By Bert ElyIn a Feb. 5 letter to Rep. Michael Conaway, chairman of the House Ag Committee, and Rep. Collin Peterson, the ranking Democrat on the committee, Ken Auer, outgoing president and CEO of the Farm Credit Council (the FCS trade association) blasted a Feb. 1 letter ABA President and CEO Rob Nichols send to Chairman Conaway and Ranking Member Peterson following up on the committee hearing. As will be evident below, the Council’s letter appears to be a slapdash rehash of earlier Council responses to ABA letters rather than a thoughtful response to the points CEO Nichols made in his letter.
The ABA letter summarized five areas of FCS activities that ABA recommends the House Ag Committee continue to examine: lending outside the FCS’s mission; indirect lending by FCS institutions to borrowers ineligible to borrow directly from the FCS; shadow banking activities, such as accepting what effectively are deposits and providing payment services; retaining mineral rights on property the FCS foreclosed on and then resold; and the FCS’s substantial overstatement of its lending to young, beginning, and small farmers.
The Council’s five-page, histrionic rebuttal made numerous false assertions about the FCS’s lending and other practices that Ag Committee members had sharply criticized. The Council letter began by asserting that banks “have far greater taxpayer backing than does Farm Credit” while ignoring the fact that, one, the FCS is a government-sponsored enterprise piggy-backing off the creditworthiness of the U.S. Treasury; two, the FCS enjoys tremendous tax advantages that banks do not, notably the tax-free profits the FCS earns on its real-estate lending; and three, deposit-insurance premiums paid by banks not only have covered the full cost of protecting insured depositors in failed banks, but also built the FDIC insurance fund to a $72.6 billion balance at Dec. 31, 2015.
Responding to specific points in the ABA letter, the Council attempted to justify loans by CoBank and other FCS institutions to large, investor-owned, non-agricultural enterprises, such as Verizon, AT&T, Cracker Barrel, and the Saratoga Raceway casino, as lending to “similar entities” that Congress authorized in 1992. It was quite evident at the December hearing that many Ag Committee members believe that the FCS has stretched the meaning of “similar entity lending” to include any large company in corporate America.
The Council’s defense of the FCS’s indirect lending activities, such as AgDirect and ProPartners Financial, ignored the fact that much of the lending by these two FCS entities goes to borrowers who are not eligible to borrow directly from the FCS, such as a homeowner who finances the purchase of a riding mower from a farm equipment dealer on paper that is purchased by AgDirect.
Retained mineral rights are an especially touchy issue for the Council to defend since the FCS has been barred by law since 1985 from retaining mineral rights when selling foreclosed property. The FCS justification for keeping those rights was that the future income from those rights would help “to recuperate losses experienced when a loan failed.” What the Council letter failed to acknowledge is that by retaining those rights, the FCS sold a property for less than what it would have received if the sale of the property had included those rights. In effect, FCS institutions gambled on the future income those rights would generate; such gambling was hardly envisioned by Congress when it created the FCS 100 years ago, which is why it told the FCS to stop retaining mineral rights. The pre-1985 rights became quite profitable for the FCS, with mineral rights income rising from $30 million in 2009 to $132 million in 2014. That gamble was less profitable for the FCS last year as mineral income dropped 37% for the first nine months of 2015 compared to the same period for 2014. Most striking, though, is the lack of any data as to the current market value of the FCS’s mineral rights.
In defending the FCS’s shadow-banking activities, the Council cited its statutory authorization to furnish its customers “closely related services” as justifying the offering of a wide range of services unrelated to the actual furnishing of “sound, adequate, and constructive credit.” Over the years the FCA, as the FCS’s very friendly regulator, has authorized FCS institutions to peddle services not closely related to furnishing credit, such as “farm record keeping, tax preparation assistance and financial planning.” Most egregious, of course, are the cash management services an increasing number of FCS institutions now offer, including the acceptance of uninsured deposits.
Although the ABA letter said nothing about the FCS’s sale of crop insurance, the Council felt compelled to defend that activity, claiming that FCS “employees that sell crop insurance must meet all of the same licensing and regulatory requirements as any other crop insurance agent.” As the FCW has previously reported, state insurance regulators, notably in Illinois and North Dakota, have cited FCS institutions for utilizing unlicensed personnel to sell crop insurance, often tied to an FCS loan.
Perhaps the most astounding aspect of the Council letter was its failure to offer any defense of the ABA’s observation that the FCS’s lending to young, beginning, and small (YBS) farmers declined from 30% of the FCS’s total loan portfolio in 2003 to 15% in 2014. The Council’s failure to defend the FCS’s YBS lending effectively is an admission that the FCS has turned its back on YBS farmers. That lack of defense also evidences the poor quality of the Council’s response.
FCA continues to stonewall House Ag Committee
As last month’s FCW reported, the Farm Credit Administration has yet to answer the questions members of the House Agriculture Committee posed to FCA Chairman and CEO Kenneth Spearman at the December 2 hearing the committee held “to review the Farm Credit System.” As often occurs at such hearings, Spearman, FCA General Counsel Charles Rawls, and FCA Chief Examiner Robert Coleman, were unable to answer all the questions fired at them during the three-hour hearing. However, as is standard procedure, Spearman and his colleagues promised to provide written answers to those questions. Oftentimes, answers to those questions are the only way to extract information from a government agency. So far, the FCA has stiffed its congressional oversight committee by not answering the questions. How much longer will that continue?
FCS: Forecasting the future
In celebrating the 100th anniversary of its founding, the FCS recently opened a time capsule buried nearly 50 years ago to mark the 50th anniversary of the Federal Land Bank system, the precursor of today’s FCS. The time capsule was buried in Larned, Kansas, near the site of the first FCS loan made in 1917. Included in that time capsule were predictions that 12 FCS leaders from across the country wrote “about the future of agriculture and the financing required to feed and clothe an ever-growing population.” According to the Farm Credit Council, “the 1967 predictions accurately identified some of the most prominent drivers of agricultural finance today.” Interestingly, none of the five predictions related to agricultural finance, other than that larger farms “will necessitate the use of more credit.” The Council declined, though, to release the text of the predictions of the 12 leaders. One can reasonably wonder if any of the twelve leaders predicted the bursting in the 1980s of the farmland bubble that was largely inflated by the FCS’s reckless real estate lending during the 1970s.