Farm Credit Watch: Shedding Light on America’s Least-Known GSE

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Still no info about FCS’s $10 billion Treasury line of credit

On May 8, I filed a Freedom of Information Act (FOIA) request with the Treasury Department to obtain all documents related to the creation of the $10 billion line-of-credit the Farm Credit System Insurance Corporation (FCSIC) obtained from the Treasury Department’s Federal Financing Bank. This line-of-credit, created on September 24, 2013, was set to expire on September 30, 2014; it has since been renewed for another year. Although I have had numerous exchanges with Treasury since filing my FOIA request, I have yet to receive a single piece of paper. I was recently advised that a Treasury official “is reviewing the documents” I have requested before they are sent to a group of officials within Treasury for further review. I will persevere in my pursuit of these documents and report to FCW readers on the background behind this line-of-credit, which came into being without any congressional authorization, as soon as I receive a response from Treasury.

Conflict within the FCA over mergers and “alliances”?

Conflict, or confusion, may be emerging within the Farm Credit Administration (FCA) over the manner in which the consolidation process proceeds within the FCS. Traditionally, consolidation has occurred when two or more FCS associations merge and, less frequently, when two Farm Credit banks merge. Due to mergers, over the last decade the number of FCS associations has shrunk from 97 to 77 while the number of banks has declined from five to four. In sharp contrast, there were 845 FCS entities thirty years ago. As the October FCW reported, a new form of consolidation has surfaced within the FCS – a “strategic alliance” between FCS of America (FCSA) and Frontier Farm Credit. Essentially, FCSA, the largest FCS association, assumed management control of the much smaller Frontier without taking ownership of it through an outright merger. As a result, Frontier is merely a shell organization today, with a board of directors but with no employees or any meaningful substance – all of that lies within the control of FCSA, which serves all of Nebraska, Wyoming, South Dakota, and Iowa. Frontier’s territory encompasses eastern Kansas. Why FCSA did not simply acquire Frontier, through an outright merger, continues to be a mystery. Interestingly, the Farm Credit Act did not mandate FCA approval of this alliance while a merger of the two associations would have.

On December 1, Leland Strom, one of the FCA’s three board members, issued a “Statement Regarding Strategic Alliances.” Strom’s statement was issued independent of any FCA board meeting or speech; speeches are how board members usually express their position on FCS issues. As Strom noted, in a strategic alliance, “the corporate charters of both associations will remain intact under the governance of each individual board, but the institutions will have joint management and a common business model and platform.” He then observed that “the anticipated advantages the associations have identified may provide the planned efficiencies, but this alliance is the first of its kind and we do not know for certain that it will produce these benefits. Therefore, it is important for the boards of these associations to remain vigilant and responsive to the needs of the member-borrowers who elected them and whom they serve.” Of course, how Frontier’s directors will be able to be vigilant when they have no employees reporting to them is an open question – time will tell.

Strom went on to state that “I believe it is important to ensure that any alliance structure does not interfere with a board’s ability to serve its members in any way . . . each association’s board of directors remains responsible for ensuring that its association operates in a safe and sound manner, complies with all laws and regulations, and serves as an independent board to meet the needs of its member-borrowers . . . In my opinion, FCA should continue to expect each board of directors to remain autonomous and to provide independent leadership for its association.” It is extremely difficult, though, to believe that Frontier’s board will pass Strom’s test given that it has essentially delegated, in all regards, the management of its association to FCSA.

Just eleven days after Strom issued his statement, the FCA board adopted a proposed rule on mergers and consolidations; it will be open for a 90-day comment period once it is published in the Federal Register. Based on an FCA news release, “the purpose of the proposed rule is to clarify the merger consideration process and to incorporate existing practices in the regulations.” Based on the news release the specific features of the proposed rule do not seem very substantive, but important changes in the manner in which mergers are executed may be revealed once the proposed rule is published. Perhaps the real intent of this proposed rule is to head off future strategic alliances.

FCA board proposes a rule limiting compensation disclosures in what appears to be yet another effort to reduce transparency within the FCS, the FCA issued a proposed rule on October 9 that would exclude certain FCS employees from current reporting requirements for compensation disclosures to FCS shareholders and investors. Currently, each FCS institution must “include a compensation table in its disclosures to shareholders [that] discloses the names and compensation amounts of all senior officers and any other employees who are among the five most highly compensated employees at the institution during the reporting period,” usually a calendar year. The intent of the proposed rule is to exclude from this reporting requirement employees who “might receive a one-time or lump-sum pension payment at the end of his or her career, briefly making him or her among the top five most highly compensated.” Of course, this is precisely the type of compensation disclosure that should be made, to deter excessive end-of-career payouts.