The Farm Credit Hearing: A Recap

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Reform Farm Credit has seen plenty of action this week with its coverage of the House Committee on Agriculture’s hearing on the Farm Credit System (FCS)!

Since no one should have to sit through two and a half hours of testimony from the Farm Credit Administration (FCA), the Reform Farm Credit team has decided to give a rundown of the committee’s best questions and the FCA’s lackluster responses. We have included the full video of the hearing for anyone who is interested.

Following Chairman Mike Conaway’s (R-TX) brief introduction and FCA Chairman Kenneth Spearman’s opening statement, Ranking Member Collin Peterson (D-MN) launched into questioning, asking Spearman to explain “how you make sure the system is staying within the parameters of that mission.”

Spearman’s reply  left us scratching our heads:

“I’m aware that there are issues with what we’re about…We are the regulator. We are there to make sure the System is safe and sound, and is there in good times and bad times…I think our folks do a great job to read the mission, that Farm Credit is a GSE…I don’t want to get into any specific issues.”

Rep. Frank Lucas (R-OK) asked about stress testing, that is, internal operations undertaken by a financial institution to ensure that it can withstand financial difficulties:

“Under Dodd-Frank, that amazing piece of legislation that affects the rest of the banking industry, banks are required to do stress testing. Can you explain how the FCA does stress testing of the Farm Credit System?”

Spearman’s response touched on the issue, but did not provide the level of detail that the regulator of a $283 billion financial enterprise should be able to present:

“Stress testing is a risk mitigation tool that the system utilizes to put certain pressures on an operation to try and determine if A happen…what happens with B. The agency requires that the system do stress testing, and we did that in the form of an information memorandum, we require every year, at a minimum, that they put certain stresses on their operations.”

Rep. Lucas, seemingly unsatisfied with the response, asked his final question, concerning FCS institutions and whether some hold mineral rights. Unexpectedly, Spearman answered to the point:

“Yes congressman, mineral rights are being held by some of the institutions in the system, I believe it’s Agribank that holds most of them, but this happened years ago, and currently system entities are no longer eligible to hold mineral rights.”

To which Rep. Lucas asked, “But we have not dispersed those old assets yet?” Spearman’s answer was telling and brief:

No, we have not.”

Rep. Scott (D-GA), like Rep. Lucas, was worried about the FCA’s oversight of FCS institutions’ stress testing procedures. His question was simple: “How would you compare your stress testing with commercial banks? Is it on an equal footing?”

Spearman’s response was shaky and it was clear that he was looking for words to excuse the FCA’s inadequate oversight:

“Again, stress testing is a risk mitigation tool utilized we have asked…I don’t want to say asked, we’ve encouraged, if you will, through this memorandum for the system to perform certain stress testing on their institution financials at a minimum of once a year. I’m not aware of any comparison that’s done with commercial bankers.”

Following Rep. Scott’s session, Rep. Steve King (R-IA) took the FCA to task, asking Spearman whether he thought the FCS had “gone outside the boundaries” of the mission statement Spearman provided. Spearman, clearly shaken, responded with a simple “no.”

Rep. King continued, citing CoBank’s infamous loan to Verizon:

“Could we imagine then that we would be having this conversation now about Verizon and other telecommunications companies, and hundreds of millions of dollars that have gone into those particular endeavors, or could there be, if some members of this panel have a sense of mission creep, is that totally explainable?”

Rep. King struck at the heart of the issue in saying:

It behooves us all to stay within those boundaries. I think the mission statement’s fine, but I think you’ve overstretched it.”

Only a few minutes later, Rep. Bob Gibbs (R-OH), a farmer himself, addressed another salient stability-focused issue:

In the second quarter of 2015 we saw that the Farm Credit Service (sic) increased their risk exposure level to $1.5 billion, that’s double what the limit was two years ago. What precipitated that change, and how many farmers and ranchers need a $1.5 billion loan?”

