Farm cooperative banks look to secede from credit system. Managers, stockholders disagree on next moves
Chicago — The Farm Credit System, the nation's biggest agricultural lender, is a lot like Humpty Dumpty. It's teetering on the brink of disaster. If it falls, no one's quite sure how to put its pieces back together.
Even now, the pieces are tugging and pulling. As this huge, far-flung cooperative struggles to meet its worst financial crisis, internal dissent is threatening its balance.
In the troubled Wichita district, the managers are hard at work.
``There's three things we have to do,'' manage the high-risk loans, rebuild the lending base, and cut expenses, says district spokesman Ron Wilson.
In the past year Wichita has begun to move. It has reduced headquarters staff, slashed its budget, and shaved nearly 0.3 percent off the cost of making a loan. It has cut the number of its local associations by more than half. It plans to move troubled loans into the hands of a special group of trained workers, leaving its loan officers free to make new loans.
But the district is already broke. Stronger districts have kicked in $213 million in aid to Wichita so far this year, but they're reluctant to give out millions more.
``They all know that they are jointly and severally liable'' for the losses, says Hugh R. Macklin, president of the system's Capital Corporation. ``But when you really begin to strip them of their hard-earned assets, that's when it begins to get `ouchy.'''
The corporation, one of Farm Credit's new central entities, is moving successfully to take over the bad loans of the weak districts.
But when it introduced in July a new process to transfer funds from the strong districts, 14 groups within the system filed suit.
Even under the old process, two strong system banks are threatening to withdraw their contributions. And the Amarillo Production Credit Association (PCA) in Texas wants out completely. It has filed suit to leave the system.
``We can't save them,'' says the PCA's president, James VanPelt, of the weak districts. ``We're going to need all our resources to take care of our own.''
Inside the financial crisis is a cultural one. When traditionalists look at the Farm Credit System, they see the borrower-controlled network of local cooperatives that the federal government set up between 1916 and 1933. Consolidation threatens that.
``This is the only cooperative in America that's managed the way it's managed,'' fumes Lumen Holman, head of a borrower-stockholder group called Grassroots. ``The people who own the stock have no more voice than you do.''
But when managers view the system, they see a single behemoth in drastic need of streamlining. ``We've got 12 different computers that can't talk to each other,'' complains Larry Buegler, the new head of the system's St. Paul district. ``Planning! Why have 12 different planning districts?'' There are also 17 major data-processing centers. No one person has responsibility over the system.
The manager's view may be gaining ground. In March, the system's district presidents and directors agreed to eight resolutions stressing efficiency and competitiveness.
``I believe at that meeting that the culture of the system changed,'' says Brent Beesley, president of another new central entity in the system, the Farm Credit Corporation of America (FCCA). ``We're not a club or a religion, but a financial system with customers.''
The FCCA's current proposal is to merge the system's 37 banks into one, its 12 districts into a few regional offices, and its 447 associations as needed. But the plan has been shuffled aside as the districts focus on the agricultural crunch, which has sliced Farm Credit's loan portfolio by 26 percent since 1984 and its reserves to $5.5 billion.
Whether the teetering system falls remains to be seen. If it does, virtually everyone expects a federal bailout, since a failure would be costly to agriculture and to many banks and savings and loans, which hold 50 to 60 percent of the system's bonds.
In October, Congress bought the system some time, allowing it to use looser accounting rules and write off its losses over 20 years instead of one.
``This isn't going to help us'' in the long run, Mr. Macklin says of the new accounting. The Farm Credit banks ``have got to tackle it one loan at a time. We should see some significant changes in 120 days. I'm going to be very disappointed if we haven't.'' Last in the series. Other stories ran Nov. 25 and 26