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| Submit comments or news to vic.cohen@farmcreditnews.com -- submissions will remain anonymous at your request. June 27, 2008 President Nominates Mark Everett Keenum to replace Nancy Pellett on FCA Board President Bush has nominated Mark Everett Keenum to fill the unexpired term of former FCA Chairwoman, Nancy Pellett. Dr. Keenum is currently an Under Secretary at the Department of Agriculture, working on issues of the Farm Service Agency, the Risk Management Agency and the Foreign Agricultural Service. Keenum was on the staff of Senator Thad Cochran from 1989 to 2006. He has Bachelor's, Master's and PhD Degrees from Mississippi State University and was on their faculty as a Marketing Specialist with the Mississippi Cooperative Extension Service. He and his wife Rhonda reside in Fairfax County, Virginia, and have four children. June 16, 2008 On June 12, 2008, the FCA Board approved publication of its periodic call for "public" input on Regulatory Burden. In other news the FCA Board announced that not one of the regulatory changes on its agenda were "significant regulatory actions." June 3, 2008 The Commodity Futures Trading Commission is set to announce concern over the willingness of Farm lenders to extend agricultural financing. The NY Times obtained an advance copy of a report voicing this concern and the CFTC's proposal to coordinate with the FCA to insure availability of farm credit. May 30, 2008 Fitch has decided to continue its AAA long-term issuer default rating for the FCS. Fitch describes the System's outlook as "stable." The individual banks have been rated a notch lower at AA-. May 23, 2008 Yesterday, the House voted 306-110 and the Senate voted of 82 to 13 to override Bush's veto and pass the 2008 Farm Bill . The bill makes major changes to the Farm Credit Act with provisions affecting insurance assessments, CoBank voting stock ownership, elimination of exclusive lending authority in the former Jackson District, and expanded authority for Farmer Mac. May 22, 2008 Bush to Remove Pellett as Chairman of Farm Credit Administration Board Sources say that President Bush, in a highly unusual action, has decided to replace current Chairman, Nancy Pellett, with Leland Strom, the other Republican on FCA's Board. Although her term officially ended yesterday, she will remain a Board member until a replacement is confirmed. Because no replacement has been nominated and it is very unlikely the Democratic Senate would confirm another Republican, Pellett will probably remain a Board member into 2009. Click here for additional info on Leland Strom. May 15, 2008 The House, on May 14 by a vote of 318-106, and the Senate, on May15 by a vote of 81 to 15, passed the 2008 Farm Bill . The bill would make major changes to the Farm Credit Act with provisions affecting insurance assessments, CoBank voting stock ownership, elimination of exclusive lending authority in the former Jackson District, and expanded authority for Farmer Mac. May 15, 2008 Chairman Pellett's Term Expires Next Week FCA Chairman Nancy Pellett's six year term ends on May 21, 2008. Under the provisions of the Farm Credit Act, she may only serve one six-year term, but may remain as a Board member until her successor is confirmed. Currently, the FCA Board has two Republican and one Democrat member. At this point, it seems highly unlikely that a Democrat-controlled Senate would approve another Republican nominee with control of the White House likely to change next year. May 12, 2008 FCA Inspector General in Disagreement With FCA Board Chairman Pellett In a highly unusual action, Carl Clinefelter, the FCA Inspector General, has issued a Report to Congress containing a formal disagreement under the provisions of the Inspector General Act. Under section 5(a)(12) of the IG Act, the agency IG must include, in his semi-annual report to Congress, any "information concerning any significant management decision with which the Inspector General is in disagreement." According to the Report, in January 2007, the IG recommended that FCA Chairman and CEO Pellett "formally document the mission, authorities, responsibilities, performance expectations and duration of the Regulation and Policy Development, Risk, and Strategic Planning Committee." These committees are important because they are the primary tools used by management to review agency activities. The CEO agreed to the recommendation in January 2007 and twice submitted the requested documentation to the IG. However, the IG found the submissions inadequate. According to the Report, "on February 15, 2008, the FCA Board Chairman notified the OIG that in management’s view the committees are operating satisfactorily and OIG’s concurrence that management has sufficiently complied with this action item will no longer be pursued." As a result, the IG issued the Report of the disagreement to Congress under the above section of the IG