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Contents

General Overview
Managing the Crisis: The FDIC and RTC Experience examines the challenges faced by
the FDIC and the RTC in resolving troubled banks and thrifts during the financial crisis
of the 1980s and early 1990s. This study reviews the resolution and asset disposition
strategies developed and implemented by the FDIC and the RTC in response to the crisis and describes the evolution of the methods used. It also reflects on the effectiveness of
these methods, as well as the lessons learned. This study does not discuss the reasons for
the upsurge in the number of bank and thrift failures during this period, nor does it
explore how the crisis could have been prevented. Those issues are addressed in History
of the Eighties—Lessons for the Future: An Examination of the Banking Crises of the
1980s and Early 1990s, a study that was complied and published by the FDIC in
December 1997.

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Forward

Acknowledgements

M A N A GI N G T H E C R I S I S

Part I
Chapter 1. Executive Summary
The Executive Summary provides an overview of the entire Managing the Crisis study.
Chapter 2. Overview of the Resolution Process
This chapter provides an overview of the specific steps undertaken by the FDIC and the
RTC to complete a resolution of a failing or failed institution.
Chapter 3. Evolution of the FDIC’s Resolution Practices
The FDIC employed various approaches to address the successive waves of bank insolvencies resulting from high interest rates in the late 1970s and early 1980s, energy and
agriculture sector problems in the mid-1980s, and collapsing real estate markets at the
end of the 1980s and early 1990s. This chapter describes those approaches and traces
the expansion of resolution alternatives from traditional deposit payoffs and purchase
and assumption transactions to later variations of those methods.
Chapter 4. Evolution of the RTC’s Resolution Practices
On August 9, 1989, the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) abolished the Federal Savings and Loan Insurance Corporation
(FSLIC) and the Federal Home Loan Bank Board (FHLBB) and created the RTC. This
chapter focuses on an important part of the RTC’s overall activity: the evolution of its
resolution practices.
Chapter 5. Open Bank Assistance
Open bank assistance occurs when a distressed financial institution remains open with
government financial assistance. To prevent an insured depository institution from closing, the FDIC provided open bank assistance in the form of loans, contributions, deposits, asset purchases, or the assumption of liabilities. This chapter provides the history of
the open bank assistance transaction.
Chapter 6. Bridge Banks
A bridge bank is a temporary national bank chartered by the Office of the Comptroller
of the Currency and organized by the FDIC to take over and maintain banking services
for the customers of a failed bank. It is designed to “bridge” the gap between the failure
of a bank and the time when the FDIC can implement a satisfactory acquisition by a
third party. This chapter discusses the formation of Bridge Banks.

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Chapter 7. Loss Sharing
Loss sharing is a feature that the FDIC first introduced into selected purchase and
assumption transactions in 1991. The original goals of loss sharing were to (1) sell as
many assets as possible to the acquiring bank and (2) have the nonperforming assets
managed and collected by the acquiring bank in a manner that aligned the interests and
incentives of the acquiring bank and the FDIC. This chapter discusses various aspects of
the Loss Sharing transaction.
Chapter 8. The FDIC’s Role as Receiver
The FDIC has three main responsibilities: (1) to act as an insurer, (2) to act as a supervisor, and (3) to act as a receiver. The roles of insurer and receiver require that the FDIC
play an active role in resolving failing and failed FDIC insured institutions. The FDIC’s
role as receiver is discussed in this chapter.
Chapter 9. The Closing Process and the Payment of Insured Depositors
Before federal deposit insurance, depositors typically would recover 50 percent to 60
percent of their money from a failed bank’s receivership and depositors often were not
able to obtain those funds for several years. Consequently, public confidence in the
banking system wavered, and depositor runs became more frequent, thus triggering
more bank closings. This chapter discusses that federal deposit insurance was designed
to provide greater protection to depositors, thereby enhancing public confidence and
leading to greater financial stability.
Chapter 10.Treatment of Uninsured Depositors and Other Receivership Creditors
A failed bank or thrift receivership has a statutory obligation to identify creditors and
distribute proceeds of the liquidation of assets to these creditors commensurate with
applicable statutes and regulations. This chapter discusses the evolution of the claims
process from 1980 to 1994 into a uniform system now codified in federal law.
Chapter 11.Professional Liability Claims
Professional misconduct was a significant factor in the failures of financial institutions
during the 1980s. The Professional Liability Program at the FDIC and the RTC played
an important role in recovering losses from those failures. This chapter describes the
development of professional liability operations at the FDIC and the RTC.
Chapter 12.Evolution of the Asset Disposition Process
This chapter provides an overview of the various asset disposition methods employed by
the FDIC and the RTC in their various capacities. The chapter also describes how the

M A N A GI N G T H E C R I S I S

FDIC and the RTC adapted their asset disposition methods to meet the enormous challenges during the 1980 through 1994 period.
Chapter 13.Auctions and Sealed Bids
This chapter reviews the use of auctions and sealed bid marketing strategies by the
FDIC and the RTC. It examines how the FDIC and the RTC marketed loans through
the sealed bid process, how they used auctions to sell loans, and how they used sealed
bid sales and auctions to sell real estate that they held.
Chapter 14.Asset Management Contracting
This chapter reviews the types of asset management and disposition contracts used by
the FDIC and the RTC. The analysis includes a discussion of the evolution, strengths,
and weaknesses of those contracts.
Chapter 15.Affordable Housing Programs
The volume of assets handled within the affordable housing programs of the RTC and
FDIC were relatively minor compared to the total assets sold by both corporations. The
RTC and FDIC viewed the programs as significant, however, because of their mission to
provide low- to moderate-income housing within a larger program designed to minimize costs and maximize overall returns. This chapter discusses both the FDIC’s and the
RTC’s Affordable Housing Programs.
Chapter 16.Securitizations
In October 1990, one year after the RTC was created, a securitization program was
established to facilitate the sale of mortgage loans. This chapter focuses on the creation,
development, and performance of this program.
Chapter 17.Partnership Programs
In the late 1980s and early 1990s, the RTC and the FDIC became custodians of a tremendous and unprecedented number of assets from failed banks and thrifts. The agencies therefore had to develop innovative methods to manage and dispose of the assets.
One of the RTC’s methods, known as the equity partnership, was a joint venture
between the public and private sectors. This chapter discusses aspects of the various
equity partnerships.
Chapter 18.The FDIC’s Use of Outside Counsel
This chapter describes the FDIC’s use of outside counsel from 1980 to 1996. It covers
the increased use of outside counsel from 1989 to 1993 during the peak of the financial
institution crisis, payments to outside counsel during the period, the advent of the

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FDIC’s Minority and Woman Outreach Program, the formation of a section to oversee
the use of outside counsel, the development of uniform policies and procedures governing the use of outside counsel, the use of information systems, and the various statutory
provisions that relate to the FDIC’s use of outside counsel.
Chapter 19.Internal Controls
Internal controls provide management with reasonable assurance that its programs are
effectively and efficiently executed; waste, fraud, and abuse and misappropriation of
assets are minimized; financial statements are reliable; and compliance with the law is
ensured. This chapter provides an overview of the evolution and implementation of
internal control programs at the FDIC and the RTC.

Part II, Case Studies of Significant Bank Resolutions
Case Studies of Significant Bank Resolutions presents case studies of the 10 most notable problem banks to illustrate some of the FDIC’s resolution processes. The case studies
also show the effects on the FDIC of changes in banking legislation in the 1980s and
1990s.
Chapter 1: Overview
Chapter 2: First Pennsylvania Bank, N.A.
Chapter 3: Penn Square Bank, N.A.
Chapter 4: Continental Illinois National Bank And Trust Company
Chapter 5: First City Bancorporation of Texas, Inc.
Chapter 6: First RepublicBank Corporation
Chapter 7: MCorp.
Chapter 8: Bank Of New England Corporation
Chapter 9: Southeast Banking Corp.
Chapter 10: Seven Banks in New Hampshire
Chapter 11: CrossLand Savings, FSB

M A N A GI N G T H E C R I S I S

Chapter 12: Conclusions

Part III, Appendices
A. Legislation Governing FDIC’s Roles as Insurer and Receiver
This appendix focuses on the FDIC from 1980 to 1994. To provide a historical context
for that period, however, the appendix begins with a brief overview of some earlier, significant legislation passed by the U.S. Congress.
B. Glossary of Terms/Abbreviations
This list of abbreviations and glossary of terms is compiled from terminology that is
used in this publication.
C. Statistical Data
This appendix provides graphical illustrations of the data presented in the study.

CHAPTER 1

Executive Summary

What This Study Is About
Managing the Crisis: The FDIC and RTC Experience examines the challenges faced by the
Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation
(RTC) in resolving troubled banks and thrifts during the financial crisis of the 1980s
and early 1990s. This study reviews the resolution and asset disposition strategies developed and implemented by the FDIC and the RTC in response to the crisis and describes
the evolution of the methods used.1 It also reflects on the effectiveness of these methods,
as well as the lessons learned. This study does not discuss the reasons for the upsurge in
the number of bank and thrift failures during this period, nor does it explore the regulatory responses to the crisis. Those issues are addressed in History of the Eighties—Lessons
for the Future: An Examination of the Banking Crises of the 1980s and Early 1990s, a study
that was compiled and published by the FDIC in December 1997.
This study is organized into six functional areas. The first area, Chapters 2 through
7, covers the evolution of the resolution process, including specific information on the
use of open bank assistance (OBA), bridge banks, and loss sharing. The issues discussed
in Chapters 8 through 11 are the receivership management process, including the
FDIC’s role as receiver, the closing process and payment of insured depositors, the treatment of uninsured depositors and other creditors, and the pursuit of professional liability claims. Chapters 12 through 17 discuss the asset disposition process, including an
overview of the evolution of the asset disposition process and descriptions of the primary
1. The term “resolution” throughout this study means a disposition plan for a failed or failing institution. It is
designed to (1) protect insured depositors, and (2) minimize the costs to the relevant insurance fund that are expected from covering insured deposits and disposing of the institution’s assets. Resolution methods include purchase and assumption transactions, insured deposit transfer transactions, and straight deposit payoffs. A resolution
can also refer to an open bank assistance plan provided to an institution to help prevent it from failing.

M A N A GI N G T H E C R I S I S

methods used, such as auctions and sealed bids, asset management contracting, securitization, partnership programs, and the Affordable Housing Program (AHP). The topic
of Chapters 18 and 19 is internal operations, which includes the legal process and internal controls. Part II includes 10 case studies of significant bank resolutions. Finally, an
appendix contains sections describing the legislation governing the FDIC’s roles as
receiver and insurer, statistical analysis over the period in the form of charts and graphs,
and a glossary of frequently used terms and abbreviations.

Magnitude of the Problem
The U.S. banking and thrift industry in the early 1980s was facing a financial crisis of a
magnitude not seen since the Great Depression years of 1929 through 1933, when
depositors lost $1.4 billion with the closing of 9,755 banks.2 The banking and thrift
crisis of the 1980s and early 1990s bore certain similarities to banking conditions leading up to the Great Depression. With the notable exceptions of Continental Illinois
National Bank and Trust Company (Continental), Chicago, Illinois, and the New York
savings banks, the early 1980s bank and thrift failures were generally small institutions,
many with roots in the agricultural or energy sectors. Continued problems in the energy
sector and a collapse in several major real estate markets greatly increased the number
and cost of failures. As a result, in 1988, the Federal Savings and Loan Insurance Corporation (FSLIC) insurance fund was reported to be at minus $75 billion, and the ratio of
losses to all insured deposits rose to 1.48 percent, a level that had only been exceeded in
1933.3 The insolvency of the FSLIC fund and the continued weakness in the thrift
industry led to creation of the Resolution Trust Corporation in August 1989. Before
that year ended, 318 failed thrifts had been taken over by the RTC.
How large was the problem? Between 1980 and 1994, 1,617 federally insured banks
with $302.6 billion in assets were closed or received FDIC financial assistance. During
this same time, 1,295 savings and loan institutions with $621 billion in assets also were
either closed by the FSLIC or the RTC, or received FSLIC financial assistance.4
The failure of 2,912 federally insured depository institutions is equivalent to one
failure every other day over the 15-year period. The combined total of $924 billion in
assets from the failed institutions is equivalent to $168 million in failed bank or savings
and loan assets that had to be liquidated or otherwise resolved each day for the 15-year
period. The timing of the bank and savings and loan failures between 1980 and 1994,
however, was not evenly distributed. At the height of the crisis, which was the five-year

2. Federal Deposit Insurance Corporation, The First Fifty Years: A History of the FDIC, 1933-1983 (Washington,
D.C.: FDIC, 1984), 36.
3. Federal Home Loan Bank Board 1988 reports.
4. The RTC did not provide open bank assistance.

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Chart I.1-1

Combined Number of Failures
(Banks and Savings & Loans)
1980–1994
550
500

Number of Failures

450
400
350
300
250
200
150
100
50
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
FSLIC Failures
RTC Failures
FDIC Failures

120

145

203

Total

115

106

174

205

251

185
279

8
318
207

213
169

144
127

59
122

9
41

2
13

550
745
1,617

464

533

382

271

181

2,912

Figures include open bank assistance transactions.
Sources: Reports from FDIC Division of Research and Statistics.

period between 1988 and 1992, a bank or savings and loan failed on an average of once
a day, bringing with it a daily influx of $385 million in assets. (See chart I.1-1.)
Another perspective on the crisis is that over the 15-year period, about one out of six
federally insured depository institutions were either closed or needed financial assistance. Those institutions held 20.5 percent of the assets in the banking system.5

Role of the FDIC and the RTC
As an independent deposit insurance agency for member banks and savings associations,
the FDIC has three primary responsibilities: to act as an insurer, a receiver, and a super5. The “6:1” ratio was calculated by taking the number of open federally insured banks and savings and loan associations at the end of 1987 (the mid-point of the crisis period) and dividing by the number of institutions that
failed or received assistance over the entire 15-year period from 1980-1994 (17,325/2,912).

M A N A GI N G T H E C R I S I S

visor.6 Two of these roles—those of insurer and receiver—require that the FDIC play an
active role in resolving failing and failed FDIC insured institutions. Those roles are the
subject of this study. The interaction between the FDIC as insurer and the FDIC as
receiver is important in promoting the efficient, expeditious, and orderly liquidation of
failed banks and thrifts to maintain confidence and stability in the U.S. banking system.
First and foremost, the FDIC was established to insure bank deposits. This role of
insurer helps ensure the stability of the financial system by guaranteeing the timely funding of insured deposits and the consequent faith in the U.S. banking system in times of
stress. The FDIC fulfills this role when a bank fails by paying insured depositors either by
direct payment or arranging for the assumption of the deposits by another financial institution. The importance of this role was critical in the bank and thrift crisis of the 1980s
and early 1990s. Despite the huge number of bank and thrift failures during this period,
there was no evidence of serious runs or credit flow disruptions at federally insured institutions. Most importantly, no depositors suffered any loss of their insured deposits.
When a depository institution fails, the FDIC is normally appointed receiver of the
institution by the courts or other authority having jurisdiction. The FDIC’s role as
receiver is important because it holds the responsibility to the creditors of the receivership to efficiently recover for them the maximum amount possible on their claims. The
FDIC itself also becomes a creditor of the receivership. By paying the insured depositors
or by arranging their assumption by another institution, the FDIC steps into the shoes
of the depositors as a creditor (the FDIC is the subrogee). By returning a significant portion of the failed institution’s assets to the private sector quickly, the FDIC as receiver
helps replenish the insurance fund while contributing to the stabilization of weakened
local economies. When acting as receiver, the FDIC has broad statutory authority and
expansive powers to ensure the efficiency of the receivership process. These powers allow
the FDIC to expedite the liquidation process for failed institutions and maximize the
cost-effectiveness of the receivership process.
Although not a part of the FDIC’s primary role, Congress passed various initiatives to
further national policy goals. To this end, for example, the FDIC has operated an Affordable Housing Program (AHP) that provides assistance in the form of credits or grants to
low-and moderate-income households that purchased lower-valued housing owned by the
FDIC as receiver. In addition, the FDIC operated a program during the crisis period to
promote the use of minority- and women-owned businesses for various contracted services.
The RTC existed from August 1989 through December 1995 and was established
by Congress as a temporary federal agency to clean up the savings and loan (S&L) crisis
after the FSLIC fund became insolvent. The RTC’s two main roles were to act as conservator and receiver of the insolvent thrifts.7 It had a third role, also required by law, to
6. Detailed information about the FDIC’s supervisory role during the 1980s and early 1990s can be found in the
FDIC’s History of the Eighties—Lessons for the Future: An Examination of the Banking Crisis of the 1980s and Early 1990s.
7. A conservatorship is established when a regulatory authority appoints a manager, such as the RTC, to take control of a failing institution to preserve assets and protect depositors.

