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Federal Reserve Bank of St. Louis
FEDERAL HOME LOAN BANK BOARD:
1983-87
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 28
Preferred Citation: Federal Home Loan Bank Board, 1983-1987; Paul A. Volcker Papers, Box 28;
Public Policy Papers, Department of Rare Books and Special Collections, Princeton University
Library
Find it online: http://findingaids.princeton.edu/collections/MC279/c190 and
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Federal Reserve Bank of St. Louis
4042s,
111H
Federal Home Loan Bank Board
Washington, D.C. 20552
OFFICE OF THE CHAIRMAN
Personal and Confidential
May 1, 1987
The Honorable Paul Volcker
Chairman, Board of Governors of the
Federal Reserve System
Room 13-2046, Federal Reserve Building
Constitution Avenue, N.W.
Washington, D.C. 20551
Paul:
I thought you would find the attached letter of
interest.
Action on the final regulation requiring all reporting
and financial statements by FSLIC-insured is scheduled for
Tuesday, May 10.
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Federal Reserve Bank of St. Louis
Sincerely,
_,,,--_-,_
•
UNITED STATES LEAGUE of SAVINGS INSTITUTIONS ,.1
EAST wAOKeR DR./CHICAGO, ILLINOIS 60601 ;TEL. (31 2) 644.31 -x
WILLIAM B. O'CONNELL
President
May 1, 1987
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bark Board
1700 G Street, N.W.
Washington, D.C. 20552
Dear Mr. Chairman:
I would like to take this opportunity to express my deep
Boardis
concern over the scheduling of final action on the Bank
No.
April 24, 1986 proposal, contained in Board Resolution
Most
86-427, to amend its regulatory capital requirements.
gs
savin
red
notably, the proposal would require all FSLIC -insu
in
ts
repor
and
institutions to prepare all financial statements
.
iples
accordance with generally accepted accounting princ
As we noted in our letter of comment on the proposed
a GAAP
changes, the U.S. League supports moving toward
that such a
reporting system. We continue to believe, however,
ve in
ducti
erpro
move under current circumstances would be count
the
about
city
the extreme. As you are aware, adverse publi
opened up a 40
state of the FSLIC and the industry already has
gs
basis point cost of funds differential between savin
a gap
-s
titor
institutions and their commercial banl, compe
hing
switc
and
-1986
which we estimate cost us $3.5 billion in
that
rbate
exace
lly
to a GAAP reporting regime could substantia
ts, of
situation. Apart from the aggregate negative effec
in
ts
resul
course, we would expect very severe adverse
of the
tion
condi
particular cases, depending on the financial
ion.
react
media
institution involved and the intensity of the
of
form
the
in
just
These results would manifest themselves not
s
level
ing
biliz
desta
higher interest rates on deposits but in
of net savings withdrawals.
its would be
In our view, whatever minor disclosure benef
ly
great
realized by adoption of the proposal would be
ive
negat
outweighed in importance by these attendant
propose these
consequences. We realize that the Board did
that time.
at
revisions last year and did receive comments
of time and the change
Nevertheless, we believe that the lapse
iate adoption of a
in circumstances argue against the immed
analysis.
final rule in this area without further
THE AMERICAN HOME THE SAFEGUARD OF AMERICAN LIBERTIES
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Federal Reserve Bank of St. Louis
—
The Honorable Edwin J. Gray
May 1, 1987
Page 2
At a minimum, we believe action on this initiative should
be delayed until after the enactment of FSLIC recapitalization
legislation and should be proposed anew at that time in
conjunction with proposals on regulatory forbearance, which at
this point clearly appear destined to be mandated by Congress.
That would assure that any regulatory steps in this area would
be taken as part of an integrated effort to respond to the
broad concerns being expressed by both Houses of Congress with
regard to forbearance-related issues, including those
associated with a closer alignment of regulatory accounting
procedures with GAAP.
Thank you for your consideration of this matter.
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Federal Reserve Bank of St. Louis
Sincerely,
d'e#7,4iaL„
)
UlaW447William . O'Connell
1700 G Street. N.W
Washtngton, D.C. 20552
Federal Home Loan Bank Board
F•deral Home Loan Bank Systern
Federal Hom• Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAJRMAN
March 9, 1987
The Honorable Fernand J. St Germain
Chairman, Committee on Banking, Finance
and Urban Affairs
United States House of Representatives
Dear Chairman St Germain:
The following seeks to lay before you, in as plain-spoken a manner as
possible, the current condition of the FSLIC and my views about our
situation.
The General Accounting Office ("GAO"), the auditor designated by you
in the Congress to audit the books of the FSLIC, has determined that the
insurance fund was insolvent at the end of 1986 by over $3 billion, using
generally accepted accounting principles ("GAAP"). On that basis, the.
FSLIC is even more insolvent today. Within the next month or so, based on
anticipated expenses, the fund may he insolvent by over $4 billion, on a
GAAP basis.
The FSLIC's liquidity has been significantly reduced. We currently
have approximately $3.7 billion in cash and investment securities. Within
a month or so, that liquidity mav well be much closer to $2 billion, based
on anticipated expenses. As you know, deposits at FSLIC-insured
institutions exceed $9no billion.
One area of concern is the impact of GAO's opinion on the secondary
reserves. The secondary reserves of the FSLIC fund are currently counted
as assets by insured institutions that have provided such reserves. The
Securities and Exchange Commission and the accounting profession are
likely to require that these reserves be written off because of FSLIC's
insolvency. The overall impact would be an $817.4 million reduction in
the industry's net worth. Individual impacts include four institutions
that would become insolvent and twenty-four additional institutions that
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Federal Reserve Bank of St. Louis
4
2
would fail their minimum net worth requirements because of the write-off
of their secondary reserves. One institution alone would see its net
worth fall by S48 million.
FSLIC-guaranteed advances will pose troubling issues for the boards
of directors and auditors of the Federal Home Loan Banks ("FHLBanks"). As
of February 20, 1987, the FHLBanks had total outstanding advances of
$3,499,872,000 to 83 institutions. These advances are guaranteed by the
FSLIC. The FHLBanks have advanced an additional $2,447,477,000 to these
same institutions without FSLIC guarantees. This leads to a grand total
of outstanding advances to these 83 institutions of $5,947,349,000.
Of these advances, the overall collateral deficiency is slightly over
billion.
One FHLBank has a collateral deficiency of $795,650,000 -- a
Si
very large percentage of its capital. Much of the collateral is of
unknown quality. This FHLBank, therefore, is depending on the FSLIC
guarantee as its only realistic source of prampt, full repayment of
advances.
There can be no assurance that the boards of directors of the
FHLBanks, in the exercise of their fiduciary duties to their shareholders,
will be willing to make uncollateralized advances to troubled thrifts on
the strength of a guarantee of an insolvent FSLIC fund.
Scale of the FHLBanks in particular would face a major dilemma. If
they made further advances, and if the FSLIC were unable to honor its
guarantees, the solvency of the entire bank would be at risk. If the
FHLBank did not make advances, it might be unable to stem a liquidity
crisis.
The accountants who audit FHLBank financial statements will face the
issue of whether uncollateralized advances require establishment of loss
reserves. If loss reserves were required, the capital of the affected
banks would fall, and the net worth of insured institutions that are
members of such banks would also be reduced. The total potential writeoff would be slightly over Si billion.
An immediate problem may also arise with respect to FSLIC's notes.
FSLIC has approximately S4.5 billion in notes outstanding payable to
troubled thrifts and de novo federal mutual associations chartered as part
of asset backed transfers. Once again, accountants will face the question
of whether the notes of an insolvent corporation (FSLIC) can continue to
be treated as assets by these associations or whether substantial loss
reserves are required. Any write-off required could force some already
troubled thrifts into insolvency. Write-offs could also cause a crisis of
confidence in other thrifts holding FSLIC notes.
I am also concerned about the potential impact of FSLIC's growing
CAP insolvency on public confidence. We have been fortunate thus far.
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Federal Reserve Bank of St. Louis
3
Net operating losses (this does not include any losses from
write-downs) at institutions in our significant supervisory caseload are
running at over $6 million a day, more than S2 billion a year. That
number is greater than FSLIC's entire annual operating income. FSLIC will
have to pay these net operating losses. Due to the weakness of the FSLIC
fund, thrifts have to pay higher interest rates to attract depositors than
paid by their FDIC insured competitors. Industry wide, this extra cost to
FSLIC insured institutions is at least S4 billion per year. FSLIC's GAAP
insolvency is likely to increase that cost. Every day of delay raises the
present value cost to the FSLIC -- and to the thrift industry.
As I mentioned, the FSLIC will soon be down to near $2 billion in
liquidity ($5 billion GAAP insolvent) to protect an industry with
approximately Si trillion in liabilities. This is untenable. Moreover,
there are severe constraints on FSLIC's ability to draw upon other sources
of liquidity.
FSLIC receiverships hold approximately $7.1 billion in assets.
Approximately 50% of these assets are located in Texas. FSLIC is by far
the largest creditor of such receiverships. Receivership assets, however,
are extremely illiquid. Any effort to improve FSLIC's liquidity through
accelerated liquidation of receivership assets would lead to charges that
FSLIC was "dumping" assets. I do not believe selling off such assets at
"fire sale" prices -- even for the sake of liquidity -- makes any sense at
all; rather, it could only exacerbate the present situation.
FSLIC could improve its liquidity by seeking to use its claim against
receivership assets as collateral for loans for Federal Reserve advances
to insured institutions. Such arrangements, however, could not be made
without substantial delay. In addition, we do not know how much "over
collateralization" would be required by the Federal Reserve, or to what
extent it would lend. In other words, the Federal Reserve may advance
only Si for every S2 of receivership assets -- or less -- given the poor
quality of receivership assets. A very large percentage of the best
receivership assets are already pledged as collateral for prior loans.
12 U.S.C. Section 1727(i) provides that the Rank Board may require
insured thrifts to deposit with the FSLIC not more than one percent of all
deposits in insured institutions. This would produce approximately S8.9
billion in liquid funds. The legislative history of this statute
indicates that these funds can be used solely for liquidity purposes -not for resolving cases. Also, the Board can use these deposits only for
the purpose of its own liquidity; whether the Board can legally use the
deposits to stop a run on an insured institution is unclear at best.
By statute, the FSLIC can obtain $750 million in advances from the
Treasury. Some members of Congress have questioned whether Treasury must
obtain an appropriation before it makes such advances to the FSLIC. We
have requested a ruling from the Attorney General.
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4
The FSLIC is authorized to make loans or contributions to any insured
institution to prevent its default or to lessen the risk to the insurance
fund. In other words, for FSLIC to provide financial assistance to an
institution, the Bank Board must be able to find that the cost of
providing such aid to the institution would be less than the cost of
liquidation (12 U.S.C. Section 1729 (f)(4)(A)). This could be a very
difficult finding for the Bank Board to make for the very institutions
most vulnerable to severe liquidity pressures. Therefore, even if the
FSLIC had adequate sources of liquidity, it could not necessarily use
them. FSLIC must have the capability to resolve problems. This requires
that the FSLIC maintain funds sufficient to resolve problems, not simply
liquidity.
The FSLIC could not call on enough liquidity to resolve problems
resulting from any material loss of public confidence. Temporary closures
proved necessary in both Ohio and Maryland. Any systemic Loss of public
confidence in FSLIC insured institutions could also spread to individual
FDIC insured problem institutions. After the collapse of Ohio and
Maryland insurance funds, legislators of both states complained bitterly
that state regulators had not alerted them to the problems of those funds
in advance so that the legislatures could avert the crisis. There was
criticism that the regulators had misled the legislatures through repeated
assertions that the Ohio and Maryland insurance funds were strong and
improving.
I have been consistently candid with Congress about the problems
besetting the FSLIC and the urgent need to recapitalize the fund. For
this, I have been criticized by many in the industry. Your own GAO
auditors also have been strongly criticized because of their candid
reports to the Congress. (See Exhibit 1 to this letter.) Some claim
there would not be a problem if the GAD and I were to simply stop talking
about it -- as though, by not addressing it, the problem would go away.
I have never sought to hide the facts from, or to mislead, the Congress.
Nor do I intend to do so now.
The FSLIC recapitalization plan we have proposed asks very little
from Congress. No appropriation of public funds is requested. No public
funds are borrowed. No federal guaranty is requested. It is not a
government bailout. Nor is any increase in premium authority requested.
Indeed, the plan we have proposed will permit FSLIC to reduce existing
insurance premiums by phasing out the special assessment. No adverse
budgetary impact is involved. GAO and investment bankers have determined
that this plan is viable, and thet it is the cheapest way to raise the
necessary funds.
We need your approval to put our recapitalization plan into
operation. In the meantime, I would request that this Congress consider
readopting its full "faith and credit" resolution of March, 1982. We
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Federal Reserve Bank of St. Louis
5
also need a Congressional directive to operate the FSLIC fund and resolve
problem thrift cases despite the GAAP insolvency of the fund. Immediate
action on all these measures is needed promptly.
In recent months, reasons have been advanced for delaying
passage of FSLIC recapitalization and for reducing dramatically the
funds available to FSLIC under the plan.
The first argument is that the FSLIC does Dot need $15 billion to
resolve coming losses. Congress' auditors -- your own auditors at GAD
-- strongly disagree with that argument. GAD's concern is that FSLIC's
losses could ultimately exceed our current estimates.
The second argument is a variant of the first. It is argued that our
plan to borrow $15 billion could be excessive, and that Congress should
not "lock" itself into a S15 billion/5-year plan. Putting aside that your
own GAD auditors have confirmed that $15 billion is essential, even if the
problems facing the FSLIC were to diminish dramatically, the Bank
Board/Treasury plan does not lock into place a $15 billion financing. We
have made it quite explicit that the markets will not accept, at reasonable interest rates, more than approximately $3 billion a year in bond
issuances. Bonds will be issued only to the extent the funds are necessary. Your GAD auditors will review periodically the issue of what funds
are necessary. Congress will have ample opportunity and means to ensure
that excessive bonds are not issued under the Bank Board/Treasury plan. I
have endorsed Senator Gramm's proposed measure that would provide for
Congressional hearings and reports within two years of the enactment of
our plan to assure that Congress would have a formal means of reexamining
the plan.
In my own view, which I respectfully offer, the adoption of plans
involving lesser recapitalization resources (i.e. $5-7.5 billion) would be
tantamount to the adoption of a continuous crisis resolution. No one has
demonstrated that such sums are even remotely adequate to meet the full
magnitude of the FSLIC's problems.
All such plans would leave the FSLIC fund deeply insolvent, using
generally accepted accounting principles. An investment banker has
already testified before the House Ranking Committee that investors will
view such plans as risky, becauc they are clearly inadequate. In
addition, they would force investors to rely on the hope that a future
Congress would take timely and affirmative action two years from now to
pass legislation allowing FSLIC to raise enough funds to recapitalize
itself. After more than a year of discussion, Congress has not yet shown
its willingness to pass recapitalization legislation, even where it has
been conceded by all that we confront a critical problem -- yes, a crisis.
The very act of Congress' passing a deficient recapitalization alternative
would convince investors of the added seriousness of the risk two years
hence. In my view, investors will surely demand higher interest rates
under alternative plans involving lesser recapitalization resources. This
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Federal Reserve Bank of St. Louis
6
higher interest expense would be wasteful. It would harm the FSLIC (in
the form of lower net proceeds from the financing corporation) and the
cost would be borne eventually by the thrifts, and ultimately by the
taxpayers.
The third argument advanced to delay passage of the Bank Board/
Treasury plan has been forbearance for economically distressed areas. I
have attached as Exhibits 2,3, & 4 the press release, policy statement and
appraisal clarification that we have issued in response to these requests
for forbearance. The pressure f^r a formal Rank Board forbearance policy
statement frankly began with a myth. The claim was that the Comptroller
of the Currency followed a liberal forbearance policy while the Bank Board
mechanically insisted on strict cumpliance with its capital requirements.
I was asked by members of Congress to adopt a capital forbearance policy
essentially identical to that the Comptroller issued. I reexamined the
Comptroller's statement and determined that was simply not appropriate.
It was inappropriate because no thrift in Texas would have qualified for
forbearance under the Comptroller's policy. This is because the weakest
bank qualifying for forbearance would have capital in excess of our normal
capital requirements. Exhibit 5 presents data demonstrating the problem.
Exhibit 5 also belies the myth that the Bank Board has not been
following a policy of forbearance. The commercial banking regulators do
not permit banks to operate with negative primary capital. As a general
rule, bank regulators take action to merge or remove FDIC insurance of
accounts to a bank with 3% or less primary capital. Tangible net worth is
the closest equivalent to primary capital in the commercial banking
system. If we followed the practices of the federal commercial banking
regulatory agencies, roughly 106 thrift institutions in Texas (38
percent of the total number of Texas thrifts) would be closed immediately
and we would take action such that an additional 66 institutions (24
percent) would be merged out of existence. Exhibit 5 demonstrates that
the Rank Board was following and has followed a practice of extraordinary
forbearance, well before the current focus on the issue.
The Bank Board's policy statement on forbearance is far more liberal
than the Comptroller's. First, t-o qualify for the Comptroller's program,
a commercial bank must have generally 4 percent primary capital. The
analogous threshold under our forbearance policy is 0.5 percent
regulatory capital. Thus, our policy is 8 times more liberal on its face.
In fact, because -less than one dollar in three of thrift regulatory
capital would qualify as primary capital for banks, our policy is really
about 24 times as liberal.
Our program is also more liberal in defining the other key aspect of
eligibility for forbearance. The Comptroller's policy generally restricts
eligibility to those banks that have more than 25% of their loans in
energy or agricultural sectors. Very few Texas banks have qualified for
forbearance. Our policy gives much broader forbearance to thrifts with
loans in depressed regions.
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Federal Reserve Bank of St. Louis
7
The third major area of greater regulatory forbearance is noted in
our policy statement -- we do not automatically appoint receivers, even
for insolvent thrifts. This is contrary to the practice of the commercial
banking regulators.
At the same time that we adopted our formal capital forbearance
policy statement, we also took action on the subject of real estate
appraisals. The staff issued clarifications of the existing appraisal
standards that addressed the reasonable concerns which had been raised by
some in the industry. I announced my intention of bringing a proposal to
the Bank Board to request public comment on what appraisal standards the
Board should follow.
Contemporaneously, I announced my intent to ask the Bank Board to
seek public comment on whether the Bank Board should adopt a classification of assets system that is less appraisal-driven and more uniform with
the system used by commercial banking regulators. Staff work on both of
these proposals is well underway.
In short, we have taken, reaffirmed, or committed ourselves to
rational devices of forbearance. We have gone well beyond the commercial
banking regulators. We have shown very significant forbearance and
discretion in dealing with institutions in states with depressed
economies. Indeed, other regions of the country could complain
vigorously about the degree of forbearance we have shown in some states.
Exhibit 6 lists all recent FSLIC takeovers. It is apparent even from a
cursory review that there have been disproportionately few FSLIC takeovers
in Texas particularly when contrasted to the number of insolvencies in
Texas. The contrast to a state such as California is startling.
Forbearance means different things to different people. Under the
rubric of forbearance a number of actions have been advanced that I
oppose. The head of one major industry group has stated that our policy
statement is inadequate because we have not allowed the industry to use
"rinky-dink" accounting, i.e., Loan loss amortization (See Exhibit 7). I
I inherited a system that had a lot of
oppose "rinky-dink" accounting.
"rinky-dink" accounting which I have tried very hard to eliminate. Let me
tell you, from experience, that not only does "cooking the books" not
work, it makes things worse. I have detailed my objections to loan loss
amortization in pages 2 and 3 of Fxhibit 8.
To others, forbearance means that FSLIC should not place hopelessly
insolvent thrifts into receivership. They reason that time heals all
wounds, and that if FSLIC were simply to wait, property values would
recover in five or ten years. This view requires the propagation of
another myth: the theory that thrifts in some depressed regions are in
trouble solely and exclusively because of the steep decline of the price
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Federal Reserve Bank of St. Louis
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of oil in 1985, and because of deregulation. The truth is more
complicated. Property values have fallen sharply in some parts of the
southwest.
Many thrifts that followed prudent underwriting policies in these
areas are solvent but have inadequate capital.
A smaller group of thrifts, however, followed terrible underwriting
and disbursement practices. As a result, the loans and direct investments
they made were losses even during the boom times. There will be losses
whatever happens to the price of oil. These thrifts were characterized by
extraordinarily excessive growth. They largely stopped making home
mortgage loans. They invested in the riskiest loans and direct investments. They loaned not just 100% of the value of the project, but also
the money to pay for the fees and the first two or three years of interest. The borrowers rarely had any equity in the projects.
The data on the bottom half of Exhibit 5 are instructive. Banks have
a much higher capital requirement than thrifts: 6 percent capital,
virtually all of it primary capital, as compared to 3 percent regulatory
capital for FSLIC insured thrifts. Nevertheless, only 4 percent of all
Texas banks are failing their capital requirement. Contrast this with the
top half of Exhibit 5, which reveals the condition of Texas thrifts. The
depressed Texas economy has caused less injury to banks because of their
larger capital level and better underwriting practices.
On average, the weakest 40 Texas thrifts grew 8 times faster than the
national average from 1980 to 1986. Most of them grew more than 100
percent in some years. On average, this group is insolvent on a tangible
basis by over 17 percent of liabilities. Their nonperforming assets are
over 10 times the national average. Over 37 percent of the assets of this
group are delinquent loans and real estate that the thrifts have had to
take back through foreclosure. Their ongoing net operating losses (again,
this does not include losses from writedowns) are running at over 6
percent of their assets. Whereas the group placed approximately 70% of
its assets in 1-4 family mortgages in 1980, by 1985 it placed 22% of its
assets in such loans. In 1980, this Texas group placed only 2.4 percent
of its assets in high risk land loans. By 198, the group was placing 20
percent, almost eight times the national average, in such loans. The same
group placed almost three times the national average of direct investments
in their portfolios. This relatively small group of thrifts sowed the
seeds of their own destruction in 1982 and 1983 and had already reaped a
bitter harvest by 1984 -- well before the sharp fall in oil prices. By
December 1984 this group had over 4 times the national average in foreclosed properties and delinquent loans, and it was suffering substantial
net operating losses. On a tangible net worth basis, this group had
already become insolvent by December 1984. This group of thrifts paid
massive dividends on the basis of artificially generated fee income. In
1983, the group paid out 18.7 percent of its reported tangible net worth
out as dividends -- compared to a national average of 3.8 percent. In the
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Federal Reserve Bank of St. Louis
9
first quarter of 1984, the group paid dividends at nine times the national
rate. Even after the group was, on average, insolvent on a tangible basis
it continued to pay substantial dividends in 1984, 1985 and the first half
of 1986. Supervisory orders were generally required to halt further
dissipation.
There are tremendous costs to the FSLIC of delay in closing
hopelessly insolvent thrifts. Time cannot heal the wounds of sudh
thrifts. Let me illustrate this problem with respect to one institution
that is a part of this group of 40. It is currently reporting
approximately $1 billion in assets and a negative GAAP net worth of over
$450 million. On a tangible basis, it is insolvent by over $0.5 billion.
Over 40 percent of its assets are non-performing. If we were to go into a
holding pattern for 5 years, its estimated net operating losses would be
as follows (in millions):
$125
1987
$156
1988
S175
1989
S193
1990
$204
1991
TDTAL....$853
By the end of 1991, this one thrift would be over $1.3 billion insolvent.
This one thrift's net operating losses would represent roughly one-fifth of
FSLIC's annual premium in 1991.
In my opinion, the systemic and individualized attempts to prevent
the Bank Board from resolving such hopelessly insolvent thrift cases must
stop. No rational regulatory system or insurance fund can survive if
efforts to undermine its effectiveness and credibility are allowed to
succeed. Congress criticized us sternly for not being sufficiently firm
in preventing unlawful and unsafe practices in the Dallas district. Roy
Green and Joe Selby of the Federal Home Loan Bank of Dallas are under
slanderous attack because they are doing their duty as regulators.
The Bank Board has gone to the outer limits of rational forbearance.
We seek your support for our forbearance policy and for our plan to
provide funds sufficient to perform our regulatory duties and resolve
hopelessly insolvent thrift cases.
Another reason offered by some for delaying passage of an adequate
FSLIC recapitalization bill is the issue of whether the FSLIC is capable
of spending the new funds wisely and effectively. I agree that FSLIC
recapitalization requires a capable system for utilizing the funds in case
resolution and liquidating assets over a period of time.
I have made clear many times, in testimony before the Congress and in
numerous speeches to industry groups, that constraints on FSLIC by the
Office of Management and Budget ("OMB") and the Office of Personnel
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Federal Reserve Bank of St. Louis
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Management ("OPM") have severely impaired our ability to attract and
maintain the numbers and quality of FSLIC staff we need to accamplish
these goals. The response to our critical needs in this regard has been
thoroughly inadequate. This is why I joined with my fellow federal
financial regulators in strong support of the Carper-Lundine legislation
in the last Congress. This legislation is still desperately needed by the
Bank Board to achieve far greater flexibility in our effort to attract and
retain the kind of staff necessary in adequate numbers to meet the
critical challenges we face.
FSLIC has had to handle the liquidation of assets of approximately
the same dollar amount as the FDIC with a staff that has scores of people
instead of the thousands of FDIC personnel assigned to liquidation
efforts. FDIC is not under the same crippling staffing and salary
constraints imposed on the Bank Board and FSLIC by OMB and OPM.
This is why I spearheaded the effort to charter the Federal Asset
Disposition Association ("FADA"), to be able to attract the quality of
personnel needed to assist the FSLIC in the most cost-effective asset
disposition program. FADA has made tremendous strides already in helping
us to achieve this objective. I am confident that our future liquidation
efforts will be of the highest caliber.
We have also taken measures to improve FSLIC case processing. Last
year I requested a comprehensive study of the FSLIC function by an
independent management consultant. The firm of Booz Allen & Hamilton
completed its study late last September and recommended that, given the
constraints on FSLIC's resources, much of the FSLIC case resolution
staffing function should be delegated to the Federal Hone Loan Banks, with
principal oversight and quality control over the function to be assigned
to the FSLIC staff and Board in Washington. A Federal Home Loan Bank
System-wide task force has nearly completed its work on how best to
implement recommendations of the Booz Allen study. The task force will
report to the Bank Board within the next few weeks. I am confident
implementation of the task force recommendations will Q0 a long way toward
reassuring all parties of the increased capability of the FSLIC function
in managing recapitalization funds and disposing of assets carefully and
wisely in the future.
The Bank Board has already demonstrated the fruits of similar
initiatives taken over the past several years. These initiatives came as
a result of our frustration with the same kinds of crippling OMB and OPM
constraints I have already mentioned. Delegation of the examination
function to our Principal Supervisory Agents in the 12 Federal Home Loan
Bank districts more than doubled our field examination staff in little
more than a year and a half. Our professional supervisory staff in the
Federal Home Loan Bank districts more than tripled in two and half
years. Oversight of these critical functions -- in defense of the
resources of the FSLIC -- has been significantly strengthened with the
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Federal Reserve Bank of St. Louis
11
establishment of the new Office of Regulatory Policy, Oversight and
Supervision in Washington, a Federal Hare Loan Bank System entity that
reports directly to the Bank Board.
The Bank Board's growth, direct investment, and capital regulations
are examples of very significant progress on the regulatory front, despite
the opposition to them by certain powerful segments of the thrift
industry.
We are taking the personnel and regulatory steps essential to ensure
that FSLIC funds are spent wisely, and that future thrift failures are
minimized. Particularly given the obstacles we faced, I am proud of the
advances we have made. Further delay in oassing the Bank Board/Treasury
recapitalization plan is unwarranted.
Further delay is also dangerous. The Ohio and Maryland thrift
insurance funds failed to maintain public confidence before they became
insolvent. If FSLIC fails to maintain public confidence the resulting
crisis could require a taxpayer bailout. Prompt action by Congress
assuring that the FSLIC fund will, indeed, be adequately recapitalized
over the next five to seven years is today's necessity if we are to
maintain and restore confidence in the thrift system and the FSLIC.
The recapitalization plan we have proposed will go a very long way
now to meet that critical need, and achieve that extremely important
objective. I invite, indeed I strongly encourage, continuing strong
oversight by the Congress over the FSLIC recapitalization process in all
its dimensions.
Thank you very much for your help and continued support.
Sincerely,
Edwin J. Gray
Chairman
Attachments
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Federal Reserve Bank of St. Louis
EXHIBIT # 1
-s-
=
UNITED STATES LEAG
UE of SAVINGS INST
IT
UTIONS
WEDNESDAY
MARCH 4, 1.987
II RELEASE
CONTACT:
Joan Pinkerton (202
) 637-8930 (offic
e)
(202) 244-3467 (hom
e)
James Kendall (312
) 644-3100 (Chicago
office)
(312) 653-4237 (hom
e)
Allan Friedman (312
) 644-3100 (Chicago
office)
(312) 724-0874 (hom
e)
NEWS
The findings of a pre
ltminary General
Accounting Office aud
it present a
completely distorted
and erroneous view of
the strength of the
Federal Savings
and Loan Insurance
Corporation. Joe C.
Morris. Chairman of
the U.S. League of
Savings Institutions
, said today.
"Reports that the
rsuc
is insolvent are
outrageous,
Norris said. "There
is no question that
accounts on deposit
at FSLIC-insured
savings institutions
remain fully protec
ted up to $100,Q00
per account and tha
t FSLIC has financ
ial
resources to meet
its obligations.
"It would appear to
some that the GAO
is manufacturing a
bookkeeping
crisis to pressure
Congress into passin
g an excessively
large FSLIC funding
program.
"The GAO report is
directed to accoun
ting issues." Morris
said. "The GAO
is earmarking FSLIC
funds to cover fut
ure contingencies
despite the fact tha
t
both the Treasury
and the Federal Hom
e Loan Bank Board
have said they can
not
determine the future
costs of case res
olution at this tim
e.
"The GAO report doe
s not take into acc
ount when the FSLIC
will need to
spend funds. Nor
does it take into
account FSLIC's fut
ure income, which is
currently -- withou
t any new funding
proposal -- approx
imately $2.5 billion a
year.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
RELEASE FROM:
United States Le
ague of Saving
s Institut
1/09 New York Av
ions
enue, N.W.,
Washington, D.
PAGE TWO
(202) 637-8930
C. 20006
-------------------------------------------------------------------------"The FSLIC repo
rt shows that at
the end of ca
lendar 1986.
the deposit
insurance agen
cy had cash and go
vernment secu
rities of abou
t $4 billion.
The informatio
n in the GAO re
port is based
on numbers su
pplied by the
Bank Board and
not the result
of an independen
t GAO audit,"
Morris said.
"The Bank Boar
d's information
is based on in
formal internal
estimates
rather than comp
rehensive anal
ysis. The nu
mbers present
an unduly pess
valuation of sa
imistic
vings institutio
ns assets.'
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Federal Reserve Bank of St. Louis
* * * *
EXHIBIT # 2
PRESS RELEASE
Federal Home Loan Bank Board Chairman Edwin J. Cray today
announced issuance by the Board of a formal policy statement on
forbearance for FSLIC-insured savings institutions experiencing
temporary financial difficulties due to distressed regional
economies.
Mr. Gray said the forbearance statement is modeled closely
after a policy statement issued last year by the federal
commercial banking regulatory agencies dealing with energy and
agricultural banks'.
The Bank Board Chairman also announced the issuance by the staff
of revised appraisal guidelines (revisions in R-41c).
In a related
step, he said he intends to ask the Board to propose promptly a rule,
the purpose being to elicit the widest possible public comment on
what appraisal standards should be used in the savings institutions
industry.
He said the revised appraisal standards that would result
would take into account appropriate concerns of FSLIC-insured
institutions and professional appraisal organizations.
Mr. Gray also said he intends to recommend to the Bank Board
amendments to its classification of assets rule that would generate
public comments on the desirability of making the Board's rule more
uniform with longstanding commercial banking regulatory agencies'
practices.
Reproposal of the Bank Board's Classification of Assets Rule
The Chairman said he believes greater uniformity among federal
financial regulators and insurers is generally desirable and he looks
forward to receiving broad public comments on such a proposal.
Mr.
Gray said such a move toward closer uniformity would make the Bank
Board's classification of assets practices less appraisal-driven and
would emphasize greater discretion and judgment.
For example, he
said, a "doubtful" classification would no longer require a specific
loss reserve that reduces the net worth of an institution. He said
such a proposal would allow savings institutions, like banks, to
count general reserves towards capital and thereby help encourage the
establishment of adequate general reserves for losses in the savings
institutions industry.
It could lead to the requirement for
increased capital only where it makes sense to impose such
requirement.
In moving the Bank Board's classification of assets practices
much closer to commercial banking regulatory practices, hence
emphasizing greater discretion and judgment and less reliance on
property appraisals, the Chairman said the proposal would provide the
following important characteristics:
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Federal Reserve Bank of St. Louis
2
Examiners, and ultimately supervisory agents, would have
more flexibility in determining whether a loss exists,
since the system would be less appraisal-oriented;
There would be no specific loss reserves created when an
asset is classified as "doubtful;"
Where the principal supervisory agent required additional
general reserves as a result, in part, of assets
classification, such general reserves could be counted
towards the thrift's capital requirement; and
The principal supervisory agent could order a greater
capital requirement if the particular portfolio of a thrift
indicates a need for additional capital.
Appraisal Reforms
Chairman Gray announced an important staff action taken in
response to concerns that have been raised regarding certain aspects
of appraisal guidelines contained in R -41c. The Office of Regulatory
Policy, Oversight and Supervision ("ORPOS") has today issued a
clarification intended to alleviate those concerns.
Today's ORPOS
memorandum seeks to clarify four important matters:
1.
Compliance with Freddie Mac and Fannie Mae underwriting
appraisal and appraisal reporting guidelines (and standard
form reports) is considered sufficient for appraisals on
one-to-four family dwellings and multi -family properties.
2.
In order to assist in cost control of appraisal services,
the Bank Board encourages the appraisal industry to develop
standardized forms that are consistent with uniform
appraisal standards, for use wherever possible. Sucn for.r.s
would have to be pre-approved by the Bank Board.
3.
It is not intended that the appraiser become enmeshed :n
aspects of the underwriting process other than those
necessary to perform the appraisal.
4.
An appraiser shall report a present market value for botn
existing properties and for proposed developments. The
appraiser may also report a value as of the conclusion Df
construction and as of the projected date when stabilize2
occupancy is achieved.
The Congress has complimented the Bank Board's appraisal
standards.
The Bank Board has taken the lead in seeking to develop
appropriate appraisal standards.
A recent House Committee report
concluded: "Among all the Federal banking agencies, only the FHLBB
has a highly developed and comprehensive system regarding appraisal
policies, practices and procedures."
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Federal Reserve Bank of St. Louis
41111.
3
Indeed, the House Committee report recommended that all federal
financial institution insurers and regulators should undertake "the
development and dissemination of appraisal guidelines utilizing the
FHLBB's Memorandum #R-41b, as a model".
Chairman Gray expressed his belief that, as clarified, R-41c is
an important safeguard for the industry.
The clarifications to R-41c
are designed to reduce costs to the industry. The Chairman is
hopeful that standardized appraisal forms can be developed promptly
that will significantly reduce the costs and delays of obtaining an
appraisal.
Chairman Gray also indicated his desire to move even more
broadly to enhance the Bank Board's appraisal standards.
In
announcing that he will ask the Bank Board to propose a rule, whose
purpose would be to revise, as appropriate, its appraisal standards,
the Bank Board Chairman said again he would press for the broadest
possible range of public comments on what appraisal standards should
be used in the thrift industry.
Policy Statement on Forbearance
Chairman Gray said the Bank Board has long followed a policy of
forbearance toward well run savings institutions experiencing
temporary financial difficulties due to distressed regional
economies.
The Board's formal policy statement on forbearance tracks
closely a policy statement on capital forbearance issued by the
commercial banking regulatory agencies in April of last year for
energy and agricultural commercial banks.
Mr. Gray said the Bank Board does not support the creation of
accounting gimmicks or any moves that could have the result of
effectively "cooking the books" of federally-insured savings
institutions.
Moreover, he said, the Bank Board will continue to
take action to reduce existing problems that are the product of
fraud, insider abuse, self dealing, imprudence or incompetence and
prevent the creation of new problems.
He emphasized, however, that
considerable number of savings institutions, with good managements,
are experiencing problems that are principally the result of
temporarily depressed regional economies.
He said the Bank Board n3s
long worked with such institutions to help turn them around, wl.:1
the goal of ultimately restoring them to health.
Mr. Gray said the Bank Board has taken steps to raise capital
requirements generally and to bring its definition of capital more in
line with that used by commercial bank regulators.
Increased capital
and supervision, he said, are vital to protect savings institutions
and the FSLIC fund from the effects of regional economic downturns.
The Bank Board policy statement on forbearance follows:
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Federal Reserve Bank of St. Louis
4.
EXHIBIT # 3
Date:
February 25, 1987
FEDERAL HOME LOAN BANK BOARD
Capital Forbearance Policy
For Insured Institutions
AGENCY:
Federal Home Loan Bank Board.
ACTION:
Policy statement.
SUMMARY:
The Federal Home Loan Bank Board ("Board"), as the operat
-
ing head of the Federal Savings and Loan Insurance Corporation
("FSLIC"), is adopting this policy statement to explai
n the Board's
intentions with regard to supervisory policies affecting instit
utions
the accounts of which are insured by the FSLIC ("insured instit
utions") that have been adversely affected by economic condit
ions 171
the oil and gas, agricultural, natural resources, and other
distressed sectors of the economy.
The statement outlines a capital
forbearance policy designed generally to benefit insured instit
utions
having sufficient capital to absorb loan losses and reasonable
prospects to replenish capital, and it reiterates previous Board
statements regarding the restructuring of loans and accounting for
them.
The statement also reemphasizes the Board's longstanding
policy that supervisory agents should not discourage lenling sup
because a project or collateral is located in a region affectel
adverse economic :DI1D-_ir)n-;.
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Federal Reserve Bank of St. Louis
•
Page 2
EFFECTIVE DATE:
[Insert date of publication in the Federa
l Register].
FOR FURTHER INFORMATION CONTACT:
William K. Black, Deputy Director
for Program Development and Implementation, Office of
the FSLIC,
Federal Home Loan Bank Board, 1700 G Street, N.W.,
Washington, DC
20552; (202) 377-6420.
SUPPLEMENTARY INFORMATION:
I.
Introduction:
The last few years have proved to be a particularly
difficult
period for insured institutions and their borrowers in region
s
suffering from lower energy prices.
During this period, an histpri-
cally large number of insured institutions have failed and
an even
larger number have developed serious problems.
Similarly, insured
institutions and borrowers dependent on the agricultural and
natural
resources sectors of the economy have been experiencing seriou
s
financial difficulties.
In light of these problems, the Board believes it approp
riate to
employ supervisory policies that will support basica
lly sound,
well-managed thrifts in weathering what is
expected to be a difficult
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Federal Reserve Bank of St. Louis
Amr
Page 3
but temporary period.
Implementation will be accomplished by
encouraging thrifts to work with their troubled borrowers;
by
establishing a capital forbearance policy; and by
reaffirming that
generally accepted accounting principles can be used
to permit loan
restructuring without loss recognition, where approp
riate.
In response to this situation, the Board encourages
thrifts to
develop work-out strategies with their troubled borrowers
in appropriate situations.
Entering into work-out plans with borrowers who
are experiencing temporary difficulties in meeting their debt
service
obligations is often in the best interests of all partie
s.
Although examiners will point out to managements the weakne
sses
that may be present in loans, the Board does not automatically
require foreclosure on collateral or acceleration of the maturi
ty of
loans.
The Board recognizes that downturns in certain sectors of the
economy are expected to be transitory. Therefore, lenders may find
that the most prudent policy is to restructure loan terms rather
than
to take more precipitous action, such as foreclosure.
II.
Capital Forbearance Policy
Despite the difficult problems facing many thrifts in the oil
and gas, agricultural, or natural resources sectors, the Board
believes that most have sound prospects for the future.
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Federal Reserve Bank of St. Louis
Even with
F
Page 4
the losses suffered by these thrifts and the likelihood that losses
will continue to occur, these thrifts possess inherent value and
capable management that adheres to sound lending policies.
Accordingly, the Board is implementing a capital forbearance
policy that will benefit basically well-managed thrifts that have
reasonable prospects of turning around.
Capital forbearance formally
acknowledges that capital replenishment takes time.
The capital
forbearance policy should provide greater incentives to thrifts to
recognize promptly losses arising in their loan portfolios, to work
with borrowers to restructure loans, and to rebuild their strength.
Under the capital forbearance policy, the Board is unlikely to
take administrative action to enforce the minimum capital requirements in 12 CFR 563.13 ("section 563.13") against a thrift whose
regulatory net worth ratio declines below its minimum requirement to
no less than 0.5 percent before December 31, 1987, provided the
thrift meets the following qualifications and conditions:
1.
The weakened capital position of the thrift must be largely
the result of problems in the energy, agriculture, natural resources,
or other distressed sectors of the economy and not due to excessive
thrift operating expenses, imprudent operating practices, excessive
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Federal Reserve Bank of St. Louis
Page 5
growth, highly speculative ventures, insider abuse, excessive
dividends, or actions taken solely for the purpose of qualifying for
capital forbearance.
2.
The thrift must be well-managed.
In reaching determinations
about the quality of a thrift's management, the Board will take into
account existing management's past record of performance in guiding
the thrift, including its timely recognition of loan losses and other
weaknesses.
The Board will also consider the thrift's past compli-
ance with any agreements with, commitments to, or orders from the
Board.
Further, the Board will consider the capability of management
to develop and implement an acceptable turn-around plan.
3.
The thrift must submit an acceptable plan for restoring
capital within a reasonable time period to the minimums required by
section 563.13.
The plan should describe the means and schedule by
which capital will be increased.
address dividend levels;
This plan should also specifically
compensation of directors, executive
officers, or individuals having a controlling interest; asset and
liability growth; and payments for services or products furnished by
affiliated companies.
The plan should provide for improvement in the
thrift's regulatory capital on a continuous or periodic basis from
earnings, capital injections, liability and asset shrinkage,
combination thereof.
or
A plan that projects no significant improvement
in capital until near the end of the forbearance period will not
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Federal Reserve Bank of St. Louis
a
Page 6
generally be acceptable.
The Board may require modification of a
thrift's plan in order for the thrift to receive, or to continue
to
receive, capital forbearance.
4.
The thrift must commit to filing annual progress reports
regarding compliance with its capital plan.
Depending on an individ-
ual thrift's progress, more frequent reports may be required.
Moreover, any contemplated actions that would represent a material
variance from the capital plan must be submitted to the Principal
Supervisory Agent ("PSA") for review.
Thrifts with capital levels below the minimums established in
section 563.13 seeking capital forbearance must file a written
request no later than December 31, 1987, with the PSA for the
District in which the thrift is located. The request must include a
certification and explanation of its eligibility to participate
(covering items 1 through 3 above), its plan, and its commitment to
file the required reports.
Capital forbearance will be considered
granted unless, within 60 days of receipt of the request, the PSA
notifies the thrift that its request has been denied or that add
tional information or time is required.
Pursuant to section
563.13, during the period covered by this capital forbearance,
3
thrift granted capital forbearance and in compliance with an accepta-
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Federal Reserve Bank of St. Louis
Page 7
ble capital plan will not be subject to the corrective actions
provided for violation of the minimum capital ratios required by
section 563.13.
Upon written request by the thrift and at the discretion
of the
Board, the capital forbearance policy may be extended in special
circumstances to a thrift with a regulatory net worth level
lower
than 0.5 percent.
While this policy remains in effect, the Board reserves the
right to terminate capital forbearance for any thrift engaged in
unsafe or unsound or other objectionable practices, or where it is
apparent to the Board that the thrift is unwilling or unable to
comply with an acceptable capital plan.
The Board also expressly
reserves the right to modify or terminate capital forbearance at any
time for any thrift that was granted capital forbearance because it
was not notified of denial or the need for additional information
within 60 days, as provided above.
Some thrifts are at present subject to capital requirements
higher than those specified in section 563.13 by a capital directive, an effective order issued pursuant to statute, or a formal
agreement between a thrift and the Board, if they are eligible to
participate in the Board's forbearance program. Thrifts that have
experienced losses and are subject to a capital ratio higher than the
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Federal Reserve Bank of St. Louis
Page 8
minimums set forth in section 563.13 may request a modification
from the Board, if they are eligible to participate in the
Board's
forbearance program.
The Board will reconsider the higher require-
ment in light of the capital forbearance policy.
In addition, the Board's capital forbearance policy
extends to
well-managed thrifts whose regulatory capital ratios decline
, as a
result of problems In the oil and gas, agricultural, or natural
resources sectors of the economy, from historic levels to levels
above the minimum capital requirement.
These thrifts do not have to
apply for capital forbearance, and the Board will not require them
to
take any action solely on the basis of that decline in capital.
These
thrifts will be expected to maintain adequate capital for the nature
of their operations and, if appropriate, to increase their capital
over time back to historic levels.
In addition, these thrifts must
recognize that asset growth should be accompanied by appropriate
increases in capital.
All thrifts that are operating with capital levels below those
that would be expected under normal economic conditions should
be
aware that the Board will be unlikely to approve applications by
them
to acquire other thrifts.
Similarly, the Board will be likely to
object to changes in control or acquisitions of such thrifts unless
the transaction will clearly strengthen their financial condition.
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Federal Reserve Bank of St. Louis
Page 9
The implementation of the Board's capital forbearance policy has
no effect on balance sheet or income statement items reported in
reports or other financial statements, nor does it allow thrifts to
report, as assets, loans (or portions thereof) considered losses.
On
the contrary, the policy retains existing financial
presentation rules and creates no inconsistencies with generally
accepted accounting principles.
The Board believes that maintaining
the integrity of financial statements is vital to assuring confidence
in the thrift system.
III.
Accounting For Troubled Debt Restructurings
The Board has followed, and will continue to follow, generally
accepted accounting principles with respect to loans that have been
formally restructured to enable the borrower to service the debt.
Statement of Financial Accounting Standards No. 15 (FAS 15), Accounting by Debtors and Creditors for Troubled Debt Restructurings,
governs the accounting for such restructurings. This Standard allows
a loan to continue to be carried on the thrift's books without any
loss recognition if the loan is formally restructured so that it Is
probable and estimable that the borrower can repay the loan under the
new terms and that the total future cash payments by the borrower
(principal and interest combined) at least equals the loan amount on
the thrift's books.
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Federal Reserve Bank of St. Louis
Page 10
Accordingly, a thrift that reasonably expects a borrower's
future cash payments to equal or exceed the loan amount does not need
to recognize a loss on the restructuring. In those situations where
it is expected that the future cash payments on the restructured loan
will be less than the loan amount, the loss recognized is limited to
the expected cash flow deficiency.
IV.
Forbearance With Respect to Insolvent Insured Institutions
It has been and is the practice of the Board not to place
insured institutions into receivership automatically upon their
reporting negative regulatory net worth.
Instead, the Board examines
the integrity and effectiveness of management, management's compl _
ance with applicable law and regulation, and the quality of the
underlying assets.
Where the Board believes that management is
capable and the underlying assets may recover sufficiently in value
if there is an economic recovery in the affected sectors, the Board's
policy is to work with such institutions to seek to turn them aroJnd
and restore them to health.
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Federal Reserve Bank of St. Louis
By the Federal Home Loan Bank Board.
EXHIBIT # 4
FEDERAL HOME LOAN BANK SYSTEM
OFFICE OF REGULATORY POLICY, OVERSIGHT AND SUPERVISION
MEMORANDUM
TO:
FROM:
AB 80
Professional Staff
Examinations and Supervision
William L. Robertson
SYNOPSIS:
R-41c Clarifications
THIS MEMORANDUM SERVES TO CLARIFY FOUR AREAS OF R-41c THAT
HAVE BEEN SUBJECT TO REPEATED MISINTERPRETATIONS.
It has become increasingly clear that at least four issues addressed in the
R-41c memorandum need clarification. The following represents the official
interpretative views of this Office relative to these issues.
1.
Compliance with Freddie Mac and Fannie Mae appraisal and appraisal
reporting guidelines (and standard form reports) is sufficient for
appraisals on existing one-to-four family dwellings and multi-family
properties.
2.
In order to assist in cost control of appraisal services and to
encourage the further establishment of uniform appraisal standards, the
use of other standardized forms will eventually be permitted, provided
they are consistent with generally accepted and established written
appraisal practices and are preapproved by the Bank Board.
3.
It is not intended that the appraiser become enmeshed in aspects of tne
underwriting process other than those necessary to perform the
appraisal.
4.
An appraiser shall report the present market value for both existing
properties and for proposed developments. The appraiser may also
report a value as of the conclusion of construction and as of tne
projected date when stabilized occupancy is achieved.
Director
Distribution to State supervisory authorities to be made by Principal
Supervisory Agents.
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Federal Reserve Bank of St. Louis
EXHIBIT # 5
Distribution of FSLIC-Insured Firm by Net Worth/Liability Ratio
(September 1966)
Ratio
Negative
)6T
All
RAP Net Worth
Texas Firms
Number by Asset Size
0<$250million
$250 < $1,000 million
$1,000 million or more
Total
Percent
U.S.: Percent
29
13
3
g
16%
7%
42
13
5
6
- 0.
22%
11%
65
22
10
7
35%
41%
67
7
3
7
28%
41%
203
55
21
T7T
100%
100%
GAAP Net Worth
Texas Firms
Number by Asset Size
•($250million
$250 < $1,000 million
$1,000 million or more
Total
Percent
47
16
3
6
-6
24%
42
17
12
7T
25%
54
16
5
7
27%
60
6
1
7
24%
203
55
21
Tangible Net Worth
Texas Firms
Number by Asset Size
oc$250million
$250 < $1,000 million
$1,000 million or more
Total
Percent
70
25
11
106
38%
41
17
8
T6
24%
41
9
2
17
19%
51
4
0
-5
20%
203
55
21
-777
100%
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Federal Reserve Bank of St. Louis
27
100%
#0900000090000099999990
FDIC-Insured Commercial Banks in Texas
(June 1986)
Total Number
Failing Primary Capital Requirement
Number
Percent of Total
Failing Total Capital Requirement
Number
Percent of Total
1,957
61
3%
88
4%
Office of Policy & Economic Research
January 30, 1987
Pole Ne.
12/11/11
2
EXHIBIT # 6
OPFACIONS AND tI00JIDA11
00 IIVISION
ittEEIYERS$11 fASIS
ASSOCIAF1OA NAME
lAlf OF REC.
lAtiOVER Tref
LOCATION
tr,Til
.r,
•
II!
12-0173 First of Soffolk/
Citirets Suffolk, VA
01/0i112
12-41424 Coronado/Sun Country
SIN Albuquerque, NN
1112112
12-0021 lorestors/fidelity
fStA
Fairvipu Aeights,
1//09/12
12-4021 Noiliwn/Telas *stern
P$1116144, T1
111/21/12
124021 Ne.lansas/Osowat
olie/Ist
1eleit, IS
11/11/12 LII
034111 Valley First/Noe,
FSLA
II Centre, CA
11/14/13 LI1
114411 Nannies/St. Paul fStA
Chico's, IL
12/03/11 LI1
•
•
411
II-0032 Aetrepolitaft ltsp
ire Mier faroinstos, NI
134133 Peolosela/tay Sr's.
lank
Newport News, VA
02/11/13
1344/13
41)
110
Zig.
13-4014 Valley/Oiscayne/Citi
c/Neu Nisei, FL
14/04/11
13-0135 N. AS/New N. AS/Serur
ity Orford, AS
04/ 1 1/83
13-4014 First
I/tete/Nose ISLA
Pleffe,
SI
011/10/83
13-4111 Celemial/fria City fesl.
Houston', 11
Oh/25/81
11-40111 kitsch/real Aerwicon
Antioch, IL
07/041/81 LIG
13-0031 At. Verwom/Petropoli
tan
Nosslyn, VA
08/05/83
13-0640 Aid Peoirillletre/Ist
Fl
iloucestrr, NJ
0810543
13-0041 First Ft/Metropolitan
6ainesville, Ft
00/65/93
13-0042 Cleveland Coos:Superior
Cleveland, 004
10'28/8' 110
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
Pat No.
112/1/11/
OPERAIIONS AkD lIQUIDA1100 IIVISICM
RECEIVIRSHIP as
C441
INNEN
411
ASSOCIAIION NAMI
......
talklION
4
MAIE Of REC.
IAKEOVER ITPE
131041 State 5(1/Sun Country SI Clovis, IN
11/03/13 110
831044 Retro fStAtSum Sett II
take Charles, LA
12/01/83 Ill
441045 Unto. iStA/lay Svls.1aril
Nichsood, VA
01/27/14 III
94-0446 (spire
Mesleite, II
II/14/114 t10
•
•
94-4047 Pioneer Mortgage Co.
13/0144
144444 Seldom Pine Service Corp.
04/01/114
44,
1044 hooricao/Seciarity
•
liter', RS
44/43/14 LII
444454 lovettors/Esprelevas IS livestoo, II
15/11/14
44-0451 hackman/rust FSLA
44/09/84
Was, 111
411
44-4452 loves City/eibraltar Sy's Seattle, VA
17/24/04
411
444451 Aser.Nerit/Netre/Hsehold
ll000seglale, It
01101144
•
44-1054 fidelity/Household lank
laltivore, NI
14/21/14
44-4055 Nattbell/Netropolataa
Fargo, NS
14/31/14
114-404 Neve/Cogs% of Pverto Miro Ponce, PI
0/06/14
94-0057 Jobs Sevier/Nov/Charter
Sevierville, IN
11/16/94 III
94-0454 Avorccom/Nev/Charter
Knovville, fM
11/16/84 lle
44-4454 East fekm./Nom/Cliarter
tnovville, IN
II/16/114 III
114-1044 lave fStAilleviCketter
Kmovville, IN
11/14/14 III
411
•
•
411
94 0041 Savammak/Iles/CAarter FSLA Savommati, IN
II/16/B4 LII
844041 Si. Itarimoikose of Ivcson Si. Marino, CA
17/0144 LII
•
https://fraser.stlouisfed.org
•
Federal
Reserve Bank of St. Louis
•
•
Palo No.
112/12/17
4
DP111411016 AM0 I HAHDAIIOM DIvISION
RECEIVERSHIP EASES
•
CAS(
WWI
.......
DATE Of REC.
IAREOVER TYPE
ASSOCIATION NAME
It••
•
411
15-4063 Fidelity/Mousholdillestein Martins Ferry, IN
01/19/15
15-4064 Peeples/First of Arrerica
41/11/85
Noaelele, NI
15-4065 Baster' toss/First United El Cerrito, CA
03/0145 110
15-0006 Stott/first Nationnide
Noeeliile, NI
04/ 1 2/15 III
15-•167 State Sill/Sandia ESTA
Salt Lake City, 111
04/ 1 2415
154068 'overly Nills/0ev.Hills F Beverly Wills, CA
04/71/05 NEP
15-4061 Ceseinity/Mes Coeemnity
Nashville, TN
04/07/15 III
15-4071 Magnolia FStA/Charter
Known', TN
01/07/15 LEO
15-0071 Se.Calii/So. Calif fStA
Deverly Mills, Cl
06/0745 MCP
15-4072 Cititens/Mississippi 151 Batesville, MI
14/21/115
15-0/73 [eatery SLA/Nooseltold 16. loeleol Park, Es
06/2k/IS III
15-0171 Swim/Wrist COLA
bras. hack, Cl
17711715 REP
15-4475 Sell 5t071011 IOtA
San Nate., Cl
07/25105 ACT
15-4076 Sell Savings laot
Teeple, 11
01/02/115 LiD
$50011 Iutterlield/Betterfield f Santa Aria, CA
00/01/05 ACT
15-4471 Montana rss
00/16/05 110
Talispell, RI
85 0471 Centennial/Centennial fSt Goerneville, CA
55 0000 Allianreillay S.ps Sank
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Penner, IA
002005 No,
08/:1'85 LIT
Patio Ns.
42/1//11
5
OPENAIIONS AMD 1 10010A1100 DIVISION
NICER/IF/SHIP CASES
olo
COM
MINER
ASSOCIAIION NAME
L0(011101
DATE OF NEC.
WOVEN WI
......
15-0081 Presidio/Presidio FSLA
Porterville, CA
01/21/15 NC?
15-0082 Nestside/Nariner 1510
Seattle, NA
08/30/85 Aft
15-0087 Oughts SA/Htlihts ISA
Msestos, II
01/06/85 NC?
15-4084 01,m Ellyn/61ra (Ilya FR ills Flip, IL
01/20/15 REP
85 40113 fasily/Colosbia first
lethesda, MI
01/27/11
15-14SA Golden Pacifir SEA
Viadsor, CA
09/27/85
150117 Fareets/falows FSLA
Davis, CA
10/11/15 RCP
150111 Security !rust/Serially
Oakridge, IN
10/2545
15-0111 Levis ISLA/Sterling Svgs. Chebalis, NA
II/05/85
15-11,1 Ni Plains/N1 Plains ISLA *refried, TI
11/25/85 RCP
85-0091 V.S.Muloal/O.S.Muleal 1St Ana *bog, NI
11/26/81 MCP
15059? Citirens/Cilitens FSLA
Sales, 00
12/04/85 MCP
85-0093 State /7reedoe Fed. SCA
Cor.allis, OP
12/06/85 A81
15-0094 leorasty/lismasty IRA
Harrison, AA
12/06/115 CID
15-1015 State RA/State Federal
Lubbock, TI
12/20/85 MCP
15-0196 Iromolleld/Oroonlield FS1 Orownfield, TI
12/20/85 RCP
16-0017 Great Nest/Allantir holm Las Vtlas, NY
81-0091 lotcapital/Great Nestern Jacksoeivtlle *ch i
IL
01/31/16 OCR
02/14184 CIO
14-0199 Capitol Sill/Capitol SCA Rt. Pleasant, IA
02/21/84 MCP
14 0100 Sierra/Cooserical Federal lenver, CO
02/?8,136 110
16 0101 MacIvidaibreit MrsIern Is Dinard, CA
fr. 1000
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Pap No.
17/11/17
i
OFIRAIICALS AND TIDOIAATTop livisioN
ACEEIYEASHIF EASES
CASI
NOWA
IIIIN.S.ST
ASSOCIATION NAN
ST
.
ST
LOCATION
DATE OF DEC.
TAPEOvEli TYPE
[ZS-T1',1 [TSS:SSS
,:r7
16-1I12 floaranty/Olvaptc Svqs.lk. Lonivien, NA
03/21/16 LID
16-0103 kst,d lank/Hibernia lanc Sam Francisco, CA
116-610111ainland/1111triPark Feder I Nuristan, II
II/20/86 ACQ
04/04/14 All
•
•
116-4105 Slob I I /Not ion Federal lake Provideoce, LA 0/12/16 MI
•
81-0101 kaoolmte/Nonterry Park
Cerlsbad, CA
16-1102 Mm.Scurity/Carteret Svq Nytheville, HA
Ok-4110 Artmlion/Hortroa Federal
Nen lr leans, LA
15/10/16 L II
16/01/86 NEP
16/20/k AlT
•
▪
Northlake/lior iron Federal Covioltika, LA
16/20/16 All
lean/Norio. Feder Neu Orleans, LA
06/20/k All
II-4M Crescent/Horizon Federal lloo Orleans, LA
16/20/86 All
Coosealty/Norizon Federal Woo Poole, IN
01/20/86 MT
SI-Gill11re
•
•
▪
•
410
16-5Il3 Atlas IStAnoptro
1111-4Ill limas ISLA
Sae Frawcisto, CA
Portland, ON
$7/ 1 4i111
01/14/14 ACO
1164115 Isofflaiship federal
Sas Diego, CA
17/ 11/04 All
16-4116 Maier federal/Beacon fel. (littoral', ON
Al/IS/SO LIG
Ok-A11/ Ceara Mimi%
07/75/56 1.10
Virden, II
Poriiasola ILA/Ist Federal Soldolaa, AN
•
16-11I1 Presidio FSLA
•
011/08/86 III
164170 Netropol ilan'Nem Metropal Hialeah, FL
01/2116 HCP
16-012I leserve/Mid Loiltiment ESL Wichita, KS
01/21/86 ACO
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•••••
Porterville, CA
01/04/116 LID
'''.1111Pd."0"-•
•
•
NA
/
•
02/11/111
011411111101S Sill 119010*1IN DIVISION
NICIIVERSNIP (ISIS
•
•
Cillt
111111181
ASSOCIAI1011 NAME
• tOCA11011
NM OF SIC.
IlalEOVER IIPE
.......St..ITS
•
•
116-0122 first Sy's/federal Syq SI
l,or,, II
164173 Consolidated SI
vine.
CA
II/71/16 ACII
06/ 71/116 III
•
1161124 11•66roas/Cliarter Sank 151 Santa Fe, IN
09/11/16
51-0125 lairsisehach federal SLA loyal.. Beach, Ft
19/17/61 MI
141176 Sister. 5111/Nestern 15(1 lallas, II
09/ 1 2/116 1(5
564121 haws FAA/lemma ISLA
111/ 1 2/66 RCP
•
•
•
Fills/se, CA
•
116-4111 Cal Aberica/Cal Si. 15L1 Pelmet Diet, CA
09/12/66 NCI
06-sir letielic/Reptiblic Svgs.
Until 'visit, Ii.
II/01/66 MCP
14-4114 liessestead/Midf irst Sil
lloodesard, OS
10/10/16 III
•
•
•
114131 Sifted Sy's/Unified ISLA fkir thrill's, CA
10/10/66 1105
51-0112 11611 lygs/fralf fishes! St kiwis, LA
11/21/66 ACI
•
•
•
116-4133 First Sic/lot Sin. Fedral kind Jviktism, CO 11/21/64 MCP
116-0114.FirstSestli/Plyeeside Fed. Pine Sluff, All
17/05/96 All
116-0111 Ilserasty Fed/lisaranty fed Casper, VI
12/12/14 1111
161136 first America/1st Syy.Fed Weed Part, IL
12/12/66
17-013/ Uspqsa S.'s. I Loan Assn. Roseburg, OR
01116/01 III
61-4111 Ist166rnell/Colonlai
011617 119
•
•
•
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Duriburnett, II
•
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
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Citation Information
Document Type: Magazine article
Citations:
Number of Pages Removed: 1
McTague, Jim. "Bank Board Unveils Eased Capital Rule." American Banker, February 27,
1987.
Federal Reserve Bank of St. Louis
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EXHIBIT # 8
1 700 G Street N W
VVasmington. 0 C 20552
Federal Home Loan Bank Board
Federal soma Loan Bank System
Federal Home Loan Mortgage Corporation
ederai Sayings and Loan insurance
Corporation
EDWIN J GRAY
CHAIRMAN
March 2, 1987
Honorable Steve Bartlett
United States House of Representatives
1709 Longworth House Office Building
Washington, DC 20515
Dear Congressman Bartlett:
In response to your request for comments of the Federal Home Loan Bank
Board ("Bank Board" or "Board") on H.R. 1063, the Thrift Forbearance and
Supervisory Reform Act (the "Act"), I offer the following points on the
Act and on the issue of forbearance.
The Board recognizes that severe economic conditions may periodically
create additional financial pressure for insured institutions and has
exercised forbearance in such situations. In response to suggestions that
the Board make its policy more formal, we have taken three significant
initiatives:
First, the Board has prepared a formal statement on forbearance. The
Board has long followed a policy of extraordinary forbearance toward
well-run savings and loan associations experiencing temporary financial
difficulties due to distressed regional econamics. The Board will
continue to take vigorous action to reduce problems that are the result of
fraud, insider abuse, or incampetence; however, the Board will continue to
work with savings and loans whose problems are primarily the result of
inadequate capital and temporarily depressed regional economics. That
continued policy of rehabilitation will be made explicit through issuance
of the statement.
Second, I am asking the Board to consider a regulatory proposal, for
public comment, containing the standards used by the Bank Board to
evaluate the soundness of real estate appraisals. The Board's appraisal
standards are crucial for sound underwriting and supervision. Moreover,
the Board has taken the lead in developing appropriate appraisal standards
and has been praised by congressional committees for having done so.
However, it is critical that such appraisal standards not result in
inaccurate valuation of real estate, nor should such standards cause undue
delay and expense to the industry. Accordingly, the rulemaking, which I 33K
the Board to consider, should provide the fullest opportunity for all
interested parties to assist the Board in evaluating the effectiveness of
our current appraisal standards and in shaping any refinements deemed
appropriate.
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Federal Reserve Bank of St. Louis
interested parties to assist the Board in
evaluating the effectiv
eness of
our current appraisal standards and in
shaping any refinements
deem
ed
appropriate.
Finally, I plan to seek Board consider
ation of proposed amendmen
our classification of assets rule.
ts to
Again, I cannot help but beli
eve
that the widest range of public comm
ent will enhance the Board's
demonstrated responsiveness to exis
ting economic conditions as we
consider
the desirability of making the Board's
classification of assets rule
uniform with the commercial banking
more
regulatory agencies' longstan
ding
classification of assets practice
s.
In summary, we agree with the spon
sors of the Act that there is
important role for rational forbeara
an
nce. We appreciate the dili
gence of
their efforts and their request for
our assistance in formulating
a
rational approach to forbearance.
Some of the mechanisms in the
Act are
consistent with our existing rule
s and the initiatives I have
proposed.
Other provisions, however, could
cause unintentional injury to the
FSLIC
fund. My specific comments on
the provisions of the Act are as
follows:
[DAN rags AMDFCIZATICN
I cannot support the Act's prop
osal to allow thrifts to amortize
qualified loan losses over five
to ten years. As you know, this
would be
improper under Generally Accepted
Accounting Principles ("GM?"
). The
effect is to allow an institution
to fail to report currently its
losses
when calculating its regulatory
capital requirement. My objectio
ns are as
follows:
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Federal Reserve Bank of St. Louis
1. The resulting financial stat
ements could mislead the public.
GAAP
forbids such loan loss amortization
because it causes an inaccurate
report of the current financial cond
ition of the institution. I know
you share my belief that it is cont
rary to public policy to mislead
the depositing and investing publ
ic. I inherited a system that had
many non-GAAP accounting provisio
ns that could mislead the public by
overstating the true financial cond
ition of thrifts. I have
successfully led the fight to abol
ish many of these so-called crea
tive
regulatory accounting principles.
I am firmly opposed to "cooking
the
books."
2. The resulting financial stat
ements would not be comparable.
An
important reason for the creation
of GAAP was to make financial
statements of different entities
comparable. The proposed loan
amortization harms comparabilit
y in three ways. First, many thrifts
are subject to GAAP reportin
g rules. Their financials will
be
prepared under GAAP and they
will not be able to amortize loan losses.
Many non-GAAP reporting thri
fts would probably amortize loan loss
es.
Second, thrifts outside the desi
gnated depressed regions who do not
have substantial loans to thos
e regions will not be able to amortize
loan losses. In addition, because only some loans would qualify for
amortization, the financials of thrifts would be a hodgepodge of
"full" and amortized losses.
3. The proposed exception for institutional responsibility for
losses
would be unworkable. I applaud the obvious intent of Congressman
Bartlett's proposed exception. I know the purpose of the Act is to
prevent abuses. Unfortunately, I believe that it is unworkable. As
I
read subsection (5), the Board could order a thrift to cease
amortizing losses from particular loans meeting the specified
standards. It is not clear whether the Board would bear the burden
of
proof. We do not have the resources to review the tens of thousands
of loans that might be amortized. Under an order to end
amortization, financials would have to be reissued, probably with an
explanation that the Bank Board had found the losses to be the result
of criminal acts or other acts warranting a cease and desist order.
The effect of such a financial restatement could be devastating.
4.
Amortization would be counter-productive to weak thrifts.
Bad accounting drives bad decision making. Amortization could delay,
sometimes for years, the Board's ability to take effective action against
a thrift that was in fact hopelessly insolvent, but was reporting positive
regulatory capital because amortization delayed the recognition of those
losses. Moreover, the Bank Board's experience is that markets are not
easily fooled by relative regulatory accounting principles. Indeed, we
believe that markets react adversely to "cooked books" and increase the
cost of capital to industries employing such techniques. The Bank Board
and the thrift industry fell into disrepute with the Congress, investors,
the accounting profession, and other financial institutions when my
predecessors embraced creative regulatory accounting principles. We
cannot survive a continuation, much less an increase, in accounting
principles that hide the true financial condition of thrifts. Worse, like
price subsidies, phony accounting is addictive. I recognize that the Act
has a 1991 sunset date, but passage of the Act would create tremendous
pressure to extend that date. My experience at the Bank Board in trying
to wean thrifts from their addiction to creative regulatory accounting
principles has taught me how difficult it is for a thrift to go "cold
turkey" and report its true financial condition after years of reporting
an artificially inflated net worth.
My overall position is that it is critical that associations report,
and that the Bank Board be able to act on the basis of, the true financial
condition of each thrift. Rational forbearance requires accurate
accounting.
TROUBLED DEB'r RESTRUCIURING
The Bank Board's accounting principles already incorporate GAAP's
provisions for troubled debt restructuring ("TDR"). Thrifts can account
for TDRs under GAAP at this time. The Bank Board's policy statement on
capital forbearance reaffirms this.
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Federal Reserve Bank of St. Louis
GAAP APPLICABLE OOR CERTAIN REGULATORY PURPOSES
This provision raises three substantial concerns. First, a
classification of assets system has been used by commercial banking
regulators for several decades. The Bank Board has adopted a similar
system, and I am proposing that our system be made more uniform with the
banking regulators' approach. Classification of assets is not an
accounting principle; therefore, I presume that it is not "inconsistent
with [(IMP]." If, however, the Act is intended to bar or restrict the
use of a classification of assets system, then I am substantially
troubled. GAAP simply does not address many issues--it was never designed
to be the regulatory system for insured financial institutions, and it
would not be adequate to protect the safety and soundness of thrifts or
banks.
Second, it appears to bar the effective use of reappraisals to
establish loan losses. Appraisals try to find market values. They
measure the economic loss when it is present. Appraisal methodology is
not an accounting principle. It is not "inconsistent with [GNU]."
Rather, it is a different system—one whose importance to protect FSLIC
from losses has been recognized by Congress.
Third, I find unacceptable the requirement that no "procedure,
standard, or interpretation" of any of our regulation on loss reserves,
classifications of assets, or appraisals may be implemented other than by
regulation. It would severely handicap the Board's examination and
supervisory efforts. This provision is not a forbearance measure. It
would prevent a supervisory body from reacting responsibly to a rapidly
changing environment. Neither the FDIC, the Comptroller of the Currency,
nor the Federal Reserve are so impeded from giving guidance to their
examiners, supervisors and regulated industries as would be the Board
under this provision. No regulation can answer every question. A
regulation that tries to define every term and foresee every contingency
becames a hypertechnical nightmare in terms of length and complexity.
Staff interpretations and general counsel opinions interpreting a
regulation are vital to the effectiveness of any regulation. They are
viewed by the industry as an important service for a regulatory body to
provide.
Indeed, this provision would have shackled the Board from issuing
timely interpretations or procedures implementing forbearance. Serving as
but one example is a staff interpretation in August of 1986 (SP-68)
granting forbearance in the determination of the amount of doubtful
classifications which would be reserved from capital accounts. More
recently a staff interpretation clarified certain misinterpreted sections
of R-41c guiding appraisal standards. This relief would have been much
longer in arriving had the Bank Board been powerless to act, other than
through rulemaking. This provision is an undue and unacceptable
restriction to the Board's effective supervision of the thrift industry.
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Federal Reserve Bank of St. Louis
LOAM LOSS RESERVES TREATED AS CAPITAL FOR CERTAIN PURPOSES
The commercial banking regulatory agencies all
general reserves to
be reported as primary capital. This is very controversial, and the
Federal Reserve has solicited comment on whether this provision should be
ended. Nevertheless, I am proposing that the Bank Board amend its
classification of assets regulation to end the current provision that
creates specific loss reserves for assets classified "doubtful." The
Bank Board's capital regulations already allow general reserves to be
treated as regulatory capital.
