Here Today, Gone to Maui

While the Farm Credit System unabashedly advertised for recreational properties in high end magazines in the past, take note of these newer ventures: luxury properties in Hawaii.

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News of Farm Credit Fragility Hits Washington

The Farm Credit System (FCS), much like other government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, has a history of catastrophic near-collapse, saved at the last minute by federal bailouts. And as the FCS edges closer and closer to its breaking point, taxpayers may soon be responsible for picking up the pieces.

The FCS’ position is so precarious that it’s been making the rounds in Washington. In her July 29 article in the Washington Examiner, Emilie Padgett reported that the FCS has grown so massive and unwieldy that members of Congress are calling for more oversight before it’s too late.

This spring, Reps. Marlin Stutzman (R-IN) and Mick Mulvaney (R-SC) issued letters calling on the FCS to clear away the cobwebs and provide answers. In his letter to the CEO of the Farm Credit Administration (FCA), Rep. Mulvaney expressed his concerns, noting that “The FCS has grown exponentially in size…If FCS were a private financial institution, it would be the 9th largest bank in the United States.” Rep. Stutzman’s letter to the Government Accountability Office (GAO) voiced the same concerns and called on the GAO to “study the impact the Farm Credit System is having on taxpayers, the agriculture community, and the private banking industry.”

These letters came in the wake of the FCS’ ambitious expansion into lending far outside of its mandate. In 2013, CoBank, a member of the FCS’ tax-advantaged network, granted Verizon Wireless $725 million in loans under the claim that it was a “‘similar entity’ to a rural telephone company and was supplying some infrastructure to rural telecommunications.” In a troubling turn, the FCS issued in 2011 a $750 million loan to restaurant chain Cracker Barrel, which is hardly an agricultural business — unless McDonalds, Burger King and other restaurant chains are considered agricultural businesses too.

Ms. Padgett’s article is a good first step in ensuring that Washington sees what was clear all along: the FCS’ mission creep may soon leave taxpayers holding the bag. Bending the rules for Verizon and Cracker Barrel is bad enough, but leaving taxpayers on the hook for FCS’ faulty judgement is far worse. It’s been too long — Congress should turn its eye to the FCS before it skips out on its tab and leaves taxpayers with the bill.

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Fannie & Freddie shower executives with lavish pay raises

Government-sponsored enterprises (GSE) Fannie Mae, Freddie Mac and Farm Credit have a shared history of federal bailouts. They’re also predisposed to shower their senior leadership with staggering compensation packages. The saga continued this month as The Washington Times reported that the chief executives of Fannie Mae and Freddie Mac would receive monumental pay increases from $600,000 to $4 million.

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Is the Farm Credit System trying to add to the student loan bubble?

The Farm Credit System clearly has no affiliation to the US Department of Education but has this GSE become the newest federal student loan provider?

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Does the USDA’s $4bn farm assistance work? No one knows for sure.

As reported by the Washington Free Beacon, a USDA Office of the Inspector General (OIG) audit recently concluded that the department does not know – and has no way of determining – if its annual beginning farmers initiative totaling nearly $4 billion has had any positive impact whatsoever.

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CoBank’s Credibility Problem

After forking over an astounding $1.5 billion in credit to four of the world’s largest telecom corporations, CoBank – Farm Credit’s largest subsidiary and supposed ag lender– is at it again, this time committing hundreds of millions of dollars in new loans to major utility companies across the country.

Here’s how it unfolded:

  • On March 10, the GSE giant participated in a $450 million unsecured revolving credit facility for a California-based water utility provider. As reported in Farm Credit Watch, CoBank acted as a co-syndication agent for the NYSE-listed corporation.
  • Just days later, Fitch Ratings Service affirmed the rating for Georgia Transmission Corp., an electrical infrastructure provider, thanks in part to a CoBank-led, $250 million revolver that was established in March 2013 and later renewed until March 2018.
  • On April 13, CoBank helped Black Hills Corp., a South Dakota-based natural gas and electric utility provider, close on a two-year, $300 million unsecured term loan.

