Stress and Stress Modeling

ShipOfFools_web_07292016“When I look at your heavens, the work of your fingers,
the moon and the stars, which you have set in place,
what is man that you are mindful of him,
and the son of man that you care for him?”
(Ps 8:3-4)

Stress and Stress Modeling

By Stephen W. Hiemstra

At some point in 1991, the Office of Financial Analysis (OFA) in the Farm Credit Administration (FCA) was re-organized and placed under the Office of Examination (OE). The objective of the economics group shifted from policy research to risk analysis and support for the examination function. To facilitate this transition, OE offered examination training to anyone interested in taking it and I signed up for all the training that I could get. Because I knew nothing about the examination function, I could only support it if I learned what it was. Over the next year, I spent as much as two weeks a month taking training courses offered both internally by examination supervisors and externally, often at the Federal Deposit Insurance Corporation’s (FDIC’s) L. William Seidman [training] Center.

While policy research focused heavily on legislative and regulatory performance, examination focused on the financial performance of Farm Credit System associations and banks. A typical association examination might last 2-3 weeks, depending on the chief examiner’s off-site risk analysis. Because the primary business of the associations was making agricultural production and farm real estate loans, much of this time was devoted to reviewing individual loan files to see if they conformed to association policies and FCA regulations, and rating loans as to their credit status. FCA examiners were typically credit and interest rate experts, knowing the business of agricultural lending almost as well as the lending officers themselves.

By contrast, FCA economists typically focused on market conditions and financial performance in the aggregate, not being nearly so focused on the business side of the associations. Assigning us to support the examination function was hugely educational, but it was also forced us to play by unfamiliar rules with unfamiliar staff. My plunge into examination training, of course, helped alleviate this problem, but the threat of failure was ever-present and my own paranoia was stroked when we were assigned interior offices half the size of the offices we were accustomed to.

One morning in June 1992, a stranger walked into my office and announced that I had been RIFed. RIF stands for reduction in force and usually meant that your position had been eliminated. In the middle of this stressful conversation, he told me that when human resources reviewed my file they discovered that I had more examination training than many of their professional examiners. Consequently, while my economics position was eliminated, I was being offered a position in the McLean examination team at my current salary and I had two years to complete certification as an examiner. If I completed the certification, I would retain my salary and begin a new career as an FCA examiner. So with two kids in diapers and my wife, Maryam, six months pregnant with my son, that morning I began a new career in examination. I ended up traveling about 80 percent of the time.

At the time when this RIF occurred, I was working as an analyst attached to a new Office of Secondary Market Oversight (OSMO), tasked with supervising Farmer Mac. OSMO consisted of a director, an analyst (me), and a secretary. OSMO’s budget was cut roughly in half that year leaving no room for an analyst at a critical time—OSMO was tasked with building a stress model for Farmer Mac which by law had to be made available for public review. While I built a balance sheet and income statement model in Excel for this purpose, public release suggested a more formal approach. Consequently, I proposed to program this stress model in the C programming language built on the Windows operating system. The director liked this proposal and sent me out for training in C and in Windows programming.

My RIF initially slowed progress in developing a Farmer Mac stress model, but after a time on the road it became obvious that van travel consumed a substantial portion of the work week on examination. And what do you do in the evening in a hotel? I proposed to the OSMO director to program the stress model during such down-time and the director arranged for me to get one of the first laptops available in FCA. At the time, even exam managers did not have laptops and my laptop was the envy of my new peers and managers. The first version of the Farmer Mac stress model was completed while riding in the back of a van in rural Virginia.

After several months of examination work in the McLean team, I applied for a licensing position in the Office of the Comptroller of the Currency (OCC) in the Department of Treasury. I succeeded in interviewing for the position because the position required working closely with licensing analysts who were typically certified national bank examiners. Ironically, my credit experience working as an FCA examiner helped me land this new position.

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Farmer Mac


“Answer me when I call, O God of my righteousness!
You have given me relief when I was in distress.
Be gracious to me and hear my prayer! O men,
how long shall my honor be turned into shame?”
(Ps 4:1-2)

Farmer Mac

By Stephen W. Hiemstra

Once I began to focus on the work of Finance and Tax Branch in Rural Economy Division (RED) in 1986, I was asked to undertake research on the Federal Agricultural Mortgage Corporation, commonly known as Farmer Mac. Farmer Mac was new and exotic and largely incomprehensible for researchers focused on retail lending. As the new kid on the block, I enjoyed an interesting assignment with virtually no competition, making Farmer Mac research the ideal project.[1]

Farmer Mac’s authorizing legislation passed in 1987 as part of a broader bill to bail out the Farm Credit System (FCS), which had experienced serious losses during the farm financial crisis of previous year. Farmer Mac was authorized to garner support from community bankers for the FCS bailout under the premise that Farmer Mac would offer improved access to the bond market for the bankers similar to the bond market access enjoyed by FCS through their funding corporation.

