Farm Credit System Asks Huge Bailout

Times Staff Writer

The financially ailing Farm Credit System asked Congress for a bailout of up to $5 billion Wednesday as President Reagan’s Treasury and agriculture secretaries reluctantly agreed to support the general form of the request.

The proposed rescue, greeted cautiously by members of the House Agriculture subcommittee on conservation and credit, would exceed the record $4.5 billion federal bailout of Continental Illinois Bank last year.

The request by the quasi-public Farm Credit System quickly drew demands for comparable federal aid from struggling commercial banks in the economically depressed Farm Belt.

In a related development, the Senate narrowly rejected a key farm bill amendment, strongly backed by Reagan, that would have slashed up to $7 billion from proposed income subsidies for wheat, corn, rice and cotton farmers in 1988 and 1989.


Cutback Proposals

After the amendment failed, 51 to 48, Senate Majority Leader Bob Dole (R-Kan.) vowed to press other cost-cutting proposals in an effort to avoid a threatened presidential veto of the legislation, which renews price-support and income-subsidy programs for four years.

Administration officials claim that the $117-billion measure, similar to a House-passed version, would exceed the figure in a congressionally adopted budget resolution by at least $25 billion.

The Farm Credit System, a federally chartered network of 800 lending institutions holding a third of the nation’s farm debt, proposed that a “backup” line of credit be established at the Treasury Department so that $5 billion in emergency loans could be obtained if the system exhausts its rapidly dwindling reserves. As much as 15% of the system’s $71 billion in outstanding loans is considered uncollectable. The system suffered $522 million in losses in the third quarter of this year, and more losses are expected.


Aid for Sick Banks

Farm Credit System officials also asked at a hearing held by the House panel that the system’s federal regulatory arm be strengthened and that healthy banks in the privately owned cooperative system be required to help sick ones.

Sources said Treasury Secretary James A. Baker III and Agriculture Secretary John R. Block had softened their resistance to a bailout of the system and agreed to recommend the line-of-credit approach to Reagan.

However, the dollar amount of the credit line and terms under which loan money would be made available to the system have yet to be decided, said the sources, who asked not to be identified.


In agreeing to the credit-line proposal, the secretaries rejected any immediate infusions of cash or federal guarantee of the system’s bonds, which are sold in financial markets to fund loans made to farmers.

Bonds Rose Sharply

The sources said Administration attitudes had changed when prices of the Farm Credit System’s bonds began rising sharply, further eating into the system’s earnings.

The system’s $5-billion request was scaled back from a $10-billion figure that had been proposed before key Administration and congressional officials in recent weeks.


“Absent government financial assistance, the system cannot survive the radical transition under way in agriculture,” Ray Moss Tucker, chairman of the Farm Credit Council--the system’s trade association--testified before the House subcommittee.

Members of the House panel, headed by Rep. Ed Jones (D-Tenn.), agreed that the massive Farm Credit System cannot be allowed to go bankrupt, an action that he said would threaten the entire economy.

Some Are Reluctant

However, members seemed reluctant to heed the plea of Farm Credit System officials for speedy action, indicating that more time is needed to assess the system’s condition and the competing requests for aid in the context of the government’s own huge deficit problems.


“I see a whole fleet of Titanics out there” seeking federal rescues, Rep. James Weaver (D-Ore.) said.

On the unsuccessful Senate amendment, offered by Sen. Richard G. Lugar (R-Ind.), a bipartisan coalition of Farm Belt lawmakers argued that cutting income subsidies would drive many farmers out of business in what already is the worst economic crisis to hit rural America since the Depression.

Although Senate Minority Leader Robert C. Byrd (D-W.Va.) worked hard to keep Democrats united against the amendment, Minority Whip Alan Cranston (D-Calif.) joined seven other Democrats in breaking ranks to support it. Sen. Pete Wilson (R-Calif.) also voted for the amendment.