Fannie and Freddie know their limit – does Farm Credit?

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Nearly 30 years ago the Farm Credit System (FCS) needed a bailout funded by the American taxpayer: $4 billion went toward correcting the mistakes of reckless lenders who loaned what they couldn’t.

And now there’s yet another reason to be worried about the FCS’ stability. According to an article by Andrea Riquier at MarketWatch, Fannie Mae and Freddie Mac, the FCS’ younger sister and brother in the government-sponsored enterprise (GSE) family, “could need a taxpayer bailout of as much as $125.8 billion in a new, severe economic downturn.”

The article continues, “The Federal Housing Finance Agency released the results of a stress test required by the post-financial-crisis Dodd Frank Act that examined how the mortgage giants would perform in what FHFA calls a “severely adverse scenario.” The test found Fannie and Freddie would require a Treasury draw of at least $49.2 billion, and as much as $125.8 billion, in a scenario devised by the Federal Reserve.”

So in the very best scenario, Fannie Mae and Freddie Mac would still need $49.2 billion to stay afloat. That’s not a comforting figure.

But what is comforting is the fact that there is a figure. Dodd-Frank stipulates that the FHFA must conduct stress testing so that regulators and lawmakers can make institutional and structural changes to avoid triggering a bailout.

Guess who isn’t subject to Dodd-Frank.

If you guessed the FCS, please pat yourself on the back. As Rep. Frank Lucas (R-OK) pointed out at the FCS oversight hearing last December, the FCS isn’t subject to Dodd-Frank, which mandates stress testing so that regulators can avert a systemic financial crisis. In the event that a financial crisis is inevitable, regulators and lawmakers at least have a figure to work with to determine what is in the best interests of the economy and the country. The FCS doesn’t even provide a bailout figure for policymakers to consider.

How will policymakers know when it’s in the best interests of the economy and the taxpayer to bail out the FCS? The issue lies at Congress’ feet: mandate stress testing and annual reports on the stability of the FCS or be prepared to remain in the dark on whether the FCS can withstand a devastating market crash – before it’s too late.