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Farm lender falls on hard times

It's bigger than the United States' sixth-largest bank. It employs more people than Greyhound Lines. It has foreclosed on so many farmers that it owns as much farmland as the size of Delaware and Rhode Island put together. Obscure and private, the Farm Credit System is the nation's premier farm lender. And in less than two years, this once high-flying lender has lost $4.2 billion, more money than any bank in the nation's history.

A three-part series on this sprawling and sometimes baffling farm corporation examines its decline, its culture and management, and its shifting lending practices that have put thousands of farmers out of business. The series also explores proposed solutions and efforts to streamline it.

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To explain Farm Credit is to avoid generalizations.

``It's like looking at a piece of concrete,'' says Pat Abele, president of the system's Arizona Farmers Production Credit Association. ``It's the aggregate of a lot of little pieces.''

In good times, the pieces of this huge cooperative, with its $71.9 billion in assets and 14,000 employees, hold together. It has 37 banks, divided among 12 districts, which fund agricultural cooperatives and some 450 associations around the country. Each association makes loans to farmers, who in turn become the association's stockholders.

But in these hard times, cracks have formed in the structure. One local association has filed suit to leave the system. Another has already dropped out. Many associations are resisting top management's consolidation moves. And the entire Texas district says it will pull out of the Farm Credit Corporation of America (FCCA), one of the system's five entities set up to consolidate operations.

``This is almost ... a United Nations,'' where the members follow the leader only if they want to, says FCCA president Brent Beesley.

Several months after the FCCA issued a directive on loan policy, Mr. Beesley recalls, one association president in the South was asked how he liked the plan. He had not heard of it.

``And what the heck is the FCCA?'' he finally asked the inquirer.

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Virtually everyone blames the agricultural downturn for the whopping $4.2 billion the system has lost since January 1985.

``That tells the story,'' says Ron Hanser, spokesman for the Omaha district, flipping open a report of troubling statistics.

The figures show the district's four states - Nebraska, Iowa, South Dakota, and Wyoming - at the center of the farm crisis. Land values have plummeted; thousands of farmers have failed.

``We don't see very much light at the end of the tunnel for Midwestern agriculture,'' Mr. Hanser says. The district lost so much money last year that stronger districts had to step in with $277 million in direct aid. The outside help is continuing this year.

But some Farm Credit practices intensified the problem, according to many system employees and managers.

After decades of success at Farm Credit, ``it became very easy for it to view itself as something ... better than a business,'' says Terry Frederickson, head of the St. Louis district.

``It was as much a church or social institution as a business. I think that resulted in ... a kind of a culture that said to an organization: `There are business things that you don't have to do and probably shouldn't do.'''

For example, after increasing interest rates started to boost the system's cost of raising money, some districts continued to aggressively lend money at low rates.

When Wayne Lautner of Jefferson, Iowa, was looking to expand his farm in the late '70s, his local Production Credit Association (PCA) found him the land and then lent him the money to make the down payment.

PCAs are the system's short-term lender and are supposed to leave such loans for their sister network, the Federal Land Bank associations. But loan officers were under pressure to make loans, partly because of the inflationary environment, and partly because of the system itself.

Soon after Duane Young became a loan officer for an Iowa PCA, his supervisor wanted to know how soon he would boost his $3 million portfolio to $10 million. In those days, an expanding loan portfolio was an important criterion for advancing in the system.

But the most pressure to lend came from farmers themselves, who wanted money to expand as the value of their farms went up. ``Sometimes these guys were pushing because all of a sudden they considered themselves rich,'' Mr. Young says.

Many associations around the country did an excellent job of managing their expanded risk. But at others, the work was shoddy.

Young, who spent part of his PCA stint lending money from what had been a gas station, recalls getting in trouble for firing a secretary, who was favored by management but wasn't accurate in typing loan documents.

Nor were the loans always adequately backed. ``We have found many instances where there was no collateral [behind a loan],'' says Frank Naylor, chairman of the Farm Credit Administration, which regulates the system.

Top management made blunders, too, critics say. Even when interest rates were peaking in the early '80s, the system did not put call provisions on the bonds it sold to raise money.

Today, Farm Credit is stuck with that mistake, paying its investors high rates on some $18 billion, with no way of calling in those bonds. Meanwhile, falling interest rates are forcing the system to lend out its money at lower rates, which is squeezing profits.

The system's regulator was supposed to guard against such excesses, Mr. Naylor says, but ``it really didn't work that way.''

Using new powers given him by Congress, he has taken several strong enforcement actions against entities within the system.

The system is moving to deal with its deep problems, but it's not clear that it can avoid asking for federal help.

``One thing I've learned in the past two or three years is not to make projections,'' says James Roll of the system's New York funding arm. Next: PCAs - more than a lender?

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