APPEAL OF CERTAIN ADVERSE DETERMINATIONS
I believe that the proposed arbitration mechanism would impose undue
delay and confidentiality problems and is inconsistent with proper
accountability of the Principal Supervisory Agent. I have attached a copy
of an alternative proposal designed to meet these policy goals without
running afoul of these concerns.
REVIEW OF REGULATIONS
I have no objection to this provision of the Act.
FLEXIBILITY
IN
RENEGOTIATION OF CERTAIN LOANS
I agree that unnecessary regulatory delays should be avoided. I do
not understand the provision of the Act dealing with treatment as "new
loans." I would appreciate further guidance on what change this language
is intended to accamplish.
FLEXIBILITY IN ANALYZING FINANCIAL CAPABILITY OF A BORROWER
The Bank Board's current rules do give supervisory agents the
flexibility this provision of the bill seeks. I am taking steps to
reemphasize the flexibility available to our supervisory agents, stressing
the need to consider all sources of credit pledged to secure the loan.
GUIDELINES CN REAPPRAISALS UPON FORECLOSURE
I have no objection to providing such guidelines.
fair market reappraisal upon foreclosure.
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Federal Reserve Bank of St. Louis
GAAP requires a
MAXIMUM AMOUNT
umrrATIoN
FOR CERTAIN COMMERCIAL REAL ESTATE LOANS
I agree that such limits should be tightened. I would propose that the
Bank Board address this issue by regulation. My only concern with the
draft language in the Act is that it could be read as prohibiting the Bank
Board from adopting a more stringent regulation requiring that the
borrower place real equity into the project.
ENDEPENDENT AGENCY STATUS FOR FSLIC
I agree that the budgetary and personnel limits imposed on the FSLIC,
create an unacceptable burden given the crisis we face. These limits
are
not necessary to protect the taxpayer; indeed, they are counter
productive. The cost of FSLIC's operations are funded by the industry,
not by the taxpayers.
FEASIBILITY STUDY RELATING TO ESTABLISHMENT OF ASSET ACQUISITDON
OORPORATION
I agree that a study could be useful.
In conclusion, the Board looks forward to working with you,
Congressman Bartlett, the co-sponsors of H.R. 1063, members of the Banking
Committee, and others in the 100th Congress as we address one of the
financial legislative imperatives of our time--the FSLIC recapitalization.
While all related issues should be and will be addressed responsibly and
efficiently, as I believe the Board demonstrates in response to this bill,
we at the Board cannot underscore enough our view that it is of utmost
importance to the public good that the primary focus remain on
recapitalization until the FSLIC receives those desperately needed funds.
Sincerely,
Edwin J. Gray
Chairman
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Federal Reserve Bank of St. Louis
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
0
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
January 12, 1987
Chairman Paul A. Volcker
Federal Reserve System
20th Street and Constitution Ave., N.W.
Washington, D.C. 20551
Dear Paul:
Thank you for your continuing interest in our FSLIC Recapitalization
Bill. As you know, I strongly believe that this Bill must be passed as soon
as possible if we are to maintain the viability of the FSLIC fund.
•
Permit me to summarize the risks from our perspective if this proposal
is indefinitely delayed. The U.S. League of Savings Institutions has
developed a plan with much less resources than the Treasury/Bank Board Plan,
which will, if fully considered by Congress, exacerbate this time delay.
These risks are treated in more depth in the attached letter to Ken McLean
(Attachment I) of November 26, 1986. They are:
1.
The risk of a liquidity crisis brought on by an inability of our
Federal Home Loan Banks to renew and issue new FSLIC guaranteed
advances. Such advances are currently at $3.6 billion with
pending requests of over $2 billion. We are currently difficient $2
billion in collateral for existing advances alone. (Attachment II
Guaranteed Advance memorandum of January 8, 1987.)
2.
A risk that is not adequately considered in the U.S. League Plan is
the cost of delay. We are currently losing over $6 million per day
in operating losses on FSLIC and other supervisory cases. This
does not include the deterioration of asset quality, which the U.S.
League assumes will inflate over time. In other words, there is a
significant time premium in resolving problems as soon as possible
to stop the hemorrhaging as opposed to the U.S. League's more
leisurely approach of providing $10 billion less in funds over the
first five years.
3.
The third risk is that further delay and Congressional "wrangling"
created all or in part by a competing recapitalization plans, may
doom all such plans to failure. Since both these plans now depend
on borrowing, further delays in addition to the inability of the
99th Congress to pass such legislation as well as a continued
deterioration in the fund may make external borrowing impossible or
very costly. Wall Street may not have the patience or confidence
to market such blemished agency paper.
•
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4.
The risk of a rise in interest rates must be considered when
evaluating such plans. The GAO has estimated that the cost of only
a 200 basis point rise in rates could raise costs to the FSLIC by
$7 billion over two years. The advantage of our $15 billion
borrowing program spread over 5 or 6 years as compared to the U.S.
League $5 billion program locked into two years provides more funds
up front as needed and the flexibility of working with the
inevitable interest rate cycles.
5.
The tax bill is also a consideration in this matter. As of
December 31, 1988, some key provisions related to the tax treatment
of the acquisition of troubled by healthy financial institutions
expires.
6.
A final risk is the continuation of higher deposit cost that FSLIC
institutions are paying over FDIC institutions. This is estimated
at greater than $4 billion at this time. A more rapid resolution
of this Bill could have savings for this year as well as the
future.
•
I have also attached for your review copies of our latest cash flow for
a $15 billion borrowing program (Attachment III), our best attempt to put the
U.S. League Plan in a cash flow format (Attachment IV) and finally a
comparison of our respective plans (Attachment V).
Some key differences in the two plans are:
•
1.
Additional funds from our plan of $3.2 billion over the first three
years, $9.5 billion over the first five and $9.5 billion over the
first seven years.
2.
Additional cases resolution of $2.1 billion over the first three
years, $6.8 billion over the first five years and $9.6 billion
over the first seven years.
3.
Fund reserves grow to $5.4 billion by year eight under our plan,
while staying low and flat at $3.0 billion under the League plan.
4.
The cost of delays from operating losses alone is over $3 billion
under the U.S. League plan over a ten year horizon.
I believe that
each of these plans
will be implemented
credibility in such
a careful consideration of the financial structure of
in the context of the dynamic environment in which they
is what is needed at this time. Your knowledge and
matters is greatly needed at this time.
Sincerely,
Edwin J. Gray
Chairman
•
Attachments
cc: George Gould
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I
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Federal Reserve Bank of St. Louis
Personal and Confidential
1700 G Street. N.W.
Washington. D.C. 20662
Federal Home Loan Bank Board
Faders' Horne Loan Bank
System
Federal Morns Loan Mort
gege Corporation
Feoaral Savings and Loan
Insurance Corporation
November 26, 1986
Mr. Kenneth A. McLean
Minority Staff Director
Committee on Banking, Housing
and Urban Affairs
Senate Dirksen Office Building
Washington, D.C. 20510
Dear Mr. McLean:
We appreciated your recent mee
ting with us to present
perspective of the current con
a comprehensive
dition of the FSLIC. The
first line staff perspective is
viewpoint from the
that the passage of the
recapitalization of
the plan at the beginning of
the 100th Congress is cri
tical. Waiting six
months or more could irreparab
ly harm our plan which inv
olves capital market
borrowing because investors wou
ld have little confidenc
e
in the strength of
the Congressional support beh
ind the plan.
Als
o,
GAO
has indicated that
absence of early Congressional act
ion in 1987 would cause
difficulty in rendering a
it to have great
clean opinion for its
audit ending December 31,
1986.
Absence of a clean opinion
would further harm our
successful offering in the
changes of a
market. Worse yet, we are
running the very real
risk of a liquidity crisis in
the thrift industry, partic
ularly with some of
our problem institutions that
require FSLIC guaranteed
advances.
As we stated at our recent
meeting, we need additiona
resolve current and projec
l funds now
ted cases.
These cases are now prTribir to
asset-quality cases.
.ily
Unlike the spread cases
of the early 1980s, the
condition of these asset qua
lity cases do not improv
e over time.
critics of the recapitalizatio
Some
n plan point to Talman
Home Savings and Loan,
the $5.8 billion "phoenix" instit
ution in the process of
issuing stock to the
public, as an example of the
advantages of waiting to res
olve cases. Talman
would have cost FSLIC $1 bil
lion to liquidate in 198
2; it is now costing
roughly one-half of that amo
unt
and 1985.) Even with additiona (including $350 million contributed in 1984
l resources, this is not
the type of problem
institution the FSLIC would rus
h to close.
Today's cases are more lik
e Sunrise Savings, the
institution placed in receivers
$1.5 billion
hip in September 1986,
as a result of rapid
growth (from $5 million in
1980), poor underwriting,
mismanagement, and a
large amount of acquisition,
development and construct
ion loans (ADC) which
would now be classified as dir
ect equity investments.
This case is expected
to cost the FSLIC approxima
tel
delay will cause further los y $680 million to resolve.
In such cases,
ses, due to management
costs, taxes, insurance
and the risk of projects bei
ng characterized in the
market as a "white
elephants".
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•
Some have suggested that the closing of these asset quality problem
cases will lead to "dumping" of real estate in already depressed markets and
to subsequent failure of additional thrifts. Such comments indicate a lack
of understanding of the receivership process.
FSLIC and its contractors,
including the Federal Asset Disposition Association (FADA), attempt to
maximize recovery of asset values -- not to maximize
disposition
speed.
Business plans for each asset and the entire entity must be developed,
reviewed and approved before any action can be taken. Assets can and have
remained in receivership for a number of years until local market conditions
accommodate disposition. We believe recapitalization of the FSLIC will have
the effect of reducing any tendency to dump assets as the need for up front
cash will be abated by recapitalization.
The purpose of this letter is to further discuss the risks facing FSLIC
if recapitalization is not passed early in the session. We would also like
to emphasize the need for accompanying legislation to allow the Bank Board to
assess an exit fee on healthy thrifts choosing to leave the FSLIC System.
Such flight could lead to a reduction in the FSLIC premium base to a level
insufficient to cover long-term debt service obligation on the Financing
Corporation's bonds.
After discussion of risks, we
will provide some
detailed background information you requested and supporting graphs.
Risks
The major risk in failure to pass the recapitalization plan early is the
risk of a liquidity crisis for the FSLIC.
The Federal Home Loan Banks
(FHLBanks) have been lending funds to institutions that are FSLIC cases and
do not have adequate collateral on the condition that FSLIC provides a
guarantee to the FHLBanks. Currently, there are approximately $3 billion of
these advances outstanding ($2.3 billion are backed by collateral with a
market value of only $600 million). They had been making these guaranteed
loans under the assumption that FSLIC would be recapitalized.
Since the
current level of FSLIC's total reserves is only $3.5 billion (primary
reserves of $2.7 billion) and is expected to decline to as low as $1 billion
as early as January, passage of recapitalization early in 1987 is crucial if
the FHLBanks are to continue lending to weak institutions. These guaranteed
loans are essential.
No other funds are available. The Federal Reserve
Banks will only lend if eligible collateral is present. (While a Treasury
line of credit is authorized by the National Housing Act, it is only $750
million.) The FHLBanks' boards of directors and managers have fiduciary
responsibility to their members and may require repayment of existing loans
and refuse to make new loans if recapitalization is not passed soon. Without
this continued source of funds, a liquidity crisis may ensue.
•
We had previously only disclosed this information to your and Senator
Garn's staff in the closing days of the 99th Congress.
This was done
primarily because we did not want to precipitate the liquidity crisis such
information could entail. Also, at that time
this was only a potential
problem because our independent FHLBank district boards of directors were
still approving such transactions and had expressed no reluctance to do such.
Since that time our twelve Federal Home Loan Bank presidents have informed us
that this is a major issue with these Boards in the absence of FSLIC
recapitalization and that they are reconsidering such transactions.
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•
The second important concern is the increased costs to FSLIC resulting
from ongoing operating losses experienced by failing institutions. FSLIC
cases (Management Consignment Program and other FSLIC cases) are currently
sustaining operating losses of $4.3 million per day; additionally,
significant supervisory cases that are expected to fail within a year are
losing $1.9 million per day -- for a total of over $6 million per day. The
longer these institutions continue to operate, the more losses they
accumulate. In fact, these operating losses will actually exceed the regular
and special premiums and other income of FSLIC for 1986 by over $150 million.
Without recapitalization, we are simply "treading water', solving few if any
cases, while the total caseload, and attendant costs, builds. This becomes
analogous to the federal deficit, where we are borrowing money to pay the
interest on the deficit, and not the deficit itself. With the passage of
time, resolution costs for known cases are growing -- leaving no funds for
new cases. This fact refutes the feasibility on any pay-as-you-go strategy
that has been mentioned by some in the industry.
The third risk is that further delay in the passage of legislation will
actually doom the recapitalization plan to failure. The plan depends on the
ability to access the capital markets at a reasonable cost. Ongoing adverse
publicity concerning the shrinking FSLIC fund, the weak 20 percent of the
thrift industry and the conversion by some thrifts to FDIC insurance may well
cause investors to insist on very high rates on the bonds. If the bonds were
to effectively deteriorate in quality to the essence of "junk" bonds, the
plan fails because premium income will no longer cover interest payments. Of
initial importance is the investors' perception of Congressional support
behind the FSLIC since these lenders will not have the "full faith and
credit" of the U.S. Government. Investors could well see cause for concern
due to Congressional inaction in 1986. delVery prompt action in the new
Congress would alleviate this concern,
ay could exacerbate it.
In
addition, delaying implementation of the plan pushes back the receipt of
funds.
A market for the obligations will have to be developed and an
investor base built up. The longer this is delayed the less funds will be
available (this topic is discussed further below).
The fourth risk is a rise in interest rates.
At the current
historically low level of rates, the probability of an increase exceeds the
probability of further declines.
Further interest rate declines might be
precipitated by an economic recession, which would tend towards greater
deterioration in asset quality. Higher rates raise FSLIC's resolution costs
by increasing operating losses and decreasing the value of some assets. A
GAO study in September 1986 found that a modest 200 basis point rise in rates
would cost FSLIC an additional $7 billion over the next two years.
GAO
estimated that the cost of waiting would be an additional $1.4 billion, over
two years with no increase in rates.
The fifth concern is the reduction in time available to FSLIC to resolve
cases. Two provisions of the new tax bill make resolutions more expensive
after December 31, 1988.
One provision removes tax exemption from FSLIC
financial assistance for acquisition.
The other provision removes the
ability of acquiring institutions to use loss carryforwards in mergers with
troubled institutions. Without these tax advantages, unassisted mergers will
not be viable alternatives in many cases. FSLIC's costs will be raised by
having to compensate acquirers for future tax payments or by having to
liquidate institutions for which mergers are no longer feasible.
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The final risk is the continued drain on the entire industry resulting
from FSLIC's poor condition, and competition with weak institutions which are
paying excessive rates to attract and maintain deposits.
A study by our
staff concluded that the FSLIC-insured thrifts were paying $4 billion in
additional deposit interest costs because they were FSLIC rather than FDIC
The sooner FSLIC can be recapitalized and some of these
insured.
institutions removed from the market, the sooner the entire industry will be
strengthened.
We would like to summarize in the remainder of this letter, the relevant
issues with supporting statistical information you requested that describes
the current condition of the FSLIC. These issues are: (1) the size of the
problem; (2) historical resolution costs and their relationship to methods of
resolution; (3) expected resolution through 1987; (4) differentiation between
FSLIC reserves and FSLIC cash; (5) sources of income for FSLIC; (6) operating
losses at failed and failing institutions; (7) FSLIC's liquidation policies
(8) FSLIC restructuring and (9) borrowing by the Financing Corporation.
1.
•
Size of the Problem
Currently there are 272 FSLIC and significant supervisory cases with
total assets of $98 billion which are projected to require assistance. Of
these, 143 with assets of $53.6 billion are FSLIC cases (50 are in the
Management Consignment Program -- MCPs), 95 with assets of $29.5 billion are
significant supervisory cases which are projected to become FSLIC cases
within the next year (75 of them holding assets of $21 billion within the
next six months), and 34 with assets of nearly $15 billion have uncertain
timeframes and costs. It should be noted that the management consignment
program was intended to be short-term (6 to 12 months) until asset values
could be determined. Some of these institutions have been in the program for
one to one-and one-half years, in the absence of resources to resolve them.
Simply applying historical average resolution costs, the 143 current
FSLIC cases will require between $7.8 billion (using the 1985 average cost
figure) and $9.3 billion (using the 1986 figure). The supervisory cases will
require between $6.5 billion and $7.7 billion. The total known cost at this
time would therefore be between $14.3 and $17.0 billion.
This can be
compared with $12 to $16 billion estimates of known costs in March of 1986.
However, we have resolved $1.8 billion in cases since that earlier estimate
making the difference even more significant. Given that the recapitalization
plan will provide over $25 billion in funds over the next five years, it can
handle the higher estimate of these known costs with room for other cases not
known at this time. We also would have the additional flexibility to provide
$30 billion in funds with a $15 versus $10 billion borrowing program, but
such an expanded program would take between six and seven years.
•
Although we feel comfortable that a $25 to $30 pillion program covers
known cases, as well as a good measure for emerging cases, our first line of
defense has been the Board's strong regulatory initiatives.
They have
massively increased our supervisory and examination staff and brought the
highest quality talent available. Tough regulations requiring higher capital
standards, interest rate risk management and prudent growth are also
currently in place.
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2.
•
Historical
Resolution
Resolution
Costs
and
Their
Relationship
to
Methods
of
A preliminary analysis of costs for 223 cases resolved from 1980 through
October 1986 indicates that these costs have increased over time, but have
I-- n somewhat cyclical.
Costs were estimated by FSLIC on a present value
I. sis at the time the institutions became FSLIC cases.
Losses for all
resolved cases fell from 11.4 percent in 1980 to 7.3 percent in 1981 and to
4.2 percent in 1982 and rose slightly to 5.1 percent in 1983. In 1984, 1985,
and 1986 costs were14.6 and 17.3 percent of assets, respectively. The
early loss experience (1980-1982) resulted from spread problems while the
cases in later years (1984-1986) were asset-quality problems. During the
middle years, spread problems were declining while asset-quality problems had
I. rely surfaced.
These cost data were influenced by the method of resolution selected.
Mergers are generally less costly than liquidations. However, merger partners
cannot always be found, particularly for institutions with poor quality
assets. In fact, the increase in resolution costs during 1984 through 1986
resulted from a decrease in the proportion of resolutions that were mergers.
Mergers decreased from nearly one hundred percent of cases in 1980 through
1982 to 85 percent in 1983, 65 percent in 1984, 67 percent in 1985 and 51
percent in 1986. In terms of assets, mergers decreased from close to 100
percent for 1980 through 1983 to 74 percent in 1984, 64 percent in 1985, and
71 percent in 1986.
•
Merger costs remained relatively constant from 1981 to 1986, ranging
between 4.2 percent (1982) to 7.3 percent (1985). They were slightly higher
in 1980 (8.3 percent).
Liquidation costs varied from 21.9 percent in 1983
percent
in
(the one case resolved in 1982 cost only 8.1
1986
to 45.7
percent.)
The increasing proportion of liquidations in recent years resulted not
only from the problems of locating outside buyers for institutions with
nonearning and difficult to value assets but from Bank Board decisions on
The Board has elected to use FSLIC's limited
which cases to resolve.
resources to resolve some of the worse cases with rapidly deteriorating asset
values, deposit retention problems and legal complications. These cases could
only be settled using some form of liquidation.
3.
•
Case Resolution Projections
FSLIC has prioritized its case resolutions for the period through
December 1987, assuming the recapitalization plan passes in early 1987.
During the remainder of 1986, FSLIC expects to resolve 17 cases - four
liquidations and 13 sales. The aggregate assets of these institutions total
$11.7 billion.
They are estimated to require an immediate cash outlay of
$2.50 billion. For 1987, 14 cases are already scheduled for resolution (only
toI as liquidations). Their assets total $6.7 billion. Cash outlays at the
time of resolution are expected to be $2.96 billion. Thus for the period
through 1987, FSLIC will spend $5.46 billion in cash on assets of $18.4
billion if recapitalization passes. It should be noted that these 31 institutions are currently losing $1.4 million per day on operations.
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This $5.5 billion clearly exceeds FSLIC's existing income sources of
approximately $2.6 billion for a 14-month period. Specific income items will
be discussed below.
4.
FSLIC Reserves vs FSLIC Cash
The total reserves of FSLIC are defined as the difference between its
assets and liabilities and exist to provide for losses that may be incurred
in the future on assistance to and/or closure of insolvent institutions. The
reserve level has fallen from $5.6 billion in December 1984 to $4.6 billion
in December 1985, $3.6 billion in September 1986, and $3.5 billion currently
(end of October). The reserve-to-deposit ratio has fallen from .8 percent to
.3 percent over the same period.
•
These reserves are composed of two elements, a primary reserve and a
secondary reserve.
At the end of October, the primary reserve was $2.7
billion, and the secondary reserve was $816 million. The secondary reserve
was created in 1962 by Public Law 87-210 to increase the size of the FSLIC
fund. The contributions were considered prepayments of premiums by members
and thus recorded as assets by them. The secondary reserve was only to be
used for losses after the primary reserve and other accounts had been
depleted. The original law and number of additional laws over the next dozen
years set various trigger points for cessation of payment to the secondary
reserve and use of the prepayments to satisfy premium requirements. Public
Law 93-495 passed in October 1974 provided for a phase-out of the secondary
reserve over ten years as long as the aggregate reserve-to-deposit ratio
remained above 1.25 percent. In 1979, the ratio fell below this point, and
payback ceased. However, members have continued to accrue interest at the
rate earned on FSLIC's investment portfolio. Thus, the secondary reserve has
increased since 1979 as a result of the accrual of nearly $600 million.
The Garn-St Germain Act of 1982 permitted FSLIC to use the secondary
reserve in the same manner as the primary reserve. Given this change, the
inadequate level of the primary reserve and the unlikely attainment of a
reserve-to-deposit ratio in excess of 1.25 percent, the Savings and Loan
Committee ("Committee") of the American Institute of Certified Public
Accountants has indicated for over a year a desire to require members to
write-down the secondary reserve account on their books.
However, the
Committee voted that the recapitalization of FSLIC together with a resolution
by the Board to (1) begin paying current interest in 1987 and (2) paying back
the $800 million accumulated reserve over 20 years beginning in 1997 would
avoid a write-down.
The failure of the 99th Congress to pass the
recapitalization has led the Committee to reevaluate their position. The
decision was made recently to defer write-down in expectation of prompt
passage of recapitalization by the 100th Congress.
The decline in total reserves from yearend 1984 to yearend 1985 was
largely the result of the Government Accounting Office's (GAO) mandated
addition of loss contingencies for cases expected to be resolved in 1986. In
order to obtain a "clean" accounting opinion, FSLIC was required to increase
its liabilities by nearly $1.6 billion. As previously mentioned, absence of
such an opinion would seriously harm our ability to access the capital
markets.
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•
The cash and investments held by FSLIC currently exceed its reserves. At
the end of 1984, cash and investments totaled $5.9 billion while total
reserves were $5.6 billion.
By the end of 1985, reserves had fallen $1
billion while cash and investments had increased by $265 million to $6.1
billion. As of the end of September 1986, cash and investments had fallen to
$4.6 billion. Currently their level is approximately $4.4 billion. It is
expected to fall to about $3 billion by yearend as cases are resolved.
Further resolutions much beyond this point would require first spending the
secondary reserve and then activating the U.S. Treasury line of credit.
Prudence calls that we not allow cash to go below $2.5 billion, for if the
GAO increases our contingency reserve, we will be in a deficit reserve
position. We could be at $2.5 billion in cash and investments very early in
1987, at which point we would have to "shut down" our case resolution
process.
5.
FSLIC Income Sources
FSLIC receives income from three major sources: (1) the regular 1/12 of
1 percent premium; (2) the special 1/8 of 1 percent assessment; and (3)
income on investments held in its portfolio. Minor sources include interest
on loans to insured institutions, interest on loans in process of liquidation
and premiums on transfers of insured accounts. Regular premiums are received
from institutions annually on the anniversary date of their insurance with
semiannual adjustments for changes in deposit levels.
Monthly receipts
during fiscal year 1986 varied from a low of $36 million in September to a
high of $81 million in November. Special assessments are received at the end
of each quarter from all institutions. All other income items are fairly
evenly distributed.
Income streams for 1984, 1985, and 1986 (actual through September,
projected for fourth quarter) and projected 1987 are shown below. Deposit
growth is projected at a rate of 2 percent per quarter.
Amounts are in
millions.
Regular premium
Special premium
Investment income
Other income
Total income
6.
1984
1985
1986
$ 596.9
-0655.3
72.8
$1325.0
$ 703.9
1010.7
489.8
183.8
$ 747.8
1085.1
364.3
196.0
$2388.2
-P
ITT-2$2393.2
1987
$ 793.4
1184.0
146.3 (at 6% yield)
244.1 (at FY86 rate)
$2367.8
Operating Losses
FSLIC and significant supervisory cases are losing massive amounts of
money every day that they remain open. Operating losses. on a daily basis are
as follows (dividing second quarter 1986 figures by 90 days):
FSLIC cases:
MCPs (50 firms)
Other (93 firms)
Significant supervisory cases (199 firms)
•
$3.0 million
1.3
1.9
Together these cases are losing over $6 million per day or nearly $2.6
billion annually as operating entities. These losses are in addition to
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•
asset write-downs and result when expenses (such as interest costs, employee
compensation, legal fees, building and equipment costs, and amortization of
goodwill) exceed interest and fees on loans and investments and income from
mortgage banking and other operations.
These operating losses can be compared to FSLIC's income discussed in
On an annual basis based on the second quarter of
the previous section.
1986, the MCP cases are losing $1,082 million, the other FSLIC cases are
losing $476 million and the supervisory cases are losing $996 million. This
total amount of $2.55 billion actually exceeds FSLIC's expected 1986 income
of $2.39 billion. Thus, without the addition of funds from recapitalization
no progress can be made.
We are merely "treading water" rather than
resolving the cases. This relationship between operating expenses and income
should put to rest any gleaming hopes on the part of some in the thrift
industry that a
pay-as-you go strategy
can
be
for
substituted
recapitalization.
7.
FSLIC's Liquidation Policies
The mission of FSLIC as a receiver of a failed institution is to
collect, liquidate at market value, and distribute the assets to creditors in
a timely fashion. FSLIC's actions are subject to scrutiny by all parties for
whom it acts as trustee. A specified process and set of procedures must be
followed by FSLIC in all cases. The fulfillment of the receivership mission,
scrutiny by other parties, and required process and procedures all constrain
the receivers from sacrificing recovery of asset values for speed of
disposition. Asset "dumping" simply does not occur.
The process of disposition of real estate assets is lengthy and complex.
The first step (which is usually accomplished within two weeks) is to
allocate assets for management and liquidation between the staff of the
receivership and the Federal Asset Disposition Association (FADA.) FADA was
chartered in November 1985 by the Bank Board and began operations in the
summer of 1986. It handles the management-intensive and distressed
The receivership staff manages marketable assets such as
properties.
single-family loans. The next step involves gaining possession of the title
to the property backing loans made by the failed institution. Appeals by the
borrower often prolong the procedure. At the same time, preliminary business
plans are developed for each asset to provide an outline of all assets within
60 days. Final detailed business plans are then developed for each asset.
These plans include in-depth local market analysis, establishment of net
realizable values based on appraisals and operating and marketing expenses,
and alternative approaches for maximizing the receiver's return. This last
step includes the analysis of such factors as extended holding periods and
debt restructuring, particularly when losses are anticipated. A strategy is
selected to produce the maximum return in the shortest timeframe taking
market conditions into account.
Asset plans are then combined and a consolidating business plan is
submitted to FSLIC for review and approval within 120 days of the takeover.
The business plan must be approved before receivership funds can be expended
for management, marketing or disposition.
•
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8.
•
FSLIC Restructuring
A number of critics have questioned the ability of FSLIC to prudently
spend the funds that recapitalization would provide. In answer to their
comments, we have engaged a management consulting firm to study the
operations and structure of FSLIC. The firm has recommended a number of
changes including earlier case resolutions, greater use of FADA, more
participation by the Federal Home Loan Banks and delegation of some merger
resolutions at the District Bank level, strengthened controls over the
receivership and asset disposition function, and the development of more
formalized planning systems, and controls at the Board level. A task force
of individuals from the Board, FSLIC and the FHLBanks has been formed to
study and implement the recommendations. These changes should enable FSLIC
to handle additional cases to provide the least cost to FSLIC.
9.
Borrowing Schedule for Financing Corporation
Under the recapitalization plan, the Financing Corporation is expected
to raise $1.5 to $3.0 billion in funds annually over five years or more for a
total of $10 to $15 billion. The amount that can be borrowed is expected to
be limited by the following factors:
Unfamiliarity of investors with a new entity - the Financing
Corporation. Despite the similarity of its bonds to those of the
Federal Home Loan Banks in terms of taxability, exemption from SEC
requirements, book entry form, etc., the instruments could not be
added to approved lists of some institutional investors immediately.
Long-term nature of borrowings.
The markets for short and intermediate term debt have exceeded that
for long term debt. Because of exposure to price risk, many entities
are not permitted to invest long term. While the Japanese have been
major purchasers of 30-year U.S. Treasury bonds and long-term agency
debt, new entity issues must be added to eligibility lists. This
process could take a number of months. Additionally, the Japanese
governments' recent decision to issue long-term debt could reduce the
market for other issuers.
The actual constraints in terms of issue size and number of issues sold
within a six-month or one-year period can not be known until the Financing
Corporation has come to market several times. Because this is a new entity
and the market for long-term debt is limited, the demand could be sporadic.
Substantial premiums to the coupons could be required to sell larger issues
or additional issues in adverse environments, making their debt very
expensive for the FSLIC.
Conclusion
•
We have attempted to lay out the current risks to the FSLIC with all
the pertinent information to demonstrate the urgent need for recapitalization
of FSLIC very early in 1987. The most immediate need is to avoid a liquidity
crisis which could result if the FHLBanks refuse to make all or a portion of
the FSLIC-guaranteed advances which are required to fund failed and failing
institutions. In addition to this risk, mounting operating losses at FSLIC
and significant supervisory cases of over $6 million a day raise the eventual
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Federal Reserve Bank of St. Louis
10
•
costs to FSLIC.
The longer period of time that elapses before money is
available to solve these cases, the greater resources will be required.
Similarly, increases in interest rates from their current historically low
levels will raise costs to the FSLIC.
Since the recapitalization plan is a borrowing plan it requires capital
market acceptance if it is to work.
Further delays before passage will
increase the concerns of investors in the ability of the thrift industry to
pay premiums sufficient to service the debt and of the strength of
Congressional support of this plan. If such uncertainty rises to the point
the bonds are considered "junk bonds," the plan could fold for two reasons:
(1) debt service costs exceed premium income and/or (2) the investor base
shrinks as those constrained to only high quality investments withdraw. The
effect of this later occurrence could be the inability to raise sufficient
amounts of debt to provide FSLIC with meaningful funds for case resolutions.
Sincerely,
aR....,..r,"•,
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,
dirirv‘AARQ
Thurman C. Conne I I
Director
Federal Savings and Loan
Insurance Corporation
•
Robert
ahadi
Direct
Offic of Policy and
Economic Research
S
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I 28 CASES
I 1E1 CASES
143 CASES
516
49.7
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12 FA5E5
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15
DECEMBER 1984
MARCH 1986
DATE
JUNE 1986
OCTOBER 1986
•
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*Total pending request for FSLIC guaranteed
advances were about $3.6 billion as of Nov.,
I 986.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
TOTAL RESERVES
ADVANCES OUTSTANDING
MEIVEN OM Olt DMIXC
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TYPE OF PROBLEM
(I) MAY INCLUDE SOME DIRECT INVESTME
NTS
(2) INCLUDES DIRECT INVESTMENTS
•
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COM A MID VC) OPERA VXGV
CURRENT
MILLIONS OF DOLLARS
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$2,T1
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MILLION
$2,554 MILLION
OTHER INCOME
$196 MILLION
2000
INVESTMENT INCOME $36L-1 MILLION
SPECIAL PREMIUM INC.
$1,0E35 MILLION
500
REGULAR PREMIUM INC.
$748 MILLION
FSLIC INCOME
FINANCIAL DATA AS OF JUNE 30, 1986
FSLIC CASELOAD AS OF OCTOBER 31, 1986
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SIGNIFICANT
SUPERVISORY CASES
$995 MILLION
NON -MCP FSLIC CASES
$476 MILLION
FSLIC MCP CASES
$1,082 MILLION
FSLIC CASE OPERATING LOSSES
ANNUALIZED SECOND QUARTER LOSSES
a
a
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1700 G Street, N.W.
Washington, D.C. 20552
•
Federal Home Loan Bank Board
11111
Federal Home Loan Bank System
F•deral Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
MEMORANDUM
FROM:
Prian M. Neubek0
2 16(1161-4VA,
Deputy Director, FSLIC
TO:
Shannon Fairbanks
Chief of Staff
January 8, 1987
SUBJ:
Guaranteed Advances
Attached for your information are a series of reports as of January 2, 1987
regarding FHLBank advances guaranteed by the FSLIC. The reports were prepared
by the FSLIC's Financial Assistance Division and are updated and distributed
on a weekly basis. We will include you on all subsequent distribution of the
reports.
The following is a brief description of each report included in this submission:
•
1.
The Guaranteed Advance Report - This report lists all institutions
with guarantees. MCP cases and guaranteed advances remaining in
liquidating receiverships are highlighted. The collateral information was reported by the District Banks. Ineligible collateral
market value is assumed to be 50 percent of book value unless the
Banks report otherwise. A negative number in the collateral
deficiency column indicates excess collateralization. Total
guaranteed advances outstanding as of 1/2/87 was $3.595 billion.
2.
Guaranteed advance totals by district.
3.
MCP related guaranteed advance totals by district. Total guaranteed advances to MCP institutions is $2.839 billion.
4.
Pending guaranteed advance requests.
5.
Collateral deficiencies, book value basis.
6.
Collateral deficiencies, market value basis.
7.
Chart comparing total guaranteed advances outstanding to the total
reserves of the FSLIC fund from March, 1985 to January, 1987.
This amount was $2.026 billion.
The true basis of the FSLIC's exposure are the collateral deficiencies. As
shown on Report No. 6, that deficiency was $2.0 billion as of January 2,
1987. Efforts are underway between the Banks and the FSLIC to better ensure
collateral of all types is perfected in all instances.
Attachments
cc:
•
Thurman C. Connell, Director, FSLIC
Dexter Bell, Deputy Chief of Staff
Robert Sahadi, Director, OPER
Gerald B. Stanton, Director, FAD
Al Heck, CFAO, FSLIC
James A. Meyer, FAD
Emil Rossman, FAD
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES
PAGE 1
LP].
MCP RECV.
1/6927
ASSOCIATION/
CITY, ST
EFFECTIVE
DATE
COLUMBIA FED SB
WESTPORT, CT
08/18/86
DISTRICT
1 SUBTOTALS (
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:53:12
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
30,000
0
0
0
0
0
0
0
0
0
0
1):
30,000
0
0
0
0
0
0
0
0
0
0
2/5266
FIRST FSB OF PR
SANTURCE, PR
03/31/82
33,000
0
0
.43,333
43,333
161,587
164,214
0
0
- 118,254
- 120,881
2/3800
FIRST NATIONWIDE
SAN FRANCISCO, CA
06/08/82
110,000
110,000
110,000
395,500
505,500
1,012,517
896,255
0
0
- 507,017
- 390,755
143,000
110,000
110,000
438,833
548,833
1,174,104
1,060,469
0
0
- 625,271
- 511,636
DISTRICT
2 SUBTOTALS ( 2):
4/4144
MCP
1ST FED OF MD FSA
HAGERSTOWN, MD
03/28/86
30,000
23,000
23,000
9,000
32,000
26,146
25,019
13,955
6,978
- 8,101
3
4/8329
MCP
BEACH FS&LA
BOYNTON BEACH, FL
09/19/86
75,000
0
0
0
0
0
0
0
0
0
0
COMMUNITY FSLA
NEWPORT NEWS, VA
04/29/82
1,500
800
500
0
500
621
617
0
0
- 121
- 117
COMMUNITY FSLA
TAMPA, FL
05/13/85
6,000
4,959
4,959
0
4,959
6,197
5,709
4,774
2,387
- 6,012
- 3,137
FIRST FSLA
KEY WEST, FL
08/09/84
120,000
100,000
44,471
2,650
47,121
63,608
59,261
0
0
- 16,487
- 12,140
4/3800
FIRST NATIONWIDE
SAN FRANCISCO, CA
06/08/82
110,000
110,000
110,000
355,140
465,140
659,980
458,890
0
0
- 194,840
6,250
4/2559
FREEDOM FSLA
TAMPA, FL
11/17/86
250,000
71,000
71,000
215,000
286,000
416,612
307,780
150,763
75,382
- 281,375
- 97,162
4/6969
GULF FSLA
MOBILE, AL
02/13/85
3,000
0
0
0
0
875
863
255
128
- 1,130
- 991
NEW METROPLTN FSLA
HIALEAH, FL
08/29/86
15,000
3,910
3,910
2,000
5,910
5,732
5,347
2,388
1,194
- 2,210
- 631
4/6359
PICKENS SLA
PICKENS, SC
05/21/84
50,000
44,000
3,000
300
3,300
14,555
13,213
0
0
- 11,255
- 9,913
4/8259
TRANS SUNRISE FSLA
BOYNTON BEACH, FL
07/09/85
25,000
25,000
25,000
62,550
87,550
161,141
159,810
264,235
132,118
- 337,826
- 204,378
1 1/19/83
125,000
125,000
27,000
0
27,000
43,527
40,944
0
0
- 16,527
- 13,944
810,500
507,669
312,840
646,640
959,480
1,398,994
1,077,453
436,370
218,187
- 875,884
- 336,160
5,836
5,836
5,836
0
5,836
6,705
4,741
0
0
- 869
1,095
4/7567
lilliii
4/8331
MCP
4/5298
SURETY FSLA
MORGANTON, NC
DISTRICT
5/5888
•
4 SUBTOTALS ( 12):
TRANS MAJOR FSLA
CINCINNATI, OH
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
10/21/85
N
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES
PAGE 2
LIO.
MCP RECV.
ASSOCIATION/
CITY, ST
EFFECTIVE
DATE
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:53:36
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
411111
DISTRICT
6/8271
MCP
5 SUBTOTALS (
REGENCY SB, FSB
ANN ARBOR, MI
.
DISTRICT
1):
5,836
5,836
5,836
0
5,836
6,705
4,741
0
0
- 869
1,095
11/27/85
50,000
23,000
23,000
13,000
36,000
67,243
64,150
30,126
13,498
- 61,369
- 41,648
50,000
23,000
23,000
13,000
36,000
67,243
64,150
30,126
13,498
- 61,369
- 41,648
6 SUBTOTALS ( 1):
7/7165
MCP
FIRST AMERICAN SLA
OAK BROOK, IL
05/02/86
9,100
500
500
2,250
2,750
14,051
7,026
0
0
- 11,301
- 4,276
7/2831
MCP
FIRST FSLA
FREEPORT, IL
05/21/85
10,000
5,000
3,000
9,000
12,000
17,455
8,728
0
0
- 5,455
3,272
7/6407
MCP
LIFE SVGS OF AMER
ROCKFORD, IL
09/18/86
38,442
3,000
0
73,225
73,225
91,705
45,853
0
0
- 18,480
27,372
7/8346
MCP
REPBLC SVGS, A FSLA
S.BELOIT, IL
10/03/86
14,095
0
0
0
0
0
0
0
0
0
0
71,637
8,500
3,500
84,475
87,975
123,211
61,607
0
0
- 35,236
26,368
DISTRICT
7 SUBTOTALS ( 4):
8' 079
MCP
BOHEMIAN SLA
ST LOUIS, MO
01/31/86
40,000
20,400
20,400
17,550
37,950
45,931
52,960
0
0
- 7,981
- 15,010
8
MCP
CAPITOL SLA, A FSLA
MT PLEASANT, IA
02/21/86
20,000
5,000
5,000
59,800
64,800
77,883
75,963
0
0
- 13,083
- 11,163
60,000
25,400
25,400
77,350
102,750
123,814
128,923
0
0
- 21,064
- 26,173
DISTRICT
9/6120
9/8291
MCP
9/7918
8 SUBTOTALS ( 2):
ALAMO SA
SAN ANTONIO, TX
10/03/86
250,000
0
0
162,500
162,500
261,900
207,500
0
0
- 99,400
- 45,000
ALLENPARK FSLA
HOUSTON, TX
04/04/86
350,000
180,000
180,000
42,000
222,000
70,200
45,900
0
0
151,800
176,100
BAYOU FSLA
NEW ORLEANS, LA
06/10/86
10,000
1,000
1,000
1,600
2,600
4,100
3,800
0
0
- 1,500
- 1,200
9/7226
MCP
BEN MILAM SLA
CAMERON, TX
03/14/86
90,000
90,000
90,000
0
90,000
2,500
2,500
0
0
87,500
87,500
9/8273
MCP
BROWNFIELD FSLA
BROWNFIELD, TX
12/20/85
4,000
0
0
0
0
4,700
4,300
0
0
- 4,700
- 4,300
TRANS CRESCENT FSB
NEW ORLEANS, LA
01/08/86
1,000
1,000
1,000
3,100
4,100
8,000
7,500
16,200
8,100
- 20,100
- 11,500
9/7850
9/7518
FIRST BANC FSB
GONZALES, LA
11/17/86
10,000
0
0
14,000
14,000
19,000
15,600
0
0
- 5,000
- 1,600
9/2360
FIRST FSLA
NATCHITOCHES, LA
03/10/86
4,000
3,000
3,000
12,600
15,600
14,900
14,900
0
0
700
700
•
https://fraser.stlouisfed.org
0
Federal Reserve Bank of St. Louis
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES
PAGE 3
0
LIO.
MCP RECV.
ASSOCIATION/
CITY, ST
EFFECTIVE
DATE
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:54:00
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
FIRST SA EAST TEXAS
HOUSTON, TX
11/17/86
25,000
0
0
0
0
0
0
0
0
0
0
9/6483
FIRST SLA
BURKBURNETT, TX
06/02/84
250,000
250,000
247,000
13,000
260,000
30,100
24,500
0
0
229,900
235,500
9/7460
GOLDEN TRIANGLE SLA
HOUSTON, TX
10/15/85
10,000
2,500
2,500
2,000
4,500
3,400
2,200
0
0
1,100
2,300
9
9/8357
MCP
GULF FSLA
METAIRIE, LA
11/21/86
75,000
5,000
5,000
127,200
132,200
154,400
139,100
0
0
- 22,200
- 6,900
9/8241
MCP
HEIGHTS SA, FSA
HOUSTON, TX
09/06/85
50,000
30,000
30,000
43,800
73,800
77,700
65,500
0
0
- 3,900
8,300
9/8270
MCP
HI -PLAINS SLA
HEREFORD, TX
11/26/85
35,000
32,000
32,000
0
32,000
18,700
14,800
0
0
13,300
17,200
9/8299
MCP
HORIZON FSLA
BATON ROUGE, LA
01/03/86
100,000
0
0
0
0
11,900
11,000
0
0
- 11,900
- 11,000
01/03/86
63,000
63,000
63,000
30,600
93,600
91,800
33,800
118,000
59,000
- 116,200
800
MERCURY SLA
WICHITA FALLS, TX
03/14/86
345,000
310,000
310,000
35,000
345,000
36,800
35,600
0
0
308,200
309,400
RANCHERS SA
JOHNSON CITY, TX
09/19/86
30,000
14,000
14,000
13,000
27,000
33,200
24,800
16,700
83,500
- 22,900
- 81,300
9/5199
9/6505
TRANS MAINLAND SA
HOUSTON, TX
MCP
9/7821
9, 356
MCP
RIVERSIDE FSLA
PINE BLUFF, AK
12/04/86
200,000
0
0
0
0
0
0
0
0
0
0
4
MCP
STATE FSLA
LUBBOCK, TX
12/20/85
532,000
229,000
229,000
13,000
242,000
20,600
13,700
0
0
221,400
228,300
9/8335
MCP
WESTERN FSLA
DALLAS, TX
09/12/86
325,000
325,000
325,000
50,000
375,000
94,900
58,300
317,900
158,950
- 37,800
157,750
2,759,000
1,535,500
1,532,500
563,400
2,095,900
958,800
725,300
468,800
309,550
668,300
1,061,050
DISTRICT
10/
9 SUBTOTALS ( 21):
FED ASSET DISP ASSN
DENVER, CO
07/15/86
50,000
850
850
0
850
0
0
0
0
850
850
10/8355
MCP
FIRST SECURITY FSLA
GRAND JUNCTION, CO
11/21/86
15,000
4,300
4,300
3,650
7,950
7,282
8,071
0
0
668
- 121
10/1541
MCP
VALLEY FSLA
GRAND JUNCTION, CO
05/02/86
10,000
5,000
5,000
38,200
43,200
60,335
54,939
0
0
- 17,135
- 11,739
VICTOR FSLA
MUSKOGEE, OK
12/30/86
100,000
5,000
5,000
85,150
90,150
177,837
6,351
0
0
- 87,687
83,799
175,000
15,150
15,150
127,000
142,150
245,454
69,361
0
0
- 103,304
72,789
508,000
483,230
483,230
0
483,230
1,108
589
61,550
30,775
420,572
451,866
10/4155
DISTRICT 10 SUBTOTALS ( 4):
11/7726
MCP
AMER DIVERSIFIED
L001, CA
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
02/14/86
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES
PAGE 4
LIO.
MCP RECV.
ASSOCIATION/
CITY, ST
EFFECTIVE
DATE
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:54:24
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
240
MCP
BELL SLA, A FSLA
SAN MATEO, CA
09/10/85
365,000
116,200
99,000
4,000
103,000
308,020
213,330
0
0
- 205,020
- 110,330
11/8257
MCP
BEV HLS SLA,A FSLA
BEVERLY HILLS, CA
04/24/85
750,000
750,000
586,584
109,236
695,820
491,127
289,755
290,884
145,442
- 86,191
260,623
11/8239
MCP
BUTTERFIELD SLA
SANTA ANA, CA
08/07/85
75,000
25,000
25,000
0
25,000
50,750
31,527
1,620
810
- 27,370
- 7,337
11/8351
MCP
CAL AMERICA SLA
WALNUT CREEK, CA
09/19/86
90,000
15,000
15,000
14,500
29,500
55,748
29,370
0
0
- 26,248
130
CAMINO REAL SLA
SAN FERNANDO, CA
02/11/85
75,000
75,000
7,085
6,500
13,585
42,312
19,776
0
0
- 28,727
- 6,191
1
11/7244
11/8234
MCP
CENTENNIAL SLA
GUERNEVILLE, CA
08/20/85
10,000
0
0
0
0
11,602
5,634
8
0
- 11,610
- 5,634
11/6186
MCP
CENTRAL SLA
SAN DIEGO, CA
05/17/84
700,000
600,000
128,333
11,667
140,000
548,968
346,978
121,780
60,890
- 530,748
- 267,868
CITY FSLA
OAKLAND, CA
06/01/84
10,000
10,000
0
0
0
13,262
5,498
0
0
- 13,262
- 5,498
8,352
50
8,402
30,207
15,103
0
0
- 21,805
- 6,701
8,000
0
8,000
96,042
69,586
0
0
- 88,042
- 61,586
11/7347
11/7633
MCP
COLUMBUS SLA
SAN RAFAEL, CA
03/21/86
25,000
8,352
11/7563
MCP
EQUITABLE SLA
SAN MATEO, CA
07/31/86
25,000
0
1
268
MCP
EUREKA FSLA
SAN CARLOS, CA
11/17/86
465,000
0
1111111k8
MCP
FARMERS SB, FSLA
DAVIS, CA
12/02/85
70,000
29,000
11/8315
MCP
FLAGSHIP FSLA
SAN DIEGO, CA
07/18/86
100,000
0
11/7353
MCP
FOUNDERS SLA
LOS ANGELES, CA
09/24/86
50,000
10,000
10,000
0
10,000
21,251
10,387
0
0
- 11,251
- 387
11/7799
MCP
GATEWAY SB
SAN FRANCISCO, CA
12/06/85
50,000
6,000
6,000
0
6,000
14,109
7,054
0
0
- 8,109
- 1,054
11/7505
MCP
HOMESTATE SLA
HAYWARD, CA
09/24/86
15,000
0
0
0
0
9,216
8,710
0
0
- 9,216
- 8,710
11/7998
MCP
MANHATTAN BEACH SLA
MANHATTAN BEACH, CA
01/23/86
5,000
2,000
2,000
0
2,000
4,585
2,292
0
0
- 2,585
- 292
11/7798
MCP
MT.WHITNEY SLA
EXETER, CA
02/12/86
18,600
14,500
14,500
0
14,500
8,174
3,799
7,104
3,552
- 778
7,149
11/8350
MCP
RAMONA SLA, A FSLA
FILLMORE, CA
09/12/86
10,000
10,000
10,000
0
10,000
0
0
0
0
10,000
10,000
11/6875
MCP
SECURITY SLA
SCOTTSDALE, AZ
05/30/86
100,000
15,000
15,000
30,000
45,000
125,708
74,030
63,672
31,836
- 144,380
- 60,866
11/8258
MCP
SO CAL FSLA
BEVERLY HILLS, CA
06/07/85
600,000
100,000
0
90,000
90,000
294,412
123,618
909
455
- 205,321
- 34,073
TAHOE SLA
SO LAKE TAHOE, CA
01/02/86
2,000
800
800
0
800
9,708
4,373
0
0
- 8,908
- 3,573
11/6967
111
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES
PAGE 5
LIO.
MCP RECV.
11/8352
MCP
11/7358
11/7611
MCP
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:54:50
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
ASSOCIATION/
CITY, ST
EFFECTIVE
DATE
UNIFIED SVGS,FSLA
NORTHRIDGE, CA
10/10/86
10,000
0
0
0
0
0
0
0
0
0
0
UNITED SB
SAN FRANCISCO, CA
03/21/86
100,000
0
0
10,000
10,000
124,056
57,871
0
0
- 114,056
- 47,871
WESTWOCO SLA
LOS ANGELES, CA
03/28/86
35,000
30,000
30,000
41,177
71,177
153,333
47,532
16,716
8,358
- 98,872
15,287
4,263,600
2,300,082
1,448,884
317,130
1,766,014
2,413,698
1,366,812
70,000
44,925
44,925
23,420
68,345
42,881
41,850
41,183
20,592
- 15,719
5,903
DISTRICT 11 SUBTOTALS ( 26):
564,243 - 1,211,927
282,118
117,084
12/8272
MCP
CITIZENS SLA, A FSLA 07/12/85
SALEM, OR
12/8243
MCP
FREEDOM FSLA
CORVALLIS, OR
12/05/85
200,000
80,000
50,000
10,000
60,000
31,229
33,750
62,751
31,376
- 33,980
- 5,126
12/5393
HOME SLA
SEATTLE, WA
11/01/85
20,000
5,000
5,000
42,276
47,276
65,157
67,498
239
120
- 18,120
- 20,342
12/7725
PEOPLES SLA
LAGRANDE, OR
12/01/85
5,000
2,800
2,800
3,775
6,575
7,343
7,032
1,144
572
- 1,912
- 1,029
TRANS STATE FSLA
CORVALLIS, OR
09/03/85
1,000
1,000
1,000
0
1,000
0
0
3,172
1,586
- 2,172
- 586
SUMMIT SLA
PARK CITY, UT
04/15/86
50,000
14,000
14,000
24,000
38,000
39,166
20,000
17,193
8,597
- 18,359
9,403
346,000
147,725
117,725
103,471
221,196
185,776
170,130
125,682
62,843
- 90,262
- 11,777
8,714,573
4,678,862
3,594,835
2,371,299
5,966,134
6,697,799
4,728,946
12/6793
12/7698
MCP
1111111
DISTRICT 12 SUBTOTALS ( 6):
GRAND TOTALS ( 80):
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1,625,221 - 2,356,886
886,196
350,992
DEFINITIONS
•
Number of Associations
The total number of associations participating in the GUarantee Advance Program
within each Federal Hame Loan Bank.
Coverage Limit
The aggregate total of guaranteed advances for each institution listed cannot
exceed the figure shown. In each case, a Bank Board resolution has established
this cap.
Approval Level
A cap established by FSLIC, but always less than the Bank Board's resolution
cap. Within this cap, the institution's Federal Hame Loan Bank may make
advances guaranteed by FSLIC. The aggregate amount of approved coverage may
not exceed the maximum coverage.
GUaranteed Advances Outstanding
The existing aggregate amount of FSLIC guaranteed advances granted to an
institution by its Federal Home Loan Bank's credit department on a weekly
basis.
•
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a
LA.,
a
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CT1VE GUARANTEED ADVANCES
STRICT
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
1111/V
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:56:55
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
BANK
NUMBER
OF
ASSOC'S
BOSTON
1
30,000
0
0
0
0
0
0
0
0
0
0
2
NEW YORK
2
143,000
110,000
110,000
438,833
548,833
1,174,104
1,060,469
0
0
- 625,271
- 511,636
4
ATLANTA
12
810,500
507,669
312,840
646,640
959,480
1,398,994
1,077,453
436,370
218,187
- 875,884
- 336,160
5
CINCINNATI
1
5,836
5,836
5,836
0
5,836
6,705
4,741
0
0
- 869
1,095
6
INDIANAPOLIS
1
50,000
23,000
23,000
13,000
36,000
67,243
64,150
30,126
13,498
- 61,369
- 41,648
7
CHICAGO
4
71,637
8,500
3,500
84,475
87,975
123,211
61,607
0
0
- 35,236
26,368
8
DES MOINES
2
60,000
25,400
25,400
77,350
102,750
123,814
128,923
0
0
- 21,064
- 26,173
LIQ.
DISTRICT MCP RECV.
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
•
DALLAS
21
2,759,000
1,535,500
1,532,500
563,400
2,095,900
958,800
725,300
468,800
309,550
668,300
1,061,050
10
TOPEKA
4
175,000
15,150
15,150
127,000
142,150
245,454
69,361
0
0
- 103,304
72,789
11
SAN FRANCISCO
26
4,263,600
2,300,082
1,448,884
317,130
1,766,014
2,413,698
1,366,812
12
SEATTLE
6
346,000
147,725
117,725
103,471
221,196
185,776
170,130
80
8,714,573
4,678,862
3,594,835
2,371,299
5,966,134
6,697,799
4,728,946
GRAND TOTALS:
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
564,243 - 1,211,927
282,118
117,084
125,682
62,843
- 90,262
- 11,777
1,625,221 - 2,356,886
886,196
350,992
a
b
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
st.
NLY GUARANTEED ADVANCES
TRICT
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
111111/IS
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 15:58:22
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
BANK
NUMBER
OF
ASSOC'S
ATLANTA
3
120,000
26,910
26,910
11,000
37,910
31,878
30,366
16,343
8,172
- 10,311
- 628
INDIANAPOLIS
1
50,000
23,000
23,000
13,000
36,000
67,243
64,150
30,126
13,498
- 61,369
- 41,648
7
CHICAGO
4
71,637
8,500
3,500
84,475
87,975
123,211
61,607
0
0
- 35,236
26,368
8
DES MOINES
2
60,000
25,400
25,400
77,350
102,750
123,814
128,923
0
0
- 21,064
- 26,173
9
DALLAS
11
2,106,000
1,201,000
1,201,000
311,000
1,512,000
492,400
390,700
317,900
158,950
701,700
962,350
10
TOPEKA
2
25,000
9,300
9,300
41,850
51,150
67,617
63,010
0
0
- 16,467
- 11,860
11
SAN FRANCISCO
22
4,076,600
2,214,282
1,440,999
300,630
1,741,629
2,224,360
1,279,294
3
320,000
138,925
108,925
57,420
166,345
113,276
95,600
121,127
60,565
- 68,058
10,180
48
6,829,237
3,647,317
2,839,034
896,725
3,735,759
3,243,799
2,113,650
1,049,739
523,303
- 557,779
1,098,806
LIQ.
DISTRICT MCP RECV.
4
6
•
.
SEATTLE
GRAND TOTALS:
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
564,243 - 1,046,974
282,118
180,217
C
II
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
NG REQUESTS FOR
NTEED ADVANCES
111111 1
DIST/
DOCKET
2/6465
4/4144
LIO.
MCP RECV.
MCP
MCP
ASSOCIATION/
CITY, ST
EFFECTIVE COVERAGE
DATE/
LIMIT/
REQUEST APPROVED/
DATE
REQUESTED
1ST FED OF MD FSA
HAGERSTOWN, MD
25,000
03/28/86
30,000
23,000
15,000
11/20/86
4/7731
MCP
9/0218
9/8274
MCP
416
MCP
STATE FSLA
LUBBOCK, TX
MCP
WESTERN FSLA
DALLAS, TX
32,000
AMER DIVERSIFIED
LODI, CA
MCP
BEV HLS SLA,A FSLA
BEVERLY HILLS, CA
11/7957
RAMONA SLA, A FSLA
FILLMORE, CA
0
0
0
0
0
0
0
0
229,000
13,000
242,000
20,600
13,700
0
0
221,400
228,300
325,000
325,000
500,000
325,000
50,000
375,000
94,900
58,300
317,900
158,950
- 37,800
157,750
508,000
483,230
150,000
483,230
0
483,230
1,108
589
61,550
30,775
420,572
451,866
750,000
750,000
500,000
586,584
109,236
695,820
491,127
289,755
290,884
145,442
- 86,191
260,623
09/12/86
02/14/86
04/24/85
0
09/25/86
32,700
09/12/86
10,000
10,000
10,000
10,000
0
10,000
0
0
0
0
0
0
0
10/24/86
GRAND TOTALS ( 12):
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
0
121,000
FUTURE SLA
ALBANY, OR
•
- 8,101
3
532,000
229,000
318,000
12/18/86
12/7759
13,955
6,978
15,000
NORTH AMERICAN SLA
SANTA ANA, CA
MCP
26,146
25,019
12/20/85
08/29/86
11/8350
9,000
9,000
9,000
330,000
12/22/86
MCP
COLLATERAL
DEFICIENCY
10/23/86
10/30/86
11/8257
9,000
LAMAR SA
AUSTIN, TX
10/02/86
9/8335
23,000
9,000
CITY SLA
SAN ANGELO, TX
10/23/86
INELIGIBLE
COLLATERAL
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
BRICKELLBANC SA
MIAMI, FL
12/03/86
9/6119
ELIGIBLE
COLLATERAL
TRI-COUNTY SLA
CAMDEN, NJ
12/12/86
REPORT DATE: 01/07/87 15:59:38
DISTRICT BANK REPORTS AS OF: 01/02/87
10,000
10,000
0
0
10,000
2,155,000
1,820,230
2,026,700
1,656,814
190,236
1,847,050
633,881
387,363
684,289
342,145
528,880
1,117,542
cn
II
6
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ALL ACTIVE GUARANTEED ADVANCES
WITH BOOK VALUE COLLATERAL DEFICITS
PAGE 1
LIO.
MCP RECV.
ASSOCIATION/
CITY, ST
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
EFFECTIVE
DATE
COVERAGE
LIMIT/
APPROVAL
LEVEL
REPORT DATE: 01/07/87 16:00:47
DISTRICT BANK REPORTS AS OF: 01/02/87
ELIGIBLE
COLLATERAL
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
GUARANTEED
OTHER
TOTAL
ADVANCES
ADVANCES
ADVANCES BOOK VALUE/ BOOK VALUE/ BOOK VALUE/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET FAIR MARKET FAIR MARKET
9/8291
MCP
ALLENPARK FSLA
HOUSTON, TX
04/04/86
350,000
180,000
180,000
42,000
222,000
70,200
45,900
0
0
151,800
176,100
9/7226
MCP
BEN M1LAM SLA
CAMERON, TX
03/14/86
90,000
90,000
90,000
0
90,000
2,500
2,500
0
0
87,500
87,500
9/2360
FIRST FSLA
NATCHITOCHES, LA
03/10/86
4,000
3,000
3,000
12,600
15,600
14,900
14,900
0
0
700
700
9/6483
FIRST SLA
BURKBURNETT, TX
06/02/84
250,000
250,000
247,000
13,000
260,000
30,100
24,500
0
0
229,900
235,500
9/7460
GOLDEN TRIANGLE SLA
HOUSTON, TX
10/15/85
10,000
2,500
2,500
2,000
4,500
3,400
2,200
0
0
1,100
2,300
9/8270
MCP
HI -PLAINS SLA
HEREFORD, TX
11/26/85
35,000
32,000
32,000
0
32,000
18,700
14,800
0
0
13,300
17,200
9/6505
MCP
MERCURY SLA
WICHITA FALLS, TX
03/14/86
345,000
310,000
310,000
35,000
345,000
36,800
35,600
0
0
308,200
309,400
9/8274
MCP
STATE FSLA
LUBBOCK, TX
12/20/85
532,000
229,000
229,000
13,000
242,000
20,600
13,700
0
0
221,400
228,300
1,616,000
1,096,500
1,093,500
117,600
1,211,100
197,200
154,100
0
0
1,013,900
1,057,000
DISTRICT
10/8355
MCP
9 SUBTOTALS ( 8):
FED ASSET DISP ASSN
DENVER, CO
07/15/86
50,000
850
850
0
850
0
0
0
0
850
850
FIRST SECURITY FSLA
GRAND JUNCTION, CO
11/21/86
15,000
4,300
4,300
3,650
7,950
7,282
8,071
0
0
668
- 121
65,000
5,150
5,150
3,650
8,800
7,282
8,071
0
0
1,518
729
DISTRICT 10 SUBTOTALS ( 2):
11/7726
MCP
AMER DIVERSIFIED
L001, CA
02/14/86
508,000
483,230
483,230
0
483,230
1,108
589
61,550
30,775
420,572
451,866
11/8350
MCP
RAMONA SLA, A FSLA
FILLMORE, CA
09/12/86
10,000
10,000
10,000
0
10,000
0
0
O
0
10,000
10,000
518,000
493,230
493,230
0
493,230
1,108
589
61,550
30,775
430,572
461,866
2,199,000
1,594,880
1,591,880
121,250
1,713,130
205,590
162,760
61,550
30,775
DISTRICT 11 SUBTOTALS (
2):
GRAND TOTALS ( 12):
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
lb
e
6
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
REPORT
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
DISTRICT BANK
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES WITH
ELIGIBLE
FAIR MARKET VALUE COLLATERAL DEFICITS
COVERAGE
COLLATERAL
PAGE 1
GUARANTEED
OTHER
LIMIT/
TOTAL
ADVANCES
ADVANCES
LIO.
EFFECTIVE APPROVAL
ADVANCES BOOK VALUE/
ASSOCIATION/
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET
DATE
LEVEL
CITY, ST
MCP RECV.
1111111
4/4144
MCP
4/3800
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
BOOK VALUE/ BOOK VALUE/
FAIR MARKET FAIR MARKET
1ST FED OF MD FSA
HAGERSTOWW, MD
03/28/86
30,000
23,000
23,000
9,000
32,000
26,146
25,019
13,955
6,978
- 8,101
3
FIRST NATIONWIDE
SAN FRANCISCO, CA
06/08/82
110,000
110,000
110,000
355,140
465,140
659,980
458,890
0
0
- 194,840
6,250
140,000
133,000
133,000
364,140
497,140
686,126
483,909
13,955
6,978
- 202,941
6,253
5,836
5,836
5,836
0
5,836
6,705
4,741
0
0
- 869
1,095
5,836
5,836
5,836
0
5,836
6,705
4,741
0
0
- 869
1,095
DISTRICT
4 SUBTOTALS ( 2):
TRANS MAJOR FSLA
CINCINNATI, OH
5/5888
DATE: 01/07/87 16:01:17
REPORTS AS OF: 01/02/87
DISTRICT
10/21/85
5 SUBTOTALS (
1):
7/2831
MCP
FIRST FSLA
FREEPORT, IL
05/21/85
10,000
5,000
3,000
9,000
12,000
17,455
8,728
0
0
- 5,455
7/6407
MCP
LIFE SVGS OF AmER
ROCKFORD, IL
09/18/86
38,442
3,000
0
73,225
73,225
91,705
45,853
0
0
- 18,480
27,372-
48,442
8,000
3,000
82,225
85,225
109,160
54,581
0
0
- 23,935
.3;coo
DISTRICT
7 SUBTOTALS ( 2):
3
iC/5°
101
MCP
ALLENPARK FSLA
HOUSTON, TX
04/04/86
350,000
180,000
180,000
42,000
222,000
70,200
45,900
0
0
151,800
176,100
9/7226
MCP
BEN MILAN SLA
CAMERON, TX
03/14/86
90,000
90,000
90,000
0
90,000
2,500
2,500
0
0
87,500
87,500
9/2360
FIRST FSLA
NATCHITOCHES, LA
03/10/86
4,000
3,000
3,000
12,600
15,600
14,900
14,900
0
0
700
700
9/6483
FIRST SLA
BURKBURNETT, TX
06/02/84
250,000
250,000
247,000
13,000
260,000
30,100
24,500
0
0
229,900
235,500
9/7460
GOLDEN TRIANGLE SLA
HOUSTON, TX
10/15/85
10,000
2,500
2,500
2,000
4,500
3,400
2,200
0
0
1,100
2,300
9/8241
MCP
HEIGHTS SA, FSA
HOUSTON, TX
09/06/85
50,000
30,000
30,000
43,800
73,800
77,700
65,500
0
0
- 3,900
8,300
9/8270
MCP
HI -PLAINS SLA
HEREFORD, TX
11/26/85
35,000
32,000
32,000
0
32,000
18,700
14,800
0
0
13,300
17,200
01/03/86
63,000
63,000
63,000
30,600
93,600
91,800
33,800
118,000
59,000
- 116,200
800
TRANS MAINLAND SA
HOUSTON, TX
9/5199
9/6505
MCP
MERCURY SLA
WICHITA FALLS, TX
03/14/86
345,000
310,000
310,000
35,000
345,000
36,800
35,600
0
0
308,200
309,400
9/8274
MCP
STATE FSLA
LUBBOCK, TX
12/20/85
532,000
229,000
229,000
13,000
242,000
20,600
13,700
0
0
221,400
228,300
9/8335
MCP
WESTERN FSLA
DALLAS, TX
09/12/86
325,000
325,000
325,000
50,000
375,000
94,900
58,300
317,900
158,950
- 37,800
157,750
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
REPORT
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
DISTRICT RANK
FINANCIAL ASSISTANCE DIVISION
GUARANTEED ADVANCES REPORT
000'S OMITTED
ALL ACTIVE GUARANTEED ADVANCES WITH
ELIGIBLE
FAIR MARKET VALUE COLLATERAL DEFICITS
COLLATERAL
COVERAGE
PAGE 2
TOTAL
OTHER
GUARANTEED
LIMIT/
ADVANCES BOOK VALUE/
ADVANCES
ADVANCES
EFFECTIVE APPROVAL
ASSOCIATION/
LIO.
OUTSTANDING OUTSTANDING OUTSTANDING FAIR MARKET
LEVEL
DATE
CITY, ST
MCP RECV.
DISTRICT
9 SUBTOTALS ( 11):
DATE: 01/07/87 16:01:39
REPORTS AS OF: 01/02/87
INELIGIBLE
COLLATERAL
COLLATERAL
DEFICIENCY
BOOK VALUE/ BOOK VALUE/
FAIR MARKET FAIR MARKET
2,054,000
1,514,500
1,511,500
242,000
1,753,500
461,600
311,700
435,900
217,950
856,000
1,223,850
850
850
10/
FED ASSET DISP ASSN
DENVER, CO
07/15/86
50,000
850
850
0
850
0
0
0
0
10/4155
VICTOR FSLA
MUSKOGEE, OK
12/30/86
100,000
5,000
5,000
85,150
90,150
177,837
6,351
0
0
- 87,687
""8g-7242..
5,ooo
DISTRICT 10 SUBTOTALS ( 2):
150,000
5,850
5,850
85,150
91,000
177,837
6,351
0
0
- 86,837
---84,44.2.
5,6-50
11/7726
MCP
AMER DIVERSIFIED
LODI, CA
02/14/86
508,000
483,230
483,230
0
483,230
1,108
589
61,550
30,775
420,572
451,866
11/825'
MCP
BEV HLS SLA,A FSLA
BEVERLY HILLS, CA
04/24/85
750,000
750,000
586,584
109,236
695,820
491,127
289,755
290,884
145,442
- 86,191
260,623
11/8351
MCP
CAL AMERICA SLA
WALNUT CREEK, CA
09/19/86
90,000
15,000
15,000
14,500
29,500
55,748
29,370
0
0
- 26,248
130
11/77E
MCP
MT.WHITNEY SLA
EXETER, CA
02/12/86
18,600
14,500
14,500
0
14,500
8,174
3,799
7,104
3,552
- 778
7,149
11/8350
MCP
RAMONA SLA, A FSLA
FILLMORE, CA
09/12/86
10,000
10,000
10,000
0
10,000
0
0
0
0
10,000
10,000
Ilk
MCP
WESTWOCO SLA
LOS ANGELES, CA
03/28/86
35,000
30,000
30,000
41,177
71,177
153,333
47,532
16,716
8,358
- 98,872
15,287
1,411,600
1,302,730
1,139,314
164,913
1,304,227
709,490
371,045
376,254
188,127
218,483
745,055
DISTRICT 11 SUBTOTALS ( 6):
12/82-2
MCP
CITIZENS SLA, A FSLA 07/12/85
SALEM, OR
70,000
44,925
44,925
23,420
68,345
42,881
41,850
41,183
20,592
- 15,719
5,903
12/7698
MCP
SUMMIT SLA
PARK CITY, UT
50,000
14,000
14,000
24,000
38,000
39,166
20,000
17,193
8,597
- 18,359
9,403
120,000
58,925
58,925
47,420
106,345
82,047
61,850
58,376
29,189
- 34,078
15,306
3,929,878
3,028,841
2,857,425
985,848
3,843,273
2,232,965
1,294,177
884,485
442,244
725,823
04/15/86
DISTRICT 12 SUBTOTALS ( 2):
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
GRAND TOTALS ( 26):
,000,409
C
H
H
6
I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
TOTAL GUARANTEED ADVANCES VP.
PRIMARY RESERVES OF THE INSURANCE FUND
6
5
V'T
4
0
E-13
4"
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
34
/111
6/85
V7
PRIMARY RESERVES
I
\
/
3/86
6/86
.\\J
1/87
G. A. OUTSTANDING
* Total pending requests for FSLIC guaranteed advances were about $2.0 billion as of January 2, 1987.
