Corporation, which sells tax-exempt bonds to raise funds that the banks and associations can loan to borrowers. The Farm Credit Council lobbies on behalf of the FCS, the Farm Credit Administration (FCA) supposedly regulates the FCS and the Congressional Agriculture Committees exercise oversight of the FCA and the FCS.

The final piece is the Farm Credit System Insurance Corporation (FCSIC). This entity collects insurance premiums from FCS banks and associations so that, should any bank or association fail to cover its debts, it can be bailed out by the FCSIC.

Simple enough, right? The FCS has insurance to ostensibly cover any losses it might incur so that it won’t shift that burden to the taxpayers.

But does the FCSIC have enough money?

At the end of 2015, it announced that it had slightly more than $4 billion in total assets. On top of that, it secured a $10B line of credit from the Treasury (courtesy of taxpayers). That combined $14B is enough bailout just six percent of the FCS’ total loan volume.

So what happens if something catastrophic happens? What if a natural disaster causes commodity prices to sink, leaving many farmers and ranchers unable to pay their mortgages?

The FCA knows the answer. In the supplemental hearing questions submitted for the record, the FCA admitted that:

“The Insurance Corporation’s resolution authorities have never been updated and modernized, creating potential legal uncertainty in the event of a System institution failure.”

Even worse than admitting that the tools to prevent a system failure aren’t good enough is admitting that:

“The System does not have guaranteed access to the Federal Reserve, the US Treasury, or any other lender of last resort, leaving it vulnerable to a market crisis similar to what occurred in 2007 and 2008.”

The FCA is right – the System doesn’t have guaranteed access to the Federal Reserve or the US Treasury, $10B line of credit notwithstanding. But does the FCA really believe that Congress would let a government-sponsored enterprise (GSE) fail? That certainly wasn’t the case with Fannie Mae and Freddie Mac.

This is exactly why the FCS needs to be reformed: the mechanisms for making sure it remains solvent aren’t in place, and if Farm Credit banks and associations are lending to anyone for any purpose, then all it will take is one weather anomaly or natural disaster to send the FCS into a tailspin, triggering another bailout. How much will this next one cost?

America’s taxpayers deserve better.



Photo Courtesy of mckinney75402