This time a year ago, the nation’s two giant mortgage lenders, Fannie Mae and Freddie Mac, were being taken over by the federal government; hallmark investment firms were filing for bankruptcy; large national banks were being seized by regulators; highly-rated insurance companies needed bailouts; and major auto manufacturers announced they could not pay their bills.
The investment and lending community locked up and commerce shut down because longstanding institutional trust and predictability evaporated. The cost of money went through the roof, and long-term money was impossible to find, because either nobody had the capital or, if they did, they did not have the confidence to take the risk.
For the Farm Credit System, which relies exclusively on its ability to sell bonds in order to fund loans to the agriculture industry, this environment was equivalent to a state of emergency — an all-out assault on the System’s ability to function.
Job No. 1 for the Farm Credit System is to provide access to funding for the agriculture industry — to those well-managed operations that can demonstrate ability to service debt. Yet, without a properly functioning financial marketplace, access was in question. In other words, if a qualified borrower walked into a Farm Credit institution and applied for a loan, would the institution have been able to fund that loan?
Unlike other lenders, Farm Credit institutions are not depository lenders that offer checking and savings accounts. Farm Credit gets its funding by issuing debt on Wall Street. As investors purchase System debt, Farm Credit institutions lend that money to the agriculture industry and throughout rural America. Then, as borrowers repay their loans, the System provides a return to investors. This process has been working successfully for almost a century; and, over the years, both the investment community and the agriculture industry have developed a lot of trust in the Farm Credit System’s ability to deliver.
Yet, a year ago, Farm Credit was at the mercy of this financial crisis, in which investors were either no longer around or were extremely risk-averse and only willing to put their money into sure things. As these investors transitioned away from anything risky and into the most low-risk investments they could find, they naturally moved into areas that had explicit government backing — often those entities that had just been bailed out or taken over by the government. Ironically, Farm Credit was financially strong and in no need of government assistance, yet the System’s cost of funds increased dramatically, simply because it did not have the government as a backstop and because investors no longer knew who and what to trust — a classic case of one bad apple (or in this case, several) spoiling the entire bunch.
Fortunately, Farm Credit came into this crisis with strong capital and consistent earnings, excellent credit portfolios (no subprime mortgages), a strong federal regulatory process and a reputation for conservative management and full financial disclosure. As a result, the System was able to keep its AAA rating and to manage through the process until circumstances improved. Most notably, at no time did a Farm Credit institution turn down a qualified borrower because the System could not access funding.
The Farm Credit System did an excellent job during an extremely difficult time, and was able to continue its mission of providing credit to agriculture and rural America. As owners and stockholders, System borrowers have every reason to maintain their trust in Farm Credit and should be proud of the local institutions with which they are affiliated.
As Farm Credit continues to manage through these volatile and challenging economic times, the result will be a stronger and wiser Farm Credit System for the future — one that continues to fulfill its mission
and continues to serve its members.
– Stan Ray