While it’s anyone’s guess as to why CoBank’s regulator does not speak out against such egregious lending activities, the fact remains that these large customers have more than enough capacity to engage the private sector rather than tap into the taxpayer-subsidized credit provided by CoBank and other Farm Credit associations.

CoBank’s seemingly endless portfolio of non-agricultural loans is unsettling because it represents a wildly stretched interpretation of the Farm Credit Act of 1971. While lawmakers passed the decades-old legislation with the intent of enabling lending to important activities and enterprises to support rural America, they likely did not foresee Farm Credit viewing it as a green light for its current “anything goes” approach.

CoBank will continue to run amok until its activities are reined in and refocused on the farm. This begs the question, when will Congress finally step in to take a look at these non-agricultural loans from CoBank and other large GSE’s masquerading as farm lenders?

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Dear Farm Credit Council:

On February 5, the Farm Credit Council (FCC) sent a letter rife with errors, bent truths and deceptions to the House Committee on Agriculture in an effort to stave off the ever-growing cry for oversight. While trying to obfuscate the actual issues at hand, the FCC’s letter showed how out of touch it is with reality. Despite claiming “to serve agriculture and rural America as Congress intended” (link to another post), we have shown time (link) and time again just how far the Farm Credit System (FCS) has veered from its original charter.

The letter lists the many clients it has served in its 100 years, but conveniently places a catch-all term “others” at the end of the list — a clear effort to downplay its enormous deals with big telecom and other corporate entities like Cracker Barrel restaurants. Sadly, the FCC portrays the efforts of Reform Farm Credit and similar organizations to educate the public as an effort to “mislead” Congress.

Asking for oversight is not unreasonableFlawed logic, factual errors and logical inconsistencies abound throughout the letter. Despite trying to portray the Farm Credit System as “private” and “cooperatively-owned,” the FCS is a government sponsored enterprise (GSE) and, therefore, is not truly private. As the FCC wails about the purported advantages that commercial banks have, it begs the question of why then do Farm Credit institutions not become banks? The answer is clear: because they do not want to give up the many advantages they  have as a GSE.

The FCC tries to spin its involvement in mineral rights retention, as well as its lack of ability to ensure that loans are only going to eligible borrowers, but that assertion just doesn’t hold up. The FCC fails to acknowledge the several complaints filed by insurance departments against FCS or why it refuses to work with state insurance regulators. It trumpets the patronage checks it distributes, but we know it better as an interest rebate — something it can afford to do because it enjoys a lower tax rate than most Americans and most banks as a GSE.

The Farm Credit System is doing whatever it can to hang on to its advantages. But American taxpayers deserve to know why more oversight and accountability of this enterprise is a bad thing.

FCS oversight summary snippet

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Congressman Seeks Answers to FCS Overreach

The Farm Credit System’s (FCS) activities have in recent years left even the most casual observers scratching their heads.

Now, US Representative Marlin Stutzman (R-IN), an important member of the House Committee on Financial Services, is stepping in to get answers.

On Friday, the congressman submitted a letter to the Comptroller of the Government Accountability Office (GAO), requesting an audit of the FCS.

“As the FCS approaches its 100th anniversary, it is important for policymakers to demonstrate appropriate oversight over this Government-Sponsored Enterprise,” he wrote. “Given the importance of agriculture to my district and state, I am compelled to address recent concerns raised by constituents and industry participants from across the country.”

In his letter, Rep. Stutzman proceeded to ask a wide array of questions related to statutory obligations, indirect lending, crop insurance and mineral rights, all of which reflect the System’s massive deviation from its intended purpose.

This is not the first time that Rep. Stutzman has raised concern over the FCS. In July 2014, he penned an op-ed published by the American Banker in which he warned against the System’s size and scope.

“Farming should be at the center of the Farm Credit System,” he wrote. “Unfortunately, a too-big-to-fail approach has allowed this $247 billion government-sponsored enterprise to overstep its purpose and crowd out private lenders. Unless we return the Farm Credit System to its original mission, taxpayers could be on the hook for a bailout in the near future and farmers’ access to credit could be reduced.”

Click here to read the op-ed.

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Farm Credit Watch: Does Ken Auer fully understand the FCS’s tax advantages?

