Pub. 9 2014-2015 Issue 1

www.nebankers.org 30 Extraordinary Service for Extraordinary Members. their RBIC investments. Furthermore, it will be interesting to know how much FCSmoney ACP actually invests in “un- derserved areas.” Who Wins With FCS’ $10 Bil- lion Treasury LOC? Last year, the Farm Credit System Insurance Corporation (FCSIC) secretly negotiated a $10 billion line-of-credit (LOC) with an obscure agency within the U.S. Treasury, the Federal Financ- ing Bank (FFB). I had to file a Freedom of Information Act (FOIA) request to obtain a copy of the Note Purchase Agreement (NPA) between the FFB and FCSIC. In effect, the Treasury Depart- ment, through the FFB, and therefore the American taxpayer, has become the FCS’ lender-of-last-resort, but without Congress authorizing this taxpayer sup- port as it has for other federal agencies such as the FDIC and the Federal Home Loan Banks. Apparently, FCS decided it would be too risky politically to ask Congress to provide this line-of-credit by statute. Under the terms of the NPA, funds the FCSIC borrows from the FFB will be reloaned to a Farm Credit Bank should that bank lack sufficient funds to pay off its share of maturing FCS debt. To quote from the NPA, the “FCSIC shall certify to FFB that exigent market circumstances [make] it difficult or impossible for one or more [FCS] banks to issue new [FCS]-wide [FCSIC]-insured debt obli- gations.” Most interestingly, the NPA does not define the term“exigentmarket circumstances.” Additionally, unlike bank borrowings froma Federal Reserve Bank, these FFB borrowings do not have to be collateralized. Also, the FCS does not have to pay a commitment fee for this line-of-credit even though the FFB is authorized to charge such a fee. The impetus for this line-of-credit arose from the 2008 financial crisis when, according to a 2012 Brookings Institution report, “unprecedented in- stability in the global financial markets reduced FCS’ ability to issue debt with preferred maturities and structures.” Translation: the FCS found it had be- come too costly, in its opinion, to raise longer-term funds at a rate that would maintain its financing advantage over its bank competitors. Rather than living with the narrower net interest margins its private-sector competitors experi- enced during the crisis and fearful of political questioning it would experi- ence if it sought a line-of-credit from Congress, the FCS has prearranged a Treasury bailout. While market conditions beyond its control in 2008 drove the FCS to seek the NPA, the next FCS crisis may stem from credit-quality problems arising from excessively risky FCS lending and investing. It was risky FCS lending in the 1970s and early 1980s that drove the FCS into insolvency, triggering its 1987 congressional bailout, legislation that also mandated significant structural and regulatory reforms within the FCS. By pre-arranging this financing, and as- suming it can renew this line-of-credit every year, the FCS has insulated itself from congressional scrutiny during its next financing crisis. Since the FFB falls within the legislative jurisdiction of the Senate Banking and House Financial Services committees, those commit- tees should examine the wisdom of the Treasury providing the FCS with such protection. FCA Issues Revised Merger & Consolidation Guidelines As the Farm Credit Watch has previously reported, the FCA held two To contact Bert Ely, email bert@ely-co.com, phone (703) 836-4101, fax (703) 836-1403, or send mail to P.O. Box 320700, Alexandria, Va. 22320. If your bank belongs to the American Bankers Association (ABA), you can enjoy a free email subscription to Farm Credit Watch or you can read it monthly online at www. aba.com . To receive Farm Credit Watch by email or to manage your subscription, visit ABA Member Email Bulletins at www.aba.com/ Tools/Ebulletins/Pages/default.aspx. For other inquiries, please contact Barbara McCoy at the ABA at (800) BANKERS or bmccoy@aba.com. “symposia” earlier this year to address “Consolidation in the Farm Credit Sys- tem.” Although the public was barred fromattending these symposia, the FCA did release the papers that were pre- sented at the symposia. Also, after filing another FOIA request, I obtained highly summarized notes of the symposia discussions. Although some symposia participants expressed reservations, the thrust of the symposia was to encourage further consolidation within the FCS. Accordingly, the FCA has just issued “Revised Guidelines on Submission of Proposals to Merge or Consolidate [FCS] Associations.” Despite comforting words, such as providing “disclosures that enhance transparency and provide greater clarity” to FCS stockholders vot- ing on mergers, the FCA signal is quite clear: let’s see more mergers within the FCS, leading to fewer and larger as- sociations. Report FCS Lending Abuses Bankers are continuing to send FCW reports of FCS lending abuses such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses in your market to green-acres@ely-co.com . Please provide asmuch detail as possible about any loan that violates the spirit, if not the law, governing FCS lending.   Bert Ely — continued from page 26 “Rather than living with the narrower net interest margins its private-sector competitors experienced during the crisis and fearful of political questioning it would experience if it sought a line-of-credit from Congress, the FCS has prearranged a Treasury bailout.”