Pub. 7 2012-2013 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 © 2012 Bert Ely FCS: Home of the Supersized Borrowers T HEFARMCREDITSYSTEM(FCS)LOVES to talk about lending to young, beginning, and small (YBS) farmers and ranchers (many of whom in fact are hobby farmers or own- ers of country estates). In fact, the FCS has done such a great job of marketing this myth that USDA granted the FCS nearly $700,000 to “help” small farm customers find credit. However, the FCS is extremely quiet about the bulk of its lending—supersized loans to big farming operations and agribusinesses who hardly need cheap, taxpayer- subsidized credit. Fortunately, the FCS’ Annual Information Statement (AIS), equivalent to a 10-K, provides interest- ing insights into FCS lending. You will find the AIS at www.farmcreditfunding. com/ffcb_live/financialInformation. html?tab=statements. According to the 2011 AIS, FCS institutions had 165,605 YBS loans and loan commitments outstanding at the end of 2011, totaling $21.290 billion. However, some YBS borrowers have multiple loans, so the FCS had far fewer than 165,605 YBS borrowers at the end of 2011. At the other end of the scale, the FCS had 80 borrowers with loan balances of more than $100 mil- lion. Those outstanding loans totaled $14.190 billion at the end of 2011—an average of $177.4million per borrower. While the FCS does not publish data on loans aggregated by borrower for borrowers with less than $100 million in loans, at the end of 2011 the FCS had 3,044 loans outstanding, each between $5 million and $100 million, totaling $33.803 billion, for an average loan size of $11.1 million. However, some of those loans undoubtedly were taken out by borrowers with multiple FCS loans. The FCS should present all of its loan data aggregated by borrower; it has the capability to do so. The FCS does not have a formal loan limit, but it tries to hold its total credit exposure (including unfunded loan commitments) to any one borrower below $750 million—hardly what the typical family farmer borrows. At the end of 2011, the 10 largest FCS borrow- ers had $3.428 billion of outstanding loans—an average of $343 million per borrower. At the same time, 10 FCS credit exposures (including unfunded commitments) fell in the $563 million to $750 million range, compared to just five such credits at the end of 2010. In just one year, the FCS doubled the number of credit exposures pushing up against its self-imposed $750 million credit-exposure limit! Interestingly, one of its 10 largest credit exposures at year-end 2011 was classified as Other Assets Especially Mentioned. CFTC Takes Care of FCS, Quite Mysteriously The March edition of Farm Credit Watch reported that the FCS was again trying to obtain special regulatory treatment. In this case, the FCSwas try- ing to sidestep a Dodd-Frank Act (DFA) requirement that it register as a swap dealer because two FCS institutions— CoBank and an FCS association—have entered into interest-rate swaps with borrowers. The FCS, through its trade association, the Farm Credit Council (FCC), argued that because DFA ex- plicitly exempts insured depository institutions from the swap-dealer reg- istration requirement, the FCS should be exempt because, like banks, the FCS makes loans. Specifically, the FCC asked the Commodity Futures Trading Commission (CFTC), the regulator of swap dealers, to expand the definition of “insured depository institution” to include FCS institutions. On April 18, the CFTC adopted a final rule defining who it would regu- late as a swap dealer. It appears the FCS has been exempted from having to register as a swap dealer, but not for the reason the FCC gave in plead- ing for the exemption—we will know more about a possible FCS exemption when the CFTC publishes its swap- dealer regulation in a few weeks. One reason the CFTC may have developed a new rationale for exempting the FCS derives from a March 29 letter the leadership of the House and Senate Agriculture Committees sent to CFTC Chairman Gary Gensler. The letter noted that “Congress provided an exemption for credit insti- tutions that offer swaps in connection with loans from designation as swap dealers.” This phrasing overlooks the fact that DFA provides the exemption only for “insured depository institu- tions,” which the FCS clearly is not. Then comes the most mysterious sentence in the letter: “This provi- sion ensures that the flow of credit can continue between businesses and small to mid-size lenders and farm