Not necessarily all of this amount will be approved by the Bank Board.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
12-Jan -87 BORROWING PROGRAM
NO SECONDARY RESERVE PAYBFHLBS CONTRIBUTE
$15 BILLION 30 YRS
$3.0 BILLION
MEMBERS WITH A DECLINING SHARE .83,.67,.5,.33,.17
DEFEASANCE RATE
DEPOSIT GROWTH
BORROWING COST
8.0%
1NVESTMEN
6.0%
7.2%
6.0%
******************F/ NANC I NG coR poRAT/oN*********
*******************
********************************
Dollars in Millions)
Calender year:
0o
Starting Fund
1987
1988
$311
1989
$O
1990
1991
1992
1993
1994
1995
1996
1997
$0
$O
$O
$586
$604
$19
$1
$O
$O
$614
$O
$O
SO
$596
$1,181
$1,199
$O
$1,200
$1
$O
$0
$O
$0
$O
SO
SOURCES:
Borrowings
Premium Income
Investment Income
Additional Purchases-FHLB
Stock Redemption
FHLB Return on Investment
Total
$2,500
$3,000
$3,500
$3,500
$2,500
$200
$440
$720
$1,000
$1,200
$O
$1,200
SO
$435
$O
$O
$311
$18
$36
$19
$435
$568
$568
$O
$0
$0
$O
$373
SO
SO
SO
$0
$O
$0
$0
$0
$O
$0
$O
$0
$0
$0
$O
SO
$0
SO
SO
$0
$0
$O
$4,011
$1,786
$1,804
$1,219
$1,201
$1,200
$1,200
$3,011
$3,813
$4,655
$4,935
USES:
Debt Service
Defeasance
FSLIC Stock
Payout (FHLB)
Total
Ending Funds
•
$200
$440
$720
$1,000
$1,200
$1,200
$1,200
$311
$2,500
$1,200
$373
$3,000
$1,200
$435
$3,500
$435
$1,200
$311
$2,500
$1,200
$O
SO
SO
SO
$0
$O
SO
SO
$O
$3,011
$0
$O
$3,813
$O
SO
$4,655
SO
SO
$4,935
$O
$4,011
$O
$0
$1,200
$0
$1,200
$O
$0
$1,200
$O
SO
$1,200
$O
$O
$1,200
SO
$O
$1,200
$O
$586
$604
$19
51
$0
SO
1991
1992
1993
1994
1995
1996
1997
$5,847
$5,742
$3,995
$2,663
$4,407
55,364
56,075
$0
$459
$O
$541
SO
$O
$24
$78
$O
$154
$3,500
*************************** F s LIC
Year
Starting Fund
1987
$4,200
1988
$4,821
1989
$5,109
1990
$5,656
SOURCES:
Sale of Stock
Premium Income
Investment Income
Realization on Assets
FHLB Contributions
Total
$2,500
$3,000
$3,500
$3,500
$2,500
$0
$1,691
$1,360
$984
$576
$227
$70
$271
$298
$323
$345
$348
$292
$160
$430
$940
$1,890
$212
$1,490
$293
$1,140
$382
$1,820
$200
$1,810
$343
$1,470
$790
SO
$11,547
$560
$O
$10,742
$O
$7,995
SO
$6,463
$O
$4,907
SO
$5,864
$0
$6,575
SO
$7,172
$0
$O
$0
$O
$O
$O
$0
$0
$O
$O
$O
$O
$O
SO
$5,000
$4,000
$3,800
$500
$500
$500
$500
$5,000
$4,000
$3,800
$500
$500
$500
$500
$O
$8,821
SO
$9,909
SO
$10,856
USES:
Payback Secondary Reserve
Interest on Sec. Reserve
Gross Case Resolution
$O
$0
SO
SO
$O
$O
SO
$O
$5,700
$4,000
$4,800
$5,200
Payback of stock
TOTAL
CASH BALANCES
RESERVES AVAILABLE
Acc
lated Equity Return
Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$4,000
$4,800
$5,200
$5,700
$4,821
$5,109
$5,656
$5,847
$5,742
$3,995
$2,663
$4,407
$3,621
$5,364
$3,909
$4,456
$6,075
$4,647
$6,672
$4,542
$3,395
$2,363
$3,807
$5,364
$6,075
$6,672
$O
0.39%
SO
0.39%
SO
0.42%
$O
$O
$O
0.42%
0.39%
0.27%
SO
0.18%
SO
SO
SO
0.27%
0.36%
0.39%
SO
0.40%
12-Jan-87
NO SECONDARY RESERVE PAYB
wwwwwww*****wwwwww FINANci NG coRpoRATI oN www*************** wwwwwwwww*wwwww******wwwww
****************
(Dollars in Millions)
Calender year:
Starting Fund
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
SO
$O
SO
SO
SO
SO
SO
SO
SO
SO
SO
$O
$1,200
SO
$1,200
SO
$1,200
$O
$1,200
$1,200
SOURCES:
Borrowings
SO
$O
$1,200
$1,200
$O
$1,200
SO
$1,200
$O
$1,200
SO
$1,200
Investment Income
Additional Purchases-FHLB
SO
$0
SO
$0
$O
SO
SO
SO
$0
SO
SO
SO
SO
SO
$0
SO
SO
SO
$0
$0
SO
Stock Redemption
SO
SO
$0
$0
$0
$0
$0
$0
SO
$0
$0
FHLB Return on Investment
SO
SO
SO
SO
$0
SO
SO
$0
$0
$0
$0
SO
$1,200
$1,200
51,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
Premium Income
Total
SO
USES:
Debt Service
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
Defeasance
$1,200
$0
SO
SO
$0
SO
SO
$0
$0
$0
$0
FSLIC Stock
SO
SO
$0
SO
$0
SO
SO
$O
$O
$0
SO
SO
SO
$1,200
$0
$1,200
SO
$1,200
SO
$1,200
SO
$1,200
SO
$0
$1,200
$0
SO
$1,200
$O
$1,200
SO
$1,200
$1,200
$1,200
SO
SO
SO
SO
SO
SO
SO
$0
SO
SO
SO
Payout (FHLB)
Total
Ending Funds
***************************F
Year
S
L
/ cwwwwww************************wwwwwwwwwwwwww *******************
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$6,672
$7,184
$7,630
$8,084
$8,667
59,391
$10,629
$12,028
$13,604
$15,374
$17,366
Sale of Stock
Premium Income
SO
$236
SO
$322
SO
$413
SO
$510
SO
$613
SO
$721
SO
$837
SO
$959
$O
$1,088
$0
$1,226
SO
$1,371
Investment Income
Realization on Assets
FHLB Contributions
$416
$444
$471
$503
$70
$680
$50
$40
$30
$982
$30
$1,109
$70
5601
$60
$869
$180
$542
$70
$769
$360
SO
$7,684
$0
$8,130
SO
$8,584
SO
$9,167
SO
$9,891
SO
$10,773
SO
$12,195
SO
$13,795
SO
$15,591
SO
$17,611
Starting Fund
SOURCES:
Total
$30
SO
$19,876
USES:
Payback Secondary Reserve
Interest on Sec. Reserve
Gross Case Resolution
$O
$0
SO
$0
$O
SO
SO
SO
SO
SO
SO
$0
SO
SO
SO
$0
SO
SO
SO
SO
SO
SO
$500
$500
$500
$500
$500
$144
$167
$192
$218
$245
$274
5500
$500
$500
$500
$500
$144
$167
$192
$218
$245
$274
$10,629 $12,028
510,629 512,028
$13,604
$15,374
$17,366
$19,602
S13,604
$15,374
S17,366
S19,602
Payback of stock
TOTAL
*
LANCES
$7,184
$7,630
58,084
58,667
$9,391
S AVAILABLE
$7,184
$7,630
58,084
58,667
59,391
Accumulated Equity Return
Reserve/Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SO
0.41%
$0
0.41%
SO
SO
SO
SO
$O
SO
$176
$353
$529
0.41%
0.41%
0.42%
0.45%
0.48%
0.51%
0.54%
0.58%
0.62%
12-Jan-87
NO SECONDARY RESERVE PAYB
•
*********FINANCING CORPORATION******
(Dollars in Millions)
Calender year:
Starting Fund
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
$O
SOURCES:
Borrowings
$O
SO
SO
SO
SO
$O
SO
SO
$1,200
51,200
$1,200
$1,200
$1,200
$1,200
$1,200
51,200
SO
SO
SO
SO
SO
SO
SO
SO
SO
$0
SO
$0
SO
SO
SO
SO
SO
SO
SO
$0
SO
$O
$O
SO
$0
SO
SO
$0
$0
$O
$0
SO
$0
SO
SO
SO
SO
SO
SO
SO
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200 ($1,500) ($2,240) ($3,020)
Debt Service
Defeasance
FSLIC Stock
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
SO
$0
SO
SO
SO
SO
SO
SO
SO
$0
$0
SO
SO
SO
SO
Payout (FHLB)
$O
$O
$1,200
$O
$1,200
$O
SO
$1,200
$O
$1,200
$1,200
$O
$1,200
SO
$1,200
SO
SO
$O
SO
SO
SO
SO
2011
2012
2013
2014
2015
2016
2017
2018
2019
$24,905
$28,023
$31,495
$35,343
$39,609
$44,317
$49,505
$55,322
$61,626
SO
Premium Income
Investment Income
Additional Purchases-FHLB
Stock Redemption
FHLB Return on Investment
Total
SO
($2,500) ($3,000) ($3,500)
$1,000
$760
$480
SO
SO
SO
USES:
Total
Ending Funds
•
$1,000
$760
$480
($2,500) ($3,000) ($3,500)
SO
SO
SO
SO
SO
$0
$0
$1,200 ($1,500) ($2,240) ($3,020)
$O
SO
$O
$O
******************F s LIC
Year
Starting Fund
2009
$19,602
2010
$22,104
SOURCES:
Sale of Stock
Premium Income
Investment Income
Realization on Assets
FHLB Contributions
Total
SO
$0
SO
$O
$0
$2,046
SO
$2,241
SO
$1,689
$O
$1,862
SO
$1,525
$2,447
$2,666
$2,898
$3,344
$3,844
$0
$4,401
$1,251
$1,410
$1,588
$1,786
$2,005
$2,249
$2,518
$2,815
$3,145
$3,508
$30
$3,887
540
540
$50
$50
$60
$60
$80
$90
SO
$O
$22,409 $25,243
$100
SO
$28,395
SO
$O
$40,098
$O
$31,904
SO
$35,791
$70
$O
$44,852
S50,100
SO
$56,074
SO
$62,765
$O
$70,014
USES:
Payback Secondary Reserve
Interest on Sec. Reserve
Gross Case Resolution
Payback of stock
TOTAL
LANCES
1111111S AVAILABLE
Accumulated Equity Return
Reserve/Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SO
$O
$O
$O
SO
SO
SO
SO
SO
SO
$0
SO
SO
$O
$0
SO
SO
SO
$O
SO
$O
$O
$305
$338
$372
5409
$448
$489
5533
$580
$669
$769
$880
$305
$338
$372
$409
$448
$489
$533
$580
$669
$769
$880
$22,104
$24,905
$28,023
$31,495
$35,343
$61,626
$67,953
$24,905
$28,023
$31,495
$35,343
$39,609 $44,317 $49,505
$39,609 $44,317 $49,505
$55,322
$22,104
$55,322
$61,626
$67,953
$706
$882
$1,059
$1,235
$1,412
$2,118
$2,294
$2,471
0.66%
0.70%
0.74%
0.79%
0.83%
51,588
0.88%
51,765
0.93%
$1,941
0.98%
1.03%
1.08%
1.13%
12-Jan-87
NO SECONDARY RESERVE PAYS
Assumptio
•
*********
(Dollars in Millions)
Calender year:
Starting Fund
2020
2021
2022
$O
SO
SO
SOURCES:
Borrowings
Premium Income
Investment Income
Additional Purchases-FHLB
Stock Redemption
FHLB Return on Investment
Total
($3,500) ($2,500)
$200
$O
SO
$0
SO
$O
$O
$O
SO
SO
$2,689
SO
$0
SO
SO
$0
($611) ($2,500)
SO
$200
SO
($3,500) ($2,500)
$O
USES:
Debt Service
Defeasance
FSLIC Stock
Payout (FHLB)
$0
Total
Ending Funds
SO
SO
SO
$2,689
SO
($611) ($2,500)
SO
•
SO
SO
$0
SO
***************************
Year
Starting Fund
2020
2021
2022
$67,953
$73,885
$80,852
SOURCES:
Sale of Stock
SO
SO
SO
Premium Income
$4,974
$5,484
$5,813
Investment Income
$4,255
$4,642
$5,101
$110
$120
$140
SO
S77,291
$0
S84,131
SO
$91,905
Realization on Assets
FHLB Contributions
Total
USES:
Payback Secondary Reserve
SO
SO
SO
Interest on Sec. Reserve
SO
SO
$O
$995
$1,097
Gross Case Resolution
Payback of stock
$1,163
$2,689
TOTAL
.
LANCES
ES AVAILABLE
Accumulated Equity Return
Reserve/Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$995
$1,097
$3,852
$73,885
$80,852
$88,053
S73,885
$80,852 $88,053
$2,647
1.16%
$2,689
1.19%
$2,689
1.23%
I
6
6
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
12-Jan-87
NO SECONDARY RESERVE PAYB
$2.5 IN ZERO COUPON BONDS FOR FIRST TWO YEARS
FHLBS CONTRIBUTE
$5.8 BILLION
SPECIAL ASSESSMENT DECLINING SHARE - .83,.67,.5,.33
,.17
DEPOSIT GROWTH
ZERO COUPON RATE
INVESTMENT RATE
6.0%
8.0%
6.0%
**************************F/NANcING covoRATION*
**************************************************
llars in Millions)
Fiscal year:
0o
1986
Starting Fund
1987
$0
1988
$O
1989
1990
1991
1992
1993
1994
1995
1996
$O
$O
SO
$0
$0
$0
$O
$0
$O
SOURCES:
Borrowings
Premium Income
Investment Income
Additional Purchases-FHLB
Stock Redemption
FHLB Return on Investment
Total
SO
$2,500
$2,500
$O
$O
$0
$O
$O
SO
SO
$O
SO
$72
$O
$275
SO
$72
$72
$72
$72
$72
$O
$275
SO
$275
$275
$0
$0
SO
$O
$0
$O
$275
$0
$72
SO
$275
$72
$O
$275
$72
SO
$O
$O
$O
SO
SO
$O
SO
$O
$O
SO
$0
$0
$347
$347
$347
$347
$347
$347
$347
$347
$347
$O
$O
$O
$O
$174
$0
$0
$0
$O
$2,674
$2,847
$O
$275
$O
$275
USES:
Debt Service
Defeasance
FSLIC Stock
$174
$347
$347
$347
$347
$347
$347
$347
$0
$2,500
$347
SO
$2,500
$0
$0
$0
$0
$O
$0
$0
$O
$0
$O
$O
$O
SO
$0
$0
$0
$347
SO
SO
SO
$347
$0
$347
$O
$347
SO
$347
$O
$347
$347
$0
5347
$O
$O
$0
SO
SO
SO
SO
$O
$O
Payout (FHLB)
$0
Total
Ending Funds
•
$0
$0
$0
$0
$O
$2,674
$0
SO
$2,847
$O
***********************************
F
Year
Starting Fund
1986
$6,130
1987
$4,200
1988
$5,038
s L / c**********************************
********************
1989
1990
1991
1992
1993
1994
1995
1996
$5,945
$4,448
$3,706
$3,992
$4,196
$4,291
$4,458
$5,386
$0
$O
$1,133
$1,205
SOURCES:
Sale of Stock
Premium Income
Investment Income
Realization on Assets
FHLB Contributions
Total
$0
$2,500
$2,500
SO
$O
$0
$1,784
$1,891
$1,727
$1,631
$1,504
$1,355
$0
$1,198
$0
$1,000
$O
$1,065
$246
$310
$277
$329
$312
$170
$1,260
$255
$1,340
$339
$560
$231
$1,200
$295
$350
$245
$1,010
$262
$0
$1,340
$1,000
$0
$9,038
$O
59,945
$990
$0
$8,448
$O
$7,206
$0
$6,492
$O
$6,696
$O
$6,791
$O
$6,958
$O
56,886
SO
$7,921
SO
$0
$8,224
USES:
Payback Secondary Reserve
Interest on Sec. Reserve
Gross Case Resolution
Payback of stock
TOTAL
CASH BALANCES
RESERVES AVAILABLE
Ac
lated Equity Return
Deposit Ratio
1111101
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$0
$0
$O
$O
$3,500
SO
$0
$0
SO
$4,000
$O
$O
$2,500
$O
$O
$4,000
$O
$O
$4,000
$0
$O
$1,496
SO
SO
$2,500
$2,500
$2,500
$0
$1,500
$0
$0
$2,000
$3,033
$4,000
$4,000
$4,000
$3,500
$2,500
$2,500
$2,500
$2,500
$1,500
$2,000
$4,200
$5,038
$5,945
$4,448
$3,706
$3,992
$4,196
$4,291
$4,458
$5,386
$3,000
$5,921
$3,838
$4,745
$3,248
$2,506
$2,792
$2,996
$3,091
$3,258
$4,186
$4,721
$0
0.34%
$O
0.41%
$O
$O
0.48%
0.31%
SO
0.23%
$O
0.24%
SO
0.24%
$O
SO
0.23%
0.23%
$O
0.28%
SO
0.30%
12-Jan-87
NO SECONDARY RESERVE PAYB
•
FINANCING CORPORATION
(Dollars in Millions)
Fiscal year:
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
SO
SO
SO
SO
SO
$0
SO
SO
SO
SO
$O
SO
$72
SO
$275
SO
SO
SO
$72
SO
$275
SO
SO
SO
$72
SO
$275
SO
SO
SO
$72
SO
S275
SO
SO
$0
$72
SO
$275
$0
SO
SO
$72
$O
5275
$0
SO
SO
$72
$O
$275
$0
$O
SO
$72
SO
$275
$0
SO
SO
$72
SO
$275
SO
SO
$72
SO
$275
SO
SO
Total
5347
5347
5347
5347
5347
5347
5347
5347
5347
5347 ($11,655)
$347
5347
5347
5347
$347
SO
SO
$O
5347
5347
SO
SO
SO
5347
5347
SO
SO
SO
5347
$347
SO
SO
SO
5347
5347
Total
$347
SO
SO
SO
5347
SO
SO
SO
5347
SO
SO
SO
5347
$0
SO
SO
5347
SO
SO
SO
5347
SO
$0
SO
SO
$0
$0
$0
SO
$0
Starting Fund
SOURCES:
Borrowings
Premium Income
Investment Income
Additional Purchases-FHLB
Stock Redemption
FHLB Return on Investment
$0 ($12,003)
$72
SO
$275
SO
SO
USES:
Debt Service
Defeasance
FSLIC Stock
Payout (FHLB)
Ending Funds
•
************************************F
Year
$347
SO
$0
SO ($12,003)
SO
SO
$347 ($11,655)
SO
SO
s L / c******************************************************
1997
1998
1999
2000
2001
2002
2003
$5,921
$6,351
$6,633
$6,796
56,949
$7,036
$7,491
$9,717 $12,134
$O
$1,282
SO
$1,363
SO
$1,449
SO
$1,541
SO
$1,637
SO
$1,740
SO
$1,849
SO
$1,964
$368
$390
S403
$412
$420
$436
$516
$656
$780
$530
$310
$200
$30
$280
$230
$190
SO
$8,351
$0
$8,633
SO
$8,796
SO
$8,949
SO
$9,036
SO
$9,491
SO
Payback Secondary Reserve
Interest on Sec. Reserve
SO
$2,000
Gross Case Resolution
Payback of stock
SO
SO
$2,000
SO
SO
$2,000
SO
SO
$2,000
SO
$0
$2,000
$0
SO
$2,000
SO
$370
SO
SO
5393
$O
SO
$417
SO
$0
5443
$0
SO
$471
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$370
$393
$417
5443
$471
$6,351
$5,151
$6,633
55,433
$66,796
55,596
56,949
55,749
57,036
$5,836
$7,491
$6,291
Starting Fund
2004
2005
2006
2007
$14,759 $17,603
SOURCES:
Sale of Stock
Premium Income
Investment Income
Realization on Assets
FHLB Contributions
Total
SO
$2,086
$0
$2,216
$O
$2,353
$807
$971
$1,149
$150
$100
$60
SO
SO
$O
$0
$10,087 $12,526 $15,177 $18,046
$0
$21,165
USES:
TOTAL
Il
LANCES
ES AVAILABLE
k
Accumulated Equity Return
Reserve/Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$O
0.31%
SO
0.31%
SO
0.30%
SO
0.29%
SO
0.28%
SO
0.28%
$0
$9,717 $12,134
$9,117 $12,134
SO
0.38%
SO
0.48%
$14,759 $17,603 $20,694
$14,759 S17,603 $20,694
SO
0.55%
5344
0.62%
$688
0.69%
12-Jan-87
NO SECONDARY RESERVE PAYB
•
******************FINANCING CORPORATION******
(Dollars in Millions)
Fiscal year:
Starting Fund
SOURCES:
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
SO
$0
SO
SO
SO
SO
SO
SO
SO
$0
SO
$0
Borrowings
($12,003)
Premium Income
SO
Investment Income
SO
Additional Purchases-FHLB
$174
Stock Redemption
SO
FHLB Return on Investment
$O
$0
$0
$0
$0
$O
$0
$0
SO
$0
$0
$0
SO
SO
SO
$O
SO
SO
$O
SO
$0
$0
SO
SO
$0
$0
$0
$0
$0
SO
SO
$0
$0
$0
$0
$0
SO
$O
$0
$0
SO
$0
$0
SO
SO
$0
SO
$0
SO
SO
SO
SO
SO
SO
SO
$0
SO
$0
$0
$0
Total ($11,829)
$0
$O
SO
SO
SO
SO
$0
SO
SO
SO
SO
$0
$0
$0
SO
$0
SO
SO
$O
SO
SO
$0
$0
$0
$0
$0
$O
$0
SO
$0
SO
$0
$0
SO
$0
SO
$0
SO
SO
$0
$0
$O
SO
$0
SO
SO
SO
SO
$0
SO
$0
$0
$O
$0
$O
SO
$O
SO
$O
$0
$0
SO
SO
$O
$0
$O
$0
USES:
Debt Service
Defeasance
FSLIC Stock
Payout (FHLB)
Ending Funds
•
$174
$0
($12,003)
$0
Total ($11,829)
$O
***************************F
Year
Starting Fund
2008
$20,694
2009
2010
$24,157 $27,971
SO
SO
$0
s L Ic**www***************** wwwww*********wwwwwwwwwwwwwww
************
2011
2012
2013
2014
$32,156 $36,753 $41,786
$47,301
2015
2016
2017
2018
$53,327 $59,917 $67,106
$74,953
SOURCES:
Sale of Stock
Premium Income
$O
$2,571
$0
$2,725
$0
$2,889
$3,062
$0
$3,246
$0
$3,441
$0
$3,647
$0
$3,866
$0
$4,098
$0
$4,344
$0
$4,604
Investment Income
Realization on Assets
$1,346
$1,564
$1,804
$2,067
$2,356
$3,397
$3,811
$70
$80
$80
$90
$100
$100
$4,262
$110
$4,754
$70
$2,673
$90
$3,019
$60
$0
SO
$0
$O
$42,435 $47,989 $54,057 $60,691
$0
$67,926
FHLB Contributions
Total
$0
SO
$24,671 $28,516
SO
$O
$O
$32,733 $37,365
$120
SO
SO
$75,822 $84,431
USES:
Payback Secondary Reserve
Interest on Sec. Reserve
Gross Case Resolution
$0
$O
$514
$0
$0
$545
$0
SO
$578
SO
SO
$612
SO
$O
$649
$0
SO
$0
SO
$688
$514
$545
$578
$612
5-649
$688
$24,157 $27,971
$24,157 $27,971
$32,156
$729
$0
SO
$773
$0
$0
$820
SO
SO
$869
SO
SO
$921
$729
$773
$820
$869
$921
Payback of stock
TOTAL
1111/
.
ALANCES
1./ES AVAILABLE
Accumulated Equity Return
Reserve/Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$1,032
$1,376
0.76%
0.83%
$32,156
$36,753 $41,786 $47,301
$36,753 $41,786 $47,301
$1,720
$2,064
$2,408
0.90%
0.97%
1.04%
$53,327 $59,917 $67,106 $74,953 $83,508
$53,327 $59,917 $67,106 $74,953 583,508
$2,752
$2,924
$2,924
1.11%
1.18%
1.26%
$2,924
1.33%
$2,924
$2,924
1.40%
1.47%
12-Jan-87
NO SECONDARY RESERVE PAYS
•
*********
(Dollars in Millions)
Fiscal year:
Starting Fund
2019
2020
2021
2022
$0
$O
SO
SO
SOURCES:
Borrowings
SO
$O
$O
SO
Premium Income
$O
SO
SO
$0
Investment Income
Additional Purchases-FHLB
Stock Redemption
$O
$O
SO
SO
$O
SO
SO
SO
$0
$0
SO
$0
FHLB Return on Investment
SO
SO
SO
$0
$0
SO
SO
$0
$0
Total
USES:
Debt Service
Defeasance
$0
$O
$O
$O
SO
$O
SO
FSLIC Stock
Payout (FHLB)
$O
$O
SO
SO
$O
SO
SO
SO
SO
SO
SO
$O
$O
SO
SO
Total
Ending Funds
SO
************************************
Year
Starting Fund
2019
$83,508
2020
2021
2022
$92,809 $102,885 $113,676
SOURCES:
Sale of Stock
SO
SO
SO
SO
Premium Income
$4,381
$5,174
$5,484
$5,813
Investment Income
$5,290
$5,871
$6,497
$120
$130
$140
$0
SO
Realization on Assets
FHLB Contributions
Total
SO
$93,798 $103,984 $115,006 $126,800
USES:
Payback Secondary Reserve
$O
SO
$O
$O
Interest on Sec. Reserve
Gross Case Resolution
SO
SO
SO
$O
$976
$1,035
$1,097
$1,163
$976
$1,035
$1,097
$1,163
Payback of stock
TOTAL
ALANCES
ES AVAILABLE
1111/1/
Accumulated Equity Return
Reserve/Deposit Ratio
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$92,809 $102,885 $113,676 $125,637
$92,809 $102,885 $113,676 $125,637
$2,924
1.54%
$2,924
1.61%
$2,924
1.68%
$2,924
1.75%
6
S
c
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LEAGUE PLAN # 1
8% BORROWING COST
6% DEPOSIT GROWTH
*********
**TOTAL**
*********
0
IBUT IONS
1987
1988
1989
1990
1991
1992
1993
1994
****
****
****
****
****
****
****
****
SPECIAL ASSESSMENTS
FHLBS
$1,167
$1,046
$912
$735
$524
$292
$0
$0
$174
$275
$275
$275
$275
$2,500
$277
$2,500
$329
$0
$231
$0
$312
$0
$245
$275
$0
$275
ZERO COUPONS
INVESTMENT INCOME
$275
$0
$246
$255
$262
$5,000
$2,157
$170
$350
$560
$1,010
$1,200
$1,260
$1,340
$1,340
$7,230
($174)
($347)
($347)
ASSET SALES
INTEREST/DEFEASANCE
($347)
($347)
($347)
($347)
$4,675
$0
($347)
EXPENSE
TOTAL ADDITIONAL
FUNDS
$4,114
$4,153
$1,712
$1,918
$1,883
$1,726
$1,523
$1,530
$18,558
SPECIAL ASSESSMENTS
FHLBS
$1,167
$311
$1,046
$373
$912
$435
$524
$311
$292
$568
$0
$568
$0
$0
$4,675
$3,001
BORROWINGS
$2,500
$3,000
$3,500
$735
$435
$3,500
$271
$298
$160
$430
$323
$940
$345
$1,470
TREASURY/BOARD
PLAN
INVESTMENT INCOME
ASSET SALES
REST/DEFEASANCE
SE
TOTAL ADDITIONAL
($511)
$3,898
$3,500
$0
$0
$0
$16,000
$348
$292
$1,890
$200
$212
$1,490
$2,289
$10,010
$1,820
$1,810
($813) ($1,155) ($1,435) ($1,511) ($1,200) ($1,200) ($1,200)
$4,334
($9,025)
$4,955
$5,050
$181
$3,243
($35) $3,208
$3,132
$3,109
$116
$6,340
$9,449
$9,565
$9,420
$8,392
$8,392
$840
$1,357
$1,715
$1,059
$1,143
$1,235
$1,333
$9,460
$4,992
$1,842
$1,378
$502
$26,950
FUNDS
DIFFERENCES
($216)
CUMULATIVE
($216)
REGULAR PREMIUM
$778
($145) ($1,028)
TOTAL INCOME
LEAGUE PLAN
$4,892
$4,993
$3,069
$3,633
$2,942
$2,869
$2,758
$2,863
$28,018
T/B PLAN
$4,676
$5,174
$6,312
$6,765
$6,051
$2,985
$2,613
$1,835
$36,410
LEAGUE PLAN
$4,000
$4,000
$4,000
$3,500
$2,500
$2,500
$2,500
$2,500
*
$25,500
T/B PLAN
$4,000
$4,800
$5,300
$5,700
$5,000
$4,000
$3,800
$500
**
$33,100
CASE RESOLUTIONS
FUND RESERVES
LEAGUE PLAN
$3,838
$4,745
$3,248
$2,505
$2,792
$2,996
$3,091
$3,258
$3,258
1/B PLAN
$3,621
$3,909
$4,456
$4,542
$3,395
$2,363
$3,807
$5,364
$5,364
$0
$270
$110
$170
$240
$380
$340
$310
$1,820
COST OF DELAYS
11111
0 INDUSTRY
GUE PLAN
!PLAN
$1,341
$1,321
$1,187
$1,010
$799
$567
$275
$275
$6,774
$1,478
$1,419
$1,347
$1,170
$835
$860
$568
$0
$7,676
*$10 BILLION IN CASE RESOLUTIONS NOT YET ACCOMPLISHED
** INCLUDES $2.4 BILLION IN CASE RESOLUTION COSTS FOR CONTINGENCY'S
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Federal Reserve Bank of St. Louis
U
..'
.
,,0.
04 GO1,ii•,,.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
PAUL A. VOLCKER
CI-IAIRMAN
December 16, 1986
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D. C. 20552
Dear Ed:
You have asked for my reaction to the proposal that
the Federal Savings and Loan Insurance Corporation rule
restricting direct investments in real estate, equity securities, service corporations and operating subsidiaries by
federally insured savings and loan associations be extended at
its expiration at the end of this year. Recent experience, as
well as more general "structural" concerns about the role and
activities of federally-insured depository institutions,
strongly suggest to me that such extension is not only appropriate but strongly in the interest of the financial system
generally as well as the FSLIC.
The "direct investments" covered by the restrictions
in your existing rule largely fall in the area of real estate
development. Entrepreneurial activity in that area
of
course, a legitimate and essential part of a growing, dynamic
economy. Rewards in specific instances can be high. But
clearly, so can losses. Studies within the FHLBB and elsewhere clearly demonstrate the exceptional risks involved.
You, I know, are faar with the experience in Ohio and
Maryland, as well as among some federally-insured
institutions, that suggests conflicts of interest and temptations for self-dealing are substantially greater in real
estate development combined with depository institutions than
in more traditional lending, with arms-length relationships
between borrowers and lenders. By definition, of course,
equity financing removes from the institution providing the
funI s the cushion available to creditors when developments in
a project are adverse.
I know some of those risks for insured-institutions
can be reduced by proper supervision, and I also realize the
efforts you have made in that direction. But such supervision, in my view, is not a substitute for limiting total
exposure. Your existing rule requires that federally-insured
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Federal Reserve Bank of St. Louis
2
associations must obtain the approval of the Federal Home Loan
Bank System to make direct investments in excess of 10 percent
of their assets. Such a limitation, which can be overridden
in specific cases of demonstrable strength and favorable
experience, seems to me, if anything, liberal. Certainly, it
is far less restrictive than proposals for regulating
investments by bank holding companies in real estate
properties and real estate development projects which the
Federal Reserve has been considering.
Our current proposal -- a revised version of one on
which the public previously commented -- would require that
direct investments in real estate properties and real estate
development projects be made only in nonbank subsidiaries of
bank holding companies and would limit the equity investments
of bank holding companies in such subsidiaries to 5 percent of
their consolidated primary capital. The real estate subsidiaries would be permitted to lever their positions up to five
times their capital, but the total exposure of the holding
company (the direct investments of the real estate subsidiary
plus loans and guarantees of the real estate subsidiary or any
other subsidiary of the holding company to properties and
projects in which the real estate subsidiary has a direct
investment) would not be permitted to exceed 25 percent of the
holding company's consolidated primary capital. In addition,
in the case of individual projects in which an organization
has an equity investment, its total exposure, as defined
above, would be restricted to 10 percent of the holding
company's consolidated primary capital. A number of other
restrictions would be imposed to avoid conflicts of interest
and to provide insulation of the equity lending from the bank
itself.
This approach will, of course, be reviewed and
perhaps modified in the light of comments received. But I
think the proposal reflects the sensitivity of the Federal
Reserve Board to the risks inherent in this type of direct
investment. Those risks seem to me relevant to savings and
loan associations and their holding companies as well,
operating on the basis of deposits obtained from the public
and protected by federal deposit insurance.
In sum, the existing FSLIC rule restricting the
direct investment of federally-insured thrifts in real estate
projects and other business ventures seems to me an appropriate reflection of legitimate concerns. It is far more
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Federal Reserve Bank of St. Louis
- 3 -
liberal than we have thought appropriate for bank holding
companies. Consequently, consideration, in my judgment,
should be given to changes having the effect of tightening the
limitations.
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Federal Reserve Bank of St. Louis
Sincerely,
/Li
)
...••,
• of GOvt •. 4
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
RAL RE.,̀t
'•
• • •..• • •
PAUL A. VOLCKER
CHAIRMAN
December 12, 1986
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 "G" Street, N.W.
Washington, D.C. 20552
Dear Ed:
I just wanted to let you know how
much I
appreciated your taking the time
out of your busy
schedule to join the Members of
the Board and the
Chairmen and Deputy Chairmen of the
Federal Reserve
Banks at dinner last Wednesday.
We enjoyed your
candid remarks.
Best wishes for the holidays.
Sincerely,
2
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
' Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
3E13,,v,
Tu-Q
j
mciLL),_Qc
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
vt.c,
•
66._x_Lc1
(!ckA:4:
CALIFORNIA UMW'coir
!MINOR INSTITurtows
December 5, 1986
The Honorable Edwin J. Gray, Chairman
Federal Home Loan Bank Board
1700 "G" Street, N.W.
Washington, D.C. 20552
Dear Ed:
The Board of Directors of the Californ
ia League have voted
unanimously to support the extension
of the direct investment regulation as it currently is desc
ribed and enforced.
The members of this League generall
y do still have concerns
for the potential negative impact
of some of the past activities that might fall under the dire
ct investment definition,
and they feel that at least for now the
restrictions on the
amount and degree of an association'
s involvement in "direct
investments" should continue to be
restrained.
We hope that the future of the busi
ness as well as the general
economy would permit continuing review
of this matter and
movement toward some degree of flexibil
ity.
Your consideration and understanding
of our request for the
cur
t re
ation without change is greatly
appreciated.
sin
ly,
W. Dean Can
President
Jr.
WDC/th
cc:
Lee Henkel
Lawrence J. White
• SC:
-
https://fraser.stlouisfed.org oAP
Federal Reserve Bank of St. Louis
A7
1==
FEDERAL DEPOSIT INSURANCE CORPORATION,
Washington 00 20429
OFFICE OF THE CHAIRMAN
December 4, 1986
Dear Ed:
In accordance with your request for my opinion, I am writing to indicate
my support for your proposal to extend for two years the Bank Board's
regulation which limits FSLIC insured institutions from directly investing
more than ten percent of assets in real estate without regulatory approval.
The limit appears to be more than adequate for the industry's needs and is
far more liberal than what we are considering for the banks which we supervise. The rule should enhance your efforts to contain the magnitude of risk
in the system and protect the reserves of the FSLIC. Such concerns are of
overriding importance in the present circumstances.
Best wishes.
Sincerely,
aS_
L. William Seidman
Chairman
Mr. Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 G. Street N.W.
Washington, D.C. 20552
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Federal Reserve Bank of St. Louis
UNITED STATES LEAGUE of SAVINGS INSTITUTIONS 111
EAST WACKER DR / CHICAGO. ILLINOIS 60601 / TEL. (312) 644-3100
WILLIAM B. O'CONNELL
Presdem
November 24, 1986
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D.C. 20552
Dear Chairman Gray:
My attention has been called to a statement in the November 1986 issue of our
magazine Savings Institutions which suggested that the U.S. League questions
the need for extension of the direct investment rule. For the record, I
wanted to correct that statement and I am attaching hereto a letter dated
October 17 commenting on the direct investment rule. A full summary of that
letter was reported in the October 24 issue of Washington Notes which went to
every member of the U.S. League.
That letter makes it clear that we strongly endorse extension of the present
rule.
As you are aware, we have begun our committee work looking towards passage ot
a FSLIC recapitalization bill in early 1987 and, in due course, we will make
our views public on what the details of such a program should be. I would,,
_hasigyss_j caution igu_a2,4_your colleagues on the Board there is no likelihood
rogram 1 tle Board fails
a
of our suppQrt of passage of a Hai
have taken t e iberty of
I
extend the direct investment regulation.
views on this matter.
our
of
leaders
al
-acquariting key Congression
Sincerely,
-L4,
7 ii.R.Lp-C-
1--1--
William B. O'Connell
WBO:va
cc:
Mr. White
Mr. Henkel
Enclosure
THE AMERICAN
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Federal Reserve Bank of St. Louis
HOME
THE SAFEGUARD OF AMERICAN LIBERTIES
•
JAKE GARP& UTAH. CHAIRMAN
JOHN HEINZ PENNSYLVANIA
WILLIAM L ARMSTRONG, COLORADO
ALFONSE U. °AMATO. NEW YORK
SLADE GORTON, WASHINGTON
MACK MATTINOLY. GEORGIA
Ch/C HECHT, NEVADA
PHIL GRAMM. TEXAS
WILLIAJA PROXMIRE. WISCONSIN
ALAN CRANSTON, CALIFORNIA
DONALD w RiEGLE. JR., MICHIGAN
PAUL S SARSANES. MARYLAND
CHRISTOPHER J. DOOD, COMIECT1CUT
ALAN J. DIXON. ILLINOIS
JIM SASSER, TENNESSEE
U. DANNY WALL STAFF DIRECTOR
KENNETH A. IkLEAPI, MINORITY STAR DIRECTOR
United eStats
nate
COMMITTEE ON BANKING, HOUSING, AND
URBAN AFFAIRS
WASHINGTON, DC 20510
November 26, 1986
The Honorable Edwin Gray
Chairman
Federal Home Loan Bank Board
1700 G Street NW
Washington, DC 20552
Dear Mr. Gray:
I am writing because I know that you and the other members
of the Board will soon be making a decision on whether to extend
the Board's regulation governing direct investments by insured
The present regulation,
thrift institutions to January 1, 1989.
limiting such investments was first adopted by the Board on
January 31, 1985, and is due to expire at the end of this year.
The direct investment rule provides that any state-chartered
thrifts that are permitted under their particular state's rules
to invest more than 10 percent of their assets in direct
investment in activities such as real estate and equity
securities must obtain the prior approval of the Federal
The Bank Board, I
authorities to exceed the 10 percent level.
understand, originally promulgated this rule binding all
federally insured thrifts in order to limit the risk of losses to
the FSLIC insurance fund from failures by institutions that were
misusing their state granted investment powers.
As you know the Congress has for years given preferred
treatment to the thrift industry because of its special role in
If that
helping to meet the housing needs of our citizens.
continued
its
for
arguments
role
industry ceases to play that
separate identity will be difficult to muster.
When the new Congress convenes one of the issues facing It
will be whether to approve the plan to recapitalize the FSLIC
developed by the Federal Home Loan Bank Board system and the
This recapitalization is needed because the FSLIC fund
Treasury.
Many of these
by heavy losses in recent years.
hit
been
has
losses stem from some thrifts which misused the direct investment
The House
powers provided to them by state governments.
Committee on Government Operations, which examined this
relationship in depth concluded that "as long as the FSLIC fund
remains impaired ... the Federal Home Loan Bank Board's direct
investment rule ... is an appropriate and necessary restriction.
It would not make sense for the Congress to recapitalize the
FSLIC fund unless measures are in place to insure that "high
flying thrifts", which have misused their powers in the past, do
not continue activities that drain the fund.
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Federal Reserve Bank of St. Louis
•
I, therefore urge, in the strongest manner, that you and the
other members of the Board extend the rule limiting direct
investments in nonhousing areas by thrifts until at least January
Thank you in advance for your consideration of my deep
1, 1989.
concern on this matter.
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Federal Reserve Bank of St. Louis
A
Congrecz of tbe attiteb -11-) tatel
3t)our3t of Repregentatibts%
5Bastington, N.C. 20515
October 15, 1986
Mr. Edwin Gray
Chairman
Federal Home Loan Bank Board
1700 G Street N.W.
Washington, D.C. 20552
Dear Mr. Chairman:
whid4 .7.h1t2,
We are writing you concerning the limited public .comment period
direct
the
of
been given to the Board's proposed two-year extension
em—
investment regulation. We believe that this is a question of extr
V4
th#P
less
no
es
importance to the savings and loan industry, and deserv
.
80-584
tion
Resolu
standard 60 day comment period given under Board
ce, Conumer
The Committee on Government Operations Subcommittee on Commer
on of the
entati
implem
ar
and Monetary affairs endorsed the original two-ye
was
rule
the
that
direct investment rule, but did so with emphasis
to determine
temporary_tri nature, and should be followed up with studies
Numerous
tion.
regula
the effectiveness of and need for this type of
industry have
s
saving
the
of
ure
parties interested in the regulatory struct
to their
ted
comple
been
not
have
expressed the opinion that such studies
extension
y
justif
to
done
be
must
able work
:
satisfaction, and that consider
under the original grant of approval.
s of a
The House and Senate are currently working out the final detail
aware,
are
you
sure
are
we
as
comprehensive banking bill which contains,
are
utions
instit
s
saving
If
provisions for the recapitalization of FSLIC.
on
questi
the
s,
zation
organi
ial
to retain viability as independent financ
the years to come.
of their profitability and autonomy will be critical in
that these
ments_
invest
of
ses
t
he
Regulations restricting or limitin
direct
and
icant
signif
have
will
•e a owed to make
institutions wi
. If
decade
next
the
durin
e
etitiv
com
impact on their abilit to remain
s
siVing
o
growt
uture
the
to
care u consi eration is not given
as insuring a
institutions, the recapitalization of FSLIC will be moot,
. Much study
non-viable industry simply cannot be continued indefinitely
tory policy
of
regula
ion
direct
the
to
given
and considered thought must be
in this area.
tee, we are
s
As members of the Banking, Housing, and Urban Affair Commit
ned
comment period
shorte
a
er
consid
would
somewhat disturbed that the Board
g or
The
closin
l.
versia
contro
on a regulation which is prima facia
erm
long-t
in
the
not
is
import
of
s
limiting of public comment on matter
ures
Proced
body.
tory
regula
its
or
ry
best interests of either an indust
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Ecfwin Gray
Page 2
October 15, 1986
of matters upon which significant
to insure the fair and open discussion
for
instituted, and should be followed. If
disagreement arises have been
board
the
,
dence
prece
e
and futur
no other reasons than procedural equity
nt period on this matter.
comme
c
publi
y
60-da
should allow the full
your decision at this time, and
We respectfully request that you reconsider nt on this matter.
comme
grant an additional 30-days for public
Sincerely,
Stan Lundine
Richard Lehman
Parren J. litchell
Carroll Hubbard, Jr.
Bart Gor on
Paul E. Kanjorski
Barney Frank
George C. Wortle
Sander M. Levin
4.(
en Erdreich
David Dreier
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Federal Reserve Bank of St. Louis
Frank Annunizo
•Idwin Gray
Page 3
October 15, 1986
Norman D. Shumway
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Federal Reserve Bank of St. Louis
BillPlcCollurn
1700 G Street. N.W.
Washington, D.C. 20552
Federal Home Loan Bank Svstern
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
Federal Home Loan Bank Board
EDW2r1 J. GRAY
CHAIRMAN
December 9, 1986
The Honorable Jake Garn
Chairman
Committee on Banking, Housing
and Urban Affairs
U.S. Senate
20510
Washington, DC
Dear Chairman Garn:
It has been
I have today issued the attached Chairman's Order.
Banks.
Loan
Home
Federal
12
the
of
Presidents
transmitted to the
The Bank Board will further develop guidelines for Federal Home
Loan Bank operations, particularly as they relate to travel and
personal expenditures.
Sincerely
Edwin J. Gray
EJG:ro
Attachment
cc:
Senate Banking Committee Members
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Federal Reserve Bank of St. Louis
4.
CHAIRMAN of the FEDERAL HOME LOAN BANK BOARD
Order No.: 702
Date: December 9, 1986
PUPSUANT to the powers and authority vested in me as
Chairman of the Federal Home Loan Bank Board, including without
limitation, that under Reorganization Plans No. 3 of 1947 and
No. 6 of 1961, I have by Chairman's Order No. 700, dated December 4, 1986, ordered Board employees to travel and accept reimbursement only in accordance with Federal Travel Regulations.
Recent inquiries into expenditures by the Banks on behalf
of travel by Board employees have caused me to review such practices of Bank employees, and I hereby conclude that some such
practices have become excessive and are inappropriate.
I have determined therefore to limit travel and travel
related expenses of Bank employees to that which is reasonable
and compellingly necessary to the effective functioning of the
B ank s;
ACCORDINGLY, it is ordered that the Banks follow prudent
travel practices to include, but not be limited to: travel on
coach fare or the equivalent, unless circumstances clearly require otherwise; conduct of all meetings in ordinary business
meeting places; and use of only modest hotel accommodations.
Under no circu,Istances shall the Banks make any payment or reimbursement to, or for the benefit of, any of their officers,
directors, employees, or agents, for excessive personal expenses
of any type, whether or not related to travel.
FURTHER, Bank employees shall not accept meals or any other
gifts such as theatre tickets, travel cruises or other entertainment, or anything else of value from member institutions of
such Banks or agents or employees of such institutions.
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Federal Reserve Bank of St. Louis
Edwin J. G
Chairman
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Home Loan Bank Board
Federal Sayings and Loan Iftstlrance Corporation
EDWIN J. GRAY
CHAIRMAN
PolAs.
L
4- oitk.exxioLA
Wu,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
it
4ELAA,1
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Home Loan Bank Board
Federal Sayings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
December 8, 1986
The Honorable Fernand J. St Germain
Chairman
Committee on Banking, Finance
and Urban Affairs
U.S. House of Representatives
Washington, DC 20515
Dear Chairman St Germain:
for my own
The purpose of this letter to you is to apologize
during my
ses
expen
l
trave
flawed judgements relating to Bank Board
tenure as Chairman.
ices at the
It is not enough to say that travel expense pract
ical to the
ident
ally
virtu
been
Board during my chairmanship have
us as
of
Each
s.
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e, for what has occurred
and practices. I stand responsible, of cours
during my tenure.
diligence, to
I have worked exceedingly hard, and with great
challenges to the
deal with the regulatory and deposit insurance
e. On countless
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e
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on the road.
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m. Travel to the field
Chairman of the Federal Home Loan Bank Syste
anticipating and
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ess
has strengthened the Board's effectiven
y decentralized
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responding to the needs of a devel
ands of hours on
thous
many
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regulatory structure. I have spent
colleagues in the Federal
the telephone with Bank Board staff and my
have enabled me to
Home Loan Bank System. Modern communications
cipation in numerous
conduct a great deal of business, including parti
I have never taken a vacation, as one
Board meetings, by telephone.
no matter where I have
truly understands a vacation, from the job,
a day to carry out my
hours
been. I have worked between 15 and 18
Indeed, I cannot
nds.
weeke
responsibilities, including countless
at this job during
work
not
did
recall a single instance in which I
in my office at the Board.
every weekend, year in and year out, many
time
mptuous, I believe the
At the risk of perhaps seeming presu
Loan
Home
al
Feder
the
of
ce
and effort I have expended in the servi
call of duty.
the
d
beyon
go
FSLIC
Bank System and the
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Federal Reserve Bank of St. Louis
2
And, in the face of the most enormous and compelling challenges
ever to face the thrift system, I am proud to say the Board has made
great progress in getting a very substantial handle on a host of
highly difficult regulatory and deposit insurance problems. You are
aware of many of them, I am sure. This does not mean I have
succeeded in all areas, most notably on Bank Board travel-related
matters. And, I truly regret this. In retrospect I can only say
that I should have paid significantly greater attention to such
matters. I suppose I felt that the cost of hotel rooms, food, etc.,
associated with official travel was infinitesimal compared to the
financial stakes for the thrift system in terms of the well-being of
the FSLIC, and the ability of the thrift system to deal effectively
with the very real exigencies of a deregulated thrift operating
environment. Thrift failures have cost, and will cost, the FSLIC
multi -S illions of dollars, compared to expenses associated with
official travel. Still, I regret my failure to attend to such
travel-related issues, irrespective of other considerations.
In this regard, I have issued a Chairman's Order (attached)
which is intended to halt longstanding practices, irrespective of
•
to Bank Board travel.
their prior regulatory basis, relating
I am currently working to develop procedures i•ntended to instill
far greater discipline in travel expense-related functions at the
Federal Home Loan Banks, and therefore to assure that any such abuses
are curbed in the future.
The chairmanship of the Bank Board is frankly a very difficult
and thankless task. Few will ever know fully how hard I have worked
to deal with the problems of the thrift system, in this inherently
unpopular and controversial position, and i•n the face of opposition
from many quarters.
I have gone into debt, personally, in the amount some $75,000
thus far in this job. I have treated my assignment as the rough
equivalent of military service, living away from my wife and two
daughters for more than three and a half years. I have two
households to support, including a small, spartan apartment in
Washington. During my tenure at the Bank Board, I have put one
daughter through college. The other is now a college sophomore. I
know I don't have to tell you of the financial obligations these
kinds of commitments entail. I have no source of income other than
that derived from my Bank Board salary. The notion that this job has
served in any intended way to achieve personal gain for me is
nonsense.
I have sought, to the very best of my ability, to be a
responsible financial regulator, consistent with the oath of office I
took when I accepted the position. Again, I deeply regret the
insensitivity to travel-related matters which I am now in the process
of correcting. I suppose everyone in a position of authority makes
errors in judgement from time to time. I have. And, I accept the
responsibility for them.
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Federal Reserve Bank of St. Louis
.
,
c.
3
I do hope, however, that my overall, deep commitment to my tasks
is understood in the light of the very substantial progress which has
been made by the Bank Board over these last three and a half very
difficult years. I look forward to the kind of working relationship
which has characterized our continuing association with members of
the Congress as we jointly seek to deal with the very real issues
facing the thrift system in the future.
Sincerely,
c--------,..
Edwin J. Gray
Chairman
EJG:ro
Attachment
cc:
House Banking Committee Members
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Federal Reserve Bank of St. Louis
CHAIRMAN OF THE FEDERAL HOME LOAN BANK BOARD
Order No.
700
Date: December 4, 1986
Pursuant to my Authority as Chairman of the Federal Home Loan Bank
Board, including, without limitation, that under Reorganization Plans No.
3 of 1947 and No. 6 of 1961, it is ordered that:
Federal Home Loan Bank Board ("FHLBB") and the Federal Savings and
Loan Insurance Corporation ("FSLIC") employees shall perform all official
travel in accordance with GSA's current Federal Travel Regulations and the
FHLBB's Official Travel Handbook. Reimbursement shall be made in accordance with these same regulations and from funds approved by OMB and the
Congress.
Except in accordance with part 511 of the General Regulations of the
Federal Home Loan Bank Board, FHLBB and FSLIC employees shall not accept,
cause to be made, or permit payment of on their behalf, any travel expense
from the Federal Home Loan Banks or entities of the Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, thrift industry trade
regulat d by the FHLBB.
associatons, or savings institutio
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Federal Reserve Bank of St. Louis
win
Chairman
I
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank Systerti
Federal Home Loan Mortgage Corpipratian.,
Federal Home Loan Bank Board
Federal Savings and Loan Insurafee Corporation
EMMN 1 GRAY
CHAIRMM4
March 4, 1986
?)Li
The Honorable Paul A. Volcker
Chairman
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
.
1;i1AAwirr
Dear .11-
e :
cN.A.Aiik •
•
The Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the Federal Home Loan Bank Board each have
published notices of proposed rulemaking regarding the regulation of deposit accounts after the expiration of the Depository
Institutions Deregulation Committee ("DIDC") on March 31, 1986.
Respectively, the regulations are published at 51 Fed. Reg. 31
(January 2, 1986); 51 Fed. Reg. 4376 (Feb. 4, 1986); and 51 Fed.
Reg. 6545 (Feb. 25, 1986).
These proposals differ in two significant respects:
o
Whether to limit third party transactions to six per
month on what are referred to as money market deposit accounts
when such accounts are held by for-profit entities;
Whether de minimis premiums on demand accounts
o
should be considered to be improper payments of interest.
In addition, there is the possibility that the three
agencies may take inconsistent positions on the following two
issues after the expiration of the DIDC:
Mandatory imposition of early withdrawal penalties
o
on time certificates withdrawn prior to maturity;
Treatment of finders' fees as payment of interest on
o
demand accounts.
Unless these differences are reconciled, the result could
be to create competitive imbalance after the expiration of the
DIDC. Of particular concern are the transaction limitations on
corporate MMDAs and the continuation of mandatory early withdrawal penalties. In view of these considerations, I believe
that the three agencies should immediately form a task force of
high-level representatives to attempt to achieve uniformity on
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Federal Reserve Bank of St. Louis
14
these important issues. Please feel free to call me or any
member of my staff to make firm arrangements for setting the
task force in motion.
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Federal Reserve Bank of St. Louis
Warm regards,
2
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
December 23, 1986
The Honorable Paul A. Volcker
Chairman
The Federal Reserve Board
Marriner S. Eccles Building B-2046
20th & Constitution Avenue, NW
Washington, DC
20551
•
r,
Dear Paul:
Attached is the transcript of the Federal Home Loan Bank
Board's meeting on Direct Investment.
The meeting, held on December 18, 1986, explores in detail
the evidence in support of the Board's Direct Investment
Regulation and the views of the Board Members and Staff on
related issues.
You may find the transcript interesting reading.
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Federal Reserve Bank of St. Louis
Sincerely,
•
Bank Board Meeting
Thursday, December 18, 1986
2:07 p.m., Open Meeting
MR. SCONYERS: Ladies and gentlemen, may we please come to order.
This is an open meeting of the Federal Home Loan Bank Board.
On behalf of the Chairman and Board Members Henkel and White, I
extend a welcome to our guests.
The Board has received a report regarding notational items
individually voted upon. This report will be incorporated into the minutes
of this meeting and will become an official part of it. Mr. Chairman?
MR. GRAY:
Thank you, and good afternoon.
We are meeting today to decide the fate of a regulatory proposal
which would extend the Board's Direct Investment Regulation for another two
years. The current regulation expires on December 31st.
The regulation in place now, which was adopted by the Board nearly
23 months ago, uses the concept of a supervisory review threshold beyond
which State-chartered FSLIC-insured thrift institutions must obtain
supervisory approval to exceed the threshold. The threshold is 10 percent
of assets or twice net worth, whichever is greater.
Since the regulation has been in place, the Bank Board's Principal
Supervisory Agents have given approval to some 60 percent of applicants
which have applied to exceed the threshold for applications which have been
acted upon thus far.
In my opinion, the Principal Supervisory Agents have administered
the supervisory review process, at the threshold levels that I've outlined,
in a fair and evenhanded manner. The supervisory agents, operating under
delegated authority, have in essence taken into account an applicant's
financial strength, quality of management, track record over time, and the
potential impact of the application on the health of the FSLIC.
The Board adopted the regulation at the end of January 1985
because of its concerns about the adverse impact on the FSLIC fund of direct
investments when institutions with high levels of such investments failed.
After a lengthy study by the House Government Operations Committee
on the Bank Board's Direct Investment Regulation in 1985, the Committee
concluded that the rule was", a prudent precaution while the FSLIC is in a
weakened condition".
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Federal Reserve Bank of St. Louis
JI
No one can possibly disagree that the fund remains in a weakened
condition, even more so than when the Committee report was prepared in
1985. Indeed, the FSLIC fund has primary reserves today of $2.2 billion,
reserves which stand behind more than $800 billion in insured deposits.
With respect to direct investments, the staff study in June of
this year concluded that for failed thrift institutions, each dollar of
direct investment increases the cost to the FSLIC for losses by 60 to 85
cents on the dollar for such investments. The staff also recently updated a
fall, 1984, study by Dr. George Benston of the University of Rochester, a
leading proponent of unrestricted direct investment by FSLIC-insured
institutions. In addition, the staff looked at the California experience--that is to say, what has happened to 33 state-chartered California
institutions which had in excess of 5 percent of assets in direct
investments in December of 1983. And the staff will present information
today on those studies.
At the outset, let me say that I am a strong proponent of the
direct investment rule. This is not because I believe it is nearly as
strong as it should be, but rather because it stands as a symbol of the
Board's resolve to protect the scarce reserves of the FSLIC fund.
I believe the conceptual approach taken in the regulation is
sound, even though it needs to be strengthened, in my opinion.
Chairman Volcker of the Federal Reserve and Chairman Seidman of
the FDIC have both sent letters to the Board indicating firm support for
extension of the regulation.
Senators Proxmire and Garn also have expressed support for the
regulation and its extension. Their letters are available to you over here,
I believe, or wherever they have -- the desk.
In my opinion, there is a very strong reason to believe that the
fate of the extension of the direct investment regulation is inextricably
tied to legislation which would recapitalize the FSLIC. In this regard, I
believe that failure by this Board to extend the regulation not only would
send the worst possible signal to leaders in the Congress and the financial
community regarding the firmness of resolve by the Board to safeguard the
FSLIC fund from the risk of future losses, but such a failure would, in all
likelihood, result in strong provisions enacted by Congress incorporating
restrictions on direct investment authorities which could well be more
restrictive than what is being proposed to the Board today.
In all candor, ladies and gentlemen, if this regulation is not
extended in a manner which can soon serve to communicate to Congress the
Board's firm position on the direct investment issue, I intend to urge the
Congress to tie this issue to passage of any FSLIC recapitalization
legislation. I say this because, as Chief Executive Officer of the FSLIC,
given the losses the fund is experiencing and will experience as a result of
direct investments, recapitalization of the FSLIC would make little sense if
future loss hemorrhages to the fund from such activity are not halted.
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Federal Reserve Bank of St. Louis
2
In my capacity as Chief Executive of the FSLIC, in the absence of
an effective regulatory mechanism to prevent losses from misuse of direct
investment authorities, I do find it a vexing irony that I am at once
responsible for the fund, but without adequate regulatory tools to protect
it from substantial losses and the high risk of loss in the future.
The direct investment regulation being proposed to the Board for
is, in my opinion, an exceedingly mild, prudential device
today
extension
and is a far less restrictive one than regulatory measures now under
consideration by the Federal Reserve and the FDIC for commercial banks and
bank holding companies.
In a very real sense, the Bank Board's principal mission is to
serve as the Board of Governors of an insurance carrier, the FSLIC. Our
sworn responsibility to the citizens of this country is to do our level best
to protect the federal deposit insurance system on their behalf.
As operators of an insurance carrier, we are obliged, it seems to
me, to take into account the risk of loss to the FSLIC, from activities
which are engaged in by insured thrift institutions, and to underwrite that
risk as best we possibly can.
The taxpayers of this country, the citizens of this country, have
a right to expect that we, as public servants, carry out our
responsibilities as trustees of the FSLIC in a manner which best serves the
public interest.
We are not the property of the thrift industry, even though we do,
and should, work very hard to facilitate industry health. More importantly,
we are servants of the public, including the American taxpayers, who
ultimately stand behind the insurance carrier we operate as a public trust.
We operate the FSLIC on behalf of the public, citizens who,
through their elected representatives, have chartered the national thrift
system, including the FSLIC, as instrumentalities of public policy.
Again, the public does count on us to do the right thing, and to
assure that we make every effort to protect their FSLIC fund.
With this in mind, I do sincerely hope that this Board will assume
its responsibility today in the continuing effort to protect the reserves of
the FSLIC.
Those are my opening comments, and I would like to call on my
colleagues, Mr. Henkel and Mr. White, to express any opening comments that
they might have before we get into the staff presentation. Mr. Henkel?
MR. HENKEL: Mr. Chairman, I'd like to make a brief opening
comment and reserve some further comments because I intend to make a motion
at the appropriate time.
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Federal Reserve Bank of St. Louis
3
I think that the S&L industry and the American public at large
will not be well served by the continuation of any flawed- regulatory
approach which itself is part of the reason for the peril that's confronting
FSLIC today.
As I see it, the way to help cure the industry and, simultaneously, ensure FSLIC's long-term viability is to adopt the enlightened regulatory approach that I will advance today. This approach will ensure the
timely and effective enforcement against that small minority in the industry
whose reckless actions have imperilled FSLIC. When strong enforcement is
coupled with a proper investment environment for S&Ls, we can reverse the
disturbing trend that has given rise to our concerns about FSLIC's viability.
Frankly, I am certain that the vast majority of Members of
Congress, regardless of party affiliation, will not refuse to provide
appropriate financing for FSLIC, as we go through the necessary transition
period and discuss what can be bad regulation to responsible regulation for
the S&L industry in this country.
MR. GRAY:
Thank you.
MR. WHITE:
Mr. White?
Thank you, Mr. Chairman.
As you know, this is my first public Board meeting. I, too, am
pleased to be here, and I, too, very much am concerned about protecting
FSLIC. And it was only when I came to the Board that I realized that one of
my major functions here was, as part of a three-person Board, to run, as you
properly stated, an $800 billion insurance company, or an alternative $800
billion loan guarantee operation. And I have that very much in mind in
these deliberations.
I would prefer to save further statements until later in the
proceeding.
MR. GRAY:
Thank you.
Now I believe we're ready for the staff presentation.
MR. SCONYERS:
Mr. Sahadi, or is it General Counsel Quillian?
MR. SAHADI: Ms. Gattuso will lead us through the reg as presently
proposed and a summary of some of the comments.
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Federal Reserve Bank of St. Louis
MR. SCONYERS:
MS. GATTUSO:
Thank you.
Ms. Gattuso?
Good afternoon, Mr. Chairman, Mr. White, Mr. Henkel.
4
As the Chairman said in his opening remarks, on September 11,
1986, the Board adopted a proposal to extend the direct investment
regulation for two more years.
The Board based its decision to extend the rule on its supervisory
experience and on the results of the study conducted by OPER. The OPER
study showed that the level of direct investments by failed institutions is
positively related to the FSLIC's case resolution cost.
More specifically, the study showed that direct investments by
failed institutions increases FSLIC cost between 60 to 85 cents for each
additional dollar of direct investment.
MR. WHITE: Excuse me.
This is my first meeting.
MS. GATTUSO:
MR. WHITE:
Are we going to get into greater detail?
Greater detail of comments?
Yes.
We will get into greater detail.
Thank you.
MS. GATTUSO: The comment period on the proposal extended from
September 17, 1986, until October 17, 1986. The Board received 83 public
comments in response to •the proposal -- 45 from insured institutions, seven
by industry trade associations, five by law firms representing insured
institutions, three by economic consultants representing insured
institutions, and 23 from Members of Congress.
Six of the comments supported the proposal to extend the rule for
two years. Three comments supported the proposal with certain suggested
modifications, 28 requested an extension of the comment period, and 32
members of the Federal Home Loan Bank System petitioned for a hearing on the
proposal.
The comments generally raised four issues concerning the proposal.
One being the Board's statutory authority to adopt the rule; the economic
and factual basis for the rule; available alternatives to the rule; and
procedural issues, such as the length of the comment period, and the
petitions for public hearings.
I will summarize the comments, the issues raised by the comments,
and then Bob Sahadi from OPER will discuss the Board's studies on this
issue.
With respect to statutory authority to adopt the proposal, several
commenters contended that the Board has no statutory authority to extend a
regulation that preempts the enactments of state legislatures authorizing
unlimited or less restrictive direct investment by insured institutions.
Additionally, these comments argue that the proposal is a direct
contravention of congressional purpose in creating a dual banking system.
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Federal Reserve Bank of St. Louis
5
Commenters also argued that the proposal is unsupported by the
OPER study. Several commenters argued that the OPER study is of no value in
measuring the correlation betweert direct investments and institution failure
because the study did not address healthy or non-failed institutions.
One commenter asserted that the OPER study was biased because the
actual cost to the FSLIC of the failures studied is the FSLIC's estimate of
cost based on its valuation of the assets and liabilities of failed
institutions.
Another commenter asserted that the OPER study showed a positive
relationship between FSLIC cost and the period of time that passes before
the Board acts to close an insolvent institution. This commenter argued
that there is an interrelationship between the time an insolvent thrift is
allowed to operate and the level and quality of its direct investments;
therefore, they concluded that the real problem is lack of prompt action on
the part of the FSLIC to close these institutions and not direct
investments.
Several commenters also asserted that direct investments are
necessary to the financial well-being of insured institutions and the thrift
industry. One commenter contended that the risks presented by direct
investments are less serious than the risks that will continue to confront
both the thrift industry and the FSLIC if insured institutions are
constrained in their efforts to use direct investments to cure their present
financial problems.
Several commenters asserted that the Board's reliance on its
supervisory experience is misplaced and does not show that increased direct
investments are linked to institution failure.
One commenter contended that the supervisory experience on which
the Board relies is based more on examples of institutions which have failed
due to fraud and mismanagement.
In the proposal, the Board specifically solicited comments on the
administrative flexibility of the direct investment rule. Several
commenters argued that the waiver provision found in the rule is
ineffective. They asserted that the time delays involved in receiving
preapproval in the filing process is costly to thrifts.
They also contended that the value of a direct investment depends
on the time when the investment is made and, to require an institution to
wait up to 30 days before they can make the investment, will deprive them of
promising investment opportunities.
Several commenters also argued that there's no need for direct
investment in light of increased net worth requirements with the new
regulatory capital rule.
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Federal Reserve Bank of St. Louis
6
The new capital rule, which will be effective on January 1, 1987,
requires all insured institutions and federally-chartered thrifts to
maintain at the end of the phase-in period regulatory capital equal to 6
percent of total liabilities, plus added capital based on a contingency
component, less the maturity matching credit.
Several commenters suggested that the Board modify the direct
investment limits in light of the new capital rule.
Two suggested that the Board raise the 10 percent direct
investment threshold to 15 percent for those institutions that are in
compliance with their new minimal capital requirements.
In addition, these commenters suggested that the Board only extend
the rule for a one-year period as opposed to a two-year period.
Other commenters suggested modifying the rule to permit unlimited
direct investments for insured institutions whose regulatory capital exceeds
6 percent to provide a 20 percent threshold for those institutions meeting
the increased regulatory capital requirements.
This commenter also suggested that, with respect to institutions
that meet their current regulatory capital requirements, the rule should be
modified to allow them to make direct investments up to 10 percent without
supervisory intervention; from 10 to 20 percent upon notice to the PSA; and
above 20 percent only with supervisory approval.
These commenters suggested that the Board continue to require
prior supervisory approval for direct investments above 10 percent for those
institutions that do not meet the regulatory capital requirements.
With respect to procedural issues, several commenters asserted
that the comment period following publication of the proposal was inadequate
and requested various extensions of the comment period.
The comment period ran for 30 days. The length of the comment
period was consistent with the APA [Administrative Procedures Act], which
does not require any specific time period for public comment.
As I indicated earlier, the Board received and considered 83
public comments, and many of those were late received.
MR. GRAY:
Many of them were late received?
MS. GATTUSO: [Ms. Gattuso nodded her head, indicating an affirmative response.] As mentioned earlier, too, the Board has received petitions
from 32 members of the Federal Home Loan Bank System requesting a hearing on
the proposal pursuant to 12 CFR 507.10 That section provides, after receipt
of written requests therefor to the Secretary of the Board of at least 25
members of the Federal Home Loan Bank System, the Board will fix a time and
a place for a hearing on a proposed amendment or upon an expiring regulation
relating to Federal Home Loan Banks to which petitioners object.
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Federal Reserve Bank of St. Louis
7
The staff has reviewed the history of Section 507.10, and has
concluded that the section does not apply to a regulation such as the Direct
Investment Regulation, which primarily regulates investment activities of
insured institutions.
It applies only to those proposed amendments and
existing regulations whose primary function it is to regulate the
activities and operations of the Federal Home Loan Banks.
The staff notes, however, that such a hearing is discretionary -is in the Board's discretion -- if they would like to hold such a hearing,
but they are not required to do so under 507.10. And they're also not
required to do so under the APA.
That concludes my summary of comments, and Bob Sahadi now will
discuss OPER's studies.
MR. GRAY: Before you go ahead, how many of the comments came from
insured institutions?
MS. GATTUSO:
MR. SAHADI:
Forty-five.
Good afternoon, ladies and gentlemen.
I have at my left here Mr. Don Bisenius, who is a senior staff
economist, who has participated from a technical aspect in many of these
studies. He'll first lead us through the study, that the Board is
proposing, the most justification for this reg, that which leads to the 60
to 85 cent cost to the FSLIC in case of direct investments in insolvent
institutions.
MR. BISENIUS: The study was undertaken by three co-authors, Jim
Barth of George Washington University, at that time a visiting scholar in
the Office of Policy and Economic Research; Dan Brumbaugh who, at that time,
was with the staff of OPER; and Dan Sauerhaft .
The study was entitled "Failure Cost of Government Regulated
Financial Firms, the Case of Thrift Institutions."
The study sought to analyze thrift failure over the last four
years, to see whether or not a set of balance sheet ratios and other
relevant variables could be used to explain, or at least derive,
associations with FSLIC's costs.
The study looked at 324 failures that occurred during the time
period. That included those that actually cost FSLIC money and those
institutions which failed or where a supervisory merger was arranged, but no
actual outlay from FSLIC took place.
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Federal Reserve Bank of St. Louis
8
I guess the relevant result, or at least one of the results, of
the study applicable to this regulation was that the higher levels of direct
investment in failed institutions were statistically significantly related
to cost for FSLIC. Of course, figures on those variables, again, ranged,
depending on the specification, between 60 and 85 cents, suggesting that for
each additional dollar of direct investment in a failed institution, the
cost of FSLIC was anywhere between 60 and 85 cents.
Other significant variables included the acquisition and development of land loans, and also a variable which measured the delay, or the
delay in response, between the time an institution became insolvent and the
time of its closure by the FSLIC. And that variable was found to increase
FSLIC's cost---any delay in action.
That's the primary results of the study at this point.
MR. WHITE: Well, if there's a flow -- I don't want to get in the
way of a flow -- but I do have some questions that I would like to ask.
MR. GRAY:
Okay.
Why don't you go ahead now.
MR. WHITE: All right. As you probably know, among the comments,
or the commenters that we received in this record, a number has suggested
that your study, that you just described, suffers from what a statistician
would call selection bias -- that basically all you've done is looked at the
failed institutions, and arguably you've failed to also note, if this is
the case, that direct investments might have benefitted other institutions,
preventing them from failing. And, therefore, perhaps the net cost to FSLIC
is not negative but, in fact, when you look at this larger group of both
successful and failed institutions, that the net cost might be zero, might
be positive, might be less negative, but you can't tell that from just
looking at the failed institutions alone.
Would you care to comment on that?
MR. BISENIUS: I think it's an accurate summary of, in fact, what
the study seeks to do, and that is, the study, by definition, was limited to
analyze the cost to FSLIC of a failure. It did not try to analyze the
effect of direct investment in healthy institutions.
So, again, if that's a criticism of the study, I don't think it
should be; I don't think you mean it that way. That defines the scope of
the study. Obviously, there's no cost in a failed institution per se and,
therefore, this study was not capable of analyzing that issue.
To my knowledge, I don't believe there is a study that provides
the evidence that you suggest, and that is the positive benefits of direct
investment, or the reduction in the likelihood of failure and the reduction,
therefore, in potential cost to the FSLIC, such that a net benefit number
could be derived.
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MR. SAHADI: I think, to add to that, with a cost of 60 to 85
cents, those benefits in other institutions would have to be very
significant.
MR. WHITE:
applies to benefit.
It depends on the number of institutions in -- what
Let me further ask you about the criticisms of the methodology,
itself. A few commenters raised questions about just the bias in the cost
numbers themselves, that a lot of these cost numbers are estimated cost to
the FSLIC, and that if the estimators had a bias in valuing direct
investment, that they might well be undervaluing direct investments, and
that that would, in turn, cause, at least some, if not all, of the effects
that you -- if you found any effects.
MR. BISENIUS: As you're well aware, I'm sure, from your own
research, any time one does empirical research, the data is not perfect.
The notion that the numbers are somehow biased, I don't believe
there's any test run to detect that, as I'm not aware of exactly what type
of test would be run to detect that.
The numbers that were used in the study, as the -- deep into
variable FSLIC costs were -- if a cost number was available, an actual cost
number, this was the outlay, that was the number that was used. If an
actual cost outlay number was not available, then the number that were used
were those that were estimated by the FSLIC staff. Again, the best numbers
available at the time the study was done ---.
