Options for Dealing With Farm Credit System Problems

GAO discussed the federal rescue of the Farm Credit System and suggested an approach to stabilizing the system in the short run while developing long-term policies, since failure or default of the System's obligations would seriously disrupt the flow of credit to the agricultural sector and pose risks to other federal lending institutions. GAO found that: (1) the system's situation has continued to deteriorate; (2) economic influences have clearly damaged the system's fiscal posture; (3) financial management decisions were made on optimistic economic expectations that failed to materialize; and (4) the system's decentralized organizational structure made it difficult to adjust policies. GAO believes that the system should establish a federal control board to: (1) control decisionmaking and certain management practices; (2) provide quarterly reports to Congress; (3) submit a plan with appropriate implementing legislation to work out the system's problems at the end of an 18-month period; (4) review and comment on the quarterly reports and implementation plan; (5) establish a reserve to ensure debt repayment and underwrite losses; (6) review the system's restructuring and report its recommendations to Congress; and (7) exercise control over the terms and conditions of debt issuances, as well as strategies for asset management and liability maturities. GAO believes that this approach would lessen the rate of deterioration and offer time and flexibility to address long-term issues in a non-crisis atmosphere.