As a conduit to the bond market, Farmer Mac had two business functions in its authorizing legislation. It was to securitize commercial farm mortgage loans and federally-guaranteed Farmer’s Home Administration mortgage loans. The commercial loan business was modeled after the home mortgage market securitizations of Freddie Mac and Fannie Mae, while the guarantee business was modeled after Ginnie Mae securitizations of Federal Home Administration guarantee mortgages. The parallels between Farmer Mac’s proposed business and the existing businesses in the home mortgage markets were incomplete, however, because farm loans are business loans and home mortgages are consumer credits—business loans are much riskier than consumer loans because their performance depends on business prospects while consumer loans rely on more stable salary income.

My initial research on Farmer Mac was a legislative review, Prospects for a Secondary Market in Farm Mortgages (1988), which took three of us about a year to complete. As subject-matter research in an agency more focused on disciplinary research (Hiemstra, 1991), the report got little attention in the building but was picked up by the farm press, the Farmer Mac board, and the board of directors at the Farm Credit Administration (FCA), which was tasked with Farmer Mac oversight. By 1989, when I gave a paper at the American Agricultural Economic Association conference in Baton Rouge, Louisiana, I was well-known enough to be invited to lunch by the FCA Chairman during the August conference and, later, was offered a promotion to join the FCA staff.

By September, however, the reality of my situation started to sink in.

The Friday of the week before I was to start work at FCA, I received a telephone call from my prospective supervisor. He asked: “Would I be willing to meeting him at J. Gilbert’s Wood-Fired Steaks and Seafood after work that day?” I responded: “No problem, but it would be no problem to swing by the office on the way home from work.” He returned: “No. Let’s get together at Gilbert’s.” Later, at Gilbert’s he proceeded to inform me that the FCA Chairman (who I had lunch with in Baton Rouge) was unhappy that an “aggie” (me) had been selected for that my position and he threatened my supervisor with a bad evaluation if he went ahead and hired me.[2] The punchline was: “Did I really want to work at FCA?” Yes . . . Absolutely . . . I needed the promotion, but the stress of my new position was now obvious even before I began work.

To deal with the stress and to celebrate my promotion, I bought a new Young Chang Studio Upright piano and began playing hymns daily.[3]

On Monday when I started work, I immediately left for Capital Hill. The agriculture committee was holding hearings on Farmer Mac and, as the resident FCA expert, it was a priority to attend. On Tuesday, the hearings were to continue and I planned to attend, but I got an early morning visit from a second-level supervisor who asked about my plans for the day. I replied: “I plan to attend the Farmer Mac hearings.” He responded that I could not attend as an FCA observer, but that I might take annual leave to attend. Dumbfounded, I asked why. Apparently, the FCA Chairman called from a conference in San Francisco to make sure that I did not attend the hearings.

Oh, by the way, welcome to the Farm Credit Administration!


Hiemstra, Stephen W. and Hyunok Lee. 1989. “Implications of Land Transfer Survey Data on Agricultural Mortgages for Farmer Mac,” Presentation at the American Agricultural Economic Association summer meetings in Baton Rouge. August .

Hiemstra, Stephen W., Steven R. Koenig, and David Freshwater. 1988. Prospects for a Secondary Market in Farm Mortgages. U.S. Department of Agricultural. Economic Research Service. Agricultural Economics Report No. 603. December. (Reprinted March 1989).

Hiemstra, Stephen W. 1991. “Production and Use of Subject-Matter Research in the Federal Service: Example of Research on Farmer Mac,” Agricultural Economics: The Journal of the International Association of Agricultural Economists. July. pp. 237-251.

[1] As a newly authorized financial intermediary, Farmer Mac was a start-up corporation without a staff or clear template for operations and most agricultural finance analysts had no experience with secondary mortgage markets.

[2] The issue was that the 1987 Act converted FCA from the head office of the FCS into an independent federal regulator. Agricultural economists (“aggies”) were considered too sympathetic to the FCS and not schooled in financial regulation. The preferred hires were accordingly bank examination personal from the Office of the Comptroller of the Currency in the U.S. Department of Treasury.

[3] The stress reducing effect of piano playing came to me from a story told to me by a roommate in college. His father was a station chief in the Central Intelligence Agency and could not discuss his work so he played piano to deal with the stress.

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Stanton: Creating Constructive Dialogue is the Key Management Skill

Stanton_review_10262014Thomas H. Stanton.  2012.  Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis.  New York:  Oxford University Press.

Review by Stephen W. Hiemstra

When my kids were young, I taught them that there are 3 kinds of people in this world:

  • People who never learn;
  • People who learn from their own mistakes; and
  • People who learn from other people’s mistakes.

