Pub. 3 2014 Issue 9

December 2014 17 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 the Alliance after full implementation is expected to be $6.5 million per year,” an outright merger would save even more money. Perhaps there are some hidden problems within one of the associations that has led to a delay in an outright merger. Time will tell. FCS investments concentrated in just a few FCS institutions An FCA proposal to amend its investments regulation (see next article) seems to reflect the belief that the FCS’s investment portfolio is spread more or less uniformly across the FCS. That most definitely is not the case. At June 30, 2014, FCS investments totaled $50.6 billion, 19% of total FCS assets. The four FCS banks – CoBank, AgriBank, AgFirst, and Farm Credit Bank of Texas – held 95.6% of all FCS investments, with CoBank investments alone totaling $23.3 billion. Four of larger associations – AgStar, 1st Farm Credit Services, Farm Credit Mid-America, and Farm Credit West – held another $1.98 billion, or 3.9%, of the FCS’s investments. The balance of the FCS’s investment portfolio – $284 million – was spread over 24 other associations; 50 associations had absolutely no investments. In terms of highly liquid securities, two FCS banks – CoBank and AgriBank – together held all of the FCS’s $9.6 billion of Treasury securities. CoBank also owned $1.2 billion of the $1.6 billion of federally guaranteed obligations owned by FCS institutions. Less liquid securities comprise the balance – 78% – of the FCS’s investment portfolio. Residential MBS was the four banks’ largest type of investment – $23.7 billion at June 30, 2014, with most of these MBS fully guaranteed by the Treasury or another GSE. These securities are a pure GSE arbitrage play because they offer yields above the FCS’s borrowing cost. Just one association owned residential MBS. The $2.25 billion of commercial MBS owned by FCS institutions at June 30, 2014, represented another profitable GSE arbitrage. Almost half of that investment was held by Farm Credit Mid-America, the second-largest FCS association; AgFirst, CoBank, and AgStar owned the balance of the commercial MBS. FCA intends to open the door to reckless FCS investing Last week, the ABA and the state bankers associations submitted comment letters opposing proposed revisions to the FCA’s regulations governing permissible investments for FCS banks and associations. The proposed revisions would give both the banks and the associations greater investment flexibility without the FCA having made the case as to why that greater flexibility is needed. In fact, as the data in the preceding article clearly show, the FCS as a whole has a far larger investment portfolio than it needs to meet short-term liquidity needs and to manage interest-rate risk. As noted above, most of those investments reflect “GSE arbitrage” – FCS use of cheap GSE debt to invest in higher yielding private-sector securities, such as commercial MBS – to enhance its profitability. No public benefit flows from that profit enhancement. Arguably the real intent of the proposed revisions is to open the door wider to FCS investments in businesses and other entities to whom the FCS cannot legally lend, such as businesses and real estate projects unrelated to agricultural or agriculturally related activities. Medical-facility and nursing-home loans are excellent examples of illegal FCS lending. The key word here is “other” as it opens the door to any type of credit extension that can be characterized as an investment. Conceivably, these “other investments” could even be equity-capital investments, a clearly inappropriate activity for any GSE. These other investments “would be subject to the portfolio limit on association investments... unless otherwise provided for by the FCA.” While “these other investments could also be subject to specific conditions of approval and subject to other limits on a case-by-case basis,” as a practical matter, the sky is the limit. Given that most FCS associations have no or very few investments, the ability of these associations to properly evaluate the riskiness of any investment is highly questionable. Report FCS lending abuses to: green-acres@ely-co.com Bankers are continuing to send FCW reports of FCS lending abuses, such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses in your market to: green-acres@ely-co.com . Please provide as much detail as possible about any loan which violates the spirit, if not the law, governing FCS lending.