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preserve affordable housing held by the receiverships and to facilitate sales to qualified
individuals and organizations.
In its role as conservator, the RTC took control of the operations of hundreds of
insolvent S&Ls. These institutions remained open, but their operation and their
employees came under control of the RTC until the best method for resolution could be
determined and implemented. The objectives of the conservatorship were to establish
control and oversight while promoting consumer confidence; to evaluate the condition
of the institution and determine the most cost-effective method of resolution; and to
operate the institution in a safe and sound manner pending resolution by minimizing
operating losses, limiting growth, eliminating any speculative activities, and terminating
any waste, fraud, and insider abuse. Shrinking an institution by curtailing new lending
activity and selling assets also was a high priority. Although a conservatorship is a
temporary solution to gain control of a failing institution and to reduce resolution costs,
many S&Ls were in conservatorship for long periods of time because the number of
insolvent thrifts was large, staff resources were limited, and funding was periodically
interrupted.
The RTC’s role as receiver is very similar to that of the FDIC’s, as described above.
It held the same type of special powers, such as the ability to repudiate burdensome
contracts and eliminate certain contingent liabilities. A pass-through receivership was
usually established at the time that the RTC became conservator or sometime during the
conservatorship.8 When the conservatorship was finally resolved, the institution was
then placed into a (second) receivership.
The RTC also was under a statutory obligation to ensure the preservation and disposition of available affordable housing. Thrifts in the United States are a primary provider of mortgages for single and multi-family housing. The drafters of the Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 recognized that
an unprecedented amount of affordable housing would come into the hands of the RTC
and could be made available for very low-, low-, and moderate-income families. In
response to that, the RTC established a national program to meet the objectives of the
legislation.

Major Objectives of the FDIC and the RTC
In its unique roles as deposit insurer of banks and savings associations and also as receiver
of failed institutions, the FDIC seeks to maintain stability and the public confidence in
the nation’s banking system. In the event of institution failures, the FDIC maintains

8. A pass-through receivership is when all deposits, substantially all assets, and certain nondeposit liabilities of the
original institution instantly “passed through the receiver” to a newly chartered federal mutual association, subsequently known as the “conservatorship.”

M A N A GI N G T H E C R I S I S

stability and public confidence in the system by providing the public with ready access to
their insured funds. The FDIC helps ensure the stability of the financial system in times
of stress by providing timely or quick resolution of failed institutions. This stability helps
promote public confidence in the system and restores liquidity to the economy.
To further minimize disruption to the public during the resolution of failed institutions, the FDIC tries to dispose of the remaining assets of a failed institution as soon as
practicable. This allows for quicker payments to the remaining creditors of the failed
institution.
As a federal agency with a statutorily limited life, the RTC had a narrower focus
than the FDIC. FIRREA gave the RTC the responsibility of managing and resolving all
failed depository institutions previously insured by the FSLIC and for which a conservator or receiver was appointed from January 1, 1989, through August 8, 1992. (This was
later extended to June 30, 1995.) The main objectives of the RTC defined by FIRREA
were (1) to maximize the net present value return from the disposition of failed thrifts
and their assets, (2) to minimize the effect of such transactions on local real estate and
financial markets, and (3) to maximize the availability and affordability of residential
real property for low- and moderate-income individuals.
Each of the three RTC objectives was, in some important way, at odds with the
other two. The goal of maximizing the return for the receiverships often meant selling
the assets as quickly as possible for the highest price. The goal of minimizing the effect
on local markets, however, would imply a measured, if not conservative, approach to the
timing of the sale and careful pricing of the thousands of properties before placing them
in their respective markets. Finally, to comply with FIRREA, affordable housing sales
had to be closely monitored before and after the sale, and a significant portion of the
owned real estate portfolio was reserved for lower income individuals. These requirements increased holding and disposition costs, which to some extent put the RTC at
odds with its first two objectives.
Compounding the challenge was the fact that from its creation in August 1989, the
RTC was responsible for an unprecedented workload. By December 31, 1990, the end
of its first full year of operation, the RTC had been appointed conservator of 531 thrifts
that contained $278.3 billion in assets. In contrast to the FDIC, which could rely on
insurance premiums paid by banks, the RTC had no internal source of funds. It relied
on congressional appropriations and other indirect sources to fund its operations. Also,
because appropriations to pay for insolvent thrifts were not popular, the RTC was hampered by delays in obtaining funding. Funding came in stages and each stage required
separate legislation and congressional approval. The legislative involvement made longterm planning of the resolution process difficult.
To meet its first two objectives of maximizing the return on the failed thrift assets
and minimizing any economic disruption to affected communities, the RTC engaged in
the conservatorship process, and drew on the experiences of the FDIC for dealing with
the disposition of numerous receiverships with a large volume of assets. The RTC was
given conservatorship powers in FIRREA as a means to get the failed and failing thrifts

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under government control for as little cost as possible. As conservator, the RTC could
begin reducing the expenses of the thrift, curtail new lending to lessen demands on
liquidity, and sell assets to raise the working capital necessary to keep the thrift open
until government funds were available to fully resolve the thrift.
The RTC reduced expenses by engaging in a strategy early on of not renewing conservatorship depositors’ interest-bearing deposits above the current market rates, thus
eliminating much of the high cost of funds. As conservator, the RTC could openly
market the assets and the franchise because the troubled status of the thrifts under conservatorship was public knowledge. The FDIC, on the other hand, was more secretive in
its bank pre-failure marketing efforts because it was dealing with an ongoing franchise
that might not fail and too much negative publicity could cause a run on deposits,
thereby bringing about the closing of the bank unnecessarily.
Because of the delays in funding, which forced institutions to stay in conservatorship for extended periods of time, the RTC’s asset disposition strategy also became very
different from the FDIC’s. The FDIC emphasized the sale of the maximum amount of
the failed bank’s assets to the bank acquirer at resolution. The RTC, on the other hand,
focused on selling the assets directly from the conservatorship or receivership, and only a
limited amount of assets were passed to the acquirer at resolution.
Because of the size of the S&L problem, one of the RTC’s earliest challenges was
dealing with the requirement of selling assets quickly without being accused of “dumping” them for perceived too low prices. The language in FIRREA concerning this issue
led to lagging sales and burgeoning inventories. By 1991, the language of FIRREA was
amended to allow the RTC to sell properties more quickly.9
As mandated in FIRREA, the RTC also began contracting with private asset management and disposition firms to dispose of the assets. Because of its limited life, the
RTC did not have the time or resources to develop the necessary experienced staff. The
RTC expanded on the FDIC’s methods of using large private firms and developed a
number of innovative techniques to meet its objectives. The RTC also developed
national sales centers to sell assets in bulk and partnerships with private asset management firms. In the area of securitization, the RTC created markets for securitizing less
traditional assets, such as commercial loans. These securitization efforts made it possible
for the RTC to dispose of a large volume of thrift assets under difficult time constraints
and at prices that might not have been realized in whole loan sales markets.
The RTC was not faced with the same set of resolution circumstances as the FDIC.
Because of the RTC’s funding limitations and its having so many thrifts in conservatorship, the RTC had to set priorities in its resolution schedule. It selected those institutions that presented the best opportunity for minimizing costs to the RTC or those with
9. FIRREA included language requiring the RTC to sell real estate for no less than 95 percent of its appraised
(market) value. In 1991, in response to growing criticism about low sales and congressional concern with the cost
of maintaining the rapidly growing inventory of properties, FIRREA was amended to reduce the minimum sales
price to no less than 70 percent of appraised value.

M A N A GI N G T H E C R I S I S

a higher rate of deterioration because of operating losses, eroding core deposit bases, and
loss of key personnel.
The RTC was innovative in separating the sale of assets from the sale of liabilities in
its franchise marketing efforts, and it developed new methods that allowed it to sell a
large number of institutions in a short time. The RTC’s focus on branch breakup transactions increased bidder participation, competition, and flexibility in the resolution
process and ultimately led to increased premiums.
To meet the objective of fulfilling the affordable housing mandate, the RTC developed a formal program for this area. In the process, the RTC established working relationships and partnerships with many public and private entities across the country to
achieve their goals. By its sunset date of December 31, 1995, the RTC had sold over
100,000 units of affordable housing.

Legislative Framework
Until the 1980s, most of the FDIC’s resolution powers were generated from legislation
enacted in the 1930s and 1950s. As the banking and thrift crisis deepened the FDIC
and the RTC needed expanded and improved powers to meet their resolution objectives.
Congress focused on these banking problems throughout the 1980s and 1990s by enacting legislation that provided new resolution tools, re-capitalized the depleted insurance
funds, and promoted stronger supervision and less regulatory discretion.
One of the first significant pieces of banking legislation passed in response to the
banking and thrift problems in the late 1970s was the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980. With a goal of improving the
competitiveness of banks and thrifts, DIDMCA began the process of deregulating the
interest rate ceilings that could be offered to depositors and raised the deposit insurance
limit from $40,000 to $100,000.
The next major banking legislation of the 1980s occurred when Congress passed the
Garn–St Germain Depository Institutions Act (Garn–St Germain) of 1982. This act
was aimed at resolving problems in the S&L and savings bank industries by further
expanding their powers, allowing them to compete in the area of commercial lending. It
also provided them with direct investment authority. The deregulation of restrictions on
interest rates and their subsequent increase led to some well-managed institutions
becoming significantly undercapitalized. To temporarily augment the capital of these
select institutions, a type of regulatory forbearance was included in the act in the form of
net worth certificates (NWC). In addition, Garn–St Germain broadened the FDIC’s
ability to use OBA, which occurs when a distressed financial institution remains open
with government financial assistance. The FDIC no longer had to prove that an institution was essential to the community for it to be allowed to receive OBA. The FDIC
could use OBA if its use was less costly than the estimated cost of liquidating the subject
institution.

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Both bankers and regulators were not prepared for the affects that deregulation
would have on the banking industry. This led to a series of banking legislation enacted
in the 1980s and 1990s to attempt to mitigate and control the crisis that followed.10
As the thrift crisis worsened and commercial bank failures increased, Congress
passed the Competitive Equality Banking Act (CEBA) of 1987. This act contained several provisions that were particularly significant for the FDIC. It expanded the FDIC’s
emergency interstate acquisition authority and permitted the FDIC to establish a temporary bridge bank.11 (A bridge bank is a chartered national bank that operates under a
board appointed by the FDIC; it assumes the deposits and certain other liabilities and
purchases certain assets of one or more failed banks.) CEBA also authorized a forbearance program for agricultural banks that allowed them to amortize their losses on agricultural loans over seven years, rather than deduct the amount of loss from capital as
soon as the loss was identified.
Because of the extent of the thrift crisis, the FSLIC reserves were exhausted and its
insurance fund became insolvent. Congress passed FIRREA in 1989, at a time when the
FSLIC was confronted with some 600 seriously troubled savings associations with assets
of about $350 billion. FIRREA dissolved the FSLIC, authorized use of taxpayer funds
to resolve failed thrifts, and established the RTC. The RTC was mandated to merge or
liquidate savings associations previously insured by the FSLIC that would be declared
insolvent during the period from January 1, 1989, through August 8, 1992 (later
extended to June 30, 1995), with the FDIC named as the manager of the RTC.
FIRREA also significantly changed the financial institution regulatory structure and
strengthened the authority of federal supervisors to require adequate capital, promote
safe banking practices, and ensure compliance with applicable laws. The powers and
duties of the FDIC in particular were greatly expanded. Some of the key provisions of
FIRREA included: eliminating the existing thrift regulatory structure and creating the
Office of Thrift Supervision (OTS) in its place, moving the responsibility of thrift
deposit insurance to the FDIC, authorizing the FDIC to assess insured depository institutions whose affiliated insured depository institutions had failed (that is, cross guaranty
assessment authority), and authorizing the FDIC and the RTC to appoint themselves as
sole conservator or receiver of any insured state depository institution, provided certain
criteria were met.
The next act that had a significant impact on the FDIC was the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) of 1991. While the law touched a
wide range of regulatory areas, certain provisions—particularly those pertaining to

10. For more information see Appendix A, Legislation Governing the FDIC’s Roles as Insurer and Receiver.
11. CEBA extended and expanded the FDIC’s emergency interstate acquisition authority so that when the FDIC
was resolving institutions with assets greater than $500 million, bank holding companies could be sold in whole or
in part and out-of-state holding companies would be permitted expansion rights in the state of acquisition. This
authority came at a critical time as the size of institution failures was increasing and fewer intrastate acquirers of
sufficient size and strength were available.

M A N A GI N G T H E C R I S I S

prompt corrective action (PCA) for failing institutions and to least cost resolutions—
had profound effects on the way the FDIC conducted failed bank resolutions. Federal
regulators were required by FDICIA to establish five capital levels, ranging from wellcapitalized to critically undercapitalized, that serve as the basis for PCA. As an institution’s capital declines, the appropriate regulator must take increasingly stringent measures. One of the aspects of PCA that most directly affects the FDIC’s approach to
resolutions prescribes mandatory measures for critically undercapitalized institutions,
which are banks with tangible equity equal to or less than 2 percent of total assets. Provisions of FDICIA also require that a conservator or receiver must be appointed no later
than 90 days after an institution falls into the critically undercapitalized category. The
appropriate federal regulatory authority can grant up to two 90-day extensions of the
PCA period if it determines that those extensions would better protect the relevant
insurance fund from long-term losses.
FDICIA also requires that if the FDIC does not liquidate a failing institution (conduct a deposit payoff), then it must pick the least costly resolution alternative. All bids
must be considered together and evaluated on the basis of comparative cost; other policy
considerations, regarding which regulators previously had some discretion, cannot be
factored into the determination of the appropriate transaction. FDICIA compelled the
FDIC to consider more transaction options than in the past to make certain that all
feasible least cost structures were offered.
Revisions to the FDIC’s OBA authority were the subject of two separate FDICIA
provisions. First, the FDIC could provide OBA only if it had determined that grounds
for the appointment of a conservator or receiver exist and that the institution’s capital is
not likely to be increased without assistance. Second, the FDIC had to determine that
the institution’s management was competent and not the cause of its problems.
As the banking and thrift crisis peaked in the early 1990s, the RTC Refinancing,
Restructuring, and Improvement Act (RTCRRIA) of 1991 was passed and further segregated the RTC from the FDIC. The restructured RTC was to be headed by a chief executive officer appointed by the president with the advice and consent of the Senate,
instead of the FDIC chairman and Board of Directors. The RTC Oversight Board was
recast into the Thrift Depositor Protection Oversight Board, made up of five government
officials and two private sector representatives. RTCRRIA provided the RTC with $25
billion more in funding through April 1, 1992, and extended the RTC’s ability to accept
appointment as conservator or receiver from August 9, 1992, to September 30, 1993.
Of particular importance to the deposit insurance funds was a major provision in
the Omnibus Budget Reconciliation Act of 1993. The act included a national depositor
preference provision, which pertained to all insured depository institutions that closed
on or after August 10, 1993. This provision stipulates that a failed institution’s depositors (including the FDIC standing in the place of insured depositors it has already paid)
have priority over general creditor claims. It was established to standardize the claims
process and to reduce the FDIC’s and the RTC’s cost of resolutions. Previously, asset

E XE C U T I VE S U M M A R Y

proceeds were distributed according to the law of the jurisdiction that chartered the
failed institution.
In terms of the mission of the RTC and the FDIC, after FIRREA, the most significant banking statute was the RTC Completion Act (Completion Act) of 1993. From
April 1, 1992, through December 17, 1993, the RTC did not have sufficient funding to
resolve additional failed savings and loan institutions. The Completion Act removed the
April 1, 1992, deadline for the use of funds that had previously been established, thus
permitting the RTC to use the remaining $18.3 billion authorized under RTCRRIA to
resolve the remaining insolvent thrifts. The act also extended the September 30, 1993,
deadline for appointment of the RTC as conservator or receiver for savings associations
to a date between January 1, 1995, and July 1, 1995, to be determined by the chairperson of the Thrift Depositor Protection Oversight Board. The transfer of the RTC operations to the FDIC and termination of the RTC was accelerated from December 31,
1996, to December 31, 1995. The RTC was required to adopt a series of management
reforms and implement provisions designed to improve the agency’s record in providing
business opportunities to minorities and women when issuing RTC contracts or selling
assets. The AHP was amended to add the requirement that the FDIC and the RTC provide tenants a right of first refusal to purchase one-to-four family residences owned by
the FDIC or the RTC. The changes also required the agencies to give limited preference
to offers from nonprofit corporations, government agencies, and others that would provide for use of a property by homeless individuals and families.

Methods of Handling Bank and S&L Failures
The FDIC and the RTC used different approaches to find the most efficient way of
managing bank and thrift failures. The resolution process itself went through a series of
changes and adjustments throughout the crisis period because of ever-changing market
conditions and legislation that prompted innovative cooperation between the government and the private sector. Until the early 1980s, the FDIC most often relied on the
purchase and assumption (P&A) resolution process in which an acquirer purchased
some or all of the assets and assumed certain liabilities. If an acquirer could not be
found, the FDIC used a deposit payoff resolution where the depositors were paid an
amount equal to their insured funds and all other liabilities and assets were held by the
FDIC as receiver. These resolution options were later expanded to include ones that
allowed for financial assistance to weakened, open institutions (open bank assistance)
and maximized opportunities to get failed institutions’ assets into private hands as
efficiently and quickly as possible.
The types and sizes of the assets and liabilities of the failed banks influenced the resolution methods that were created and used. In the 1970s and the early 1980s, there had
been few closings and the FDIC was more concerned about the safety and soundness of
the newly created bank than whether the assets of the failed bank passed to the acquirer.