The point is to become someone capable of learning from other people’s mistakes.  Learning behavior determines personal success; it also determines the success of firms.


Thomas Stanton’s book, Why Some Firms Thrive While Others Fail, examines firm learning behavior in the context of financial stress: the Great Recession. He is in a position to know a lot about this subject both because of his long tenure in financial law practice in Washington and because he served as a researcher on the Financial Crisis Inquiry Commission in 2010-2011, a commission established by Congress.  As a researcher, he personally interviewed many of the major players in the financial crisis and the federal regulators.

Stanton is an attorney by trade with the mind of an economist.  He is well-known among Washington insiders, especially in finance, and his book, A State of Risk [1], led Congress to create a new federal agency, the Office of Federal Housing Enterprise Oversight (OFHEO) [2], where I worked during my last 7 years of federal service until I retired at yearend 2010.  Tom and I have known each other since the 1980s when I worked on Farmer Mac legislation and supervision [3].  Tom graciously gave me a copy of this book knowing that I would eagerly read it and write about it.


Stanton writes Why Some Firms Thrive While Others Fail in 10 chapters, including:

  1. Repairing Our Public and Private Institutions: A National Imperative;
  2. Dynamics of the Financial Crisis;
  3. Coping with the Crisis;
  4. Company Governance and the Financial Crisis;
  5. Risk Management and the Financial Crisis;
  6. Company Organization, Business Models, and the Crisis;
  7. Supervision and Regulation of Financial Firms;
  8. Hyman Minsky: Will It Happen Again?
  9. Governance and Management: Lessons Learned; and
  10. Governance and Management: Beyond the Financial Crisis (v).

These chapters are preceded by a preface and acknowledgments and followed by a Table of Acronyms, Notes, References, and an Index.


An important theme in the Great Recession, as reflected in the book, is the need to link and understand intimately highly technical knowledge of financial markets, financial instruments, firm operations, and modeling to firm risk management and business objectives.  The image of a Fortune-500 CEO who wanders the halls having substantive conversations with staff throughout the organization captures this dynamic. Stanton highlights this hands-on, engaging management style in his concept of constructive dialogue.

Stanton writes:

One of the critical distinctive factors between successful and unsuccessful firms in the crisis was their application of what this book calls “constructive dialogue.”  Successful firms managed to create productive and constructive tension between (1) those who wanted to do deals, or offer certain financial products and services, and (2) those in the firm who were responsible for limited risk exposure (10).

The importance of quality dialog within the firm or government agency arises from the simple observation that no single individual, no matter how bright or experienced, could understand the totality of the highly technical financial environment that now exists.  Having an open-minded executive is accordingly insufficient; the firm culture must embrace active learning and open communication.

Stanton’s has an interesting blend of wide scope and technical depth within its subject-matter: governance and management.  Four firms who succeeded received the majority of his attention:  JPMorgan, Goldman Sachs, Wells Fargo, and TD Bank.  Stanton makes the case that these firms survived because of operational competence and intelligent discipline (43).  In other words they maintained disciplined risk taking, combined good judgment with good information, and had good communication (54-55).  Failing firms (Fannie Mae, Freddie Mac, Bear, Lehman, Merrill, Countrywide, WaMu, IndyMac…) failed for different reasons, including focus on short-term growth, ineffective data systems, weak capacity to answer simple questions, and lack of effective communication (57-66).


Stanton’s Why Some Firms Thrive While Others Fail should be of keen interest to financial policy makers and bank supervisors who deal with large institutions.  Because the federal agencies have mostly shied away from writing studies of what went wrong in the Great Recession (unlike earlier crises [4]), this book functions as a quasi-official study of the Great Recession.  For the reader interested in enterprise risk management, his contribution consists of a series of case studies of important firms that both succeeded and failed.  For students of organizational behavior this book should be required reading.

[1] A State Of Risk: Will Government Sponsored Enterprises Be The Next Financial Crisis? (New York:  HarperCollins Publishers, 1991)

[2] OFHEO was created by Federal Housing Enterprises Financial Safety and Soundness Act of 1992 and folded into the Federal Housing Finance Agency (FHFA) in 2008 by the Housing and Economic Recovery Act.

[3] I studied and wrote about the Federal Agricultural Mortgage Corporation (Farmer Mac) as a researcher in the Economic Research Service, USDA and later took a role in Farmer Mac supervision as a financial economist at the Farm Credit Administration (FCA) responsible for Farmer Mac regulation and supervision.

[4] See, for example, an exhaustive study of the banking crisis of the 1980s by the Federal Deposit Insurance Corporation (FDIC) at:


Stanton: Creating Constructive Dialogue is the Key Management Skill

Also see:

Stanton Explains the Risk in Government Sponsored Enterprises

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