Pub. 5 2016 Issue 1

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 20 BERT ELY’S FARM CREDIT WATCH ® SHEDDING LIGHT ON THE FARM CREDIT SYSTEM, AMERICA’S LEAST KNOWN GSE ©2014 Bert Ely FCA FACED TOUGH QUESTIONS AT HOUSE AG COMMITTEE HEARING O N DECEMBER 2, THE HOUSE AGRICULTURE Committee held a three hour hearing “to review the Farm Credit System.” The sole witness was Kenneth Spearman, chairman and CEO of the Farm Credit Administration (FCA), the FCS regulator. Although Spearman has been a full-time member of the FCA board of directors for the last six years and CEO since March of this year, in responding to questions from committee members, he needed substantial assistance from two FCA executives, Charles Rawles, the FCA’s General Counsel, and Robert Coleman, the FCA’s chief examiner. Most of the committee’s 45 members attended the hearing; nearly all of them asked questions. While many committee members expressed support for FCS, with several acknowledging that as farmers they were or had been FCS borrowers, they still asked a lot of tough questions and offered many sharp criticisms of the FCS, and by extension, the FCA. The following summarizes key issues raised at the hearing. FCS mission In the context of posing questions about who the FCS was lending to, numerous concerns were expressed about the FCS lending outside its statutory mission. Members raised concerns about “mission creep,” especially with regard to CoBank’s lending to Verizon and other investor-owned telecommunications companies. Spearman attempted to justify these CoBank loans as “risk diversification,” claiming that was why Congress authorized the FCS to lend to “similar entities.” A “similar entity,” according to the Farm Credit Act, is “an entity that, while not eligible for a loan [from the FCS], is functionally similar to an entity eligible for a loan [from the FCS].” The concept of “similar entity” certainly does not encompass a racetrack and casino loan the FCS made in New York. Chief examiner Coleman claimed that the FCS needs to diversify its risks outside agriculture, but that assertion is absurd given the diversity of American agriculture and the fact that the FCS, primarily CoBank, already has about $23 billion of credit exposure to electric and telecommunication utilities, 10% of the FCS’s total credit risk. One committee member stated that CoBank “has done considerable damage to the FCS brand” by lending to Verizon. The FCA witnesses strongly implied that the FCA directed, or at least encouraged, CoBank to get rid of its Verizon loan. Apparently there have been other instances where the FCA has ordered an FCS institution to sell a loan that did not fit within one of the FCS’s lending authorities and was not a loan to a similar entity. Loan participations Closely related to the mission issue and “mission creep” is the amount of participations in loans to “similar entities” held by FCS institutions. While participation loans held by CoBank cannot exceed 15% of its total assets, questions were raised about limits on the amount of participations in loans to “similar entities” held by other FCS institutions, with the suggestion that the 15% limit should be imposed on all FCS institutions as a way to limit mission creep.