M A N A GI N G T H E C R I S I S

The acquiring bank generally purchased only the cash and cash equivalents of the bank,
which left all the other assets for the FDIC to resolve. The resolution process changed as
bank failures grew in the mid-1980s and traditional resolution methods proved inadequate. The FDIC determined that a strategy of passing as many of the assets as possible
at resolution to acquirers would reduce the strain on the liquidity of the insurance fund
and on its limited staffing resources while moving the assets more quickly back to the
private sector.
The resolutions used by the RTC were similar to those used by the FDIC. The RTC
also used P&A transactions and deposit payoffs, although it did not have the authority
to engage in OBA. The RTC’s methods of handling institution failures, however, were
different from the FDIC’s primarily due to the situation that the RTC had inherited.
When the RTC was established in August 1989, it immediately assumed responsibility
for 262 thrift institutions in conservatorship with assets of $115 billion. Because of sporadic funding, the RTC often had to delay its resolution plans.
As a result of provisions in a series of legislation, beginning with FIRREA, the RTC
also developed resolution programs to preserve and, if possible, to increase the number
of minority-owned institutions. The programs were structured to give preference to
potential acquirers of the same ethnic identification as the previous owners’ if the bids
were less costly than a payoff would be. The programs were expanded in 1993 to give
bidding preference to a minority acquirer making an offer for any thrift or any of its
branches, located in a neighborhood where 50 percent of the residents were minorities.
The number of minority-owned thrifts that failed was relatively small. Of those that did
fail, however, minority ownership was preserved in approximately 50 percent of those
that were purchased.
The RTC resolution process evolved into a simpler process than the FDIC’s.
Because the public was already aware that the RTC had control of an institution, there
was no need for the secrecy that was required when the FDIC took bids on open institutions. The RTC was able to widely market the thrifts by placing advertisements in
national publications. It developed ways to market and sell large numbers of thrifts in a
short time. It simplified its process by making a conscious decision to separate the marketing of the assets from the marketing of the deposit franchise. The RTC completed
resolutions on 747 thrifts.
The three primary methods of resolutions, the P&A transaction, the deposit payoff,
and the OBA option, are described in more detail below.
Purchase and Assumption Transactions
A P&A is a resolution transaction where a healthy insured institution purchases some or
all of the assets and assumes, at a minimum, all insured deposits and may assume all of
the deposit liabilities of a failed bank or thrift. The P&A was the favored resolution policy of the FDIC. From 1980 to 1994, the FDIC handled 1,188 of the 1,617 failing and
failed institutions, or 73.5 percent, through P&A transactions. Similarly, of the $302.6

E XE C U T I VE S U M M A R Y

billion in assets and $233.2 billion in deposits, $204 billion of the assets (67.4 percent)
and $161.3 billion of the deposits (69.2 percent) were in the 1,188 institutions handled
through P&A transactions.
Like the FDIC, the RTC’s emphasis during its resolution history generally was on
P&A transactions. Of the 747 institutions resolved by the RTC, 497 institutions, or
66.5 percent, were handled through P&As. Similarly, of the $220.6 billion in deposits at
those 747 institutions, $161 billion of the deposits, or 73 percent, were in the 497 institutions handled through P&A transactions.
As the number of failures increased and resources were stressed, the P&A transaction evolved. In early P&As, the acquiring bank generally assumed all of the failed
bank’s deposit liabilities (including uninsured funds) and certain secured liabilities. The
acquirer also purchased a limited amount of “clean” assets (like cash and cash equivalents). The FDIC generally did not sell loans to an acquiring institution, thereby retaining the assets’ associated risk.
When the amount of assets it received began to overwhelm the FDIC, it tried to
transfer as many assets as possible to the acquiring banks by using a “put” option. To
induce the acquirer to take more assets, the FDIC required the acquirer to take assets,
but allowed them to put back to the FDIC those assets they did not wish to keep within
a specified timeframe. While the put option was a way to pass more assets to the
acquirer, thereby lowering the initial cash payment to the acquiring bank, there were
several significant problems with this feature. First, acquirers were able to “cherry pick”
the assets, choosing to keep only those with market values above book value or assets
having little risk, while returning all other assets. Second, assets tended to be neglected
by the acquirer during the put period before being returned, which adversely affected
their value. Finally, the limited due diligence before bidding did not allow acquirers to
include the potential profits in their bids. The FDIC discontinued use of the put option
as a resolution tool in late 1991. The RTC also used put options in an attempt to pass
more assets. Put options were used extensively during the first year of the RTC’s existence and their results were similar to those experienced by the FDIC. Although approximately $40 billion of assets were sold subject to put options, over $20 billion of those
assets were subsequently returned to the RTC.
Another method used by the FDIC to induce acquirers to retain assets was to give
priority to bidders that proposed taking the largest number of assets at resolution. That
policy led to the use of the whole bank P&A transaction. This type of transaction passed
to the acquirer virtually all of a failed bank’s assets and deposits. The FDIC made a onetime payment to the winning bidder and in return the acquirer assumed all of the risk
associated with ownership of the assets and liabilities of the institution.
Whole bank sales were widely used from 1988 to 1991 and during that period
represented 23 percent of the FDIC’s total resolution transactions. At that time (preFDICIA), whole bank bids simply had to be less expensive to the FDIC than the cost of
liquidation; after the least cost provisions were mandated, though, whole bank bids
could no longer remain competitive. While the FDIC maximized its transfer of assets

M A N A GI N G T H E C R I S I S

back to the private sector and most significantly preserved liquidity, this strategy likely
came at the expense of somewhat higher overall resolution costs.
By the early 1990s, the FDIC was having difficulty obtaining reasonable bids from
acquirers for portfolios of commercial loans from large bank failures. To convince reluctant acquirers to purchase these loans, the FDIC developed P&As with a loss sharing
feature. In those transactions, the FDIC reduced the acquirer’s risk by covering the
majority of the loss (and receiving the majority of the recovery) on certain pools of problem assets, and the acquirer agreed to take responsibility for the remainder of the loss on
those asset pools. Between 1991 and 1993, the FDIC implemented loss sharing a total
of 16 times, primarily at large bank failures, to resolve 24 failed banks. (See table I.1-1.)
Loss sharing transactions kept failed bank assets in the banking sector. The loss share
transactions were able to pass $18.5 billion, or 45 percent, in failed bank assets under
loss sharing and another $17.8 billion, or 43 percent, to the acquirer without loss sharing, which left only $5.1 billion, or 12 percent, of residual assets retained by the FDIC
for liquidation. In comparison, the 175 P&A transactions during 1991 and 1992 that
did not involve loss sharing accounted for $62.1 billion in failed bank assets and were
able to pass just $24.3 billion, or 39 percent, of the failed bank assets to the acquirers.
The P&A transactions with loss sharing were less expensive than those without it,
including whole bank transactions. The 24 failed loss share banks were resolved by the
FDIC at a cost of $2.5 billion, or 6.1 percent of assets. The 175 banks resolved by P&As
without loss sharing during the period were resolved by the FDIC at a cost of $6.5 billion, or 10.4 percent of assets. A further comparison of costs of loss share transactions
and conventional P&A transactions has been made on both large banks (total assets over
$500 million) and small banks with assets under $500 million. In both small and large
banks that failed during the same period, the costs in relation to total assets were less
expensive on the loss share transactions.
Under the various P&A asset purchase structures offered post-FDICIA, bidders
were given the option of bidding on only the insured deposits. Because an “insured
deposit only” bid did not have to compensate the FDIC or the RTC for the additional
cost of covering 100 percent of the uninsured depositor’s claim, it was easier for an
insured deposit only bid to pass the least cost test. Additionally, as the FDIC and the
RTC began offering this option on an increasingly regular basis, acquirers discovered
that the effects of not covering the uninsured depositors were less detrimental than they
had once believed.
The results of this change in acquirer bidding behavior were immediately apparent.
Chart I.1-2 displays the number of failed banks where the uninsured depositors were
both protected and unprotected from 1986 through 1995. On average, 82 percent of all
banks failing from 1992 to 1995 were resolved in a manner that did not provide full
protection to uninsured depositors, compared with 17 percent from 1986 to 1991. Perhaps more significantly, 85 percent of all the deposits in banks that failed from 1986
to1991 were in banks where all deposits were protected. By comparison, only 15 percent
of the deposits in failed banks from 1992 to 1995 were in banks where all deposits were

E XE C U T I VE S U M M A R Y

Table I.1-1

FDIC Loss Share Transactions
1991–1994
($ in Millions)
Transaction
Date
Failed Bank*

Location

09/19/91

Southeast Bank, N.A†

Miami, FL

10/10/91

New Dartmouth Bank

10/10/91

Total Resolution
Assets
Costs

Resolution Cost
as Percentage
of Total Assets

$10,478

0.00

Manchester, NH

2,268

571

25.19

First New Hampshire

Concord, NH

2,109

319

15.14

11/14/91

Connecticut Savings Bank

New Haven, CT

1,047

207

19.77

08/21/92

Attleboro Pawtucket S.B.

Pawtucket, RI

595

5.41

10/02/92

First Constitution Bank

New Haven, CT

1,580

127

8.01

10/02/92

The Howard Savings Bank

Livingston, NJ

3,258

2.67

12/04/92

Heritage Bank for Savings

Holyoke, MA

1,272

1.70

12/11/92

Eastland Savings Bank‡

Woonsocket, RI

545

3.30

12/11/92

Meritor Savings Bank

Philadelphia, PA

3,579

0.00

02/13/93

First City, Texas-Austin, N.A.

Austin, TX

347

0.00

02/13/93

First City, Texas-Dallas

Dallas, TX

1,325

0.00

02/13/93

First City, Texas-Houston, N.A.

Houston, TX

3,576

0.00

04/23/93

Missouri Bridge Bank, N.A.

Kansas City, MO

1,911

356

18.62

06/04/93

First National Bank of Vermont Bradford, VT

225

14.97

08/12/93

CrossLand Savings, FSB

7,269

740

10.18

$41,384

$2,512

6.07

Totals/Average

Brooklyn, NY

* The banks listed here are the failed banks or the resulting bridge bank from a previous resolution; however, it is the
acquirer that enters into the loss sharing transaction with the FDIC.
† Represents loss sharing agreements for two banks: Southeast Bank, N.A., and Southeast Bank of West Florida.
‡ Represents loss sharing agreements for two banks: Eastland Savings Bank and Eastland Bank.
Source: FDIC Division of Research and Statistics.

M A N A GI N G T H E C R I S I S

protected. One of the intentions of FDICIA was that uninsured depositors bear more of
the cost of bank failures. This result appears to have been achieved. Uninsured depositors did, however, receive some relief as the Omnibus Budget Reconciliation Act of 1993
included a national depositor preference provision giving them priority over general
creditors of the receivership.
Deposit Payoffs
Deposit payoffs were used when no acquirer could be found or if the FDIC or the RTC
did not receive a less costly bid for a P&A transaction. Generally, deposit payoffs
occurred in smaller bank failures when there was little interest in the banking franchise.
In a deposit payoff, no liabilities are assumed and no assets are purchased by another
institution. The FDIC or the RTC would pay depositors of the failed institution the
amount of their insured deposits either directly (known as a straight deposit payoff) or
through a healthy institution that acts as the FDIC or the RTC’s agent (called an insured
deposit transfer, or IDT). Depositors with uninsured funds and other general creditors

Chart I.1-2

Uninsured Depositor Treatment
1986–1995
100

Percentage of Failed Banks

90
80
70
60
50
40
30
20
10
0
1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Uninsured
Protected (%)

Uninsured
Not Protected (%)

100

Source: FDIC Division of Finance, Failed Bank Cost Analysis, 1986–1995.

E XE C U T I VE S U M M A R Y

of the failed institution were given receivership certificates entitling them to a share of
the net proceeds from the sale of the failed institution’s assets.12
In 1983, the FDIC introduced the insured deposit transfer. An IDT involves the
transfer of insured deposits and secured liabilities of the failed bank to a healthy institution
that agrees to act as the FDIC’s agent. The agent bank makes available to the depositors of
the failed bank a “transferred deposit”
account. The IDT saved the FDIC conChart I.1-3
siderable overhead expense while providing an opportunity for the agent bank to
FDIC: Bank Failures by Resolution Method
introduce their services to potential new
1980–1994
customers.13 Because this type of transacStraight Deposit Payoffs
tion reduced the disruption caused by a
120 7.4%
deposit payoff to insured depositors and
Open Bank Assistance
to the local community, it was considered
133 8.2%
more consumer-friendly than a straight
deposit payoff and was employed whenever practicable. At times, however, certain circumstances precluded its use, such
Insured Deposit Transfers
176 10.9%
as when no other bank was interested in
performing the “as agent” role, when perPurchase and Assumptions
haps too many deposits were tied to
1,188 73.5%
loans, or when the FDIC had to act so
Total Bank Failures = 1,617
quickly that there was no time to set up
such a transaction with another bank.
Sources: FDIC Division of Research and Statistics and FDIC annual
Of the 1,617 failing and failed instireports.
tutions handled by the FDIC between
1980 and 1994, deposit payoffs were
used 296 times, or 18.3 percent of the total. These transactions represented only 5.3
percent of the assets and 6.1 percent of the deposits of the banks handled by the FDIC
for this period. IDTs accounted for 176 of the 296 deposit payoffs, or 59.5 percent of
the total number of transactions. (See chart I.1-3.)
At the RTC, deposit payoffs were more common because many of its early conservatorships consisted of institutions that had been insolvent for some time, were located in declining real estate markets, and had little franchise value because of industry conditions. Of the
747 institutions resolved by the RTC, 158, or 21.2 percent, were handled through IDTs and
92, or 12.3 percent, involved straight deposit payoffs. (See chart I.1-4.)
12. The FDIC’s insurance limit is $100,000. Any amount over that limit, including interest, is uninsured. The
FDIC uses the term “insured depositor” to refer to any depositors whose total deposits are under the insurance limit. Similarly, the term “uninsured depositor” is used to refer to those depositors whose total deposits are over the
insurance limit. It is important to note that customers with uninsured deposits are paid up to the insurance limit,
and only that portion of their deposits over the insurance amount is uninsured.
13. FDIC, 1983 Annual Report, 12.

M A N A GI N G T H E C R I S I S

Chart I.1-4

RTC: Savings and Loan Failures
by Resolution Method
1989–1995
Branch Insured Deposit Transfers
34 4.6%
Insured Deposit Payoffs
92 12.3%

Insured Deposit Transfers
124 16.6%

In addition, in an effort to alleviate an
uninsured depositor’s liquidity problems
caused by the unexpected loss of their
funds, both the FDIC and the RTC issued
advance dividends.14 This type of transaction, originally known as a “modified payoff,” allowed the FDIC or the RTC to
provide depositors with at least a portion
of their uninsured funds more quickly.
Open Bank Assistance

Open bank assistance was a resolution
method in which the FDIC provided an
insured bank at risk of failure with financial help in the form of loans, contributions, deposits, asset purchases, or the
Total Savings and Loan Failures = 747
assumption of liabilities. Generally, the
majority of a failing institution’s assets
Sources: FDIC Division of Research and Statistics and FDIC annual
remained intact.15 While the term “open
reports.
bank assistance” gained national recognition with the Continental transaction in
1984, the FDIC had been authorized to provide OBA since 1950.16 OBA occurred
when a distressed financial institution remained open with the aid of the financial assistance from the government.17 Generally, the FDIC required new management, ensured
that the shareholders’ interest was diluted to a nominal amount, and called for a privatesector capital infusion. OBA also was used to facilitate the acquisition or merger of a
failing bank or thrift by a healthy institution. A major criticism of OBA has been that
shareholders of failing institutions have benefited from government assistance, even
though historically most of the OBA transactions required the shareholders of the failing
institutions to significantly dilute their ownership interests.
The FDIC has not used OBA transactions frequently. From 1950 to 1982, the
FDIC could grant OBA only if the institution’s continued existence was determined to
Branch Purchase and Assumptions
119 15.9%
Standard Purchase and Assumptions
378 50.6%

14. An advance dividend is a payment made to uninsured depositors immediately or soon after a bank fails, based
on the estimated value of the receivership’s assets.
15. The RTC was not permitted to use OBA.
16. For further information, see Chapter 5, Open Bank Assistance and Part II, Case Studies of Significant Resolutions, Chapter 4, Continental Illinois National Bank and Trust Company.
17. Several types of assistance to open banks include forms of cash and noncash assistance. To the FDIC, the term
“open bank assistance” refers specifically to a resolution method whereby the FDIC gives financial assistance to a
troubled bank or thrift to prevent its failure.