Spearman deferred to one of his colleagues, Robert Coleman, director of the Office of Examination, whose answer, though clear, didn’t address the second part of Rep. Gibbs’ question.

Rep. Gibbs then pivoted from this line of questioning to an earlier line of questioning:

“It’s been reported to me that the Farm Credit System made a 700 some million dollar loan to Verizon, is that true?”

Rep. Gibbs, like Rep. King, addressed the FCS’s mission creep:

How could regulators sign off on a deal like that that has really nothing to do with the mission? I’m really struggling with that. This is almost three quarters of a billion dollars. How does that help my farmers in Ohio?”

After a brief interlude, Rep. Austin Scott (R-GA) began his line of questioning by recapping the issues with the FCS addressed by the representatives preceding him, capping his statement with a very direct assessment:

I’ll just be honest with you, I don’t think CoBank’s going to stop until someone stops them.”

With all of that said, Rep. Scott asked a question that no other congressman addressed:

“Are you aware of one of your institutions accessing confidential and proprietary information from a password-protected extranet of its competitor?”

Charles Rawls, general counsel at the FCA, delivered a blasé explanation for what amounts to a serious security breach of the FCS, if not corporate espionage on its part:

“I am aware, a number of years ago, of, probably, the incident you’re referring to, yes.”

Rep. Scott ended his comments with a blunt appraisal of the situation:

“I think that bank would probably be shut down in the private sector.”

Rep. Rick Crawford’s (R-AR) began his session by asking for the ancillary benefits provided to rural communities from the Verizon deal. He then got to the core of his concern:

But what’s happened here with CoBank: they’ve done considerable damage to the Farm Credit brand.”

Nearing the end of his time allotment, Rep. Crawford brought the issue to a close:

“The fact that we’re spending so much time on this, and the amount of energy that’s being devoted to defending it probably means that it’s one of those kinds of things that has done some severe damage to the brand. Let me suggest this, in the time that I have remaining: If CoBank wants to help Farm Credit restore the damage they did to the Farm Credit brand, they might want to be very forthright and proactive in helping you engage rural utilities deliver rural broadband around this country so that we can see the tangible benefits accrue to rural constituents to the extent that they did help Verizon and Vodafone.”

Rep. Scott Desjarlais’ (R-TN) spoke plainly during his session, highlighting the FCS’s status as a government-sponsored enterprise:

“It’s always concerning when you hear stories of a quasi-government entity potentially expanding beyond what appears to be its statutory authority.”

He continued, sharing with Spearman examples of loans provided by some FCS institutions, including for a carwash, an exotic animal hobby farm and a local restaurant chain.

Spearman responded to the question, pleading ignorance:

“I’m not aware of any… I know that our examiners examine, if you will, for loans when they are reviewing loan portfolios at the institutions. If anything comes to our attention there we indicate immediately that they divest of it. We have those authorities and powers to do that. If you are aware of any specific ones, please let me know.”

Rep. Dan Benishek (R-MI) expressed his concerns about FCS institutions and their legally dubious mineral rights holdings, just as Rep. Lucas did. And on the subject of the FCA’s oversight of loans by FCS institutions, Rep. Benishek also expressed growing consternation at the FCA’s inability to answer his repeated question:

“Could you give me an example of something that you would say ‘this is not an appropriate transaction’ to?”

After two minutes of fumbling, Coleman responded:

“There was a loan made to Cracker Barrel by a Farm Credit System institution and we did not agree with the conclusion by the institution that it met the similar entity…”

Neither Cracker Barrel, nor the FCA, has made this knowledge public. As far as the public knows, Greenstone Farm Credit Services took part in a $750 million loan to Cracker Barrel.

After nearly two and a half hours of hard-hitting questions, Chairman Conaway ended the hearing with a warning to the FCA:

“You’re the referee in this deal, and you have a great responsibility to make sure that the mission for the Farm Credit System is met, and that it’s safe and sound.”