The Financial Condition of the Farm Credit System and Guidelines for Considering a Rescue Package

GAO discussed the financial condition of the Farm Credit System, focusing on whether and how federal assistance should be provided. GAO found that: (1) the System's difficulties stemmed from the deterioration in the quality of its loan portfolio; (2) by June 1985, 17 percent of federal land bank loans were adversely classified; (3) consolidated System records showed that the amount of nonaccrual loans had reached $2.7 billion; (4) the System was forced to set aside a large portion of its earnings to cover future charge-offs of bad loans; and (5) the System increased the interest rates it charged to reverse the decline in income. GAO noted that System officials expressed concern about the competitiveness of its interest rates and the effect that the rates had on its better borrowers. However, GAO found that, despite the negative financial indicators, the System had $7.5 billion in earned surplus and reserves available to absorb losses. GAO also found that there are some essential areas considered in a rescue of the Farm Credit System, including: (1) timely definition of the recue's objectives and the natural interest; (2) clear and unambiguous goals and objectives; (3) protection of the government's financial interests; (4) concessions from those with a financial stake in the rescue; and (5) a program administration and oversight mechanism. GAO concluded that, with no reversal in the current rates of deterioration in the quality of the System's loans, its capital will eventually disappear.