E XE C U T I VE S U M M A R Y

be “essential” to providing adequate banking services in the community. The FDIC’s
authority to provide OBA, however, changed over time. Authority was broadened in the
1980s and then restricted in the 1990s. From 1980 through 1994, the FDIC provided
OBA to 133 institutions out of the 1,617 total banks handled by the FDIC, or only
about 8.2 percent of the total. OBAs were, however, used for some of the larger failures
in the 1980s and represented approximately 27 percent of the assets of the banks handled by the FDIC during this period. Beginning with 1989, the FDIC moved away from
providing OBA and entered into only seven OBA transactions from 1989 to 1992. One
of the reasons for this was that FDICIA, passed in 1991, required the FDIC to establish
that OBA was the least costly resolution option to the insurance fund prior to providing
assistance to the failing institution. The FDIC could deviate from the least cost requirement only to avoid systemic risk to the banking system. Finally, under the Completion
Act, passed in 1993, insurance funds could not be used to benefit shareholders of the
failing institution. There have been no OBA transactions since 1992. (See chart I.1-3.)
Forbearance Programs
Other resolution techniques were developed in the 1980s that were used to stabilize certain regional and economic sector problem situations. The early 1980s were a period of
high and volatile interest rates, which particularly affected mutual savings banks (MSB)
because those institutions held large portfolios of long-term fixed-rate mortgages. By
1982, MSBs were losing $2 billion annually. In many instances, the market value of the
savings banks’ assets fell 25 to 30 percent below outstanding liabilities.18 The FDIC
faced the possibility of incurring significant losses for a problem that was believed to be
transitory—high interest rates.
Income Maintenance Agreements. One of the FDIC’s resolution strategies in the early
1980s was to force weaker savings banks to merge into healthier banks or thrifts by guaranteeing a market rate of return on the acquired assets through an income maintenance
agreement. The FDIC paid the acquirer the difference between the yield on acquired
earning assets and the average cost of funds for savings banks, thereby assuming the
interest rate risk. If interest rates declined to where the cost of funds was below the yield
on earning assets, the acquirer was required to pay the FDIC.
Between 1981 and 1983, income maintenance agreements were used to resolve 11
of the assisted mergers of FDIC insured mutual savings banks as detailed on table I.1-2.
These banks did not technically fail because they were merged into operating institutions. Depositors and general creditors, therefore, suffered no loss. In most cases, however, the failing bank’s senior management was requested to resign, and subordinated
note holders only received a partial return of their investment. Because there are no
stockholders in a mutual savings bank, the FDIC did not have to concern itself with the

18. FDIC, The First Fifty Years, 99.

M A N A GI N G T H E C R I S I S

Table I.1-2

Income Maintenance Agreements
($ in Millions)
Date
Bank Name

Location

Assets

Acquirer

Comments

11/4/81 Greenwich Savings

New York,
NY

$2,475

Metropolitan S.B. *
(Renamed CrossLand
in 1984)

Failed in
1992

12/4/81 Central S.B.

New York,
NY

910

12/18/81 Union Dime S.B.

New York,
NY

1,453

Buffalo S.B.
(Renamed Goldome
Bank for Savings in 1984)

Failed in
1991

1/15/82 Western NY S.B.

Buffalo, NY

1,025

Buffalo S.B.
(Renamed Goldome)

Failed in
1991

1,002

Marquette
National Bank

703

First Interstate
National Bank

2/20/82 Farmers & Mechanics S.B. Minneapolis,
MN

Harlem S.B.
(Renamed Apple Bank
for Savings in 1983)

3/11/82 Fidelity Mutual S.B.

Spokane,
WA

3/26/82 New York Bank
for Savings

New York,
NY

3,404

Buffalo S.B.
(Renamed Goldome)

Failed in
1991

4/2/82

Philadelphia,
PA

2,126

Philadelphia
Savings Fund Society
(Renamed Meritor S.B.)

Failed in
1992

Syracuse
Savings Bank

Failed in
1987

Dollar S.B.
(Renamed Dollar
Dry Dock Savings Bank)

Failed in
1992

Syracuse Savings Bank

Failed in
1987

Western Savings Fund
Society

10/15/82 Mechanics Savings Bank

Elmira, NY

2/9/83

New York,
NY

2,452

Dry Dock Savings Bank

10/1/83 Auburn Savings Bank

Totals

11 Institutions

* Savings Bank
Sources: FDIC annual reports, 1981 to 1993.

Auburn, NY

133

$15,738

E XE C U T I VE S U M M A R Y

interests of existing stockholders. While the cost savings of the program are difficult to
quantify, the income maintenance agreement program provided participating mutual
savings banks time to restructure their balance sheets and remain solvent until interest
rates became more favorable.
Net Worth Certificates. Another resolution strategy was the Net Worth Certificate
(NWC) Program. The program’s purpose was to buy time for savings banks to correct
rate sensitivity imbalances and restore capital to acceptable levels. Garn–St Germain
enabled insured institutions that met statutory requirements to apply for capital assistance in the form of net worth certificates.
Under the program, eligible institutions received promissory notes from the FDIC
representing a portion of current period losses in exchange for certificates that were to be
considered as part of the institution’s capital for reporting and supervisory purposes.
Although Garn–St Germain did not prescribe a formula based on specific capital levels,
the FDIC established a working formula to purchase certificates equal to between 50
percent and 70 percent of the institution’s net operating loss.
The NWC Program allowed solvent, well-managed institutions to survive until the
results of restructured balance sheets produced profitable operations or until unassisted
mergers with stronger institutions could be arranged. The effectiveness of the NWC
Program was largely the result of the drop in interest rates after 1981. In addition, the
FDIC was generally able to contain the risks associated with the continued operation of
banks having little or no equity. Most of the savings banks were free of serious creditquality problems, and the relatively small number of savings banks in the program
simplified supervision and helped control potentially risky behavior.
Of the 29 savings banks in the plan, 22 required no further assistance and eventually extinguished their net worth certificates. Seven savings banks required additional
financial help from the FDIC, four repaid all assistance, and three merged into healthy
institutions with additional monetary aid from the FDIC.19
Other Forbearance Programs. By the mid-1980s, many regional banks with a concentration of assets, mainly loans in the energy and agricultural sectors, began having serious credit problems and began failing. To save some of these banks, the FDIC developed
a resolution strategy of forbearance, which exempted certain distressed institutions that
had been operating in a safe and sound manner from capital requirements.
In 1986, the Capital Forbearance Program was established for banks that were weakened as a result of lending to the agricultural and energy sectors. Federal regulators issued
a joint policy allowing capital forbearance programs for agricultural banks and banks
with a concentration of energy credit. The program was directed at well-managed, economically sound institutions. Eligible banks had to have a capital ratio of at least 4 percent, and their weakened capital position had to be the result of external problems in the

19. FDIC, Office of Research and Statistics, “Open Bank Assistance: A Study of Government Assistance to Troubled Banks from the RFC to the Present” (May 1990), 12.

M A N A GI N G T H E C R I S I S

Table I.1-3

Results of the Capital Forbearance Programs*
Agricultural and Energy Sector Banks
Regulatory
Joint Policy

CEBA Loan Loss
Amortization

301

Assets ($ in Billions)

$13.0

$0.5

Avg. Size of Bank ($ in Millions)

$43.2

$15.2

236

Number of Banks in Program

Number of Banks that Survived†
Number of Banks that Failed

* Banks that participated in both programs are included only in the regulators’ program.
† Banks that left programs as independent institutions or were merged without assistance.
Source: FDIC Division of Research and Statistics.

economy and not mismanagement, excessive operating expenses, or excessive dividends.
Ultimately, 301 agricultural and energy sector institutions with assets of approximately
$13 billion participated in the Capital Forbearance Program; 236 of these banks survived
or merged without FDIC assistance, while 65 of these banks subsequently failed.
Congress’s passage of CEBA in 1987 provided the FDIC with another forbearance
program aimed at defusing the agriculture crisis. The Agricultural Loan Loss Amortization Program was Congress’s initiative to allow “fundamentally sound banks to weather
[the current] storm.”20 This program provided additional relief to agricultural lenders by
permitting small banks serving predominantly agricultural customers to defer accounting recognition of agriculture-related loan losses. The program allowed those banks to
amortize losses over a seven-year period. Only institutions with less than $100 million in
total assets with at least 25 percent of their total loans in qualified agricultural credits
were eligible for the program. Qualified institutions had to be considered economically
viable and fundamentally sound except for needing additional capital to carry the weak
agricultural credits.
These temporary forbearance programs were successful; overall, the capital ratio and
return on assets of the banks in the programs improved by year-end 1989, a trend that
mirrored improving economic conditions in the agricultural and energy markets. Of the
33 banks in this program, 29 survived while 4 failed. (See table I.1-3.)
There are many risks in offering forbearance, but carefully managed programs can
prevent institution failures and reduce costs to the insurance fund. Without proper over-

20. Congressional Record, 100th Congress, 2d session, March 26, 1987, S.3941.

E XE C U T I VE S U M M A R Y

sight, however, forbearance can create the opportunity for further deterioration and
result in increased resolution costs as operating losses accumulate. This is what occurred
in the savings and loan industry in the 1980s when forbearance was applied broadly to
the whole industry. This did not occur in the bank forbearance programs because a
smaller number of institutions were involved and, unlike the FSLIC, the FDIC had the
resources to more closely monitor and supervise the participants.
Other Resolution Strategies
The FDIC and the RTC employed other strategies to resolve institutions. Some of those
strategies included the use of bridge banks, conservatorships, and branch breakups.
Bridge Banks/Conservatorships. Beginning in 1987 with passage of CEBA, the bridge
bank structure became an important part of the FDIC’s bank resolution process for large
banks with complex financial structures in danger of failing. A bridge bank is a temporary banking structure that is controlled by the FDIC and designed to take over the
operations of a failing bank and maintain banking services for the customers. Initially,
the FDIC organizes bridge banks for up to two years, with the possibility of up to three
one-year extensions. As the name implies, the bridge bank structure is designed to
“bridge” the gap between the failure of a bank and the time when the FDIC can implement a satisfactory resolution of the failing bank. The temporary bridge structure provided the FDIC time to take control of a failed bank’s business, stabilize the situation,
and determine an appropriate permanent resolution. It also enabled the FDIC to gain
sufficient flexibility for reorganizing and marketing the bank.
The FDIC used the bridge bank powers sparingly because of its complexity and the
fact that smaller banks, which constituted the bulk of the failures, did not require an
interim bridge before resolution. Between 1987 and 1994, the FDIC used its bridge bank
powers 10 times; most of those instances, however, involved multiple, related bank failures. The 10 situations in which the FDIC used its bridge bank authority resulted in creation of 32 bridge banks into which the FDIC placed 114 individual banks. Those banks
had total assets of about $90 billion. During this period, bridge banks made up 10 percent of the total number of bank failures, but they represented 45 percent of the total
assets of failed banks. Table I.1-4 summarizes the FDIC’s use of its bridge bank authority.
Although the RTC did not have bridge bank authority, FIRREA did empower both
the RTC and FDIC with conservatorship authority. Whether a bridge bank or a conservatorship is established, they operate in a similar manner and have the same purpose.
Because of the circumstances, however, there are distinct differences in the way that the
two agencies used these resolution techniques. On its inception in 1989, the RTC
assumed responsibility for 262 failed savings and loan associations already in conservatorship, and resolution loss funding was an immediate problem. Unlike the FDIC’s use
of bridge banks as a temporary control measure, the RTC was forced to hold many conservatorships open indefinitely. Conservatorships allowed the RTC to take control of a
large number of institutions and to begin the process of liquidating their assets until

M A N A GI N G T H E C R I S I S

Table I.1-4

The FDIC’s Use of Bridge Bank Authority
1987–1994
($ in Thousands)
Bridge
Bank
Failure
Situations Date

Bridge Banks

Number
of Failed
Banks

Total
Assets

Total
Deposits

$386,302

$303,986

32,835,279

19,528,204

*582,350

*164,867

10/31/87

1 - Capital Bank & Trust Co.

07/29/88

2 - First RepublicBanks (Texas)

08/02/88

3 - First RepublicBank (Delaware)

03/28/89

4 - MCorp

15,748,537

10,578,138

07/20/89

5 - Texas American Bancshares

*4,733,686

*4,150,130

12/15/89

6 - First American Bank & Trust

1,669,743

1,718,569

01/06/91

7 - Bank of New England, N.A.

*14,036,401

*7,737,298

01/06/91

8 - Connecticut Bank & Trust Co., N.A.

*6,976,142

*6,047,915

01/06/91

9 - Maine National Bank

*998,323

*779,566

10/30/92

10 - First City, Texas-Alice

127,990

119,187

10/30/92

11 - First City, Texas-Aransas Pass

54,406

47,806

10/30/92

12 - First City, Texas-Austin, N.A.

346,981

318,608

10/30/92

13 - First City, Texas-Beaumont, N.A.

531,489

489,891

10/30/92

14 - First City, Texas-Bryan, N.A.

340,398

315,788

10/30/92

15 - First City, Texas-Corpus Christi

474,108

405,792

10/30/92

16 - First City, Texas-Dallas

1,324,843

1,224,135

10/30/92

17 - First City, Texas-El Paso, N.A.

397,859

367,305

10/30/92

18 - First City, Texas-Graham, N.A.

94,446

85,667

10/30/92

19 - First City, Texas-Houston, N.A.

3,575,886

2,240,292

10/30/92

20 - First City, Texas-Kountze

50,706

46,481

10/30/92

21 - First City, Texas-Lake Jackson

102,875

95,416

10/30/92

22 - First City, Texas-Lufkin, N.A.

156,766

146,314

10/30/92

23 - First City, Texas-Madisonville, N.A.

119,821

111,783

10/30/92

24 - First City, Texas-Midland, N.A.

312,987

289,021

10/30/92

25 - First City, Texas-Orange, N.A.

128,799

119,544

10/30/92

26 - First City, Texas-San Angelo, N.A.

138,948

127,802

E XE C U T I VE S U M M A R Y

Table I.1-4

The FDIC’s Use of Bridge Bank Authority
1987–1994
($ in Thousands)

Continued
Bridge
Bank
Failure
Situations Date

Bridge Banks

Number
of Failed
Banks

Total
Assets

Total
Deposits

10/30/92

27 - First City, Texas-San Antonio, N.A.

$262,538

$244,960

10/30/92

28 - First City, Texas-Sour Lake

54,145

49,701

10/30/92

29 - First City, Texas-Tyler, N.A.

254,063

225,916

11/13/92

30 - Missouri Bridge Bank, N.A.

2,829,368

2,715,939

01/29/93

31 - The First National Bank of Vermont

224,689

247,662

07/07/94

32 - Meriden Trust & Safe Deposit Co.

6,565

Totals

114

$89,877,439 $61,043,683

Data for Total Assets and Total Deposits are as of resolution.
Data marked with an asterisk (*) are from the quarter before resolution.
Source: FDIC Division of Research and Statistics.

appropriated funds to finally resolve them became available. The conservatorship function gave the RTC additional time to lower the thrift’s high cost of funds and stabilize it
while reducing the amount of assets.
The RTC also used conservatorships to a much greater extent than the FDIC used
the bridge bank option. From its inception to June 30, 1995, the RTC managed a total
of 706 institutions through the conservatorship program, with the number of conservatorships peaking at 353 in 1990. By the end of June 1995, the RTC had resolved all 706
institutions in the program. The FDIC operated only one conservatorship.
The bridge bank and conservatorship resolution methods provided the FDIC and
the RTC broad powers to operate and manage large, complex failing financial institutions. Both are temporary measures designed to facilitate organization and stability. The
management goal of the newly organized institution was to preserve any existing franchise value of the failing institution, reduce the ultimate cost to the insurance funds, and
lessen any disruption to the local community.
Branch Breakups. In certain large failing institutions, there were few, if any, acquirers
willing to assume the deposits of a multi-branch bank or thrift. This became a major
concern to the RTC in the early 1990s as the size of many of the conservatorships and
the general health of the banking and thrift industries limited the amount of competition during the resolution process. In response, the RTC initiated the branch breakup

M A N A GI N G T H E C R I S I S

transaction to enhance the franchise value by increasing bidder participation, competition, and flexibility for the resolution process. The FDIC also used the strategy of selling
portions of a failed institution to more than one buyer.
Branch breakup transactions became a successful modification to resolution procedures.
Of the 747 resolutions handled by the RTC, 153 of those, or 21 percent, involved branch
breakup transactions that resulted in more bidders and higher premiums paid to the RTC.
Charts I.1-3 and I.1-4 (presented earlier in this chapter) illustrate the distribution of
the resolution methods employed by the FDIC and the RTC during the crisis period.