Act. May 9, 2008 The Farm Credit Administration (FCA) Board approved a proposed rule on May 8, 2008 to authorize Farm Credit System institutions to purchase and hold investments in rural communities. If the rule is consistent with recent FCS trends, the new rule would greatly expand FCS authority to provide financing outside of agriculture. Click here to see an advance copy of the proposed rule May 8, 2008 The Farm Credit System reported that its net interest income the first quarter of 2008 increased $164 million to $1.137 billion from $973 million for the first quarter of the prior year. On a slightly more ominous note, the System recognized a provision for loan losses of $23 million for the first quarter of 2008. In addition, nonaccrual loans increased $155 million to $667 million at March 31, 2008, as compared with $512 million at December 31, 2007. The System's press release credited the loss provision and the increase in nonaccrual loans to "deterioration in the credit quality of a limited number of loans in the current agricultural environment of commodity price volatility and higher farm input costs." April 27, 2008 Moody's and the other rating agencies come under heavy fire in an article in the New York Times Sunday Magazine for the methodology behind their ratings of mortgage-backed securities and collateralized debt obligations. The article points out the rating agencies' inherent conflict of interest in rating a security issued by the party that pays the rating agency for the rating. In addition, the article is very critical of the government regulators, especially the SEC, who have deferred to the rating agencies on safety and soundness issues. The author, Roger Lowenstein, says "In effect, the government outsourced its regulatory function to three for-profit companies." FCA, like the other regulators, defers to the rating agencies for investment management and capital adequacy. Mr. Lowenstein recommends, at a minimum, that the rating agencies be sripped of their official government imprimatur. April 15, 2008 FCA Revises Criteria for Processing and Marketing Loans On April 10, the FCA Board adopted the controversial final rule on Processing and Marketing (click here to see a pre-publication copy of the rule). The most problematic new provision (Section 613.3010 (a)(5)) appears to permit financing to non-farmers contrary to the limited financing criteria of the Farm Credit Act. The Act contains two distinct criteria for processing and marketing loans: (1) the loan must be made to farmers and (2) it must be directly related to the farmers' operations. Although the new rule tries mightily to satisfy the "directly related" criterion, it does not appear to satisfy the "made to farmers" requirement. The Farm Credit Act requires that "financing for basic processing and marketing" may only be "made . . . to farmers, ranchers, and producers or harvestors of aquatic products." (Sections 1.11(a)(1) and 2.4(a)(1)). The courts have agreed with FCA that a loan could be considered "made" to this limited group if the entity doing the processing or marketing is at least 50% owned by farmers, ranchers, and producers or harvestors of aquatic products. The new rule goes far beyond this limitation by authorizing loans to a borrower with no ownership by farmers, ranchers, and producers or harvestors of aquatic products. (Section 613.3010 (a)(5)). Note: It's spring planting season, so a more complete analysis of the new rule will have to wait until I get my tomatoes in. April 14, 2008 The latest survey shows a continuing high level of dissatisfaction in many areas. Standouts are: only 43% of employees have a high level of respect for FCA's senior leaders, only 39% were satisfied with the policies and practices of their senior leaders, only 35% agreed that their leaders generate high levels of motivation and commitment in the workforce, only 25% agreed that steps are taken to deal with a poor performer, and only 43% agree that promotions are based on merit. Interestingly, FCA's comment on the the survey describes the results as "favorable," and says nothing about the negative results. April 7, 2008 April 2, 2008 Treasury Plan Proposes New Regulator for GSEs To address these challenging issues in the near-term, the idea of a separate regulator
conducting prudential oversight of the GSEs should be considered. A separate regulator
would be an important signaling device that the GSEs do not have government
guarantees. In order to ensure that the GSEs operate in a safe and sound manner, that
regulator should have powers similar to those provided to PFRA. In addition to these
safety and soundness powers, that regulator should limit the GSEs’ activities to those
necessary to accomplish their public purpose. The Federal Reserve as market stability
regulator should have the same ability to evaluate the GSEs’ activities as it has for other
federally chartered entities in the optimal structure.
