Farm Credit foe sees Congress keeping system

OMAHA, Nebraska Mon Nov 8, 2010 5:14pm EST

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OMAHA, Nebraska (Reuters) - The Farm Credit System (FCS) and the U.S. farm bill, two frequent targets of conservative attacks on government spending and farm supports, will likely see little change despite the big win for Republicans in U.S. mid-term elections, a top critic of the FCS said on Monday.

"The thing that is interesting about agriculture when it comes to the Farm Credit System there is fairly broad bipartisan support. That is something that drives bankers nuts," Bert Ely told Reuters on the sidelines of a farm lending conference here.

"I'm not sure much is going to happen this year. Instead, eyes are turned on 2012 when the Farm Bill comes up again. I wouldn't be surprised to see the present Farm Bill extended into 2013, particularly with the divide in the House," Ely said.

Ely, a consultant and adjunct scholar at the conservative think tank The Cato Institute, is a long-time critic of the Farm Credit System, a government-sponsored enterprise (GSE) like Fannie Mae and Freddie Mac.

His newsletter, Farm Credit Watch, is widely followed in the U.S. banking industry, which opposes government-aided lending as unfair competition in its marketplace.

On Friday, FCS reported earnings rose 32 percent at $949 million in the quarter ended September 30, with loan-loss provisions down 39 percent at $158 million. Net interest earnings rose to $1.480 billion from $1.342 billion.

"Two things about that," Ely said. "Number one, they are continuing to re-fund a lot of their debt and roll out a lot of their more costly debt. So their spread is widening out.

"Secondly, they are pulling down their loan-loss revision even though their non-performing assets went up a little in the third quarter. Their lending was up a lot too because of higher commodity prices and funding grain elevators," Ely said.

It is all commodity related, he added, referring to funding for grain elevator customers of FCS buying a near-record grain harvest this year and hedging those buys.

"The elevators have got margin calls," Ely said, referring to continuing high grain futures prices that pressure the selling positions in grain markets of hedgers like grain elevators.

"Will any of the grain elevator operators blow up because of it? I'm not close enough to it to say."

GRIDLOCK, NOISY HEARINGS AHEAD?

Ely said the key for Farm Credit System is that through its lobbying leading up to this summer's Dodd-Frank legislation, the massive Wall Street reform bill, FCS remains overseen by the agriculture and not finance committees in Congress.

Ely had proposed that all GSE's involved in housing, including FCS, come under a new single government regulator.

"The more the Farm Credit System expands outside of agriculture ... the more it is within Congress stepping on the turf of Banking and Financial Services Committees," Ely said.

As for the general efforts of the new Republican majority in the U.S. House of Representatives to attack or dismantle Fannie Mae and Freddie Mac, the housing mortgage giants, Ely said he sees no hope before the 2012 presidential election.

"Nothing really significant. We are going to have a gridlock," Ely said.

"The Republicans aren't going to get much through Congress in terms of meaningful reform of the Dodd-Frank act. But we will see some very aggressive hearings and oversight in the House where the Republicans control the agenda and what they will do is drag the regulators up and send signals when they think the regulators are going too far," Ely said.

Nothing is going to happen to Fannie and Freddie "while we are in the midst of the housing financial crisis and that's going to last another couple years," he said.

"The real question is: what do you replace them with? Barney Frank will say you can't replace something with nothing, and he's right. That is where a lot of the debate has been," Ely said.

"The more I work with these numbers and the aftermath of this crisis, the more I see the problem being one of excess leverage and a tax system that encourages excessive leverage. That as a country is what we have to move away from. The big question is to what extent will the debate get to that level."

(Reporting by Christine Stebbins; Editing by David Gregorio)

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