Methods for Handling Assets
As the number and size of bank failures increased in the early 1980s, the FDIC had to
develop more efficient ways of liquidating failed bank assets. The FDIC historically had
utilized its internal staff to resolve the assets on an individual basis. In the early and mid1980s, although the FDIC continued to maintain a core group of employees to work
assets, it began a gradual shift to asset marketing and the utilization of private sector
contractors as leverage against the increasing volume of assets from failed institutions.
Unlike the FDIC that saw a more gradual build up of failures to resolve, the RTC
was charged with the disposition of hundreds of failed institutions and billions of dollars
of assets from its inception in 1989. The RTC placed less emphasis on passing assets at
resolution than the FDIC did. It focused instead on selling the more marketable failed
thrift assets during conservatorship and retaining the more problematic assets for disposition during receivership.
Throughout the crisis, both agencies employed methods of asset disposition such as
regional and national auctions, sealed bid, and bulk sales on a large scale. But, as the
size, complexity, and volume of the portfolios grew, each agency had to expand their
methodologies and experiment with new techniques. For example, the offering of representations and warranties and seller financing eased bidder concerns about buying large,
complex pools of loans and real estate.
The FDIC and the RTC developed national satellite auctions, contracted with
national firms to manage and market complex real estate assets, and created an effective
securitization program. By the 1990s, the FDIC and the RTC had developed their early
disposition methods into highly sophisticated procedures and strategies. As a result of
those efforts, by the end of 1997 the FDIC held less than $5 billion of the total $705
billion in assets from FDIC and RTC managed bank and thrift failures.
Volume of Assets
From 1980 through 1994, the FDIC resolved 1,617 failed or failing banks that had
$302.6 billion in assets. About $230.6 billion, or 76 percent, of those assets were sold to

E XE C U T I VE S U M M A R Y

Chart I.1-5

Failed Bank and S&L Assets
1980–1994
($ in Billions)
$160

Failed Bank and S&L Assets

$140
$120
$100
$80
$60
$40
$20
$0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
219.03
5.57 17.73 15.38 8.72 102.14 0.73
141.75130.25 79.03 44.88 6.11 0.13 402.15
4.97 11.55 7.27 36.53 8.40 6.82 9.24 52.68 29.40 15.73 62.47 44.55 3.53 1.41 302.63

FSLIC*
RTC**
FDIC***

1.69 30.85 26.44 9.78

Total

9.77 35.82 37.99 17.05 42.10 26.13 22.20 17.96 154.82171.88145.98141.50 89.43 9.64 1.54 923.81

8.08

* FSLIC assets as reported at resolution.
** RTC assets as reported at time of conservatorship/takeover.
*** FDIC assets as reported at resolution.
Figures include open bank assistance transactions.
Sources: FDIC Division of Research and Statistics, FDIC annual report, RTC Statistical Abstract, and FSLIC
annual reports.

the acquiring bank at resolution. From 1989 to 1994, the RTC took over 745 thrifts
with total assets of $402.1 billion. In 1995, the RTC’s last year, the RTC took over
another two thrifts with $426 million in assets. Of the total $402.6 billion in assets,
$157.7 billion or 39 percent were collected or sold during conservatorship, $75.3 billion
or 19 percent were sold to the acquirer at resolution, and $169.6 billion or 42 percent
were retained for disposition during receivership.
From 1980 to 1989, the FSLIC had also acquired a significant volume of assets
when it resolved 550 thrifts with total assets of $219 billion. When the FSLIC was dissolved by FIRREA in August 1989, $11 billion in thrift receivership assets were transferred to the FDIC. Altogether, from 1980 to 1994 these three agencies resolved 2,912
banks and thrifts with assets of approximately $924 billion. (See chart I.1-5).

M A N A GI N G T H E C R I S I S

Of the approximately $705 billion in total assets handled by the FDIC and the
RTC, about $305 billion were sold through the resolution process. The remaining $400
billion in assets was disposed of through a variety of methods including, but not limited
to, auctions and sealed bids, securitizations, equity partnerships, the use of asset management contractors, and especially through the significant efforts of the FDIC and
RTC in-house staff.
Auctions and Sealed Bids
Record high interest rates in the late 1970s and early 1980s caused a rapid deterioration
in the value of the FDIC’s receivership mortgage portfolios. The rise in failing bank
activity from the 1980s through the early 1990s caused a corresponding increase in the
FDIC’s receivership asset holdings. Traditional FDIC asset disposition methods of single
asset sales could not keep pace with the volume of assets being received, and by 1976,
the FDIC began packaging and selling assets on a limited basis. As the financial crisis
developed, the FDIC and the RTC relied heavily on auctions and sealed bids to move
large numbers of assets into the private sector.21
Loan Sales. In 1984, the FDIC initiated a formal loan sales program to accelerate
the disposition of assets acquired from failed banks. The FDIC’s asset marketing efforts
at that time were directed toward performing loans in pools based on size, asset quality,
asset type, and geographic location. As the workload increased, emphasis was placed on
the sale of nonperforming loans, especially those with small individual balances (generally under $10,000). By accelerating the disposition of the small loans, asset specialists
could focus on larger loans with higher potential recoveries. From 1986 to 1994, the
FDIC sold more than 866,000 loans with a total book value of more than $20 billion.
The FDIC used in-house staff to evaluate, package, and market loan portfolios. The
RTC, in contrast, had a unique mission, a relatively short life, and was a taxpayerfunded agency. As such, the RTC was directed by FIRREA to use the private sector
whenever it was deemed to be cost-effective. By 1990, the RTC predominantly contracted with private-sector firms to perform all phases of selling those loan portfolios,
which included evaluating, packaging, and marketing the portfolios. Using experienced
private-sector firms also relieved the RTC of the necessity to hire and train thousands of
employees.
One similarity the agencies shared was that both the FDIC and the RTC stratified
loan portfolios into pools based on such criteria as geographic area, asset type, asset quality, and asset maturity. Both agencies provided representations and warranties although
the FDIC’s were more limited than the RTC’s.
The RTC adopted the use of seller financing as an additional tool for portfolio sales.
Seller financing developed because most of the RTC’s assets were secured by real estate mortgages and their disposition was hampered by a nationwide decline in real estate markets.
21. For further information, see Chapter 13, Auctions and Sealed Bids.

E XE C U T I VE S U M M A R Y

Until the 1980s, FDIC auctions had been used to sell real estate and assets such as
equipment and automobiles. In the late 1980s, the FDIC expanded the scope of its auctions to include pools of performing and nonperforming loans, as well as loans previously charged off by failed institutions. In August 1987, the FDIC conducted its first
open outcry loan auction that offered pools of loans that had been charged off by banks
prior to their failure; it conducted six more through June 1995. Although the FDIC
experimented with loan auctions, it primarily continued to sell its loans through the
sealed bid process.
In part because of its relatively short lifespan, the RTC adopted an auction policy
that was more aggressive than the FDIC and conducted 12 regional loan auctions from
June 1991 to December 1992. As an outgrowth of this, the RTC established the
National Loan Auction Program in September 1992 to provide a common forum for the
RTC field offices to market their hard-to-sell loans. Altogether, the RTC conducted
eight national loan auctions, with the last one taking place in December 1995.
The RTC’s loan auction experience showed that (1) loan auctions were cost-effective when the asset inventory was above a certain level; (2) small regional auctions were
as effective as large-scale national auctions; (3) reserve pricing was critical for the sale of
difficult, more complex products as a means to guide the market value; and (4) reserve
pricing was not needed for performing loans because the bidders could easily establish a
market price for those assets.
Real Estate Sales. The FDIC began holding real estate auctions periodically in the
late 1980s to dispose of large inventories of smaller, distressed, and labor-intensive real
estate properties, such as condominiums and vacant lots. Because of this, real estate auctions connoted the image of a “fire sale” in which the seller was willing to accept heavily
discounted prices to liquidate undesirable real estate. Concern regarding a fire sale mentality, or the “dumping” of assets, was prevalent when the RTC was created. As a result,
FIRREA included language requiring the RTC to sell real estate for no less than 95 percent of market value, which was defined as appraised value. Consequently, in the early
stages of the RTC’s existence, real estate auctions were prohibited for fear that they
would aggravate already distressed markets and damage the financial standing of banks
and thrifts that were heavily invested in real estate markets.
By the late 1980s and early 1990s, it became more acceptable to purchase all types
of real estate at auctions, not just distressed properties. This led to the FDIC and the
RTC initiating a number of large-scale national auctions as they saw their inventories
grow with larger real estate properties. The FDIC coordinated the first nationwide auction of large real estate holdings in March 1989 and held the first of its three national
satellite real estate auctions for 178 commercial properties from 23 states in December
1991. As inventory levels fell and asset sizes no longer justified nationwide initiatives,
the FDIC suspended the use of national auctions after 1993 and instead relied principally on smaller, regional sales approaches.
The RTC’s real estate inventory was more than $18 billion by 1990. Congress raised
concerns about the slow pace of asset sales, the carrying costs of inventory, difficulties in

M A N A GI N G T H E C R I S I S

managing large numbers of assets, and the continuing decline in real estate prices.
FIRREA was amended and, in March 1991, the RTC responded to the mandates of
FIRREA by approving a new pricing policy for all real estate sales and authorized the use
of auctions to sell real estate. Through its national sales office, the RTC planned, coordinated, and executed real estate sales, including the sale of many real estate pools worth
more than $100 million.
An alternative to auctions was the sealed bid asset disposition. The FDIC had historically used the sealed bid method for owned real estate sales, believing it to be quicker
and more profitable than auctions. Unlike bulk sales or auctions, sealed bid events were
almost always single asset sales until the early 1990s. The RTC also made regular use of
sealed bids and operated under procedures similar to those of the FDIC. Generally,
sealed bid sales satisfied agency requirements for broad marketing and competitive bidding. The process also facilitated a faster sale, which was especially helpful for properties
that were experiencing significant negative cash flows or holding costs.
Asset Management Contractors
During the banking crisis, the FDIC used 14 asset management contracts to liquidate
assets with a book value of over $33 billion, which was more than 45 percent of the
post-resolution assets the FDIC retained for liquidation. Based on the experiences of the
FDIC and the congressional goal of using private-sector resources whenever possible,
the RTC started operations with the intent to fully use asset management and disposition contractors to complete its mission. The RTC issued 199 Standard Asset Management and Disposition Agreements (SAMDA) to 91 contractors, from 1991 to 1993,
covering assets with a book value of $48.5 billion.22
The FDIC first began using contractors to manage and dispose of distressed assets
in 1984 with the resolution of Continental Illinois National Bank and Trust Company.
As part of the Continental OBA transaction, the FDIC acquired problem assets with an
adjusted book value of $3.5 billion. Continental established a special 250-employee
unit, known as the FDIC Asset Administration (FAA) unit, within the bank to service
those assets. Except for having indemnification authority, the FAA had full delegated
authority to manage and dispose of problem assets. The FDIC reimbursed the FAA on a
“cost-plus” basis, which meant that the FAA received the cost of its expenses plus incentive compensation based on a tiered scale of net collections.
The next large failure where asset management contractors were necessary occurred
in Oklahoma City, Oklahoma, in 1986. Asset management contractors were not used
again, though, until 1988 when the FDIC began receiving a torrent of failed bank assets.
It began issuing contracts designed for asset pools with a book value of greater than $1
billion called Asset Liquidation Agreements (ALA). The FDIC issued 10 contracts for

22. For additional information, see Chapter 14, Asset Management Contracting.

E XE C U T I VE S U M M A R Y

large banks that failed between 1988 and 1992. The average duration of an ALA contract
was four years and five months. Like the Continental contract, all of these large bank
contracts had a cost-plus feature where the FDIC reimbursed the contractor for the cost
of all operating expenses, including all asset-related expenses, overhead, salaries, and
employee benefits and, in addition, paid the contractor an incentive fee.
The process used by the FDIC regarding outside contractors evolved over time. The
earlier contracts were negotiated between the FDIC and an asset management organization affiliated with the bank acquiring the deposit franchise of the failed bank. Later,
ALAs evolved into competitively bid contracts between the FDIC and private sector
contractors who did not have affiliations with the acquiring bank. In the first three ALA
contracts, the bank that acquired the deposit franchise also owned and held title to the
assets, and the FDIC basically covered the losses to the acquiring bank by paying the difference between each asset’s book value and the proceeds obtained on its disposition.
With the fourth and subsequent ALA contracts, the assets were owned by the FDIC.
That led to a reduced funding cost as the FDIC had cheaper sources of funds than the
acquirer did. As additional ALA contracts were established, the FDIC was able to
change portions of the ALA structure to improve the model from the experience it
gained from previous contracts. Primarily, the changes that were made to the standard
ALA contract refined the way incentive fees were calculated to increase the quality of the
contractor’s performance.
The FDIC provided between 5 and 10 employees to oversee each ALA contract onsite at the contractor’s facilities. Under delegated authority, the contractor had day-today control of the management of the assets, and an oversight committee composed of
two senior FDIC employees and one contractor employee generally had unlimited delegated authority to jointly approve all actions related to larger asset disposition. The oversight committee approved the asset management and disposition procedures prepared
by the contractor, the contractor’s annual audit plan, budget, business plans, staffing
levels, and salary structure, and monitored the contractor’s expenses, collections, and
goal achievement.
Meanwhile, the RTC had to determine how it would manage its inherited portfolio
of distressed thrift assets. It designed contracts for managing and disposing of real estate
and nonperforming loan portfolios that were greater than $50 million. The RTC issued
the first of its 199 SAMDAs in August 1990. The average term of a SAMDA contract
was three years and three months. The contract mandated that the contractors competitively bid and subcontract 12 specified asset management and disposition activities to
other firms; those expenses were reimbursed to the SAMDA contractor by the RTC.
The smaller size of the SAMDA contract and the subcontracting requirements of the
contract allowed the RTC to meet its goal of using more of minority- and womenowned businesses firms.23
23. FIRREA in 1989 and RTCRRIA in 1991 mandated that the RTC promote the use of minority- and womenowned businesses (MWOB) as contractors.

M A N A GI N G T H E C R I S I S

The total compensation structure of the SAMDAs consisted of three components: a
management fee, a disposition fee, and an incentive fee. The RTC competitively bid the
earlier SAMDA contracts to private-sector firms that would submit their qualifications
and bids for the management fee and disposition fee. The management fee was paid
monthly and was based on the remaining value of the assets under contract. When the
contractor disposed of an asset, a disposition fee was earned. Further incentive fees could
be earned if the asset was disposed of within a specified time period. Disposition fees
were subject to a holdback provision designed to motivate contractors from having assets
with high carrying costs remaining on the contract’s expiration. Because of a change in
the RTC’s sales policy toward the promotion of portfolio sales coordinated by RTC staff,
the Standard Asset Management Amendment (SAMA) provision was introduced in January 1992 that amended most of the existing contracts by eliminating the collection of
the disposition fee by the contractors.
At about the same time, in 1992, that the RTC was adding SAMAs to their contracts, the FDIC developed another type of asset management and disposition agreement,
the Regional Asset Liquidation Agreement (RALA). Four RALA contracts, each of which
contained asset pools of less than $500 million in book value, were issued to private-sector contractors from November 1992 to June 1993. These four contracts covered assets
totaling $1.2 billion in book value with an average term of three years and one month.
The RALA contract contained provisions for the payment of a management fee, a disposition fee, and an incentive fee and, most importantly, reimbursed the contractor only for
defined asset-related reimbursable expenses, which was effective in controlling costs.
The RALA management fee was based on the estimated gross collections to be
received from the assets under management. Unlike the SAMDAs where the RTC
allowed contractors to bid the management fee, the RALAs had a fixed management fee
rate that was applied to the asset portfolio’s estimated gross collection value. The disposition fee schedule, however, could be altered as part of the bidding process; this schedule was based on projected recoveries to be achieved from the entire asset portfolio. The
FDIC’s estimate of the portfolio’s gross collection value also was subject to adjustments
from bids. The attainment of specific asset disposition goals within defined time periods
served as the basis for the incentive fee. On average, contractors earned 43 percent of
their revenue from management fees, 17 percent from disposition fees, and 40 percent
from incentive fees. Competition from the bidding process resulted in lower costs than
expected.
Table I.1-6 summarizes the financial performance of each program.
Each of the three contracting programs had its own mix of asset types, unique contractual requirements, and distinct operational environment, making the ability to draw
direct comparisons among the programs impossible. Some trends are, however, worth
noting as each agency revised previous agreements. With respect to compensation,
although cost-plus was a feature of the earliest agreements, the agencies generally did not
use that compensation method in later contracts, believing that costs could be

E XE C U T I VE S U M M A R Y

Table I.1-6

Summary of Contractor Financial Performance
Inception Through December 31, 1996
($ in Millions)
ALAs

RALAs

SAMDAs

Totals

84,610

2,455

100,344

187,409

Book Value of Assets in Program:
Performing Loans
Nonperforming Loans
Owned Real Estate
Other Assets
Total

$4,091
19,900
4,800
3,200
$31,991

$440
760
0
10
$1,210

$0
26,937
19,031
2,509
$48,477

$4,531
47,597
23,831
5,719
$81,678

Book Value Reductions

$30,484

$1,156

$46,425

$78,065

Gross Collections
Expenses:
Management Fees
Disposition/Incentive Fees
Reimbursable Expenses
Total Expenses
Net Collections
NPV of Net Collections*

$22,189

$794

$23,293†

$46,276

0
532
2,914
$3,446
$18,743
$16,432

17
19
15
$51
$743
$692

400
300
3,739
$4,439
$18,854†
$17,369†

417
851
6,668
$7,936
$38,340
$34,493

72.8
2.4
13.1
15.5
61.5
53.9

68.7
4.5
1.9
6.4
64.3
59.9

50.2
3.0
16.1
19.1
40.6†
37.4†

59.3
2.7
14.4
17.1
49.1
44.2

Number of Assets

Ratios (%):
Gross Collections/Book Value Reductions
Total Fees/Gross Collections
Reimbursed Expenses/Gross Collections
Total Expenses/Gross Collections
Net Collections/Book Value Reductions
NPV of Net Collections/Book Value
Reductions
*

The net present value calculations (NPV) used the average one-year U. S. Treasury constant maturity rate during the term
of the contracts and assumed that net collections were received evenly during the term of the contract.
†
Collections exclude all loan payments made prior to 1993. In addition, collections for all assets withdrawn for sale by the
RTC were imputed at the lesser of 90 percent of the asset’s estimated recovery value (ERV) or its derived investment
value (DIV).
Source: ALA and RALA data are from the FDIC Division of Resolutions and Receiverships financial performance report dated
June 30, 1996. SAMDA data are from the RTC Asset Management System as of December 31, 1996.