March 31, 2008 Farmer Mac Purchases $400 million of Debt from the National Rural Utilities Cooperative Finance Corporation Farmer Mac, created to purchase agricultural and rural housing mortgages, announced the purchase of $400 million of rural electric utility debt from the National Rural Utilities Cooperative Finance Corporation. National Rural CEO Sheldon C. Petersen said, “Our mission is to provide member electric cooperatives with an assured source of affordable financing. One part of pursuing that aim is creating access to diverse funding sources like this transaction with Farmer Mac.” While Farmer Mac is prohibited from purchasing utility debt under its direct mortgage purchasing authority, it appears that Farmer Mac is using an alternate avenue to consummate this deal. According to Farmer Mac, "the structure of the transaction is consistent with parameters established by the Farm Credit Administration, Farmer Mac’s federal regulator." March 31, 2008 Treasury Secretary to Propose Major Changes in Financial Regulation In a summary published by the NY Times, the Treasury said it will propose today three new financial regulators. One would oversee market stability (the Fed), one would regulate safety and soundness (a combination of all FDIC, OCC, OTS, and NCUA), and one would combine business conduct regulation (the SEC and the CFTC). The plan would also eliminate the thrift charter by creating a new universal charter for all insured banks and also create a national insurance regulator. The future of the Farm Credit Administration is not clear, but the summary contained a couple of references to the GSEs. First, interestingly, the new universal charter would be available to all corporate forms, including "cooperative ownership structures." Second, the summary explicity states that: some consideration should focus on including GSEs within the traditional prudential regulatory framework. Given the market misperception that the federal government stands behind the GSEs' obligations, one implication of the optimal structure is that PFRA should not regulate the GSEs. Nonetheless, given that the federal government has charged the GSEs with a specific mission, some type of prudential regulation would be necessary to ensure that they can accomplish that mission. To address these challenging issues, in the near term, a separate regulator should conduct prudential oversight of the GSEs and the market stability regulator should have the same ability to evaluate the GSEs as it has for other federally chartered institutions.
The consolidation of regulators will be a long and drawn out process, so the future of FCA will likely not be determined for some time to come.
March 23, 2008 Congressman Barney Frank, Chairman of the House Committee on Financial Services, is once again proposing the consolidation of the Federal financial regulators. It is not clear whether the Farm Credit Administration would be included in the new regulator. In a speech given in Boston on March 20, Frank discussed a number of new policy options to help stabilize the housing market and address the current economic downturn, including a "'Financial Services Risk Regulator' that has the capacity and power to assess risk across financial markets regardless of corporate form and to intervene when appropriate." Click here to view the Committee press release. March 14, 2008 FCA Board Delegates Authority Over Ineligible Investments to Office Director FCA has disclosed that, on February 27, its Board voted to delegate authority to the Director of the Office of Regulatory Policy to approve or disapprove divestiture plans for ineligible investments submitted by FCS institutions. Pursuant to FCA regulation 615.5143, any previously eligible investment that becomes ineligible must be disposed of within six months unless FCA approves an alternate plan. For example, a commercial mortgage-backed security must be rated AAA to be eligible. If the security's rating subsequently falls, the institution must dispose of the security within six months unless the FCA Board approves an alternate plan. Under the new delegation, an office director may now provide that approval. One wonders if the new delegation is related to an increase in the number of requests caused by the current credit crisis. March 12, 2008 For the fourth straight month, there is no rulemaking item on FCA's Board meeting agenda. FCA's move away from rulemaking is becoming more pronounced as the months go by. After an average of about 12 rulemaking actions a year over the past decade, FCA seems determined not to subject Farm Credit institutions to increased regulation. March 10, 2008 The spread (the difference between the yield on GSE debt and the yield on Treasury bonds) on Fannie Mae and Freddie Mac debt last week