Pub. 1 2012 Issue 4

24 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s FCS – home of the supersized borrowers T he FCS loves to talk about lending to young, beginning, and small (YBS) farmers and ranchers (many of whom in fact are hobby farmers or owners of country estates). In fact, the FCS has done such a great job of marketing this myth that USDA granted the FCS nearly $700,000 to “help” small farm customers find credit, as I reported in the January 2012 FCW. However, the FCS is extremely quiet about the bulk of its lending – supersized loans to big farming operations and agribusinesses who hardly need cheap, taxpayer- subsidized credit. Fortunately, the FCS’s Annual Information Statement (AIS), equivalent to a 10-K, provides interesting insights into FCS lending. You will find the AIS here: http:// www.farmcreditfunding.com/ ffcb_live/financialInformation. html?tab=statements According to the 2011AIS, FCS institutions had 165,605 YBS loans and loan commitments outstanding at the end of 2011, totaling $21.290 billion. However, some YBS borrowers have multiple loans, so the FCS had far fewer than 165,605 YBS borrowers at the end of 2011. At the other end of the scale, the FCS had 80 borrowers with loan balances over $100 million. Those outstanding loans totaled $14.190 billion at the end of 2011 – an average of $177.4 million per borrower. While the FCS does not publish data on loans aggregated by borrower for borrowers with less than $100 million in loans, at the end of 2011 the FCS had 3,044 loans outstanding, each between $5 million and $100 million, totaling $33.803 billion, for an average loan size of $11.1 million. However, some of those loans undoubtedly were taken out by borrowers with multiple FCS loans. The FCS should present all of its loan data aggregated by borrower – it has the capability to do so. The FCS does not have a formal loan limit, but it tries to hold its total credit exposure (including unfunded loan commitments) to any one borrower below $750 million – hardly what the typical family farmer borrows. At the end of 2011, the ten largest FCS borrowers had $3.428 billion of outstanding loans – an average of $343 million per borrower. At the same time, ten FCS credit exposures (including unfunded com - mitments) fell in the $563-$750 million range, compared to just five such credits at the end of 2010. In just one year the FCS doubled the number of credit exposures pushing up against its self-imposed $750 million credit-exposure limit! Interestingly, one of its ten largest credit exposures at year-end 2011 was classified as Other Assets Especially Mentioned. CFTC takes care of the FCS, quite mysteriously Last month’s FCW reported that the FCS was again trying to obtain special regulatory treatment. In this case, the FCS was trying to side-step a Dodd-Frank Act (DFA) requirement that it register as a swap dealer because two FCS institutions – CoBank and an FCS association – have entered into interest-rate swaps with borrowers. The FCS, through its trade association, the Farm Credit Council (FCC), argued that because DFA explicitly exempts insured depository institutions from the swap- dealer registration requirement, the FCS should be exempt because, like banks, the FCS makes loans. Specifically, the FCC asked the Commodity Futures Trading Commission (CFTC), the regulator of swap dealers, to expand the definition of “insured depository institution” to include FCS institutions. On April 18, the CFTC adopted a final rule defining who it would regulate as a swap dealer. It appears the FCS has been exempted from having to register as a swap dealer, but not for the reason the FCC gave in pleading for the exemption – we will know more about a possible FCS exemption when the CFTC publishes its swap-dealer regulation in a few weeks. One reason the CFTC may have developed a new rationale for exempting the FCS derives from a March 29 letter the leadership of the House and Senate Agriculture Committees sent to CFTC Chairman Gary Gensler. The letter noted that “Congress provided an exemption for credit institutions that offer swaps in connection with loans from designation as swap dealers.” This phrasing overlooks the fact that DFA provides the exemption only for “insured depository institutions,” which the Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE ©2012 Bert Ely