M A N A GI N G T H E C R I S I S

controlled more effectively in other ways. Also, in later agreements, disposition and
incentive fees were designed to generate a greater proportion of a contractor’s income
than in earlier contracts. In addition to compensation methods, other aspects changed as
well. The manner in which the contracts were bid changed from negotiated contracts
with the acquiring bank to competitive bidding among firms having asset management
and disposition expertise.
In summary, neither the FDIC nor the RTC could have managed the volume of
assets that came under their custodianship without the use of asset management and disposition contractors. The FDIC and the RTC did not have sufficient staff to manage the
huge volume of assets in-house, nor did they have the time required to hire and train
them. Through the agreements, the contractors managed and disposed of more than
187,000 assets having a book value totaling $78 billion. Notably, some of these assets
were the most complex assets within the FDIC and the RTC inventories. When a manageable level of distressed assets was reached, the contracts either expired under their
terms or were terminated, and the agencies moved the remaining assets back in-house to
be managed by FDIC and RTC personnel.
Affordable Housing Programs
The RTC and the FDIC affordable housing programs were considered an area in which
the nation could glean some social benefit from the financial crisis. The programs’ mission was to provide an opportunity for very low- to moderate-income households to
realize their dream of home ownership or to improve their standard of living at affordable rent levels. During its approximately five years of operation, the RTC provided
109,141 affordable housing units, worth more than $2 billion, to very low-, low-, and
moderate-income households, as well as to nonprofit organizations and public agencies.24 In total, the RTC sold 81,156 units of multi-family properties and 27,985 units
of single-family properties to lower-income families or sold the properties for their benefit.
The RTC developed many strategies for marketing affordable housing. The RTC
provided seller financing for 25 percent of single-family and 33 percent of multi-family
properties that it sold. Retaining grass-roots technical advisors to assist the buyers and
providing repair funding for the properties were two other key aspects of the program.
Because of the large inventory of assets with nominal value, the RTC also developed
a policy to donate such properties to a nonprofit organization or public agency at no
cost, provided that the assets would be conveyed for the public good, such as for lowincome, single- and multi-family housing, homeless shelters, and day care facilities for
children of low- and moderate-income families. More than 1,000 single-family and 73
multi-family assets were donated.

24. For further information, see Chapter 15, Affordable Housing Programs.

E XE C U T I VE S U M M A R Y

Although modeled after the RTC program, the FDIC AHP was much smaller in
scope. The FDIC provided affordable housing to 2,933 low-income families. A primary
difference between the FDIC and the RTC affordable housing programs was their
source of funding. Because the FDIC does not use public funds for its operations (its
funds come from the premiums it charges to banks for insurance), it required a separate
federal appropriation for an affordable housing program. It first received funding for the
AHP in fiscal year 1993. The FDIC’s program subsidies were operative only insofar as
congressionally appropriated funds were available. In contrast, the RTC’s program operated with general funds available to the RTC and was not dependent on a specific
appropriation.
During the first and second years of the FDIC AHP, the appropriated funds were
not sufficient to discount all of the properties that would have been eligible for the program. The annual appropriation legislation allowed the FDIC to modify, at its sole discretion, the statutory requirements so that the available money could be put to the most
efficient and beneficial use. That discretion enabled the FDIC to concentrate its efforts
on single-family properties where the funding requirements were more modest. Also,
discretionary language allowed the FDIC to be more creative in the way it provided discounts, which led to the FDIC’s providing credits or grants on properties that could be
used toward closing costs or down payments in lieu of straight discounts. The AHP
placed 2,400 single-family units with low- to moderate-income families and sold 18
multi-family properties, which included 533 units.
In response to a requirement of the Completion Act, the FDIC and the RTC
ratified a plan to merge the affordable housing programs in April 1994. The plan was
beneficial as it allowed the FDIC and the RTC to market certain FDIC-owned multifamily properties (to which the FDIC had given a lower priority due to funding restrictions) under the RTC direct sale program.
The FDIC’s public funding continued from 1993 for a three-year period on a very
limited basis, but it was eliminated at the end of fiscal 1995. Because of a stipulation in
FDICIA, the FDIC has to continue to maintain a non-subsidized affordable housing
program.
Although the RTC and the FDIC accomplished their goal of providing affordable
housing to lower-income families, taxpayer funds were used to subsidize the program.
While the FDIC spent the $15.7 million in appropriated funds to run its affordable
housing program, the RTC’s true costs will never be known because it did not keep an
accounting of Affordable Housing Disposition Program (AHDP) costs separate from its
other expenses. It is estimated that, on a conservative basis, the RTC’s additional asset
disposition costs due to the AHDP were in the range of $135 million.
In summary, although the volume of assets handled within the affordable housing
programs were relatively minor compared to the total assets sold by both corporations
(less than one-half of one percent of total assets liquidated), the programs were viewed as
significant. Their most important contribution was that they provided many lowerincome families the opportunity to live in decent, affordable housing. Even though

M A N A GI N G T H E C R I S I S

there was a monetary cost associated with these programs, the short- and long-term benefits for the participants were significant.
Securitizations
The RTC and, to a much lesser extent, the FDIC successfully used the vehicle of securitization to dispose of a sizeable portion of their large performing mortgage loan portfolios.25 In August 1990, the mortgage loan inventory of the RTC was estimated to be
more than $34 billion. After a disappointing performance in establishing a bulk sales
program for such loans, the RTC explored new ways to successfully liquidate its loan
portfolio. The mortgage-backed securities market was already well established by two
government-sponsored entities, the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These entities
purchased loans with specific characteristics from mortgage originators and packaged
such loans into securities. Although the RTC was able to liquidate a portion of its mortgages in Fannie Mae and Freddie Mac swaps, the majority of its mortgages did not comply with the standards set by those agencies.
Because the size of its nonconforming loan portfolio was so large, the RTC instituted its own private securitization program in December 1990.26 The loans in this program had characteristics that detracted from their marketability, such as documentation
inaccuracies, servicing problems, and late payments. Although the RTC securitization
program initially included residential mortgage loans, it was expanded to include other
types of loans that previously had not been securitized, such as commercial mortgages,
multi-family properties, and consumer loans. (See table I.1-7.)
The RTC originally wanted their securitizations to have a full faith and credit guarantee of the United States government to maximize the number of investors for the
offerings. With a direct government guarantee, RTC securities would have had a zerorisk weight similar to the risk weight of Government National Mortgage Association
(Ginnie Mae) securities. The RTC Oversight Board did not, however, support a full
faith and credit guarantee. The RTC was a temporary federal agency, and the government would retain all of the risk. The U.S. Department of the Treasury also was concerned that issuing a new security with such a guarantee would compete with
contemporary Treasury issues. As a result, the RTC did not use a government guarantee
to enhance the credit of RTC securities. Instead, the RTC decided to use cash reserves
and other methods to provide credit support. Using these methods, it issued publicly

25. Securitization is the process by which assets with generally predictable cash flows and similar features are packaged into interest-bearing securities with marketable investment characteristics. Securitized assets have been created
using diverse types of collateral, including home mortgages, commercial mortgages, mobile home loans, leases, and
installment contracts on personal property.
26. For additional information, see Chapter 16, Securitizations.

E XE C U T I VE S U M M A R Y

Table I.1-7

RTC & FDIC Securitizations
As of June 30, 1997
($ in Millions)
Bond Issues
Type and
Number of
Transactions
Single-Family
(41)

Original

Number of Loans

As of
As of
June 30, Percent
June 30, Percent
1997
Decrease Original 1997 Decrease

Credit Reserves
As of
June 30, Percent
Original
1997 Decrease

$24,351.50

$7,774.20

68.1

399,946

168,044

58.0

Multi-Family
(11)

4,472.20

2,158.40

51.7

8,385

3,198

61.9

1,283.10

732.50

42.9

Commercial
(18)

13,931.50

5,157.10

63.0

33,870

15,850

53.2

3,596.00

2,840.20

21.0

Mobile Home
(3)

615.90

90.60

85.3

39,987

16,377

59.0

103.70

69.40

33.2

Home Equity
(1)

311.49

0.00 100.0

17,600

0.00 100.0

39.40

Totals (74)

$43,682.60 $15,180.30

65.2% 499,788 203,469

$3,253.60 $2,124.90

0.00 100.0

59.4% $8,275.80 $5,767.00

Source: FDIC Division of Resolutions and Receiverships.

rated mortgage-backed securities for which the senior securities were rated in the two
highest rating categories by at least two national credit rating agencies.
The RTC is credited with developing the market for securities backed by “non-traditional” assets, most notably commercial mortgage loans. (As a point of reference, the
securitized commercial mortgage loan market has grown from $6 billion in 1990 to
more than $80 billion in 1997.) Commercial securitizations were an efficient way for
the RTC to transfer large portfolios of real estate into the private sector by providing a
consistent marketing approach to sell these assets at competitive market prices.
The FDIC securitizations, although based on the RTC’s program, were different in
one major respect: the FDIC provided a limited guarantee as a mechanism for credit
enhancement for which in return it would receive the excess interest after payment of
the securities’ principal and interest. The FDIC completed its first securitization transaction in August 1994 for $762 million of performing commercial real estate mortgage
loans from 197 failed institutions. A second securitization followed in December 1996
for $723 million in commercial mortgage loans from 180 failed institutions. Both
issuances were considered successful.
From 1991 through December 1996, 72 RTC and 2 FDIC securitization transactions were consummated, backed by more than $43.7 billion in book value of almost

34.7

30.3%

M A N A GI N G T H E C R I S I S

500,000 conservatorship and receivership mortgage loans. Of the RTC’s asset portfolio,
more than $42 billion, or more than 10 percent, of its total assets were resolved through
securitizations. The RTC’s securitization program was considered particularly successful
not only because of the amount of assets that were liquidated through it, but also
because of the innovative methods the RTC used, given its large portfolio of nonconforming loans, to forge new markets through which it accomplished its disposition
goals. Although the RTC used securitizations more than the FDIC, both agencies found
the approach to be effective when liquidating their large inventory of mortgage loans.
Furthermore, outside investors have found worth in these securities, which are actively
traded in secondary markets all over the world.
Equity Partnerships
One of the more innovative methods the RTC used for asset disposition was the equity
partnership. In an RTC equity partnership, the RTC sold nonperforming assets
acquired from failed thrifts to a joint venture between a private sector firm and the RTC.
The private investor acted as general partner and controlled the management and disposition of the partnership’s assets. The RTC’s ongoing role was limited and generally passive, restricted to having an “equity” interest in the assets that it had sold. The RTC
created equity partnerships in an effort to obtain greater present value recoveries from
troubled assets by capturing the expertise and efficiencies of the private sector and
reserving some upside potential from the recovery of depressed markets.27
Although the concept of having the RTC hold a residual interest in sold assets was
introduced in its first strategic plan in 1989, the RTC did not create an equity partnership until the fall of 1992. By that time, the RTC had tried several different approaches
to dispose of nonperforming assets, most notably using private asset management contractors to manage and dispose of assets both individually and by multi-asset sealed bid
sales. Each of these approaches had benefits and drawbacks. Assets disposed of through
the contracting program appeared to have acceptable recoveries, but administering the
program was burdensome and the pace of asset disposition slow. The RTC’s multi-asset
sales conveyed large volumes of nonperforming loans in a timely manner, but anecdotal
evidence suggested that the purchasers were able to obtain high returns by quickly
restructuring or settling the loans. The partnership structure provided a vehicle for
obtaining the desired features of both programs.
The RTC created 72 partnerships with a total asset book value of about $21.4 billion. Seven different partnership structures were developed, each designed for specific
asset types and investor markets. The RTC contributed asset pools as its equity capital
and arranged for financing of the partnership, providing a leveraged return to the investor. The general partner invested both equity capital and asset management services.

27. For additional information, see, Chapter 17, Partnership Programs.

E XE C U T I VE S U M M A R Y

Table I.1-8

General Characteristics of the Equity Partnership Types
Number
of
Program Partner- Bonds?/
Inception ships Bond Holder
N
Series

Dec.
1992

MIFs

Jan.
1993

Land
Funds

July
1993

S
Series

Sept.
1993

JDCs

Dec.
1993

SN
Series

Aug.
1995

NP
Series

Aug.
1995

Yes/
Institutional
investors via
open market
No, but bond
equivalent/
Held by RTC

Types of
Underlying Assets

Target Investor/
Legal Structure

Commercial and
multi-family nonperforming loans

Large investors/
Trust

Commercial and
multi-family nonperforming
loans, REO†

Large institutional
investors/
Partnership

LP/GP*
Ownership
Percentage
51/49

25-50/
50-75

Small investors/
Undeveloped and
partially developed Partnership
land (REO and nonperforming loans)

60-75/
25-40

Yes/Held by
a trustee for
the RTC

Commercial and
multi-family nonperforming loans

Small investors/
Trust

51/49

JDCs and small
balance assets
(SBAs)

Investors with
collection
experience/
Partnership

Yes/Held by
a trustee for
the RTC

Commercial nonperforming loans

Large and small
investors/Trust

51/49

Yes/Held by
a trustee for
the RTC

Small investors/
Nonperforming
Trust
land loans and
land REO, unsecured
loans or loans
secured by non–real
estate collateral (such
as business loans),
nonperforming
commercial real
estate and REO
(commercial and
multi-family)

50-70/
30-50

‡

* LP is limited partnership; GP is general partner.
† REO is real estate owned.
‡ The LP contributed 1 percent of the book value for JDCs and 20 percent of the book value for SBAs; the GP contributed
0.0101 percent of the book value for JDCs and 0.20 percent of the book value for SBAs.
Source: FDIC Division of Resolutions and Receiverships.

M A N A GI N G T H E C R I S I S

The financing terms required that cash proceeds generated from the liquidation of assets
be applied first to retirement of the debt (usually bonds held by the RTC). After the
debt was paid in full, the partners generally split the remaining proceeds according to
the percentage of ownership each respective partner held. Table I.1-8 outlines the
general characteristics of the RTC equity partnerships.
The largest of the seven types of equity partnerships set up by the RTC was the
Judgements, Deficiencies, and Charge-offs (JDC) Program. The JDC Equity Partnership Program established 30 partnerships containing 137,000 assets with a book value of
$12.4 billion. The assets the RTC contributed generally were legally impaired or were
unsecured and of poor quality, so typically the general partner was a firm with collection
experience.
By participating in the JDC partnerships, the RTC was able to have a large volume
of low quality, small balance assets processed when it realistically could not have staffed
such an effort, but yet it could share in the results of having profit-oriented firms cull
the assets for any substantial recoveries that might have otherwise been overlooked.
The FDIC became a limited partner in two partnerships, known as the Asset Management and Disposition Agreements or AMDA partnerships, which held assets with a
book value of approximately $3.7 billion. Unlike the equity partnerships, which the
RTC created to dispose of assets, the AMDA agreements were vehicles used to restructure certain FSLIC assistance agreements. Once created, however, the AMDA partnerships operated similarly to the equity partnerships, with a general partner controlling the
management and disposition of the partnership’s assets and the FDIC serving as limited
partner. Each was established to operate for five years and held a variety of asset types,
although most were nonperforming.
Professional Liability Claims
Professional misfeasance and malfeasance were notable factors in the enormous losses
from the financial institution crisis of the 1980s. The professional liability programs of
the FDIC and the RTC reviewed these bank and thrift failures and sifted through thousands of potential claims relating to conduct by former directors, officers, attorneys,
accountants, appraisers, brokers, and other professionals formerly affiliated with these
failed banks and thrifts. This effort contributed more than $5 billion in cash recoveries
to the FDIC and the RTC receiverships.28
Litigation Management
As the asset levels increased, the agencies also had to address many legal issues. The
FDIC and the RTC increasingly turned to outside counsel to effectively manage the

28. For further information, see Chapter 11, Professional Liability Claims.

E XE C U T I VE S U M M A R Y

tremendous volume of legal matters related to the FDIC’s role as receiver and the RTC’s
roles of conservator and receiver.29 The legal work encompassed areas such as foreclosure, loan workout, bankruptcy, contract disputes, asset sales, collection of notes and
guarantees, state and federal tax issues, pension funds, environmental issues relating to
the institution’s property, torts, and shareholder suits. The use of outside counsel peaked
in 1991 when the combined FDIC and RTC direct and indirect payments to outside
counsel reached $701 million.
Asset Disposition Summary
In summary, because of the enormous amount of assets that flooded the FDIC and the
RTC, the agencies had to be creative, yet responsible, in how they determined their policies regarding the handling and resolution of assets. While the FDIC strove to pass on
as many assets as possible to the acquirer at resolution, the RTC focused on the disposition of assets in the conservatorship and receivership periods. Both agencies effectively
used auctions and sealed bids to move as many assets as quickly as possible into the private sector. The RTC and the FDIC also improved other standard asset disposition
methods and developed many innovations. For example, the agencies created new markets through the use of securitization, particularly for commercial mortgages, and equity
partnerships enabled the agencies to transfer large amounts of assets into the private
sector while obtaining potentially greater recoveries. All of these strategies enabled the
agencies to efficiently dispose of the majority of the failed institutions’ assets for which
they became responsible during the crisis period.