was the largest since 1986. Because Farm Credit debt is viewed as similar to the debt of the other GSEs (Fannie Mae and Freddie Mac), spreads on Farm Credit debt may also widen as the national credit crisis worsens. [Rumors last Thursday of an explicit recognition by Treasury of the Government guarantee caused the spreads to narrow slightly.] February 29, 2008 New Agricultural Bank? The Global Crop Diversity Trust announced the opening of its seed bank bored into a mountain above the Arctic circle. The Global Seed Vault will eventually hold samples of every seed for every plant from every corner of the world. According to the trust, "The opening of the seed vault is part of an unprecedented effort to protect the planet’s rapidly diminishing biodiversity. The diversity of our crops is essential for food production, yet it is being lost. This “fail-safe” facility, dug deep into the frozen rock of an Arctic mountain, will secure for centuries, or longer, hundreds of millions of seeds representing every important crop variety available in the world today. As well as protecting against the daily loss of diversity, the vault could also prove indispensable for restarting agricultural production at the regional or global level in the wake of a natural or man-made disaster. Contingencies for climate change have been worked into the plan. Even in the worst-case scenarios of global warming, the vault rooms will remain naturally frozen for up to 200 years." February 27, 2008 FCA Defines Role of Its CEO and Board Farm Credit News has obtained copies of the revised "functional statements" of the Farm Credit Administration CEO and the FCA Board. While the Board has responsibility for policy and rulemaking, the CEO enforces the rules, directs the implementation of policies and regulations, develops and oversees strategic planning, manages agency staff, and communicates policy to staff and System institutions. February 23, 2008 Economic Stimulus Act Allows Fannie and Freddie to Increase Limits to $729,750 Section 201 of the Economic Stimulus Act of 2008 permits Fannie Mae and Freddie Mac to increase conforming loan limits to "125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008." The New York Times estimates that the new limits could be as high as $729,750. With Farm Credit System rural home loans limited to "rural areas" and to homes that are "moderately priced," look for the System to lobby Congress and the FCA for even more flexibility on limits for rural home lending. February 19, 2008 New Policy Statement Addresses Enforcement Actions As we reported last week, FCA adopted a new policy statement (PS 79) at its February Board meeting to address "Consideration and Referral of Supervisory Strategies and Enforcement Actions.” The policy statement formalizes the procedure in use by FCA since in received enforcement authorities in the late 1980s, i.e., once enforcement issues are identified, the matter is referred to a Regulatory Enforcement Committee (REC). The REC then makes an enforcement recommendation to the FCA Board. Of note in the new policy statement is a statement that it would be "unlikely" "when an institution receives a composite 4 or 5 FIRS rating" for the REC not to recommend an enforcement action to the FCA Board. Also new is a requirement that all requests for prior approvals or other actions must be referred to the REC for consultation for any institution under a formal Enforcement Document or that is assigned a composite FIRS rating of “4” or “5.” In addition, PS 79 clarifies that the policy statement and all of FCA's statutory enforcement authorities apply to the Federal Agricultural Mortgage Corporation (Farmer Mac). February 18, 2008 Trouble In Credit Default Swap Market The NY Times reported on possible problems in the little understood and unregulated credit default swap market. Credit default swaps act as insurance against a particular risk of loss. The total market for these swaps is estimated at $45.5 trillion, more than twice as large as the valuation of the entire U.S. stock market. The total amount of credit default swaps in use by the Farm Credit System is unknown, although, for the year ending December 31, 2006, the Funding Corporation stated, "we have reduced the credit risk of some real estate mortgage loans by entering into agreements that provide long-term standby commitments to purchase System loans and other credit guarantees, including credit default swaps. The amount of loans under credit guarantees was $3.2 billion at December 31, 2006 and$3.6 billion at December 31, 2005." February 18, 2008 Farm Credit System Income Increases The Funding Corporation reported an increase of $329 million in combined net income from 2006 to 2007. Income rose to $2.708 billion for the year ended December 31, 2007, as