MR. BLACK: And with your permission, I would also say that if one
were to a priori guess at any direction of bias in those estimates, since
it's in FSLIC's interest to have higher dollar values to the assets since
it, after all, wants to sell them. That's how FSLIC recoups its money.
I don't think one would guess, if he had to make a guess, that
there would be any systematic bias towards under-reporting of the values of
assets in the FSLIC portfolio. And, indeed, our experience tends to be that
when we ultimately do have to sell assets, they are very frequently under
those estimates. The actual prices we get are very frequently under those
estimates.
And apropos your earlier question about the degree of bias in
terms of selection, if you simply look at the statistics and how many
people, how many insured institutions, do view it in their interest to
exceed ID percent direct investments. Again, the numbers are very, very
tiny.
I think that ORPOS has some statistics on how few institutions believe
themselves --- apparently that they will get significant positive benefits
from exceeding 10 percent in direct investment.
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MR. WHITE: I think you've just reminded me of yet another criticism
that was levied at the study, which was that it really didn't address the
specific provisions of the rule that you can't tell from the study whether
it's really the high fliers, or somewhere else in the distribution, that are
causing the effects on the price.
MR. BISENIUS: Right. The study does not differentiate direct
investment levels; it doesn't, you know, stratify this in that fashion.
MR. WHITE: The last criticism that I remember is that there is a
correlation between delay and the likelihood that a savings and loan
institution would decide to "shoot the moon" on a direct investment; the
returns are asymmetric and the management gets the up side returns, but we
here at FSLIC have to pick up the pieces if it fails. And that correlation
between delay and the tendency to go out on a limb with direct investment
might be somehow explained here.
MR. BISENIUS: Again, I think that is definitely a possibility, in
these. There was a significant coefficient on the delay variable. And I
believe that's consistent with the statements of the Chairman in his opening
remarks, and that is at a time when FSLIC is not able to act maybe as
rapidly as it otherwise would like to, extra caution needs to be taken. I
think that's something that variable indicates.
Whether or not that somehow is correlated or influencing the results
in the direct investment coefficient, I'm not certain. I guess my one
inclination is, and maybe you've already dealt with this, is that there's
not a lot of reason to believe that that would only influence direct
investment.
Again, an institution which seeks to "plunge," while direct
investment is one asset it could choose, there's obviously an entire array
of assets that it could choose to plunge in. To the extent those other
assets did not show up as significant, I'm not sure the conclusion can be
drawn.
MR. WHITE: Now, I don't know, Bob, if I'm anticipating, but there is
the question of the relationship between the study we've just been talking
about and studies that have tried to determine whether direct investment
levels bear any relationship to the likelihood that a thrift will fail in
the first place.
Am I getting it?
Am I getting it?
I don't want to
MR. SAHADI: Well, I think -- we'll go through some of those studies,
but I think, you know, basically we're justifying the reg on the significant
cost to the FSLIC; that we're in the position of an insurance company that's
identified that there are tremendously high costs to this in the event of
failure, and these costs, when added up, well exceed the reserves of the
FSLIC.
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You know, we're not trying to make a case that the econometricians
have conclusively determined that casualty has been determined but, on the
other hand, we purport to show a lot of anecdotal information that is almost
overwhelming in respect that this may be the case if further studies can be
refined.
MR. WHITE: I just remembered one more -- sorry about that -- one more
question. And that's this issue of misclassification that is claimed that
thrifts may well be misclassifying, and particularly at the time that the
study covered, were misclassifying direct investments and putting them into
ADC categories rather than in the direct investment category that they
really should have been.
MR. BISENIUS: That's been, you know, a question of concern. I think
the Board has taken steps to deal with that misclassification problem.
Whether or not that actually influenced the results of the cost study,
again, it's difficult to discern. One can only plug into the model, the
variables which you have available, the various items, direct investment or
acquisition and development loans fall into different categories.
One interesting point, though, is that both of those variables were
significant in influencing costs, both the direct investment and the
acquisition and development loans.
To the extent there was some misclassifying, that may indicate why one
or the other became significant.
MR. BLACK: To add to it, as Bob has said, the principal argument he's
making from the econometrics standpoint is this one involving cost. The
Board certainly has very substantial supervisory experience and in, for
example, the question you asked, Board Member White, were these failures
--"high fliers" --- you're certainly right. The study didn't look at it,
and I'm sure that further work on the study will look at that issue. But
the Board has in front of it its supervisory experience, and it knows that
the Sunrises of the world, et cetera, were not simply "high fliers" but extraordinary "high fliers," that properly, their assets properly classified
as direct investments, they were well in excess of 10 percent. I mean their
portfolio was more in the 70 percent range.
MR. GRAY:
MR. WHITE:
Let me try to remember that case.
As I recall --
Before my time.
MR. GRAY: Just before your time.
[Laughter]
I believe we found that there were $780 million in, what were on, an
economic basis, of direct investments. In fact, we're told that by the
Chief Financial Officer of the institution.
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The institution, as I recall, was roughly $1.5 billion, and that
institution is estimated to cost -- will cost -- the FSLIC about $680
million -- at one institution, one-and-a-half billion dollars.
MR. BLACK: And Sunrise is simply one of the leading examples. The
supervisory experience is these kinds of high fliers were pervasive in that.
That cost study was of that group.
Question.
MR. HENKEL:
October '86?
Which one are we talking about?
MR. SAHADI:
MR. GRAY:
The study you're talking about is dated when?
That bigger one.
The cost study?
The June '86.
MR. BISENIUS:
It's June 1986 -- is the date on that one?
MR. HENKEL:
Okay.
MR. BISENIUS: It used data through October 1985, the exam period was
from 1981 through October '85. Just a second, Bill.
MR. BLACK:
Okay.
MR. GRAY:
Do you have any question on this?
MR. HENKEL:
What, what's it entitled?
study is which.
MR. BISENIUS:
That study is entitled
Go ahead.
I'm confused about which
-- I'll get the exact title.
"Failure Cost of Government Regulated Financial Firms in Case of
Thrift Institutions."
MR. HENKEL: I've got one dated October of 1986.
got the wrong one?
MR. BISENIUS:
put on top of it.
I just wondered
No, it's not -- that may be when the actual cover was
THE CHAIRMAN: All right.
time, the staff can continue.
If there are no further questions at this
MR. SAHADI: Okay. Since our proposal, we've done two other studies
that cast some further light on this situation.
The Chairman mentioned both of these in his opening remarks.
walk you through them.
Let me
In October of 1986, the OPER staff conducted a study to follow up on
and current condition of institutions examined by Professorperformance
the
Benston in a 1984 study. In this study, he presented the results of a
statistical study which he contended supported unlimited direct investment
for insured institutions.
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One aspect of his study was to identify the institution that as of
December 1983 had direct investments in excess of 10 percent of assets.
Professor Benston contended that the study showed that these institutions had considerable net worth and were quite profitable.
In its October study, the OPER staff determined that there were 37
institutions with direct investments in excess of 10 percent as of December
1983. Professor Benston in his study had only found 34.
The average regulatory capital ratio of these 37 institutions, as a
percent of liabilities, was 4.3 percent in December 1983.
By June 1986, that ratio had declined by 96 percent, from 4.3 percent
to .23 percent.
By way of comparison, the thrift industry's average regulatory capital
ratios were 4.2 percent in 1983, and close to 4.7 percent in June 1986.
MR. GRAY: Now, let me stop you there. You're saying that the average
regulatory net worth of the 37 institutions in December of 1983 was 4.3
percent, and by June of 1986 it had dropped to virtually near insolvency on
an average basis?
MR. SAHADI:
MR. GRAY:
Yes.
What was 0.23 percent.
While at the same time, you're saying the thrift
net worth, which was 4.18 percent in December '83, had
risen -- by comparison -- it had risen; the others had
percent, but the average for the industry had risen to
30th, 1986.
industry's average
risen -- actually
gone down to 0.23
4.66 percent on June
MR. SAHADI: Since 1983, 21 of these 37 institutions have either
failed, become FSLIC cases, or are currently considered a significant
supervisory case by the Office of Regulatory Policy and Oversight.
Ten of the 21 institutions are currently in the FSLIC caseload. They
have assets of $6.3 billion, and the estimated cost to FSLIC to resolve them
is $2 billion.
The current average return on assets for these 10 institutions is a
negative thousand basis points.
Another eight of these 21 cases are in FSLIC's significant supervisory
caseload. These institutions have assets of 3.75 billion and the FSLIC
estimates the cost resolving them will be approximately 1.2 billion.
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MR. GRAY: What was the rate of return on these?
speech I made, a negative 408 base points.
MR. SAHADI:
I had -- in the
That's correct.
Finally, three of these 21 institutions referred to have been closed
by the FSLIC. These three institutions had assets of $703 million, and the
cost of resolution to FSLIC is approximately $350 million.
MR. GRAY: And the negative return on assets for those at the time of
closure was a negative 916 base points?
MR. SAHADI:
That's correct.
In June 1986, the other 16 institutions in the study had an average
positive return on assets of 30 basis points, far below the average return
on assets of 108 basis points, for the close to 80 percent of the thrift
institutions that are healthy today.
Now, some commenters have argued that the problems that were picking
up in the direct investment reg are really a function of distressed regional
economies. But we decided to do another study that would look at California
-- I'm sorry -- did you have something?
MR. WHITE: Well, let me ask it now and if you want to come back to us
later, that's just fine.
MR. GRAY:
All right.
Go ahead.
MR. WHITE: Do we know whether it is the direct investments that
pulled these thrifts down? Or stating it another way, did the direct
investments perform appreciably worse than the other assets in these
institutions' portfolios in the slide down as described?
MR. SAHADI: We have looked at case studies of these institutions, and
we find that the direct investments, indeed, in these institutions were
sour. There was also land loans that had also soured. But, in many cases,
our accountants felt that these were misclassified direct investments.
MR. WHITE: Yeah. But were they the only things that soured?
rest of the portfolio sour as well?
Did the
MR. SAHADI: There was other, you know, assets of things that soured.
It's hard to -- you know, obviously there was overwhelming evidence of
direct investment. There were other things that had soured. We haven't
broke that out statistically. But that's something that will be forthcoming.
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MR. GRAY: Now, let me understand. You're saying that for these 37
institutions, 21 of which have either been closed or in the FSLIC caseload,
or projected to be insolvent within a year. You're saying that -- I believe
--did I hear you say, because I recall this myself, they will cost the FSLIC
about $3.5 billion to resolve just 21 institutions?
MR. SAHADI:
Yes.
MR. GRAY: That's 21 institutions. And, of course, $3.5 billion is
$1.3 billion more than we have today in the FSLIC fund, the primary reserve
to the fund.
MR. SAHADI:
MR. GRAY:
MR. HENKEL:
question.
Yes, sir.
Okay.
Proceed.
Let me ask another question, following along on Larry's
We're talking about these 37 institutions, 35 of which went in
Professor Benston's study.
I quote from a letter that he sent to the Secretary a few weeks ago
studying the same group, and all of this doesn't square to me, and I'm just
confused.
He said he found the following: One, direct investments are not
responsible for any of the three failed S&LAs in the study.
Two, direct investments appear to have contributed to three of the 10
S&LAs that were FSLIC cases. The extent of the losses incurred, however,
were importantly mitigated by direct investment profits at one of the other
FSLIC cases at the least.
Three, only one of the eight significant supervisory cases appeared to
have become distressed because of direct investments, while the financial
condition of the six others was significantly helped by profits from direct
investments. Thus, a closer view of the past and present, to December '85,
operations of the 21 institutions reveals that their problems were largely a
result of factors other than direct investments. Indeed, on the whole,
direct investments appear to have mitigated losses from other operations.
What do you say to that?
MR. SAHADI: Well, it's our evidence that these institutions he's
referring to were not a member of that group of 37 institutions. This is
some material that's dated and from a previous study.
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MR. HENKEL: I was understanding he was commenting on the same 37 you
were talking about.
MR. SAHADI:
We can't verify that that's the case.
I'd like to have Frank Passarelli, who's our Senior Policy Advisor in
our Office of Regulatory Policy, maybe give us a little feel for some of the
cases that we've seen involving direct investments.
MR. PASSARELLI:
MR. SAHADI:
MR. BLACK:
You can proceed and I'll get this later.
Okay.
Let me go through our California study which --
Let me take a brief stab.
What Professor Benston has done in the past with similar analyses has
used reported book returns on direct investment. And the Board supervisory
experience, particularly with these kinds of problems or failed shops is
that those reported book returns on direct investment are completely
unreliable; that they disouise the loss in asset value that is dramatic.
And as you've seen from our failure study, isn't just material, it is
gigantic, the typical loss on these assets.
So he looks at book returns by problem shops which are unreliable and
ignores the loss in the asset value. I mean, I understand why he does it in
terms of data available to him, but he should -- I mean, the limits on that
form of analysis have to be recognized as well.
I can also add something to your question, Professor White, about are
there other things at these institutions -- Board Member White, Dr. White -that could be involved. And certainly there is some answer to that.
But it comes back to how this all started. I mean, the Board didn't
pick this group of 34 or seven to look at. Professor Benston picked this
group. And he, originally back in December of '84, said, "Look, Board, you
should not adopt a direct investment rule, because look at these 34 institutions. They're doing much better because of their direct investments. This
is the success story."
The Board, in January of '85, in its preamble, wrote the following:
The McKenzie Study demonstrates, however, that in the relatively small group
of institutions currently engaged in direct investments in excess of 10
percent of their assets, which is the group of 34, they are in fact generally operating in a very risky manner.
For example, compared to the industry as a whole, such institutions
have approximately four times as much of their assets in ADC loans, three
times as much of their assets in construction loans, twice as many jumbo
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Federal Reserve Bank of St. Louis
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deopsits, eight times as many brokered deposits, and grew on the average by
181 percent between mid-'83 and mid -'84, which was almost nine times the
average rate of growth. It tells you a couple of things.
It tells you that they were plungers; in general. It tells you, yes,
there are other types of investments, and other types of investments that
are risk involved. And it also tells you again, in light of our supervisory
experience, that they had a great deal of misclassified ADC loans, but some
of them were ADC loans. And ADC loans are risky, too.
Let me just follow up on one thing that you mentioned two
MR. WHITE:
minutes ago.
My brief association with this industry and its problems had led me to
believe that if there were hanky-panky occurring in the way that institutions felt with things like fees, that it mostly happened, particularly back
in the period that the studies cover, on the ADC loan side, and less so on
the direct investment.
MR. BLACK: You're clearly correct in an ordinal sense. That.doesn't
mean that there wasn't some significant hanky-panky on the direct investment
side with when you booked profits.- And you have to also remember the
interplay. It was very frequent to do some of that stuff where you did ADC
loan in connection with the direct investment. You sell part of the project
where you provide financing. You book the profits from the sale of that
portion of your development, but you've really given 120 percent financing.
There are many ways.
But you're right.
MR. HENKEL:
More of the games were played on the ADC side.
Let me make sure that you understand.
I'm not saying that any particular academic is right or wrong. I've
never met Professor Benston -- likely one day, his name has been in the
paper so much.
All I want's the facts, and I want them all. And I want to hear the
news
and I want to hear the good news so I can make a regulatory
bad
decision. And some of the things I just haven't understood as to why we
don't publish stuff that doesn't support us as well as stuff that does
support us. And that's what I'm trying to get, is to the bottom of everything. I have a great deal of respect for all of you all. That's my point.
MR. GRAY:
Do we publish things?
MR. SAHADI: All our information, all our staff studies, are available
under the Freedom of Information Act. We regularly publish information. We
put these little fancy covers on them. We disseminate them to libraries all
over the country. I think we've probably been the most open Economics
Department in any of the government banking agencies in terms of its
research.
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Now, to the extent that we didn't put every study in this reg, maybe
that's a valid criticism, but we do make our studies generally public.
MR. PASSARELLI: Bob, could we interrupt right now? I think that
Michael Scott, who actually has worked this analysis, will actually give us
the specifics in regards to the Benston study. In that study, of the 37
that were on that list, three have failed, eight are SSCs [significant supervisory cases] and 10 of the cases have been referred to FSLIC. - And you
might want to go over on the specifics in those cases, Michael.
MR. SCOTT: Okay. Well, significant supervisory cases basically, it
means that there is some significant problem with the institution, which
supervisory people have deemed it necessary to put them into a category
stating that perhaps there's going to be some restrictions on the kinds of
activities that they can engage in. And based on -MR. GRAY: And it also means that they are essentially projected to be
insolvent, roughly, within a year.
MR. PASSARELLI:
That's right.
MR. SCOTT: Eight of the institutions that were in the study of 37
that we've been discussing are in that category. And Board Member Henkel
and Board Member White have raised the issue, well, how much can we attribute to direct investment to the position that they are in?
And I can state, in conjuction with OPER, that that is a difficult
thing to do. But there are some facts that are available. And the facts
from what we get from the eight SSCs is that three of them are presently
insolvent. An example, one of them is under a cease and desist order. Their
total assets were $175 million, and they put a direct investment of approximately $40
million into raw land. And the examiners have said, there's no
doubt that's
going to be a loss, a major loss. That, to me, is a factor
in the institution's potential failure.
In general, all of these institutions, of course, did exceed the 10
percent of assets situation. The usual concerns--there were underwriting
deficiencies. In other words, there were other factors involved besides
direct investment. But, in general, they were all engaged in rapid and
aggressive deposit growth, and they used that deposit growth to engage in
direct investments, and, in four of the cases, there appears to be little
doubt that they're experiencing these financial difficulties as a direct
result of one or more of the direct investments that they made. Okay. Now,
there's as definitive a statement as can be made from a supervisory standpoint on those eight cases.
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Federal Reserve Bank of St. Louis
MR. GRAY:
Did these tend to be quite substantial direct investments?
19
s, I'm looking at
MR. SCOTT: Looking, in general, direct investment
rs. Total assets,
numbe
quick
some
you
give
five institutions. Let me just
s was 62 million, 22
one institution was 280 million. Direct investment
n; 220 million, 15 million
percent of assets in that particular institutio
a significant percentage of
involving direct investments. In other words,
t investments.
the portfolio of these institutions included direc
institution? That's a
Did they contribute to the profitability of the
I can tell you is
All
.
alone
question that we can't get at from this data
, there was a high
eight
the
of
that in three or four cases, absolutely, out
loss to the
sive
exces
level of direct investment, and that caused an
institution.
MR. GRAY:
All right.
Bob, you were
MR. HENKEL: Let me go back to one other thing.
now, as a lawyer.
this
about
us
mentioning we published -- I'm just curio
paper, obviously
Board
in
bound
-This is the paper we're talking about
cost to FSLIC.
sive
exces
-s
cause
ated
distributed, says things that indic
argue that side of the
And if I was a lawyer, I'd love to have this, to
case.
-- Wang -- that has
Here's a paper by the same folks, with one more
side, and it doesn't
other
on the
some language in there which I could argue
it's been
that
ation
indic
have any brown back on it. I don't see any
?
views
both
distributed. Are we giving equal publicity to
paper, they're free
MR. SAHADI: If anybody wants a copy of that other
it hasn't been -and
ent
docum
to have it, but that paper is still a working
staff, that once papers come
we have a procedure, we have an editor on our
s with the fancy cover on
serie
cular
in and they want to get into that parti
n it to three people on the
it, we have a staff review process where we assig
into a collegial type
get
and
it,
at
staff, senior-type people that look
on faculties, and, you know, get
process, just as, you know, maybe people do
" And then once everybody's
into some kind of professional "give and take.
y important and significonvinced that this paper is -- you know -- prett
we put a fancy cover on it and
cant, and doesn't have any flaws in it, then
send it out.
hasn't gone through
That paper you're showing is still in process and
that review process yet.
the paper was cited
MR. BISENIUS: Although, just for clarification, and was distributed
t,
in Augus
in the Capital Regulations that were adopted
review at that time.
for
rooms
ng
readi
c
publi
--you know -- to the
eted it? You know,
MR. HENKEL: We cite it and yet we haven't compl
that doesn't made any sense to me.
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Federal Reserve Bank of St. Louis
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MR. SAHADI: No, as I mentioned, we have a process where we do -- we
have internal working papers that we make available to the public -- this is
the document you're fingering through -- and then we also have a technical
research series that is intended to be something of benefit to college
libraries and institutions. And so we, you know, go through a different
type of review process, and put a cover on it, and send it out to libraries.
There are papers of -- they're just sort of a different audience, so to
speak.
MR. HENKEL: But with a language in there like: "earlier findings
indicated that direct investments do not adversely affect the likelihood
that an institution will be closed." Isn't that something we ought to at
least let everybody look at? I mean, it's another academic view, and it's
one by the same three folks.
MR. BLACK: Well, let me -- I mean, it's difficult I think for the
person under attack to respond as forcefully as you probably should. This
is not submitted for publication. When and if it is, it gets the same brown
cover through the same procedure. It has been made publicly available
through the public reading room.
It was sent by its authors to George Benston immediately and other
opponents of the rule. It is preposterious and, indeed, insulting, to
suggest that this study is somehow being suppressed by OPER. It has been
broadly disseminated and the opponents of the regulation have had access to
it and know all about it, and Board Members have been fully briefed on the
existence of this study, and on the limitations of the study.
MR. HENKEL: I wasn't using the word "suppressed," I was using the
words, "equal publicity."
MR. BLACK:
mind.
I stand by --- we both stand by our statements.
MR. GRAY: In other words, you want these -- well, that's --- never
I won't get into that. All right. Let's continue.
MR. SAHADI: Okay. One of the comments that's been brought about,
that we were measuring regional economic distress, as opposed to really
accurately measuring direct investment as an activity for investment by
failing institutions.
In order to isolate this regional characteristic, we looked at a
number of institutions in California that had been involved in direct
investments. California does have liberal investment laws allowing thrift
institutions, state-chartered thrift institutions there, to go up to -- I
guess it's 100 percent of -MR. GRAY: To place 100 percent of their assets in service corporations, which is a euphemism for direct investment.
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Federal Reserve Bank of St. Louis
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MR. SAHADI: Uh-hum. In order to be very conservative, we said
instead of looking at the 10 percent threshold that our proposed reg cites,
we would look at 5 percent as a cutoff point. And we found that there were
33 institutions that had greater than 5 percent of assets at the end of '83
in California. Twenty of these institutions are now problem cases. The
cost of FSLIC to resolve these twenty institutions is over $3 billion.
The average ratio of regulatory capital of these 33 institutions was 3
percent in December '83, which was slightly above the required capital at
that time. In September '86, that ratio had decreased to a negative .3
percent.
We also looked at -- I'm sorry -- of these institution -MR. GRAY: You're saying that these institutions, which in December of
'83, had in excess of 3 percent regulatory net worth, have slipped to a
negative average insolvency of ---.
MR. SAHADI:
Point three percent.
MR. GRAY:
Point three percent?
MR. SAHADI:
That's right.
MR. GRAY: And the negative return on assets in September of '86 for
these institutions was -- in my notes here -- 3.345 percent, as opposed to
their return on assets in December of '83, which was 0.66 percent?
MR. SAHADI: Correct. We characterized, or we compared them, I should
say, to 148 institutions that had direct investment levels below 5 percent.
Of these 148 institutions, as of December '83, they had a capital ratio of
4.7 percent. In September of '86 that had grown to 5.4 percent.
More interestingly, they had a return on assets of 48 basis points.
That had almost doubled to 86 basis points as of September of this year.
So I think what we're seeing is that, by and large, in California,
those institutions that even had a 5 percent or greater level of direct
investment have lost capital, and are significantly losing income at this
time; whereas, institutions that were below the 5 percent thresholds -- not
to say that they didn't use direct investment in a prudent manner -- have
doubled their profitability during that time period and are quite healthy at
this point, and are well in excess of our capital standard with a 5.4
percent average capital level.
MR. GRAY: Let me go through my notes here, and talk about the 13
California institutions that are cited in this study, which had direct
investments on their books in excess of 10 percent of assets in December of
'83.
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Eleven of those now are in -- they remain. In December of '83, they
reported regulatory net worth of 2.7 percent, a negative return on assets
even at that time, of 1.72 percent. But by September of this year, just
several months ago, those same eleven institutions which remained were
reporting average negative net worth of 9.692 percent and an average
negative return on assets of 12.69 percent.
And I would point out from my information here, that three of them are
-- three of the eleven are projected to be insolvent within a year. That
is, they're in our significant supervisory caseload. Five are FSLIC
insolvencies and two have failed.
And if my figures are correct -- I believe you can correct me if I'm
not -- they are projected to result in losses to the FSLIC of an estimated
$1.9 billion, which is not too far short, just for thirteen institutions, of
the entire primary reserve that we have in the FSLIC fund for thirteen
institutions.
MR. SAHADI: By way of comparison, in those that had below 5 percent
direct investments, of those 148 institutions, eighteen have failed over
this time period. So that is eighteen over 148, or, you know, something
like 12 or 15 percent have failed; as opposed to, of the thirty-three,
twenty have failed. So we're talking about a 60 percent failure rate versus
a 15 percent failure rate. A four-to-one failure rate.
MR. GRAY: Now, these 24 California institutions that had direct
investments in December of '83 in excess of 5 percent of assets and are now
either insolvent, projected to be insolvent soon, or have been closed, those
institutions, you say, are projected to cost the fund $3.15 billion. And
that is $900 million more than we have in the reserves of our fund for
twenty institutions in California alone.
Let me ask you: I'm not an economist like you, Dr. White, and I'm not
a lawyer, either. But, it's interesting to me, I must say, that looking at
these studies, both of the thirty-seven, and then the California experience
--that these same institutions which were healthy in December of 1983, have
come to such a demise, in large part --- such an incredible demise.
I find it difficult to see this as being merely a thing of chance. Do
any of you have any comments on that? I want to talk to you as a layman
about what this somehow means. I mean, it is very strange that this would
happen with these institutions. Have any comments? Bill?
MR. BLACK: Well, I mean, clearly we don't think that it's a matter of
chance. Supervisory experience suggests that it's not a matter of chance.
It suggests that there are a group of folks who are plungers, who are not at
all risk -averse, who are particularly susceptible to very severe losses. The
basic economic theory suggests that these assets are riskier, in terms of a
more precise definition of chance. That's what statistical confidence tests
are designed to say. Is it a chance that we're looking at simply random
variation in the information? And that would be, apropos Board Member
Henkel's point, I think the question that he would have.
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And as Bob has said, there isn't an empirical study by the Board that
demonstrates, at a statistically significant confidence interval, that
increased direct investment leads to increased failures. There is such a
study on the losses to the FSLIC fund. You know, almost nothing in life is
decided on the basis of statistically significant empirical evidence.
If you wait for statistcially significant empirical evidence on an
insurance fund, you've gone out of business -- broke -- three years earlier
on loss experience, before you learn that indeed cigarette smoking, in that
first sample of thirty-seven institutions, is statistically significantly
correlated, once you reach higher sample sizes -- four years later -- and
allow the progression of lung cancer. That type of thing.
In terms of what people normally make decisions on, this is, to my
mind, one of the most monumental cases for adopting a rule that exists.
Beyond that, there is statistical information that, at an absolute minimum,
if you were an insurance company, would cause you to zap them.
MR. GRAY: Well, let's talk about that. If you were an insurance
company, a private insurance company, and you had this kind of information,
and you knew that you were very low in your reserves, protect against
claims, what would you likely do?
MR. BLACK: Well, first thing you would look to whether it was
perfectly rational or not, if you're simply an insurance company, is your
loss experience. And on the basis of your loss experience, you'd either
have such a prohibitive premium, or an exclusion from coverage.
MR. GRAY:
Which is something that you cannot do.
MR. BLACK: Which is something we cannot do --- an exclusion from
coverage already just from the loss experience. But here you've got more
than that. You do have the studies that you've talked about. You haven't
done the statistical significants tests yet to know whether the difference
in the means is statistically significant. Given the very small number of
institutions, thirty-seven, you may find -- I don't know what the answer is
going to be. Certainly we will do it and should do it. But the point is,
as I said, you wouldn't wait around. If you had that difference in two
groups, as an insurance company, you'd do something about it.
If you looked at Professor Benston's own studies, and you looked at
his studies of the relationships between direct investment to total assets,
an analysis of failed savings and loan institutions -- where he finds a
statistically significant correlation between increased direct investment
and failed institutions, at the 95 percent confidence interval for certain
of its year's, and, though he does not state it, above the 90 percent
confidence interval for other years. Particularly considering that he is a
consultant for folks posing the rules. I'm referring to Specification 15 of
his '85 study, that the Board did the review on and found that -- I think it
was the '85 data, that was statistically significant, at approximately the
ninety -- slightly above the 90 percent confidence interval.
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MR. WHITE:
A change in the institution.
MR. BLACK:
Yeah, that's the time -- that's all I'm saying.
MR. GRAY: Okay. Let me just get back to this. Just get back to
this. We have $2.2 billion today. We have other cases coming up that are
going to reduce that. We all know that. And substantially, in the absence
of recapitalization.
MR. BLACK:
Well, you can't afford the additional losses.
MR. GRAY: Well, this is the point. If you're an insurance company,
you call a halt to this until you can figure out a way to deal with it.
But it always seems very strange to me, Bill -- and Bob -- that we
have a good deal of evidence here, that institutions that were heavy into
direct investments -- I mean even 5 percent, or in excess of 5 percent, who
have, or are on the way to reaching their demise, and we have such a small
margin for error here, where the stakes are so high for this fund, that I
guess I have difficulty understanding, I guess, from a prudent man's point
of view, how it is that whatever lack of statistics there may be, we know we
have a problem here, and we know that it involves high levels of direct investments.
Now, we also know and recognize that direct investments can, indeed,
provide a higher rate of return, and they are therefore inherently -correct me if I'm wrong -- a higher rate of return generally means that
there may be higher risk involved. And if there is higher risk involved,
there is higher risk of loss, losses that the FSLIC simply cannot continue
to sustain without going out of business, or without some other kind of
action being taken by other parties.
And I suppose, then, from a prudent person's point of view, as the
operators of an insurance company, that we operate not on behalf of the
thrift industry -- we operate this on behalf of the American people, on
behalf of the American people. This is not the property of the thrift
industry, it's the property of the American people. And here we are, it
seems to me, discussing whether or not, to anyone's particular satisfaction,
the riskiness of these kinds of investments is so risky that -- or maybe not
as risky as it might be -- when we have almost no money to take care of
claims, anyway. It seems rather strange.
MR. SAHADI: Well, I think a key point here is, we're not prohibiting
this type of investment. All we're doing is establishing a supervisory
threshold, that once people bump up to that 10 percent or twice their net
worth, they come to a supervisory agent and demonstrate a case that what
they're doing is -- does present some higher return to the institution, does
have some portfolio diversification, is something that they have the
management capability to pull off.
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So, in effect, it's saying, even though we're in this very difficult
situation of having a $2.2 billion fund in a -- and obviously with problems
much higher than that; we're saying you can still sky-dive but we just want
to check your parachute to see if it's got any holes in it.
MR. GRAY: All right. And by the way, it seems to me, from an
underwriter -- insurance underwriter's point of view, that one might liken
this supervisory threshold, where supervisory agents become involved, to an
underwriting device. It's a kind of underwriting device. I gather that 60
percent of all those institutions which have applied to exceed the regulation, or have been allowed to do that -- those, I assume, that have not been
allowed to exceed the threshold, have financial problems, and other problems
that relate to the criteria that supervisory agents use.
MR. SAHADI: Well, many of the problems were withdrawals.
for further information, the institution just withdrew.
When asked
MR. GRAY: In other words, it's likely, then, when "push came to
shove," they didn't want to go through with this because it might raise
concerns about the very criteria that's involved here. And it sounds to me
like it's reasonable criteria, such as the quality of management, the track
record of the institution, the financial strength of the institution, the
potential impact on the FSLIC. Those seem to be rather reasonable steps of
criteria.
MR. SAHADI: Well, we also have more of -- you know -- if an institution doesn't obviously want to get involved in every deal, coming in and ask
the PSA for approval, I could understand how that, you know, particularly a
well-run institution would resent that type of -- you know -- "Big Brother"
intervention. If institutions come in and provide a general business plan
for this type of investment, then they can -- you know -- don't have to come
in on a case-by-case basis.
MR. GRAY: Well, let me -- this is a long Board meeting.
all the time you want.
MR. WHITE:
You may have
All?
MR. GRAY: You know, I received a letter on December 16th from the
Chairman of the Federal Reserve, Paul Volcker, and that is available, by the
way.
It says, "You've asked for my reaction to ..." our proposal. "Recent
experience, as well as more general 'structural' concerns about the role and
activities of federally -insured depository institutions, strongly suggest to
me that such extension is not only appropriate but strongly in the interest
of the financial system generally as well as the FSLIC."
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And he talks about the types of direct investments covered by the
restrictions in our existing rule. He said: "I know some of those risks
for insured institutions can be reduced by proper supervision.... But such
supervision, in my view, is not a substitute", -- not a substitute "for
limiting total exposure. Your existing rule requires that federally-insured
institutions must obtain approval from the Federal Home Loan Bank System to
make direct investments in excess of 10 percent of assets. Such a limitation, which can be overriden in specific cases of demonstrable strength and
favorable experience, seems to me, if anything, liberal. Certainly, it is
far less restrictive", Mr. Volcker says, "than proposals for regulating
investments by bank holding companies in real estate properties and real
estate development projects which the Federal Reserve has been considering."
And he goes on to say: "Our current proposal," -- that is to say, the
proposal of the Fed -- "would require that direct investments in real estate
properties and real estate development projects be made only in nonbank
subsidiaries of bank holding companies and would limit the equity investments of bank holding companies in such subsidiaries to 5 percent of their
consolidated primary capital."
Now I would compare that, 5 percent of consolidated primary capital,
which is a limit, to 10 percent of assets in this current regulation, which
is one of the reasons why I think this regulation is not nearly as strong as
it ought to be. I think the Federal Reserve is taking more of the kind of
approach that I, personally, would like to see taken. He goes on to say:
"The real estate subsidiaries would be permitted to lever their positions up
to five times their capital, but the total exposure of the holding company
(the direct investments of the real estate subsidiary plus loans and
guarantees of the real estate subsidiary or any other subsidiary of the
holding company to properties and projects in which the real estate subsidiary has a direct investment) would not be permitted..."
Then the holding company, this 5 percent that would be upstream, 5
percent of capital, "would not be permitted to exceed 25 percent of the
holding company's consolidated primary capital, itself. In addition, in the
case of individual projects in which an organization has an equity investment, its total exposure, as defined above, would be restricted to 10
percent of the holding company's consolidated primary capital."
He said: "This approach will, of course, be reviewed and perhaps
modified in the light of comments received. But I think,"he saysfithe
proposal reflects the sensitivity of the Federal Reserve Board to the risks
inherent in this type of direct investment. Those risks seem to me relevant
to savings and loan associations and their holding companies, as well,
operating on the basis of deposits obtained from the public and protected by
federal deposit insurance." In sum,"he says"the existing FSLIC rule
restricting direct investment of federally-insured thrifts, seems to me to
be an appropriate reflection of legitimate concerns." And again he points
out, "It is far more liberal" --- far more liberal --- "than we have thought
appropriate for bank holding companies. Consequently, consideration "he
says to us,"in my judgment, should be given to changes having the effect of
tightening the limitations."
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Now, the head of our sister regulatory agency, Mr. Seidman, wrote a
letter on December 4th, and he said: "In accordance with your request for
my opinion,"-- the opinion about the Direct Investment Regulation, that the
Bank Board has -- he said, "I'm writing to indicate my support for your
proposal to extend for two years the Bank Board's regulation. The limit
appears to be more than adequate for the industry's needs and is far more
liberal than what we are considering for banks which we supervise. The rule
should enhance your efforts to contain the magnitude of risk in the system
and protect the reserves of the FSLIC. Such concerns are of overriding importance in the present circumstances." So, we have letters here from the
Chairman of the Federal Reserve, the Chairman of the FDIC, commenting
directly on our proposed regulation, the Fed having a very restrictive rule
compared to this one, with no threshold to exceed, and the FDIC is considering an approach which, I believe, would be something like 50 percent of
capital, which is almost infinitely different from a 10 percent of assets
threshold.
So, that's why I've said we have, ladies and gentlemen, an extremely
liberal regulation here, -a regulation that, in effect, constitutes a form of
underwriting for the risk that the FSLIC must bear. And we are discussing
the inadequacies of studies relating to the empirical evidence we have about
losses that are involved, losses that from these few institutions that very
substantially exceed our resources, today or tomorrow, to deal with these
cases.
I think it's instructive that our sister regulatory agencies have
looked very carefully and seriously at this problem and they, obviously, are
quite concerned, or they would not be as restrictive as they are with
respect to direct investments for their own insured institutions. Now.
MR. WHITE: Thank you, Ed. You, somewhere back there, asked about
risk and what risk was. Let me reserve comment on that. I want to come
back to the issue of risk.
Bill, even farther back, you had made some comments. First, you had
talked about the risks from cigarette smoking. You didn't mention about the
risks of being downwind from two cigarette smokers. (Laughter)
But I don't get hazardous duty pay for this! However, I am newly come
to the insurance business and I'm not sure I know what an insurance company
would or wouldn't do under certain circumstances. But I would guess that an
insurance company tries to get it right, tries to identify what the source
of its possible losses are, and wants to find the least costly way of
dealing with that. I think we're -- at least most of us -- are agreed, that
the first test would be to try to price the insurance properly to reflect
risk. If that isn't possible, then we have to think about other mechanisms
to try to deal with risk.
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My concern about the California data, as they stand right now, is that
we have before us, in essence, only what would be _called a univariate
analysis.
I don't know whether there may be other influences, other
variables, which might be co-linear with direct investment, might be doing,
have the same explanatory effect. I don't know enough right now. That's
what multivariate analysis is all about.
And so, on the basis of what I have -- I mean, I see what we have, but
I'm not sure I know everything about the data.
MR. BLACK:
And we don't disagree with any of them.
MR. GRAY: We're not disagreeing with you on that, but -- not at all -but here you have a state, in California, that has the most liberal direct
investment law in the United States, and we, at least, looked at institutions with 5 percent of assets, or, in excess of 5 percent of assets in
direct investments. I mean, I think it's very interesting -- I can't bring
myself to believe that this is just a coincidence, when I look at this kind
of material.
It seems to me, personally, to be rather compelling, particularly for
an insurance underwriter, and particularly for an insurance underwriter that
has a threshold -- not a limit, but a threshold that says you can exceed it
anyway, if you come to the supervisory agent, and you request approval, and
you meet the criteria that we're talking about. You know, this has been
portrayed as some kind of limit. It is not a limit at all. And as I say,
again, it is far, far more liberal than anything that they're talking about
in our sister banking agency.
MR. QUILLIAN:
Mr. Chairman.
MR. GRAY:
Maybe they know something we don't know.
MR. QUILLIAN: Mr. Chairman, if I may? I've been sitting here
perfectly quiet. All of the discussion up to now has been supervisory, and
economic analysis, and what-not, and comment about the insurance company. I
must say that although this is not a legal point, I feel compelled to point
out, that from my viewpoint at least, some of the insurance company analogy
is well-taken, and some might be a bit of a stretch and not terribly
helpful.
From the standpoint of the insurance analogy, you have pointed out,
and it seems to me it's well pointed out and it's well to take into account,
that we are in somewhat the situation of representing an insurance company
whose existing obligations, contingent or otherwise, out-strip its resources
on the order of at least five-to-one, maybe a good deal more. And so we are
in a situation of trying to protect an insurance company which is indeed in
a very fragile and precarious position. With respect to what an insurance
company, another kind of insurance company, might do, one thing, of course,
it might be able to do would be to cancel or not renew the policy. As you
know, it is a very tedious procedure to go through, to cancel FSLIC insurance. It takes a long time and it's very difficult to accomplish.
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And so unlike a private insurance company, we can't simply cancel or
non-renew the policy. Another thing which a private insurance company could
do, where the risk is excessive, or is perceived as excessive, is to raise
the premium, and of course the FSLIC, in essence, did that awhile back by
imposing the special assessment. But that's not really the same thing.
That, as was said, we have, as you have pointed out again and again, what,
in essence, is a group insurance scheme with the FSLIC where all of the
insured members pay the same premium regardless of the risk they impose on
the system, and that premium, even with the special assessment included, is
nowhere near enough income to cope with the burdens which the FSLIC has and
is incurring; if our analysis is correct -- in large measure, certainly not
in sole measure -- based on the additional risks that result from direct
investment.
Mr. GRAY: Then I'd like to go beyond that. We are not talking about,
here, money coming in from thrifts alone in premiums. We are talking about
money that is insured by the United States, itself, and which the taxpayers
have to stand behind, if there are not other means to deal with this
problem, and, for that matter, recapitalize the fund. So, we're talking
about institutions taking high risks, not on their own money -- as the
figures show -- they are taking high risks on somebody else's money. And if
the somebody else's money is involved in a loss, the ultimate somebody
else's money is the taxpayers of this country, and the citizens of this
country. And that's a little bit different from a private insurance
company, since we're making comparisons.
MR. HENKEL:
protecting FSLIC.
Mr. Chairman, let me tell you, we're all in agreement on
I mean, all of us are dedicated to that.
MR. GRAY:
Well, you know, the way you are dedicated to protecting
FSLIC is to try to be a good underwriter. I mean, you know, you can't just
say that "I'm interested in protecting FSLIC." I mean that--it takes
actions, not just saying "I'm for protecting the FSLIC," and that's what
we're here today to talk about. What are the actions we're going to take?
MR. HENKEL: I agree with that a hundred percent, but I'd like to pose
this question. This direct investment reg was first passed January 31st,
'85. The principal study we're talking about now, which tends to indicate
increased thrift costs and failures was June or October of '86. We get
contrary views now, and there's a big debate about whether direct investments do or do not cause failures.
I don't think we still know, and I pose the question: why didn't we
start finding out January the 31st of '85, what really caused these things?
Was it examination failure? Did we not close them quick enough? Did we not
rout out the "bad guys?" Are direct investments indeed something we ought
to stop completely?
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MR. GRAY:
Well, we're not talking about the reverse.
30
MR. PASSARELLI: One point you gotta keep in mind about the examination process, it's after the fact. I mean, these institutions already made
their investments. They've incurred a risk, and the examination comes on
after the fact. And then what has happened, these things mature, and when
they mature, it's when the problem occurs.
MR. HENKEL:
Oh, I understand.
MR. GRAY:
Right.
MR. PASSARELLI: I mean that's the thing you gotta keep in mind.
Everybody thinks about the examination/supervisory process as being the
cure-all. It's not the cure-all because those people are operating. They
operate independently. I mean, they perform, and based on the regulation,
you realize they've got 10 percent of their investment in direct investments. That's a very large amount that they can invest in, and an institution can get those kind of investments, and when the examiner and the
supervisory people get in there, those investments could actually not, uh,
matured at the time to show the weakness that exists in those type investments. And I think you gotta keep that in mind.
MR. HENKEL: Oh, I understand what you're saying, but all I want to
know is, what caused the problem? Was it crooks? Was it--you know--was it
really direct investments? What was it?
MR. PASSARELLI: Well, basically, what you'll find out on all these
cases is that they weren't properly underwriting, they didn't have the
proper feasibility. I mean, lots of those things that you're going to
recognize in this. That's what makes these high-risk type of activity. They
didn't do the necessary underwriting that would actually provide the
protection to the institution and to the FSLIC. In other words, these are
after the fact, and the people who made these loans didn't prepare the
necessary underwriting, didn't maintain proper records, they didn't do the
proper inspection. They didn't do everything that's prudent. And I think
that's the problem. And there's where the weakness comes about. Lots of
these institutions, they think they can handle--like, for example, you
talked about Sunrise. That institution came into existence--within three or
four years, they became a million, four. In other words, that kind of
activity -MR. GRAY:
A billion, a billion four.
MR. PASSARELLI: I mean a billion, four. I mean, the whole point is
this: with that kind of investment activity, you go in there, it's afterthe-fact. They've made their investments.
MR. GRAY: Well, I think there's another point here, too. If we are
going to get the definitive study on everything, we'll be out of business
long before we reach that point, and it'll be all an academic matter. Now
let me say one other thing. It's interesting that we're talking about
direct investments here because we're only talking about state-chartered
institutions. We're not talking about federals.
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Interesting that in 1982, when the Congress passed the Garn-St Germain
Act, it did not increase the ability of federally-chartered institutions to
make direct investments in excess of 3 percent of assets. And I will have
to ask the staff, but it seems to me, that in terms of the kinds of losses
that we have suffered in this fund--many of the biggest losses have not come
from federally-chartered institutions, but rather from state-chartered
institutions.
Is that your general belief, staff, around the table?
MR. BLACK: It's clearly our experience in the losses we deal with in
litigation, there's no question about it. Passarelli, Mr. Passarelli
MR. GRAY:
Is that generally correct --- that these are statechartered institutions, the ones that have the authority that go well beyond
anything that Congress provided in its law for federally-chartered institutions?
MR. BLACK: Right. I'd also say that this is the most studied
regulation in terms of econometric analysis of any regulation, in the
Board's history, by a very considerable margin; a very substantial amount of
OPER's resources have been devoted to try to do studies and they didn't just
stop the first time around. They did follow-up studies. The studies
continued to go forward so if you want to talk about after-the-fact how much
was lost on each direct investment--you have to remember a place like
Sunrise, you're talking about at least hundreds of individual assets, which,
even today, may be two years from being sold and may not even be appraised
at this point. You will be gone, if you're wrong, before you get those
numbers.
MR. PASSARELLI: I think another point you gotta be bringing out here
is, the good operators, they can continue to make these investments. That's
the thing you gotta keep in mind. We've got a system in place that provides
for the good operators to continue to make these kinds of loans, and we're
not restricting those people. Those people can manage and present their
kind of business plan, how they want to make additional investments in
excess of 10 percent. We review it, and we give approval to it. It's those
people who are not good operators; who do not underwrite the loan properly;
who do not maintain proper recordkeeping. Those are the kind of people that
we're actually controlling. The good operators continue to make these kind
of investments and we bless them.
MR. GRAY: Well, let me take that one step further. Bob, I believe
that you have done a very recent study that talks about institutions that
have tangible net worth. That's where basically you back out from GAAP,
generally accepted accounting principles you back out goodwill.
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Do we know how much goodwill we have in this industry, in total?
MR. SAHADI:
Yes.
Let me give you some numbers here.
32
Let me characterize in my view goodwill as being in very,
MR. GRAY:
very, very substantial part, nothing more than hot air.
MR. SAHADI: We have $50 billion in regulatory net worth in this
industry. $25 billion of that is goodwill. So, exactly half.
MR. GRAY:
So, exactly half of the net worth that we have in this
industry is goodwill. Hot air. All right.
MR. NEUBERGER:
Which is included in GAAP.
Goodwill is included in
GAAP.
Oh, I understand it's included in GAAP, but I'm just
MR. GRAY:
saying it doesn't protect the FSLIC --hot air does not protect the FSLIC.
MR. NEUBERGER:
That's correct.
MR. GRAY:
It's not a cushion. Now, let me go step a step
further. You did a study of the number of institutions we have in the
industry with tangible net worth without goodwill, GAAP without goodwill,
and I believe you found it was something like 880 institutions.
MR. SAHADI:
Well, I divided them into three categories. I looked
at institutions in California, Texas, and all the other institutions. There
were 2700 institutions nationwide other than in those two states. Of those
2700, 881 have tangible net worth greater than 6 percent.
MR. GRAY:
All right. Now, I'm getting at something because I'm
taking off and going a step further from where you were. We're talking
about good operators being able to exceed the threshold, and 60 percent have
been able to that.
Now, let's take our net worth standard, which we had in our net worth
regulation, which was adopted several months ago; and let's assume, for
purposes of this discussion, that instead of regulatory net worth at 6
percent, we're going to take tangible net worth at 6 percent. People who
have their own money on the line, tangible net worth, 6 percent; how many
institutions in California with their own money on the line, very strong in
terms of tangible net worth, have chosen to exceed 10 percent of assets in
direct investments?
MR. SAHADI:
73 institutions in California who have tangible net
worth greater than 6 percent. Of those 73, eight institutions with tangible
net worth.
MR. GRAY:
in Texas?
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Only eight institutions.
33
Can you give us what figure is
MR. SAHADI:
In Texas, there were 54 institutions in the universe and
only three have been involved in direct investments ---.
You're saying 54 that have tangible net worth in excess
MR. GRAY:
of 6 percent or more, and only three of those that have tangible net worth
of that magnitude are into direct investments in excess of 10 percent.
So, you have in California and Texas a total of 11 institutions with
their own money on the line, am I right?
MR. SAHADI:
Right.
MR. GRAY:
Why do you think that only 11 institutions out of that
universe of 87 and 54, I think, have chosen to go into these riskier kinds
of investments, only 11, why is that? Why do you think? Obviously I'm
asking a judgment question.
MR. SAHADI: Well, I think, basically we have a term that comes from
Wall Street which is called "capital at risk," and people, when they have
their own capital at risk, they tend to be very conservative in the investments they do get into, and I think that, as was pointed out here, is that
here are institutions that probably took a good deal of time to build up the
6 percent tangible net worth and they're going to-MR. GRAY:
In other words, they don't want to lose it.
MR. SAHADI: Not to say that these institutions aren't involved in
direct investments.
MR. GRAY:
only very few.
No, no, I'm saying in excess of 10 percent, there are
MR. SAHADI: In excess of 10 percent. But that they would look up
this possibly as something they would like to do, but look upon it in a
photo portfolio context and in something in relation to their ability of
capital to withstand a loss from it.
So, they've got 6 percent hard capital and so that in effect-MR. GRAY:
Doesn't that say something to you?
MR. SAHADI: Those types of people would say, I'm going to put this
much capital at risk, given a project. I may put 25 percent of my capital
at risk, which, 25 percent may be 1.5 percent of their capital or maybe I'll
put 50 percent of my capital at risk, which, is 3 percent. And what we're
saying is, in effect, you could put 200 percent of your capital at risk,
only it doesn't even have to be tangible, it can be regulatory which, as we
said, is 50 percent goodwill.
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One thing which is clear, however, the institutions of that strength
could, if they chose, apply to the Principal Supervisory Agent for the
necessary approval to investment in direct investments if they chose; and if
they are, indeed, strong, well -managed institutions, the likelihood of them
being able to convince the Principal Supervisory Agent that they should be
permitted to do so would be presumably high.
MR. SAHADI: Well, Harry, just by the fact that they have 6 percent
tangible means that they can exceed 10 percent now without having to go to
the PSA in twice their net worth.
MR. WHITE: Bob, I was going to bring it up at some point. You
brought up this issue of portfolio, and it is one of the puzzles to me. In
one of the studies that have been done, there is the apparent finding that
the effect of direct investments for institutions--well, now, let me start
back on this--it's to your question about risk.
If one is looking at an individual asset, then variance is a measure
of risk, but for an institution, you care about the portfolio rather than
individual assets, and so one has to ask about how an asset fits into the
portfolio.
As a friend of mine has written, by itself, selling umbrellas looks
pretty risky and the pattern of sales would vary from day to day. By
itself, selling sun tan lotion would look pretty risky and the pattern of
sales would vary from day to day.
Put them together, however, and you may have balanced out your sales
portfolio with the variance in the one offsetting the variance in the other;
and the claim in one of the studies is for institutions at direct investments of above 5 percent and above 10 percent. The direct investments have
the effect that I just described, that they tend to balance out the portfolio to reduce the overall variance of the portfolio rather than exacerbate
it.
And I'm interested in what reaction you have on this.
MR. SAHADI: I would certainly agree with that theory, that I think
does not argue against this rule that we are saying by the fact that we have
a 10 percent threshold and even approval above that, that our supervisory
agents aren't looking for a salutory portfolio effect in relation to this.
If you want to talk to the direct study that talks about direct
investment in these portfolios and our analysis of that, I'll turn it over
to Don Bisenius.
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MR. BISENIUS: It's always enjoyable to be on the other side of the
study rather than defending one, to be able to criticize one. The study
we're referring to, again, was one done by Professor Benston who attempted
to analyze the diversification. At least one aspect of the study was to
look at the diversification opportunities afforded direct investment. His
results indicate that, on average, institutions have received some diversification benefits from their involvement in direct investment. I find that
result interesting and, I guess, consistent with what theory would suggest,
but I think there has to be some caution in interpreting those results, and,
I, at least noted three that somewhat bothered me.
In coming up with his returns from which he derived variance measures,
the returns were averaged over three years. As you're aware, anytime one
averages returns over years, you reduce the overall variance and therefore
whether or not the variance in correlation measures are accurate or reflective of the underlying asset is, at least, suspect.
Secondly, the returns that are investigated do not take into account
or at least potentially do not take into account, capital gains and loses.
That's. a point that Mr. Black has referred to earlier. They look at
accounting income. To the extent there are capital gains and losses on the
project, those should somehow be distributed over the various years of the
project, which will influence both the returns and potentially the variance.
The third issue, and again, this gets, I guess, somewhat technical,
and I think an important aspect of it, has to do with the variance measures
that were used in this study, and that is, what was used was a crosssectional variance. You took all the direct investments. You looked at
their returns and you saw how much variability there were in returns across
direct investments. That doesn't seem the appropriate variance measure to
use.
If one wants to look at the variance of a direct investment, one would
prefer to have a time series on that investment, to be able to know, how
does this one project vary over time. The analogy, the example, I think
that comes to mind is, if I was going to invest in GM stock, I wouldn't
necessarily look at the return on GM stock, Ford stock and Chrysler stock,
calculate the variance and say that's the riskiness of GM stock; rather I
would look at GM stock over time and see how much fluctuations there were in
holding that stock in my portfolio.
So, I'm not sure that the variance measures that were used in these
studies accurately reflect the riskiness of the projects, and therefore,
inappropriate in determining whether or not it provides the diversification
benefits.
valid.
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If those criticisms can be dealt with, then, in fact, his study is
It provides diversification opportunities.
MR. WHITE:
Thank you, Don.
36
I think next time we have a Board meeting we ought to talk about
heteroskidasticity, simultaneous equations, bias and sufficient estimators.
(Laughter.)
MR. GRAY:
Maybe you can explain what all that means.
MR. WHITE: Frank, we're talking about the problems of high flyers, et
cetera. As you know, a number of the commenters said, yes, that was a
problem in the past, but the new capital regulations are going to bring that
under control because the high fliers are going •to have to find the money
somewhere. And, again, once they start putting up their own money, do we
have to work? Do you have any sense of what the new capital regulations
are?
MR. PASSARELLI: One thing about a high flier, he gets his money back
one way or the other. I mean, in other words, these institutions get
organized and they'll actually come in with systems. So, that they were
able to get their investment out of this institution before it goes broke.
I mean, that's usually what our experience has been. What they'll do,
they'll actually provide some means of getting some kind of fee income. So,
the Net Worth Regulation will not actually be the controlling factor. I
mean, that of itself is only one aspect of a control.
If people want to provide additional net worth, that, alone, does not
provide the necessary protection, in my view, because what happens is these
people, they will actually generate the necessary income with some of these
high-risk type of activity, and as a result, they'll have the income and
also provide a way for them to get their investment out of these institutions before they become insolvent.
MR. WHITE: Yeah, but doesn't that, in a sense, go too far? I mean,
that almost says, you got these high fliers out there, they're going to get
their money out no matter, and if it isn't direct investment, they'll go out
and hedge in improper ways rather than proper ways and, or, you know,
leverage themselves in some way that even I couldn't even begin to think
about.
MR. PASSARELLI:
I don't disagree with it.
MR. QUILLIAN:
There's another kind of set of considerations there,
if I may, Board Member White. Our allusions to the new regulatory capital
regulation, of course, sometimes overlooked the fact that is a new regulation, and the increased capital strength which it looks to will be built up
over time, as much as six to twelve years into the future.
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And, so, as the institutions come into compliance with the regulation
as it takes hold, and gains strength, well, that, of course, will be more
relevant. That brings to mind, of course, a number of considerations, and
that is, that if FSLIC itself were stronger; if the industry had stronger
real capital of its own; if there were fewer institutions in rather desperate conditions than there are now; then one might take a bit more laid back
attitude towards the dangers which we believe inhere in excessive direct
investment.
But of course, those conditions don't obtain. We do have several
hundred institutions that are in rather desperate conditions, we have a
severely undercapitalized FSLIC. We have an undercapitalized industry which
we regulate, and this regulation addresses that current condition.
MR. BLACK: Everyone on the staff agrees that increased real capital
is beneficial and salutory in lots of different ways, and this is one of the
fields salutory. Aside from the phasing, of course, the current regulation
doesn't require tangible net worth, and it has limitations in terms of
deterring, plunging, inherent, and not going to a tangible net worth
measure.
In terms of the question to Mr. Passarelli, there is that danger that
they'll do something else, but most of even our worst shopped attempt to
follow the regulations, they attempt to do so because it slows down enforcement efforts against them.
And what we see time after time is folks basically gaining their net
worth to be able to do what they wanted. Empire reported record profitability until the very verge of collapse, and there are lots of ways to do that,
including under our new capital requirements and to burst off into very
large measures of direct investment or other risky investments and, as I
read from this January '85 one, it isn't just direct investment. No one is
claiming it is just direct investment. The same folks who tend to put very
heavy concentrations in their portfolio of direct investment, also choose
very risky other areas in their portfolio, in terms of commercial loans, ADC
loans, of very volatile deposit base. They are plungers.
MR. WHITE: You just, again, I think, reenforced my concern with, for
example, the California study that just by looking at the data in front of
me, I don't know what really was causing failure.
MR. BLACK: And we understand your point. We understand about the
limits of analysis, and particularly with low sample sizes, and I get back
to again, since--yes, insurance companies try to do it right, but insurance
companies try to stay in business first, and when they see their loss
experience, they don't wait until they can have the most perfect study in
the world. If they see they're taking losses up the kazoo in those areas,
they cut it off.
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MR. GRAY: But let me go a step further here. The House Government
Operations Committee report that came out, I believe, on November 5th of
1985, went into this whole subject in great detail over, I think, a matter
of something like five or six months. And I think there was general
recognition that there wasn't nearly as much data as they would like. Let
me read to you what they concluded. They said that "As long as the FSLIC
fund remains impaired" -- and no one can doubt that it remains impaired-"as long as the FSLIC fund remains impaired, the Federal Home Loan Bank
Board's direct investment rule is an appropriate and necessary restriction."
And there was another part of the report which called the direct
investment rule "a prudent precaution while the FSLIC is in a weakened
condition." That's what we're really talking about here.
What kind of reasonable precautions are we taking when the FSLIC fund
is in a weakened, and remains in a weakened condition, more weak today than
ever before in my memory?
MR. BLACK: I think it gets back to one of the questions Board Member
White asked. He says he wants to make a rational decision, which everyone
agrees with, which involves, let's look at the net effect of direct investment. I see here evidence in what it Causes in terms of failures, but let
me look at the up side, too.
Let's look at the up side because I agree, and, particularly if you
are distinct from an insurance company analogy, but even if you just taTk
about it from a government regulator's perspective, look at the up side.
Who was above 10 percent? Remember if you're below 10 percent, you
can do it anyway, and we're not stopping you from doing it. So, our reg
doesn't hurt you, doesn't stop you from that up side.
Who was above 10 percent? It's not a sample. It's the universe,
these 37 institutions that were above 10 percent. What up side harm could
we possibly have done if three years ago we had prohibited those institutions from going above 10 percent in direct investments? That's the up side
that you might be losing.
I submit, if you look at it in those terms, it gets to be a relatively
easy decision. For any insurer, it's a super-easy decision, but I think
even academically, if you look at it on that up side versus the down side
from the FSLIC cost numbers, it doesn't get to be that hard a decision.
MR. QUILLIAN: There is, of course, Bill, the additional consideration
that we're not talking about a regulation which is a ceiling or a firm
limitation or a prohibition, but rather a regulation which establishes a
threshold for supervisory review.
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This might be agood point at which to also say something about the
nature of the proceeding. It's very unusual, at least in my experience of
almost 20 years with regulatory agencies, in one proceeding or another for
an informal rulemaking to result in a record which is so airtight that it's
beyond all reasonable doubt.
This is not a judicial proceeding where the case has to be proved
beyond a reasonable doubt in a criminal case or on a preponderance of
evidence in a civil case. This is an informal rulemaking, and the test is
whether there is a reasonable basis for the action of the Board based on the
record as a whole.
As Bill has pointed out, and others have pointed out here, we on the
staff believe that this is a very strong record; that it makes a very strong
case for what the chairman has repeatedly characterized as a prudential
limited rule, and it does not seem to me--there's certainly no doubt in my
mind, that based on the record which is before the Board today, the Board
could extend this rather mild, limited rule, including a threshold of
supervisory review with firm confidence that it would survive any challenge
on review.
MR. WHITE: Okay. I understand that, but also I am not only one of
three Board Members running an insurance company, but also, in general,
regulating the savings and loan industry and I've got to think about, well,
maintaining my concern about the insurance least cost way of achieving the
desired goals, least social cost way of achieving our important insurance
goal.
MR. QUILLIAN:
We certainly share that orientation.
MR. GRAY:
Let me make a slight comparison with another regulation
that was adopted by the Board the same day, January 31st of 1985. That was
the regulation having to do with growth in deposits in the industry, and
hence, growth in assets.
We, of course, knew at the time what the rate of growth was, but we
could not have known the effect of that regulation. There would have been
no way to predict it. The actual effect of the regulation enabled us to
reduce the rate of growth in the industry as a whole down to the rough
equivalent of the commercial banks.
In 1984, it was 20 percent; much, much higher in many institutions.
That was a prudential action on our part, and it yielded very good results
from the FSLIC's point of view.
And I haven't heard anything thus far today that would indicate that
the Direct Investment Regulation --maybe, Mr. Henkel you would have some
comments on this--that the Direct Investment Regulation has impaired the
ability of strong institutions to go into direct investments at higher
levels than 10 percent.
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I haven't heard any damages thus far which have resulted from this
Direct Investment Regulation on any party. Maybe I can hear some damages
that have occurred as a result of this.
MR. WHITE: Following up on what Ed just said, I mean, this issue of
the 30-day rule that a number of the commentators said, 30 days, that's a
lifetime, I'm paraphrasing--that's a lifetime when it comes to these kinds
of investments. You've got to hit the bid when it's there, and you wait 30
days, and it's just not going to be there.
MR. GRAY:
I don't believe that. That's baloney. I'll tell you why
I think it's baloney. I think that if an institution, an insured institution, wants to make an investment or do a loan, the idea of doing it
summarily and instantaneously is the very reason why we have all the
problems we have today.
MR. HENKEL: But what we're talking about -- you asked the question,
Mr. Chairman, about what the damage out there is, if any. I don't really
know, but I know this, from having been out there in that world and knocking
around in business, if you're talking about a lot of deals and you're faced
with, number one, the cost of preparing the thousands of dollars to prepare
your business plan or whatever you've got to get together; that takes time,
and then you've got 30 more days to wait. There's going to be a lot of
deals that are going to be gone before you get there, and that's just a
fact. And you're doing this, most importantly, on a principle basis. We've
got state law that we're overriding and before we override state law, we do
that cautiously and we do it carefully.
MR. GRAY: Yeah, but what State treasury picks up one penny of any
loss? Not one penny, any treasury in this country ever pays for it. You
know who pays for it? The FSLIC.
MR. HENKEL: Mr. Chairman, I didn't design this system. We've got a
state system and we've got a federal system, and sobeit, but we've got to
operate within it.
Mr. GRAY: But on the other hand, we have to insure those deposits
that those institutions operate their businesses on, here, in Washington.
MR. BLACK: With respect, I think this debate is about a regulatory
provision that doesn't exist. The regulatory provision, in response to the
comments back in December of '84 about precisely this point that we can't go
investment-by-investment; we need more generalized authority in advance on
the basis of a business plan. The staff considered those views, thought
they were rational, brought a proposal to the Board to allow precisely that.
The Board adopted that proposal. That is the rule. I don't think anybody
-- at least I haven't heard anybody object to the concept that you ought to
do a business plan in advance of exceeding what is, after all, a very high
threshold.
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MR. WHITE: Let me make sure I understand this. A thrift institution
can come in with a business plan, say here's, in general, what we want to
do; here's, in general, the levels of a direct investment we're going to be
undertaking in general areas, without specifying, specific -MR. GRAY:
That's right.
MR. BLACK: That's right. Here are the personnel that have expertise
in this kind of investment. Here we have underwriting standards that we
follow when we consider investments, as well as loans. As you may know, our
regulations don't really cover direct investments very well in terms of
underwriting expressly.
Those are the types of things that the Principal Supervisory Agents or
their delegees look at in determining whether to approve a generalized grant
of authority to exceed ten percent, and they don't have to come back on
individual investments.
MR. GRAY: This is why, I mean, I'm always afraid of instant decisions. They sometimes don't work out very well in our experience, but even
if you want to make an instant decision because you might lose business if
you couldn't, there's nothing in this regulation that says you can't, unless
you're over the ultimate threshold that you want. Nothing!
If you want to make that kind of judgment and do a transaction like
that and you have that within the amount that you've been approved, the
level that you've been approved, then you can do that.
MR. BLACK: This Board, historically, different Board Members, have
always taken the position that they had the ability to regulate on safety
and soundness grounds, that it wasn't a matter simply of the state said you
could do anything in the world and that meant that you could have no federal
regulations addressed to safety and soundness.
But this one -- there really is a question what this sturm and drang
is all about. The number of denials of applications are de minimis relative
to system size. Of those denials, there is a right to appeal to the Bank
Board and, of course, a right after that, to sue.
To my knowledge, there has been one appeal in almost two years of any
denial --one, and no court challenge ever. I mean, there is no evidence in
our expeTience wfEF the waiver procedures, no evidence in the comments
filed, that there is any problem being imposed by this threshold in application.
MR. QUILLIAN: It certainly would look different, Bill, it seems to
me, if, instead of the record, which is about a hundred applications with
nearly two-thirds of them approved -- if it were 500 applications and
two-thirds of them denied, this kind of argument would make a whole lot more
sense.
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MR. BLACK: Well, again, you have to go back historically. The
comments in December '84 were very much in terms of, we don't believe you,
with this waiver procedure. We know what you're really going to do; you're
going to say no to everything. And the Board tried to make it crystal clear
that that was not the rule, yet went out of its way to adopt a presumption
of approval in the regulation that the PSA could not turn down the application unless he or she found specific factors, and it was basically the PSA's
burden to find those factors. I mean, you have to provide information so
that they can make the decision, but all of those changes were made, again,
precisely because the Board did pay attention to the comments.
And as far as I can tell from the entire two years of experience
afterwards, and from the comments subsequently filed, no one is claiming
that that procedure isn't working precisely as if was intended and precisely
as it was praised by what started out as a very hostile, frankly, House
committee and ended up praising the flexibility of the rule; that it wasn't
a regulation of the least common denominator, that it wasn't a fiat prohibidum.
MR. GRAY: Yes. Let me comment on that. The Board, through the
institution of the supervisory review threshold concept, has tried very hard
not to regulate to the lowest common denominator, and this is the perfect
example of that, of not regulating to the lowest common denominator, by
establishing a threshold and allowing institutions which are capable of
doing so to go above that, if you will, underwriting threshold.
MR. WHITE: I've got to ask. I mean, it is well known that this
is a regulation, a proposed rule, that has generated a great deal of
controversy. All three of us have been subjected to a great deal of letters
flying in from various places. The comment period comments reflect this
controversy. What's going on? I mean, if things are really as reasonable
as you tell us, what's going on? Why is there so much flack being -MR. GRAY: Well, let me see.
institutions that sent in comments?
hearing.
MS. GATTUSO:
So only --
Well, you had, what was it, 45
Right, and out of those 45, 32 just requested a
MR. GRAY: All right. So how many do you have who were
specifically objecting to the rule?
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MS. GATTUSO:
Three.
MR. GRAY:
Three?
MS. GATTUSO:
Six.
MR. GRAY:
Now, I'm trying to find the controversy, too, here.
I'm sorry.
43
MR. WHITE: Where's the beef?/Well, let us be frank. There is an
institution that is generating by paper volume, certainly, a big bulk of
what's going on, and they are very adept at hitting the political buttons
and they have spent a great deal of money hiring very reputable academics
with very prestigious names and producing a great volume of information.
It is very important to them and they are fighting it and have
spent, clearly, millions of dollars on the subject. But when you look at
the numbers who follow the regular public comment procedures where somebody
else can respond to them, their views -- it's minimal.
MR. QUILLIAN: I think that's a good point. If you look back, this,
of course, Board Member White, is your first rulemaking as a Board Member.
I'm sure you recall your experience at the FTC with rulemaking there.
MR. WHITE:
Department of Justice, please.
MR. QUILLIAN:
I'm sorry; Department of Justice.
MR. WHITE:
We were very sensitive to that.
MR. QUILLIAN: Yes. It's always possible that in any rulemaking
you will misstate the comments that you do get as kind of an avalanche or a
flood. We've had rulemakings here in years gone by, for example, the
rulemaking as to whether there should be a requirement of payment of
interest on escrow accounts, which generated hundreds, maybe even thousands,
of comments, and a lot of them scribbled on the backs of postcards saying,
"Of course, I should get interest paid on my escrow account."
The relatively
my experience, at least,
rulemakings which were a
not to say this is not a
mild filings in this docket in this rulemaking, in
is not exactly an avalanche. I've participated in
good deal more controversial than this, but that's
controversial rulemaking.
MR. GRAY: Well, it is controversial on the part of some. I seem
to recall that back in 19
-- the original comment period for this rule,
there were something in the nature of 200, 250 comments; something like
that, as I recall.
This is rather remarkable that on the proposed extension -correct me if I'm wrong, but you had three objections from insured
institutions?
MS. GATTUSO:
MR. GRAY:
Let me clarify that.
Out of the 83 --- •
To the rule itself.
MS. GATTUSO: Okay. Out of the 83 comments that we received, 19
opposed the proposal, 6 supported it, three supported it with modifications,
but out of those 83 comments, approximately 68 were either requesting
extension of the comment period or requesting hearings.
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MR. GRAY: All right, and some of them might Piave certainly
registered their opposition to the regulation.
MR. SAHADI: Well, I think another factor here is that if you go
back to 1984 when this was first discussed that the industry was just
licking its wounds from an interest rate beating that it had taken in the
early 1980s. Deregulation was quite new. Many in the industry looked upon
this as a way of, you know, gaining some profits to offset some of the
obvious losses from their mortgage operations. The FSLIC at that time
wasn't quite as impaired as it is today.
In a sense, the Bank Board was maybe ahead of its time, seeing the
problems at the supervisory level. Proposing this seemed to fly in the face
of what was then pretty much of a consensus in the industry towards
deregulation.
And I think even a lot of, you know, reputable operators in the
business complained at that time because they either didn't see the problem
or they saw this as an option that they might want to exercise at some time,
and this option was not costing them anything and it was, in effect, being
taken away.
I think what we see now is a few years have gone down the pike.
We've seen much more evidence of what's happening. I think the good
operators -- and I think there is an equity issue here, in your judgment -are looking at paying the cost of people having the right to exercise
unlimited direct investment powers, and they're paying for it in the special
assessment, even though their portfolios may be made up of single-family
mortgages that, by and large, have a one-percent foreclosure rate and they
get 80 percent recovery on those RE0s.
So I think this is something that has just started out hot and
it's remained hot.
MR. BLACK: Back in '84, what, 200, over 200 Members of Congress
signed a resolution asking the Bank Board to delay the direct investment
rule, consideration of the final rule by-MR. GRAY:
Representatives.
There was more than half of the House of
MR. BLACK: You mean it was a huge political football. That's
what started some of the genesis of my comments that---when we started in
front of the House Committee it was quite hostile to the idea of the direct
investment rule.
MR. GRAY: I think it's also curious, to me, here we have in
California the most liberal law in the United States for state-chartered
thrifts and at the same time I received, I believe, it was last week, a
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45
letter from the president of the organization saying that the board of
directors of the California League of Savings Institutions had voted
unanimously, all 17 of them, to strongly urge that we adopt the direct
investment regulation as written. I don't know --- Can we add 17 to that
in favor?
I also have a letter from the president of the U.S. League of
Savings Institutions which, I gather, represents about 96 percent of the
associations in this country, and I certainly wouldn't add all of them, but
the point is they also strongly urged that we adopt the extension of the
direct investment regulation as written.
