Pub. 5 2016 Issue 3

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 26 BERT ELY’S FARM CREDIT WATCH ® SHEDDING LIGHT ON THE FARM CREDIT SYSTEM, AMERICA’S LEAST KNOWN GSE ©2016 Bert Ely END OF 2015: ALMOST HALF OF FCS LOANS TO JUST 4,458 BORROWERS F OR YEARS, THE FCS’S Annual Information Statement presented data on the number of FCS loans outstanding at year-end by size of loan, with this loan data aggregated by size range. I have long criticized this practice because many FCS borrowers, especially larger ones, have multiple FCS loans. Consequently, Information Statement readers could not gain a sense of the extent to which the FCS provides taxpayer- subsidized loans to very large borrowers even though the FCS has long had the capability of aggregating loan data by borrower. In fact, prior Information Statements provided data on the total amount lent to the FCS’s ten largest borrowers. Finally, the 2015 Information Statement provides data for all loans aggregated by borrower. What an eye-opener! At December 31, 2015, just 4,458 persons or entities – less than one percent of the FCS’s 527,462 borrowers – had each borrowed at least $5 million from the FCS. Their loans totaled $107.3 billion, or 45.5% of total FCS loans outstanding at year- end 2015, for an average loan size of $24.1 million. Within that group were 49 borrowers with an average loan balance of $417 million, including one loan exposure in the $1 to $1.5 billion range and another five loan exposures in the $750 million to $1 billion range. Can taxpayer-subsidized financing be justified for any of these borrowers? FCA bookletter raises doubts about FCS similar-entity lending Perhaps in response to criticisms raised at the House Agriculture Committee’s December 2 hearing on the FCS, on March 10 the Farm Credit Administration (FCA) issued a bookletter on “similar-entity” lending by FCS institutions. Bookletters are regulatory guidance the FCA issues to FCS institutions. According to the bookletter, a qualified similar- entity borrower is “a person or entity that is not eligible for [an FCS] loan but has operations ‘functionally similar’ to the operations of an eligible borrower.” For example, Verizon and AT&T are similar entities because CoBank can lend to cooperatives which provide telephone and wireless communication services. However, similar entity loans cannot be made to companies engaged in activities outside the FCS’s lending authorities. For example, the FCS cannot lend to an investor-owned casino since FCS institutions cannot lend to a cooperatively owned casino. Presumably, similar-entity lending levels the playing field between entities eligible to borrow from the FCS and direct competitors ineligible to borrow from the FCS. By virtue of being able to borrow from the FCS at taxpayer-subsidized interest rates, those similar-entity borrowers, of course, gain a financing edge over competitors who do not borrow from the FCS. Similar-entity lending occurs when one or more FCS institutions “purchase participations in loans originated by [non-FCS] lenders to qualified similar entity borrowers,” subject to three limitations. First, the aggregate amount lent to the borrower by all FCS institutions “must not, at any time, equal or exceed 50 percent of the principal amount of the loan.” For example, FCS institutions, in the aggregate, cannot buy more that $50 million of participations in a $100 million loan a commercial bank had made to a large sugar producer. Second, the total amount lent by an FCS institution to a single similar entity “must not exceed 10 percent of an institution’s total capital,” unless its shareholders have approved a higher limit, up to 25 percent. Third, “the aggregate dollar volume of