By Bert ElyAs last month’s FCW reported, on December 2 the House Agriculture Committee held an oversight hearing “to review the Farm Credit System.” The sole witness was Farm Credit Administration (FCA) Chairman and CEO Kenneth Spearman; he was accompanied by the other two FCA board members as well as by two FCA executives who answered many of the questions posed to Spearman. As often occurs, Spearman and his colleagues were unable to answer all the questions fired at them during the three-hour hearing. As is also the case at such hearings, Spearman and his colleagues promised to provide written answers to those questions. Those answers, which are included in the published record of the hearing, provide important documentation of the issues raised at the hearing. Oftentimes, those questions are the only way to extract information from an agency. Usually witnesses, especially those from a federal agency overseen by the committee whose members posed the questions, respond quickly and fully to those questions. It is not smart for an agency to do otherwise. However, the FCA seems to be the exception as 57 days later it still has not answered the questions put to it at the hearing.
FCS Southwest finally acquired by Farm Credit West
The FCA finally announced on January 11 the completion of Farm Credit West’s acquisition of FCS Southwest, the financially troubled association serving most of Arizona; Farm Credit West serves portions of central and southern California and part of Nevada. The “share exchange phase” of the two associations’ merger was completed on November 1, 2015, but FCS Southwest will continue to operate as an independent subsidiary of Farm Credit West for up to three years. Interestingly, the FCS Southwest website does not indicate that FCS Southwest has been acquired by Farm Credit West. Likewise, there is barely any mention of the FCS Southwest acquisition on the Farm Credit West website. The only hint Farm Credit West is managing FCS Southwest is on the webpages pertaining to Farm Credit West’s online banking program.
While operationally FCS Southwest has been integrated into Farm Credit West, its financial results are not being consolidated with Farm Credit West’s results as long as FCS Southwest operates as an independent subsidiary. That is, FCS Southwest will be kept at arms’ length from Farm Credit West until such time as all litigation related to FCS Southwest’s financial problems has been fully resolved. That separateness will protect Farm Credit West members from the cost of cleaning up the FCS Southwest mess. Presumably FCS Southwest will continue to file call reports so that the eventual cost of its financial problems will be fully disclosed to the public and to its members. Time will tell.
FCA’s rationale for not publishing its enforcement orders
As bankers know, banking regulators routinely publish enforcement orders issued against banks and thrifts, but that is not the case at the FCA. To the best of my knowledge, the FCA has never published an enforcement order against an FCS institution. The only way to find out about the existence of an enforcement order, specifically those dealing with safety-and-soundness issues, is when it is disclosed by the FCS institution subject to the order. The FCA’s non-disclosure philosophy is spelled out in a Policy Statement it has issued on several occasions, most recently last September in a document titled “Disclosure of the Issuance and Termination of Enforcement Documents.”
That document first states that the FCA Board “finds that it is in the best interest of the [FCS], the FCA, and the public that certain information concerning the issuance and any subsequent termination of final enforcement orders, formal agreements and conditions imposed in writing . . . be disclosed to the FCS and the public. Specifically, the basis for disclosing this information is to communicate to the FCS and the public that the FCA is effectively using its enforcement powers. . . .” So far, so good, but then the document states that “if the [FCA’s Office of General Counsel] determines that [such] a disclosure adversely affects a civil or criminal investigation, the disclosure will not be made.” It seems that FCA’s general counsel always makes that determination. The banking regulators never seem to worry about the impact of disclosing an enforcement order, so why does the FCA have that concern, unless it is trying to protect the FCS from adverse publicity, such as in the FCS Southwest situation?
Where does FCA’s inspector general fit into the picture?
Like many other federal agencies, the FCA has an Office of Inspector General (OIG). Although appointed by the FCA Board, the OIG “provides independent, objective oversight authority for the [FCA] . . . promoting economy and efficiency, and preventing and detecting fraud, waste, abuse, and mismanagement . . . by conducting audits, inspections, and investigations of [FCA] programs and operations.” [emphasis supplied] One of the FCA’s key responsibilities is to enforce the lending constraints Congress has imposed on the FCS. The FCA’s OIG, however, disclaims any responsibility for monitoring FCA enforcement of FCS lending activities by conflating FCS mistreatment of borrowers with loans the FCS should not have made, regardless of how well the borrower was treated.
Specifically, the OIG claims that its “statutory authorities extend only to the operations of FCA and its employees, not to the operation of [FCS] institutions.” The OIG then instructs borrowers that if an FCS institution “has violated your rights as a borrower [or] has not complied with a statute or regulation . . . please notify the FCA Office of Congressional and Public Affairs.” However, complaints the FCA has chosen to ignore about FCS institutions, notably CoBank, making impermissible loans clearly represents FCA mismanagement. The FCA OIG needs to begin investigating the numerous, well-document instances where the FCA has not taken enforcement action against FCS institutions, and not just CoBank, who have lent outside the FCS’s congressional charter. The FCA OIG should then blow the whistle on FCA’s regulatory mismanagement.
CoBank’s solar tax gimmick
As if it does not already benefit enough from the tax breaks and cheap financing it enjoys as a GSE, CoBank has pushed the edge of the envelope further with a financing model for solar power installations. According to “SunShot,” a publication of the U.S. Department of Energy, Farm Credit Leasing (FCL), a for-profit and therefore tax-paying subsidiary of CoBank, entered into a leasing deal with the electric cooperative serving Rockford, Minnesota, to install solar panels on property owned by the City of Rockford. In this transaction, FCL leased the solar panels to a for-profit, and therefore taxable, subsidiary of the cooperative. That subsidiary was entitled to a “30% federal investment tax credit for solar . . . equipment.” Likewise, FCL will capture whatever tax benefits are available to a lessor of solar equipment. A sweet deal all the way around, except for taxpayers.