I'm trying to find the controversy, too.
MR. QUILLIAN: Well, at least defined it in the record, I
suppose. These figures have been read before, but I think that to round off
that thought they perhaps should be read again; that is, the Board received
83 public comments in response to the proposal. Six supported the proposal.
Three supported the proposal with modifications, 19 opposed the proposal, 28
requested an extension of the comment period and 32 members of the Bank
System petitioned for a hearing. That's not exactly an uprising on the
record in response to this proposal.
MR. NEUBERGER: There is generally a comment bias, too. Usually
if you like a reg or can live with it, you're not going to take the effort
to write. So it's definitely a bias when you make comments for being
opposed to something. A lot of the comments also have been made relative to
the fact the fund is undercapitalized, industry is very thinly capitalized.
Implicitly in all this we've been saying that the industry is significantly
under-managed, and I think there's no doubt that direct investments -- ADC
loans involved -- vary -- instant management.
A study we did internally about a year-and-a-half ago which has not
been referred to, we were considering the feasibility of doing a risk -based
premium-MR. GRAY:
That was a FSLIC internal study, not an OPER study,
right?
MR. NEUBERGER:
MR. GRAY:
That is correct.
This is FSLIC internal study.
All Right.
MR. HENKEL: Now that we're getting into statistics, as I recall,
Mr. Chairman,'I got 86 phone calls on Wednesday--(Laughter)--I didn't keep
any tally how many for or against, but I think that was the doubt.
MR. GRAY:
a different way.
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Well, I guess they wanted to register their comments in
46
MR. NEUBERGER: If I can just to complete this comment, if we were
to look at feasibility of a risk -based premium plan, and so we did what I
call an autopsy report of all institutions that were in FSLIC's caseload
from 1982 to early 1985 where the examining force identified the major cause
was that of bad excluded assets, and not because of spread.
But then we looked at the results of those cases either closed or
through a sister transaction over that next three-year period, and we looked
at about 20 different categories of failure, had examiners go back and
looked really at the autopsy reports of those exams and see where the
evidence of failure was.
Two areas that came out far ahead of everyone else was again
direct investments and ADC loans. And again, as commented before, some of
the ADC loans have been misclassified, but those are autopsy reports.
MR. QUILLIAN: There's a remedy for those phone calls, which I
don't necessarily advocate, and that is the institution of a regulatory
system such as exists at the Federal Communications Commission where, after
a rulemaking has been sunshined for a meeting, presentations to decision
making personnel are prohibited.
That cuts off the phone calls a day or two before the meeting.
MR. HENKEL:
I was kidding. [Laughter.] It was only 36.
MR. GRAY: Are there any other questions, as this board meeting,
as I suspected)would be long, and it is.
MR. WHITE: Sorry, Mr. Chairman. There is one set of studies
which really haven't been discussed yet, except indirectly, because they
didn't have a cover on them. (Laughter.) And that's the issue of studies
which look at the likelihoods of institutions failing, and try to explain,
try to find variables that will explain whether an institution will fail or
not, and those studies, including the one without the cover by Barth, et.
al., appear to show that direct investment does not significantly affect the
likelihood of an institution failing.
What I find a litle puzzling, and have not been able to resolve
the puzzle in my mind, is the apparent inconsistency in the implications
between those set of studies, direct investment doesn't appear to affect the
likelihood of an institution failing, and the second Barth, et. al., study,
the one with the cover on it, which indicates that once an institution has
failed the extent of direct investment will significantly and positively
affect the extent of business losses.
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There seems to be conflicting implications from --- .
47
MR. QUILLIAN: Could I take a shot at that as a noneconomist and a
nonstatistician? In the discussions that I participated on that, my
reaction -- my reaction -- is that I don't really care whether the direct
investment increases the incidents of failure if, in those cases of failure,
it dramatically increases the cost to FSLIC from the failure. That is, if
the impact on the institutions which do fail are such that it sinks the
FSLIC fund, that's enough.
MR. WHITE: Well, but that gets back to my much earlier question
about a selection bias, and we may not be seeing the institutions who are
benefitted.
MR. QUILLIAN: No question about that, and if there were anything
in the record to indicate that on balance large direct investments protected
or helped FSLIC more than they hurt it, that would certainly be very useful
information.
MR. GRAY: Well, but with respect to studies, and just let me just
mention parenthetically, you might want to reconsider putting these covers
on your studies in the future.
I understand the importance of studies, and I don't want to say
that they are not important, but I have the feeling here that we could study
ourselves into oblivion at the FSLIC, and I certainly hope we don't want to
do that.
MR. SAHADI: Let me add in relation to these studies, I think we
had some studies that have been going on for the last couple of years or so.
Some of the earlier studies had the obvious disadvantage of misclassification of ADC loans which are, indeed, direct investments once our examiners
got in and looked at the characteristics of those assets.
Another problem is as in developing any kind of actuarial case
history, it takes time, and some of these studies only had data through
August of '85, October of '85. Now, we're coming up with data through
September of '86. We're seeing, hopefully, a much clearer pattern here.
If you want to talk about some of the more detailed technical
considerations on those, I'll have Don talk about heteroskidasticity.
MR. WHITE:
With that particular problem, it was satisfactory.
MR. BISENIUS:
Actually the studies deal differently with it,
MR. GRAY:
What -- what is that?
MR. WHITE:
You don't want to know, you don't want to know.
MR. BISENIUS:
No, go ahead, Bill.
but---.
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The dates differ. It doesn't --- the first study
MR. BLACK:
that they're talking about doesn't even go through August of '85. The data
only runs through 1984. It has, in my view from supervisory experience, a
systematic bias because of the classification of ADC, putting that aside.
It also looks not at failures but at closures, and closures during
the time period sampled, 1981 to 1984, several things result. First, we
know that just taking Benston's December '83 type numbers that there were
very, very few institutions above 10 percent of direct investments in the
double digit, probably in the low- to mid -double digits.
Secondly, the two I know about that were shut down in --- by '84
in that category, San Marino and Empire, both had very heavy components of
direct investment and both of them dramatically under-reported them as ADC
and, for example, there is a House report on the Empire failure that goes on
for pages about the misclassifica--- this isn't simply us. This one
everybody agrees on. So when you look particularly at the small numbers,
the fact that the investments hadn't been on the books very long, we know,
from looking at that same group of 34 to 37, what happened to them by 1986.
We know that with direct investments in ADC, as Mr. Passerelli said, there's
a time period to go sour and we know even when they went sour, we hadn't
closed them up through 1984 in any significant number, and we know from
looking at autopsies or supervisory experience when we look at '85 and '86
and we run those numbers and we get sued.
We don't have the '86 data in the second study, but we have some
of the '85 data in the second study, and we also have, in terms of statistics, when you're looking at failures, it's either zero or one. And that
has implications, as you know, far better than I, for trying to measure
differences and means, et cetera. When we look at the cost data, we can,
although Sunrise may have not been in it--I don't know whether hit mid '85
or not--you have a $680 million losses from shops. You have a different
result in your statistics from the fact that it isn't a zero one but this
allows this huge variance.
MR. GRAY:
MR. BLACK:
And we can't take very many $680 million losses.
Well, I'm just trying to address the technical
question.
MR. QUILLIAN: Well, on the nature of the proceeding again, we are
not in the condition here where we're relying on what the Court of Appeals
has called administrative intuition or administrative feel, and it has made
clear that regulatory agencies are not entitled to do that, and that it will
strike down rulemakings which rely on that. We're talking here about a
record which we believe provides a very solid foundation on which reasonable
people can reasonably infer that excessive direct investment is costing
FSLIC a lot of money.
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We don't claim that it is an airtight case, but we believe that
it's a good record.
MR. GRAY: Well, if it's not an airtight case, there are certainly
a great many coincidences involved here, which---.
MR. NEUBERGER: You go back three years ago, you relied heavily
upon anecdotal evidence, but we'll assume that anecdotal evidence assembled
against large becomes a trend, I think our data base now is such, with
various enhancements, we're better able to capture the data to demonstrate
direct investments versus ADC. Information we didn't have three years ago.
MR. GRAY: That's true. Now, are there any other questions or
comments at this point, because if not-MR. HENKEL:
Mr. Chairman, I'm prepared to make a motion if I
could.
MR. GRAY: All right, well, let me, first of all, you have to
understand, you ladies and gentlemen, that there has been some consultation,
some of it indirect as to where the various Board Members are coming out
and, as I indicated earlier in my opening remarks and, frankly, during many
of the points that I've made, I am a strong proponent of this regulation
even though I think it is not nearly as strong as it ought to be.
With that in mind, I would be prepared to make a motion on this
proposal by staff to extend the direct investment regulation for two years.
I have, however, indications that for various reasons the other two Board
Members do not want to extend it for that period of time. So, for that
reason, unless there has been a change of heart, it seems somewhat
ridiculous forme to make that motion and, having said that, I will defer to
you, Mr. Henkel for a motion that you might wish to make.
MR. HENKEL: Thank you, sir. I want to explain a little bit, too,
if I could, reserving some opening comments, as some of you may know and
some of you may not, I'm not new to Washington, having served as Chief
Counsel to the Internal Revenue Service and ranking Assistant General
Counsel to the United States Treasury. In that capacity, I supervised some
750 lawyers who were charged with drafting regulations to the Internal
Revenue Code.
When the time came in 1972 to write regulations for the Wage and
Price Control Program, Phase Two, I was assigned the task by the Secretary
of the Treasury to supervise some 75 additional lawyers who undertook that
monstrous task. I did the job. I know how to regulate. I'm not afraid to
regulate. By the same token, I strongly support the right of American
business to freely conduct their own affairs without governmental meddling
unless interference becomes necessary to protect the public.
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When it comes to the thrift industry, I believe there must be a
direct connection between regulation and safety and soundness concerned or
we will be lost in the jungle of second-guessing business decisions.
We have an industry which is already heavily regulated by both
state and federal governments. It is one of the most comprehensive regulatory schemes in this country. Where safety and soundness require any new
regulation, I insist on the minimum amount necessary to do the job. All
regulations must be finely tuned to the real problems that exactly exist. I
have carefully studied the available materials and staff papers, the public
comments, and have been literally flooded with advice, suggestions, letters,
calls and visits.
I do not believe I was appointed to do anything other than to vote
my conscience, and that's what I intend to do.
The direct investment regulation has been questioned by Members of
Congress, members of the industry and leading academics. It needs to be
exposed to the full light of day and this is what I intend to do.
I've found substantial and persuasive authority for the
proposition that direct investment, properly undertaken --- properly
undertaken --is desirable for the stability of the industry. It permits
diversification of investments that I believe is one of the key ingredients
to balanced, stable growth in the thrift industry. As currently written,
the direct investment regulation penalizes everyone whether healthy or sick.
It is too broad, too unfocused. Any proposed extension of the direct
investment regulation in its present form is not acceptable to me. I
instead propose a modified extension of the regulation to protect both FSLIC
and, at the same time, not unduly restrict well capitalized firms in making
necessary investment decisions.
And I would like to now propose my extension. Number one, I would
propose that notice be given to the Principal Supervisory Agents, be
required contemporaneously for all direct investments. I said all direct
investments.
MR. GRAY:
You're talking about every transaction?
MR. HENKEL: Every transaction. So we would have an early
warning. Secondly, I would instruct the PSAs to monitor closely the
compliance of institutions with the new capital requirements requiring
undercapitalized thrifts interested in increasing direct investments,
generally, to increase capital by the 10 to 16 percent of such investment,
which is what those regulations do.
I think that's important for everybody to understand --- that
those new capital regulations that were put into effect which I feel, are
good regulations, will require, in effect, sort of a 10 to 16 percent cash
down payment, in effect, when you want to go into additional direct
investment.
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Three, PSAs would be instructed to give priority attention to
reviewing new direct investments to see if any are unsafe or unsound.
Let me --- just an aside here for a second in the middle of my
proposal about the examination force --- one of the brightest spots I have
found up here is the examination force. It's growing. It's getting more
mature. It's something we desperately need. It's something I strongly
support, and it's something I hope to see really do its job in the future,
and it will have my full support. And -Four, thrifts not meeting the minimum regulatory capital
requirements of the regulations can make direct investments only with
supervisory approval. I think that's a proper focus. Where you're
undercapitalized, you may be tempted to "shoot the moon" or to role the
dice.
Five, thrifts meeting the minimum regulatory capital requirements,
but having less than the greater or fully phased-in capital, or 6 percent of
liabilities, can make direct investments up to twice regulatory capital or
10 percent of assets, whichever is greater, without supervisory approval.
Such institutions make direct investments above this level only
with PSA supervisory approval. That's no change in the current rule.
Six, thrifts meeting the greater of the fully phased -in capital
requirements, or 6 percent of liabilities, can fully exercise direct
investment authority granted them by their federal or state authorities
without PSA approval.
Seven, capital requirements shall be determined as of the close of
the previous quarter.
Eight, the extension shall clarify the present confusion in the
industry concerning the inadvertent exceeding of the direct investment
limitations by institutions through the misconstruing of the proper application of the grandfathering provisions providing such direct investments
shall be deemed grandfathered, and the PSAs will allow the continuation
and/or completion of such direct investments provided the institution agrees
to make no further direct investments without prior PSA approval until the
direct investment levels are in compliance with the revised rule.
In other words, I'm proposing where we've got a mess of trying to
determine what you do with that rule, we simply freeze, and nobody, whatever
their capital is, can't do anything until they get back into coMpliance.
Nine, other features of the regulation would be preserved
unchanged.
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•
Ten, as revised, the regulation shall be extended until December
the 31st, 1987, or such time as the Board shall decide, if we determine
to have a hearing at some future time on the direct investment regulations.
And I would propose, eleven, that a hearing, open to the public to be
held the later part of January --- January 29th and 30th, or as soon as
possible, after which the Board can modify or adjust any part of the
regulation deemed necessary to protect the FSLIC.
I consider myself somebody who is somewhat experienced as a
regulator, and I have been concerned and I have spoken frankly to the
Chairman and with the staff, and we have a give and take up here, and I've
told the staff to tell it like it is and to criticize me and tell me I'm way
off base, and I hope we'll get along just fine.
I'm concerned about some of the Board's regulations and policies
of the past that have been too broad, too restrictive, and not in the
interest of a healthy thrift industry. I think regulatory policies that
have the effect of hamstringing the ability of healthy institutions to raise
capital and to earn an attractive return must not be permitted.
The keys to a healthy industry and a sound FSLIC are three, (a)
real capital; (b) good people who can keep risks within their capabilities;
(c) sound and effective enforcement.
I want to send a message to the industry. We will regulate only where
necessary to ensure safety and soundness. We pledge not to over-react. We
will not regulate to the lowest common denominator.
The triumverant of the new minimum capital requirements, the new
steep level of capital required on direct investments --- 10 to 16 percent
--- and the early warning system I proposed of prior reporting are a
powerful deterrent to under-capitalized direct investment.
My proposal is more than enough to allow the system to be
adequately protected. I am prepared to vote and I think we ought to extend
the thing for the year period.
MR. GRAY:
Is there a second to the motion?
MR. HENKEL: There are copies of my proposal if anybody is
interested in some of them.
MR. GRAY:
to the motion.
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MR. WHITE:
Is there a second to the motion?
There is not a second
Mr. Chairman, let me give it a try.
53
MR. GRAY: Well, hold on, we're not ready for a new motion yet.
comment on some of the points made in this failed motion. I
to
like
I'd
believe you stated, Mr. Henkel, that this direct investment regulation
penalizes everyone. Could you explain what you mean by "penalizes
everyone"?
MR. HENKEL: It penalizes everybody in a basket without any regard to
your health or your capital.
Well, now, how is it that the 60 institutions or the
MR. GRAY:
60 percent of institutions--[Laughter.] Now, wait a second. I really need
an explanation as to how the direct investment regulation penalizes all
institutions. Now those--those state-chartered --could we have some order in
here?
MR. SCONYERS:
Please!
Please. Now, I want to know whether all those
MR. GRAY:
institutions that are below the 10 percent threshold in direct investments,
how they are penalized by the direct investment regulation? You say it
penalizes everyone. How are they penalized?
MR. HENKEL:
It penalizes all.
MR. GRAY:
No, but, but ---.
Mr. HENKEL: My point, Mr. Chairman, is that we have no threshold of
capital. The under-capitalized institutions that may be the problems, as
I've seen from the studies --- I see safety and soundness requiring regulation.
MR. GRAY: No, but I'm asking you how, how this penalizes
everyone, and I really --- I really --- think that I deserve an answer.
What about the institutions that are below 10 percent of assets making
direct investments? How are they penalized? Tell me how they're penalized.
I'm not sure I quite understand that.
MR. HENKEL:
How are they penalized?
Yeah, by the direct investment regulation. I don't
MR. GRAY:
quite understand that. I'm just taking what you said here. I don't
understand how they're penalized.
MR. HENKEL:
Mr. Chairman, what I'm ---.
MR. GRAY:
By the direct investment regulation.
MR. HENKEL: What I'm saying is that you have a basket prohibition
against all classes in the thrift industry regardless of capital, regardless
of ability, regardless of anything.
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MR. HENKEL:
By my regulation?
Mr. GRAY:
No, no, no, no.
MR. HENKEL:
Well, I haven't changed the current regulation.
By the current regulation.
MR. GRAY:
No, no, no. But I'm asking you how they're penalized
because you said it penalizes everyone. I'm trying to figure out how -it
penalizes everyone.
MR. HENKEL: Well maybe in my haste to write this, maybe I should
have been a little more careful with my language.
MR. GRAY:
All right. Well, let's see how it penalizes the
people over 6 percent. Does it penalize healthy institutions that want to
exceed the threshold?
MR. HENKEL:
Sure it does.
MR. GRAY:
How?
MR. HENKEL: They have to spend their money, and they have to
prepare a business plan, and they have to come in and ask for approval, and
they may lose a lot of deals.
MR. GRAY: How would they lose deals, unless they're denied the
ability to go over the 10 percent threshold? I don't know how they would
lose deals.
MR. HENKEL: Mr. Chairman, I've been out there in the business
world and just came up here.
MR. GRAY:
Well, no; but that's not an answer; but that's not an
answer, Mr. Henkel. I mean, you know, this is a serious meeting, and I, I
really want an answer --- how it penalizes everyone. I don't see how it
does. And I'm taking those over 10 percent of assets threshold. Those that
are healthy, the ones that you believe ought to be able to do as many direct
investments as they wish, how are they penalized?
MR. HENKEL:
Because we won't let them under the current rules.
MR. GRAY:
Well, now, just a minute. The healthy ones, they can
exceed the 10 percent direct .investment threshold with approval from the
supervisory agent. I don't see how those which are approved by the
supervisory agent are, in fact, penalized.
MR. HENKEL: Mr. Chairman, we wouldn't have a room full of people
and all the comments if there wasn't a problem.
MR. GRAY:
Well, but you're not answering my question.
know ---.
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I want to
MR. HENKEL: Mr. Chairman, we wouldn't have a room full of people
and all the comments if there wasn't a problem.
MR. GRAY:
Well, but you're not answering my question.
I want to
know ---.
MR. HENKEL:
I am as far as I'm concerned.
MR. GRAY:
Well, if that's your answer, I don't quite understand
how these institutions that are approved to go above the 10 percent
threshold are, in fact, penalized, and I have yet tb hear a cogent, direct
answer to my question, and I would wonder whether anyone else in this room
heard an answer to my question.
Now, you talked about government meddling. I don't know. That
seems to be a pejorative term, and I agree that, in too many cases, the
government meddles but, in the case of insured depository institutions, the
government, which is underwriting the risk of loss, itself, from the
activities that are engaged in of whatever type, it seems to me that the
government does, indeed, have a responsibility not to meddle but, as you
suggested, to supervise and to examine and to regulate these institutions,
not necessarily always by rule, but to regulate.
It seems to me that when you decide that you want to get in bed
with the government; namely, have a public charter and have the ability to
have insurance of accounts, then you have an obligation also, when you get
in bed with the government, to perform in a certain manner and it seems to
me that that is a quid pro quo for operating your business on the implicit
full faith and credit of the United States.
Now, we all can have disagreements as to how to go about regulation, but I'm concerned about the term "government meddling," particularly
in a pejorative sense, as it relates to the supervision of federally insured
institutions which the taxpayers ultimately back.
It seems to me that the taxpayers ought to have something to say about
this, particularly when they are subjected to the possibility --- at least
the possibility -- of having to pay the costs for failed institutions.
That comes out of the pockets of people who never had anything to do
with the savings and loan business or operating a savings and loan other
than, perhaps, by placing their deposits in an insured institution.
You also talked about real capital.
regulatory net worth real capital?
Do you consider 6 percent
MR. HENKEL: Mr. Chairman, 6 percent regulatory capital is the
limit we set for everybody to aspire toward.
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MR. GRAY:
That's not what I'm asking.
56
MR. HENKEL:
MR. GRAY:
real capital?
It's the best we got, and ---.
No, that's not what I'm asking.
Do you consider that
MR. HENKEL: It's the best we got. I think it's our test we got
to live with. If you're asking the basic question, would I prefer every
thrift institution in the country to have 50 percent capital, sure. Who
wouldn't?
MR. GRAY:
Well, I'm not sure I would, not 50 percent. It seems
to me that might be counter-productive. But my question here is -- it
relates to an earlier conversation we had around this table at this Board
meeting---and it had to do with the use of generally accepted accounting
principles.
Now, you know, over at the commercial banks for purposes of primary
capital, it's my understanding that they cannot use as primary capital --they
cannot use as a calculation for primary capital---even GAAP with goodwill.
Goodwill I described earlier as, essentially, for a very large part,
hot air.
The purpose of capital in insured institutions is to serve as a
cushion to protect the FSLIC. I don't see how goodwill protects the FSLIC
by one penny. If an institution fails, somebody is going to have to tell me
how you can use hot air to save one dime for the FSLIC.
So I'm not sure that I consider that real capital in terms of what
we're talking about, and I wanted to point that out. I would agree with you
that I'm very pleased with the progress that we've made in terms of the
development of our examination force, and I think that Herculean efforts are
being made out in the field with respect to that.
Now, I didn't comment on all the points that you made in your
presentation, but I think it is very important, Mr. Henkel, to understand
that it is the government, itself, which stands behind every federally
insured institution, and the government has a responsibility to make sure
that these institutions are operated properly and that they are, to the best
of our ability, operated in a way where the taxpayers themselves are not
going to have to come in and pick up the pieces. That is our responsibility
again--as the operators in effect of an insurance carrier.
I haven't seen the rest of the comments, and I may well comment on
them, but I think we're in desperate, terrible trouble in this country when
we treat insured institutions the same way that we would any other business
because those businesses, when they fail, don't cost the government a dime.
They cost the owner a lot of money, they may cost stockholders a lot of
money, but the government is not on the hook. But that is the case with
depository institutions that operate on the implicit full faith and credit
of the United States.
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Federal Reserve Bank of St. Louis
57
Now, the Chair will entertain another motion.
MR. WHITE:
Lee, I don't want to ---.
MR. GRAY:
Unless you, unless you ---.
MR. WHITE: No, no, I will.
anything he wanted ---.
I just--I wasn't sure if Lee had
MR. HENKEL: Just, just one more comment. And I made the comment
that Ed and I get along famously--we do--so just because we're up here
disagreeing--I have some very pronounced views. I've been a regulator, and
I feel very strongly about them and I'm going to continue to feel that way.
I have an approach to regulatory authority to protect FSLIC, and
that's what I'm going to do, and just because we disagree, Mr. Chairman, on
the way to go about it, doesn't mean I'm any less sincere about going about
it than anybody else.
MR. GRAY: No, no, there's no intent to question motivations.
There may be some questions, but not intent to question motivations.
MR.
Mr. Gray:
HINKEL:
I know that.
Okay, why don't you go ahead.
MR. WHITE:
Thank you, Mr. Chairman. This is a proposal that
has been put to us by the staff. It's generated extensive comment and
controversy, and the public record is a sizable stack.
As you know, I've been a Bank Board Member for only five weeks,
and unfortunately this has just not been enough time for me to acquaint
myself fully with the full complexities of this issue, especially in light
of my other obligations as a new Board Member and, consequently, I do not
feel that, at this time, I can make a properly informed decision on the
merits of the proposal as it stands.
You've heard in the past almost three hours the questions that
I've raised. There have been some answers. There are still a lot of
puzzles in my mind. I don't ask for perfection. I know we're never going
to know everything, but there are still too many questions that are out
there in my mind.
As a solution to my dilemma, I suggest, and I will put it in an
appropriately phrased motion, that the Board extend the current rule for
two-and-a-half months past December 31, 1986, that would extend it to March
15, 1987.
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Federal Reserve Bank of St. Louis
58
6
In the interim the public comment period should be reopened so
that any new information can be provided to the Board and interested parties
can comment on the evidence and arguments that have been advanced thus far.
Also, the new evidence which we heard about today that has been
developed by the Board since the close of the most recent comment
period --through this process can be exposed to public scrutiny. In addition
MR. GRAY:
You mean additional public scrutiny?
MR. WHITE:
Yes, well ---.
MR. GRAY:
Right.
MR. WHITE: The evidence since --- that's been developed since the
public comment period.
MR. GRAY:
All right; all right; all right.
MR. WHITE: In addition, a public hearing should be held on the
proposal, and I would suggest the dates of January 29 and 30, 1987 as those
dates, so that oral presentations can be made before the Board. There can
be give and take between Board Members and interested parties.
I believe that a public hearing is especially worthwhile for
regulation that is considered to be as important and as controversial as
this one.
Let me emphasize this suggestion for what I consider to be a
relatively brief extension should not be interpreted as a signal as to my
eventual decision on this matter. It is simply a means by which I can
better inform myself so as to be able to make a better decision.
Let me emphasize that when we open the public comment period, I would
welcome public comment on really a wide range of issues relevant to this
rule. We've heard from Board Member Lee Henkel some proposals that involve,
for example, notification; for example, gearing of the ability to take
direct investment to capital requirements. I would welcome comments on the
feasibility of notification as a means of dealing with the possible problems, the feasibility of the capital requirements, perhaps substituting an
alternative set of capital pool requirements, perhaps tangible net worth, as
an alternative measure.
I would like to hear, perhaps, comments on the suggestions that
have been made in the record of raising the threshold for some well-financed
institutions. I'd like to know how well it's thought the new capital
requirements will serve as a measure to deal with our insurance problems.
I'd like to hear how better supervision might be put into effect
to deal with our monitoring and policing problems.
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Federal Reserve Bank of St. Louis
59
Let me emphasize that, at this point, I don't feel that I know enough
to make a decision. I don't even know which direction the regulation ought
to go. If one believes the California data, that we heard about earlier
today, perhaps a regulation ought to go down to a 5 percent threshold and
approval beyond 5 percent.
Perhaps we ought to bring the state-chartered institutions down to
federal levels. Perhaps we should bring our rules into conformity with
other banking agencies. At this point, I don't know.
Some of these directions are clearly in a more stringent direction, other of these suggestions are in a less stringent direction. At this
point, I don't feel I know enough to be able to endorse any of them, and I
believe that the best course of action then is a limited extension, open up
the public comment period, have an oral hearing, expose the new data, the 37
institutions, the California institutions, if we can find out about the
Texas institutions, as well, within the limits of confidentiality, of
course. I believe that at the end of this process by March 15th, I will be
prepared to make a definitive decision on this rule, and so I would move
that the current rule be extended for two-and-a-half months to expire on
March 15, 1987; that this be adopted as an interim final rule and that the
existing proposal, in essence, stay on the table. I'm not quite sure
exactly legally how to phrase that, and that we have a January 29 and 30
oral hearing on the wide range of issues that I've presented.
second?
MR. GRAY: All right. We'll have comment after --- is there a
The Chair will second the motion.
Let's have a little comment.
Member, particularly an academic-(Laughter.)
I understand fully that a new Board
MR. WHITE: Ed, I will teach you about heteroskidasticity before
my term of office is over.
MR. GRAY: I can certainly understand that time has been short and
that you would want more time to do this, to take a look at this, including
the public hearing that you're talking about.
I have very reluctantly seconded the motion, not because I have any
doubt that you want to get at the issues here and learn them very well, but
because I am concerned about sending a bad signal to the Congress that the
Board does not have that resolve, that I mentioned earlier, to deal with
this issue in even a mild way, which is not as strong, as I say, and I would
hope, speaking for myself, that anything we do with respect to dealing with
direct investments be stronger than we currently have in this current
regulation, as we move down the track, particularly in light of what the
banking agencies have proposed, themselves.
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Federal Reserve Bank of St. Louis
60
S
I don't know particularly what form that might take at this time,
of course, but I'm trying to say that your points are very well taken in
that you do need more time.
I would say, however, and I will repeat what I said earlier: If
this Board cannot send that signal to Congress, that it does, in fact,
intend to deal with this issue with resolve, then I will urge the Congress
to put in statute, particularly with the recapitalization legislation, the
means by which we can deal with this issue as heads of this insurance
carrier.
So, though as I say, my decision to support this is very reluctant. I believe you can understand that, too, and also can understand that
I have lived with this problem for a long time, now---.
MR. QUILLIAN:
Mr. Chairman ---.
MR. GRAY:
And you have not.
MR. QUILLIAN: May I ask for clarification of one aspect of Board
Member White's motion for the benefit of the Board voting on the motion. It
was our understanding from the conversations just prior to the Board meeting
that it was contemplated that there would be a meeting of the Board no later
than the end of February to act on the basis of whatever the outcome of the
hearing was.
It seems to me it may well be undesirable to specify a precise
date, but I was wondering whether Mr. White might want to include in his
motion the further element of a Board meeting by the end of February to act
upon the rulemaking.
MR. WHITE: Since I automatically assume that the Board and its
staff would need a reasonable amount of time subsequent to a meeting to get
it all down right and make sure it gets to the Federal Register right, I
mean, just as we are meeting two weeks prior to the expiration date, and I
know the holidays are there, but I assume we're doing it also because it
gives the staff adequate time.
I had certainly assumed that that would be the case and I would
certainly be aiming for a meeting at the end of February that would take the
definitive decision on this rule.
MR. BLACK:
comment date?
Did your motion include a comment date?
Mr. WHITE: All
suggested hearings on
public comment period
makes it February 6.
right. All right. What I would like to have ---I had
January 29 and January 30, and I would extend the
to one week past those hearings. So I guess that
If that's the Friday, that's the one I want, so as to
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Federal Reserve Bank of St. Louis
61
An end on the
allow people to react to what they've heard in the oral arguments and
provide us with written comments subsequently. February 6th being the end
of the public comment period.
MR. GRAY: All right.
taken into account of?
So the motion has been made.
Is that duly
MR. QUILLIAN: Yes, sir; as you know, we had prepared the documentation for today's meeting on the basis that the Board might take up and
approve the recommendations of the staff and we have prepared a document on
that basis. The staff will need to prepare a document for submission to the
Federal Register. It seems to-me that that could be approved in form by
notational voting to incorporate whatever the Board decides on the basis of
Professor White's motion or otherwise. That is, that you could vote on the
motion and we will prepare the memorialization of that vote and that could
be approved on notational voting.
MR. HENKEL: Mr. Chairman, a comment and I'll be brief because it's
been long. I oppose the motion. It's time to move on and get a regulation
out there, for a period of time of some sort, that the industry can rely on.
We're just delaying further and having more uncertainty, and I think we need
a measure of predictability so that managers can run their institutions with
some idea of what the regulatory consequences would be so they can concentrate on the bottom line.
I made a proposal. It has what I think is innovative, giving the
examination force the ability to focus on those problem institutions where,
I think, most of our problems are. I'd be perfectly willing, if that rule
needs modification later, to change parts of it. I'm not fixed on any part
of it, but I think we ought to get on with the job. I was ready to move on,
and I proposed one year. I'd even go longer than that. I think it's time
to move, and I will vote no on the motion.
MR. GRAY: So, all right.
seconded the motion.
MR. HENKEL:
Chairman, but ---.
Well, it's been moved and seconded.
I
I don't disagree with the public hearing, Mr.
MR. GRAY: All right. With respect to that, we had a proposal on
the table and there would have been certainty had that two-year extension
been adopted, which it was not. That certainly provided certainty and
particularly on the basis of almost two years of experience and particularly
in light of the comments that have come in to us from interested parties,
particularly insured institutions.
Again, it is very important because we have a recapitalization
bill that --- we have not voted yet --- we have a recapitalization bill that
will be before the Congress. There may be several, but there certainly is
one that the Treasury and the Bank Board have already proposed to the
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Federal Reserve Bank of St. Louis
62
Congress, and I think it is absolutely imperative that this issue be dealt
with and a signal, in fact, be sent to the Congress as to the degree to
which we do have resolve to deal with these kinds of issues, because, in my
opinion, it is highly likely that the Congress will do this for us and take
this regulatory flexibility that we now have on this issue out of our hands
in any event if we fail to send that signal expeditiously, particularly in
the early part of consideration of an FSLIC recap bill. Now ---.
MR. WHITE: Mr. Chairman. I'm sorry, Mr. Chairman. I realize
that there is a one topic -- I've raised it earlier in oral discussion -that I really welcome the comment on and that's this 30-day rule and whether
the 30-day notice period in order to go forward with direct investments, how
it's working, are there horror stories? I want to hear about the horror
stories in the public comments
Again, there seems to be this disjunction between what the
comments are saying and what the practice of the rule appears to be and what
the staff is saying, and I want to try to shed as much light on that
disjunction as possible.
MR. GRAY:
Are there any other questions?
If not, how do you vote?
MR. WHITE:
I vote aye, Mr. Chairman.
MR. GRAY:
Aye.
MR. HINKEL:
No, Mr. Chairman.
Mr. GRAY:
Thank you.
All right." It's been long.
MR. SCONYERS: Thank you, Mr. Chairman.
adjourned.
(Whereupon the meeting adjourned at 5:10 p.m.)
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Federal Reserve Bank of St. Louis
63
I think we're finished.
This meeting is
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
0.„,c (
212s2
at-- °Et LA,t
a,6fraced2
Of5LA4,1;
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Federal Reserve Bank of St. Louis
s(t.0
CONFIDENTIAL
1700G Street. N.W.
Washington, D.C. 204562
Federal Home Loan Bank Systara
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
Federal Home Loan Bank Board
EDW
GRAY
CHAIRMAN
September 26, 1986
The Honorable William Proxmire
Committee on Banking, Housing and Urban Affairs
534 Senate Dirksen Office Building
Washington, DC 20510
Dear Senator Proxmire:
An article in the September 20, 1986, Washington Post reported
certain allegations suggesting the possibility of harassment or
improper disclosure of information by this agency or its
representatives with respect to an ongoing examination of Lincoln
Savings and Loan Association, Irvine, California.
To allay any' concern this article may have caused, with respect to
your oversight responsibility for the Board, I want to share with you
the enclosed copy of a report on this matter prepared at my request by
the Board's Principal Supervisory Agent at the Federal Home Loan Bank
of San Francisco. Because the report relates to an ongoing examination
of an open institution, I request that you hold it in confidence.
I believe the information in this report speaks for itself in
refutation of any suggestion of impropriety by the Board or its
representatives regarding the examination of Lincoln Savings. If,
however, you should have any questions regarding this matter which are
not answered by the report, I would be glad to provide any further
information you may desire regarding it.
Again, please treat the report as confidential.
Sincerely,
EJG:ro
Enclosures
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
1700 G Street P.W.
Washington. D.C. 20562
Federal Horne Loan Bank Board
Federal Horne Loan Bank System
Federal Home Loan Mortgage Comoration
Federal Savings and Loan Insurance Corporation
MEMORANDUM
TO:
James Cirona
Principal Supervisory Agent
Eleventh District
Federal Home Loan Bank of
San Francisco
FROM:
Edwin J. Gray, Chairman
Federal Home Loan Bank Board
DATE:
September 22, 1986
1111014/11.1
411EIMI
......
on of The Washington
An article in the September 20, 1986 editi
, a California
ings
(Sav
ln
Post attributes to "officials at Linco
Bank Board is
"the
that
s
ation
state-chartered association)" alleg
harassing" the association.
ln "has lasted seven
The article says an examination of Linco
executives say is
try
indus
than
months, about 5 1/2 months longer
institution of LIncoln's
typical in a routine examination of an
ing (the CEO of Lincoln
"Keat
size." The article goes on to say:
gh his lawyer, Margery
Savings) said in a statement issued throu
neys believe that the
attor
Waxman of Sidley and Austin, 'Lincoln
it may be
that
long
so
routine examination has dragged on
ners that they have
exami
the
harassment. There is no evidence from
the statement said."
(found) any problems' during the audit,
s have been made by Lincoln
Because these very serious allegation
Washington Post article, I would
and its attorneys, as related in The
response to the allegations
like you and your staff to provide your
in a memorandum to the Bank Board.
Board itself do not
As you know, the members of the Bank
a matter of practice.
as
,
intervene in the conduct of examinations
through delegated authority
The conduct of examinations is overseen
the Federal Home Loan Bank
by the Principal Supervisory Agents in
Districts.
include the date of
In your response to the Board, please
oln, whether it is, or was, a
commencement of the examination of Linc
examination, or otherwise, and the
"routine," that is to say, regular
months, if this is the case.
reason(s) it has allegedly taken seven
bears directly on the nature of
Include any other information which
Board should, at this time, be
these allegations by Lincoln which the
Post article.
aware of, in light of The Washington
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Federal Reserve Bank of St. Louis
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to internal or confidential information.
Citation Information
Document Type: Correspondence
Citations:
Number of Pages Removed: 6
Confidential: Memoranda to E.J. Gray from J.M. Cirona, "Lincoln Savings & Loan (FHLBB No.
3805)", September 25, 1986.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Newspaper article
Citations:
Number of Pages Removed: 1
Day, Kathleen. "Bank Board Chief, Critic are Feuding." Washington Post, September 22,
1986.
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Home Loan Bank Board
Eleventh District
office of Supervisory Agent
August 8, 1986
Peter M. Fishbein, Esq.
Kaye, Scholer, Fierman, Hays & Handler
425 Park Avenue
New York, New York 10022
Dear Mr. Fishbein:
As I indicated I would do when we spoke on July 24, 1986, I am
writing in response to your letter of July 15, 1986, which
concerns the ongoing examination of your client, Lincoln
Savings and Loan Association ("Lincoln"), by the Federal Home
Loan Bank Board ("FHLBB"). Because your letter reflects a
fundamental misunderstanding of the facts and law pertaining to
this examination, I shall endeavor to set the record straight.
1.
Your proposal that the FELBB's examination in California
and Arizona be "coordinated" throuRh your partner a New
York City litiRatora is unacceptable and reflects a
fundamental misunderstandinR of the examinations process.
Your letter proposes that your partner Karen Katzman, a
litigator, "coordinate" the FHLBB's examination of Lincoln from
her offices in New York City. You state:
"Mould you please have any Bank employee engaged in
the examination who desires any documents or
information from Lincoln contact Ms. Karen Katzman of
our office with the request. Her telephone number is
(212) 407-8777. She will arrange for an appropriate
response. We fully intend to cooperate with
legitimate examination requests in a manner that will
not unduly burden the association or detract from its
ability to operate its regular business" (your letter,
p. 2).
600 California Street
Post Office Box 7948
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San Francisco. California 94120-7948
Federal Reserve Bank of St. Louis
Peter M. Fishbein, Esq.
Page 2
August 8, 1986
As you know, we found this unprecedented proposal
unacceptable. It reflected a fundamental misunderstanding of
what an FHLBB examination is and how it is conducted. An FHLBB
examination is not civil litigation discovery, nor is the
"discovery" model at all appropriate for the work of the FHLBB.
The FHLBB (and its agents at the various regional Federal Home
Loan Banks) have the right and the duty to examine any and all
of the operatioins and records of insured savings and loan
associations such as Lincoln. Such examinations can be
conducted at any time, with or without warning. FELBB
examiners have the right to see anything they want. Indeed,
were it otherwise, the FHLBB could not fulfill its statutory
responsibility to ensure the safety and soundness of insured
savings and loan associations. Unfettered access, including
the ability to appear at an association without advance notice,
is essential to the fulfillment of this function. The slow
pace and maneuverings of civil discovery have no place in the
examination process.
Examinations typically take place at the association's
offices. Examinations are informal and should not require the
assistance or the intervention of lawyers. Examiners' requests
for information and documents are usually handled orally and
rapidly by guiding the examiner to the appropriate person and
files. Part of the examiners' function is to become familiar
with the people and procedures of the association, so that both
can be evaluated. Examiners deal not only with top management
but also with department heads and other middle-level
personnel. Indeed, many associations welcome examination
reports because they provide top management with an objective
outside evaluation of middle and lower level personnel.
Except for the fact that Lincoln's top management has played so
active a role in this examination (of which more will be said
below) the FHLBB's 1986 examination of Lincoln has attempted to
follow these procedures. The examination has taken place at
Lincoln's offices in Irvine, California, and on occasion at the
offices of Lincoln's parent and affiliates in Phoenix,
Arizona. The examiners have a work room at the Irvine facility
and deal with Lincoln personnel, not litigation counsel 3,000
miles away. The examiners' requests were (until recently)
handled informally, although not always expeditiously.
Although Lincoln's top management has attempted to limit the
examiners' access to other Lincoln personnel and files, the
examination, at least initially, vent smoothly.
The purpose of an examination is to determine whether an
association is following FHLBB regulations and operating in a
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Federal Reserve Bank of St. Louis
Peter M. rishbein, !sq.
Page 3
August 8, 1986
safe and sound manner.* While you conclude that Lincoln is
doing both (your letter, p. 1) the FHLBB, of course, cannot
accept an attorney's representations in this respect, but must
make its own conclusions based on the findings of its
examination and supervisory staff about regulatory compliance
and the safety and soundness of any insured institution's -operations. The FHLBB would be derelict in its duties to do
otherwise. Nor will the FHLBB permit its examiners to be
interrogated by an association's counsel, or its examination to
be limited in scope by counsel's opinions as to Vhat is
"appropriate" or an "undue burden" (your letter, p. 2).
Neither the association nor its litigation counsel have the
right to restrict an FHLBB examination in this fashion or
obstruct such an examination in any way.
Your subsequent proposal on July 28, 1986 to have examination
requests funneled through a Kaye, Scholer litigator at the
Irvine location and Mark Sauter, an in-house lawyer, at the
Phoenix location is most unusual, but we will try it for so
long as it imposes ag burden on our examination process. We
will not per-alit any effort to interrogate our examiners while
they are trying to do their jobs. Further, any attempt to
obstruct the examination process by inappropriate interrogation
in response to requests for specific information will be
considered a refusal to produce documents.
2.
Your criticisms of the TELBB's examination are mot well
taken.
a.
ram, of Your assertions reflect a risunderstandinx of
the examination Drocess.
Most of your letter consists of criticism of the duration of
the FHLBB's examination of Lincoln. Here again, your
criticisms are unfounded and many of your factual statements
are simply erroneous. Before turning to your specific
assertions, however, I would like to discuss some of the
general notions contained in your letter.
First, your continual references to "the Bank" and "Bank
officers" suggest some confusion about who conducts
examinations. Examinations are conducted under the direction
of the FHLBB and not the regional Federal Home Loan Banks such
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Federal Reserve Bank of St. Louis
There is no basis for your statement that "the FHLBB is
primarily concerned with Changing the operating philosophy
of Lincoln * * *" (your letter, p. 1). Rather, the FHLBB's
interest is in determining whether Lincoln is operating
within FHLBB regulations and in a safe and sound manner.
Peter M. Fishbein, !sq.
Page 4
August 8, 1986
as the Federal Home Loan Bank of San Francisco ("FHLB-SF").
While examinations and supervisory personnel are now employees
of the regional Banks, they are agents of the FHLBB, not the
FHLB-SF, for purposes of supervisory and examination
activities. The FHLBB has the right to give guidance to and
manage the activities of its agents. Indeed, the examiners and
supervisory personnel are solely responsible to the FHLBB and
the Federal Savings and Loan Insurance Corporation ("FSLIC")
when performing their examination and supervisory fucntions.
They are not agents of the FHLB-SF, and they do not report to
or take any direction from the FHLB-SF board of directors. I
shall have more to say on this topic below (see part 3 of this
letter).
Second, a number of your comments about the duration of the
examination suggest some confusion about the discretion
accorded the examiners on-site at Lincoln. The individual
examiners and the Examiner-in-Charge of a particular exam (who
spend almost all of their time on-site at an association during
an examination) do not have unfettered discretion to speak for
the FHLBB or to determine the course and scope of an
examination. Instead, they report to their FHLBB superiors,
who review and direct their work. Of course, the examiners
superiors, as well as supervisory agents, can and do provide
direction and guidance to the examiners during the course of an
examination. An examination is an iterative process. Review
and evaluation of work in process often leads to requests that
the on-site examiners take another look at, or seek more
information about, a particular aspect of an association's
activities. In addition, the close and informal working
relationship between the examiners and the association should
and usually does lead to a further exchange of ideas, as the
examiners make comments, the association responds and the
examiners review their comments in light of that response. All
this takes time, expecially when an association (suCh as
Lincoln) is large and its activities are varied and
geographically diverse.
Third, your remarks about the examination overlook the fact
that the progress of an examination slows when, as here,
examiners' routine requests are sometimes met with delays and
evasions. On several occasions during this examination,
routine requests have taken days or weeks to fulfill or have
never been fulfilled. For example, a request for a summary of
major loans by type and geographic description took weeks to
fulfill despite Lincoln's promise to provide the information
within a matter of days. Another request, for a copy of
Lincoln's loan policies and procedures manual, took over two
weeks to fulfill. Another request, for financial statements
pertaining to one loan (Testamentum), took over three weeks to
fulfill. Still another request,for appraisals, title policies
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Federal Reserve Bank of St. Louis
•
Peter M. Tiabbein, Esq.
Page 5
August 8, 1986
e
and certain other documents pertaining to one servic
we have
And
l.
corporation, took almost two months to fulfil
a profit and loss
never received any response to a request for
n service
statement on the Hotel Pontchartrain, a *38 millio
everybody
corporation investment. Conduct such as this slows
down.
b.
Many of sour factual assertions are vrong.
(i) rostoonements of meetinks.
Let me now turn to your specific factual assertions.
an exit
Contrary to the statement on page 2 of your letter,
May
late
any
was
nor
interview was not scheduled for May 27,
tand
I
unders
as
exit interview cancelled.* Here are the facts
and Lincoln's
them: in May, Judy Wischer, a Lincoln director
to
principal liaison with the examiners, mentioned
to take a
d
planne
she
that
Kotrys
Joseph
Examiner-in-Charge
asked
whether
she
and
month
the
of
short vacation at the end
d that
replie
Kotrys
Mr.
plans.
she should ca,ncel her vacation
on
plans
vacati
r's
Wische
he did not wish to interfere with Mrs.
exit
May
late
No
and saw no need for her to Change them.
meeting was ever scheduled, much less cancelled.
cancelled the
Your statement that "[Ohe Bank officials then
the Bank's
e
becaus
part
in
[May 27] conference, apparently
two months
ation
examin
the
appraisers, who had begun work on
, p. 2) also
letter
late, had not completed their review" (your
let alone
ence,
is incorrect. There was no May 27 exit confer
sers did
on cancelled by "Bank officials"; and the FHLBB apprai
fact, the
not begin their work "two months late." In
the May 27 date
before
weeks
April,
in
appraisers' work began
suggested by your letter.
by first sending
In this case we followed standard procedures
ation, and
r
examin
regula
in the examiners to start Lincoln's
of loan
ation
then calling in the appraisers when the examin
files
loan
some
files (and, in particular, the discovery that
sals)
contained no appraisals or apparently deficient apprai
the
While
es.
servic
sers'
apprai
for
indicated the need
this is just
appraisers had not completed their work by May 27,
led, or
schedu
be
could
iew
one more reason why no exit interv
was scheduled, for late May.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
, p. 2);
The examination did not begin March 4 (your letter
it began March 12.
Peter M. Tishbein, Esq.
Page 6
August 8, 1986
We did schedule a conference for June 24 and then postponed it
ion'
for a week, until July 3, but most of your other assert
is not
It
wrong.
are
2)
,
p.
letter
(your
about this conference
his
Dove,
Mr.
or
arge,
er-in-Ch
Examin
true that Mr. Kotrys, the
Bank
r
"senio
to
nement
week
postpo
superior, attributed the oneofficers in San Francisco," nor did they say that the
conference "would pRain be rancelled" (your letter, p. 2)
(emphasis added). The conference was not cancelled, much less
"again," and the one-week postponement was not ordered by
"senior Bank officers in San Francisco."
24
Nor is it true that the one-week postponement of the June
high
land,
in
ments
conference was "because of Lincoln's invest
yield bonds and acquisition and development loans" (your
bonds
letter, p. 2). While Mr. Dove may have mentioned land,
r
and loans, he did so only to indicate areas that needed furthe
examination.
(ii) The July 3 conference.
pp.
Your description of the July 3 conference (your letter,
this
of
2-3) also is inaccurate. The noteworthy aspect
and
conference was not the examiners' remarks but the hostility
threats to which the examiners were subjected by your
to
clients. Understandably, the examiners were reluctant
ted,
comple
been
not
have
that
ation
discuss areas of the examin
loan
s
to
discus
but they were ready, willing and able
documentation deficiencies. Your statement about Supervisory
Agent Richard Sanchez's knowledge of Lincoln's "written
rebuttal materials" is a red herring. The examiners had
reviewed these materials and were prepared to discuss Lincoln's
deficiencies, but they could not get in a word edgewise, as
officers of Lincoln and its parent (notably Charles Keating,
Jr., Chairman of American Continental Corporation) dominated
the meeting and made repeated threats to sue the FHLBB. It is
true that several Lincoln lawyers at the meeting attempted to
interrogate FHLBB personnel, but in view of the threats of
litigation being made by Mr. Keating, the FHLBB personnel
present (who were not represented by counsel) were not obliged
to submit themselves to such unwarranted interrogation.
(iii) Lincoln's defaulted Louisiana timberland
loan,
Many of your accusations about the appraisal of certain
Louisiana property (on which Lincoln made a loan that has since
gone bad) were addressed in my June 20, 1986 letter to
Lincoln's Chairman and Chief Executive Officer Andre Niebling,
and I see no need to go over the errors contained in your
previous letter. Here are the facts: The appraisers examined
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Peter M. rishbein, Esq.
Page 7
August $, 1986
the loan documentation and discovered serious deficiencies in
the appraisal. Your employee attempted to minimize these
deficiencies by pointing to the guarantee, but it later turned
out that this guarantee was essentially worthless and indeed
later called the guarantor "a snake."
Based upon their conclusions about the deficiencies in the
existing appraisal, the FHLBB appraisers decided to order an
independent reappraisal. Formally, the FELBB does this by
hiring its own appraiser under the procedures setforth in 12
C.F.R. §§ 563.17-2 and 571.1. The appraisers set out to do
that this time until Mrs. Wischer prevailed upon them to let
Lincoln hire the appraiser. When this departure from normal
practices came to the attention of the appraisers' FHLBB
superiors, they asked that the normal practice be followed.
While you characterize this as reneging on a deal, the fact of
the matter is that Lincoln attempted to arrange a departure
from sound normal practices designed to ensure the independence
of FHLBB appraisers.
Your statement that Bank officials directed FHLBB appraisers to
obtain numerous reappraisals (your letter, p. 3) is also wrong;
some of the properties had never been appraised and the
appraisers and I, not FHLB-SF officials, made the decision to
obtain these appraisals.
(iv) The Wolfswinkel vrolect.
Your discussion of the examination of the Wolfswinkel projects
(your letter, pp. 3-4) is erroneous both as to the facts and
the law. Your statement that FHLBB regulations provide "that
the determinations of an institution's independent accountant
control the loan accounting issue" (your letter p. 4) (emphasis
added) is also wrong. While the views of an association's
accountants are of some guidance, your reading of the FELBB's
supplementary materials on 12 C.F.R. § 571.17 apparently was
not complete. The discussion goes on to state:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
"* * * the Board further expects examiners to review
this documentation (of an association's accountants'
classification of the ADC arrangements) just as they
review other decisions and clasification issues during
the examination process. Should a question arise as
to the classification of specific transactions, the
Board expects its Supervisory Agents to review the
examiners' comments and discuss the issue with the
institution and its independent public accountants"
(50 Fed. Reg. 18233, 18235 (April 30, 1985)).
This is exactly the procedure being followed by the examiners
and supervisory personnel here. This procedure gives you and
your client no cause for complaint.
Peter M. Fishbein, !sq.
Page 8
August 8, 1986
ers
Contrary to your suggestion (your letter, p. 4), the examin
review
y to
did not ask Lincoln to retain Arthur Young & Compan
to
wanted
ers
the
d,
examin
Instea
ts.
projec
the Wolfswinkel
very
retain Arthur Young on behalf of the FHLBB and were
and
FHLBB
the
n
betwee
itself
ed
insert
surprised when Lincoln
sers,
apprai
land
ana
timber
Arthur Young. As with the Louisi
this departure from sound normal practices was unacceptable.
J.
s from
Your letter mentions that "Lincoln also provided letter
Mr. Wolfswinkel's attorneys, as well as several of his
,
creditors, substantiating his creditworthiness" (your letter
and
l
unusua
the
r,
howeve
note,
p. 4). You failed to
questionable nature of Lincoln's response in this regard. We
are surprised that Lincoln disclosed details of a confidential
sed that
ongoing examination to Wolfswinkel and even more surpri
riate
approp
the
Lincoln and Wolfswinkel would think that
tion if
repsonse to an examination inquiry is to threaten litiga
are
a loan is reclassified. In general, I must say we
and
concerned that Lincoln's repeated threats to sue the FHLBB
the
FHLBB
for
ulties
diffic
create
to
use its "political clout"
and obstruct
may constitute an attempt to intimidate the FHLBB
respect to
with
duties
ory
it in the performance of its statut
the thrift industry.
(v) The Continental _foothills property.
(your
Your remarks about the Continental Foothills property
rate
does
illust
topic
the
but
ect,
letter, p. 4) are also incorr
ation.
the
ged
examin
prolon
has
how Lincoln's hostile attitude
Originally the examiners discovered that the Continental
Foothills property had not been adequately appraised.
When
Accordingly, the FHLBB appraisers ordered an appraisal.
FHLBB
ty,
proper
the
sold
n
Lincol
fter
immediately therea
n
appraiser Everett Fenton asked Mrs. Wischer for documentatio
t
able
reques
reason
s
and
obviou
an
t,
of the sale. This reques
to
right
MBE's
the
e
despit
e
in the circumstances, led nowher
ent
that
statem
r's
Wische
see such information and despite Mrs.
y
Lincoln had financed this sale, was carrying approximatel 80
the
out
of
percent of the sale price, and was not by any means
s
property. I trust you understand that an institution' holding
a
much
concern
as
is
value
fied
unveri
of security property of
owned.
estate
to the FHLBB as is holding real
Be therefore
Mr. Fenton's oral request met with no response.
followed it up with his letter of June 18, which, contrary to
your characterization (your letter, p. 4), seeks appropriate
and pertinent information. Eventually, Lincoln provided
unsigned escrow papers and an unsigned agreement but little
y and the
more. The examiners had to - turn to the title compan
ction.
this
on
transa
ation
inform
r
public record to obtain furthe
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Peter M. Fishbein, Esq.
Page 9
August 8, 1986
The information does show a sale, but it is one in which
Lincoln is providing 80 percent of the purchase price.
Although the information came slowly and in part from sources
outside Lincoln, it has answered the FHLBB's questions on this
topic and accordingly the FHLBB will cancel its order for a
Continental Foothills appraisal. This isiue could have been resolved sooner had your clients cooperated instead of
resisting the examination.
(vi) Few reauesto for information.
Your final assertion that the examiners have made burdensome
new requests in the last week (your letter, p. 5) is
substantially inaccurate. We have certainly not asked for a
list of all of American Continental Corporation's land holdings
since 1969; ACC did not buy Lincoln until 1984. We did ask for
a current inventory of lots -- which Lincoln stated was not
availabe -- but we did not ask for any cost data on houses.
While as part of the iterative process described above, we did
ask for some additional data on joint ventures, direct
investment and securities trading, your letter describes Dot
our requests but instead Lincoln's putative reasons for
refusing our requests. The documents we seek were not all
reviewed in 1984 and are not part of our current work papers.
3. 'our attacks on the FELBD and ITIB-SF are unwarranted and
nave no itroundinK in fact.
Your assertion that the "examiners are managed by the Bank's
board of directors which consist of many of Lincoln's
competitiors" (your letter, p. 5) is completely untrue. As
explained above, the examination and supervisory functions are
directed by the FHLBB and not the FHLB-SF. The board of
directors of the FHLB-SF does pot direct and is pot kept
informed of the FHLBB-controlled examination and supervisory
process. Your insinuation that the FHLB-SF board of directors
has had anything to do with, or even knowledge of, the ongoing
examination of Lincoln is wrong and lacks any grounding in fact.
Your "black-listing" allegations (your letter, pp. 4-5) are
equally groundless. The FHLBB conducts bidder conferences from
time to time. Invitation lists are drawn up by the FHLBB in
Washington. FHLBB-directed personnel in the regional offices
then review the list. The FHLB-SF board of directors and
Lincoln's competitors (whomever they might be) have no role in,
to
or knowledge of, the FELBB's decision to invite or not
nce.
bidders
lar
confere
particu
a
invite an association to
In the case of the June 19, 1986 conference to which you refer
(your letter, p. 4), the FHLBB list from Washington did not
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Peter M. Fishbein, Esq.
- Page 10
August 8, 1986
include Lincoln and nobody in San Francisco discussed whether
to invite Lincoln. While FHLBB personnel had not invited
Lincoln to an earlier bidder conference because the ongoing
examination had revealed several unresolved supervisory
concerns, similar decisions not to invite other associations
have been made in numerous cases. Whenever there are
regulatory concerns about an association (such as often arise
in the midst of an examination), it is not appropriate to
invite the association to take on additional responsibilities
for the management of a failed association at least until the
examination findings can be analyzed and the supervisory
concerns are cleared up.
If your word "abusive" (your letter, p. 5) has any application
to this examination, it should be applied Dot to THUS
personnel but to the repeated threats and evasions made by your
clients during the past several weeks. Despite this conduct,
the examiners can and will complete their examination as
quickly as possible, and they will report their conclusions in
a thorough and professional manner. A thorough and
professional examination was and is the FHLBB's only goal in
this matter.
Very truur8,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
eX.4.4.601
. Davis
rector of Examinations
Peter M. Tiabbein, lag.
Page 11
August 8, 1986
bcc:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
J. M. Cirona
W. Black
J. Price
R. Stewart
D. S. Adams
C. A. Deardorff
R. A. Sanchez
D. B. Fassett
R. D. Dove
R. Kuzcek
BOARD CF. GGVUNES
OF THE
FEH.RAL USERVE
4.
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank BoTga JUL
24 AP 8: 11111
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
9"4
CHAIRMAN
Sa,
Tgct‘/Iv.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Almcka
Adz, 9—
oiet,
e t
Ce6
1700 G Street, N.W.
Washington, D.C. 20552
Federal Horn• Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Home Loan Bank Board
Federal Sayings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
July 18, 1986
Editor
Wall Street Journal
22 Cortland Street
10007
New York, New York
Dear Sir:
d
The July 16, 1986 article in the Wall Street Journal, entitle
Fine,"
Just
Along
"Thrifts Trade Group and Its Regulators Get
insinuates unmistakably that as chief regulator of the savings
institutions industry in America I am a mere lackey of,
controlled by and in the hip pocket of an industry trade
ly
association. The article also strongly suggests I am basical
who
nt
sycopha
a
dishonest because I am somehow nothing more than
trade
the
has allowed himself to be improperly used by
association.
are untrue.
I deeply resent these ugly insinuations because they
by and in the
If I were the sycophant, the lackey of, controlled
-- which
tions
hip pocket of, the U.S. League of Savings Institu
I
tions
institu
counts as its members the vast majority of the
fellow.
regulate -- I would very likely be a most popular
I am not.
over the
Even a casual reading of the financial and trade press
Board
Bank
past three years of my tenure as Federal Home Loan
ory
regulat
Chairman would indicate that the Bank Board's tough
safety
and
approaches intended to restore industry discipline
and soundness have been distinctly unpopular at best.
me as a
Curiously enough, the writer of this article depicted
a lengthy
very unpopular regulator with the thrift industry in
has
Wall Street Journal article in early 1985. The writer
the
continually insisted on having it both ways. Indeed, in
minimize the
July 16, 1986 Journal article, the writer sought to
numerous
strong and continuing disagreements I have had on
in the
others
and
tions
associa
trade
regulatory matters with
industry.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4a
4b
Editor
Wall Street Journal
Page 2
July 18, 1986
The U.S. League is, as the writer says, a very powerful lobbying
force in Washington. Of course, I have sought to gain the
understanding of the League for various Bank Board policies. It
would be foolish, and even irresponsible, for me not to do so.
But everyone who has followed my tenure knows, or ought to know,
I have not given on matters I feel strongly about, even in the
face of lobbying by this and other industry groups.
In the writer's zeal to somehow demonstrate that the Bank Board
is in bed with the industry and its trade groups, the impression
was clearly left in the article that the Board has acted
contrary to the public interest. Indeed the writer of the
article stated flatly that the U.S. League has "virtual veto
power over many" Bank Board proposals. This is an egregious
falsehood.
It is a personal insult to me, and to my colleagues
on the Board.
The writer claims the U.S. League "is consulted on nearly every
Bank Board action." If the writer had said the League and all
other interested parties are permitted to comment on proposed
Bank Board Regulations, such would have been correct because by
law and regulation all parties are, indeed, permitted to
comment. As a matter of policy, the Bank Board encourages the
widest possible public comment. This is clearly not what the
writer was suggesting. The writer clearly was intimating that
we at the Bank Board, as a matter of course, take our orders
from the U.S. League. The writer of the article strongly
suggests the Bank Board encourages the distribution of "internal
drafts of regulations" to the U.S. League, presumably before
they are publicly proposed. This is absurd. In the event any
such internal documents are leaked to the industry trade
associations or others, both Bank Board policy and rules are
violated.
Much of what I said, in response to questions by the writer of
the article, was taken out of context and grossly oversimplified
at the expense of accuracy and precision, in order quite clearly
to generate hype and controversy. Business people and political
figures understand how this can happen because most have been
subjected to such unethical journalistic tactics at one time or
another. A number of allegations in the article were made under
the cover of anonymity.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
111
lee
Editor
Wall Street Journal
Page 3
July 18, 1986
interviews
any mention whatsoever of
The writer chose to omit
eral
decessor Chairmen of the Fed
she conducted with my two pre
se
who
d T. Pratt and Jay Janis,
Home Loan Bank Board, Richar
the
In these interviews, both of
tenures date back to 1978.
es at
ens
made it clear that hotel exp
former Bank Board Chairmen
as
ner
for in exactly the same man
league meetings were paid
mine.
ons
that such conspicuous omissi
I find it bizarre, indeed,
Chairmen
rd
ts of these two Bank Boa
occurred. Perhaps the commen
buted
tri
because they might have con
were left out of the story
Board
k
Ban
tanding of longstanding
to a better historical unders
d
ere
sid
ments apparently were con
practices. The fact their com
ted
wan
y
onl
eed. Perhaps the writer
irrelevant is curious, ind
the
ehow dishonest, even though
to brand me, alone, as som
k many,
bac
of us have followed dates
general practice the three
many years.
trade
tings sponsored by thrift
Frankly, invitations to mee
National
se of the U.S. League, the
associations, including tho
s,
gue
utions and various state lea
Council of Savings Instit
to
s
tor
unities for thrift regula
represent important opport
y
arl
ious, timely issues. To cle
to
express their views on var
is
s
meetings by thrift regulator
we
indict attendance at such
ry
ust
uing dialogue with the ind
t,"
ignore the value of a contin
ugh
"bo
that the Bank Board may be
ner
man
regulate. The insinuation
ly
eem
be compromised in some uns
or that the regulator may
the
h meetings, as outlined in
through participation in suc
arrogance
t the writer believes the
article, suggests to me tha
the value
vail -- at the expense of
of officialdom ought to pre
regulator.
utions may contribute to the
of input regulated instit
distortions
half truths, innuendo and
Again, I deeply resent the
my personal
h of the article about how
which so characterized muc
bbying". We
mised through industry "lo
integrity has been compro
e we simply
n at the Bank Board becaus
have not achieved perfectio
government. It
s. Nor does anyone in
concerns
don't have all the answer
to the industry's ideas and
ng
is important that we listen
epi
swe
ures on final decisions of
we,
before we put our signat
e,
and let there be no mistak
le
regulatory impact. However,
sib
respon
rd make, and are soley
.
the members of the Bank Boa
ations
the industry trade associ
for, our decisions -- not
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Editor
Wall Street Journal
Page 4
July 18, 1986
front
Thank you for the opportunity to respond to this lengthy
hype
istic
journal
for
quest
the
that
regret
I
page article.
this
seems always to consume the energy of the writer of
journalist
former
a
As
me.
s
concern
it
when
lly
article, especia
of
myself, I continue to be amazed at this writer's utter lack
journalistic ethics.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely,
Edwin J.
Chairman
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Home Loan Bank Board
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
July 7, 1986
Dear Paul:
Since rumors have been prevalent that Dr. George
Benston is a leading White House candidate for the
Democrat seat on the Bank Board, I thought you might
As you
find several of his writings of interest.
know, Dr. Benston tried his best to derail all our
efforts to accomplish our growth/net worth regulation
and our direct investment regulation. He was
unsuccessful. Some apparently now think he, perhaps,
ought to be given a second chance to do so, and thus
undermine our safety and soundness initiatives at the
Bank Board.
Please keep my comments confidential.
Best regards,
.; ,; ,
/ h -1...
—
The Honorable Paul A. Volcker
liP
',.f ' ,...._:]
Chairman, Board of Govefnors
Federal Reserve System 0:9;i4
Marriner S. Eccles BuilOng'i- 77p
.4.1
20th & Constitution Aveildei N.M.
20551
Washington, DC
:
•':I:.:A.
,.i
_,... Li
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
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Citation Information
Document Type: Book excerpt
Citations:
Number of Pages Removed: 26
Kaufman, George G. and Roger C. Kormendi. Deregulating Financial Services: Public
Policy in Flux. Cambridge, Massachusetts: Ballinger Publishing Company, 1986.
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
•••,-
264
TESTIMONY OF GEORGE J. BENSTON
PROFESSOR OF ACCOUNTING, ECONOMICS
AND FINANCE,
GRADUATE SCHOOL OF MANAGEMENT,
UNIVERSITY OF ROCHESTER
before the
Commerce, Consumer and Monetary
Affairs Subcommittee
U.S. House of Representatives
February 28, 1985
I undertook a number of empirical
analyses to
determine whether the rules the Federal
Home Loan Bank Board
(FHLBB) would adopt are likely to
help or hurt savings and
loan associations (SLAs) and
the Federal Savings and Loan
Insurance Corporation (FSLIC).
the industry is in trouble.
There is little question that
More SLAs have failed in the
past
three years than at any time since
the Great Depression.
Many more are close to failure.
The FHLBB fears that weak
SLAs and even strong institutions
might undertake risky
investments or expand unwisely, thus
endangering the FSLIC
insurance fund.
I share their concern, but I
am also con-
cerned that their proposed regulations
would do harm rather
than help FSLIC and the industry.
The empirical studies
I just completed and have submitted
to the Committee show
clearly, I believe, that the Board is
mistaken in its assessment of the risks posed by direct
investments and growth.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
265
Instead, contrary to the FHLBB's assertion, the data indicate
that direct investment and growth have been beneficial to
SLAs, and, hence, to the FSLIC.
I now briefly review the four papers that I am
submitting to the Committee -- "Savings and Goan Failures:
An Analysis of Proximate Causes," "Direct Investments by
Savings and Goan Associations:
Return and Risk," "Growth,
Return and Risk Among Savings and Goan Associations," and "A
Review and Critique of the FHLBB's Economic Support for Rules
Restricting Direct Investments and Growth."
Failures Study
In its statement of support for a rule that would
limit direct investments to ten percent of an insured SLA's
assets, the Board indicated that direct investments had been
the cause of many failures.
Consequently, I obtained the
financial statements filed with the FHLBB of the 164 SLAs
from
that failed from January 1, 1981 through June 30, 1984
Cates Consulting Analysts, Inc.
These data were compared
with those of peer (similar asset size) SLAs that did not
associated
fail to determine, statistically, the variables
with failure.
interThe major determinant of failure is negative
est rate spread caused primarily when the failed SLAs'
interest and other expenses increased much more than their
*SUBCOMMITITEE NOTE:
Papers referred to appear in appendix
I
266
revenues.
267
The higher interest payments were on
Federal Home
partial data on direct investments during the period.
On the
Loan (FHL) bank advances, jumbo CDs,
and brokered deposits --
whole, the partially reporting SLAs were recent direct
with none of these sources being
dominant.
investors, and their investments tended to be profitable.
High loan losses,
unexplained "other" expenses, and high rates
of growth in
years before 1983 also played roles.
The Board acknowledges that direct investments
generally have been profitable to SLAs.
Most important, though, is the finding that
very
few of the failed SLAs held direct
investments.
confirm this.
The data I analyzed
The greater an SLA's direct investments, the
higher its net profits, on average.
In fact, returns on
Most (65.9%)
of the failures had less than one
percent of their assets in
other operations without direct investments tended to be
direct investments; 93.3% (eleven SLAs)
had less than five
negative over the three years analyzed.
percent.
Of these eleven, only three had more
than ten
percent of their assets in direct investments.
However, the Board expresses concern with the risk
I analyzed
it believes these investments pose to the FSLIC.
The Board
the financial statements of the eleven
SLAs for the years
measures risk by the variance of returns, and refers to a
before their failure and found that nine
of them had profited
Board staff study of only a portion of direct investments --
from their direct investments (some very
considerably).
service corporations.
Losses
I analyzed total direct investments
for the other two amounted to no more
than twenty percent of
(which includes real estate investments) and found that the
their other losses.
total variance risk of SLAs is slightly lower with direct
Thus I found that direct investments had
no role in the failure of SLAs -- indeed,
these investments
investments than without them, a result that is consistent
appear to have reduced the cost of the failures
to the FSLIC.
with standard finance theory.
wide range of returns on direct investments is due primarily
Direct Investments Study
For this study I analyzed three years of
semi-annual
financial statements of 2,377 SLAs.
to small percentages (under one or even five percent of
assets) or amounts (under $500,000) invested.
Those SLAs
These are all those
operating on June 30, 1984 that had not merged
or begun
operations since June 30, 1981, and that did
not report only
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Federal Reserve Bank of St. Louis
Furthermore, I found that the
with over ten percent of assets in direct investments reported
only positive returns.
Thus the variance about which the
Board is worried is present only for the SLAs that would not
be affected by its rule.
I
.
269
268
I also reviewed the study the Board commissioned
from SRI International.
The Board concluded that direct investments are risky solely
held
because SLAs which held more direct investments also
This synthetic study used share
returns on real estate investment trusts (REITs), including
asserts
more of other assets and liabilities that the Board
REITs with over 96 percent of assets in mortgages, as a proxy
are risky.)
for returns on direct investments.
per
direct investments is associated with a $14,000 increase
This study found that the
I found that, on average, a $100,000 increase in
FSLIC was best protected if SLAs held nothing but adjustable
increase
year in net worth at the weaker SLAs and a $8,000
rate mortgages (ARMs), as measured by U.S. Treasury note
in net worth at the stronger SLAs.
yields plus 250 basis points.
I used their data but assumed
that SLAs would continue to make fixed rate mortgages.
When
tend
The study, then, finds that direct investments
are made by
to increase the financial strength of SLAs and/or
The investments dic not
fixed rate mortgages are as little as thirty percent of total
financially strong associations.
mortgages made, the SRI model concludes that a portfolio with
they
increase the riskiness of the SLAs' returns -- indeed,
no REIT shares is as risky as a portfolio with at least
decreased the risk to the FSLIC.
eighty percent REIT shares and the balance ARMs.