compared with combined net income of $2.379 billion for 2006. February 15, 2008 FCA February Board Meeting At its February Board meeting, FCA adopted Policy Statement 79 entitled "Consideration and Referral of Supervisory Strategies and Enforcement Actions.” Although the policy statement is not yet available on its website, FCA's news release does not reveal any change of policy for addressing enforcement actions. The release merely states that the policy statement is necessary "to ensure that situations that may warrant enforcement action are promptly and appropriately addressed by the Agency" and "accomplishes this by identifying the conditions in a Farm Credit System (FCS) institution that will trigger a review by the Agency’s Regulatory Enforcement Committee (REC). Such conditions include, among other things, the inability or unwillingness of an institution or person to address an unsafe or unsound condition or practice or to correct a violation of law or regulation." A close reading of the policy statement will be necessary to determine if there is, in fact, any change in policy. The Board also approved Bookletter 055, providing guidance to System associations on floor nominations for directors. The Bookletter emphasizes that associations cannot set requirements that are unduly restrictive. February 12, 2008 Increase in FCA Employment Discrimination Complaints FCA's 2007 No FEAR Act filing shows an increase in employee EEO complaints from a low of 0, 1, and 1 in 2004, 2005, and 2006 to 4 in 2007. The reasons for the filings included race, sex, reprisal, and disability. The No FEAR Act is a federal law requiring disclosure of data related to discrimination complaints filed by employees against U.S. government agencies. February 11, 2008 FCA has increased the maximum Farm Credit System bank director compensation for 2008 to $50,205, an 85% increase since 2005. Although increases to the $20,000 statutory maximum are limited by law to the CPI, FCA Bookletter BL-051, dated December 15, 2005, authorized a one-time adjustment based on "safety and soundness" that increased the maximum compensation for 2006 to $45,740, plus the CPI. February 11, 2008 FCA's Valentine's Day agenda again contains no rulemaking activity. Interestingly, one agenda item addresses the "Consideration and Referral of Supervisory Strategies and Enforcement Actions." February 8, 2008 FCA Adds Tax Exemption to CoBank's Charter Farm Credit News has learned that, in June 2007, FCA amended CoBank's charter to add a specific exemption from Federal, state and local taxation. CoBank's previous charter merely described its authorities and its geographic territory. Under the Farm Credit Act (section 1.15), Farm Credit Banks are specifically exempt from Federal, state and local taxation; Banks for Cooperatives are not exempt (see the 2001 Supreme Court decision on CoBank's exemption for a full discussion). In 1995, CoBank (a Bank for Cooperatives) merged with the Springfield Farm Credit Bank to create the Farm Credit System's first and only Agricultural Credit Bank. Because the Farm Credit Act did not contain a specific tax exemption for an Agricultural Credit Bank, the merged bank appeared to be fully taxable. CoBank's new charter now specifically states that the Farm Credit Banks' tax exemption for long-term income applies to the merged bank. Whether FCA's action will have the intended consequence remains to be seen. It is up to the IRS and, ultimately, the courts to determine the extent of CoBank's taxability. January 30, 2008 According to the Worthington Daily Globe, AgStar has announced net earnings for 2007 of approximately $65 million, compared to $52 million for 2006. If these numbers are correct, AgStar's aggressive approach to new business would seem to be succeeding big time. January 24, 2008 FCA's Regulatory Agenda (officially called the Unified Agenda) for 2008 shows no new regulatory projects other than the Congressionally-mandated periodic reg burden review. The scope of lending/moderately priced housing rule (on FCA's agenda almost forever) is now scheduled for a proposed rule in March. The very controversial processing and marketing proposal (first proposed in 2006) was scheduled for January 2008, but no action was taken at this month's Board meeting. No reason has been announced for the delay. January 23, 2008 January 11, 2008 Another Light Agenda at January FCA Board Meeting The FCA Board met on January 10 to receive it's auditor’s report on it's fiscal year 2007/2006 financial statements. In addition, the Board heard a report on the condition of the Farm Credit System and, in closed session, an update on the Office of Examination oversight activities and supervision of unnamed institutions. |
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