Pub. 1 2012 Issue 7

26 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 “Mission-related” bond guarantee triggers big loss for FCS Another FCS lending fiasco – actually a bond guarantee gone bad – provides yet another example of an FCS association assuming a credit risk well outside the FCS’s mission. Around November 1, 2009, AgFirst, the FCS bank funding FCS associations in the Southeast, assumed an outstanding guarantee obligation on $49.8 million of industrial revenue bonds issued to finance the construction of new fairgrounds for the State Fair of Virginia, Inc. (SFVA). The initial bond guarantee that AgFirst assumed was issued in December 2007. Separately, ArborOne, an FCS association based in Florence, South Carolina, was designated as the “Lender of Record” for a $23.2 million USDA loan guarantee on some of the revenue bonds. In addition to AgFirst and ArborOne, the Farm Credit Bank of Texas and eleven other FCS associations invested in the SFVA revenue bonds. SFVA filed for Chapter 11 bankruptcy in December 2011. The case has since been converted to a Chapter 7 liquidation. The fair grounds and related assets were sold in May, 2012, for just $5.67 million. Creditor losses will be substantial given that claims filed in the case total $143 million, including $65 million of secured claims. Amidst this wreckage are two claims, totaling $50.9 million, filed by ArborOne, acting as the agent for AgFirst and the USDA, as well as a $14.1 million claim filed by USDA. While these claims may overlap, clearly this bond-guarantee fiasco has generated losses that the FCS has not openly acknowledged. A very close reading of AgFirst’s 2011 annual report suggests that it took a $10 million loss on its SFVAbond guarantee, specifically in a credit-risk category labeled “Other (including mission related).” It appears AgFirst classified the SFVA bonds it guaranteed as Rural America Bonds (RABs), a “mission-related” investment program the Farm Credit Administration (FCA) first approved in 2005 for a “three- year pilot period.” RABs were to enable FCS institutions to “safely and soundly invest in debt obligations that support farmers, ranchers, agribusinesses, and their rural communities and businesses.” These mission-related investments are supposed “to address the diverse needs of agriculture and rural communities across the country. The FCA ap - proves these investments on a program or case-by-case basis.” [emphasis supplied] A fair essentially is a commercial enterprise that should be able to attract private-sector financing, if it is an economically viable proposi - tion. Clearly, the SFVA was not. In fact, it appears that the combination of the AgFirst and USDA bond guarantees enabled the fair to overinvest in its new fairgrounds, leading to its bankruptcy – hardly the intended purpose of RABs. More troubling than this SFVAfiasco is the fact that in October 2008, the FCA extended the RABs investment program “for an as yet undetermined time period.” In other words, FCS institutions can use RABs to continue indefinitely operating outside their congressional lending mandate and they can do so in ways lying outside the “mission- related investment” concept, such as by guaranteeing tax-exempt bonds issued by a commercial enterprise. The time has come for the FCA to cancel the FCS’s mission-related investments program, and RABs, before even worse abuses occur. FCSA, through AgDirect, tries to extend its lending reach As past issues of FCW have reported, FCSA launched AgDirect to provide financing to farm equipment dealers outside its four-state ter - ritory. This ad from TractorHouse.com Click Here advertises a 2.99% fixed rate on equipment financing from AgDirect. A call to the “800” number in the ad goes directly to AgDirect where a representative told me that AgDirect can only buy dealer-originated paper – it does not deal directly with borrowers. He also told me that AgDirect “guidelines” pro - vide that dealers should only originate loans for borrowers with at least some farm-related income or to owners of properties with a potential to generate farm income. However, it is up to the dealers to enforce that agriculture-related requirement. Given how attractive AgDirect’s rates are, one can reasonably wonder how rigorous the dealers, and AgDirect itself, are in enforcing those guidelines. REPORT FCS LENDING ABUSES TO: GREEN-ACRES@ELY-CO.COM continued frompage 25