Thus, if
Furthermore, the study did
direct investnot include the probably beneficial effects of
the Board believes the model to be meaningful, it should
and liabilities,
ments for reducing the mismatch of SLAs' assets
consider a rule that would very severely constrain fixed
failures of
a mismatch that is responsible for most of the
rate mortgages rather than direct investments.
the past several years.
Finally, I related changes in the SLAs' net worth
Growth Study
over the three years ended June 30, 1984 to changes in direct
investments and other assets and liabilities.
Weaker SLAs
(those with net worth less than three percent of total lia-
-proportional
The Board bases its demand for more-than
in
increases in net worth and special permission for growth
two
total liabilities beyond twenty-five percent per year on
bilities on June 30, 1981) and stronger SLAs were analyzed
assumptions:
separately.
(In contrast, a Board staff study simply compared
if fast growth SLAs continued to grow at their
per
1984 rate, they would overwhelm the FSLIC; and growth,
the asset and liability balances on June 30, 1984 of SLAs
se, is opportunistic, and hence overly risky.
with direct assets above and below a percentage of assets.
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Federal Reserve Bank of St. Louis
The net worth
$100
requirements are more onerous for larger (assets over
271
270
million) SLAs, apparently because the Board considers them
to be a bigger threat.
The Board also would require an
. direct invest!
additional ten percent net worth "reserve' fll
I tested the first assumption by examining the
previous annual growth rates of SLAs that increased total
liabilities by more than fifteen percent in 1984/83.
(The
same sample of 2,377 SLAs used for the direct investments
I found that most of the faster growth SLAs
had grown by significantly lesser amounts in 1983/82 and
1982/81, while the slower growth SLAs had previously grown by
greater amounts.
Furthermore, the higher the 1984/83 growth,
the less the previous growth.
The data, taken from a period
when growth was not constrained by the FHLBB, are contrary to
the Board's assumption.
Also, the data do not show a difference
In 1984/83 the larger SLAs tended to put proportion-
ately more of their funds into direct investments and ADC
residential mortgages in 1983/62 and 1982/81.
Next I examined the sources and uses of funds in
each of the three years ended June 30, 1984 by SLAs that grew
(A Board staff study measured
Direct invest-
ments, however, comprised only about seven percent of the
increase in total liabilities, which makes one wonder why the
Board singled out these assets for a special net worth
requirement.
(The Board points to its staff study finding
that real estate direct investments averaged six times more
at SLAs that grew at more than the average rate, but it fails
to note that the figures are .0013 at the slower growth SLAs
and .0079 at the faster growth SLAs.)
Then I tested hypotheses about the motivations for
growth, contrasting the "investment opportunities" with the
"opportunistic behavior" explanation.
between the behavior of small and larger SLAs.
at higher and lower rates.
1982/81.
(acquisition, development, and construction) loans, and into
ments above ten percent of assets.
study was used.)
in 1984/83 and 1983/82 and more from jumbo CDs in 1983/82 and
The analyses are
inconsistent with the belief that faster growth SLAs behaved
opportunistically.
Those that grew faster tended not to be
those with low net worth which might have been "going for broke."
this relationship inappropriately by simply comparing the
Nor do the data indicate that the faster growth SLAs were
asset and liability balances of SLAs that grew at more or
attempting to cover up past mistakes or were growing to pay
less than the mean nationwide rate of 19.7 percent.)
small and larger associations behaved similarly.
Both
The faster
growth SLAs obtained about half of their funds from ordinary
deposits, and got relatively more funds from brokered deposits
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Federal Reserve Bank of St. Louis
past high interest expenses.
Rather, the data show a strong
positive association between growth and increases in net worth.
Thus growth by SLAs has resulted in less risk to the FSLIC.
273
272
restraints on
evidence reviewed above provides no support for
Critique of the FHLBB's Support
for the Change in Rules
In writing the critique, I tried to put down all of
the points the Board made in support of its 44rect investment
and net worth rules.
I believe that the Board has not answered
critics of the rule changes effectively or provided adequate
support for the rules.
Furthermore, the studies that I
just completed (and which I am submitting to the Board today)
show that the rule changes are not based on the facts and are
I should note that my studies are based on the
definition of direct investments that the Board previously
Direct investments
are directly owned property -- equity in service corporations
and real estate held for investment and development.
that its net
In addition, the Board should recognize
the immediate data.
worth rules are based on a misreading of
an aberration, one
Excessive, continuing growth appears to be
actions rather than
dealt with best by specific supervisory
SLAs that are either
by all-encompassing rules that restrain
the evidence) to
attempting (successfully, on the whole, from
increasing their net
increase their net worth or that are
likely to increase the risks faced by the FSLIC.
employed and on which data were reported.
directly-owned assets.
The
worth proportionately.
Summary of Findings
as a conseNo savings and loan associations failed
quence of direct investments.
returns
Direct investments served to increase SLAs'
Board would extend the definition to cover all loans in which
total
without increasing the variance of their
an association has any sort of equity interest, from partial
FSLIC.
returns, thus decreasing the risk to the
If these are the assets about
ownership to profit sharing.
which the Board is concerned, it ought to do two things.
First, it should demonstrate, by other means than assertions
that "we know from our experience," that these loans pose
special risks to the FSLIC.
Second, constraining rules should
be applied to these assets, not to direct investments as they
have been previously defined.
Direct ownership is not
the same as partial ownership and profit sharing, and the
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Federal Reserve Bank of St. Louis
risk from
Direct investments offset the returns and
risk to the
fixed rate mortgages, thereby reducing the
FSLIC.
associations
Increases in net worth, which benefit the
with
and the FSLIC, are associated significantly
increases in direct investments.
On the average, a
associated
$100,000 increase in direct investments is
274
with a $12,000 increase in net worth at weaker SLAs
275
References
and a $8,000 increase at stronger SLAs.
Growth does not tend to be continuous -- more rapid
growth SLAs grew at lesser rates in past years, and
vice versa.
Growth patterns do not differ much between small and
larger SLAs.
Growth is associated with increases in direct investments, but these increases amount to, at most, seven
Weak SLAs and those holding higher levels of what the
FHLBB asserts are risky liabilities and assets did not
tend to grow more rapidly.
The net worth of SLAs that grew more rapidly increased
Thus, growth has not resulted
in increased risks to the FSLIC, on the whole.
.
In short, the Board's rules are not based on the facts
and should increase risks to the FSLIC.
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Federal Reserve Bank of St. Louis
Edwards, Donald G., "Rates of Return from S&L Investments in
Service Corporations," Office of Policy and Economic
Research, Federal Rome Doan Bank Board, November 28,
1984.
Federal Home Loan Bank Board, "Regulation of Direct Investments
by Insured Institutions," 50 Fed. Reg. 6912 (1985).
Federal Home Loan Bank Board, "Net-Worth Requirements of
Insured Institutions," 50 Fed. Reg. 6891 (1985).
percent on the average.
along with the growth.
Crockett, John and A. Thomas King, The Contribution of New
Asset Powers to S&L Earnings: A Comparison of Federal- and
State-Chartered Associations in Texas, Research Paper No.
110, Office of Policy and Economic Research, FHLBB,
July, 1982.
Markowitz, Harry M., "Portfolio Selection," Journal of Finance,
7 (March 1952), 7-91.
McKenzie, Joseph A., "An Analysis of Service Corporation
Investment and Direct Real Estate Investment by FSLICInsured Savings Institutions," Office of Policy and
Economic Research, Federal Home Doan Bank Board, November
28, 1984B.
McKenzie, Joseph A., "Recent Deposit Growth and Asset Allocation of FSLIC-Insured Institutions," Office of Policy and
Economic Research, Federal Home Loan Bank Board, November
28, 1984B.
Moser, Niel F. and Douglas E. Whitely, "Short Fuse on ARMs,"
Mortgage Banking, 1984.
Quinn, Daniel, Donald Green, Syed Shariq, and Marika Garskis,
Possible Regulations of the FHLBB to Limit Direct Investment of State Chartered, Federally Insured Savings Associations, prepared for the Federal Home Goan Bank Board,
SRI International, December 1984.
Sirmans, G. Tracy, "Deriving a Thrift Institution's Efficient
Frontiers in Constrained and Unconstrained Environments,"
Office of Policy and Economic Research, Federal Home Loan
Bank Board, November 28, 1984A.
Sirmans, G. Tracy, "A Reestimation of a Thrift Institution's
Efficient Frontiers," Office of Policy and Economic
Research, Federal Home Loan Bank Board, December 10,
19848. •
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank Board
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
OFFICE OF COMMUNITY INVESTMENT
March 14, 1986
Honorable Paul A. Volker
Chairman
Board of Governors of the
Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
CD
Dear Mr. Chairman:
We are pleased to forward to you the Federal Home Loan Bank Board's annual
report to the Congress on this agency's efforts to prevent unfair and
deceptive trade practices in the thrift industry. We submit the report in
accordance with Section 18(f) of the Federal Trade Commission Act.
Incorporated as part of this report are statistics and analyses relating to
this agency's administration of its consumer complaint function. These
data have previously been summarized in this report, but provided in detail
to the Subcommittee on Commerce, Consumer and Monetary Affairs, of the
House Committee on Government Operations, in accordance with the
Subcommittee's longstanding request. We believe this combined annual
report avoids duplication and provides a more complete picture of the
Board's efforts to serve thrift customers.
The Board received 8,895 written complaints during 1985, a 29 percent
increase over 1984 complaint volume. The Board made significant
administrative improvements during the year in developing new complaint
codes that will provide better management information starting in 1986, and
in responding rapidly and effectively when customer complaints revealed
situations requiring supervisory attention.
The Board also carried out significant regulatory initiatives relating to
customer protection. These included adopting a Credit Practices Rule,
mandating early disclosures about adjustable-rate mortgages, and
prohibiting the imposition of a prepayment penalty when a due-on-sale
clause is invoked.
Sincerely,
ichard Tucker
Director
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Federal Reserve Bank of St. Louis
Cr)
C/)
rs•ri
•
INTRODUCTION
For the past six years, the Federal Home Loan Bank Board (Bank Board) has
submitted to Congress a description of activities fulfilling its
responsibilities under Section 18(f) of the Federal Trade Commission Act
[(15 U.S.C. 57a(f)(1)]. Those responsibilities are (1) to identity unfair
or deceptive trade practices and to adopt regulations prohibiting such
practices; (2) to receive and take appropriate action upon complaints
directed against insured savings institutions; and (3) unless certain
exceptions apply, to promulgate regulations applicable to insured
institutions that are substantially similar to rules promulgated by the
Federal Trade Comnission (FTC) within 60 days after such PDC rules take
effect. These annual reports to Congress are also required by the Act.
For the past seven years, the Bank Board has also submitted an annual
comprehensive Consumer Complaint Report to the Subcommittee on Commerce,
Consumer, and Monetary Affairs, of the House Committee on Government
Operations. These annual reports have been submitted in accordance with
the subcomaattee's request.
This is an expanded annual report that covers FHLBB activities fulfilling
its responsibilities under Section 18(f) ot the Federal Trade Comnassion
Act and includes related material on consumer complaints previously
supplied separately to the Subcommittee on Cominerce, Consumer and Monetary
Affairs.
I.
Administrative Structure
During 1985, the Bank Board continued to delegate to the Office of
Community Investment (OCI) oversight responsibility for handling
customer and civil rights issues, including complaint processing and
activities relating to unfair and deceptive practices.
Full-time office statt handling these issues include a supervisory
specialist, three full-time consumer/civil rights specialists, one
otfice assistant and one secretary. Additional assistance is provided
by other OCI personnel, including the director and deputy as
appropriate.
Investigations of over 90% ot all written complaints are handled by
the twelve district banks. The size of the bank state handling
complaints varies according to district, but all are under the direct
supervision of a Supervisory Agent who is responsible both to the
Washington office and the district bank president.
II.
identitication of Practices
The Bank Board obtains information about potentially untair or
deceptive trade practices primarily from examinations and consumer
complaints.
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Federal Reserve Bank of St. Louis
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A.
Examination
The Board took the following major steps in 1985 to improve the
efficiency of its examination system in identifying and correcting
potentially unfair or deceptive practices:
-
The Board adopted uniform interagency examination procedures
for the newly adopted Credit Practices Rule (12 CFR S 535).
(See IV below for background.)
-
The Board continued to promote uniform and effective
enforcement of the Truth in Lending Act. The Office of General
Counsel regularly provided requested assistance to district
banks in obtaining restitution without resorting to cease and
desist orders. Similarly, the Office of Community Investment
worked with district banks to ensure consistent application of
criteria for waivers of restitution. The Bank Board issued one
consent cease and desist order relating to Regulation Z and
other issues. For all of 1985, 43 savings institutions
reimbursed a total of $713,678 to 1,311 accounts due to truth
in lending violations.
The Board continued to work with examination staff and
regulated institutions to emphasize the importance of accurate
and responsible loan servicing and recordkeeping. Supervisory
Memorandum T 18-5, on loan recordkeeping, was reaffirmed and
expanded by T 18-6, issued February 3, 1986, which counseled
thrifts to review the capability and the underwriting standards
of unregulated mortgage orginators with whom they deal.
-
The Board completed work on a pilot curriculum for New Examiner
Training School, including expanded introductions to customer
and civil rights compliance issues.
The Board worked on guidelines for monitoring consumer and
civil rights compliance in the mortgage lending operations of
service corporations owned by regulated savings institutions.
The guidelines developed during 1985 were issued in final form
early in 1986.
-
B.
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Federal Reserve Bank of St. Louis
Late in 1985, Board staff began meeting with other financial
regulatory agencies on joint guidelines for basic banking
services. Under the auspices of the Federal Financial
Institutions Examination Council (FFIEC), an ad hoc interagency
task force explored the feasibility of encouraging depository
institutions to consider cost-effective methods, consistent
with their own safety and soundness, for meeting customers'
need for a safe place to keep money, a way to get cash and a
way to make third-party payments.
Complaints
The Board took the following steps during 1985 to strengthen its
utilization of consumer complaint information for identifying and
correcting potentially unfair or deceptive trade practices:
-3-
-
The Board developed new complaint codes that reflect the
industry's increased sophistication. These codes will produce
higher quality management information tor the Bank System.
The codes took effect January 1, 1986, with accompanying
definitions to assure consistent coding by the 12 district
banks. They will be reflected in the Board's 1986 complaint
analysis.
-
The Board made significant progress in developing a system to
give district banks direct computer access to complaint data.
This will provide more timely and accurate data for supervisory
decisions.
OCI continued to work with the district banks to expedite the
handling of customer complaints and develop improved methods
for resolving the most frequent types of complaint. As a
result of these efforts, the Banks were able to resolve 8,309
customer complaints in 1985, a 25 percent increase over 1984.
This total included 334 complaints received in 1984.
-
In response to increased complaint volume, several district
banks increased the size of the staff devoted to handling
complaints.
-
In order to reduce potential customer problems, OCI also began
to work during 1985 with the FSLIC and the district banks in
connection with supervisory mergers, conservatorships, and
receiverships. In addition to consulting with these of
OCI staff also joined on-site FSLIC teams to help handle
customer problems and inquiries.
-
During 1985, the Board increased the speed and effectiveness of
its response to information generated by consumer complaints.
For example, complaints received in 1985 led to
several on-site examinations that resulted in both supervisory
agreements and cease and desist orders.
In response to Bank Board concern, one of the largest savings
institutions regulated by the Board initiated significant
policy and procedural changes to improve its handling of
customer problems and customer compliance issues.
-
C.
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Federal Reserve Bank of St. Louis
When the Federal Home Loan Bank of Cincinnati found a high
error rate in complaints about adjustable-rate mortgages
(ARMs), it conducted a series of three all-day educational
seminars for thrift loan officers in Ohio and Kentucky.
Personnel from the district bank, OCI and other Washington
offices provided information on Bank Board regulations and
other pertinent Federal laws and regulations that govern
ARMs.
Customer Information
For customers to play an effective role in the detection and
prevention of unfair and deceptive trade practices, they need
adequate information about financial transactions they are
-4-
considering, their legal rights, and appropriate complaint
procedures. Bank Boara actions to promote these goals have
included the following:
-
The Board's primary customer education goal in 1985 was the
assurance of timely and complete information for homeowners
considering ARMs. Early in 1985 the Board worked with trade
associations, the district banks, and the Federal Reserve Board
to distribute several million copies of a Consumer Handbook on
Adjustable Rate Mortgages. Subsequently the Board proposed and
adopted a regulation requiring savings institutions to provide
their customers with basic ARMs information, such as the
handbook, before the customers become committed to a particular
loan or lender. (See III below.)
-
The Board worked with the FFIEC to publish and distribute
several thousand copies of a basic brochure on Important
Consumer information prepared for organizations or individuals
who receive complaints about depository institutions and need
help in interpreting and referring such complaints.
-
The Board continued to participate in all the activities of the
U.S. Office of Consumer Affairs.
III. Regulatory Activities
During 1985, the Bank Board took several major regulatory actions to
protect customers and help prevent unfair or deceptive practices by
its regulatees. These included the following:
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Federal Reserve Bank of St. Louis
-
The Boara adopted a Credit Practices Rule that parallels the
Federal Traae Commission Rule. (See IV below.)
-
563.9-9) ensuring that
The Board adopted a regulation (12 CFR
all regulated savings institutions, and many unregulated
lenders who deal with thrifts, provide customers with basic
information, such as the Consumer Handbook on Adjustable Rate
Mortgages, before the customers apply for an adjustable rate
mortgage (ARM) or become carmitted to a particular loan or
lender. This regulation has had a very wide impact because it
applies to all FSLIC-insured institutions, not just
federally-chartered thrifts, to all lenders who follow FHLBB
ARMs regulations in accordance with the Garn St Germain Act,
and to all lenders who sell loans to federally-chartered
thrifts.
Through 1985, the Board continued to consult with other
financial regulatory agencies and trade associations, about the
feasibility of revisions to Regulation Z, Truth in Lending,
that would produce uniform ARMs disclosure requirements
governing all mortgage creditors. These efforts continued into
1986.
The Board adopted a Final Rule [12 CFR S 591.5(b)(2)] that
increases customer protection by providing that a prepayment
penalty may not be imposed if a lender (1) exercises a
due-on-sale clause by written notice, (2) commences a
-5-
foreclosure proceeding to enforce a due-on-sale clause or to
seek payment in full as a result of invoking such a clause, or
(3) fails to consent within a reasonable time to the written
request of a qualified purchaser to assume the loan in
accordance with its terms; and thereafter the borrower sells or
transfers his home to that purchaser and prepays the loan in
full. This regulation applies to all mortgage lenders, not
just thrifts, since it was promulgated pursuant to the Board's
authority under the Garn - St Germain Act to Issue rules
interpreting the due-on-sale provisions of that Act.
The Board issued a supervisory memorandum reaffirming and
clarifying the application of the Board's nondiscrimination
regulations to loans secured by property locatea or to be
located on Indian reservations.
IV.
FTC Regulations
In 1984, the Federal Trade Coflunission issued a rule on unfair and
deceptive consumer credit practices. This rule became effective on
March 1, 1985. Pursuant to Section 57a of the Federal Trade
Commission Act, the Board promulgated a similar regulation addressing
unfair credit practices ("Credit Practices Rule"). The Credit
Practices Rule, like the rule adopted by the FTC and the Federal
Reserve Board (FRB), prohibits the use of clauses containing
confessions of judgment, wage assignments, security interests in
household goods, and waivers of exemption in consumer credit
contracts. Moreover, the Rule addresses the use of unfair or
deceptive cosigner practices and precludes the pyramiding of late
charges. See generally 12 C.F.R. Part 535.
Although the Board's Credit Practices Rule did not become effective
until January 1, 1986, the Board responded to numerous inquiries and
requests for interpretations concerning most provisions of the Rule
throughout 1985. These inquiries were received from thrifts,
attorneys, and members of the public.
The Board also received a petition for exemption from the Rule by the
State of Wisconsin. The petition is currently under consideration by
Board staff. In responding to Inquiries regarding the Rule, and in
evaluating this exemption request, the Board has worked closely with
the FPC and the FRB.
V.
Analysis of Complaints Received in 1985
A.
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Federal Reserve Bank of St. Louis
Subject and Disposition of Complaints
In 1985, the Board received 8,895 written complaints, inquiries
and referrals. This represented a 29 percent increase over 1984
complaint volume. However, the analysis below is based on the
7,975 complaints both received in 1985 and resolved in 1985.
Complaints regarding loans increased from 2,851, 44 percent of all
complaints, to 3,791, 48 percent of all complaints. Escrow
complaints continued to be by far the largest category, increasing
significantly from 512 complaints in 1984 to 902 complaints in
1985. Other major categories, in decreasing order, were mortgage
-6-
loans (594 complaints), loan charges (318 complaints), fees and
late charges (260 complaints), and Fair Credit Reporting Act (253
complaints).
Two other categories of complaints also increased significantly.
Written inquiries and complaints regarding insurance of accounts
almost doubled in volume, from 199 in 1984 to 395 in 1985.
Complaints about credit cards also increased, from 298 in 1984 to
421 in 1985.
Complaints regarding savings accounts declined absolutely and
relatively, from 2,475, 39 percent of all complaints in 1984, to
2,459, 31 percent, in 1985. Complaints about NOW accounts
continued as the single largest identifiable category of savings
complaints, increasing from 391 complaints in 1984 to 419
complaints in 1985. Complaints about IRA and Keogh accounts also
increased, from 256 complaints in 1984 to 308 complaints in 1985.
However, complaints concerning interest calculation decreased from
272 to 210. There was no other single identifiable category of
savings account complaint that exceeded ten percent of the 2,459
savings account complaints received and processed in 1985.
The proportion of cases involving association violation or error
increased slightly, from 15 percent in 1984 to 16 percent in 1985.
Again, as in previous years, the highest rate of association error
involved complaints alleging problems with advertising practices.
Out of 132 advertising complaints, 46 (34 percent) resulted in a
finding of association violation or error. The highest error rate
for loan complaints involved escrow accounts (285 out of 902, a 32
percent error rate); and the highest error rate for savings
complaints concerned IRA/Keogh accounts (92 out of 308, or 30
percent.)
In 1985, 86 percent (1,102) of violations or errors were resolved
voluntarily by the savings institutions. The Bank Board requested
corrective action in the remaining 14 percent (182) of the cases.
This is a continuing improvement over voluntary resolution rates
of 82 percent in 1984, 79 percent in 1983, 71 percent in 1982, and
41 percent in 1981.
The complaint system produced adjustments for 2,135 customers in
1985. This represented 27 percent of all complaints processed,
the same proportion as in 1984, but an increase from 22 percent in
1983. In 1985, 979 consumers received monetary adjustments and
1,156 consumers received non-monetary adjustments that did not
involve immediate restitution or compensation to the consumer.
Exhibit II presents a complete breakdown of these figures.
B.
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Federal Reserve Bank of St. Louis
The Geographic Concentration of Complaints
Exhibit III, Tables 2a and 2b, compare the extent and nature of
the concentration of complaints, inquiries and referrals by
district in both calendar years 1984 and 1985. In 1985, 68
percent of all complaints and inquiries were filed against
institutions in the New York, Atlanta or San Francisco districts.
The total number of written complaints, inquiries and referrals
-7-
filed against specific FSLIC-insured institutions in these three
districts increased 22 percent, from 4,348 in 1984 to 5,309 in
1985. Nationwide, the increase was 21 percent, from 6,420 to
7,762.
The proportion of savings institutions that generated complaints
or inquiries was 64 percent in 1985, down from 66 percent in 1984
and 71 percent in 1983. In 1985, the percent of complaint-free
institutions ranged from a low of 44 percent with no complaints
in the San Francisco district to 74 percent in the Cincinnati
district. Institutions with three or more complaints represented
14.1 percent of all institutions nationwide, ranging from 8.2
percent in Cincinnati to 29.7 percent in San Francisco. In
1984, 12.2 percent of institutions nationwide had three or more
complaints.
The district with the greatest number of complaints per million
dollars of assets was New York (.020). The district with the
fewest number of complaints per million dollars of assets was
Indianapolis (.003). The average number of complaints per million
dollars of assets was .007, the same as in 1984.
In 1985, 1,174 of the 3,246 institutions regulated by the Bank
board were the subject of written consumer complaints or
inquiries. Forty-five institutions were the recipients of 25 or
more complaints, compared to forty-one institutions in 1984. Of
these 45 institutions, 12 generated more than 100 complaints or
inquiries. (Only 8 institutions generated more than 100 in 1984.)
In summary, 1.4% of the total number of insured institutions were
responsible for 50.4% of all complaints and inquiries received
Exhibit III presents a complete breakdown of these figures.
C.
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Federal Reserve Bank of St. Louis
The Cost of the Consumer Complaint Program
In 1985, the combined cost of the consumer program to the Federal
Home Loan Banks was $1,521,225, up from $1,144,000 the previous
year. The cost averaged about $183 per complaint resolved,
compared to approximately $173 in 1984. We believe this increase
reflects the cost of training new staff and the increasing
complexity of complaints received. The figures are based on
8,309 written complaints, inquiries and referrals resolved in
1985, regardless when received.
Exhibit I
Final Regulations of the Federal Home Loan Bank Board
That Address Areas Potentially Involving Unfair or
Deceptive Trade practices (Regulations and Amendments
Becoming Final in 1985)
[References are to Title 12 of the Code of Federal Regulations]
Regulations applicable to institutions that are members of the Federal
Home Loan Banks (the District Banks):
S 535.1 et seq.
prohibited consumer credit practices
("Credit Practices Rule")
Regulations applicable to federally-chartered savings and loan
associations and savings banks:
545.33(f)(7)
S 545.115
Home loans--disclosure
(Adjustable-rate mortgage loan
disclosures)
Statement of condition
Regulations applicable to institutions whose accounts are insured by
the Federal Savings and Loan Insurance Corporation:
S 563.7-5(a)
S 563.7-5(f)
563.8(g)
Mandatorily redeemable preterred
stock; requirements as to securities
Disclosures regarding the offer,
sale, or issuance of a security
evidencing a borrowing
S 563.9-9
Adjustable-rate mortgage loan
disclosures
S 563.13(h)
Reserve accounts--net worth;
transactions for purposes of evasion
591.5(b)(3)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Limitation on exercise of due-on-sale
clauses--completed credit application
of a qualified transferee.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
EXHIBIT II
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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EXHIBIT III
Table 2a
Concentration of Car_plaints
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all complaints
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Table -b
Concentration of Complaints
Received During 1935
ee
-.
Distric:
Bank
Percentage or Institutions
Institutions Receiving Three or More
Receiving
Complaints .
' Total
Complaints
Total
Assets
r
Total
Per
Number of
Percent o*Average
instiZillions ComplaintsInsti5o
1 - 2
3 or More Institut- Number
of
Total
Number of
tutions
tution 2omplaintsComplaint.5Complainti
ions
2omplintsZomplaintsComplaints
Boston
99
$21.1
298
3.01
.
62
23
15
15
269
90
17.9
22
54
1,851
98
34.3
10
20
138
72
6.9
23
15
91
1,046
85
11.5
74
13
8
31
203
71
6.5
70
22
8
14
75
62
•
New York
240
94.2
, 1,898
7.91
63
15
_ Pittsburgh
198
37.9
192
.97
69
21
Atlanta
597
172.4
1,225
2.05
62
,
Cincinnati
377
68.0 ,
285
.76
Indianapolis
168
43.7
121
.72
349
75.3
1.27
1.05
63
66
11
40
157
81
3.9 -
49.9
442
204
21
194
24
10
19
140
69
7.3
Dallas
488
124.0
526
1.08
65
22
13
61
377
77
6.2
Topeka
173
47.4
182
1.06
61
28
10
18
120
69
6.7
71
2,092
96
29.5
24
153
75
w
.., Chicago
_ Des Moines
..-,
,
1
.
_ San Francisco
Seattle
Total
,
,
239
124
3,246
294.8
39.5
51,068.7
.
9.12
2,186
203
7,762 *
,
1.63
.
,
2.39
44
51
64
.
.
26
30
22
30
19
,
,
6.4
-
14
458 **
6,821 **
83
-
* The total number of complaints does not include 1,133 complaints which were not directed against a
particular
institution.
** Fourteen percent of insured institutions are accounting for 88 percent of all complaints
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14.9
,
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Citations:
Number of Pages Removed: 2
Confidential: Note to Paul Volcker from Ed Gray, June 8, 1985.
Federal Reserve Bank of St. Louis
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Confidential: Speech by Ed Gray to the Conference of Larger Savings Institutions, Palm
Springs, Florida, March 29, 1985.
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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•
p
••
•
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loon
November 15, 1985
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
Washington, D. C. 20552
Dear Ed:
On a fast trip to Europe and back, I've had a chance to
read your speech to the U.S. League convention last week. It
strikes me as an exceptionally clear expression of philosophy,
of the challenges for the industry and the FSLIC, and your
regulttory approach. I can only welcome your consistent
emphasis on those "old fashioned" verities of safety and
soundness, andtbe threat to the industry from the "high
flyers" in effect gambling with your insurance reserves.
I realize your regulatory and supervisory initiatives
don't necessarily win popularity contests, but I think they
are crucial in beginning to deal with the problems, to the
ultimate benefit of all those in the industry that want to
operate prudently and constructively, as well as to the
financial system generally. I think we can see some of
those benefits even now, and they should become clearer if
we can have a reasonably favorable economic and interest
rate environment.
By the way, I don't know what to make of all that smoke
in the press recently about whether you will be leaving. I
obviously can understand all the personal pressures that would
lead you in that direction, but I also know that a lot of
people join me in great respect for the job you are trying to
do in most difficult circumstances, for the industry and for
you personally.
Best regards,
PAV:ccm
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Federal Reserve Bank of St. Louis
-.111111,
Federal Home Loan Bank Board
Washington, D.C. 20552
EDWIN J. GRAY, CHAIRMAN
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
,
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Federal Reserve Bank of St. Louis
EXCERPS OF AN ADDRESS
BY
EDWIN J. GRAY, CHAIRMAN
FEDERAL HOME LOAN BANK BOARD
BEFORE THE NINETY-THIRD ANNUAL CONVENTION
OF THE
UNITED STATES LEAGUE OF SAVINGS INSTITUTIONS
DALLAS, TEXAS
NOVEMBER 5, 1985
2
Thank you very much.
It is again a distinct honor and great privilege for me to
be invited to share with you in the events of this annual
convention of the U.S. League.
I have had the pleasure of attending many of your annual
conventions over the years and I compliment the leadership of the
League for, again, having put together an outstanding program.
This annual conclave brings together, in a way that no
other one does, the savings institutions family in America.
Like any family, yours or mine, there is often times a wide
variety of views on any number of subjects. The savings
institutions industry family is more diverse than ever before.
It surely must be difficult for the savings and loan family
to achieve truly broad concensus on the myriad of issues which
confront it. Surely, it is not easy even for the Board of
Directors of this diverse, trillion dollar industry, in a trade
association context, to resolve some of the knotty and
fundamentally complex challenges you now face.
Nor is it ever easy at all for the broad regulatory family
which oversees the activities of the industry. The complexity
of the issues, the magnitude of the challenges, the enormity of
the task, would surely test the best wisdom Solomon could bring
to the effort on his best day.
One reporter characterized the task we face in a local
newspaper several days ago as "gargantuan."
In this atmosphere, characterized as it must be by
complexity and diversity, it would be naive to believe or to
expect that controversy, even turmoil, could possibly be
avoided.
At a time of very significant -- indeed historically
unprecedented -- challenge and change for the diverse elements
of the savings institutions industry, and for our unique,
separate and distinct national thrift system, there are bound to
be areas of disagreement and differences of opinion, as there
are.
Nevertheless, how issues of great moment for the industry
are resolved in the public forum of ideas and in the government
policymaking process represents enormous stakes for institutions
themselves, the industry as a whole, the statutorily-established
thrift system, the depository institutions system in a broader
sense, and the American public.
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3
This Bank Board has been, and continues to be, a strong
advocate for the maintenance of a strong thrift industry,
separately identified as such, and for a viable and distinct,
statutorily-established and maintained system whose framework
includes as integral components deposit insurance, examination,
supervision and Federal Home Loan Bank credit.
In late 1984, the Task Group on Financial Regulatory Reform
headed by Vice President George Bush recommended unanimously
that the National Thrift System remain separate and distinct
from the apparatus which regulates and insures commercial banks.
Indeed, the report, which also was approved by President Reagan,
specifically recommended that what it called "thrift regulatory
treatment" by savings institutions should require a trade-off or
quid pro quo: namely that thrift institution portfolios remain
principally tied to housing finance through what the task group
described as an asset composition -- or "thriftness" -- test.
The Vice President's task group report was, again, signed
unanimously by the members, including myself, the Secretary of
the Treasury, the Chairmen of the Federal Reserve Board, the
FDIC, the Comptroller of the Currency, the Securities and
Exchange Commission, Council of Economic Advisors, National
Credit Union Administration, OMB and others, the most important
being the Vice President himself. Thousands and thousands of
man-hours went into the task group effort over a two-year
period.
The concensus reached by the task group on the financial
regulatory scheme in our country was titled "Blueprint for
Reform" in the final report. That historic reaffirmation of the
role and policy underpinnings of our National Thrift System
should, in my view, continue to remain preeminent in your minds
as you as industry members grapple with -- and share with us,
your regulators -- the challenges ahead.
For three years now, the savings institutions industry has
been operating in a new and very different environment. The
industry entered this environment with the passage of the
landmark Garn-St Germain Depository Institutions Act of 1982.
That historic and unprecendented deregulatory legislation
for thrifts was the result of nearly two years of development -by the Bank Board, the Administration and the Congress.
Its purpose was clear, even though some, in my view, have
continued a campaign intended to obfuscate its intent.
The Garn-St Germain Act was not fashioned to make thrifts
the functional equivalents of commercial banks.
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Federal Reserve Bank of St. Louis
4
The asset-related provisions of the Act were intended to
provide thrifts a way to work out of their portfolio problems
over time. Because savings institutions were saddled with very
large long-term fixed rate asset portfolios -- that is to say,
long-term fixed rate mortgages -- which were yielding less than
the costs they had to pay for funds, the Congress enacted new,
though limited freedoms, intended to compensate for this state
of affairs.
To accomplish this, the Congress authorized new and
inherently much shorter-term debt instruments for
federally-chartered saving institutions. These took the form of
commercial and consumer lending instruments which, in each case,
were significantly circumscribed within certain, relatively
narrow asset baskets -- narrow, certainly, relative to the
lending authorities permitted commercial banks.
The reason the Congress chose to place such asset basket
restrictions on savings institutions is because the Congress
wants this industry to stay principally in housing finance. The
preamble to the Garn-St Germain Act says it all. The preamble
states the intent of the Congress. The Preamble says this is
"an Act to revitalize the housing industry by strengthening the
financial stability of home mortgage lending institutions and
ensuring the availability of home mortgage lending institutions
and ensuring the availability of home mortgage loans."
On the other hand, the Congress did provide for very
significant asset diversification in the Garn-St Germain Act -again, in my view, as a means to help the industry compensate
with shorter-term lending instruments for the long-term
fixed-rate mortgage albatross they had been forced to bear as
the result of earlier government policies.
The asset deregulation Congress intended was, therefore,
essentially a portfolio restructuring device for thrifts as well
as a diversification tool to be exercised within measured
limits.
To try to argue otherwise flies in the face of the terms of
Garn-St Germain, which speak for themselves, as well as the
clearly stated intent of the Act in its preamble.
Indeed, in 1984, the Senate of the United States passed a
bill which, in no uncertain terms, established a "thriftness
test" to further reinforce the intent of the Garn-St Germain
Act. That bill was passed overwhelmingly by the Senate.
This year, the House Banking Committee marked up and passed
a bill which is remarkably close to the Senate bill of last year
insofar as a "thriftness" test is concerned.
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Federal Reserve Bank of St. Louis
5
These actions by your Congressional leaders, when both the
House and the Senate choose to come together on other
banking-related issues, will take the form of law. And, indeed,
they are -- insofar as "thriftness" test is concerned -thoroughly consistent with the spirit of and the intent of the
report of the Vice President's task group.
I find it curious that some in this industry have
continually chosen to ignore these self evident facts of life.
I am a government employee and an officer of the United States.
It is my job to carry out the policies of the Congress to the
best of my ability and to, as best I can, reflect the will of
the Congress.
Perhaps it would be well for more thrift executives to more
carefully analyze what the Congress had in mind, and continues
to very clearly have in mind, regarding the fundamental purposes
of thrift deregulation.
As you know, I worked very hard to develop and achieve
passage of that landmark thrift industry deregulation bill we
know as Garn-St Germain. Moreover, I have said publicly, on
hundreds of occasions during my tenure on the Bank Board -- yes,
I have repeatedly encouraged thrift managements in this regard
-- that the new authorities in Garn-St Germain were meant to be
used -- wisely and carefully and prudently -- but, yes, to be
used.
.
That, it seems to me, hardly justifies the notion that
somehow Gray is trying to re-regulate us back into the womb of
the 1940s and 1950s.
On the other hand, the Congress clearly did not mean to
direct in the Garn-St Germain Act the abolition of prudential
rulemaking.
This is particularly true when it comes to the FSLIC -your deposit insurance carrier.
Prudential rulemaking intended to protect and safeguard the
limited and finite reserves of the Insurance Corporation is a
necessary fact of life and it is a solemn responsibility that
your regulator cannot shirk under any circumstances.
I am under
a legal mandate to exercise my authority to protect and
safeguard the reserves of the FSLIC, however difficult -- and
yes, sometimes unpopular -- that responsibility, that task, may
be.
Regulators are not picked, and should not be expected to
win popularity contests.
Regulators are, in no sense,
extensions of trade associations. Regulators are traffic cops
who take a solemn oath to uphold the spirit and letter of the
law and carry out their duties accordingly.
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Federal Reserve Bank of St. Louis
6
This is why the Congress in its wisdom many years ago made
the Federal Home Loan Bank Board an independent financial
regulatory agency to shield it and insulate it from undue
political pressures. Because decisions must be made by
regulators, there is bound to be criticism, yes even sharp
criticism from some on some occasions, but that is endemic to
the job and it simply goes with the territory.
Deregulate the traffic laws to the point where there are no
longer any rules to be observed and there are no traffic cops on
the streets and highways, and chaos, anarchy and yes injury and
deaths will surely ensue.
In my own view, despite the confusion which continues to
exist regarding the purposes the Congress had in mind for thrift
deregulation, there not only continues to be a need for
prudential rulemaking as the circumstance requires -particularly to safeguard the reserves of the FSLIC -- but also,
in this connection, there needs to be tough, expeditious and
sure supervision and enforcement of laws and regulations. This
is the imperative of a deregulated operating environment. The
Bank Board's principal supervisory agents are under explicit
orders to enforce compliance with laws and regulations. And
where material violations of laws, regulations and supervisory
agreements are discovered, our supervisory agents have been
directed to immediately request cease and desist actions from
the Bank Board, or explain to us why they are not doing so.
I am not at all enamored of imprudent and excessive
risktaking engaged in by the high fliers and daredevils in the
I have no sympathy for them because, in my view,
industry.
their actions can only bring harm to the FSLIC.
Responsible members of the FSLIC -- those in the industry
who operate carefully and prudently and eschew excessive
risktaking, those who work to build up their retained earnings
using sound management practices to accomplish their business
goals -- are the ones who, in the end, are forced to pay for the
excesses and ultimate failures of institutions which have not
acted prudently and responsibly.
The high fliers and excessive risktakers, who often carry
out their activities using high cost funds on lower levels of
net worth, have cost, and will continue to cost the FSLIC huge
sums of money which responsible members of the industry are
called upon to pay for through insurance premium assessments
which are unfortunately too high themselves.
Fortunately, most members of the industry do operate wisely
prudently,
soundly and profitably, and I congratulate them
and
for their well deserved successes.
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Federal Reserve Bank of St. Louis
7
As you know, early this year, the Bank Board adopted
several regulations -- prudential regulations -- which were
fashioned to address excessive growth and excessive risktaking.
These regulations were not popularly acclaimed by some
quarters of the industry but, in the Bank Board's view, they
were very necessary.
And, in my own view, despite the residual grumbling of
some, they have accomplished their purposes rather well.
As a result, the growth of the industry, on a whole is only
a third of what it was in 1984. The so-called net worth/growth
regulation adopted in January not only has begun the phase-out
of the extremely distortive effects of the Bank Board's former
5-year averaging net worth scheme, but in addition, it has
caused institutions to have to earn their new growth and,
therefore, to have to add new net worth to the bottom line,
relative to growth.
That's an old fashioned idea -- the idea that a financial
institution, or any business for that matter, ought to earn its
growth.
I think it's particularly well-suited to thrift
institutions under the circumstances.
The other regulation we adopted last January -- under heavy
pressure from more than half the members of the House of
Representatives at the time to abandon it -- also appears to be
working quite well.
Indeed, I understand that today, in Washington, the House
Government Affairs Committee is issuing a report on our direct
investment regulation that strongly supports the approach we
took. This report, I understand, says the flexibility we
incorporated into the direct investment regulation can serve as
a model for other financial regulatory agencies to follow.
I
also understand the report calls our direct investment
regulation "responsive" to a regulatory problem under difficult
circumstances.
The House Committee report carries, I believe, particular
credibility and value, given the somewhat cynical initial
response of the Government Operations Subcommittee to our direct
investment regulation.
The committee report, noting the limited resources of the
FSLIC and the need to safeguard and protect them, makes a
particular reference to the fact that supervision alone is not
enough to deal with the problems which can result for
institutions from direct investments.
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Federal Reserve Bank of St. Louis
8
Examination and follow-up supervision are inherently "after
the fact" regulatory tools the Bank Board uses.
All too often
the damage -- sometimes great, even irretrievable damage which
results from excessive and often swift-excessive risktaking -already has occurred, and the only remaining alternative is for
the FSLIC to pick up the expensive pieces, yes, generally at
great cost to the insurance fund.
In my view, it would be redundant in this forum to again go
into my concerns about the FSLIC.
My views are generally well
known in that regard.
I would say, again, however, that my concerns are very real
and that they deserve your constructive and very serious
attention. Failure to come to grips with them -- sooner than
later -- can only make the National Thrift System as currently
structured more vulnerable to measures which could, in time,
seriously alter the character and structure of the industry
itself, as we have known it for a half century.
The stakes for the future of the thrift industry are simply
enormous. Removal of the FSLIC from out National Thrift System
would cut the heart out of the system and, if this were to
happen, others who have traditionally had far less sympathy for
the role of thrifts in the national financial structure would
end up making the insurance rules for all of your institutions.
I need not really remain you that over time, those who devise the
rules for commercial banks -- of which there are more than
14,000 in this country -- would then be making the rules for
3,000 thrift institutions.
For those of you who believe, as I do, that thrifts are
different from banks; for those of you who believe that thrifts
have a different public policy role to play in our financial
system, this should give you pause, and I do hope you will
seriously reflect on the potential stakes of it all for your own
institutions and your own National Thrift System as it currently
exists.
Your insurance fund -- the FSLIC -- cannot operate on hot
air. We do not print money at the Federal Home Loan Bank Board.
In order for us at the FSLIC to meet and deal with the insurance
corporation's obligations, we must have the resources to do so.
The only alternative is to defer resolution of cases as best we
can, in the absence of sufficient resources to do otherwise.
We have set in motion a Management Consignment Program for
failed institutions which essentially puts them in a holding
pattern under sound management until ultimate resolution can be
achieved. We believe that under the circumstances this is the
best alternative available where it can be accomplished.
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Federal Reserve Bank of St. Louis
9
However, in my view, it is only a holding pattern operation
in great part. Still, I am pleased with the success of the
Management Consignment Program thus far, and given that it is the
best alternative available to us under the circumstances, we
will continue to pursue it further.
There are some, apparently in and out of the thrift
industry, who have suggested that the Bank Board does not have a
long-term plan to help the thrift industry and the insurance
fund work out of their problems.
I would remind them that both
last year and again this year, we submitted and have had
introduced by request in both houses of Congress comprehensive
legislation intended to achieve this end. The specific
legislative proposals contained in our comprehensive package now
before the Congress remain ready for action.
However, as I
mentioned earlier in my remarks, we do not consider that
comprehensive package to be definitive in any sense because we
recognize it takes two to tango -- or perhaps three or four or
more in this case. The industry must be a key partner, it seems
to me, in any effort to bring about a successful legislative
outcome.
Nevertheless, the sooner all parties get on with it,
the better. You in the industry have the clout to make
legislation which is responsive to current real needs happen in
the Congress. As it works out, in the real world of Washington,
the ball -- if I may say so -- is in your court.
Regulators are not elected. Regulators do not make laws.
The Congress is elected to make laws and to bring about
statutory reforms. Our proposals to bring about thrift deposit
insurance reform have been considered by both the Senate and the
House Banking Committees as have the League's own proposals.
Again, ladies and gentlemen, the ball is in your court. The
Congress will act, and act swiftly, on reforms which achieve
consensus in the industry, if you but push for them.
In my
view, the time has come for meaningful action in this regard.
Delay serves no useful purpose. Indeed, I believe its effects
can be very deleterious, especially for your future.
Fortunately some statutes on the books have enabled the
Bank Board to bring about substantial modernization of the
regulatory process.
In July, using provisions of the Federal
Home Loan Bank Act and the Garn-St Germain Act, we transferred
our entire field examination force to the Federal Home Loan
Banks under delegated authority. This very significant action
removed our field examiners from counterproductive civil service
salary-setting and budget constraints on the agency. As a
result, instead of being limited to 750 field examiners to
examine 3,100 FSLIC-insured institutions across the nation -institutions whose assets exceed one trillion dollars -- we will
now have over 1,000 field examiners by the end of this year and
we expect to have 1,500 in the force by the end of 1986.
Further, we are confident that the high turnover rates we
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Federal Reserve Bank of St. Louis
10
experienced earlier in the field examination force can decline
significantly because the salary and benefit advantages provided
under the Federal Home Loan Banks should serve to accomplish far
better retention of examiners.
Another provision of federal law -- Section 406 of the
National Housing Act -- also enables us to employ our existing
statutory authority to enhance the FSLIC's ability to receive
the best possible return on the disposition of FSLIC assets.
After considerable study, the Bank Board has, today, taken
action to charter a Federal Savings and Loan Association, to be
called the "Federal Asset Disposition Association."
The Association, which will be based in Denver, Colorado,
is being provided a million dollars initially by the FSLIC to
cover organizational expenses, including the search for a
president and chief executive officer, the establishment of
office space, the development of a business plan for the
Association and other related initial start-up costs.
The Board has appointed an eleven-person board of directors
consisting largely of acknowledged and highly successful thrift
industry leaders from around the country.
In addition to these eleven voting members of the new
Association's Board, three others will serve as ex-officio,
non-voting members of the board of directors, including the
Director of the FSLIC, a Federal Home Loan Bank president, and
the yet-to-be-selected president and chief executive officer of
the Association.
All voting members of the board of directors will be
appointed by the Federal Home Loan Bank Board for staggered
initial terms of two, three and four years. The Bank Board has
designated William F. McKenna Chairman of the Board of the new
Association. Earlier this year, in his capacity as Chairman of
the Federal Savings and Loan Advisory Council, Mr. McKenna
developed the concept of such a "406" Association and, on behalf
of the entire Savings and Loan Advisory Council, presented the
idea to the Bank Board.
A few weeks ago, an organizing committee of thrift industry
and business leaders filed a petition with the Bank Board
requesting that the FSLIC charter a "406" Corporation.
Following up on these initiatives, I believe the action,
consummated this morning by the members of the Bank Board, is a
meaningful and important step in the right direction.
It is but
one of many steps which need to be taken to strengthen the
ability of the FSLIC to deal with its problems in the future.
The chartering of the new Federal Asset Disposition Association
does not constitute a panacea for the difficulties of the FSLIC.
Rather, it is one element in a much larger mosaic of actions
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Federal Reserve Bank of St. Louis
11
which need to be taken to strengthen the insurance corporation's
hand in meeting its obligations, now and in the future. What we
are looking for from the "406" Association is every last penny
we can squeeze from the sale of FSLIC assets.
Among additional actions I believe are necessary for the
long-term health and survivability of the FSLIC is a reform of
the manner in which the risk of loss to the FSLIC is
underwritten.
We at the Board last year, and again this year, have asked
the Congress for the authority to assess supplementary risk
premiums, priced commensurate with the risk of loss to the
insurance corporation for activities state-chartered
FSLIC-insured institutions choose to engage in when such
activities extend beyond those authorized for
federally-chartered institutions. Supplementary risk premiums
would be proportionally less, the higher the net worth of the
association affected.
The concept as proposed by the Bank Board is generally well
known and I will not, therefore, take more time here on it,
except to say, once again, that in my view the group insurance
program we now have at the FSLIC was not fashioned to
effectively underwrite risk of loss in the present thrift
deregulated operating environment, nor can it be expected to do
so out into the future.
In my humble opinion, trying to maintain our present
deposit insurance scheme -- specifically our thrift group
insurance plan -- is not at all unlike trying to force a square
metal peg in a round metal hole.
It doesn't work, and there's no way it really can work in
these times. Group insurance plans that have to accommodate all
risks need very deep pockets to make it. The resources of the
FSLIC are limited and finite and I expect they will continue to
be limited and finite.
The issue is not whether FSLIC-insured deposits are safe.
They are safe and they will continue to be, of course. There is
absolutely no doubt, whatsoever, in my mind that the full faith
and credit of the United States does, indeed, stand behind these
deposits.
No, that is not at issue.
Not at issue at all.
The issue will be, I fear, what entity will insure them and
in whose hands will that responsibility fall. As I said earlier
in my remarks, the stakes are enormous enough for your National
Thrift System that you as an industry need to address these
challen9es with the greatest possible seriousness,
expeditiously. That means soon.
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Federal Reserve Bank of St. Louis
4
12
There must, there simply must be, a renewed sense of
discipline, self-discipline, in this industry. Safety and
soundness and prudence may sound old-fashioned.
I assure you,
ladies and gentlemen, these are not trite concepts. They spell
the difference between survival and failure. They are as close
to eternal verities as we can ever know in the savings
institutions business.
Etched in the granite stonework across the top of Executive
Office Building Number One, across the street from the State
Capitol Building in Sacramento, are these words: "Give me men
to match my mountains."
With these words in mind, these calls to
move forward together -- shoulder to shoulder
women, who are ready and willing to match our
have the wisdom and the courage to face them,
them.
Thank you very much.
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Federal Reserve Bank of St. Louis
greatness, let us
-- as men, and
mountains. Let us
and to conquer to
1700 G Street, NW.
Washington, D.0. 20552
Federal Home Loan Bank Board
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
EDVV1N J. GRAY
CHARMAN
November 9, 1985
Editor Of The
New York Times
229 West 43rd Street
New York, New York 10036
Dear Sir:
This is in reference to the November 4, 1985 article in the New York
Times entitled Bank Board's Embattled Chief. I read the article with
considerable interest, of course, and I believe the writer, Nathaniel
Nash, largely succeeded in what was a clear effort on his part to write
a balanced story.
Nevertheless, there are some elements of the article, especially assertions
by unnamed thrift institution executives, which I believe need to be
addressed because they are either fundamentally wrong, in my view, or are
based on real or imagined misconceptions.
First, one may differ, of course, on the qualifications necessary for a
chief regulator "to steer a course" for a "troubled" industry. I was for
seven years a savings and loan executive: a Vice President, then a Senior
Vice President and ultimately a First Vice President and Chairman of the
Executive Committee of a major Southern California Savings Institution
I was encouraged by many leaders in the thrift industry to accept what
became a request by the President that I serve as Chairman of the Federal
Home Loan Bank Board. My Senate confirmation hearing was one of the shortest
on record and I was approved by unanimous consent of that body in the Spring
of 1983. I became Chairman on June 1, 1983. Apparently, all parties at
that time found my qualifications for the office suitable.
It is untrue that I failed "to put into effect any significant regulation
for 18 months after becoming Chairman," even by the article's own account
which, in an apparent and unintended contradiction, points to the brokered
deposit rule which both the Bank Board and the FDIC adopted in early March,
1984. This rulemaking procedure was begun in November of 1983, only five
months into my chairmanship. The article says the brokered funds rule was
"challenged by the banking industry." This is untrue. It was, in fact,
supported by the American Bankers Association and by the U. S. League of
Savings Institutions. It was challenged by the deposit brokerage industry
and the rule was found to exceed the statutory authority of the FDIC and
the Bank Board months after adoption, by the federal judiciary. From the
Bank Board's perspective the purpose of this rule was to slow the skyrocketing
growth in deposits, provided in significant part by money brokers. I warned
repeatedly, early on in my tenure, that such deposit growth was excessive
and that it was fueling excessive asset growth at too many savings institutions
As it turns out, this was indeed the case and many of the horrendous thrift
failures we must now deal with are the direct result.
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Federal Reserve Bank of St. Louis
Page Two
Frankly, to say, as the article does, there were no signficant regulatory
actions taken by the Bank Board in the first 18 months of my chairmanship
is plainly wrong. Indeed, in February of 1984, the Bank Board proposed a
rule intended to remove the distortive effects of a long-established net
worth scheme which enabled institutions to average their net worth over
the previous five year period. This was enabling institutions to leverage
heavily in the money markets for funds on far too little net worth to support
inordinate liability growth. The Bank Board was beseiged with a veritable
firestorm of opposition from all quarters of the thrift industry. In
April of 1984, the Bank Board proposed a regulation which had the effect of
limiting direct investments in real estate and equities by FSLIC-insured
institutions. This, again, was met with an unprecedented outcry of extremely
strong opposition from most of the thrift industry. It is frankly sheer
hypocrisy for those in the industry who led these campaigns of opposition
to these proposed Bank Board regulations to now suggest that nothing was
done of any significance in my first 18 months of office when they know,
very well, that pressures they were bringing to bear on some key Congressional
leaders to derail such initiatives would doom the adoption of such rules
at the time.
Further, the Bank Board not only adopted many regulations during that 18
month period but also took strong actions to begin the modernization process
of an antiquated supervision and examination program, throughout the Federal
Home Loan Bank System. I personally conducted a national crusade, from the
outset of my tenure as Chairman, to push -- some said goad -- thrift
institutions to make adjustable rate mortgages. That campaign was so successful
that by August of 1984, 14 months after becoming Chairman, three quarters of
all mortgages being made by thrifts were adjustable rate mortgages. That
was three times the level being made when I assumed the chairmanship.
Indeed, much of the advance planning for other Bank Board initiatives which
have since borne fruit took place in 1984. That included the reproposal in
late 1984 of two of the strongest, and yes the most controversial, regulatory
initiatives ever pursued by any Federal Home Loan Bank Board. One regulation
required that in the future any thrift would have to earn its growth. In
other words, all new growth would have to be directly correlated with what
an institution was able to earn on any new growth. The Board's regulation
also initiated the elimination of the distortive effects of five-year net
worth averaging. Another regulation placed supervisory review thresholds
on all direct equity investments in real estate and equity securities, a
regulation which has since been praised by the House Government Operations
Committee. However, at the time these regulatory reproposals were made, many
in the thrift industry again went to key members of Congress in a very major
effort to thwart these regulatory reforms. These lobbying efforts by thrift
industry powers caused more than half of the members of the House of Representatives to sign a resolution intended to bring pressure on the Bank Board
to abandon adoption of the regulations. The pressure, the intimidation if you
will, was pervasive and extremely strong. This time, I and my colleagues
on the Bank Board hunkered down. We refused to budge. And, the regulations
are not only in place, but they're working and working well.
It is axiomatic, especially at the Federal level, that those who oppose or
take strong issue with a governmental official and his policies often seek
to make him or her the scapegoat for their own problems. They often accuse
the official of incompetence or inefficiency. In all honesty, some of those
who, in the article, suggested a loss of 18 months, in which "many of the
current troubles (facing the industry and the FSLIC) could have been substantially
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Federal Reserve Bank of St. Louis
e
Page Three -
alleviated," and which have made "the current troubles even more severe
and intractable" are the same people in the thrift industry who either
strongly opposed the Bank Board's efforts or who literally begged us to
do little or nothing, as the record of comment letters on our regulations
will surely demonstrate. To suggest a "lack of knowledge of the industry
and less-than-professional management skills" on my part might be far more
credible as the source of our current problems if those who have made such
statements had been willing to stand up and be counted, and support the
Bank Board in its efforts to deal with problems I foresaw and repeatedly
warned would occur, when we needed their support. Too many of these latter-day
analysts were hiding in the weeds when we needed their support, which in all
too many instances, never came. No quarterback can possibly win when his
blockers are conspicuously absent.
The article says "the Gray shortcoming most fomented by thrift industry
officials is his managing of the Bank Board itself and burdening himself
with too many decisions." The truth is that 85 percent of all the decisions made
on applications and other matters involving transactions requested by institutions
occur at other levels in the Federal Home Loan Bank System through delegated
authority. The kinds of individual requests which must come to the Board, itself,
for action achieve decisions very quickly, almost always in a matter of a few
days. To say, as one trade association executive did in the article, that
"applications have sat on Ed's desk for two years with no action" is utter
nonsense.
Moreover, every application filed by any FSLIC-insured savings
institution is on a nationwide computer tracking system with specific time-clock
deadlines which, when not met by any party to the decision making process,
are flagged and reviewed by the Bank Board's Applications Review Committee
chaired by Board Member Mary Grigsby to determine the reasons for any such
delays, and corrective action is taken. These review meetings occur once a month.
One of the allegations made in the article by some is that I "spend too much
time writing and making speeches." First, I make about a dozen speeches a
year, generally to industry groups. Second, I have never written a speech,
ever, except well after working hours or on a weekend. I wonder which of those
dozen-or-so speeches thrift industry groups would like me to eliminate?
What does take more of my time is writing Congressional testimony. However,
once again, I simply never, ever, write any Congressional testimony except
after regular business hours and on weekends. Briefings on regulatory
issues and policy matters of broad concern, legislative matters, and meetings
relating to administration, simply do not provide any time during regular
business hours to even consider writing speeches or Congressional testimony.
I am often up late at night at my typewriter writing testimony, only to begin
another day of meetings at the Board early the next morning.
Finally, the fact is that during my tenure as Chairman, I have been saddled
with government-imposed budgetary and salary-setting constraints which would
severely test the patience and long-suffering record of the Old Testament's
Job. The Federal Reserve Board and the FDIC are immune from such constraints.
Until only recently, budget constraints imposed on the Federal Home Loan
Bank Board by others limited the Bank Board to only 750 field examiners whose
responsibility it is to examine a trillion dollar thrift industry with
hundreds of institutions in deep trouble. These field examiners were limited,
as it works out, to an average salary of $25,000. Thus, turnover rates in
districts with the worst problem institutions ranged from 23 to 28 percent
a year. Half of our spartan and thoroughly inadequate force of dedicated
field examiners had been on the job for two years or less, a survey showed.
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Federal Reserve Bank of St. Louis
Page Four.
Federal civil service entry level salaries for Bank Board examiners were
held to $14,000 a year. These federal salary setting and budgetary constraints
on our field examination force have taken their toll. Ludicrous is the only
adjective which can possibly apply to this state of affairs. Obviously,
it is incredibly difficult to "manage" under these circumstances.
Further, these same budgetary and salary-setting constraints have limited
the Bank Board, which serves as operating head of the FSLIC, to 114 FSLIC
personnel, including clerical employees. The 81 professionals employed by
the FSLIC earn an average salary of $35,000. They are beseiged with cases
which are characterized by the most sophisticated financial challenges in the
history of finance. It is no wonder then that the annual FSLIC staff
turnover rate is 33 percent -- three times that of the U. S. Government
civil service employee body as a whole. The FSLIC's Liquidation Division
totals 25 persons, 19 of them professionals, and they are called upon to
manage and dispose of some $3 billion in FSLIC assets. The Liquidation
Division of our sister agency, the FDIC, has -- not 25 persons -- but rather
2,500 persons. Managing, under these circumstances, approaches the outrageous
This is an agency under seige. To be given low marks as a manager under these
and other very trying, yes truly vexing and frustrating circumstances
indicates very substantial misperceptions, at best, by some in the thrift
industry about the difficulties of running the agency in these times.
All in all, I am proud of the efforts I have made as an officer of the United
States in my financial regulatory capacity. In hindsight, I might have done
some things differently, yes. This is a very lonely assignment at times, as
it probably should be. I have sought to bring some significant measure of
discipline to an industry which, if it is to survive as a separate thrift
industry with its own unique, separate and distinct federal (Home Loan Bank)
credit, deposit insurance and regulatory system, must accept the fact that
operating on the implicit full faith and credit of the United States presumes
on savings institutions special obligations and responsibilities -- not the
least of which is the absolute imperative that institutions be operated
soundly and prudently. I believe publically-chartered depository institutions
which operate on federally-insured funds have been vested with the
equivalent of a public trust and they must operate, yes behave, accordingly.
Finally, I have taken a solemn oath to carry out the duties of my office,
as prescribed by law. It is my responsibility to strive as best I can to
protect and safeguard the reserves of the thrift deposit insurance system:
the FSLIC. This is a legal mandate.
I have sought to impose what I consider to be certainly reasonable constraints
on excessive risktaking and imprudent practices by federally insured savings
institutions, through the regulatory process. The fact is, I have never
really had the support of those in the thrift industry who insist on following
imprudent operating strategies and excessive risktaking on the Federal
Government's -- ultimately the federal taxpayer's -- nickel. I have said
many times that I have no sympathy, whatsoever, for the daredevils and the
high fliers in the thrift industry who have caused, and are causing, the
severe problems which the FSLIC is facing, and who subject our entire financial
system to grave harm. Some of the constraints the Bank Board has imposed
through regulation have been distinctly unpopular with these kinds of operators.
However, the stakes are so high for our financial system that failure to have
taken sometimes unpopular stands on certain issues could only have hastened
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Federal Reserve Bank of St. Louis
Page Five
the day of reckoning without them, and whose alternatives would be, in my
view, far less sanguine.
Again, I have no particular complaint about the writer's effort to present
a balanced story. On the other hand, since I was the subject of the article,
I believe I have a responsibility to correct inaccuracies and misperceptions
contained in it, although I recognize that they flow largely from some in
the thrift industry, itself.
Thank you for the opportunity to bring these matters to your attention.
Sincerely,
_
-
cc: Nathaniel Nash
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Federal Reserve Bank of St. Louis
GALSIONIPIIA WOW OP
114myna's',
Contact: Kirk Hallahan, 213/670-6300
CALIFORNI
FOR IMMEDIATE RELEASE
.iAGUS VOICES SUPPORT FOR FHL31 CILAIRMAN GRAY
LOS ANGELES, October ZEV, 1985 -- The California League of Savings
Institutions today voiced
its Support
and extended a strong vote of
confidence in Federal Home Loan Bank Board Chairman Edwin J. Gray.
According to news reports, Gray is considering resigning from the
regulatory agency that oversees the nation's savings institutions.
The League's directors took the action at a regularly scheduled board
meeting.
"Edwin Cray has served this industry well during a difficult time, when
regulato:s and institutions alike were forced to adjust to a changing
environment of deregulation," said California League Chairman Gerald O.
Barrone.
5arrone, who is president and chief executive of Fidelity Federal,
Glendale, noted that Gray is the first FHLBB chairman whose term followed
passage of the 1982 Garn-St Germain Act, which opened the way for
Institutions to diversify their operations.
'more)
98003 Sep411woda 00‘slavArd
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Federal Reserve Bank of St. Louis
Sole 500
Los Angc4os. CA 90045 0054
Toloptiono 213 670 6300
&
•
• ZAL LEAGUE SUPPORTS GRAY Z -Z-Z
"Gray acted forcefully to deal with issues confronting our business,"
Barron. said. "While our industry has opposed certain FHLBB actions from
time to time, Gray has been basically right on the big issues," he
added.
"While w• oppose the suggestion that institutions should set aside I% cif
their insured deposits as a na•ans to reca.pitaliz• the FSLIC, Gray has not
embraced the plan officially and the Bank Board has taken no formal
action.
The I% set -aside provision is simply one of the alternatives
that the Bank Board has considered," Barrone added.
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Federal Reserve Bank of St. Louis
0••
•••si.l.
.9.1 1.1.111
N[TED STATES LEAGUE of SAVINGS INSTITUTII IN%
VdAS-1 NC3-"ON
1709 NE'v% YORK AVENUE
oNG'ON OPPICE
MARK F CLARK
Se".c, vice •e.s CP'.
,CY Put,- c Affaos
October 29. 1985
Note to Editors. Reporters
From: Mark Clark
Senior Vice President for Public Affairs
U.S. League of Savings Institutions
U.S. League President William B. O'Connell sent the attached
letter yesterday to White House Chief of Staff Donald T. Regan
regarding press inquiries O'Connell had received about the White
House staff's relationship with Federal Home Loan Bank Board
Chairman Edwin Gray.
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Federal Reserve Bank of St. Louis
r
VNITE.D STATES LEAGUE of SAVINGS INSTITUTIONS
wit_LIAM
-
0 CONNELL
October 28, 1985
The Honorable Donald T. Regan
Chief of Staff
The White House
Washington. D.C. 20500
Dear Mr. Regan:
Last Friday afternoon I was called by a reporter from the
American Banker to ask it it was true that Don Regan of the
White House had asked Edwin Gray to resign. My response was
that I didn't know and that question might be better directed
to Mc. Regan oc Mc. Gray.
This call typifies the various press inquiries and acticles
that have treated the general subject of "Administration
unhappiness" with Chairman Gray, indicating that certain
unnamed White House sources are responsible foc these
I do not know which members of the White House
sentiments.
staff are responsible for this campaign of disparagement.
The most conservative, best-run institutions in our
business have been strong supporters of Chairman Gray even
though there have been instances of opposition as well. One
notable instance of opposition developed because the Chairman
raised the possibility of a one percent recapitalization plan
to be levied against all institutions insured by the Federal
Savings and Loan Insurance Corporation. The business believes
the problems of FSLIC can be solved by other means and Mr. Gray
made it clear in a recent hearing that he understands the
shortcomings of such a plan.
More to the point. however. I believe there is strong
sentiment in favor of the Chairman's general policy thrust in
recent years. In handling the case of Financial Corporation of
America he spaced the Reagan Admstration a major
embarrassment. His program of tightening up operations of
institutions appears to be very sound in light of the whole
deregulation process. While most of the business understands
full well and accepts the need for the tougher regulatory
stance. it is not surprising that there are some people in the
eseSe
business who oppose Chairman Gray because of
Apparently they resent the strong supervisory hand that has
been provided by the Federal Home Loan Bank Board under Mr.
Gray. No effective regulator ever wins a popularity contest
nor would you wish hia to.
'-E
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Federal Reserve Bank of St. Louis
T.( S•FE:i..,•PC)
•VE
. BE.' ES
The Honorable Donald T. Regan
October 28, 1985
Page Two
Frankly. I do not know why an appointee of President
Reagan. who has served the President loyally and well for many
years. should be subjected to a White House campaign
undermining Mr. Gray's accomplishments. I am confident it the
President were aware of this campaign he would disavow it.
I
hope you see fit to do so as well.
Sincerely.
WILLIAM B. O'CONNELL
WBO:va
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Federal Reserve Bank of St. Louis
1700 G Street, N W
Washington, D C 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
November 7, 1985
The Editor
The Wall Street Journal
22 Cortland Street
New York, New York 10007
Dear Sir:
This is in reference to the October 28, 1985 article in the Wall Street
Journal entitled Troubled Bank Board's Chairman Gray Is Likely To Resign
Soon, Officials Say.
As it turns out, this collection of hearsay, rumors, gossip and other
innuendo may not come true, after all. As I told the writer of the
article, Monica Langley, on the evening of October 25, by telephone,
I had made no decision, whatsoever, to resign as Chairman of the Federal
Home Loan Bank Board, nor have I. And, it may well be I will not do so
for some time. Whatever decision I make, whenever I choose to make it,
will be done on my own timetable.
Ms. Langley has a way of quoting unnamed "officials," and other "sources"
in her articles who, though they apparently will only allow themselves to
be quoted under the cover of anonymity, are sometimes wrong. As a former
journalist, myself, I always felt it somehow unseemly to allow myself to
be used by others seeking particular results. The so-called "administration
official" quoted by Ms. Langley in her article as saying "He (Gray) just
has to submit his resignation" doesn't know what he or she is talking about.
Of course, I don't "have to" submit my resignation, whether or not that
"official" may like it or not. I was, after all, appointed to my position
by the President of the United States, not a so-called "administration
official."
Interestingly, another "White House official" told the Associated Press
within hours of the Wall Street Journal story being published: "There is
no White House pressure. Regan is not trying to force him out." White
House Deputy Press Secretary Larry Speakes was quoted by the Associated
Press as saying: "(Gray) serves at the pleasure of the President and I
have not heard of the President being displeased." The Los Angeles Times,
on October 30, quoted a White House spokesman as saying: "I've checked
very carefully in the highest levels of the White House, and I can say
unequivocally that no pressure is being put on (Gray) to resign. I don't
see why Mr. Gray shouldn't be able to serve out his term," the White House
spokesman was quoted as saying by the Los Angeles Times. The Washington
(D. C.) Times quoted White House spokesman Rusty Brashear as saying
reports of pressure...are 'absolutely wrong,'" in its October 31 edition.
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Federal Reserve Bank of St. Louis
Page Two
Ms. Langley may have quoted the same "administration official" in saving
"the strong California thrifts...abandoned him (Gray)" and "they began the
move to dump him..." On the very same day the article was published,
the California League of Savings Institutions issued a public statement
"voicing its support and extended a strong vote of confidence" in me.
The League's statement said: "Edwin Gray has served this industry well
during a difficult time, when regulators and institutions alike were
forced to adjust to a changing environment of deregulation." The League
statement said I have "acted forcefully to deal with the issues confronting
our business. ...Gray has been basically right on the big issues."
That hardly seems like "abandonment" or a "move to dump" me.
U. S. League of Savings Institutions President William B. O'Connell was
quoted by the Associated Press the day following publication of the Wall
Street Journal article as saying "he (Gray) has done a superb job" and
that he hoped I would not resign. In a letter to White House Chief of
Staff Regan, Mr. O'Connell said: "There is a strong sentiment in favor
of (Chairman Gray's) general policy thrust in recent years. His program
of tightening up operations of institutions appears to be very sound in
light of the whole deregulation process. While most of the business
understands full well and accepts the need for the tougher regulatory
stance (of Gray), it is not surprising that there are some people in the
business who oppose Chairman Gray because of these policies. Apparently
they resent the strong supervisory hand that has been provided by the Federal
Home Loan Bank Board under Mr. Gray. No effective regulator ever wins a
popularity contest nor would you wish him to," Mr. O'Connell's letter to
Donald Regan said.
The fact is, I have never really had the support of those in the thrift
industry who insist on following imprudent operating strategies and excessive
risktaking on the Federal Government's -- ultimately the federal
taxpayer's -- nickel. Many of these thrift institution operators have
caused, and are causing, the severe problems the FSLIC insurance fund is
facing. I have said many times that I have no sympathy, whatsoever, for
the daredevils and the high fliers in the thrift industry who subject our
entire financial system to grave harm. However, even if, theoretically,
I had lost the support of the industry -- which is not the case at all -this, in itself, would not be, in my view, a relevant measure of a government
financial regulatory officer. One cannot, and should not, even try to
engage in a popularity contest among those institutions he or she regulates.
Nor should the regulator be seen as, or be expected to be an extension of,
or a representative of, any industry trade association.
I am proud of the efforts I have made as an officer of the United States
in my financial regulatory capacity. In hindsight, I might have done some
things differently. This is a very lonely assignment at times, as it probably
should be. I have sought to bring some measure of discipline to an industry
which, if it is to survive as a separate thrift industry with its own unique,
separate and distinct federal (Home Loan Bank) credit, deposit insurance
and regulatory system, must accept the fact that operating on the full faith
and credit of the United States presumes special responsibilities and
obligations -- not the least of which is the absolute imperative that institut:
be operated soundly and prudently. I believe publically-chartered depository
institutions which operate on federally-insured funds have been vested with
the equivalent of a public trust and they must act, yes behave, accordingly.
