Farm Credit: America's Next Big Bailout?

I just read a great article in the Washington Examiner titled “America’s next big bailout?” dated July 29th, 2015. In the article the investigative reporter sights numerous examples of a government backed organization branching out into massive transactions that could put the American taxpayers on the hook for a major bailout.

This rapid expansion has heightened fears that the Farm Credit System could be America’s next Fannie Mae. When Fannie Mae collapsed under the housing bubble along with Freddie Mac, the taxpayer bailout reached $187 Billion. The FCS was created in 1916 as a tax-exempt and taxpayer backed organization to provide loans to farmers and rural communities. It has deviated from this purpose and assets have expanded to $283 Billion, making it equal to the nation’s ninth largest bank.

While the original purpose was to help hard up rural areas, it has expanded to outside of its mission to help farmers. It has issued a $725 Million dollar loan to Verizon Wireless and their Vodafone owner in London. They entered into a $350 Million “credit agreement” with Frontier Communications Corporation to help finance a $2 billion acquisition from AT&T. The system was also part of a $750 million loan to restaurant chain Cracker Barrel in 2011.

A review of the Annual Information Statement from the Federal Farm Credit Banks Funding Corporation indicated that 51.3% of all FCS outstanding loans at the end of 2013 were in excess of $1 million dollars. Typical young, beginning or small farm loans have a median size of $250,000.

This is putting pressure not only on the American taxpayer but the community banking system itself. When a community bank has to follow enormous regulations and safeguards to compete for good loans, and finds itself competing against the same government that imposes those regulations and the government funded entity doesn't pay taxes or requires the same personal guarantees of the borrowers, well the clock is ticking.

There have only been three new bank charters approved over the last ten years. The combination of aggressive regulations, unfair competition, and a low prospect of a favorable return on equity for a shareholder of a bank, one has to wonder why we are allowing this to continue.  A link to the article is provided below. Contact your congressman and express your voice.

The Washington Examiner: America's Next Big Bailout?