* Politically connected Farm Credit is healthiest GSE
* Commercial banks complain of unfair advantages
* FCS mandate to fund rural areas seen immune from attacks
By Christine Stebbins
CHICAGO, Feb 21 The Farm Credit System, a
giant government-linked lender to U.S. farmers and rural
communities with $230 billion in assets, is confident it can
stay mostly exempt from oversight by U.S. banking regulators
despite bitter criticism by competing private banks, Farm Credit
"We are competitors. They'd be happy if the system didn't
exist," Kenneth Auer, president of the Farm Credit Council, the
system's lobbying group, said in an interview. "We had our Dodd
Frank moment in the 1980s," he added, citing a bailout by
Congress that revamped and tightened government oversight and
laid the foundation for the System's current strength.
The FCS, the single largest lender to farmers, was the first
government-sponsored entity (GSE) set up by the United States in
1916, long before the better known -- and now troubled -- GSEs
such as Fannie Mae or Freddie Mac. Such GSEs gain investor
credibility from an "implicit" guarantee that the government
will not let them fail financially.
The FCS is booming now and the strongest GSE financially,
buoyed by extraordinary demand for U.S. food and farmland.
On Friday, FCS reported record 2011 earnings of $3.94
billion, up 12.7 percent. By comparison, Citigroup's 2011 net
profit was $11.3 billion and Bank of America's $1.4 billion.
FCS is a network of more than 85 financial cooperatives
owned by farmers, ranchers and rural customers and overseen by
the Farm Credit Administration (FCA), a federal agency set up in
1933. Its mission is to fund farms and rural development,
assuring that businesses far from money centers receive loans
for food production and rural development.
Commercial banks are becoming increasingly critical of the
advantages GSE sponsorship gives to the FCS, as the bankers
learn more of how Dodd Frank rules will raise their costs.
"The primary reason why FCS got out of Dodd-Frank is
politics. The FCS is well protected by their supporters on the
House and Senate Agriculture Committees," John Blanchfield of
the American Bankers Association, a top critic, told Reuters.
"The System will do anything to keep 'outsiders' from taking
a critical look at their activities," he said.
Bankers say they'll lend to any viable farmer or rural
business in need. But farmer distrust of big banks and giant
corporations runs as deep as the rich top soil of the Farm Belt,
and the FCS is seen by them as a vital safety valve.
As such, FCS is integral to the politically powerful farmer
and agribusiness complex in the United States, a key sector for
U.S. national security, exports and banking assets based on
Agriculture is big business in almost every Congressional
district. FCS is also fundamentally different from banks, taking
no deposits and being self-funded mainly through debt securities
it issues to domestic and foreign investors.
So although FCS based on its loan assets would be among the
top 15 banks in the country, the system remains overseen by the
Congressional committees, not the Federal Reserve, the Federal
Deposit Insurance Corp or other U.S. banking regulators.
That exemption from the regulatory oversight of banks under
the sweeping Dodd-Frank legislation put in place after the 2008
market turmoil is a bitter pill for banks, who have long argued
that FCA has unfair advantages in its tax burden as well as in
interest rates, both in borrowing and lending money, due to its
perceived government backing by money markets investors.
Blanchfield said FCS has developed into a significant
consumer lender and home mortgage lender in some parts of the
country, cutting into the business of private community banks.
"The FCS represents a major threat to the future viability
of rural community banks going forward because they have
advantages in taxation, funding, scale, and now greatly reduced
regulatory burden," Blanchfield said.
The advantages are significant. FCS's U.S. tax exemption on
its long-term real estate loans in 2011 accounted for
"approximately $600 million of the $4 billion in earnings" last
year, FCA administrator Leland Strom said in a Jan. 24 speech.
"In addition, even though it is impossible to put an exact
value on the system's GSE status in terms of savings from lower
funding costs, certainly there is a monetary benefit extracted
because of that status," Strom added.
Strom, in that speech to the FCC's annual meeting, warned
that system lenders and lobbyists will have to keep defending
their rural mission to help all farmers to keep from being
lumped in with commercial banks and hedge funds.
"How is the System going to proceed as a GSE, with its own
independent arm's-length regulator, to differentiate itself from
others and their recent practices?" Strom said.
FARM CREDIT "DIFFERENT"
Auer said FCS and its defenders inside and outside Congress
are ready to argue the basic differences between the system and
the institutions covered by the new Dodd-Frank regulations.
"The system's structure is very different than Freddie and
Fannie," he told Reuters. "We do not take deposits. The Farm
Credit System is not engaged in the housing market in any great
degree. We can make home mortgage loans but only in communities
of 2,500 or less, very rural communities.
"We were not in the subprime business and don't make
subprime loans. We have strong underwriting: the system is a
lender that makes and holds all the loans. So we're not selling
off the risk to someone else. The underwriting is done correctly
because we are holding all the risk," Auer said.
The System, like other lenders, saw losses in the 1980s farm
crisis, when land values plummeted as interest rates soared.
Congress bailed out the FCS, authorizing up to $4 billion in
taxpayer-backed bonds to be sold to cover losses.
"There was a considerably different regulatory regime in
place prior to 1985," Auer said, "As a result the Farm Credit
Act was substantially rewritten. There were wholesale changes
put in place: creation of the insurance fund, creation of FCA as
a fully independent regulatory agency."
Auer said lending standards and oversight were tightened
based on that experience. The insurance fund, funded by FCS
earnings, covers any shortfalls in obligations to FCS investors.
That is now "fully funded," Strom said last month.
"The taxpayers don't stand behind our insurance fund. When
FDIC in the last couple of years ran out of money, the Treasury
stood behind that and put up funds and backstopped. In the case
of our insurance fund, we don't have a line to the Treasury,"
Bankers also object to FCS not being included in regulations
covering systematically important financial institutions
(SIFIs), or the rules overseeing system-wide risk uncovered by
the vast intertwined debt obligations -- and loss multipliers --
seen in banks, insurance companies and hedge funds which
cross-held "securitized" debt before 2008.
"Again, we don't do that. That's not the type of banking
activity that the Farm Credit System is involved in," Auer said.
"The view was we don't represent a systematic risk in the
context of what we are doing. We have a very narrow charter. We
have strong regulatory oversight. We can't engage in a lot of
the types of activities that created the systematic risk."