Pub. 6 2011-2012 Issue 1

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2011 Bert Ely FCS Pushing Hard for a Derivatives Carve-Out O N MARCH 31, ANN TRAKIMAS, CoBank’s chief operating offi- cer, pleaded to the House Ag Committee for a FarmCredit System (FCS) exemption from the de- rivatives title of the Dodd-Frank Act (DFA). Trakimas testified on behalf of the FarmCredit Council, the FCS trade association. The thrust of Trakimas’ message was that the Ag Committee should lean on the Commodities Fu- tures Trading Commission (CFTC) to treat the $230 billion FCS as if it were a small community bank. DFA did authorize the CFTC, at its discretion, to exempt banks, credit unions, and FCS institutions with less than $10 billion in assets fromDFA’s swap-clearing re- quirement. However, during the DFA debate, some Ag Committee members stated that the $10 billion number was merely a suggestion and that the CFTC could exempt larger institutions if it thought it appropriate to do so. In effect, CoBank, with $66 billion in assets at the end of 2010, is trying, for itself and the entire FCS, to take advan- tage of that suggestion on the grounds that not exempting the entire FCSwould be unfair to the FCS. Trakimas had the audacity to proclaim that “unless [FCS] institutions were able to use it, the community bank exemption would give commercial banks an unwarranted competitive advantage in themarket for agricultural lending. . . . This is unfair.” Of course, she made no mention of the substantial taxpayer subsidy the FCS has long enjoyed. If CoBank completes its proposed merger with U.S. AgBank, CoBankwill have total assets of approxi- mately $90 billion—hardly a commu- nity bank. More importantly, because of the joint-and-several liability of the five FCS banks for $189 billion in FCS debt outstanding at the end of 2010 and the extensive buying and selling of loan participations within the FCS, the CFTC should view the FCS as a very large, highly integrated financial institution. Trakimas contended further that in considering the FCS’ exemption request, the CFTC should “appropriately recog- nize the unique cooperative structure of the [FCS]” and to “look through” the [five] Farm Credit Banks “to the smaller Farm Credit associations that own them.” Of course, that cooperative structure did not prevent the FCS from needing a taxpayer bailout in 1986 nor has it protected numerous FCS asso- ciations from various lending fiascos in recent years andnumerous enforcement orders the Farm Credit Administration (FCA) has issued. Separately, on April 11, the FCA joined with four other financial regula- tors to issue a proposed regulation to implement two sections of the DFA related to derivatives transactions. The regulationwould “establishmargin and capital requirements for swap dealers, major swap participants, security-based swap dealers, andmajor security-based swap participants.” It will be interest- ing to read the FCS’ comments on this proposed regulation and to assess what influence those comments, in addition to Trakimas’ pleading, might have on the CFTC as it considers the FCS’ ex- emption request. FCA Chairman Warns About FCS Problems, Risks In an April 7 speech at the an- nual meeting of the Texas FarmCredit Bank, FCA Chairman Leland Strom expressed concern about problems and risks within the FCS. The CFTC should closely read Strom’s speech when it considers the FCS exemption request discussed above. Strom noted that “the risk profile for many [FCS] institutions has weakened over the past two years, reflecting . . . a rapidly changing risk environment in certain agricultural segments and manage- ment’s effectiveness in responding to these risks.” As a result, the FCS now has “six institutions under enforce- ment actions and a number of institu- tions under heightened supervision.” With the FCS down to 84 associations, six operating under enforcement or- ders is a lot; three of those orders were issued in March. Of course, unlike the bank regulators, FCA continues to refuse to make those enforcement orders public. Strom also talked about “the impor- tance of data to systemic risk assess- ment” and about the FCA’s “ability to conduct strategic analysis and to assess systemic risks” within the FCS. His concerns about the systemic risk the FCS poses should lead Congress to reconsider the DFA’s exemption of the FCS from systemic risk regulation by the new Financial Stability Oversight Council (FSOC). Bringing FCS under the FSOC would undercut Trakimas’ argument for an FCS exemption from CFTC regulation.