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Federal Reserve Bank of St. Louis
Page Three
Finally, I have taken a solemn oath to carry out the duties of my office,
as prescribed by law. It is my responsibility to strive as best I can to
protect and safeguard the reserves of the thrift deposit insurance system:
the FSLIC. This is a legal mandate.
I have sought to impose what I consider to be certainly reasonable constraints
on excessive risktaking and imprudent practices by federally-insured savings
institutions, through the regulatory process. Some of these constraints have
been distinctly unpopular with some in the thrift industry. However, the
stakes are so high for our financial system that failure to have taken
sometimes unpopular stands on certain issues could only have hastened the
day of reckoning without them, and whose alternatives would be, in my view,
far less sanguine.
Ms. Langley has every right to write as many articles as she wishes in any
way that she chooses, of course. However, let the record show that every
significant article she has written about me, personally, has been crafted
in a similar fashion and has been largely characterized by the predominance
of unidentified critics. Whatever happened to the concept of balance in
in reporting?
Thank you for the opportunity to bring these matters to your attention.
Sincerely,
\
Eawin J. Gray 1
Attachments (2)
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Federal Reserve Bank of St. Louis
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank Board
Federal Home Loan Bank Systerts
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
November 9, 1985
The Editor
Fortune Magazine
Time & Life Building
Rockefeller Center
New York, New York 10020-1393
Dear Sir:
I read with considerable interest the article in the November 25, 1985
issue of Fortune entitled Uncle Sam Enters the S&L Business. While the
article did outline in some measure the problems confronted by the
national thrift system and the growing, severe strains on the FSLIC,
there were a number of factual errors and certainly misleading statements
which, I believe, need to be corrected.
First, the article states that my "only experience in the (thrift) industry
was as a Vice President for public relations and government affairs" at a
savings and loan association. For the record, I served first as Vice
President, then as Senior Vice President and finally as First Vice
President of what was San Diego Federal Savings and has later become
Great American First Savings Bank, San Diego. These assignments were held
over a seven year period. While some of my duties included responsibility
for the public relations function, I reported directly to the Chairman and
Chief Executive Officer of the institution on a wide range of matters which
went well beyond the public relations function. Indeed, as First Vice
President, I also was Chairman of the Executive Committee of the association
and was a member of the boards of directors of two of the association's
service corporation subsidiaries.
I was, indeed, an "aide" at the White House, yes. I was, in fact, Director
of the White House Office of Policy Development, a 50-person office
responsible for coordinating the development of domestic and economic policy
for the President. I left the White House staff on August 15, 1982 to
return to the savings and loan business and in the Spring of 1983, after
being asked by the White House to do so, I came back to Washington to
serve as a member of the Bank Board and as its Chairman.
The article apparently sought to link my leadership of the Bank Board during
these two and a half years with the problems of the industry and the FSLIC
and with a "collection of (thrift institution) zombies," calling my "role"
as Chairman "almost as bizarre." Colorful as this sort of financial
journalism may be, its clear pejorative intent may better serve the purpose
of selling magazines than clarifying the issues and problems faced by the
industry I regulate and those I encounter in trying to manage the FSLIC.
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Federal Reserve Bank of St. Louis
The article went on to suggest that my only qualification "for high office"
was my fierce loyalty to Ronald Reagan. And, it is true that I am, indeed,
fiercely loyal to Ronald Reagan who I have sought to serve faithfully, at
some considerable personal and financial sacrifice now for 19 years in and
out of Federal and State government, and in the private sector.
Apparently, the savings institutions industry in this country, along with
the President and the Senate of the United States felt I did meet the
test and qualifications "for high office." My Senate confirmation hearing
was one of the shortest on record and I was confirmed by unanimous consent
of that body. I have now served as Chairman of the Federal Home Loan Bank
Board longer than any of my eight immediate predecessors.
The article states that "I have been pounding the pavement for a new job."
This is a complete fiction. Moreover, any person in this very difficult
regulatory position at this juncture in history might well be seen as
a glutton for punishment, so I suppose it is logical for a writer to assume
I would somehow be looking for a more sane line of work. However, it would
be totally improper and, I believe, unethical to do so under present
circumstances -- given my continuing regulatory responsibilities. Many people,
in and out of the savings institutions business, as well as my fellow
federal financial regulatory colleagues, have told me on many occasions
that I have an "impossible" job and certainly one of the most difficult
regulatory assignments ever thrust on anyone.
The article says I am given "low marks as a manager." In all honesty, I
believe this is a particularly unfair assessment, given the fact that
during my tenure as Chairman I have been saddled with government-imposed
budgetary and salary-setting constraints which would severely test the
patience and long-suffering record of the Old Testament's Job. The Federal
Reserve Board and the FDIC are immune from such constraints.
Until only recently, budget constraints imposed on the agency I head by
others limited the Bank Board to only 750 field examiners whose responsibility
it is to examine a trillion dollar thrift industry with hundreds of
institutions in deep trouble. These field examiners were limited, as it
works out, to an average salary of $25,000. Thus, turnover rates in
districts with the worst problem institutions ranged from 23 to 28 percent
a year. Half of our spartan and thoroughly inadequate force of dedicated
field examiners had been on the job for two years or less, a survey showed.
Federal civil service entry level salaries for examiners were held to
$14,000 a year. These federal salary-setting and budgetary constraints
on our field examination force have taken their toll. Ludicrous is the
only adjective which can possibly apply to this state of affairs. Obviously,
it is incredibly difficult to "manage" under these circumstances.
Further, these same budgetary and salary-setting constraints have limited
the Bank Board, which serves as operating head of the FSLIC, to 114 FSLIC
personnel, including clerical employees. The 81 professionals employed by
the FSLIC earn an average salary of $35,000. They are beseiged with cases
which are characterized by the most sophisticated financial challenges in
the history of finance. It is no wonder then that the annual FSLIC staff
turnover rate is 33 percent -- three times that of the U. S. Government
civil service employee body as a whole. The FSLIC's Liquidation Division
totals 25 persons, 19 of them professionals, and they are called upon to
manage and dispose of some $3 billion in FSLIC assets. The Liquidation
Division of our sister agency, the FDIC, has -- not 25 persons -- but
rather 2,500 persons. "Managing" under these circumstances is ludicrous.
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Federal Reserve Bank of St. Louis
Page Three
This is an agency under seige. To be given "low marks as a manager" under
these and other very trying, yes truly vexing and frustrating circumstances,
amounts to -- so far as I am concerned -- a cheap shot. I say this because
these same facts were made clear to the writer of the article.
The article states that I have "lost the support of the industry." This
is simply untrue as a factual matter. What is true is that I have never
really had the support of those in the thrift industry who insist on
following imprudent operating strategies and excessive risktaking on the
Federal Government's -- ultimately the federal taxpayer's -- nickel. Many
of these thrift institution operators have caused, and are causing, the
severe problems which the FSLIC insurance fund is facing. I have said
many times that I have no sympathy, whatsoever, for the daredevils and the
high fliers in the thrift industry who subject our entire financial system
to grave harm. However, even if, theoretically, I had "lost the support
of the industry" in general -- which is not the case at all -- this, in
itself, would not be, in my view, a relevant measure of a government
financial regulatory officer. One cannot, and should not, even try to
engage in a popularity contest among those institutions he or she regulates.
Nor should the regulator be seen as, or be expected to be an extension
of,
or a representative of, any industry trade association.
I am proud of the efforts I have made as an officer of the United States
in my financial regulatory capacity. In hindsight, I might have done some
things differently. This is a very lonely assignment at times, as it
probably should be.
I have sought to bring some measure of discipline to an industry which, if
it is to survive as a separate thrift industry with its own unique,
separate and distinct federal credit, deposit insurance and regulatory
system, must accept the fact that operating on the implicit full faith and
credit of the United States presumes on savings institutions special
responsibilities and obligations -- not the least of which is the absolute
imperative that institutions be operated soundly and prudently. I believe
publically-chartered depository institutions which operate on federallyinsured funds have been vested with the equivalent of a public trust and
they must behave accordingly.
Finally, I have taken a solemn oath to carry out the duties of my office,
as prescribed by law. It is my responsibility to strive as best I can to
protect and safeguard the reserves of the thrift deposit insurance system:
the FSLIC. This is a legal mandate.
I have sought to impose what I consider to be certainly reasonable
constraints on excessive risktaking and imprudent practices by federallyinsured savings institutions, through the regulatory process. Some of
these constraints have been distinctly unpopular with some in the thrift
industry. However, the stakes are so high for our financial system that
failure to have taken unpopular stands on some issues could only have
hastened the day of reckoning without them, and whose alternatives would
be, in my view, far less sanguine.
Thank you for the opportunity to bring these matters to your attention.
Attachments (2)
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Federal Reserve Bank of St. Louis
‘Zi`e4G
1700 G
eet, N.W.
Wastienton, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
September 24, 1985
The Honorable Paul A. Volcker
Chairman, Board of Governors of the
Federal Reserve System
Washington, DC
20551
Cz)
Dear Paul:
Thank you for seeking my views on appropriate regulatory steps to provide
customers with better information about adjustable rate mortgages (ARMs).
As you know, on August 15, the FFIEC asked its Consumer Compliance Task
Force to seek to develop a uniform approach to ARMs disclosure aimed at
achieving consensus by members of the Council. I look forward to the Task
Force's recommendations and hope we can move toward such consensus on this
important issue.
During recent months, the Federal Home Loan Bank Board has carefully
considered the issue of ARMs disclosure requirements. We believe that safe
and sound lending using ARMs requires that the borrower have a full
understanding of the type of obligation being incurred in order to make a
reasonable and meaningful decision concerning ability to repay. Although a
responsible lender must make an independent determination of the borrower's
ability and commitment to repay the loan, we believe that the borrower's
informed agreement is essential to a successful loan relationship. This
requires, in turn, that the borrower fully understand the current and
potential obligations under the loan arrangement at its inception.
We have come to the conclusion that distribution of the Consumer Handbook
on Adjustable Rate Mortgages provides improved and uniform customer
education early in the mortgage shopping process without undue burden on
the creditor. We believe that if customers do not receive the Handbook
when they start the shopping process, they should at least be assured of a
copy of it before filing an application. Therefore, on August 1 we
adopted a final rule requiring all insured institutions to provide the
Handbook, or suitable substitute information, before an ARM customer
receives an application or becomes obligated to pay a nonrefundable
application fee, whichever is earlier. That regulation is effective
October 8, 1985.
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Federal Reserve Bank of St. Louis
V
2
We believe this approach is desirable for all creditors offering ARMs. The
Handbook provides customers with their most important tool, the right
questions to ask. Furthermore, the mortgage checklist at the end provides
the basis for uniform information about all the ARMs they are considering.
In addition, our current regulations for home lending, embodied in 12
C.F.R. §§ 545.32 and 545.33, cover substantive contractual matters as
well as disclosure. We believe these interdependent regulations provide an
essential framework for safe and sound lending. They represent the final
product of extensive Bank Board experience with home mortgages generally
and adjustable rate mortgages specifically.
I believe it is worth noting that in drafting the existing home lending
regulations, we were very careful not to interfere with the secondary
market. Nothing in our regulations makes it difficult for other lenders to
sell loans to thrift institutions. Purchased loans have to comply with our
disclosure requirements only if they are purchased from an affiliate, or
purchased as part of a business arrangement to purchase loans not yet
or
Since the thrift industry was established in order to promote home finance,
the Bank Board has felt an obligation to take a leadership role in matters
that vitally affect home finance. I believe that, in this instance, our
actions have served as a creative catalyst in the ongoing process of
balancing the legitimate needs of lenders and homebuyers.
I look forward to the kind of continued cooperation and consultation
between the Federal Reserve Board and the Bank Board which resulted in the
final ARMs Consumer Handbook our two agencies jointly authored.
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Federal Reserve Bank of St. Louis
Best regards,
40,
..•°of
ovq..
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, 0. E. 20SSI
PAULA.
LCKER
CHAIRMAN
December 8, 1985
Mr. Edwin
Chairman
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, DC 20552
Dear Chairman Gray,
I appreciate the opportunity to comment on the
Bank Board's proposed rule to adopt a new method of
classifying certain commercial loans and to revise its
method of evaluating the asset quality of federally-insured
thrift institutions (Proposed Rule No. 85-504). I agree
that the proposal is timely, and recognize that it is
designed to strengthen the Bank Board's supervision
function.
The proposal is an important step toward
harmonizing the supervision methods of the Bank Board with
those of the banking agencies. As noted in the proposed
rule, the Bank Board is proposing to adopt the basic
concepts contained in the "Uniform Agreement on the
Classification of Assets . . . Held by Banks" ("Uniform
Agreement") which was established in 1938 and further
revised in 1979. The Uniform Agreement provides for certain
uniform examination procedures and practices by both iederal
and state banking agencies. A significant feature of the
Uniform Agreement was the establishment of guidelines for
the risk evaluation of bank assets and a classification
scheme for problem assets, i.e., substandard, doubtful and
loss. This common methodology for the evaluation and
classification of bank assets as used by the banking
agencies has helped to standardize the analysis of the risk
characteristics contained in bank portfolios, and I am
encouraged that the Bank Board is moving toward this
approach. However, I note that certain types of secured
loans are excluded from uniform classification scheme.
Partial adoption of the uniform classification
scheme would, of course, be helpful in providing comparable
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Federal Reserve Bank of St. Louis
4
•
2
analysis of lending practices. Nevertheless, I would
encourage you to move just as far as possible toward full
accord so that similar or identical types of lending are
treated in a uniform way.
In summary, I consider the proposal and continuing
efforts of the Bank Board as a positive step toward the
consistent application of the supervisory process.
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Federal Reserve Bank of St. Louis
Sincerely,
PAUL
•
No. 85- 504
Date: June 21, 1985
FEDERAL HOME LOAN BANK BOARD
12 CFR Parts 561, 563, 571
Classification of Assets
AGENCY:
Federal Home Loan Bank Board
ACTION:
Proposed Rule
SUMMARY: The Federal Home Loan Bank Board ("Board"), as operating head of the Federal Savings and Loan Insurance Corporation
("FSLIC"), is proposing to adopt a new method of classifying
certain commercial loans, and to revise its regulation regarding
the reevaluation of assets by examination staff.
COMMENTS MUST BE RECEIVED BY:
August 30, 1985
ADDRESS: Send comments to Director, Information Services
Section, Office of the Secretariat, Federal Home Loan Bank
Board, 1700 G Street, N. W., Washington, D.C. 20552. Comments
will be available for public inspection at the above address.
FOR FURTHER INFORMATION, PLEASE CONTACT: Jane W. Katz, Senior
Policy Analyst, Office of Policy and Economic Research, (202)
377-6782; Francis E. Raue, Financial Analyst, Office of Examinations and Supervision, (202) 377-6360; or Susan McC. van den
Toorn, Attorney, Office of General Counsel, (202) 377-6525, at
the above address.
SUPPLEMENTAL INFORMATION: Pursuant to Section 403(b) of the
National Housing Act ("NHA"), 12 U.S.C. 1726(b) (1982), the
Federal Home Loan Bank Board ("Board"), as operating head of the
Federal Savings and Loan Insurance Corporation ("Corporation" or
"FSLIC"), has the authority to conduct examinations of institutions the accounts of which are insured by the FSLIC ("insured
institutions"). Section 403(b) of the NHA provides for such
examinations of insured institutions that in the judgment of
the Corporation may from time to time be necessary for its
protection and the protection of other insured institutions, and
permits the Corporation to have access to any information or
report with respect to any examination made by any public
regulatory authority and to furnish any additional information
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Federal Reserve Bank of St. Louis
NO. 85- 504
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with respect thereto as the Corporation may require. Pursuant
to this authority, the Board has the respcnsibility to examine
and evaluate insured institutions' assets and to require
regulatory reporting and treatment of assets for regulatory
evaluation purposes. Section 403(b) of the NHA also requires
all insured institutions to provide adequate reserves established in accordance with regulations made by the Corporation.
See 12 CFR 563.13 (1985).
The Garn-St Germain Depository Institutions Act of 1982
("DIA") (Pub. L. No. 97-320, 96 Stat. 1469, effective October
15, 1982), granted new powers to federally chartered savings and
loan associations and mutual savings banks ("federal associations"). The DIA amended the Home Owners' Loan Act of 1933
("BOLA"), 12 U.S.C. SS 1461-1470 (1982), to permit federal
associations new authority in a broad range of activities, in
order to provide such institutions the flexibility necessary to
maintain their role of providing credit for housing. Section
325 of the DIA added a new Section 5(c)(1)(R) to the BOLA (12
U.S.C. 1464(c)(1)(R) (1982)), which authorized federal associations to invest in secured or unsecured loans for commercial,
corporate, business, or agricultural purposes. The legislative
history of this provision indicates that Congress intended to
authS rize, to a limited extent, "commercial lending" similar to
that practiced by national banks. In addon to this expanded
authority granted to federal associations, many state-chartered
insured institutions which have tradonally followed federal
associations' investment authority have been granted commercial
lending authority under state law.
The Board implemented the new federal commercial lending
authority by adoption of final regulations on April 26, 1983.
Board Resolution No. 83-241, 48 FR 23032 (May 23, 1983). In the
past two years of experience in reviewing these loans and
comparable assets held by state-chartered insured institutions,
the Board has observed that its traditional methods of classifying loans is not an effective method to categorize most commercial lending agreements. The current classification system
evolved in a manner to accommodate primarily home lending, which
is keyed to the timely receipt of periodic repayments and other
features of loans which are secured by real estate. The Board
is concerned that this system may not adequately reflect the
condition of commercial loans where payment schedules and other
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Federal Reserve Bank of St. Louis
No. 85-504
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indicia of "current" status are of a different nature. The
Board therefore believes it is necessary to look at other
methods of evaluating these loans.
Although commercial lending has not yet become a significant
activity for most institutions, the Board is aware of a heightening interest in commercial lending because of its profit
potential and the ability of institutions to employ such loans
to reduce interest-rate risk. The Board is determined, therefore, to ascertain an appropriate method of evaluating these
assets before the scope of this activity increases further, and
to choose a method that will serve to alert institutions and
regulators on an early basis of any deterioration in the quality
of commercial loan assets.
The proposed regulatory language would apply a new evaluation method only to commercial loans of the type described in
Section 5(c)(1)(R) of HOLA and 12 CFR 545.46 (1985), excluding
commercial loans secured by first liens on real estate and other
assets which could be described as "commercial, agricultural or
business" loans but which have long been authorized investments
for federal associations and many state-chartered associations
and have been assessed under the "scheduled items" approach.
However, the Board specifically solicits public comments on
whether a new evaluation method, if adopted, should also apply
to all or some of those categories, for example whether it
should apply to commercial loans of all types, all loans that do
not have regular payment schedules, other investments such as
investment securities, investments in subsidiaries, miscellaneous other assets, etc.
In considering approaches to evaluating commercial loans,
the Board has looked to the federal bank regulatory agencies'
methodology because of their long-term involvement in reviewing
this type of lending and their consequent development of a
classification system to analyze the quality of commercial
loans. Because of the effectiveness of that classification
system in assessing bank commercial loans, and the availability
of interpretive and other explanatory materials for the Board to
draw upon in its discretion, the Board is proposing to adopt the
basic concepts contained in the "Uniform Agreement on the
Classification of Assets. . . Held by Banks" ("Uniform Agreement") issued in revised form on May 7, 1979, as a Joint
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Federal Reserve Bank of St. Louis
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Statement of the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Board of Governors of
the Federal Reserve System and the Conference of State Bank
Supervisors. The May 7, 1979, Uniform Agreement further revised
examination procedures first established in 1938 and revised on
July 15, 1949.
The Board notes that the loan classifications set forth in
the Uniform Agreement are by their nature expressions of
different degrees of a common factor, i.e. risk of nonpayment.
All loans involve some risk, but the degree varies greatly. As
proposed, "problem assets" would be classified as (1) Substandard, (2) Doubtful, or (3) Loss. Each of these categories
is defined and discussed below, following in substantial part
the Uniform Agreement language (in quotes) and training materials used by the banking agencies.
1.
Substandard
"A Substandard asset is inadequately protected by the
current [net worth] and paying capacity of the obligor or of
the collateral pledged, if any. Assets so classified must
have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. They are characterized by the
distinct possibility that the [insured institution] will
sustain some loss if the deficiencies are not corrected."
Weaknesses are to be based upon objective evidence and uncontrollable external factors. Jeopardy .does not imply an ultimate
loss but may show lack of timely liquidation. If the deficiencies are not corrected, the lending institution may sustain some
loss.
Loans classified Substandard would exhibit one or more of
the following characteristics:
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Federal Reserve Bank of St. Louis
O
collateral which is not subject to adequate inspection
and verification;
O
the primary source of repayment is gone and the
lending institution is relying upon the secondary
source;
No. 85-504
Page No. 5
O
loss does not seem likely, but sufficient problems
have arisen to cause the lending institution to go
to abnormal lengths to protect its position in order
to maintain a high probability of repayment;
O
obligors are unable to generate enough cash flow
for debt reduction;
O
deterioration in collateral; and
O
flaws in documentation, leaving a lending institution
in a subordinated or unsecured position.
In addition, examiners could also consider the following in
determining whether the Substandard classification is appropriate:
2.
O
extension of loans beyond the original repayment terms;
O
deterioration in the borrower's affairs sufficient to
cause the lending institution to look to the sale of
collateral for repayment;
O
loans to unprofitable or undercapitalized business; and
O
special problems arising from conditions of a given
industry.
Doubtful
"An asset classified Doubtful has all the weaknesses
inherent in one classified Substandard with the added
characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and
improbable."
The possibility of loss on a Doubtful loan is extremely high,
but because of certain important and reasonably specific pending
factors that may work to the strengthening of the asset, its
classification as an estimated loss is deferred until its more
exact status may be determined.
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Federal Reserve Bank of St. Louis
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Loans classified Doubtful would exhibit discernible
loss potential where some, but not complete loss, seems very
likely but there is still sufficient uncertainty that permits
the asset to remain on the books (at its full value). In
addition, a Doubtful loan could reflect the fact that the
primary source of repayment is gone and doubt exists as to the
quality of the secondary source of repayment.
Doubtful classification would most likely not be repeated at
a subsequent examination because there should be enough time to
resolve pending factors. If pending events did not occur and
repayment is now deferred awaiting new developments, a Loss
classification normally would be warranted.
3.
Loss
"Assets classified Loss are considered uncollectible and of
such little value that their continuance as assets is not
warranted. This classification does not mean that the asset
has absolutely no recovery or salvage value, but rather it
is not practical or desirable to defer writing off this
basically worthless asset even though partial recovery may
be effected in the future."
The Board wishes to note that while the proposed system
necessarily entails a certain amount of subjectivity, because it
is not based upon loan payment performance, it relies upon
traditional factors weighed by commercial banks long active in
this lending area and their regulators. It should also be noted
that, as implemented by the bank regulatory agencies, in some
circumstances a single loan could be divided among different
categories.
The Uniform Agreement guides examiners in reviewing the
classification of loans, classifying loans, and judging the
adequacy of valuation allowances (reserves). The classification
system is the basis upon which valuation allowances are established. For banks, 50 percent of the total of "doubtful" assets
and 100 percent of the "loss" category are reserved or charged
off.
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The current treatment of problem assets employed by the
Board is to -IntiVide—them in the classification of scheduled
items (12 CFR 561.15 (1985)), under which loans are classified
based primarily upon payment performance. An institution's
regulatory net-worth requirement is increased by 20 percent of
such scheduled items. As proposed, commercial loans classified
as Substandard would be treated as a type of scheduled item, ana
the institution's regulatory net-worth requirement would be
increased to reflect 20 percent of such loans. Commercial loans
classified as Doubtful or Loss, however, would require establishment of a specific reserve (50 and 100 percent, respectively); the specific reserves would be drawn from the institution's net-worth accounts and would thus lower the amount of an
institution's actual regulatory net worth, as specific reserves
do not count as eligible net-worth items. While the proposed
classification would require specific reserves for assets
classified as Loss or Doubtful, the Board has directed the
staff to investigate the need to propose non-specific (basket)
reserves for all loans, regardless of classification.
These various proposed effects appear to differ from
commercial bank treatment in a number of ways. First, bank
assets classified as Substandard do not require establishment of
reserves, nor do they increase banks' net-worth requirements
comparable to the extra reserve requirement for scheduled items.
Second,
the bank reserves established for assets classified as
_
5aubtful and Loss do reduce retained earnings, a component of
bank net worth, but are later added pack in calculating bank
reserves so there is no net additional reserve requirement as a
result of the classification, as there would be for insured
institutions establishing specific reserves under the proposal.
However, unlike thrifts, banks are subject to variable net-worth
requirements based upon the quality of their assets, as determined by bank regulators; additionally, in practice uncollectible loans are required to be promptly charged off, thus directly
reducing bank net worth.
If the Board adopted a classification system for commercial
loans substantially as proposed, it would monitor any further
modifications to and interpretations of the Uniform Agreement of
the banking agencies, and would consider on a case-by-case basis
whether any such changes were appropriate to apply to the
classification of assets of insured institutions.
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With regard to the issue of delegation, it is the Board's
intention that, as is currently the practice, the appropriate
Principal Supervisory Agent or his designee would have authority
to approve or disapprove the classification and reevaluation of
particular loans.
The Board is also proposing to adopt a new Statement of
Policy which would give insured institutions as much guidance
as possible in classifying assets.
In addition, the Board is proposing to revise 12 CFR
563.17-2(b), the appraisal provision in the Board's Examinations
and Audits regulation for insured institutions. Section
563.17-2 currently permits a reevaluation of an institution's
assets as a part of the Board's examination process. It
requires the use of appraisals in accordance with S 563,17-1
when the reevaluation involves real estate. The proposed change
would allow for evaluations that take into considera-Eion
economic factors that directly affect the immediate value of the
assets from the insured institution's point of view, other than
direct appraisal of the property. For example, in reviewing a
project, exahiners would measure its continued viability
including such factors as market concentration, whether overbuilding exists, the overall ability of the borrower to complete
the project and whether there are adequate funds remaining in
loans-in-process to complete the project. Tools which could be
employed to make such evaluations could include market research
and other available information pertaining to population
changes, potential future growth, and changes in technology; a
comparison of similar projects in comparable areas; industry
averages on returns from comparable investments; the insured
institution's track record with similar investments; and an
analysis of the desirability of continued funding over the long
term. An example of an evaluation approach that would be
permitted under the proposed language would be, in connection
with a project that has incurred unexpected costs prior to
completion, a review of the use of loan proceeds for purposes
other than completing the project. Such use of loan proceeds
may result in inadequate funds remaining in loans-in-process to
complete the project.
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Finally, the Board is also taking this opportunity to
propose several nonsubstantive changes to the title and text of
S 563.17-2.
Initial Regulatory Flexibility Analysis
Pursuant to Section 3 of the Regulatory Flexibility Act, 5
U.S.C. S 603 (1982), the Board is providing the following
initial regulatory flexibility analysis:
1. Reason, objectives, and legal bases underlying the
proposed rules. These elements have been discussed elsewhere in
the supplementary information regarding the proposal.
2. Small entities to which the proposed rules would apply.
The rule would apply to all insured institutions.
3. Impact of the proposed rules on small institutions.
would have no differential effect on small institutions.
It
4. Overlapping or conflicting federal rules. There are no
federal rules that would duplicate, overlap, or conflict with
the proposed rules.
5. Alternatives to the proposed rule. The current system
may not provide for adequate classification of certain assets.
The proposed method would appear to impose the least burden on
the regulated industry while complying with the Board's stated
objectives.
List of Subjects:
Accordingly, the Federal Home Loan Bank Board hereby
proposes to amend Parts 561, 563 and 571 of Subchapter
Chapter V, Title 12 of the Code of Federal Regulations, as set
forth below.
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SUBCHAPTER D
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
PART 561 - DEFINITIONS
1. The authority citation for Parts 561, 563 and 571 would
continue to read as follows:
Authority:
Sections 401, 402, 403, and 407, 48 Stat. 1255, 1256, 1257, and
1260, as amended; 12 U.S.C. §§ 1724, 1725, 1726, 1730. Reorg.
Plan No. 3 of 1947, 12 FR 4981, 3 CFR, 1943-48 Comp., p. 1071.
2.
Amend S 561.15 by revising paragraph (a) as follows:
S 561.15
Scheduled items.
The term "scheduled items" means:
(a)
3.
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Federal Reserve Bank of St. Louis
slow consumer credit, slow loans, and assets
classified as "substandard" under § 561.16c of this
Part (other than loans specified in paragraph (b) of
this section), *
Add a new § 561.16c as follows:
§561.16c - Classification
of certain assets.
(a)
Scope. The classification system described in this
section applies to the types of commercial loans
defined in 12 U.S.C. S 1464(c)(i)(R) that would
not be eligible for inclusion elsewhere in 12 U.S.C.
S 1464(c).
(b)
Classifications.
(1)
Substandard.
A Substandard asset is inadequately protected by
the current net worth and paying capacity of the
obligor or of the collateral pledged, if any.
Assets so classified must have a well-defined
weakness or weaknesses that jeopardize the
No. 85-504
Page No. 11
liquidation of the debt. They are characterized
by the distinct possibility that the insured
institution will sustain some loss if the
deficiencies are not corrected.
(2)
Doubtful.
An asset classified Doubtful has all the
weaknesses inherent in one classified Substandard
with the added characteristic that the weaknesses
make collection or liquidation in full, on the
basis of currently existing facts, conditions, and
values, highly questionable and improbable.
(3)
Loss.
Assets classified Loss are considered
uncollectible and of such little value that their
continuance as assets is nOt warranted. This
classification does not mean that the asset has
absolutely no recovery or salvage value, but
rather it is not practical or desirable to defer
writing off this basically worthless asset even
though partial recovery may be effected in the
future.
PART 563 - OPERATIONS
4. Amend S 563.17-2 by amending the title and first sentence
of paragraph (a), revising the title and text of paragraph (b)
and adding new paragraph (e), as follows:
S 563.17-2 Reevaluation of assets; adjustment of
book value; adjustment charges.
(a) Real estate owned.
appraise...
Insured institutions shall
(b) Reevaluation of other assets. In connection
with each examination of an insured institution
or service corporation, the Board examiner
shall make such reevaluation of such
institutions' or service corporations' assets
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Federal Reserve Bank of St. Louis
No. 85-504
Page No. 12
(exclusive of insured or guaranteed loans) as
he deems advisable or necessary.
(1) Treatment of real estate loans.
Reevaluations of real estate may be based
upon an appraisal as provided in S 563.17-1
of this Part (except that reevaluation of
parcels of real estate that are similar in
all essential respects may be based upon an
appraisal of one or more of such parcels),
or other appropriate evaluation methods as
determined by the examiner.
(2) Treatment of certain commercial loans.
This section shall apply to the assets defined
in S 561.16c of this Subchapter. Assets
classified as Substandard are included in the
definition of scheduled items set forth at
S 561.15 of this subchapter. Assets classified
as Doubtful or Loss shall have specific loss
reserves of 50 and 100 percent of book value,
respectively, established for them.
(e) Delegations and
interpretations.
The Principal Supervisory Agent or his designee shall have
authority to approve or disapprove the classification and
reevaluation of assets made pursuant to this section. The
Board's Office of Examinations and Supervision shall, from time
to time, issue interpretations and other informational material
regarding reevaluation of assets.
PART 571 - STATEMENTS OF POLICY
5.
Add a new S 571.1a as follows:
S 571.1a
Classification of certain assets.
This statement of policy provides guidance in the classification of assets as set forth in S561.16c of this Subchapter.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
No. 85-504
Page No. 13
(a)
Substandard.
A loan so classified must have a positive and welldefined weakness or weaknesses that jeopardize the
liquidation of the debt. A Substandard debt is an
asset inadequately protected by current net worth and
paying capacity of the obligor, or pledged collateral,
if any. It is characterized by the distinct possibility that the lending institution will sustain some loss
if the deficiencies are not corrected. Weaknesses are
to be based upon objective evidence and uncontrollable
external factors. Jeopardy does not imply an ultimate
loss but may show lack of timely liquidation. If the
deficiencies are not corrected, the lending institution
may sustain some loss. Loans classified Substandard
would exhibit one or more of the following characteristics:
(1)
collateral which is not subject to adequate inspection
and verification;
(2)
the primary source of repayment is gone and the lending
institution is relying upon the secondary source;
(3)
a loss does not seem likely, but sufficient problems
have arisen to cause the lending institution to
go to abnormal lengths to protect its position in
order to maintain a high probability of repayment;
(4)
obligors are unable to generate enough cash flow for
debt reduction;
(5)
deterioration in collateral;
(6)
flaws in documentation, leaving a lending institution
in a subordinated or unsecured position.
(7)
In addition, Board examiners may also consider the
following in determining whether a Substandard classification is appropriate:
(i)
extension of loans beyond the original
repayment terms;
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Federal Reserve Bank of St. Louis
No. 85-504
Page No. 14
(ii)
deterioration in the borrower's affairs sufficient
to cause the lending institution to look to the
sale of collateral for repayment;
(iii) loans to unprofitable or undercapitalized
business;
(iv)
special problems arising from conditions of a
given industry.
(b)
Doubtful.
(1)
Loans classified "Doubtful" would exhibit discernible loss
potential where some, but not complete loss, seems very
likely but there is still sufficient uncertainty that
permits the asset to remain on the books (at it full
value). In addition, a Doubtful loan could reflect the
fact that the primary source of repayment is gone and doubt
exists as to the quality of the secondary source of
repayment.
(2)
Doubtful classification would most likely not be repeated
at a subsequent examination because there should be enough
time to resolve pending factors. If pending events did not
occur and repayment was deferred awaiting new developments,
a Loss classification normally would be warranted.
(c)
Loss.
A loan classified as "Loss" is considered uncollectible
and of such little value that continuance as an asset is
a
not warranted. A loss classification does not mean that
simply
loan doesn't have recovery or salvage value, but
that it is not practical or desirable to defer writing off
all (or a portion) of a basically worthless asset, even
though partial recovery may be effected in the future.
By the Federal Home
•
Bank Board
EfrLW
Se
conyers
ry
1700 G Street, N.W.
Washington. D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
Federal Home Loan Bank Board
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
EDWIN J. GRAY
CHAIRMAN
PERSONAL AND PRIVATE
April 10, 1985
The Honorable Paul Volcker
Chairman
Federal Reserve Board
20th & Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Paul:
I thought you would be interested in
the
attached -- a publication which has
on
numerous occasions questioned Bank Board
policies, and which is widely read
in the
savings institutions industry.
Sincerely,
Edwin J. Gray
Chairman
Attachment
0
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
PAUL A. VOLCKER
CHAIRMAN
March 21, 1985
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Rank Board
1700 G Street, N. W.
Washington, D. C. 20552
Dear Ed:
I was interested to learn that the regulation you
had proposed to limit investments in real estate service
corporations, and equity securities by all FSLIC-insured
institutions, has been adopted. As you know, the Federal
Reserve Board continues to share your concern about excessive risk taking by depository institutions -- risks that
ultimately would be borne in large part by the federal
insurance agencies and the public. Indeed, the events
affecting state-insured thrift institutions in Ohio only
unI- rscore the importance of effective supervisory and
regulatory policies to encourage safe and sound banking
poes. Thus, I would like to emphasize again the
Federal Reserve's support of the Bank Board's regulation
and policy to restrict direct investment, especially equity
poons in real estate and real estate development where
risks can be exceptionally high.
I earlier expressed the Federal Reserve Board's
concern that your rules in fact may not be strong enough to
deal adequately with potential risk. You may recall that
we particularly emphasized the desirability of considering
not only the direct exposure of the FSLIC from investments
of insured S&L's, but also indirect exposure from the
assets acquired by service corporation subsidiaries.
As you well realjze, the banking agencies
responsible for supervision of federally-insured statechartered institutions -- that is, the FDIC and the Federal
Reserve -- both have under consideration regulations to
limit or prohibit the exercise of certain "real estate
development" powers granted by states.
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Federal Reserve Bank of St. Louis
WI
2
I am pleased that the three federal depository
institution regulatory authorities charged with regulating
state-chartered banks are moving ahead in this area. In
this context, we fully support the investment regulations
that vou have adopted, and would only recommend consideration of strengthening amendments.
Sincerely,
p
cc:
Mr. Bradfield
Mr. Ettin
Mrs. Satterfield (2)
SMR:dmg-b
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Federal Reserve Bank of St. Louis
I!
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
PAUL A. VOLCKER
CHAIRMAN
January 4, 1985
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
Washington, D. C. 20552
Dear Ed:
t for comments on
This letter responds to your reques
s designed to strengthen the
the proposed regulatory change
sured depository institunet worth requirements of FSLIC-in
rd shares your concern about
tions. The Federal Reserve Boa
ift industry, in particular
certain developments in the thr
ios and the unusually
the low and declining capital rat
d by some savings and loan
aggressive growth policies adopte
ts that rapid expansion by
associations. The record sugges
tion
associated with deteriora
depository institutions often is
e,
y become apparent over tim
in asset quality, which may onl
ly volatile short-term
and with heavy reliance on potential
wth, even when capital is
liabilities. That aggressive gro
the explicit and implicit
low is, of course, facilitated by
urance and Home Loan Bank
protections afforded by FSLIC ins
membership.
support your efforts to
In this context, we strongly
ositories,
nts for FSLIC-insured dep
tighten the capital requireme
lly
ther the actions specifica
and our questions concern whe
.
direction
proposed go far enough in that
earnings pressures on the
We fully recognize that the
aining
ssures are related to rem
industry, insofar as those pre
practiges acquired years ago,
relatively low interest mortga
that
ement in capital ratios
cally limit the overall improv
context,
period of time. In that
can be achieved in a short
worth
osing higher marginal net
we believe the concept of imp
rly
ing thrifts to be particula
requirements on rapidly expand
le
whi
cy
qua
ade
l
urn to capita
appropriate, speeding their ret
the
At
.
ing
tak
essive risk
imposing some constraints on exc
mination
than the immediate eli
her
rat
t,
same time, the phase-ou
ticular
par
the
s
ures recognize
of, the various averaging proced
its
e
rov
imp
to
ds more time
problems of an industry that nee
fundamental capital position.
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Federal Reserve Bank of St. Louis
n J. Gray - Page 2.
The Honorable Edwi
we also note our
steps you propose,
e
h
th
g
in
om
lc
we
In
gulatory net wort
percent minimum re
3
a
at
sth
gi
g
le
in
ed
nd
understa
in the propos
ntially reaffirmed
ly temporary, in
requirement, esse
the FHLBB to be on
by
ed
nd
te
in
s
wa
have plagued the
lation,
ial problems that
ec
sp
e
th
of
n
io
, inflation, and
recognit
lt of deregulation
su
re
c
a
as
ry
st
du
lieve, sympatheti
thrift in
You are also, I be
s.
te
ra
on
st
p
re
ou
te
Gr
higher in
ent's Task
of the Vice Presid
should
with the proposal
gulatory agencies
re
e
th
of
l
al
at
s.
th
d accounting rule
Financial Services
pital standards an
ca
e
m
is
mu
ra
ni
mi
to
on
g
mm
in
work
adopt co
encies have been
ag
g
in
nk
ck
ba
ba
e
th
at
,
th
ow
As you kn
s. Against
for commercial bank
lation recognize
capital standards
the proposed regu
at
th
os
ge
ur
d
ul
wo
pital-asset rati
ground, we
rd more adequate ca
er
wa
id
to
ns
ng
co
vi
mo
to
r
d
fo
your Boar
the need
ge
ur
d
ul
wo
d
an
,
ssible
ts are really
as promptly as po
marginal requiremen
ed
os
op
pr
e
th
r
now whethe
y's circumstances.
adequate for toda
rve Board undere the Federal Rese
il
wh
,
rd
ga
re
is
ecial accounting
In th
the adoption of sp
r
fo
s
on
ti
va
ti
mo
the FHLBB in the
stands the
institutions by
ed
ur
ns
C-i
LI
FS
of
higher capital
treatment
at the phase-in to
th
e
ev
li
be
we
,
's
by a return to
early 1980
ld be accompanied
ou
sh
me
ti
er
ov
requirements
ples.
accounting princi
more traditional
ed
t on this propos
rtunity to commen
po
op
e
.
th
ns
r
io
fo
ut
u
it
yo
Thank
pository inst
in FSLIC-insured de
regulatory change
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely,
W
BOARD OF GOVERNORS
OF THE
.lialliv--
_,
FEDERAL RESERVE SYSTEM
WASHINGTON, 0. C. 20551
PAUL A. VOLCKER
CHAIRMAN
January 16, 1985
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D.C. 20552
Dear Ed:
This letter responds to your request for comments on the Federal Home
Loan Bank Board's regulatory proposal to limit investments in real estate,
service corporations and equity securities by all FSLIC-insured institutions.
The Federal Reserve Board shares your concern about the risks that heavy
investment in certain types of assets, particularly those associated with
equity in real estate and real estate development, imply for depository
institutions.
The Federal Reserve Board also shares your view that ultimately
the cost of excessive risk taking by depository institutions themselves is
borne in significant part by the federal insurance agencies and the public;
moreover, the Board is concerned about the indirect risks to the insurance
funds of activities carried out in affiliates that may not be entirely insulated from depository institutions. Indeed, considerations of that kind, as
well as the potential for conflict of interest, have led the Board of Governors
to consider utilizing means at its disposal for appropriately limiting (or
even prohibiting) such activities by bank holding companies. An outline of
our proposed regulation will be forwarded shortly for your review.
We fully support the thrust of your efforts to impose prudent
restraints on investment activity by those state-chartered institutions
insured by the FSLIC that have been granted increasingly broad asset powers.
We also concur in your view--and that of the FDIC as indicated by its
recent proposed rule to limit direct real estate investment by state-chartered,
federally insured commercial banks--that the recent and, perhaps increasing,
tendency for state authorities to provide liberal provisions for real
estate investment should not be used in a way that would jeopardize the
federal responsibility for the basic safety of the financial system and
the integrity of the insurance fund.
Our concerns about your proposal revolve around whether the rules
are in fact strong enough to deal adequately with potential risk. While
losses to the FSLIC due to substantial direct investment have not been a
major problem in the past, recent supervisory experience suggests that the
problem is growing. Moreover, while large and aggressive investment by thrifts
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
id*
The Honorable Edwin J. Gray
Page 2
institutions appear to be
in these areas has been relatively recent, some
it will offset other
deliberately following a high-risk strategy in hopes
ments may not show
invest
pressures on earnings, and the full effect of poor
up for several years.
ed rule could
In that regard, the Board believes that your propos
that the
e
believ
we
be strengthened in two general directions. First,
-chartered,
state
by
ment
invest
limitations on the amount of permissible direct
we urge
,
Second
y lower.
FSLIC-insured institutions should be significantl
investdirect
on
tions
the FHLBB to consider, as a supplement to its limita
activity
ment
invest
of
volume
ment, a constraint on what is now a substantial
and
stateboth
at
that takes place in service corporation subsidiaries
believe that the Bank
We
.
utions
instit
sured
FSLIC-in
red,
federally charte
ct risks to the FSLIC
Board should give significant weight to the indire
associated with such service corporation investment.
proposal to
Thank you for the opportunity of commenting on your
.
reduce direct investment by FSLIC-insured institutions
cerely,
aptize,t
aul A. Volcker
cc:
Eric I. Hemel, FHLBB
Messrs. Ettin and Freund
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Federal Reserve Bank of St. Louis
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to internal or confidential information.
Citation Information
Document Type: Correspondence
Citations:
Number of Pages Removed: 2
Confidential: Memo to Paul Volcker from Ed Gray, "Brokered Funds," February 23, 1983.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
f-Eli 1U a34
L---
Honorable Paul Volcker, Chairman
Board of Governors of the
Federal Reserve System
Washington, D.C. 20551
Dear Paul:
Thank you for your letter of January 27, 1984, asking the Bank Board
to join you in a review of data collection requirements under Regulaticn B,
Equal Credit Opportunity. We will be glad to work with you in this review,
and have designated Richard Tucker, Director of our Office of Community
Investment, to serve on the task force.
The Bank Board has always supported the goal of a uniform, interagency
data collection system to promote fair housing and equal credit opportunity
enforcement.
In fact, the Board strongly favored the unified system
proposed in a 1982 study conducted by JRB Associates for the Federal
JRB designed a system that
Financial Institutions Examination Council.
would be uniform for all financial regulatory agencies and would reduce the
industry reporting burden by combining fair lending data with the reporting
requirements of the Home Mortgage DisclosureThe task force reviewing
Regulation B data collection might want to consider the JRB study as a
starting point.
Please let me know if I can be of any further assistance.
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Federal Reserve Bank of St. Louis
CF
F TIE
1700 G Street, N.W.
FEE:7,a
Federal Home Loan BankPitlo
Washington, D.C. 20552
el 16
r
F:1
ET,t
o.
L.'
11111
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
December 15, 1983
Mr. Paul Volcker
Chairman
Board of Governors of the
Federal Reserve System
Washington, D.C.
g"..)
Dear Chairman Volcker:
")
Today the Federal Home Loan Bank Board ("Bank Board
to
York,
New
accepted the bid submitted by Citicorp, New York,
go,
Chica
of
n
acquire First Federal Savings and Loan Associatio
from the
Chicago, Illinois ("First Federal"), with assistance
on
IC"),
("FSL
n
Federal Savings and Loan Insurance Corporatio
which
,
andum
memor
s
substantially the terms stated in the issue
accepting
has already been provided to your General Counsel. In
e
sever
that
this bid, the Bank Board found and determined
of First
lity
stabi
the
financial conditions exist which threaten
ns or
tutio
insti
ed
Federal and of a significant number of insur
cial
finan
t
of insured institutions possessing significan
orp is
resources; that the acquisition of First Federal by Citic
and
al,
Feder
First
likely to improve the financial condition of
to
offer
orp's
Citic
would lessen the risk to the FSLIC; and that
risk
least
and
se
acquire First Federal presents the lowest expen
to the FSLIC of any acceptable offer submitted for First
ved the
Federal. Based upon these findings, the Bank Board appro
Loan
s'
Owner
proposed acquisition under both §5(p) of the Home
as
Act,
ng
Act, as amended, and §408(m) of the National Housi
amended. The closing of this acquisition is expressly condi
al
Feder
the
of
nors
tioned upon approval by the Board of Gover
Reserve System ("Board").
billion
First Federal is a "Phoenix" institution with $3.9
d in
forme
ill,
goodw
in assets and over $1 billion in non-earning
with
al
Feder
First
1982 through the FSLIC-assisted mergers of
State of
two other failing, FSLIC-insured institutions in the
over $86
ased
purch
Illinois. Since its formation, the FSLIC has
First
from
million in Income Capital Certificates ("ICCs")
the ICC
Federal. Despite the provision of assistance through
nued to
conti
purchases, First Federal's financial position has
$4.4
ge
worsen. Losses for the first 10 months of 1983 avera
net
al's
million per month. Since January, 1983, First Feder
159%.
or
worth, without ICCs, has declined by $36.7 million,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Paul Volcker
Page 2
Total savings declined by $7,954,000, in October, 1983. During
the past 10 months, First Federal's average cost of money has
been 9.12% while its average yield on assets has been 8.80%.
As a Phoenix institution, First Federal is subject to a
significant degree of control by the FSLIC, including the
authority of the FSLIC to approve or reject any nomination to
First Federal's board of directors, or senior management
positions, and to approve or reject its operating plans and most
proposed significant business actions. The FSLIC has exercised
these contractual rights and, at the present time, a majority of
First Federal's directors consists of persons suggested by the
FSLIC. While present management is cooperative, it lacks the
depth, continuity and skill required to bring First Federal to
recovery. In part this is due to First Federal's Phoenix
status, as a result of which it can be sold or liquidated by the
FSLIC at any time; under these circumstances, it is extremely
difficult to attract or retain competent managers at middle or
upper levels. Because First Federal's management is faced with
critical decisions beyond its ability to handle, there is a
serious risk that its management and administration will
collapse in the near future unless the FSLIC is able to implement a permanent solution to First Federal's problems.
First Federal's financial and managerial problems make it
an extremely urgent problem which the Bank Board and the FSLIC
must, consistent with their statutory responsibilities, resolve
as promptly as possible. The Bank Board has determined that
Citicorp has offered to acquire First Federal on terms that
serve the public interest and minimize the cost of the acquisition to the FSLIC to a substantially greater extent than those
offered by any other bidder. The net present value cost to the
FSLIC of Citicorp Savings' proposal is $559,674,000 or
$118,691,000 less than the next lowest bid, and at least
$574,364,000 less than the cost of liquidation, the net present
value cost of which is estimated to be $1,134,038,000.
Economic and financial forecasts prepared by the Bank
Board's staff indicate that implementation of Citicorp Savings'
proposal will result in a complete financial recovery for First
Federal and create a viable surviving institution in the
Illinois market for thrift and housing finance services.
Citicorp has agreed to immediately invest sufficient capital in
First Federal to bring its net worth to the level required by
the Bank Board's regulations, and to continue to maintain First
Federal's net worth at the required level in the future. The
management of Citicorp will provide the expertise necessary to
transform First Federal into a competitive institution in the
Illinois market.
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Federal Reserve Bank of St. Louis
Mr. Paul Volcker
Page 3
by First Federal
In light of the continuing losses incurred
effect a solution
described previously, the cost to the FSLIC to
increase with each
to the problem posed by First Federal will
and the Office
passing month. Therefore, the staff of the FSLIC
dispatch to close
of General Counsel are prepared to act with
Citicorp's acquisithat
hoped
is
It
tly.
the acquisition promp
without delay, so that
tion of First Federal can be accomplished
red, confidence
public confidence in First Federal will be resto
maintained, and the
in the savings and loan industry will be
caused by this
daily increasing potential cost to the FSLIC
association can be minimized.
n,the Bank Board
In its Resolution approving the acquisitio
ct to First
determined that an emergency exists with respe
y on Citiiatel
immed
act
to
Board
the
res
Federal which requi
sition of First
corp's application for approval of its acqui
in view of the
Federal. Therefore, it is requested that,
the Board
emergency nature of First Federal's situation,
Bank Holding
exercise its authority under §4(c)(8) of the
notice and
Company Act, as amended, and dispense with the
For the reasons
hearing otherwise required by that section.
er erosion of
explained in this letter, delay will cause furth
FSLIC.
public confidence and increased cost to the
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Federal Reserve Bank of St. Louis
By the Federal Home Loan Bank Board
ad
ecretary
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
EDWIN J. GRAY
CHAIRMAN
January 19, 1984
Mr. Paul Volcker
Chairman
Board of Governors of the
Federal Reserve System
Washington, D. C.
Dear Chairman Volcker:
This is written in answer to your request that the Federal
Savings and Loan Insurance Corporation ("FSLIC") provide a
summary of cost evaluations of proposals received by the FSLIC
for the acquisition of First Federal Savings and Loan Association of Chicago, Chicago, Illinois ("association"), employing
interest rate assumptions of the Office of Management and Budget
("OMB").
In my letter of January 18, 1984, I informed you that the
staff of the FSLIC had provided to the Bank Board a cost
analysis of the Citicorp proposal to acquire the association
using OMB assumptions, and that this analysis was intended to
show the possible effect of an interest rate environment
differing from that employed by the Bank Board to evaluate
proposals for the association and other FSLIC insured institutions. The staff of the FSLIC did not present or prepare
cost analyses that employed OMB assumptions for other proposals.
In accordance with your request, the staff of the FSLIC has
reviewed under OMB future interest rate assumptions all of the
proposals to acquire the association.
The net present value cost of the Citicorp proposal,
employing such assumptions, is $339 million. One offer
received, but later withdrawn, has a net present value cost of
$207.1
million utilizing the OMB assumptions. This offer was
submitted by an out of state holding company and included
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Federal Reserve Bank of St. Louis
,
2
conditions requiring the granting of entry rights in four
additional states. Because of this condition this offer was not
acceptable regardless of its costs. All other acquisition
proposals have costs under these assumptions substantially in
excess of the Citicorp proposal.
The out of state offer referred to above was highly
sensitive to interest rate changes and was admittedly designed
by the bidder to place the risk of high interest rates upon the
FSLIC. For this and the unacceptable condition discussed above
as well as a net present value cost that was substantially
higher than that of Citicorp under the standard assumptions
employed by the Bank Board for evaluation of bids, this bidder
was advised by the staff that its bid would not be recommended,
and the bidder agreed that this bid should no longer be
considered to be open.
In conclusion, I wish to emphasize again that the cost
summary given above is provided only upon your request and that
the Bank Board, in evaluating proposals for the association, did
not employ OMB assumptions for the purpose of comparing bids.
After evaluating all considerations that the Bank Board deems
relevant, including cost to the FSLIC, the Citicorp application
is by far superior to all other proposals.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Si
erely,
Edw n J.
Chairman
BOi',173 CF
Li' TVE
FEEE7,;-.L
DV
Federal Home Loan Bank-B rd
1r
117i
r'q
1700 G Street, N.W.
•
Washington, D.C. 20552
Fi 2. (7, I
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
, %. - • • i
December 15, 1983
Mr. Paul Volcker
Chairman
Board of Governors of the
Federal Reserve System
Washington, D.C.
Dear Chairman Volcker:
Today the Federal Home Loan Bank Board ("Bank Board")
to
accepted the bid submitted by Citicorp, New York, New York,
o,
Chicag
of
ation
Associ
Loan
and
s
Saving
l
acquire First Federa
the
from
ance
assist
with
l"),
Federa
t
("Firs
is
Chicago, Illino
on
Federal Savings and Loan Insurance Corporation ("FSLIC"),
which
substantially the terms stated in the issues memorandum,
ing
accept
In
l.
Counse
l
Genera
your
to
ed
provid
has already been
this bid, the Bank Board found and determined that severe
First
financial conditions exist which threaten the stability of
or
Federal and of a significant number of insured institutions
of insured institutions possessing significant financial
rp is
resources; that the acquisition of First Federal by Citico
l, and
likely to improve the financial condition of First Federa
to
would lessen the risk to the FSLIC; and that Citicorp's offer
risk
acquire First Federal presents the lowest expense and least
to the FSLIC of any acceptable offer submitted for First
ed the
Federal. Based upon these findings, the Bank Board approv
Loan
'
Owners
Home
the
of
§5(p)
both
under
ition
proposed acquis
as
Act,
g
Housin
al
Nation
the
of
)
S408(m
and
Act, as amended,
amended. The closing of this acquisition is expressly condiFederal
tioned upon approval by the Board of Governors of the
Reserve System ("Board").
billion
First Federal is a "Phoenix" institution with $3.9
in
formed
in assets and over $1 billion in non-earning goodwill,
with
1982 through the FSLIC-assisted mergers of First Federal
of
two other failing, FSLIC-insured institutions in the State
$86
over
sed
purcha
has
FSLIC
the
ion,
format
Illinois. Since its
million in Income Capital Certificates ("ICCs") from First
the ICC
Federal. Despite the provision of assistance through
ued to
contin
has
on
ial
positi
financ
l's
purchases, First Federa
$4.4
e
averag
of
1983
months
10
first
worsen. Losses for the
net
l's
Federa
First
y,
1983,
Januar
million per month. Since
1
or
n,
millio
by
$36.7
ed
worth, without ICCs, has declin
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
...Mr. Paul Volcker
Page 2
Total savings declined by $7,954,000, in October, 1983. During
the past 10 months, First Federal's average cost of money has
been 9.12% while its average yield on assets has been 8.80%.
As a Phoenix institution, First Federal is subject to a
significant degree of control by the FSLIC, including the
authority of the FSLIC to approve or reject any nomination to
First Federal's board of directors, or senior management
positions, and to approve or reject its operating plans and most
proposed significant business actions. The FSLIC has exercised
these contractual rights and, at the present time, a majority of
First Federal's directors consists of persons suggested by the
FSLIC. While present management is cooperative, it lacks the
depth, continuity and skill required to bring First Federal to
recovery. In part this is due to First Federal's Phoenix
status, as a result of which it can be sold or liquidated by the
FSLIC at any time; under these circumstances, it is extremely
difficult to attract or retain competent managers at middle or
upper levels. Because First Federal's management is faced with
critical decisions beyond its ability to handle, there is a
serious risk that its management and administration will
collapse in the near future unless the FSLIC is able to implement a permanent solution to First Federal's problems.
First Federal's financial and managerial problems make it
an extremely urgent problem which the Bank Board and the FSLIC
must, consistent with their statutory responsibilities, resolve
as promptly as possible. The Bank Board has determined that
Citicorp has offered to acquire First Federal on terms that
serve the public interest and minimize the cost of the acquisition to the FSLIC to a substantially greater extent than those
offered by any other bidder. The net present value cost to the
FSLIC of Citicorp Savings' proposal is $559,674,000 or
$118,691,000 less than the next lowest bid, and at least
$574,364,000 less than the cost of liquidation, the net present
value cost of which is estimated to be $1,134,038,000.
Economic and financial forecasts prepared by the Bank
Board's staff indicate that implementation of Citicorp Savings'
proposal will result in a complete financial recovery for First
Federal and create a viable surviving institution in the
Illinois market for thrift and housing finance services.
Citicorp has agreed to immediately invest sufficient capital in
First Federal to bring its net worth to the level required by
the Bank Board's regulations, and to continue to maintain First
Federal's net worth at the required level in the future. The
management of Citicorp will provide the expertise necessary to
transform First Federal into a competitive institution in the
Illinois market.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Paul Volcker
Page 3
Federal
In light of the continuing losses incurred by First
t a solution
described previously, the cost to the FSLIC to effec
se with each
to the problem posed by First Federal will increa
and the Office
FSLIC
the
of
staff
the
fore,
passing month. There
to close
ch
dispat
with
act
to
ed
prepar
of General Counsel are
acquisiorp's
Citic
that
hoped
is
It
tly.
the acquisition promp
delay, so that
tion of First Federal can be accomplished without
confidence
public confidence in First Federal will be restored,
ained, and the
in the savings and loan industry will be maint
this
daily increasing potential cost to the FSLIC caused by
ized.
minim
be
association can
Bank Board
In its Resolution approving the acquisition,the
First
determined that an emergency exists with respect to
Cition
ately
immedi
act
to
Board
the
res
Federal which requi
First
corp's application for approval of its acquisition of
the
of
view
in
that,
ted
reques
is
it
fore,
Federal. There
Board
emergency nature of First Federal's situation, the
g
Holdin
Bank
the
of
(8)
§4(c)
under
ity
author
exercise its
and
Company Act, as amended, and dispense with the notice
reasons
hearing otherwise required by that section. For the
n of
erosio
r
explained in this letter, delay will cause furthe
public confidence and increased cost to the FSLIC.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
By the Federal Home Loan Bank Board
ecretary
c2F
t.;
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bar*3ErEtirAS
EA 2: 51
sg ,
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
11.ri.tt1P.:'.1'
December 16,
19b3 r:7
Mr. Paul Volcker
Chairman
Board of Governors of the
Federal Reserve System
shington, D.C.
tf
Dear Chairman Volcker:
) approved the
Today the Federal Home Loan Bank Board ("Bank Board"
ation of
Associ
Loan
and
s
acquisition of New Biscayne Federal Saving
New
York,
New
rp,
Citico
by
Miami, Miami, Florida ("New Biscayne"),
re
Delawa
gton,
Wilmin
ation,
York ("Citicorp"), Citicorp Banking Corpor
ri
Missou
Louis,
St.
("CBC"), and Citicorp Person-To-Person, Inc.,
the merger of New
("CPTP") (collectively "Citicorp Applicants"), by
Federal Association
A
Loan,
Biscayne into Biscayne Federal Savings and
zed by the
organi
be
("Savings"), a Federal stock association to
Savings and Loan
l
Federa
the
Citicorp Applicants, with assistance from
terms stated in
the
y
ntiall
Insurance Corporation ("FSLIC"), on substa
to your General
ed
provid
the issues memorandum which has already been
that severe
found
Board
Counsel. In taking this action, the Bank
of New
ity
stabil
financial conditions exist which threaten the
as well
utions
instit
Biscayne and of a significant number of insured
ces;
resour
ial
financ
as insureu institutions possessing significant
e
improv
to
likely
is
that the acquisition of New Biscayne by Savings
to
risk
the
lessen
the financial condition of New Biscayne and would
e New
the FSLIC, and that the Citicorp Applicants' offer to acquir
of
FSLIC
the
to
Biscayne presents the lowest expense and least risk
these
upon
Based
any acceptable offer submitted for New Biscayne.
isition under ooth
findings, the Bank board approved the proposed acclu
S 408(m) of the
and
d,
S 5(p) of the Home Owners' Loan Act, as amende
acquisition is
this
of
National Housing Act, as amendea. The closing
ors of the
Govern
of
expressly conditioned upon approval by the Board
eederal Reserve System ("Board").
to deteriorate
The financial condition of New Biscayne continues
("Old Bisrapidly. Biscayne Federal Savings and Loan Association
6, 1983,
April
cayne") was insolvent by more than $29 million on
sion of Old
when the FSLIC, in its receivership capacity, took posses
liabilities
and
Biscayne and transferred substantially all its assets
by the FSLIC.
to New Biscayne, a new mutual association organized
ne reported
Biscay
New
1983,
31,
r
Octobe
and
1983,
Between April 6,
a total
averagea net monthly operating losses of $1.8 million, for
peni
tha
reported net operating loss of more than $13 million for
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Paul Volcker
Page 2
6, 1983, and
New Biscayne's total reported net losses between April
1983, New
31,
er
October 31, 1983, exceed $16 million. As of Octob
's
FSLIC
it
80),
Biscayne's net worth had declined to (S46,532,1
e Capital
Incom
ased
purch
temporary financial assistance in the form of
sition
acqui
The
.
Certificates ("ICC's") is excluded from net worth
ICC's
the
of
on
llati
cance
approvea by the Bank Board contemplates the
ana the FSLIC notes issued in exchange for them.
and ending
In addition, auring the period beginning April 6, 1983,
by
ned
decli
have
gs
October 31, 1983, New Biscayne's total savin
in
ne
decli
er
$373,759,795.00, or 20.79%, a substantially great
ienced by
magnituae and percentage of deposits than that exper
Carolina,
,
Perpetual Savings and Loan Association, High Point North
Biscayne's
New
n.
ratio
which was recently acquired by Old Stone Corpo
total
its
and
,
negative spread has increased from 0.33% to 1.07%
assets have declined by $8,661,581.
g New
In order to protect the public interest by stabilizin
business when
act
trans
Biscayne's financial condition so that it could
FSLIC, in
the
rized
it opened on April 7, 1983, the Bank Board autho
in an
yne
Bisca
New
from
its corporate capacity, to purchase ICCs
a total of
ased
purch
has
amount up to $100 million. To date the FSLIC
rized
autho
has
Board
Bank
the
ion,
$38.7 million in ICC's. In addit
of
Bank
Loan
Home
al
Feder
the
the FSLIC to guarantee aavances from
of
As
on.
milli
S650
to
up
Atlanta to New Biscayne in an amount
were outstandOctober 31, 1983, $381 million of guaranteed advances
ing.
Biscayne has
In addition to its financial aifficulties, New
Since the
nnel.
suffered a significant loss of management perso
employees,
yne
Bisca
New
appointment of the FSLIC as receiver, 146
submitted
have
s,
visor
including 27 managers ana 7 first line super
Biscayne
New
at
dent
Presi
letters of resignation. The Senior Vice
tainty
uncer
the
that
responsible for personnel has advised the FSLIC
it
made
has
yne
Bisca
relating to the future disposition of New
ers ana supervisors.
difficult to replace personnel, particularly manag
tainty, employment
uncer
this
of
Moreover, apparently taking advantage
contacted New
have
n
agencies and former employees of the associatio
in
yment
emplo
Biscayne personnel to encourage them to seek
the
While
ity.
secur
institutions capable of offering greater job
ed
enter
yne,
Bisca
New
of
FSLIC, in connection with the organization
San
n,
iatio
Assoc
Loan
into an agreement with Home Federal Savings and
ding
provi
is
Home
Diego, California ("Home"), pursuant to which
agreement is short
assistance in the management of New Biscayne, the
Biscayne's
New
d
term and the loss of personnel has exacerbate
inability to operate effectively.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.4)
Mr. Paul Volcker
Page 3
There are no indications that the rate of aecline in New
Biscayne's position will slow, or that New Biscayne's position can
ever improve unless it is acquired by an entity that can rebuild
to
public confidence in the association. The cost of FSLIC assistance
ates.
deterior
effect such an acquisition will increase as New Biscayne
Given the current condition of the savings and loan industry in
is
general, and the extent of the FSLIC's statutory commitments, it
by
incurred
clearly in the best interest of the public that the cost
the FSLIC with respect to New Biscayne be minimized.
Because of New Biscayne's size and the unabated decline in its
the
condition, New Biscayne presents an unusually urgent problem which
y
Bank Board and the FSLIC must, consistent with their statutor
New
responsibilities, resolve as promptly as possible. The urgency of
United
the
Biscayne's situation was underscored by the willingness of
the
States Circuit Court of Appeals for the Eleventh Circuit to grant
Court's
Circuit
Bank Board and the FSLIC an expedited hearing and the
the
expeditious action on November 29, 1983, reversing and vacating
the
for
Court
9, 1983, order of the United States District
September
enabled
has
action
Southern District of Florida. The Circuit Court's
the Bank Board and the FSLIC to proceed immediately with the resolupublic
tion of the problem posed by New Biscayne. In order to restore
the
minimize
ana
confidence, preserve New Biscayne's remaining assets,
FSLIC
the
that
ve
cost of this transaction to the FSLIC, it is imperati
conclude arrangements for the acquisition of New Biscayne without
delay.
have
The Bank Board has determined that the Citicorp Applicants
offerea to acquire New Biscayne on terms that serve the public
a
interest ana minimize the cost of the acquisition to the FSLIC to
substantially greater extent than the terms offerea by any other
biader. The present value cost to the FSLIC of the Citicorp Applicost
cants' bid is zero, and $150,000,000 less than the present value
initial
an
of licluidating New Biscayne, which is estimated to require
total
cash outlay of $1,000,000,000.00, or one-seventh of the FSLIC's
Citicorp
insurance reserves. Furthermore, the management of the
Applicants will be able to provide the expertise necessary to enable
acquisiNew Biscayne to operate effectively. Implementation of the
tion would render New Biscayne viable and remove future risk that
auaitional FSLIC assistance will be necessary for New Biscayne,
because the Citicorp Applicants have agreed to maintain the net worth
of Savings in accordance with Bank Board requirements.
While the Citicorp Applicants' proposal represents, in all
, the
respects, the best solution to the problems posed by New Biscayne
's
cost of that proposal to the FSLIC increases daily as New Biscayne
the
of
purchase
FSLIC's
of
effect
the
ng
(excludi
worth
negative net
the
ICC's) rapidly approaches $60,000,000. Accordingly, the staff of
g
followin
Board,
Bank
the
of
Counsel
General
of
FSLIC and the Office
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Paul Volcker
Page 4
the example of the Circuit Court of Appeals, are prepared to act with
dispatch to close this transaction promptly. The Bank Board hopes
that the acquisition of New Biscayne can be accomplished without
delay, so that public confidence in New Biscayne will be restored,
confiaence in the savings and loan industry will be maintainea, and
the daily increasing potential cost to the FSLIC caused by the
deterioration of this association can be stabilized.
In its Resolution approving the acquisition, the Bank Board
determined that the condition of New Biscayne would support a finding
by the Board that an emergency exists with respect to New Biscayne
n
which requires the Board to act immediately on Citicorp's applicatio
Bank
the
for approval of its acquisition of New Biscayne. Therefore,
Board requests that, in view of the emergency nature of the New
Biscayne situation, the Board exercise its authority under § 4(c)(8)
of the Bank Holaing Company Act, as amended, and dispense with the
notice and hearing otherwise required by that section. For the
reasons explained in this letter, delay will cause further erosion of
the public confidence and increased cost to the FSLIC.
Thank you for your consiaeration in this matter.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
By the Federal Home Loan Bank Board
/11
pe retary
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank Board
RICHARD T. PRATT
- CHAIRMAN
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
APR 29 1983
4..93
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Honorable Fernand J. St Germain
Chairman
Committee on Banking, Finance
and Urban Affairs
House of Representatives
20515
Washington, D.C.
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Dear Mr. Chairman:
ng to express my
As Chairman of the Bank Board, I am writi
which would impose a
n
strong opposition to any proposed legislatio
financial service
other
moratorium on the acquisition of thrifts by
a ban is
such
rn with
or industrial companies. My primary conce
the
ng
enizi
homog
that it represents a hasty first step toward
In my
.
tries
ng indus
regulation of the thrift and commercial banki
ul
harmf
be extremely
view, such treatment is unwarranted and could
legal
Additionally, there are a number of other
to the industry.
such a measure.
and policy considerations which argue against
several
As you are aware, the bank regulators have made
Company Act,
ng
Holdi
Bank
legal and policy decisions affecting the
three
last
the
over
allowing the development of "nonbank" banks
nal
r
natio
eithe
with
Nonbank banks are commercial banks
years.
ting
accep
from
r
or state bank charters that elect to abstain eithe
in
ities
activ
two
demand deposits or making commercial loans within the definition
fall
to
order
in
e
engag
must
which a company
Commercial and
of a bank for Bank Holding Company Act purposes.
, acquisitions
industrial firms have thus acquired nonbank banks
Company Act.
which would otherwise be barred by the Bank Holding
on acquiIn effect, a legislative decision to impose a ban
financial service and
sitions of both thrifts and banks by certain
d consolidating the
towar
step
commercial firms represents the first
ve that such
belie
I
.
tries
supervisory systems for the two indus
First,
ns.
reaso
two
identical treatment is inappropriate for
is
banks
ank"
even assuming arguendo that the creation of "nonb
ation
regul
the
to
inherently problematic, it is a problem unique
tically different
drama
are
which
nies
compa
ng
holdi
of banks and bank
savings and loan .assoin structure, orientation and authority from
ciations or other thrift institutions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
AL
MInImMilMIIIMiNomma...
- 2 While thrifts were given significant increased operating
flexibility by the Garn-St Germain Act, there are still many
disparities between their legal powers and those of banks, as
well_as their structural orientation. For example, all federallychartered thrifts, and most state-chartered institutions are unable
to engage in such bank activities as offering retail demand accounts
and underwriting state and local obligations, and are subject to
very restrictive percent-of-assets limits on their commercial
lending powers which have no parallel in banking laws.
Perhaps even more significant, thrift assets are still heavily
composed of mortgage,loans. Even if thrifts had total legal parity
with the commercial banking sector, their history and experience
as mortgage lenders would prevent an immediate expansion into
commercial lending. Favorable tax treatment available by virtue
of the so-called "bad debt deduction" is also a compelling incentive
for thrifts to maintain a strong commitment to mortgage lending.
Finally, thrifts simply do not have the human capital to accomplish
a speedy, wholesale restructuring toward commercial lending even if
they were desirous of doing so.
Additionally, there is a very important legal distinction
between an acquisition of a thrift by a commercial firm and the
acquisition of a "nonbank" bank by such a firm. Because of a legal
gap in the Bank Holding Company Act, a firm which acquires a "nonbank"
bank does not become a bank holding company and is, therefore, not
In sharp contrast,
subject to federal regulation of its activities.
such an acquisition of a thrift would subject the acquirer to
regulation by the Bank Board under the Savings and Loan Holding
Under this Act, all holding companies are
Company ("SLHC") Act.
required to provide to the FSLIC detailed financial reports as to
the condition of the holding company and its subsidiaries and to
Moreover, the SLHC Act imposes a
submit to FSLIC examinations.
number of restrictions on transactions between affiliates of an
Generally, these provisions
SLHC and the SLHC's subsidiary S&L.
prohibit an S&L subsidiary from purchasing stock from, or making
loans to, any SLHC affiliate, and provide strong safeguards against
conflicts of interest in the SLHC's operation of its S&L subsidiary.
There are also a number of other legal and policy considerations
which argue strongly against imposing a moratorium on acquisitions
of thrifts by other financial service or industrial companies.
First, throughout the fifty years that the Federal thrift system
has been in existence, non-financial and industrial corporations
whether steel manufacturers or finance companies, have had the
Many such acquisitions have occurred
authority to acquire thrifts.
throughout this period with little fanfare and no disruption to
I have seen no evidence that the ownership of thrifts
the system.
by non-depository corporations or non-financial services firms
has ever caused a serious problem in the industry or its regulation.
