Emergency Measure Goes to House : Senate OKs Farm Credit Bail-Out

The Senate on Tuesday passed and sent to the House an emergency rescue package for the Farm Credit System designed to restore the confidence of the $70-billion system’s investors and borrowers.

“We’ve taken the first step to assist rural America and farmers, as far as the Farm Credit System is concerned,” said Senate Majority Leader Bob Dole (R-Kan.)

The Senate made several changes in the bill, most of them minor, that require House approval. If House members endorse the changes as expected, the bill would go to President Reagan, who has indicated that he will sign it.

Farm Credit is a 37-bank network that is the nation’s largest farm lender, holding roughly one-third of the $212-billion U.S. farm debt. Because its fortunes are tied closely to that of an ailing agriculture sector, it has suffered heavy losses this year and is expected to continue losing money for at least the next two years.

Some of the loosely linked system’s units, particularly those in the hardest-hit areas of the Midwest and in the Northwest, have been liquidated, despite loss-sharing agreements that require healthy institutions to bail out their poorer counterparts.

The rescue bill would set up a new Farm Credit Capital Corp. to centralize and handle financial aid for the worst-off banks.

It would get money by selling obligations to banks that have healthier reserves and would serve as an accounting “warehouse” for bad debt and foreclosed land and property.

In addition, the bill would reconstitute the Farm Credit Administration, the federal agency that oversees the system, as a true “arm’s-length” regulator, giving it beefed-up powers to halt shaky lending practices.

Last Resort Provided

And, as a last resort, the bill would give the Treasury authority to infuse money into the system if the banks could prove they had exhausted all available resources. Congress would first have to pass a separate bill appropriating any bail-out money.

One important change that the Senate made in the bill would revamp the composition of the corporation’s board of directors.

The original House version had put the corporation under control of a five-member board elected from system districts from which it has drawn money, a concession to give those districts more say in how the money is used and how much they can be forced to contribute.

The Senate bill had vested control in the hands of a similar board, but it provided that two members would be elected from district banks, two appointed by the regulatory Farm Credit Administration and one named by the secretary of agriculture.

Tuesday’s amendment would have the board made up of one member chosen by system banks that are contributing money to the corporation, one from institutions receiving money, one from the system at large and two to be chosen by the agriculture secretary.

If federal funds are actually used to shore up the system, the board would grow to seven members, with one of the additional directors appointed by the secretary and the seventh to be selected by the board itself.

Another provision in the bill would require that if any bank is to receive direct federal aid, it would first have to freeze the salaries of its top executives.

Members of Congress have criticized the system for giving pay raises of 50% or more over the last six years while its banks were incurring financial problems.