Methods for Handling Liabilities
Simply put, a bank fails when its liabilities exceed the value of its assets. When this
occurs, the FDIC as receiver needs to determine which of the creditors of the failed bank
should be paid from the proceeds of the sale or settlement of its assets. Until 1993, the
FDIC’s first priority for paying unsecured claims against the failed national bank’s estate
was the administrative claims of the receiver followed by the deposit liabilities and general creditor claims; if any proceeds remained, payments were made in turn to the subordinated debtholders, the Internal Revenue Service for unpaid federal income taxes and,
finally, the shareholders. The FSLIC process for distribution was similar to this although
there were a few more classes of creditors identified. For failed state chartered institutions, each individual state was responsible for determining the order of payment,
although usually the only main difference was that some states gave priority to all depositors claims (after administrative costs) over the other general creditors. The National

29. For further information, see Chapter 18, The FDIC’s Use of Outside Counsel.

M A N A GI N G T H E C R I S I S

Bank Act of 1864 established the priority of payment on unsecured creditors for national
bank receiverships. The various claims priorities were unified on August 10, 1993, when
the National Depositor Preference (NDP) Amendment was passed. This law standardized the asset distribution process for all receiverships regardless of charter. Claims now
are paid in order of administrative expenses followed by depositors, other general creditors, subordinated debtholders, and those in the last claimant category, the shareholders.
A failed bank receivership will have many types of creditors laying claim to the
assets. One type of creditor that is resolved early in the receivership is the secured depositor. Generally, these depositors are municipalities, school districts, or state agencies that
by law must have their deposits secured in order for a bank to hold them. This is accomplished by the depository institution pledging sufficient securities to cover any deposit
funds that would otherwise be uninsured in the event of a bank failure.
The largest liability of any failed institution is usually its insured deposits. When a
financial institution fails, the FDIC, in its role as insurer, pays depositors their insured
portion, then “steps into the shoes” of the depositors as claimant and files its subrogated
claim against the receivership estate. Therefore, the FDIC is paid in the class that the
depositors would otherwise occupy.
The FDIC is committed to providing insured depositors with their funds as quickly
as possible after a bank fails. Since the start of FDIC deposit insurance on January 1,
1934, not one depositor has lost a penny of insured funds as a result of a failure. Until
the early 1980s, the payment process was burdensome for the FDIC to complete. In the
mid-1980s, the FDIC computerized the payment processes used to identify the insured
depositors to the point where, in most instances, the insured depositors have the use of
their funds the day following the bank failure. Depositors also can have their checks
mailed to them, which eliminates the need to stand in line at the failed bank.
Until the early 1980s, losses to uninsured depositors were relatively small. All failed
banks with deposits totaling more than $100 million had been handled with P&A transactions that protected uninsured depositors. In the smaller institutions, the amount of
uninsured funds normally was very little. As the bank failures grew in average size, so too
did the number and dollar amount of the uninsured accounts. Large banks held deposit
accounts from commercial businesses, other banks, and high profile accounts such as
those from large churches and local governments. With the failure of the Penn Square
Bank, N.A. (Penn Square), Oklahoma City, Oklahoma, in 1982, the exposure of many
financial institutions to a serious loss of liquidity was brought sharply into focus.
In 1983, the insured deposit transfer resolution was developed by the FDIC to alleviate some of the problems insured depositors encountered. The IDT process transferred the insured accounts to an open institution for administration. IDTs permitted
the depositors of a failed institution to make an orderly and convenient transfer to an
open institution and the acquiring institution gained new customers.
To reduce the hardship on uninsured depositors, in 1984 the FDIC began making
advance dividend payments soon after a bank’s closing. The advance dividend percentage is based on the estimated recovery value of the failed bank’s assets. Advance

E XE C U T I VE S U M M A R Y

dividends provide uninsured depositors with an opportunity to realize an earlier return
on the uninsured portion of their deposits without eliminating the incentive for large
depositors to exercise market discipline. If the FDIC’s actual collections on the assets of
the failed institutions exceeded the advance payments and administrative expenses of the
receivership, the uninsured depositors and other creditors received additional payments
on their claims. The FDIC did not pay advance dividends when the value of the failed
institution’s assets could not be reasonably determined at the closing.
The incentive for depositors to exercise discipline was increased with the passage of
FDICIA in 1991, which required the FDIC to select the resolution method that is the
least costly to the insurance fund. This places transactions with bids on uninsured
deposits at a pricing disadvantage.
The category of other general or senior liabilities of a failed institution includes
claims from vendors, suppliers, and contractors of the failed institution; claims arising
from repudiated contracts; claims arising from employee obligations; tax claims; and
claims asserting damages as a result of business decisions of the failed institution. In
1993, the National Depositor Preference Amendment lowered claimants in this category
to a priority level below that of the deposit liabilities, thereby significantly reducing any
potential recovery on these claims. Before NDP legislation, many banks and thrift
receiverships paid general creditor claims on par with deposits.
Subordinated debtholders are allowed claims on receivership assets only after all
claims with a higher priority have been satisfied. Any liability of the insured depository
for a cross guarantee assessment would receive distributions after subordinated debtholders, but before distributions were made to shareholders.
Of the claimants, stockholders have the lowest priority and rarely if ever receive a
dividend. Even in the case of an OBA transaction, all of its depositors and creditors were
protected, but the shareholders’ position was significantly diluted.30 For P&A and
deposit payoff transactions, the shareholders do not receive any payment unless all other
creditors’ claims are paid in full. From 1986 through 1994, the FDIC made distributions to stockholders in only 16 receiverships.
With their low priority status, subordinated debtholders and shareholders should
provide the most discipline for financial institutions. This is especially true for individuals that are directors of the institution. In addition to their financial investment risk,
they have some individual fiduciary liability if the institution fails because of some
negligent acts by the board of directors.
In summary, the manner in which the FDIC handles liabilities of failed financial institutions and administers claims against their receiverships is an important part of its responsibility to lessen the economic effects of the failure of those financial institutions. The claims
process has evolved into one that is predictable while meeting statutory requirements. As
such, this process ensures that creditors are treated in an equitable and timely manner.

30. For further information, see Chapter 5, Open Bank Assistance.

M A N A GI N G T H E C R I S I S

Conclusion
The period between 1980 and 1994 was one of turbulent change for the banking industry, which saw record numbers of bank and thrift failures, the creation and dissolution of
the RTC that was specifically designed to handle thrift failures, and new legislation that
continually affected the way the FDIC resolved bank failures.
The FDIC’s primary objective is to maintain financial stability and public confidence in the banking system. Although severely tested throughout this period, public
confidence in deposit insurance never faltered. No depositor lost a penny on federally
insured deposits. One of the main differences between the financial crises of the early
1930s and the 1980s was that in the latter period, the insured depositors trusted that
they would not be harmed in the event of a bank failure. The FDIC and the RTC were
able to gain control, liquidate, and resolve large numbers of financial institution failures
without causing disruption and panic in the banking system.
The FDIC and the RTC also sought to soften the effect that the banking crisis had
on the economy and to contribute to regional, as well as national, economic recovery.
Their results in this area were favorable, but not without criticism. On the positive side,
deposit insurance provided immediate liquidity to depositors whenever their bank failed
and limited the negative effects of the failure on the local communities. In the majority
of the failures, both the RTC and the FDIC had success in locating an acquiring institution to provide a continuation of banking operations. This also softened the effect of the
bank failure on the community. On the negative side, however, the handling of loan customers during both the agriculture crisis and the distressed economic situation in New
England was criticized.
The FDIC and the RTC met their objectives in a myriad of ways. Whenever a bank
failed, the FDIC’s primary focus was to ensure that the depositors received the use of
their insured funds as soon as possible, which throughout the crisis was almost immediately after a bank failed. This eliminated any doubts or negative publicity about the
deposit insurance system. Another method used to reduce the effects of a bank failure
was the careful selection of the transaction type to be used to resolve the situation. A
majority of the resolutions of both the FDIC and the RTC was completed by using a
P&A transaction rather than a deposit payoff or an insured deposit transfer. The majority of those transactions protected all depositors (including those who were uninsured)
against any loss. For failed thrifts, even though the FSLIC fund was insolvent, Congress
took action to reassure the depositors that their insured funds would be safe.
The Evolution of the Resolution Process
Flexibility and innovation were the keys that enabled the FDIC and the RTC to meet
their objectives. As the economy deteriorated and the number and size of the problem
banks increased, the FDIC changed its resolution process to balance the needs of the
industry with its own practical limitations. For example, when it became apparent that

E XE C U T I VE S U M M A R Y

there would be more deposit payoff situations, the FDIC created the insured deposit
transfer transaction. That reduced the burden on insured depositors, and the need for
them to line up to receive their funds was eliminated.
The FDIC also expanded its resolution options during this period to adjust to the
changing times. The original P&A transaction did not transfer many assets with it. If
the FDIC had not modified this process, it would have been unable to internally handle
the volume of residual assets. As liquidity and workload pressures grew, the FDIC began
to consider techniques and incentives to pass more of the failed banks’ assets to the
acquirer. A law was passed in 1987 to provide the FDIC with bridge bank authority.
This provided the FDIC with the flexibility needed to handle large bank failures. To
reduce the flow of assets into the FDIC, it introduced the whole bank sale transaction in
1987 and emphasized its selection from 1988 to 1991. In the end, the most dominant
features of the FDIC’s resolutions process were the efforts that were made, and the
results achieved, in moving assets back to the private sector and the fact that all depositors generally were protected against any loss.
The FDIC created loss sharing transactions in 1991 to reduce the acquirer’s concerns about the quality of failed bank assets and to keep bank assets in the banking system. The RTC increased competition for failed S&Ls by completing branch breakups to
cater to the needs of their bidders.
The RTC used conservatorships to take control of a large number of institutions
and to begin the process of liquidating their assets before the conservatorships were
finally resolved. Because of the lack of funding for the RTC, the assets were in conservatorship an average of 13 months, a much longer period of time than were failed bank
assets in bridge banks. This altered the RTC’s original plan of duplicating the FDIC resolution process. Proceeds from those asset sales reduced the RTC’s immediate funding
problems and allowed the RTC to continue their liquidation efforts even without the
availability of loss funding.
The Evolution of Asset Disposition
The ability to adjust and create new methods to adapt to the ever-changing marketplace
was instrumental for both the FDIC and the RTC in accomplishing the task of disposing of assets acquired from failed financial institutions. Generally, the agencies had two
basic requirements for asset disposition: (1) to dispose of the assets as soon as possible
without upsetting local markets, and (2) to maximize the return to the receiverships.
The factors and processes used to decide, for example, when to hold versus when to sell
assets or when to litigate versus when to compromise evolved in response to the circumstances of the times.
While the primary FDIC asset disposition strategy was to sell the majority of the
failed bank’s asset portfolio to the acquiring bank at the time of resolution, the FDIC
employed several other resourceful ways to liquidate its ever-increasing volume of assets.
In the early 1980s, the FDIC normally used in-house staff to liquidate assets one at a

M A N A GI N G T H E C R I S I S

time. Over time, the two agencies employed more sophisticated disposition methods
both in-house and through the use of their contractors. Methods such as securitizing
asset sales, creating equity partnerships with private-sector firms along with mass marketing methods in bulk sales of loans, auctions, and multiple sealed bid events became
the standard. The RTC was especially innovative when implementing an effective
affordable housing program, which successfully employed seller financing, close working
relationships with local nonprofit firms, and auctions.
The main results of the two agencies in the area of asset disposition were (1) the
RTC arranged for the securitization of $42.2 billion in mortgage loans; (2) the RTC
developed equity partnerships with private-sector firms to manage the collection of $25
billion in book value of assets; (3) the FDIC and the RTC created asset management
programs with outside contractors that serviced $80 billion in distressed asset pools; (4)
the FDIC created a secondary market for nonperforming loan sales and sold in excess of
800,000 loans through sealed bid sales; (5) the FDIC piloted national real estate auctions and both the RTC and the FDIC arranged real estate events that sold hundreds of
millions of dollars of property at each event; (6) the RTC developed a national Affordable Housing Program and sold more than 100,000 units; and (7) in a life span of
slightly over five years, the RTC disposed of more than $400 billion in assets; at its
sunset, only $8 billion in assets were transferred to the FDIC.
The Maintenance of Public Trust
Maintaining public trust is a key objective for any federal agency. Professional abuse,
especially in the thrift industry, was suspected to be widespread, and the FDIC and the
RTC needed to conduct a fair and consistent investigative process of these matters. Professional misconduct was a notable factor that exacerbated the losses from the financial
institution crisis, and these parties needed to be held accountable for wrongful conduct.
The professional liability programs of the FDIC and the RTC yielded cash collections of
more than $5 billion (as of December 1997) and had a positive effect on the awareness
of professional standards, which directly benefits the public by promoting discipline
among all professionals.
The dramatic growth in the two agencies also increased their vulnerability to inefficiency and ineffectiveness, as well as waste, fraud, abuse, and the misappropriation of
assets. As the workload and staffing expanded accordingly and operations grew in complexity, traditional internal control methodologies proved insufficient. The FDIC and
the RTC were faced with three areas of high vulnerability: contracting and contract
management, information systems, and asset management and disposition. The internal
control programs at the FDIC and the RTC were altered to adapt to the radically changing dimensions of their management requirements. In addition, mounting public concern over the financial institution crisis and new laws subjected virtually every aspect of
the agencies’ activities to outside scrutiny. Ultimately, the financial crisis was resolved by

E XE C U T I VE S U M M A R Y

the FDIC and the RTC without serious mismanagement or waste, issues that could have
eroded public trust.
Other Key Objectives
Cost-Effectiveness. One objective common to both the FDIC and the RTC was to minimize costs and maximize the net present value return from the disposition of failed
banks and thrifts and their assets. The 1,617 banks that failed or required OBA between
1980 and 1994 had $302.6 billion in assets. The FDIC’s cost of handling these failed
banks was $36.3 billion, or about 12 percent of the banks’ assets. The 747 institutions
that the RTC resolved from 1989 to 1995 had $402.6 billion in assets. The RTC’s cost
of handling these assets was $87.5 billion, or 22 percent of the assets. It is difficult to
draw any firm conclusions regarding cost because of the large number of variables that
affected these results. For example, the agencies had no control over such factors as the
condition of the assets at the time of failure, any unrecognized losses in the failed institutions’ portfolios, and prevailing economic conditions.
Equitable Treatment. Throughout this period, one objective that the FDIC had difficulty in achieving was equity to all parties throughout the resolution process. A prime
example of this was the OBA transaction used to assist Continental. This type of resolution sparked a policy debate about whether certain banks were truly “too big to fail” and
whether they were given special treatment not available to smaller institutions. Whether
equitable or not, the FDIC felt it had fully considered a number of substantial concerns
that justified the manner in which Continental was handled. The FDIC and other regulators had concerns of systemic risk that Continental’s potential failure could extend
beyond the bank itself. Those risks included a potential liquidity crisis for major banks
with significant foreign deposits that could have caused a decrease in foreign investor
confidence in U.S. financial institutions, a severe equity blow to the many unaffiliated
banks with uninsured correspondent bank accounts at Continental, and a negative effect
on financial markets in general. A failure of such magnitude could have caused other
bank failures and tied up creditors in bankruptcy for years.
In instances where the FDIC provided assistance to keep a failing bank open or
where the FDIC created a bridge bank, critics have sometimes expressed concern that
the government had, in fact, “nationalized” the bank and given the assisted bank undue
advantage over other banks mainly because of its low cost of funds. This concern, however, is mitigated by the short-term nature of a bridge bank. The effect of any unfair
advantage for assisted banks is offset by the covenants that restrict shareholder benefits
until after the FDIC’s stock interest is redeemed. Stock ownership by the FDIC also
worked to reduce the costs of resolution if there was any increase in the value of the
stock.
The FDIC and the RTC also were concerned about equal treatment toward failed
bank borrowers in the resolution process. In New England this became a topic of discussion because of the extended economic issues that led to a credit crunch in this region.

