By Bert Ely
The House Agriculture Committee is scheduled to hold a hearing on the Farm Credit Administration (FCA). The proposed hearing date is Wednesday, Dec. 2. The purpose of the hearing will be to examine the performance of the FCA as the FCS’s regulator. The expansion of the FCS’s lending far beyond its traditional scope is likely to generate many questions. CoBank’s lending in recent years to large, investor-owned telecommunications companies, such as Verizon, AT&T, and Frontier Communications, should be challenged as well as FCS loans to large businesses such as the Cracker Barrel restaurant chain. The FCA’s adequacy as a safety-and-soundness regulator should be questioned, too, such as its handling of what essentially has been the failure of FCS Southwest – see the article below for an update on that mess. The FCS’s failure to meet its statutory obligation to serve young, beginning, and small (YBS) farmers also needs be examined as the FCS increasing focuses on financing very large enterprises.
The Farm Credit System: A GSE that has lost its way
The ReformFarmCredit.org website has just posted a new report, “The Farm Credit System: A GSE That Has Lost Its Way.” This 24-page report first summarizes the legislative background and history of the FCS as a GSE, including the FCS’s ongoing attempts to mask its GSE status by calling itself “a national network of cooperatives that support rural communities and agriculture with reliable, consistent credit and financial services.” The core of the report cites numerous instances where the FCS, notably CoBank, has lent to large and very large non-farm corporations, especially investor-owned telecommunications companies. Many of these lending abuses have been reported in the FCW. Bankers are encouraged to not only read this report but to share it with others, including their farm customers, the media, and members of Congress from their state.
FCS completely exempt from the new swaps rule
On Oct. 30, the FCA, the Federal Housing Finance Agency, and the three bank regulatory agencies issued a final regulation establishing capital and margin requirements for swap dealers, major swap participants, and other users of swaps. Those participants are called “covered swap entities.” This rule, mandated by the Dodd-Frank Act, was later modified by Congress to exempt swaps of “small banks, savings associations, [FCS] institutions, and credit unions with less than $10 billion in assets” that enter into swaps for hedging purposes. According to an FCA news release, this exemption also “applies to the swaps of . . . any financial cooperative, regardless of asset size, as long as it uses the swaps to hedge or mitigate risk caused by lending to its member-borrowers.” [bold in the original]The news release then reported the FCA had declared that “no FCS institution is currently a covered swap entity” even though, as of September 30, 2015, all four FCS banks plus three FCS associations – FCS of America, Farm Credit Mid-America, and Northwest FCS each had over $10 billion of assets.
FCS’s first credit risk exceeding $1 billion!
In the September FCW I reported that during the second quarter of 2015 the FCS hiked its self-imposed lending limit to any one customer to $1.5 billion from $1 billion. Clearly, the FCS was gearing up to assume even larger credit risks. Sure enough, that happened, for as the FCS’s quarterly information statement for the quarter ended September 30, 2015, reported, the FCS had one credit exposure that “was above $1 billion but less than $1.5 billion, while at December 31, 2014, no exposures exceeded $1 billion.” The FCS does not disclose the names of individual borrowers, so it is anyone’s guess who that very large borrower is, but it probably is a sound credit risk not in need of any taxpayer-subsidized credit. Additionally, “six exposures at September 30, 2015 and five exposures at December 31, 2014 exceeded $750 million.” Translation: Over the first nine months of 2015, the number of borrowers who had obtained more than $750 million of credit from the FCS rose from five to seven. Over that same period, total FCS lending rose $9.8 billion, or 4.5%. One can reasonably surmise that a disproportionally large amount of that increase was due to higher credit for the FCS’s largest borrowers. That was hardly Congress’s intent when it created the FCS 100 years ago.
What is going on at FCS Southwest?
Also as reported in the September FCW, the shareholders of Arizona’s FCS Southwest and California’s Farm Credit West were in the process of voting on a merger of the two associations, with Farm Credit West the surviving institution. According to an FCA webpage last updated on October 19, “on August 25, the FCA Board granted preliminary approval to a proposed plan of merger by and between” the two associations. “If the merger receives final approval, the share exchange phase of the merger will be effective on November 1, 2015.” Nearly a month past that deadline, there has been no announcement by the FCA or either association that the merger was approved by the associations’ shareholders or that the merger has become effective, which raises this question: Did the associations’ shareholders reject the merger and if so, why? That leads to another question: What now for FCS Southwest?
CoBank using its taxpayer subsidy to build new headquarters
CoBank, the largest FCS institution, with total assets of $110 billion, is building a new, very modern-looking 11-story headquarters building in Greenwood Village, Colo. (near Denver) containing 296,000 square feet of office space and ground-floor retail. According to news reports, “the building is estimated to cost more than $88.5 million,” or approximately $300 dollars per square foot. CoBank, which has approximately 560 employees in its present headquarters in Greenwood Village, “will occupy 10 of the 11 floors in the building,” which works out to about 480 square feet per employee, equivalent to a 20-foot by 24-foot office. That is a very generous space allocation per employee.
What is especially unusual, and puzzling, about this transaction, is that CoBank is leasing the building rather than buying it outright. Given CoBank’s very low cost of funds, by virtue of being a GSE, and substantial size, presumably CoBank could easily fund the entire cost of the building. It may be that the lessor of the building is able to capture some tax advantages that CoBank cannot, with the lessor then passing those tax benefits back to CoBank in the form of a lower rent. Also, it may be that CoBank is financing much, if not most, of the lessor’s investment in the building. CoBank CEO Robert Engel said “we could not be more excited about this project . . . [we are creating]a landmark facility the entire community can be proud of.” If nothing else, CoBank is building a very visible monument to the FCS’s taxpayer subsidies and its ongoing abuse of its statutory lending authorities.