Pub. 4 2015 Issue 1

January 2015 23 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 28, 2014, newspaper article reported that a Roger Becker had been selected as Southwest’s new president and CEO. Although the article did not say who Becker’s predecessor was, it appears that he replaced Gary Dyer, who had been Southwest’s president since 1990. The article reporting on Becker’s promotion stated that “for the past 10 years, Roger has served [Southwest] by managing risk in the portfolio and was promoted to Senior Vice President – Risk Management Officer in January 2013.” Becker’s promotion to CEO is quite puzzling since Southwest’s problems stem from poor risk management. The Southwest fiasco raises many questions. First, the supervision of FCS associations is shared by the FCA and the FCS bank which funds the association. In Southwest’s case, this is CoBank. In addition to funding and overseeing 26 associations, CoBank also is the FCS’s exclusive lender to agricultural and rural utility cooperatives. Did CoBank fail to properly oversee Southwest as its lending problems grew and its internal controls broke down? More broadly, has CoBank been so busy expanding its investment banking activities, such as providing $750 million of credit to Verizon and a $350 million credit agreement for Frontier Communications Corporation, that it has dropped the ball on its more mundane, and less profitable, job of overseeing the FCS associations it funds? Equally important, where were the FCA examiners? Why didn’t they short-circuit this lending fiasco? Second, what impact will Southwest’s accounting problems have on the FCS’s ability to produce timely year-end financial statements? The FCS’s third-quarter 2014 Information Statement contained a cryptic note that the FCS “has determined that [Southwest’s] errors are not material to the current and previously issued [FCS] combined financial statements.” However, the investigation into Southwest’s financial reporting may reveal “material” problems, especially if Southwest sold participations in dodgy loans to other FCS institutions. The FCS’s Annual Information Statement, which should be issued by the end of February 2015, should provide some interesting reading. FCSIC renews $10 billion Treasury line-of-credit As FCW reported earlier this year, the Farm Credit System Insurance Corporation (FCSIC) obtained a $10 billion line-of- credit from the Federal Financing Bank (FFB) in September 2013. The FFB is an arm of the U.S. Treasury that provides credit to federal agencies. The FCSIC can draw upon the line- of-credit “to provide assistance to the [FCS] Banks in exigent market circumstances which threaten the Banks’ ability to pay maturing debt obligations.” The four FCS banks act as the funding intermediary between the Federal Farm Credit Banks Funding Corporation (the FCS’s access to the capital markets) and the FCS’s 77 direct-lending associations. The line-of- credit expired on September 30 of this year. Not surprisingly, it was quietly renewed for another year and will now expire on September 30, 2015. A Treasury Department letter sought to justify the renewed line-of-credit by claiming it is intended to provide liquidity as a “last resort” only if “a broad credit market disruption prevents the FCS from accessing the market,” but not to avoid higher FCS funding costs or to “address a capital or solvency problem at FCS banks.” The letter does not explain how to differentiate liquidity from solvency problems. Treasury further asserts that it does not need statutory authority to issue the line-of- credit, but fails to cite any legal authority for doing so. Finally, Treasury claims the new line-of-credit clarifies that “advances may only be made under exigent circumstances involving a broad disruption across U.S. credit markets” without explaining how a broad disruption will be identified as such. 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. For Lease: Prime location in Great Bend, Kansas. 7,000 sq. ft. Former Bank of America Banking Center. Available for immediate occupancy. Call 620-793-9200 and ask for the Building Manager. O O