Ken Auer is president of the Farm Credit Council, the FCS trade association that lobbies on behalf of the FCS and its constituent Farm Credit banks and associations.  During the 2013-14 period, the Council’s Political Action Committee raised $1.08 million and contributed $935,000 to candidates for federal office. Those contributions give the Council, and therefore the FCS, a lot of clout in Congress and especially with members of the House and Senate Agriculture Committees as the FCS fights to protect its tax exemptions while opposing the ABA’s request for periodic congressional oversight hearings of FCS activities. The ABA letter requesting hearings can be found here.  A similar letter was sent to the House Agriculture Committee.

In the April 15 issue of Brownfield Ag News, Auer asserted that “the FCS does pay federal taxes, but has special tax provisions and does not pay many state taxes.” Auer is right that the FCS “does not pay many state taxes,” but he grossly misrepresented the extent to which the FCS is exempt from the federal corporate income tax, or perhaps he does not understand the magnitude of that exemption. The FCS’s largest tax break is its exemption from federal income taxes on profits earned on real estate lending; FCS real estate loans are carried on the books of Federal Land Credit Associations (FLCAs). All but two FLCAs are subsidiaries of the FCS’s 74 Agricultural Credit Associations (ACAs) that cover almost all of the country. Each ACA also has a Production Credit Association (PCA) subsidiary that holds its non-real estate loans; PCA profits are subject to federal income taxes. Understandably, the ACAs have a powerful financial incentive to maximize the profitability of their tax-exempt FLCA subsidiary while minimizing the income of their federally taxable PCA subsidiary.

According to the FCS’s annual Information Statement for 2014, the FCS’s “nontaxable entities;” principally the FLCAs, effectively reduced the FCS’s federal tax bill by $1.26 billion, or 73%. The comparable reductions were $1.23 billion and 72% in 2013 and $1.09 billion and 72% in 2012. This federal income tax reduction gives a lie in Auer’s statement to Brownfield Ag News that “there is NO federal or taxpayer money involved in the [FCS].” The FCS’s federal income savings are financially equivalent to the U.S. Treasury Department sending checks in those amounts to the FCS. Additionally, the FCS has a $10 billion line-of-credit at the Treasury. Perhaps Auer does understand the magnitude of the FCS’s tax subsidy, but does not want to publicly admit it, especially since the FCS increasingly tilts toward lending to larger borrowers and investor-owned utilities rather than to young, beginning, and small (YBS) farmers the FCS is supposed to focus on serving.

The FCA’s double-standard on enforcement actions

Like the bank regulators, the Farm Credit Administration (FCA) takes enforcement actions against FCS institutions for various reasons. Unlike the bank regulators, though, the FCA does not publish its enforcement orders nor does it even name the FCS institutions subject to those orders. However, these institutions (usually FCS direct-lending associations) do disclose the existence of those orders in their quarterly and annual reports to their members. It takes a lot of work, though, to identify those institutions. Presumably the FCA fears dire consequences if it names names, yet the FCA does not hesitate to name the individuals it has barred from serving, without the FCA’s consent, “as a director, officer, or employee of any FCS institution.” Rarely, though, are individuals prohibited from working in the FCS – over the last decade, just four persons have been subject to a prohibition order.

Although the FCA does not name the institutions subject to enforcement orders, it does provide some data regarding those orders. That data, though, is not clear-cut. For instance, the FCS’s 2014 annual Information Statement reported that at the end of 2014, the FCA “had entered into written agreements with three Associations who assets totaled $1.191 billion, as compared with eight Associations whose assets totaled $4.803 billion as of December 31, 2013.” On the surface, that decline looks pretty good. However, a March 31, 2015, report issued by the FCA’s Inspector General (IG) on the FCA’s special supervision and enforcement processes paints a more disturbing picture.

According to the FCA’s IG, during the fiscal year ended September 30, 2014, eight FCS institutions were under enforcement orders and three were subject to “special supervision,” which is one step away from an enforcement action. Assuming all eleven are FCS associations, this means that approximately one of every seven FCS associations experienced supervisory issues during fiscal year 2014, a time of exceptionally good economic conditions in American agriculture. Ten of the eleven associations’ “areas of concern” involved management issues and nine related to asset quality. Clearly some associations generated both management and asset quality concerns.

