Farm Credit System May Be Considered for Federal Aid

Times Staff Writer

The Reagan Administration said Thursday that it will consider federal aid for the troubled Farm Credit System only if Congress is willing to reform the $71-billion banking network and require it to extensively tap “its own considerable resources.”

Responding to pleas for a bail-out of from $5 billion to $6 billion, Agriculture Undersecretary Frank W. Naylor said the quasi-public Farm Credit System should be able to return to profitability in 1988 on its own, even though it faces $5.5 billion in losses before then.

Naylor called the 800-bank system, which holds a third of the nation’s farm debt, “one of the strongest financial institutions in the country.” As much as 15% of the system’s loans are considered uncollectible.

Self-Help Measures


Nevertheless, Naylor told House and Senate Agriculture committees that “the Administration will assess the need for federal financial assistance” if Congress agrees to legislate self-help measures and reforms that include a strengthening of the system’s federal regulatory agency.

Later, Agriculture Secretary John R. Block told reporters that “the President hasn’t closed the door on anything. At the same time, he hasn’t put any money on the table yet.”

Sources close to Block and Treasury Secretary James A. Baker III said Wednesday that the two had reluctantly agreed to support federal aid for the system if the self-help and reform conditions are imposed.

Asked to comment, Block said Thursday only that “there’s not going to be anything happening if Congress is not willing to impose these conditions.”


Lawmakers Willing

Members of the agriculture committees expressed a general willingness to go along with such conditions--as well as some kind of bail-out.

Actually, Donald Wilkinson, head of the Farm Credit System’s regulatory agency, proposed the conditions himself as he requested a $5-billion “backup” line of credit to be drawn on if the system’s own reserves prove inadequate.

However, officials representing the system’s local, farmer-run lending agencies said there are sufficient loss-sharing measures already in effect and they strongly opposed new conditions’ being placed on their request for $6 billion in aid spread over three years.


‘Scorched-Earth Policy’

Gene Swackhamer, president of the Farm Credit Banks of Baltimore, angrily denounced the Administration for wanting to impose conditions but not commit to an immediate bail-out.

“I’d call it a scorched-earth policy and a return to the Dust Bowl,” he declared before the Senate Agriculture Committee.

He protested that the conditions “would require us to consume all of our capital (before receiving federal aid), merge our associations (local banks), raise interest rates (on loans to farmers) and accelerate foreclosures.”


A White House aide said the Administration would want an added condition if a multibillion-dollar line of credit were established for the Farm Credit System: a commitment to early repayment of loans.

‘Payback a la Chrysler’

“If you don’t have strong provisions for payback a la Chrysler, it has the potential for being a bailout” that could cost taxpayers billions, the aide said, referring to massive federal loans given the Chrysler Corp.--and paid back in full.

Naylor told the House and Senate panels that he did not intend to minimize the Farm Credit System’s problems, which he called “substantial and serious.” But he said the system’s $12.4 billion in reserves is more than enough to weather anticipated losses based on “reasonably prudent economic assumptions.”


“The system, after taking the appropriate steps to reserve and manage its problem loans, should return to a positive operating position in 1988,” he said.

System officials strongly disagreed, saying that the government’s failure to offer assistance would seriously undermine the confidence of private investors whose purchase of bonds provides most of the system’s loan money.

Already, the officials said, the system is having to pay a high interest premium on the bonds, which is driving up loan interest rates for farmers and cutting deeply into the system’s earnings.