Pub. 5 2016 Issue 3

April/May 2016 27 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 similar entity participations held by [any one FCS] institution must not exceed 15 percent of its total assets.” If each FCS institution’s similar-entity lending had reached that 15 percent limit at the end of 2015, total FCS similar- entity lending could have equaled $67.1 billion, given that the combined assets of all FCS banks and associations on December 31, 2015, totaled $447.4 billion. That amount of similar-entity lending would have equaled 28.5 percent of all FCS loans outstanding at the end of 2015. It is unlikely that total FCS similar-entity lending would have reached that limit, but interestingly, the FCS Annual Information Statements provide no data on the FCS’s similar-entity lending. Future FCS financial statements should do so. According to the bookletter, “Congress established the similar entity authority to provide [FCS] institutions and [non-FCS] lenders [including banks] with a tool to manage risk. By lending to similar entities, [FCS] institutions can reduce geographic, industry, and individual borrower concentrations.” That is a highly dubious proposition, for this reason: The similar entities to which FCS institutions can lend are limited to the same industries as entities and persons eligible to borrow from the FCS. Similar-entity lending authority does not empower the FCS to lend to persons and entities FCS institutions cannot lend to, such as casinos and automobile manufacturers. Since CoBank can lend to telephone cooperatives, that supposedly justifies CoBank lending to Verizon and AT&T. Presumably, individual FCS institutions can diversify their geographic and industry risks by purchasing participations in loans to borrowers located elsewhere in the country or by purchasing a portion of a loan participation CoBank had previously purchased in a loan to an investor-owned utility such as AT&T or Verizon. However, through such transactions, the FCS, as a whole, has increased its aggregate risk exposure to those industries, including agriculture, where it already has substantial credit risk. That increased risk concentration hardly represents sound risk diversification for the FCS. Although the four FCS banks are separately chartered and managed institutions, they have joint-and-several liability for debt securities sold to investors by the FCS’s Federal Farm Credit Banks Funding Corporation. However, the first line of defense in preventing an FCS default on its debt securities is the Farm Credit System Insurance Corporation (FCSIC), which is funded by assessments, comparable to FDIC assessments, on the FCS banks. The FCS banks in turn pass a portion of those assessments through to the associations they fund; in 2015, the FCS banks assessed FCS associations for $169 million of the $261 million in premiums paid to the FCSIC. The combination of joint-and-several liability and FCSIC assessments binds the four FCS banks and 76 direct-lending FCS associations into what essentially is one highly interconnected financial institution implicitly backed by U.S. taxpayers. The FCS’s similar-entity lending authority has enabled the FCS to make loans to borrowers not otherwise eligible to borrow from the FCS, thereby increasing FCS’s taxpayer risk by untold billions of dollars. That additional credit risk resides in those sectors and regions of the economy where the FCS already has a substantial risk concentration, further exacerbating the FCS’s already extremely concentrated risk in large borrowers, as reported in the article above. For that reason alone, Congress needs to reexamine the rationale for the FCS’s similar-entity lending authorization. CoBank: $1.7 billion of loans to investor-owned utilities Although CoBank normally does not disclose information on its similar-entity lending to investor-owned utilities, such as Verizon and AT&T, during CoBank’s annual investor conference call on March 10, I posed this question: At year- end 2015, what was the total amount of CoBank’s lending to investor-owned utilities. To my present surprise, CoBank later provided an answer – approximately $1.7 billion. That amount equaled 8.7% of CoBank total lending on December 31, 2015, to electric, telecommunication, and water/wastewater utilities. These participations are especially profitable for CoBank because of its tax breaks and cheap funding; that additional profitability subsidizes its other lending activities. CoBank did not provide data on participations in loans to investor-owned utilities it had sold to other FCS institutions, but it probably is substantial since those other institutions had a total of $6.1 billion of utility loans outstanding at the end of 2015, almost all of which consisted of loan participations purchased from CoBank. CoBank’s spokesman said it is routinely approached by large commercial banks to buy loan participations. That may be true, but that does not mean that CoBank should buy them. CoBank’s rationale reminds me of the Flip Wilson saying: The devil made me do it. 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