No abuse in this area has been documented. Second, any moratorium
to restrain the acquisition of thrifts by non-depository corporations
and commercial firms would raise the erroneous implication that
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 3 such acquisitions had caused substantial and insurmountable
industry and regulatory difficulties.
That is simply not
true.
In this regard, it is particularly important to note that
to date, the Bank Board has not passed upon the legality of any
particular application by a securities firm to acquire a thrift.
Finally, acquisitions of thrifts by such firms bring into the
industry new capital which can support and invigorate both ailing
and healthy thrifts in this very competitive market. This is
especially crucial now, since the net worth of the industry has
been severely eroded by the financial crisis of the last three
years and competition among financial services firms has become so
vigorous.
In short, there appears to be little basis in sound policy
for such a moratorium after fifty years of success.
During its
deliberations on the Garn-St Germain Act, Congress had the unitary
S&L holding company issue before it.
Congress unequivocally
decided that, as long as an insured institution meets the asset
composition test specified for domestic building and loan associations under section 7701(a)(19) of the Internal Revenue Code,
it may be owned by any company.
Likewise, by exempting thrifts
from the Bank Holding Company Act definition of a bank, Congress
made an additional definitive comment on the continued appropriateness of the activities restraints contained in the S&L Holding
Company Act.
Congress also clearly understood the progressive changes it
made to the authorities of a federal thrift in the Garn-St Germain
Act and how attractive that charter could become to new capital.
It is illogical to believe that Congress did not explicitly
design these circumstances with the public interest in mind. Any
suggestion that Congress -- after deliberating for nearly two
years on all aspects of the Garn-St Germain Act -- was not aware
of the implications of that law for the thrift industry, is a
disservice to the members of Congress and their staffs Who labored
so long to produce that landmark legislation.
Thus it seems
unreasonable and hasty to call for a repeal of the Garn-St Germain
Act approximately six months after its effective date because of
conceptual and legal gaps in the commercial bank statutes that have
been understood for nearly three years.
Given these considerations, I believe that the "nonbank"
bank issue must be viewed exclusively as a bank regulatory problem.
Therefore, it would be inappropriate to impose a moratorium
that would have the de facto effect of permitting commercial bank
regulators to assert their authority over institutions historically
and successfully regulated -- by Congressional direction -- by
the Bank Board. Moreover, I believe any attempt to include
thrifts in a moratorium on "nonbank" bank acquisitions would be
an overreaction, as well as conceptually unsound. To date, less
than 20 "nonbank" banks have come into existence.
It makes no
sense to disrupt a statutory framework which has been in place
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 4 for many years, and potentially disadvantage an entire industry
of some 3300 associations, in order to deal with a tiny fraction
of the commercial banking sector.
Finally, the acquisition of thrifts by other financial and
nonffnanCial corporations can eventually provide Congress with a
controlled experiment which may be helpful in any future action to
redesign the bank laws.
Please note that, in accordance with 12 U.S.C. § 250, this
letter has not been reviewed outside the Federal Home Loan Bank
.
Board and does not necessarily reflect the views of the President
Richard T. Pratt
Chairman
CC:
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
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Federal Reserve Bank of St. Louis
(
Henry Gonzalez
Joseph Minish
Frank Annunzio
Parren Mitchell
Walter Fauntroy
Stephen Neal
Jerry Patterson
Carroll Hubbard
John LaFalce
Norman D'Amours
Stanley Lundine
Mary Rose Oakar
Bruce Vento
Doug Barnard
Robert Garcia
Mike Lowry
Charles Schumer
Barney Frank
William Patman
William Coyne
Buddy Roemer
Richard Lehman
Bruce Morrison
Jim Cooper
Marcy Kaptur
Ben Erdrich
Sander Levin
Thomas Carper
Esteban Torres
Chalmers Wylie
Stewart McKinney
,
,
CC:
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
-Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
Honorable
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Federal Reserve Bank of St. Louis
George Hansen
Jim Leach
Ron Paul
Ed Bethune
Norman Shumway
Douglas Bereuter
Stan Parris
Bill McCollum
George Wortley
Marge Roukema
Bill Lowery
David Dreier
John Hiler
Thomas Ridge
Steve Bartlett
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
RICHARD T. PRATT
APR 28 1983
CHAIRMAN
cgo
.
T
cc>
.- 711
Honorable Donald T. Regan
Chairman, Depository Institutions
Deregulation Committee
Department of the Treasury
15th & Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear Mr. Chairman:
I am writing in regard to a letter dated January 5, 1983,
from Dechert Price & Rhoads, counsel to Caguas Federal Savings
and Loan Association of Puerto Rico, requesting that the
Depository Institutions Deregulation Committee (DIDC) amend
§§ 1204.107, .113 and .118 (12 CFR §§ 1204.107, .113 and .118
(1982)) of its regulations.
Caguas Federal is seeking action by DIDC which would
permit accounts to be offered by Federal savings and loan
associations and other depository institutions located in
Puerto Rico on essentially the same terms as Individual
Retirement Accounts ("IRAs") are available to residents of
the states and the District of Columbia. Current DIDC regulations concerning early withdrawals of IRA deposits and the
interest rate to be paid on such accounts apply only to
accounts established pursuant to § 408 of the Internal Revenue
Code of 1954 (26 U.S.C. § 408). Since § 408 relates only to
trusts established in the states and the District of Columbia
and residents of Puerto Rico are not generally subject to
Federal income tax, the Puerto Rican
legislature recently
enacted legislation (1982 P.R. Laws Act No. 11, as amended)
("Act No. 11") which authorizes Puerto Rican financial institutions to offer IRA - type accounts similar to those offered
pursuant to § 408. By amendment of DIDC's IRA account regulations to apply to accounts established pursuant to Act No. 11,
the Committee will provide Puerto Rican institutions with the
same degree of IRA account flexibility that is available to
other institutions.
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Federal Reserve Bank of St. Louis
- 2 I believe that it is appropriate for financial institution
regulators to assist the Government of Puerto Rico in making
the benefits of IRA - type accounts available to residents of
Puerto Rico.
The Board already has proposed regulations that
would authorize Federal associations in Puerto Rico to act as
trustee for IRA accounts established pursuant to Puerto Rican
law.
For your information, a copy of an opinion of our General
Counsel describing the authority of a Federal association to
act as trustee for an IRA - type account issued pursuant to
Puerto Rican law and the resulting deposit insurance coverag
e
is enclosed.
Also enclosed is a draft DIDC regulation implementing the above request, as well as a copy of the Puerto
Rican legislation referred to above.
We recommend that the DIDC consider the request of Caguas
Federal as involving only an extension of the application of
previous decisions of the Committee and act on an expedited
basis, taking final action by notational vote of the members
of the Committee.
In the interest of time, I am taking the liberty of
sending a copy of this letter and enclosures to other members
of the Committee.
Sincerely,
7s/ Richard T. Prate
Richard T. Pratt
Chairman
Enclosures
cc:
Chairman, Board of Governors,
Federal Reserve Board
Chairman, Board of Directors,
Federal Deposit Insurance
Corporation
Chairman, National Credit Union
Administation
Comptroller of the Currency
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Federal Reserve Bank of St. Louis
uheOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 C.F.R. Part 1204
[Docket No.
RETIREMENT ACCOUNTS AND KEOGH TIME DEPOSITS;
EARLY WITHDRAWAL PENALTIES
AGENCY:
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
ACTION:
FINAL RULE
SUMMARY:
The Depository Institutions Deregulation Committee (the
"Committee") has amended its regulation pertaining to Individual
Retirement Accounts (IRA) and Keogh Plan accounts to permit commercial
banks, mutual savings banks, or savings and loan associations
located in Puerto Rico to offer the 18 month (or more) time deposit
authorized by 12 C.F.R. § 1204.118 to residents of Puerto Rico who
establish an individual retirement account authorized by 1982 P.R.
Laws Act No. 11*, as amended by 1982 P.R. Laws Act No. 6** ("Act No.
11").
The Committee also has amended 12 C.F.R. § 1204.107 and
§ 1204.113 to make applicable certain early withdrawal provisions
to accounts established pursuant to Act No. 11.
EFFECTIVE DATE:
, 1983
FOR FURTHER INFORMATION CONTACT:
Alan Priest, Attorney, Office of
the Comptroller of the Currency (202/447-1880); Joseph DiNuzzo,
Attorney, Federal Deposit Insurance Corporation (202/389-4147);
Rebecca H. Laird, Senior Associate General Counsel, Federal Home
*First Special Session
**Fifth Special Session
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Federal Reserve Bank of St. Louis
Loan Bank Board (202/377-6446)7 Paul Pilecki, Attor
ney, Board ot
Governors of the Federal Reserve System (202/
452-3281)7 or
, Attorney-Advisor, _Treasury Department, (202/
566-8737)
LISTS OF SUBJECTS IN 12 C.F.R. 1204
Banks, Banking
SUPPLEMENTAL INFORMATION:
Effective December 31, 1981, the Committee
authorized a new
time deposit category for IRA and Keogh Plan
accounts, with a
minimum maturity of 1 and 1/2 years and no
regulatory interest rate
ceiling.
That category is "tied" to an individual retir
ement
account agreement or Keogh (H.R. 10) plan estab
lished pursuant to
26 U.S.C. §§ 219, 401, 404, 408 and related
provisions.
In section 408, an individual retirement accou
nt is defined as
a trust created or organized in the United
States.
In section
/701(a)(9) of the Internal Revenue Code of
1954, as amended ("IRC"),
(26 U.S.C. § 7701(a)(9)) the "United State
s" is defined to include
"only the states and the District of Colum
bia."
Section 7701(c) of
the I.R.C. (26 U.S.C. § 7701(c)) defines and
describes the Commonwealth
of Puerto Rico as a possession of the Unite
d States.
Consequently,
individual retirement-type accounts estab
lished by residents of
Puerto Rico in Puerto Rico do not fall
within the purview of section
408, or the current provisions of 12
C.F.R. § 1204.118.
To provide residents of Puerto Rico
an opportunity to save for
retirement in a manner offered residents
of the states of the United
States and the District of Columbia,
the Commonwealth of Puerto Rico,
on May 21, 1982, enacted Act No. 11,
which amended the Puerto Rico
Income Tax Act of 1954, as amended.
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Federal Reserve Bank of St. Louis
411•1
3
(Amendments in 1982 P.R. Laws Act No. 6, to Act No. 11 were enacted
effective January 12, 1983).
Act No-. 11 authorizes the establishment
of individual retirement accounts in Puerto Rico beginning with
the taxable year 1983.
The IRA-type account authorized by Act No.
11 for residents of Puerto Rico is similar to the account authorized
by section 408 of the I.R.C.
The Committee has amended 12 C.F.R. § 1204.118 to permit
commercial banks, mutual savings banks, and savings and loan
associations in Puerto Rico, to the extent that interest and
dividends on accounts they issue are subject to the jurisdiction of
the Committee, to offer the minimum maturity 18-month account,
without interest rate ceiling, to residents of Puerto Rico who
desire to open an IRA-type account under Act No. 11.
enable depository institutions located in Puerto Rico
This will
to compete
effectively with brokerage firms, insurance companies and other
entities that are empowered to offer such accounts to residents of
Puerto Rico pursuant to Act No. 11.
In the foregoing connection, jurisdiction of the Committee as
to interest and dividend rates on savings deposits and accounts
which is derived from the authorities conferred by § 19(j) of the
Federal Reserve Act (12 U.S.C. 371b) and § 18(g) of the Federal
Deposit Insurance Act (12 U.S.C. 1828(g)) is limited, insofar as
deposits and accounts in Puerto Rican depository institutions are
concerned, to those deposits and accounts that may be payable in
the states of the United States and the District of Columbia.
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Federal Reserve Bank of St. Louis
Authority of the Committee with respect to rates which derive
from
the provisions of § 5B(a) of the Federal Home Loan Bank Act (12 U.S.0
1425b(a)) applies to any deposit or account in any Federal or
other
insured institution referred to in the latter provisions.
The Committee also has amended the early withdrawal provis
ions
of 12 C.F.R. § 1204.107, in order to permit withdrawals from
the
IRA-type accounts opened pursuant to Act No. 11, without
penalty,
when the same withdrawals are permitted pursuant to Act
No. 11
without tax penalties (in case of disability, at age 60; also
regulations are authorized to permit withdrawals to defray
costs
of university expenses of taxpayer's direct dependents or in
case
of the taxpayer's unemployment).
The Committee has also amended
12 C.F.R. § 1204.113, in accordance with Act No. 11, to
make the
early withdrawal provisions of that section applicable
to accounts
established pursuant to that Act.
The Committee finds that the observance of a comment period
pursuant to 5 U.S.C. § 553(b) and delay of the effect
ive date
pursuant to 5 U.S.C. § 553(d) are unnecessary because it
is in the
public interest to permit depository institutions locate
d in Puerto
Rico to offer these accounts which are similar to those
previously
authorized by this Committee, and to enable such instit
utions to
compete with non-depository institutions that curren
tly are permitted
to offer these accounts.
Additionally, a delay in the effective
date is unnecessary because the action eliminates
a restriction on
the maximum interest rate payable on IRA-type
accounts authorized
by Act No. 11 and eases restrictions pertaining
to required early
withdrawal penalties under certain circumstances.
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Federal Reserve Bank of St. Louis
Pursuant to its authority under Title II of Pub. L. 96-221 (94
Stat. 142; 12 U.S.C. § 3501 et seq.) to prescribe rules governing
the payment of interest and dividends on deposits and accounts of
federally insured commercial banks, savings and loan associations,
and mutual savings banks, the Committee amends Part 1204--Interest
on Deposits, effective January 5, 1983, as follows:
1.
Section 1204.107 is amended by adding a colon after the
word "represents," by replacing the period at the end of the section
with a semi-colon, and adding the following:
"or individual retire-
ment accounts established under 1982 P.R. Laws Act No. 11, as
amended by 1982 P.R. Laws Act No. 6 ("Act No. 11") if the withdrawal
is permitted without tax penalties under said Act No. 11."
2.
Section 1204.113 is amended by adding the words "or 1982
P.R. Laws Act No. 11, as amended by 1982 P.R. Laws Act No. 6 ("Act
No. 11")", after the first reference to 26 U.S.C. § 408, and by
adding the words "or Act No. 11" after "26 C.F.R. § 1.408-(1)(d)(4)."
3.
Section 1204.118 is amended by adding the clause "or an
account established pursuant to 1982 P.R. Laws Act No. 11, as
amended by 1982 P.R. Laws Act No. 6" after the words "related
provisions" in the first sentence of paragraph (a) of said section.
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Federal Reserve Bank of St. Louis
By Order of the Committee,
, 1933.
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Federal Reserve Bank of St. Louis
230 2-8.3
9371
P.R.—The Law—Income Tax Act
Capable of Converting Solar Energy into Usable constituting the place of business of the taxpayer of
any solar equipment in service up to thc amount of
Energy, Directly or Indirectly, Whether the Equiptnree thousand five hundred (3,500) dollars.
ment Is Purchased or Built by the Taxpayer and
Which Is in Operation.
(2) Verification.—Any corporation or partnership
the special deduction provided in paraclaiming
an
of
individual,
case
the
Allowance.-1n
(1)
graph (I) of this subdivision shall include with its
there shall be allowed as a special deduction, in addition to any other deductions provided by this act. income tax return the invoices or receipts containing
information regarding the cost of the solar equipthirty (30) percent of the expenses rncurred during
ment or the parts and labor required for building it
any taxable year in the acquisition, building and inand the expenses incurred for its installation; a cerstallation in the property constituting the principal
tificate that the solar equipment has been approved
place of residence of the taxpayer, whether owned or
by the Energy Office of Puerto Rico, as well as a cerleased, of any solar equipment, up to the amount of
tificate of the purchased solar equipment's guaranfive hundred (500) dollars. When the solar equiptee of five (5) years or more.
ment is installed by the lessee the owner of the real
property shall be allowed no deduction for the same
(3) Limitation.—No individual, corporation or
solar equipment even when it remains for the
partnership shall be allowed to take more than one
benefit of the owner upon termination of the lease. deduction under the provisions of this subsection.
This deduction shall cover those solar equipments
This deduction shall be allowed only for taxable
installed in dairies licensed by the Departments of
years beginning after December 31, 1978 and before
Health and Agriculture and in ranches for frying
January 1, 1982. [Comp. ¶ 11-034d] (As added by
chickens and egg-laying hens.
Act 3, Laws of 1979, Seventh Special Session, and by
Act 11, Laws of 1981, First Special Session, effective
(2) Verification.—An individual who claims the
special deduction provided in paragraph (1) of this June 9, 1%1.)
subdivision shall accompany with his income tax
[192-1811
return the invoices or receipts containing information regarding the cost of the solar equipment or the
parts and labor required for building it and all the
(1) Allowance.—In the case of an individual,
expenses incurred for its installation; a certificate
there shall be allowed as a deduction the cash
that the solar equipment has been approved by the
contributions by said individual to an individual
Energy Office of Puerto Rico, as well as a certificate
retirement account. qualifying under section 3169 of
of the purchased solar equipment's guarantee for
this title.
five (5) years. Any person who has installed his solar
(2) Maximum deduction allowed—The maximum
equipment prior to the effective date of this act
amount allowable as a deduction under paragraph
shall submit a certificate from the Energy Office of
(1) of this subsection for any taxable year shall not
Puerto Rico.
exceed the lesser of two thousand dollars ($2,000) or
(3) Limitation.—No individual shall be allowed to
ten percent (10%) of the adjusted gross income
take more than one deduction under the provisions derived from salaries or attributable to professions
of this subsection unless in the case of a dairy lior occupations.
censed by the Departments of Health and Agricul(3) Married individuals.—The maximum
ture or of ranches for frying chickens and egg-laying
allowed under paragraph (2) of this
deduction
for
only
hens. This deduction shall be allowed
shall
be computed individually by each
subsection
taxable years beginning after December 31, 1979
a joint return under section 3051(b) of
tiling
spouse
(As
[Comp.
1983.
1,
January
and before
1111-03.4c_]
title in the case where both spouses contribute
added by Act 185, Laws of 1979, and as amended by this
individually to their own individual retirement
Act 11, Laws of 1981, First Special Session, effective
accounts with regard to income individually earned.
June 9,1981.)
This paragraph shall apply with regard to any
provisions regarding community property.
[192-181]
(4)[Limitation].—No deduction shall be allowed
(nn) Special Deduction for Expenses Incurred in
under this paragraph for a taxable year in which the
the Purchase, Building and Installation of Solar
Equipment, Solar Equipment Is Understood to individual has attained the age of 701/2 before the
Mean All Equipment Capable of Converting Solar close of said taxable year.
Energy into Usable Energy, Directly or Indirectly,
(5) In the case of an emp!oyer, there shall be
Whether the Equipment Is Purchased or Built by allowed as a deduction in his income tax return for
the Taxpayer and Which Is in Operation.
the corresponding taxable year, his contributions to
(1) Allowance.—In the case of an individual, cor- a trust created under the provisions of section
3169(c) of this title. The maximum amount allowporation or partnership, there shall be allowed as a
special deduction, in addition to any other deduc- able as a deduction for any taxable year shall not
exceed the lesser of two thousand dollars ($2,000) for
tions provided by this act, forty (40) percent of the
expenses incurred during any taxable year in the ac- each individual or 10% of the adjusted gross income
of each individual derived from salaries or profits
quisition, building and installation on the property
..
(*3)4111111111111111111mimmilm
Puerto Rico Tax Reports
002-59
§ 3023
¶92-181a
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Federal Reserve Bank of St. Louis
9372
P.R.-The Law-Income Tax Act
from professions or occupations, whichever is
les.ser. This deduction shall be in lieu of
deduction under section 3023(a) of this title
shall be subject, for all other purposes, to
requirements of said section.
the
the
but
the
(6) In the case of an annuity or • endowment
contract under scction 3169(b) of this title, that
part of the contribution paid under said contract
and applicable to the cOst of life insurance shall not
be allowed as a deduction. [Comp. ¶ 11-034e] (As
added by Act 11, Laws of 1982, and as amended by
Act 6, Laws of 1982, Fifth Special Session, effective
January 12, 1983, but applicable to taxable years
beginning after December 31, 1982.)
[11 92-181b]
(PP) Spec I Deduction f Husband and Wife
When Both
uses Are Inca
Earners and Fl
Join Returns.
(1i Allowanc -In the case of h sband and wife
livin together, th earning income, there shall be
allowe as a s
1 deduction, in a tion to any
other eduction p • 'ded by this act, n amount
equal t? ten percen (10%) of the earned come of
the s use with th lower earned inco
The
amount of the ded tion shall not ex • five
hund
dollars($500) r annum.
230 2-83
of the expenses incurred during any taxable year for
the acquisition and installation in the residence of
the taxpayer of a windmill and all its accessories
used to generate electric power if the windmill and
its accessories are manufactured in Puerto Rico or if
its manufacturing cost is at least fifty percent (50%)
the result of local manufacturing.
(B) In the case of a corporation, partnership or
individual thre shall be allowed a deduction of fifty
percent (50%), but not over three thousand dollars
($3,000), of the expenses incurred during any
taxable year for the acquisition of a windmill with
all its accessories used to generate electric power if
the windmill and its accessories are manufactured in
Puerto Rico or if its manufacturing cost is at least
fifty percent (50%) the result of local manufacturing.
(2) Verification.-Any individual, corporation, or
rtnership claiming any or all the deductions
pr ided for under this section shall include with his
or i return, the invoices or receipts containing
inform on regarding the cost of the windmill and
the • •ses incurred in the installation thereof,
copy of th
stallation permit or authorization duly
issued by
Regulations and Permit Administration, a . . mate that the windmill has been
approved by the
ergy Office of Puerto Rico, and a
certificate of the .ndmill's guarantee for five (5)
years.
(2)
inition of Ea ed Income.-For put
of this s section, the te "earned income" mean
(3) Limitation.-No dividual shall be allowed to
the adju.ed gross inco e derived from salaries,
take more than one d • ction under the provisions
wages or rofessional fees
well as other amounts
Clause (A) of Paragra h (1) of this subsection.
received Is compensatio for personal services
deductions shall be 'lowed only for taxable
actually r dered, but does ot include that part of
yea beginning after Dece ber 31, 1981. [Comp.
the compe scion received for personal services
rendered b the taxpayer to a corporation or ¶ Us•g] (As added by A 34, Laws of 1982,
partnership hich represents distribution of gains effecti June, I, 1982.)
or profits s lieu of a
'nable amount for
[1 92-182J
compensatior for the persona services actually
rendered. In e case of a
• yer engaged in a
Subs= Ling Evidence Requi -An individtrade or businss where the perso
services as well
ual claimin one or more of the spec 1 deductions
as the capita constitute rel
factors in the
provided in
sections (ff), (hh), (ii) ad OD must
production of income, there shal be considered, submit with
ncome tax return:
under regulatio s prescribed by th Secretary, as
(1) Cancelled ecks and/or receipts in
earned income for compensation or personal
covered by s
(ft) and (ii); or
services a reason ble amount not to ceed thirty
profits of
percent (30%) of t e share in the gains
(2) Certificates_i the cases covered by s
said trade or bus ess. No amount r ived as tions(hh) and(D.[Co p.11 13-3211
pension or annuity
11 be deemed earn income
(Sec. 3023 is as amen• • by Acts 8 and 28, Laws
for purposes of this pr sion.[Comp. 11 III j.j(As
added by Act 19, La
of 1982, effective
y 25, 1963; by Acts 1C€ and • Laws of 1966; by Act 5,
1982, but applicable s taxable years beg' ning Laws of 1970; by Act 50, iws of 1971; by Act 79,
Laws of 1973; by Act 177, ws of 1974; by Act 22,
after December 31, 1982.
Laws of 1975, Eighth Spea Session, by Act 1,
Laws of 1976, Tenth Special
on, by Act 185,
[17 92- 1
Laws of 1979, by Act 3, Laws of 1979, Seventh
(oo) [(N] Special De ction for Expenses
pecial Session, by Act 136, Laws of 1980, by Act
Incurred in the Acquisitio and Installation of
, Laws of 1981, First Special Session, by Acts 11,
Windmills to Generate Electri ower.1 nd 22, laws of 1982, and by Act 6, Laws of
1982, Fifth Special Session, effective January 12,
(1) Allowance.-(A) In the ca of an individual
1983, but applicable to taxable years beginning
there shall be allowed a deductio of fifty percent
(50%), but not over three thousand ollars ($3,000), after December 31, 1982.)
¶92-181a
§ 3023
01983, Commerce Clearing House,Inc.
024-sa
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Federal Reserve Bank of St. Louis
•
• "-
C
subsection, amounts paid by an employer for the
purchase of annuity contracts which are transferred
to the trustee shall be deemed to be contributions
made to a trust or trustee and contributions applied
by the trustee for the purchase of annuity contracts;
the term "annuity contracts purchased by the
trustee" shall include annuity contracts so purchased by the employer and transferred to . the
trustee, and the term "employee" shall include only
a person who was in the employ of the employer,
and was convered by the agreement referred to in
paragraph (2), prior to January 1, 1954. [Comp.
11-436.]
(Sec. 3165 is as amended by Act 1(3, Laws of
1966, effective June 23, 1965, but applicable to sales
or transactions carried out after December 31,
1%6.)
E1 93-243j
Sec. 3166. Revocable trusta.—Where at any
time the power to revest in the grantor title to any
part of the corpus of the trust is vested—
(1) in the grantor, either alone or in conjunction
with any person not having a substantial adverse interest in the disposition of such part of the corpus or
the income therefrom, or
(2) in any person not having a substantial adverse
interest in the disposition of such-part of the corpus
or the income therefrom,
then the income of such part of the trust shall be included in computing the net income of the grantor.
[Comp. ¶ 12-014.]
[193-2441
Sec. 3167. Income for benefit of grantor.—(a)
Where any part of the income of a trust—
=OM/
[1 93-2451
(b) As used in this section, the term "in the discretion of the grantor- means in the discretion of the
grantor, either alone or in conjunction with any
person not having a substantial adverse interest in
the disposition of the part of the income in question.
(Comp. ¶ 12-0161
[3193-246)
(c) Income of a trust shall not be considered
taxable to the grantor under subsection (a) or any
other provision of this subtitle merely because such
income, in the discretion of another person, the
trustee, or the grantor acting as trustee or cotrustee, may be applied or distributed for the
support or maintenance of a beneficiary whom the
grantor is legally obligated to support or maintain,
except to the extent that such income is so applied
or distributed. In cases where the amounts so
applied or distributed are paid out of corpus or out.
of other than income for the taxable year, such
amounts shall be considered paid out of income to
the extent of the income of the trust for such taxable
year which is not paid, credited, or to be distributed
under section 3162 of this title and which is not otherwise taxable to the grantor.[Comp.1 12-020.]
[193-247]
Sec. 316& Taxes of the United States, possessions of the United States, and foreign countries—The amount of income, war-profits, and
excess-profits taxes imposed by the United States,
possessions of the United States and foreign countries shall be allowed as credit against the tax of the
beneficiary of an estate or trust to the extent provided in section 3131 of this title.[Comp. ¶ 12-022.]
93-247a1
(1) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in
the disposition of such part of the income may be,
held or accumulated for future distribution to the
grantor, COY
(2) may, in the discretion of the grantor or of any
person not having a substantial adverse interest in
the disposition of such part of the income, be distributed to the grantor; or
(3) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in
the disposition of such part of the income may be,
applied to the payment of premiums upon policies of
insurance on the life of the grantor, except policies
of insurance irrevocably payable for the purposes
and in the manner specified in section 3023(o) of
this title, relating to the so-called "charitable contribution" deduction;
then such part of the income of the trust shall be included in computing the net income of the grantor.
[Comp. ¶ 12-016.]
¶93-242
§ 3165
a
ot this section, the term "individual
retirement account" means a trust created or
, organized under the laws of the Commonwealth of
Puerto Rico for the exclusive benefit of an
individual or his beneficiaries, or the share of an
individual for his exclusive benefit or of his
beneficiaries in a trust created or organized under
the laws of the Commonwealth of Puerto Rico when
the governing instrument of the trust provides that
the participants shall be those individuals who elect,
through contract or request to that effect, to be
covered under the provisons of such trust, but only if
the written governing instrument creating the trust
meets the following requirements:
(1) That, except in the case of a rollover
contribution described in subsection (dX4) of this
section, no contribution will be accepted unless it is
in cash and no contribuuon will be accepted for the
taxable year in excess of two thousand dollars
($2,000) on behalf of any individual.
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Federal Reserve Bank of St. Louis
F.K.—The.law—laciams TAN Act
(2) The trustee is a hank, savings and loan
association, savings bank, brokerage house, trust
company, insurance company or life insurance
cooperative demonstrating, to the satisfaction of the
Sccretary, that the manner in which such institution
will be administered will be consistent with the
requirements of this section.
(3) (A) No less than fifty percent (50%) of the
trust funds shall be invested in obligations of the
Commonwealth of Puerto Rico or any of its
instrumentalities or political subdivisions or in
mortgage loans for the financing of the construction
or acquisition of residential property in Puerto Rico.
(B) The remaining fifty percent (50%) of the
funds of the trust shall be invested in given assets in
Puerto Rico, according to the Regulations issued by
the Secretary for each purposes.
7‘+47
added by Act 11, Laws of 1982, and as amended by
Act 6. Laws of 1982. Filth Special Session, approved
January 12. 1983, but applicable to taxable years
beginning after December 31. 1982.)
[193-24711]
(b) For purposes of this section the term
"Individual Retirement Account" shall also mean
an "Individual Retirement Annuity". Individual
Retirement Annuity means an annuity contract, or
an endowment contract, as determined under
regulations prescribed by the Secretary of the
Treasury, issued by a life insurance company or life
insurance cooperative duly authorized by the
Commissioner of Insurance of the Commonwealth of
Puerto Rico to do business in Puerto Rico and which
meets the following requirements:
(C) Trusts shall meet the investment
requirements of clauses (A) and (B), above, if they
deposit the funds earned by the individual
retirement accounts with the institutions described
under paragraph (2) of subsection (a) of this section,
which, in turn, shall invest such funds as required
by clauses(A)and (B).
(4) The interest of an individual in the balance in
his account is ncmforfeitable.
(5) The asseu of said trust shall be kept in a
common trust or a common investment fund for
such purposes, provided separate accounting is kept
for each trust.
(6) The entire interest of an individual for whose
benefit the trust is maintained will be distributed to
him not later than the close of the taxable year in
which he attains the age of 70%, or will be
distributed in accordance with regulations
prescribed for such purposes by the Secretary, over
(1)The contract is not transferable by the owner.
(2) Under the contract:(A)the premiums are not
fixed; (B) the annual premium in behalf of any
individual will not exceed $2,000 or 10% of his
adjusted gross income, whichever is the lesser, and
(C) any refund of premiums will be applied before
the close of the calendar year following the year of
the refund toward the payment of future premiums
on the purchase of additional benefits.
(A) the life of such individual or the lives of such
individual and his spouse, or
(B) a period not exceeding beyond the life
expectancy of such individual or the life expectancy
of such individual and his spouse.
(7) If an individual for whose benefit the trust is
maintained dies before his entire interest has been
distributed to him-, or if the distribution has been
commenced as provided in paragraph (6) to his
surviving spouse and the surviving spouse dies
before the entire interest has been distributed to
such spouse, the entire interest, or the remaining
part of such interest if distribution thereof has
commenced, will, within five (5) years after his
death, or the death of the surviving spouse, be
distributed. The preceding provision does not apply
if distributions over a term certain commenced
before the death of the individual for whose benefit
the trust was maintained and the term certain is for
a period permitted under paragraph (6) of this
subsection.
(8) No part of the trust funds shall be invested in
life insurance contracts. [Comp. Ir 12-022a.] (As
(4) If the owner dies before his entire interest has
been distributed to him, or if distribution has been
commenced as provided in paragraph (3) to his
surviving spouse and such surviving spouse dies
before the entire interest has been distributed to
such spouse, the entire interest (or the remaining
part of such interest if distribution thereof has
commenced) will, within 5 years after his death (or
the death of the surviving spouse), be distributed_
The preceding sentence shall have no application if
distributions over a term certain commenced before
the death of the owner and the term certain is for a
period permitted under paragraph (3).
Puerto Rico Tax Reports
007-58
(3) The entire interest of the owner will be
distributed to him not later than the close of his
taxable year in which he attains age 70% or will be
distributed, in accordance with regulations
prescribed by the Secretary, over—
(A) the life of such owner or the lives of such
owner and his spouse, or
(B) a period not extending beyond the lift
expectancy of such owner or the life expectancy of
such owner and his spouse.
(5) The entire interest of the owner is
nonforfeitable.
(6) At least fifty percent(50%) of premiums shall
be invested in obligations of the Commonwealth of
Puerto Rico or any of its instrumentalities or
political subdivisions, or in mortgage loans for the
financing of the construction or acquisition of
residential property. The remaining fifty percent
(50%) shall be invested in given assets in Puerto
Rico according to the regulations prescribed by the
§3169
¶93-247b
644;)-1J
P.R..—The.1.sesiv—Inconete Tax A,ct
Secretary for such purposes. It shall be the
obligation of the Secretary of the Treasury, IS,- WC!!
as of the Commissioner of Insurance of. the
Commonwealth of Puerto Rico, to watch for faithful
compliance with the provisions of this ciausc.
The term "individual retirement annuity" does
not include such an annuity contract for any taxable
year of the owner in which it is disqualified on the
application of subsection (e) or for any subseqUent
taxable year. For purposes of this subsection, no
contract shall be treated as an endowment contract
if it matures later than the taxable year in which
the individual in whose name such contract is
purchased attains age 70%; if it is not for the
exclusive benefit of the individual in whose name it
is purchased or his beneficiaries; or if the aggregate
annual premiums under all such contracts
purchased in the name of such individual for any
taxable year exceed $2,000. (As added by Act 6,
Laws of 1982, Fifth Special Session, effective
January 12, 1983, but applicable to taxable years
beginning after December 31, 1982.)
[I 93-247c]
(c) Accounts Established by Employers and
Certain Associations of Employees.—A trust created
or organized under the laws of the Commonwealth of
Puerto Rico by an employer for the exclusive benefit
of his employees or their beneficiaries or by an
association of employees, *which may include
employees who are also owners of the business, for
the exclusive benefit of its members or their
beneficiaries, shall be treated as an individual
retirement account, as defined in subsection (a) of
this section, but only if the written governing
instrument creating the trust meets the following
requirements:
(1) The trust satisfies the requirements of
subsection (a)of this section.
•••
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Federal Reserve Bank of St. Louis
(2) There is a separate accounting for the interest
of each employee or member. The assets of the trust
may be held in a common fund for the account of all
individuals holding an interest in the trust. [Comp.
12-022a.](As added by Act 11, Laws of 1982, and
as amended by Act 6, Laws of 1982, Fifth Special
Session, effective January 12, 1983, but applicable
to taxable years beginning after December 31,
1982.)
&it)
Z.N.)
distribution is carried out, the basis, if any, shall be
prora ted.
(2) Excess Contributions Returned Before Due
Date of Return.—Paragraph (1) of this subsection
(d) does not apply to the distribution of any
contribution paid during a taxable year to an
individual retirement account to the extent that
such contribution exceeds the amount allowable as a
deduction under section 3023(oo) of this subtitle, if
(A) such distribution is received on or before the
day prescribed by law (including extensions of time)
for filing such individual's return for such taxable
year,
(B) no deduction is allowed under section 3023(oo)
of this subtitle with respect to such excess
contribution, and
(C) such distribution is accompanied by the
amount of net income attributable to such excess
contribution. Any net income described in this
subsection shall be deemed earned and receivable by
the individual in the taxable year the excess
contribution was made.
(3) Transfer of an Individual Retirement Account
Incident to Divorce.—The transfer of an
individual's interest in an individual retirement
account to his former spouse under a divorce decree
or under written instrument incident to such divorce
is not to be considered a taxable transfer made by
such individual notwithstanding any other provision
under this act, and such interest at the time of the
transfer is to be treated as an individual retirement
account or annuity of such spouse and not of such
individual Thereafter, such account, for purposes of
this subtitle, shall be treated as maintained for the
benefit of such spouse.
(4) Rollover Contributions.—An amount paid or
distributed shall be considered as a rollover
contribution under this paragraph. if it meets the
requirements of subparagraphs(A)and (B).
[1 93-247d]
(d) Distributions of Assets from Individual
Retirement Accounts.—
(A)In General.—The provisions of paragraph (1)
above do not apply to any amount paid or •
distributed out of an individual retirement account
to the individual for whose benefit the account is
maintained if the entire amount received (including
money or any other property) is paid into an
individual retirement account (except an
endowment contract) for the benefit of such
individual no later than the 60th day after the date
on which he received the paymentor distribution.
(1) Except as otherwise provided in this
paragraph, any amount paid or distributed out of an
individual retirement account shall be included as
gross income from a retirement payment by the
distributee for the taxable year in which the
payment or distribution is received. The basis of any
person in such account is zero increased by the
proportion of income, derived with regard to said
funds, that is income tax exempt. In case a partial
(B)Limitation.—The provisions of this paragraph
(4) do not apply to any amount described in
subparagraph (A) above received by an individual
from an individual retirement account if at any
time during the 1-year period ending on the day of
such receipt such individual received any other
amount out of an individual retirement account
which was not includible in his gross income because
of the application of this paragraph (4).
93-247b
§ 3169
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P.R —11
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Mit Art
(5) Distributions of Annuity Contracts.—The
provisions of paragraph (1) above shall not: apply to
any annuity contract which meets the requirements
of paragraphs (1). (3). (4) and (5) of subsectlon (h)
of this section and which is distributed from an
individual retirement account. [Comp. 11 12-022a1
(As added by Act 11, Laws of 1982, and as amended
by Act 6, Laws of 1982. Fifth Special Session,
effective January 12, 1983, but applicable to taxable
years beginning after December 31, 1982.)
[193-247e]
(e) Treatment of Individual Retirement
Accounts.—
(1) Exemption from Tax.—Any individual
retirement account is exempt from taxation under
this subtitle unless such account has ceased to be an
individual retirement account by reason of
• paragraph (2) or (3) of this subsection. Notwithstanding the preceding sentence, any such
account is subject to the taxes imposed by section
3404(a) of this subtitle.
(2) Loss of Exemption of Account Where
Employee Engages in Prohibited Transaction.—
(A) In General.—II, during any taxable year of
the individual for whose benefit any individual
retirement account is established, that individual or
his beneficiary engages in any transaction
prohibited by section 3162(gX2XB) of this title with
respect to such account, such account ceases to be
an individual retirement account as of the first day
of such taxable year. For purposes of this paragraph
(i) the individual for whose benefit any account
was established is treated as the creator of such
account, and
(ii) the separate account for any individual within
an individual retirement account maintained by an
employer or association of employees is treated as a
separate individual retirement account_
•
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Federal Reserve Bank of St. Louis
(B) Account Treated as Distributing All Its
Assets.—in any case in which any account ceases to
be an individual retirement account by reason of
subparagraph (A), the account shall be considered as
of the first day of said taxable year, as if a
distribution was made equal to the fair market
value of the total assets of the account on that date.
(3) Effect of Pleading Account as Security.—(A)
If, during any taxable year of the individual for
whose benefit an individual retirement iccount is
established, that individual uses the account or any
portion thereof as security for a loan, the portion so
used is treated as distributed to that individual.
(B) If during any taxable year the owner of an
individual retirement annuity borrows any money
under or by use of such contract, the contract ceases
to be an individual retirement annuity for purposes
of section 3023(oo) as of the first day of such taxable
year. Such owner shall include in gross income for
Puerto Rico Tax Reports
024-511
41.61
such year an amount equal to the fair market value
of such contract as of such first day.
(4) Withdrawal of Contrthutions and Close of
Account—if at any time during the first seven (7),
working days after an individual retircmenutccount
has been opened, the individual or entity who
opened the account determines that he or it does not
wish to continue with such account, said individual
or entity may withdraw any contribution made to,
and close such account, without being subject to the
provisions of this section and section 3023(oo).
[Comp. 11 12-022a1 (As added by Act 11, Laws of
1982, and as amended by Act 6, Laws of 1982. Fifth
Special Session, effective January 12, 1983, but
applicable to taxable years beginning after
December 31, 1982.)
[j93-2471].
(f) Reports.—(l) The trustee of an individual
retirement account created under the terms of
subsection (a) of this section and the life insurance
company or cooperative issuer of an endowment
contract or annuity under the terms of subsection
(b) of this section shall prepare reports for the
Secretary and the individuals for whom the account,
endowment contract or annuity is maintained. Such
reports shall be made with respect to contributions,
distributions and other matters as the Secretary
may require by regulations. The reports required by
this paragraph shall be filed at such time and in
such manner as may be required by those
regulations.
(2) Any trustee or life insurance company or
cooperative which, after notification of failure to
comply with paragraph (1) above, once again fails to
comply with such paragraph, shall lose the
eligibility to act as trustee for any individual
retirement aasunt. The Secretary shall request the
transfer of all the individual retirement accounts
held by the disqualified trustee, company or
cooperative to another trustee chosen by the
participants. A change in trustee, where funds go
directly from the administration of a trustee
authorized to maintain individual retirement
accounts to another ,trustee, without any
distribution to the individual beneficiary of the
account, shall not be considered as a payment,
distribution or reimbursement, and shall not be
subject to the tax or 10% penalty provided under
section 169(g) of the law. [Comp. If 12-0222](As
added try Act 11, Laws of 1982, and as amended by
Act 6, Laws of 1982, Fifth Special Session, effective
January 12, 1983, but applicable to tAxable years
beginning after December 31, 1982.)
[1 93-247g]
(g) (1) Penalties for Distnbuubns Made Before
Beneficiary Attains the Age of 60.—Any amount
distributed, or understood as distributed, according
to the provisions of this section before the
beneficiary of the individual retirement account has
§ 3169
¶93-247g
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Federal Reserve Bank of St. Louis
attained the age of 60 shall be sub*.ct to a penalty
equal to ten percent (10%) of the distributed
amount and shall be included in his gross income for
such year. The above ten percent (10%) shall be
withheld by the trustee and delivered to the
Secretary according to section 3141 of this title.
(2) Paragraph (1) above does not apply if the
amount paid, or distributed, or deemed distributed
according to subsection d of this section, is
attributable to the taxpayer becoming disabled.An individual is determined disabled if he is
impaired from holding any meaningful profitable
employment due to a clinically determinable
impairment, whether physical or mental, which may
be expected to be of a long and indefinite nature or
that may result in death. An individual shall not be
considered disabled unless the disability is proven in
the way and manner required by the Secretary.
(3) The Secretary may, by regulation issued for
such purposes, exempt from the provisions of
paragraph (1) of this subsection, any taxpayer who
due to the loss of employment, or need of funds to
defray the university expenses of his direct
dependents, is compelled to make advance
withdrawals. [Comp. ¶ 12-022a.] (As added by Act
11, Laws of 1982, and as amended by Act 6, Laws of
1982, Fifth Special Session, effective January 12,
1983, but applicable to taxable years beginning
after December 31, 1982.)
(Sec 3169 is as added by Act 11, LAWS of 1982,
and as amended by Act 6, Laws of 1982, Fifth
Special Session, effective January 12, 1983, but
applicable to taxable years beginning after
December 31, 1982.)
[193-248)
Sec. 3170. Net operating Imam—The benefit of
the deduction for net operating losses allowed by
section 3023(s) of this title shall be allowed to
estates and trusts under regulations prescribed by
the Secretary.[Comp. ¶ 12-023.]
[193-249)
'Sec. 3171. Income of an estate or trust in case
of divorce or separation.—(a) Inclusion in Gross
Income.—There shall be included in the gross
¶93-247g
§ 3169
income of a wife legally separated under a decree of
divorce or of a wife who by reason of being separa led
from her husband, is hound, in accordance with the
provisions of section 3051(b)(2) of this title, to make
a separate return the amount of the income of any
trust which such wife is entitled to receive and
which, except for the provisions of this section,
would be includible in the gross income of her
husband, and such amount shall not, despite section
3166, section 3167, or any other provisions of this
subtitle, be includible in the gross income of such
husband. This subsection shall not apply to that
part of any such income of the trust which the terms
of the decree or trust instrument or any agreement
between the parties appearing in the public deed (in
case only of separation) fix, in terms of an amount of
money or a portion of such income, as a sum which
is payable for the support of minor children of such
husband. In case that such income is less than the
amount specified in the decree, or in the trust instrument or in the agreement, as the case may be,
for the purpose of applying the preceding sentence,
such income, to the extent of such sum payable for
such support, shall be considered a payment for such
support. [Comp. 1 12-025.] (As amended by Act 9,
Laws of 1970, effective April 17, 1970, and applicable to taxable years beginning after December 31,
1969.)
[193-250]
(b) Wife Considered a Beneficiary.—For the purposes of computing the net. income of the estate or
trust and the net income of the wife described in
section 3022(k) of this title or subsection (a) of this
section, such wife shall be considered as the beneficiary specified in this supplement. A periodic
payment under section 3022(k) to any part of which
the provisions of this supplement are applicable
shall be included in the gross income of the beneficiary in the taxable year in which under this supplement such part is required to be included. [Comp.
I 12-027] (Sec. 3171 is as amended by Act 9, LAWS
of 1970, effective April 17, 1970, and applicable to
taxable years beginning after December 31, 1969.)
[193-251-43-239]
Reserved
C1983, Commerce Clearing House, Inc.
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1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation
RICHARD T. PRATT
CHAIRMAN
April 26, 1983
<-3
-
Honorable Fernand J. St Germain
Chairman
Committee on Banking, Finance
& Urban Affairs
United States House of Pepresentatives
Washington, D.C. 20510
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Dear Mr. Chairman:
As the end of my tenure as Chairman of the Federal Home Loan
Bank Board nears, I wish to share with you my concern about socalled "constitutional tort" suits that have been filed against
officials of the Bank Board, as well as against other federal
employees, in their individual and personal capacities for actions
taken in the course of performing official duties.
I have been
named as a defendant in my individual capacity in numerous lawsuits
stemming from the fulfillment of my duties as Chairman, and have
found the experience onerous and troublesome.
I believe that my
fellow Board members and senior staff members of the Board who
have also found themselves targets of such suits would echo my
feelings.
The increase in the number of these lawsuits in recent
years suggests that my successor as chairman will face even more
lawsuits filed against him individually challenging his official
activities.
I am extremely concerned that if the filina of these lawsuits
continues unabated, a fear of personal liability may cause Board
officials to hesitate unnecessarily before performing their
official duties.
Such a cloud over Board actions could seriously
jeopardize the effective enforcement of Bank Board regulations
and the speedy resolution of failing institution cases.
In
addition, because of the number of potential thrift failures and
the corresponding exposure to personal liability suits, aualified
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Federal Reserve Bank of St. Louis
1
-2-
men and women may be discouraged from serving in positions of
I therefore urge this
responsibility with the Bank Board.
Committee to seek a legislative solution to this problem as soon
as possible.
Currently, the Federal Torts Claims Act subjects the government to liability for tort claims based on the negligent or
wrongful act or omission of any government employee while acting
within the scope of his office or employment, such liability to
be determined "in the same manner and to the same extent as a
private individual in like circumstances," subject to enumerated
exceptions, such as cases involving discretionary governmental
functions. See, 28 U.S.C. §§ 1346(b), 2672, 2674, 2680.
Although
Congress has enacted several specific provisions that make the
government the exclusive defendant in certain situations, a
plaintiff is generally permitted to sue both the federal employee
allegedly responsible for misconduct as well as the United States.
In the 1971 decision of Bivens v. Six Unknown Named Agents
of the Federal Bureau of Narcotics, 403 U.S. 328 (1971), the
Supreme Court held that Congressional authorization was not
required to subject individual federal officials to personal
liability for violations of Fourth Amendment rights.
The
Supreme Court and lower federal courts have in the years since
Bivens handed down a number of precedents which have encouraged
plaintiffs to seek economic relief for "constitutional torts"
from individual defendants rather than the Government.
These
suits initially focused on law enforcement activities.
However,
recent suits increasingly have arisen out of regulatory or personnel
actions taken by federal officials.
The Bank Board has experienced increasing problems as a
result of the Bivens decision and its progeny.
In the decade
since that decision, the number of so-called "constitutional
tort" cases filed against individual Board members and senior
staff have increased from zero to eight pending lawsuits, and
currently account for 20% of staff time expended in our Litigation
Division.
This would not include the large amounts of time
devoted to these cases by the Department of Justice which represents
the personal defendants in such a suit.
To date, all these suits
have involved supervisory decisions by the Bank Board to place
institutions in receivership and arrange a merger, a sale of
assets or liquidation.
In view of the troubled condition of the
thrift industry, we have every reason to believe that the problem
of constitutional tort suits will continue to grow along with
the number of supervisory cases in which similar Bank Board
action is required.
From the Bank Board's perspective, allocation of more resources and staff time to such suits is extremely undesirable.
While the severe earnings crisis of the thrift industry has
eased somewhat in recent months, as you know, much of the industry
continues to face serious financial difficulties.
Our top priorities are to cope with these difficulties in a manner designed
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Federal Reserve Bank of St. Louis
-3-
to maintain public confidence in the financial system and to
promote the longrun viability of those institutions which are
strong enough to weather the current economic conditions.
Central
to meeting these goals is the defense of suits filed against the
Bank Board in its capacity as an arm of the United States government, When such suits challenge important regulations or policies
essential to continued viability of the thrift industry.
Due to current budgetary constraints, our legal staff
resources and our ability to hire new staff are very limited.
And because of the ever-growing litigation case load, the staff
is under steadily increasing pressure to meet expanded responsibilities.
Any increase in our current responsibilities, such as
that likely to occur in the future as a result of more Bivens-type
suits arising from a projected increase in supervisory mergers,
must have a very negative impact on our staff's ability effectively
to defend the Board in other litigation matters.
The Bank Board believes that the current spate of Bivenstype suits is especially pernicious because all have been filed
simultaneously with the suits against the Board and a number are
based on legal grounds so dubious as to be frivolous.
In short,
we believe these suits are not aimed at effecting a recovery, but
are being used mainly as a harassment tactic, and as a means of
intimidating Board members and senior staff from performing their
statutory duty to ensure the safety and soundness of individual
institutions. Such attempts to intimidate are especially harmful
where they affect areas of Bank Board operations requiring swift
and decisive regulatory action, such as the appointment of FSLIC
as receiver for insolvent institutions.
Unfortunately, just
such regulatory actions have resulted in the filing of "constitutional tort" suits against individual Bank Board employees.
These suits are effective harassment tools because they
result in significant personal hardship for the employee defendants
For example, even the most frivolous suits must be disclosed as
creating a contingent liability when the employee completes a
standard loan application.
Therefore, the mere filing of such a
suit can interfere wwith the employee's credit rating.
Our
experience regarding the frivolousness of these suits is borne
out by the Department of Justice's estimate that of several
thousand constitutional tort suits filed to date, only a handful
have resulted in a judgment against federal employees.
A bill has been introduced to ameliorate the problems posed
by "constitutional tort" suits and to provide fairer treatment
for those individuals who may have meritorious claims against
government agencies, and individuals acting for those agencies.
That bill, the Government Accountability Act of 1983, S. 633,
would amend the FTCA to make the Government the exclusive defendant
in all common law tort actions in which the Attorney General
certifies that the employee was acting within the scope of his
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Federal Reserve Bank of St. Louis
VI*
-4-
employment.
In addition, it provides that for the first time,
the United States could be sued under the FTCA for a Bivens-type
"constitutional tort." The exclusive remedy in such a case
would have been against the United States.
The provisions of
S. 633 would also retain the qualified immunity defense and
other immunity defenses that have been recognized by the courts
in the Bivens actions as available to an individual employee.
We supported this bill when it was first introduced in the
last Congress as S. 1775, and continue to support its passage in
this session.
We believe that the provisions of that bill would
be more beneficial to potential plaintiffs than current law, as
it is extremely difficult for a plaintiff to prove actual damages
even if he establishes that a "constitutional tort" has occurred,
and Government employees ordinarily would be unable to pay.
By
making the United States the defendant in "constitutional tort"
cases, S. 633 ensures that plaintiffs with valid claims will
have a certain recovery where damages are awarded.
We also
strongly support the preservation in the bill of the immunity
defenses currently available to individual employees.
The
continued availability of such defenses will, in our opinion,
advance the public interest by permitting disproof of the merits
of the claim by testing the acts of challenged officials against
the standard of reasonableness and good faith.
Finally, providing
the good faith defense will prevent a chilling effect on the
conduct of public officials where the law may be uncertain.
Because areas of legal certainty are diminishing, providing such
a good faith defense is vital to encourage progressive and enlightened policies in the numerous areas where the law is unfolding
or equivocal.
The Bank Board is especially sensitive to this
concern, as it seeks new and innovative approaches to address
the problems of the thrift industry.
In addition, I urge this Committee to consider similar
legislation directed specifically to the banking regulatory
agencies -- the Bank Board, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation and the Federal Reserve
Board.
Such legislation would, of course, be especially important
if S. 633 does not move forward in this session.
As I noted
above, many of the regulatory actions undertaken by the Bank
Board require swift action in order to maintain public confidence
in the thrift industry and in our regulatory authority.
The
other banking agencies often face the same need for swift action.
We cannot afford to continue to risk the possibility that the
threat of such lawsuits will deter federal employees from fulfilling their official duties and from taking decisive action,
where needed.
To that end, we believe that this Committee should
take action to free the employees of the banking agencies from
the unnecessary threat of these lawsuits as soon as possible.
Therefore, I urge this Committee to consider this problem
as it affects Bank Board officials, and all federal employees.
I trust these comments will be helpful to you.
If I or my staff
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Federal Reserve Bank of St. Louis
-5-
can be of any assistance to you in providing additional information
Please note that, in
or drafting assistance, please let me know.
not been reviewed
has
letter
accordance with 12 U.S.C. § 250, this
not necessarily
does
and
outside the Federal Home Loan Bank Board,
reflect the views of the President.
Sincerely,
Chairman
Concur:
Concu
ray
J.
Ed
Board Member
cc:
Honorable
Honorable
Honorable
Honorable
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Federal Reserve Bank of St. Louis
C. T. Conover
William M. Isaac
Paul A. Volcker
Peter W. Rodino, Jr.
ie Jay
ard Member
JOHN A DAHLSTROM
CHAIRMAN
DESMOND J BARKER, JR.
VICE CHAIRMAN
THE
,\IVERSITY
OF ,TA
ASUU PRESIDENT
REED W BRINTON
RANDY L. DRYER
RICHARD W. GIAUQUE
DEANNE D. HANSON
GORDON E. HARMSTON
D. BRENT SCOTT
ALINE SKAGGS
INSTITUTIONAL
COUNCIL
WENDY P SMITH
SECRETARY
SPENCER F. ECCLES
TREASURER
January 31, 1983
Paul A. Volcker
Board of Governors of the
Federal Reserve System
Washington, D.C. 20551
Dear Mr. Volcker:
Your letter in support of the nomination of Dick Pratt for an
honorary degree has been received and will be held for the consideration
of the Honorary Degree Committee of the Institutional Council. During
the months of February, and March, Committee deliberations on the
nominations will take place, and announcements of those who have been
selected to receive honorary degrees will be made in May.
If you have any questions regarding the nomination, please do not
hesitate to contact me at campus extension 3033.
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Federal Reserve Bank of St. Louis
Sincerely,
14..ge-c
endy PJ Smith
Secretary
January 27, 1983
Mr. David P. Garner
President
University of Utah
Park Building
Salt Lake City, Utah
64112
Dear Mr. Garner:
It has come to my attention that the University
of Utah is considering awarding Dick P att an honorary
degree. I am pleased to recommend Dic
or such
recognition.
I am sure the University community already
knows and respects Dick because of his association with
you before coming to Washington. What I can add to
that is recognition of his intense dedication to his
vision of the public interest and grace under pressure.
This has been a period of enormous strain for the
industry that he has been charged with supervising, and
he has handled the job with skill and integrity. I
think an honorary degree from the University would be
a fitting tribute to Dick's public service.
Sincerely,
NMS:dmg-b
#111
cc:
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Federal Reserve Bank of St. Louis
Mr. Jamie Jay Jackson
Federal Home Loan Bank Board
Miss Wolfe (2)
1700 G Street N. W.
Washington, D. C. 20552
Federal Home Loan Bank Board
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
an
JAMIE JAY JACKSON
LAJ
C—
Board Member
January 18, 1983
Mr. Paul A. Volcker
Chairman
Board of Governors of the
Federal Reserve System
Federal Reserve Building
Washington, D.C. 20551
Dear Paul:
I was recently contacted by a faculty committee member
of the University of Utah pertaining to the consideration of
an honorary doctorate for Richard T. Pratt. As you are aware,
Dick was a faculty member of the University prior to becoming
Chairman of the Federal Home Loan Bank Board. Certainly,
Dick Pratt was Chairman during the most difficult days facing
the Bank Board. We, naturally, feel that he is very deserving
of this honor.
I do not know your personal position as to your recommending people for certain awards. However, if you are inclined to
write a letter on Dick's behalf, please address a letter of
recommendation to the following address:
!David P. Garner, President
Park Building
';University of Utah
84112
ySalt Lake City, Utah
Your consideration of this matter will be greatly appreciated. The faculty meeting on this matter will be in early
February. If I can ever be of assistance to you, please do not
hesitate to contact me.
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Federal Reserve Bank of St. Louis
Very truly yours,
'N\
zyjCE-7-)
Jamie Jay Jaulcson
;
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Sayings and Loan Insurance Corporation
Federal Home Loan Bank Board
•
RICHARD T. PRATT
CHAIRMAN
2
Honorable Paul A. Volcker
Chairman
Board of Governors of the
Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Mr. Chairman:
4-p
1
"
6Y3
I am pleased to forward to you the Federal Home Tian Bank Board's fourth
annual report to the Congress on this agency's efforts to prevent unfair and
deceptive trade practices in the savings and loan industry. Our report indicates that in 1982 consumer complaint resolutions continued to be expeditious.
Moreover, we improved our complaint data system, and this year we are able to
report for the first time the number of consumers (937 or 24.2 percent of all
complaints received and resolved in 1982) who received some adjustment as a
result of their complaints to the Board.
Exhibit A lists regulations, adopted by the Board, that
potentially involving unfair and deceptive trade practices.
Enclosure
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Federal Reserve Bank of St. Louis
address
areas
•
•
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Federal Reserve Bank of St. Louis
ANNUAL REPORT TO CONGRESS
ON
SECTION 18(f) OF THE FEDERAL TRADE COMMISSION ACT
FEDERAL HOME LOAN BANK BOARD
March 15, 1983
,
INTRODUCTION
This is the fourth annual report describing the activities of the Federal Home
Loan Bank Board ("Board-) in fulfilling its responsibilities under Section 18(f)
of the Federal Trade Commission Act. Those responsibilities are: (1) to identify
unfair or deceptive trade practices and to adopt regulations prohibiting such
practices: (2) to receive and take appropriate action upon complaints directed
against insured savings and loan associations; and (3) unless certain exceptions
apply, to promulgate regulations applicable to insured associations that are
substantially similar to rules prescribed by the Federal Trade Commission (FTC)
within 60 days after such FTC rules take effect.
The Department of Consumer and Civil Rights (DCCR) of the Office of Examinations
and Supervision (OES) administers the Board's activities relating to unfair and
DCCR, established in late 1979, was staffed and
deceptive trade practices.
The activities of DCCR form the core of the
1980.
in
operational
became fully
comment in the Federal Register in October
for
published
Program,
Board's Consumer
19, 1981.
February
on
Board
the
by
1980, and adopted
I.
Regulatory Activities
A.
New Regulations
One of the Federal Home Loan Bank Board's main duties is to ensure that
no unfair or deceptive practices are used by its regulatees. This responsi—
bility devolved upon the Board as a result of amendments to Section 18(f) of
the Federal Trade Commission Act (15 U.S.C. 57a(f)(1)). A number of the
Board's current regulations have been formulated with this mission in mind.
In 1982, the Board's regulatory actions carrying out this responsibility
included the following:
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Federal Reserve Bank of St. Louis
•
institu—
mortgage
—
The Board adopted a new home loan regulation requiring
tions to provide a plain—language written description of
terms before they can accept a mortgage application.
—
The Board continued to monitor industry practices with regard to
repurchase agreements and in May 1982 adopted a new regulation ex—
panding repurchase agreement disclosure requirements for all insured
institutions.
_
The Board worked with other members of the Depository Institutions
Deregulation Committee (DIDC) to develop and monitor new DIDC regula—
As part
tions authorizing deposit accounts without rate ceilings.
of this process, the Board issued several supervisory memoranda
concerning the structuring and advertising of these accounts.
_k
-2-
-
The Board proposed regulations providing that the prohibitions against
referral fees and unearned fees to affiliated persons, originating in
the Real Estate Settlement Procedures Act (RESPA), be extended to cover
all services offered by regulated institutions. (The Board has delayed
action on this proposal, pending studies of RESPA being undertaken by
the executive and legislative branches.)
-
In April 1982, the Board proposed a revision of its fair lending data
system to reduce the reporting burden on industry while continuing to
provide the data necessary for streamlined examination procedures. The
Board issued its proposed regulations for public comment (April 19,
Subsequently, however,
1982, Federal Register, pp. 16,633-16,642).
the Federal Financial Institutions Examination Council (FFIEC) began
a study, required by the Home Mortgage Disclosure Act amendments of
1980, of the financial regulatory agencies' fair lending data systems.
The study was for the purpose of assessing the feasibility and desirability of eliminating any duplicate or inconsistent reporting requirements. In the interests of carrying out these congressionally mandated
goals and as a result of savings and loan associations' comments that
changes in data systems are costly, FHLBB postponed action on revising
its regulations until the FFIEC action. The Board circulated copies
of its April 1982 proposal and the FFIEC study to consumer and civil
rights groups to encourage their comments.
Pertinent Bank
Board
regulations
adopted
in
1982
are
listed
in
Exhibit
A.
B. Identification of Practices
The Bank Board obtains information about potentially unfair or deceptive trade
practices primarily from examinations and consumer complaints. The Board took
the following steps in 1982 to improve the efficiency of its examination system
in identifying and correcting potentially unfair or deceptive practices:
-
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Federal Reserve Bank of St. Louis
Since the beginning of fiscal year 1982, OES has used a revised system
for district offices to report quarterly on violations of consumer and
civil rights regulations. These reports establish a uniform method of
counting violations for all districts and distinguish between substantive and technical violations of the Board's nondiscrimination regulations. In fiscal year 1982, for the first time, a slight majority of
associations examined had no nondiscrimination violations of any kind,
including technical violations.
-3-
-
-
OES revised its examiner training in consumer protection and civil rights
to provide more detailed and uniform instructor outlines.
•
OES worked with the FFIEC to develop and adopt uniform examination procedures for the Truth in Lending Act.
-
In order to promote more uniform enforcement of Truth in Lending regulations, OES reviewed the monthly summaries of restitution requests for
Truth in Lending violations that District Banks have submitted since
As a result of this review, OES developed a supervisory
early 1981.
memorandum clarifying Bank Board policy and providing procedural guideIn 1982, 56 associations
lines for restitution requests and appeals.
reimbursed a total of $479,649 to 706 accounts due to disclosure violations.
-
Fiscal year 1982 was the first full
computerized fair lending data in
special attention institutions with
minimize attention to those in which
year in which examiners could utilize
regular examinations to target for
potential discrimination problems and
discrimination is unlikely.
The Bank Board took the following steps during 1982 to strengthen its utilization
of consumer complaint information for identifying potentially unfair or deceptive
trade practices:
-
The Board distributed information on its consumer complaint system at
the Consumer and Constituent Resource Expositions sponsored by the U.S.
Office of Consumer Affairs.
-
OES continued to advise supervisory agents of institutions receiving an
unusually high number of complaints in relation to asset size. Supervisory agents have worked closely with several of these institutions in
1982, to help them detect and resolve any practices or procedures causing
the problems.
-
Fiscal year 1982 was the first full year that the Washington Office sent
computerized monthly reports of complaints received directly to examination staff, to help them detect and resolve any systemic consumer problems
during regular examinations.
-
OES adopted an expanded consumer complaint code for fiscal year 1982, in
order to identify the cause and disposition of consumer complaints with
greater precision. OES continues to review its consumer complaint codes
regularly.
-
When a specific type of consumer complaint increases or changes significantly, DCCR makes an effort to survey Districts Banks and other sources
of pertinent information and to review the adequacy of Board regulations
and guidelines on the subject. (Assumption fees and foreclosure practices
are two subjects that were surveyed informally during 1982.)
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Federal Reserve Bank of St. Louis
-4-
II.
ities
Complaint Investigation and Enforcement Activ
A.
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Federal Reserve Bank of St. Louis
AnalYsis of Complaints Received in 1982
During 1982, DCCR continued
consumer complaints.
to streamline its system for
aints. This
In 1982, the Board received 4,043 compl
from the
that the number of complaints declined
in 1980,
received 4,251 complaints in 1981, 4,249
aints,
The total workload for 1982 was 4,456 compl
complaints carried over from 1981.
monitoring
was the first year
We
previous year.
and 3,633 in 1979.
which included 413
involved loans and comprised
The largest category of these complaints
Com38.1 percent in 1981.
41.9 percent of the complaints, up from
d
secon
the
for
lly
substantia
plaints about escrow accounts increased
252
1981,
in
w;
escro
concerned
year in a row. In 1980, 212 complaints
the figure increased to 366.
1982
in
and
w;
escro
rned
complaints conce
decrease from 542 in 1980 to
Complaints about loan charges continued to
279 in 1981 to 115 in 1982.
accounts fell from 44.2 percent
The percent of complaints about savings
12 percent (191) of the savings
in 1981 to 39.8 percent in 1982. Over
Order of Withdrawal (NOW)
account complaints related to Negotiable
gs account problems was in
accounts. The greatest decline in savin
which declined from 508 (28 percent
early withdrawal penalty complaints,
to 156 (10 percent) in 1982.
of all savings complaints) in 1981
or the Banks' complaint activity
The Washington Office continues to monit
and offer assistance where
in order to identify protracted complaints
31 complaints (7 percent of 449
and as needed. At the end of 1982 only
for more than 90 days. This
unresolved complaints) had remained open
there were 52 such complaints
was a decline from the end of 1981, when
aints).
(13 percent of 413 unresolved compl
n error or violation increased
The number of cases involving associatio
(10.1 percent) in 1981. As in
to 502 (13.0 percent) in 1982 from 418
error involved complaints alleging
1981, the highest rate of association
of 95 advertising complaints,
problems with advertising practices. Out
ng of association error or violation.
27 (28.4 percent) resulted in a findi
violations or errors were resolved
In 1982, 71.1 percent (357) of the 502
Board had to request corrective
voluntarily by the association. The
nt (245) of the cases. This was a
action in the remaining 28.9 perce
only 40.7 percent (170) of the 418
marked improvement over 1981 when
tarily.
volun
errors or violations were resolved
.
r
-5-
New disposition codes introduced in fiscal year 1982 revealed that the
Of
complaint system produced adjustments for 937 consumers in 1982.
these, 600 consumers received a monetary adjustment: 233 due to association error or violation and 367 without any findings of association
error or violation. The remaining 337 consumers received non-monetary
adjustments that did not involve immediate transfer of funds to the
customer; 124 were due to association violation or error and 213 occurred
without a finding of error or violation.
Guidance for Complaint Handling
B.
-
The Washington Office continued to send supervisory agents detailed
computer analyses of delays in their Banks' complaint handling, and
to work with District Banks to reduce the backlog of unresolved complaints.
-
To prevent backlog, Banks receiving the largest number of complaints
have launched a pilot program to encourage customers who lodge complaints to work as a first level directly with the institutions involved. Supervisory agents advise customers that they are forwarding
their complaints to the institution, which will contact them directly.
They encourage customers to contact them again if their problems are
not resolved.
III.
-
The Washington Office continued to send sample response letters to
supervisory agents handling consumer complaints, to share with them
effective solutions to some difficult problems and to assist them in
responding efficiently to questions that arise frequently.
-
Fiscal year 1982 was the first full year in which computerized fair
lending data for all institutions were available for use in evaluating
civil rights complaints.
FTC Regulations
During 1982, the FTC did not adopt any regulations pursuant to
18(f) relating to the savings and loan industry.
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Federal Reserve Bank of St. Louis
Section
%
EXHIBIT A
Federal Home Loan Bank Board Regulations
(Title 12 Code of Federal Regulations)
that Address Areas Potentially Involving
Unfair or Deceptive Trade Practices.
References to 12 CFR §
, unless otherwise noted:
Regulations applicable to member institutions of the Federal Home Loan
Banks (the District Banks)
§ 523.10
§ 526.10
Authority for Federal Associations to
act as Depository and Fiscal Agent of
the Government
§ 531.12
Amendments on Transfer and Repurchase of
Government Securities
Regulations applicable to federally-chartered savings and loan associations
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Federal Reserve Bank of St. Louis
§
§
§
§
§
543.2
545.14
545.15
546.2
552.13
Processing of Applications by Associations for
Organizing, Branching, and Merging
§
§
§
§
541.8-1
541.8-2
541.8-3
543.2
543.6
§ 545.9-1
§ 546.2
§ 552.13
Amendments Relating to the Organization,
Merger, and Acquisition of Interim
Savings and Loan Associations and Interim
Savings Banks
§ 545.01
Amendment relating to Grandfathering of
State Authority by Institutions converting
to Federal Charters
§ 545.24-3
Authority for Federal Associations to
act as Depository and Fiscal Agent of
the Government
§ 545.29-1
Financial Options Trading
-2-
Regulations applicable to federally-chartered savings and loan associations
Continued .
§ 545.6(a)(2)
Federal Preemption of State Law
§ 545.6-2(a)
Home Loan Amendments (General Authorization
for all types of Home Loans)
§ 545.6-5(b)
Disclosure Requirements apply only to
Home Loans
§ 545.8-3(b)
Requiring notice to borrower of deficiency
in the amount to be kept in escrow
§ 545.8-5(b)
Penalty for Prepayment if interest rate
adjustment remains fixed for 5 years
§ 545.7-10a(a)
§ 545.7-10a(b)
§ 545.7-10a(c)
Consumer Leasing
§
§
§
§
§
§
§
544.6
545.1(b)
545.1-1(a)
545.1-1(f)
545.1-3(b)
545.2(a)
545.2(b)
§ 556.5(a)
Savings Account Amendments
Policy Statement Concerning Branching in
Supervisory and Non-supervisory Acquisitions
Regulations applicable to institutions whose accounts are insured by
the FSLIC
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Federal Reserve Bank of St. Louis
§ 563f.5
Grandfathered Interlocking Relationships
§ 563.22
Processing of Applications by Associations for
Organizing, Branching, and Merging
§ 562.4
§ 562.6
§ 563.22
Amendments Relating to the Organization,
Merger, and Acquisition of Interim
Savings and Loan Associations and Interim
Savings Banks
§ 564.3(b)
Single Ownership Accounts - Insurance of Certain
Accounts held by Loan Servicers
-3-
Regulation6 applicable to institutions whose accounts are insured by
the FSLIC - Continued
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Federal Reserve Bank of St. Louis
§
§
§
§
§
§
561.3
561.11d
561.11e
563.6
563.15
564.8
Authority for Federal Associations to
act as Depository and Fiscal Agent of
the Government
§ 563.17-3
§ 563.17-4
§ 563.17-5
Financial Options Trading
§ 563.8
§ 563.8-4
Amendments on Transfer and Repurchase of
Government Securities
§ 564.2(c)
General principles applicable in
determining insurance of accounts
§ 564.10
Clarification that insurance of IRA or
Keogh accounts is separate from other
trust accounts
§ 590.101
Preemption of State Usury Laws
§ 563.9-6
Limitations on Investment in Accounts of
Institutions and in Debt Securities
Hedged with Forward Commitments
§ 584.2(c)
Prohibited Holding Company Activities
§ 584.3(a)
Prohibited Transactions with Affiliates
@FedFRASER