Shares of Federal Agricultural Mortgage (NYSE:AGM), or Farmer Mac, plunged after the company revealed in a filing that it owns $60 million in senior debt securities issued by Lehman Brothers (OTC:LEHMQ) as part of its portfolio of non-program investments. Lehman Brothers filed for bankruptcy last week, and creditors are expected to recover very little as the company is liquidated.

Farmer Mac is a publicly traded, federally chartered entity that was created by Congress in 1988 to establish a secondary market for agricultural real estate and rural housing mortgage loans, and to increase the availability of long-term credit at stable interest rates to American farmers, ranchers and rural homeowners.

The Muck on Farmer Mac's Boots
Farmer Mac said that it owns two issues of Lehman Brothers notes, $40 million maturing in November 2009, and $20 million maturing in May 2010. The securities are trading at 19 cents on the dollar, and Farmer Mac is taking a non-cash, other than temporary, pre-tax impairment charge on the notes in an amount equal to the difference between the amortized cost of the securities at June 30, 2008 and the market value as of September 30, 2008. The current charge using market prices today for Lehman Senior debt would be $48 million. (Read more in Impairment Charges: The Good, The Bad and The Ugly.)

Farmer Mac operates two main loan programs:

  • Farmer Mac I - Farmer Mac purchases agricultural real estate mortgage loans from eligible lenders.
  • Farmer Mac II - Farmer Mac purchases the guaranteed portions of loans guaranteed by the United States Department of Agriculture.

A third program called Farmer Mac III combines the Farmer Mac I program with a government funded second mortgage.

Two Weeks, Two Write Downs
This was the second time in two weeks that Farmer Mac stock fell sharply after writing down the value of its portfolio. On Sept 12, 2008, Farmer Mac revealed in a 8-K filing that its investment in Fannie Mae Series O Preferred stock, which totaled one million shares, had fallen significantly in value after the U.S Government put the Fannie Mae (NYSE:FNM) into a conservatorship on Sept 7, 2008.

Farmer Mac said it expected to record a non-cash, other than temporary, impairment charge equal to the difference between the carrying value of the securities at June 30, 2008, and the market value of the securities as of September 30, 2008. The preferred stock was valued at $47.2 million on June 30, 2008, and the charge is expected to be $44 million.

Many other financial institutions have been hurt by their ownership of stock or debt of Fannie Mae and Freddie Mac (NYSE:FRE). Two banks reported significant exposure as a percent of tangible capital due to holdings of stock or debt of the two entities:


Gateway Financial Holdings (Nasdaq:GBTS) - 34% of total tangible equity.
Midwest Banc Holdings (Nasdaq:MBHI) - 32% of total tangible equity.


Bottom Line

The problems at Farmer Mac are another example of how the crisis that has gripped Wall Street for more than a year is spreading to Main Street and the heartland.

To learn how we got in this mess, read The Fuel That Fed The Subprime Meltdown.

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