Farmer Mac Rescued by Lenders

Group Injects $65 Million, Lifts Capital Above Minimum Level; CEO Edelman Departs

A group of farm lenders rescued Farmer Mac from a glut of souring investments by injecting $65 million of fresh capital into the smaller cousin of Freddie Mac and Fannie Mae.

As part of the move Wednesday, Farmer Mac, which is chartered by Congress to operate a secondary market for farm loans, replaced Henry D. Edelman as its chief executive, a position he had held since its creation in 1989.

Mr. Edelman, 59 years old, was succeeded by Michael A. Gerber, the 49-year-old chief executive of Farm Credit of Western New York. Mr. Gerber will hold the position until a permanent CEO is found for Farmer Mac, which is formally known as Federal Agricultural Mortgage Corp.

Farmer Mac's stumble comes as farm banks are riding high. While bad debts are battering the home-mortgage industry, rural lenders are benefiting from a two-year boom in grain prices, which is lifting farmland prices to record levels. Because land, along with machinery and John Deere tractors, are the biggest source of collateral for farmers, the farm-debt picture is its brightest in decades: The delinquency rate on the $9.5 billion in farm and rural loans under Farmer Mac's umbrella is the lowest in its history.

What got Farmer Mac in trouble were losses in its investment portfolio, which included one million preferred shares of Fannie Mae. The value of the shares evaporated when the federal government took Fannie Mae into conservatorship, and Farmer Mac faced a $44 million write-down. Then, Farmer Mac took another hit when Lehman Brothers Holdings Inc. filed for protection under Chapter 11 of the federal bankruptcy code, casting a cloud over its holdings of $60 million in Lehman debt securities.

The losses threatened to drain Farmer Mac's capital below the minimum level required by regulators. Farmer Mac's move to sell $65 million of preferred stock to some of its biggest banking customers brought its capital level up to $210 million, above the minimum statutory requirement of $181 million.

Most of the new capital came from the five banks in the Farm Credit System, a network of lenders created by Congress in 1916 to lend to farmers. An additional $5 million of preferred stock was purchased by Zions Bancorp of Salt Lake City, which has owned about a fifth of Farmer Mac's voting shares.

As part of the rescue plan, the preferred stock bought by the Farm Credit System banks will pay an initial annual dividend of 10%. The Farm Credit System banks also get the right to nominate three observers to the Farmer Mac board.

By: Scott Kilman
Wall Street Journal; October 2, 2008