Especially troubling is how long it takes the FCA to resolve supervisory issues.  Eight institutions falling within the scope of the IG’s report were “under enforcement [that] ranged from one and a half to five years, with an average of 39 months” – over three years! It appears from data in the FCS annual Information Statements that most of these associations are relatively small – well under $1 billion in total assets, which raises this question: Why does it take the FCA so long to get these problems resolved? Further, the FCA has had to take numerous formal supervisory actions against some of these associations – six over 46 months in one case and five over 60 months in another case. Possibly some of these associations have been resolved through mergers with stronger associations. Putting a spotlight on these problem associations, by publicizing their enforcement orders, would help greatly to reduce these problems. The new FCA Chairman, Ken Spearman, should so order.

The FCS Southwest saga continues

FCS Southwest, which serves most of Arizona plus California’s Imperial Valley, announced last October that due to “a sudden significant increase in the level of delinquent loans” it would have to restate its financial results. At the same time, the FCA removed from its website all call reports Southwest had filed since 2010. That financial restatement process still has not been completed. The FCA website simply states that a “data correction is underway [for Southwest] and data not available at this time.” In February, Southwest announced its intent to merge with Farm Credit West, a large California FCS association. Shortly thereafter, Farm Credit West’s CEO assumed the CEO position at Southwest and the two associations began “operating under a joint management agreement.”

Almost certainly, the FCA engineered a shotgun marriage of Southwest into Farm Credit West, but that deal cannot be closed until each association’s borrower/stockholders approve it; August 1, 2015, is the anticipated merger date. However, they cannot vote on the deal until due diligence has been completed and “detailed disclosure documents [have been] provided to each stockholder.” Of course, Southwest’s financial restatement must be completed before the disclosure documents can be finalized. In the meantime, a criminal investigation reportedly is underway at Southwest related to fraudulent transactions that led to the “sudden significant increase” in delinquent loans.

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Farm Credit’s Tax Heist

It’s safe to say that most Americans wouldn’t categorize tax season as a “special time of year.”

So why, then, is Farm Credit joyously announcing it as such?

The answer is simple: the FCS doesn’t pay taxes like the rest of us.

Instead of taking careful stock of its finances like most Americans in the days and weeks leading up to the April 15 filing deadline, Farm Credit has been busy this year finding ways to celebrate. This is according to an advertising campaign by Southwest Georgia Farm Credit in which the publicly-backed lender virtually admits to having more cash than it can possibly handle by depicting money literally growing on a tree. On its website, the association portrays money sprouting from the ground.

FCS Patronage Tax Season

For some context, Farm Credit in 2013 paid taxes at a rate of just 4.55 percent — a rate lower than 80 percent of Americans – despite $4.6 billion in subsidized profits. In 2014, Farm Credit similarly enjoyed a net profit of $4.7 billion while paying just 4.47 percent in combined federal, state and local taxes.

With exorbitant profits at hand and absent any responsibility to file its annual taxes at a rate comparable to other farm banks or individuals, Farm Credit has adopted a name for this time of year: patronage season. That’s right, Farm Credit takes its tax payer subsidies, lends to big telecom ($725 million to Verizon?), then turns around and doles out interest rebates to its constituents.

Its first bailout in 1987 cost taxpayers $4 billion. At the time, the System had total assets of $40 billion. Today, the System has grown substantially to more than $282 billion in assets – if it were to need another bailout, the cost to taxpayers would be much greater. This is a real concern given the state of Farm Credit’s lending portfolio, its clear loss of focus and the track record of government sponsored enterprise (GSE) counterparts Fannie Mae and Freddie Mac.

Just remember that while the average American may fret, scramble, worry – whatever it may be – over the implications of April 15 filing deadline, Farm Credit audaciously boasts of its subsidized profits, thanks to an astonishingly privileged tax responsibility.

Tax day is as good a time as any to remind Congress that Farm Credit needs immediate reform.


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