M A N A GI N G T H E C R I S I S

Borrowers in special asset pools were sometimes hampered in their refinancing efforts by
the stigma of being a failed bank customer. The FDIC addressed this by placing such
borrowers back into the acquirer’s loan portfolio, subject to the FDIC’s guarantee to buy
back the loans that deteriorated. The creation of the loss share transaction also has
addressed this problem by providing for loan customers to remain with the acquiring
bank and for any losses to be shared with the FDIC.
Issues Related to Attainment of the Agencies’ Objectives
The crisis has shown that there are other issues closely related to the ability of the agencies to reach their objectives. These issues are discussed in more detail below.
Use of the Private Sector. Both the FDIC and the RTC extensively employed the private sector during the crisis years. The FDIC used private-sector firms to manage more
than 45 percent of its post-resolution assets during the peak period of 1988 to 1993.
Because of its temporary status and as mandated by law, the RTC used private-sector
resources whenever possible and used SAMDA contractors to manage hard-to-sell assets.
The RTC also made good use of the secondary market to sell its securitized portfolios.
In addition, the RTC established partnerships with outside parties to manage and dispose of distressed assets that either had a low present value or could not be securitized.
The FDIC modified its asset management contracts throughout the years, learning
as it gathered experience. One of those lessons is that the creation of a successful contract hinges on the proper alignment of the (primarily financial) interests of the asset
management firms with those of the FDIC. In addition, minimal interference from the
government is important to the private sector to allow it to operate efficiently. Identifiable performance measures also are critical to motivate the contractor effectively. Finally,
the contractors should be fair and equitable in all facets of their business dealings.
Competition. For the most part, both the FDIC and the RTC developed resolution
and asset sales programs that provided competition to the broadest market of qualified
financial institutions and asset buyers. At the beginning, because of the large volume of
assets at the RTC, some of its sales were naturally restrictive because the portfolios were
too large for most investors. Because of outside pressures, the RTC reduced the size of its
portfolios to attract smaller investors; this change, although initially resisted, was of
benefit because it increased competition and seemed to bring about better results.
The FDIC and the RTC were innovative in their sales events. The FDIC’s national
auctions of properties used advanced satellite technology to offer simultaneous auctions
to major cities across the country. Buyers no longer needed to travel great distances to
attend an event. The RTC also broke new strategic ground by selling assets through a
partnership program. This program was unique in that it took product that would not
bring an optimal price given the condition of either the asset or the current market and
because it created a disposition vehicle that would allow the RTC (and later, the FDIC)
to share in the value enhancement resulting from improved real estate markets and a
better economy.

E XE C U T I VE S U M M A R Y

Independence. Congress has entrusted the FDIC with complete responsibility for
resolving failed federally insured depository institutions and has conferred expansive powers to ensure the efficiency of the process. As receiver and as insurer, the FDIC is not subject to the direction or supervision of any other agency or department of the United
States or of any individual state in the operation of the receivership. Those statutory provisions allow the FDIC to exercise its discretion in determining the most effective resolution of a failed institution’s assets and liabilities. In exercising that authority, the FDIC is
expected to maximize the return on the assets of the failed bank or thrift and to minimize
any loss to the deposit insurance fund. The FDIC as receiver is also responsible for liquidating the failed institution’s assets and using the proceeds to pay proven creditors.
Market Discipline. When large banks were in jeopardy, the FDIC had in the past
protected all depositors from loss, as in the case of Continental and Bank of New
England, Boston, Massachusetts. Large banks (with the exception of Penn Square) were
resolved either through P&As, bridge banks, or OBA agreements where all depositors
were protected.
To preserve financial stability and maintain public confidence in the deposit insurance system, however, a certain amount of market discipline is required. The savings and
loan industry is a prime example of what can happen in the absence of such discipline.
This situation resulted in the insolvency of the federal insurance fund for savings and
loans, the subsequent dissolution of the FSLIC, and the large losses that were ultimately
borne by the taxpayer.
Depositors and shareholders can provide a bank with market discipline to operate
without taking excessive risks. At the time of failure, management is always removed,
and the claims of the shareholders fall behind those of the depositors, the FDIC, and the
bank’s creditors. Because the shareholders’ entire investment is almost always lost, or in
the case of some OBAs at least severely diluted, they instill a certain amount of market
discipline in the operations of the bank. Often, the larger shareholders are also directors
of the bank; if the directors’ actions are determined to be grossly negligent, they may
become liable for some of the losses that they caused.
The depositors, for the most part, are minimally affected by the bank failures.
Insured depositors who are fully protected by the FDIC provide no discipline to the system. In small banks, the uninsured depositors represent such a small portion of the banks’
deposits that they do not influence the banks’ actions. In addition, in the 1980s when the
FDIC chose to complete P&A transactions for the majority (73.5 percent) of its resolutions, depositors had little reason to exercise discipline as all insured and uninsured
deposits were protected in those transactions. Also, from 1980 to 1992, the FDIC completed 133 OBA transactions that again protected all depositors. The ability of banks to
obtain fully insured brokered deposits lessened the effect of depositor discipline as well.
There were signs, however, that uninsured depositors exercised some discipline during this period. As problems became known, especially at some of the larger troubled
institutions, those institutions had to borrow heavily from the Federal Reserve to provide liquidity caused by the withdrawal of funds by their larger depositors.

M A N A GI N G T H E C R I S I S

Since passage of FDICIA, there is more of an incentive for the uninsured depositors
and unsecured creditors to exercise deposit discipline. The least cost provision usually
causes the uninsured to share in the cost of the resolution. From 1992 to 1995, this has,
on average, occurred in 82 percent of the cases. From 1986 to 1991, it took place, on
average, only 17 percent of the time.
Funding and Liquidity. To ensure financial stability and public confidence in the
banking system, a strong insurance fund is a necessity. The FSLIC was forced to complete transactions that had the least short-term effect on their insurance fund, which had
the unfortunate effect of increasing the long-term cost of cleaning up the S&L crisis.
Thrifts were viewed at the time to be too costly to resolve. The government appropriations that would have been required were not forthcoming until creation of the RTC.
The lack of funding and increased congressional oversight restricted the FSLIC’s ability
to react quickly to many of the early, pre-FIRREA thrift crisis issues.
The FDIC also had funding and liquidity concerns during the late 1980s and early
1990s. This led, in part, to the FDIC’s preference for whole bank sales to preserve
liquidity. The lack of whole bank transactions since enactment of FDICIA (which contains the least cost provision) seems to show that whole bank sales were not the most
cost-effective alternative. For several large bank failures in the late 1980s, the FDIC
selected resolutions in which the assuming bank retained the problem assets to preserve
the insurance fund’s liquidity. These agreements resulted in the FDIC reimbursing the
acquirer at a higher cost of funds than would have been the case if the FDIC had
retained ownership of the assets. Another way the FDIC reduced its initial cash outlay
was to use puts to induce the acquiring banks to take the assets at failure. Because the
acquirers returned the majority of the assets to the FDIC before expiration of the put
period, however, this option was significantly limited.
The lack of adequate, consistent funding also affected the way the RTC completed its
mission. Because of the high cost associated with resolving the S&L problem and its effect
on the U.S. deficit, the RTC often was hampered by delays in obtaining governmentapproved funding. The RTC had to be selective in choosing which S&L could be resolved
and which had to remain in conservatorship. The conservatorships were operated for
longer periods of time than would have been necessary if sufficient funds had been available. Because the thrifts’ cost of funds was higher than the government’s cost of funds, this
additional expense had to be added to the final cost of cleaning up the S&L crisis.
Summary. Both the FDIC and the RTC made mistakes as they struggled to find a
solution to the challenge of moving billions of dollars of assets properly back into the
private sector. Some saw the agencies as too bureaucratic, while others complained that
assets were sold too quickly and at below market prices. Nevertheless, the FDIC and the
RTC accomplished their objectives. By staying flexible and creative, the FDIC and the
RTC maintained the public’s confidence while providing stability to the financial
marketplace. Their collective experience in managing the crisis has provided the FDIC,
as well as the financial industry and other regulators, with invaluable lessons on how the
financial marketplace works in times of both adversity and prosperity.

fter gathering the necessary information
and determining the appropriate
resolution structure to be offered,
the FDIC begins to confidentially market
the failing bank or thrift as widely as
possible to encourage competition
among bidders.

CHAPTER 2

Overview of the
Resolution Process

Introduction
This chapter provides an overview of the specific steps undertaken by the Federal
Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC)
to complete a resolution of a failing or failed institution. The intent is to provide background for the reader. Chapters 3 through 7 then trace in more detail the evolution of
issues associated with, and results of, various resolution alternatives employed by the
FDIC and the RTC between 1980 and 1994.

Resolution Methods
The three basic resolution methods for failed and failing institutions are a deposit payoff, a purchase and assumption (P&A) agreement, and an open bank assistance (OBA)
agreement. Through the years, the FDIC and RTC have used these transactions in a
number of variations, which are discussed in later chapters.
In a deposit payoff, as soon as the bank or thrift is closed, the FDIC is appointed
receiver, and all depositors with insured funds are paid the full amount of their insured
deposits.1 Depositors with uninsured funds and other general creditors of the failed

1. The FDIC’s insurance limit is $100,000. Any amount over that limit, including interest, is uninsured. The
FDIC uses the term “insured depositor” to refer to any depositor whose total deposits are under the insurance limit.
Similarly, the term “uninsured depositor” is used to refer to those depositors whose total deposits are over the insurance limit. It is important to note that customers with uninsured deposits are paid up to the insurance limit; and
only that portion of their deposits over $100,000 is uninsured. Deposit payoff is described in more detail in
Chapter 3, Evolution of the FDIC’s Resolution Practices.

M A N A GI N G T H E C R I S I S

institution are given receivership certificates entitling them to a share of the net proceeds
from the sale and liquidation of the failed institution’s assets.
The P&A agreement is a closed bank transaction in which a healthy institution
(generally referred to as either the acquirer or the “assuming” bank or thrift) purchases
some or all of the assets of a failed bank or thrift and assumes some or all of the liabilities, including all insured deposits. The acquirer usually pays a premium for the assumed
deposits, decreasing the FDIC’s total resolution cost. For most of the FDIC’s history,
P&A transactions have been the preferred resolution method.2
In an open bank assistance agreement, the FDIC provides financial assistance to an
operating insured bank or thrift determined to be in danger of closing. The FDIC can
make loans to, purchase the assets of, or place deposits in the troubled bank. Where possible, assisted institutions are expected to repay the assistance loans. While used in a
number of situations during the 1980s, including for the resolution of several larger
failing banks, that method has not been used since 1992.3

Resolution Process
Between the time it receives notification that a bank or thrift institution is about to fail
and the time it develops the actual plan for closing the institution, the FDIC performs a
number of specific tasks. Those tasks include processing the failing bank letter, developing an information package, performing an asset valuation, determining the appropriate
resolution structure, and conducting an on-site analysis to prepare for the closing.
Failing Bank Letter
When an insured bank or thrift is about to fail, the FDIC initiates its resolution process.
An institution is typically closed by its chartering authority when it becomes insolvent,
is critically undercapitalized, is implicated in a discovery of a severe case of fraud, or is
unable to meet deposit outflows.4 The chartering authority, which is the state banking
agency for state chartered institutions, the Office of the Comptroller of the Currency for
national banks, or the Office of Thrift Supervision for federal savings institutions,
informs the FDIC when an insured institution will be closed.

2. For further information, see Chapter 3, Evolution of the FDIC’s Resolution Practices.
3. For further information, see Chapter 5, Open Bank Assistance.
4. In 1991, the FDIC was given the authority to close an institution that was considered to be critically undercapitalized (having a ratio of tangible equity to total assets equal to or less than 2 percent) and that did not have an
adequate plan to restore capital to the required levels. The FDIC was also given the authority to close an institution
that had a substantial dissipation of assets due to a violation of law, operated in an unsafe or unsound manner,
engaged in a willful violation of a cease and desist order, concealed records, or ceased to be insured.

O VER V I E W O F T H E R E S OL U T I O N PR O C E S S

The FDIC’s formal resolution activities begin when a financial institution’s chartering authority sends a “failing bank letter” advising the FDIC of the institution’s
imminent failure. After the FDIC receives a failing bank letter, a planning team contacts
the chief executive officer of the failing bank or thrift to discuss logistics, to address
senior management’s involvement in the resolution activities, and to obtain loan and
deposit data from the institution or its data processing servicer. After the FDIC receives
the requested data, a team, usually consisting of 5 to 15 specialists, is sent to the bank or
thrift to gather and analyze additional information. The team prepares an information
package to give to potential bidders, assigns a value to all the assets of the institution,
estimates the amount of uninsured deposits, determines the resolution structures to be
offered, and plans for the closing and receivership.
The Information Package
As part of its analysis, the FDIC develops detailed data for the information package on
the amounts and types of assets and liabilities that the institution holds. The information varies depending on each institution’s business strategies as reflected in its asset and
liability structure. For example, if a failing bank is involved primarily in residential
mortgage lending, the FDIC will develop information on the basis of that bank’s asset
characteristics such as interest rates and loan terms, as well as the performance of the
portfolio (performing versus nonperforming).
Asset Valuation
Simultaneously, the FDIC begins a review of the failing institution’s assets using asset
valuation models to estimate the liquidation value of the assets, which is used in calculating the cost of a deposit payoff. Because the FDIC does not have enough time to
assess every asset, it uses an extensive statistical sampling procedure. Loans are divided
into categories, such as real estate, commercial, and installment, and within each category the loans are identified as performing or nonperforming. For each subcategory of
loans, a sample is identified and reviewed carefully to determine an estimated liquidation value. Adjustments are made to discount future cash flows and to account for liquidation expenses. The loss factor that results from that estimate is then applied to the
subcategory of loans that were not reviewed.
The Resolution Structure
The FDIC uses all the previously discussed information to determine the appropriate
resolution structures to offer potential bidders. In compiling the marketing strategy, the
FDIC considers the asset and liability composition of the failing institution, the competitive and economic conditions of the institution’s market area, any prior resolution
experience with similar institutions in the same geographic area, and any other relevant

M A N A GI N G T H E C R I S I S

information such as potential fraud at the institution. Using that information, the FDIC
determines how best to structure the sale of the bank or thrift.
The primary decisions include the following factors:
• How to market the failed institution; that is, whether to sell it whole or in parts.
Portions of the bank or thrift, such as its trust business, its credit card division, or
its branches, may sell best as separate transactions.
• Which types or categories of assets should be offered to purchasers.
• How to package saleable assets; for example, should the acquirer be required to
purchase them, should they be offered as optional asset pools, or should they be
sold with loss sharing?5
• At what price the assets should be sold; for example, book value, a fixed value
estimated by the FDIC, or reserve pricing.
Preparation for the Closing
Finally, the FDIC conducts an on-site analysis to prepare and plan for the closing. The
FDIC estimates the number and dollar amount of uninsured deposits at the institution,
determines and analyzes the extent of any contingent liabilities, and investigates whether
any potential fraud is present.

Marketing a Failing Institution
After gathering the necessary information and determining the appropriate resolution
structure to be offered, the FDIC begins to market confidentially the failing bank or
thrift as widely as possible to encourage competition among bidders. The FDIC’s bank
examination force compiles a list of potential acquirers consisting of financial institutions and private investors. In compiling the list, the FDIC takes into account
geographic location, competitive environment, minority owned status, overall financial
condition, asset size, capital level, and regulatory ratings. Before they can bid, private
investors not only need to have adequate funds, but they need to be engaged in the
process of obtaining a charter. They cannot purchase a failed institution unless they have
obtained the necessary approvals from the chartering authority.

5. Optional asset pools and loss sharing, methods for selling assets, are discussed further in Chapter 3, Evolution
of the FDIC’s Resolution Practices, and Chapter 7, Loss Sharing.

O VER V I E W O F T H E R E S OL U T I O N PR O C E S S

The Information Meeting
The FDIC invites all approved bidders to an information meeting. After signing confidentiality agreements, the bidders receive copies of the information package, including
the financial data on the institution, legal documents, and other documents describing
the various resolution methods being offered. At the meeting, the FDIC discusses the
details of the failing institution, the resolution methods offered, the legal documents,
the due diligence process (bidders’ loan review), and the bidding procedures. Chartering
authority officials describe the regulatory requirements for bidding, as well as the application process for branches or new charters. Typically, the transaction terms are focused
on the treatment of the deposits and assets held by the failing bank or thrift. The FDIC
also advises the bidders about the types and amounts of assets that pass to an acquirer as
part of each of the various transaction terms; which assets the FDIC plans to retain;
terms of the asset sale, such as loss sharing arrangements and optional asset pools; and
other significant conditions that are part of each proposed resolution method.
Bidder Due Diligence
Approved bidders who have signed confidentiality agreements are invited to conduct
due diligence at the failing institution. Due diligence is the bidder’s on-site inspection of
the books and records of the institution and the bidder’s assessment of the value of the
assets and liabilities. The failing institution’s board of directors must pass a board resolution authorizing the FDIC to conduct due diligence before bidders visit the institution.
All bidders performing due diligence are provided the same information, so no bidder
has an advantage.
Bid Submission
After all bidders have completed due diligence, bidders submit their proposals to the
FDIC. Ideally, they will submit proposals 12 to 15 days before the closing, but they
often submit them as close as 6 or 7 days before closing. All bids, including those that do
not conform to the FDIC’s previously identified resolution methods (referred to as nonconforming bids), are evaluated and compared with one another and with the FDIC’s
estimated cost of liquidation to determine the least cost resolution.
A bid has two parts: One amount, called the premium, is for the franchise value of
the failed institution’s deposits; the second amount is what the bidder is willing to pay
for the institution’s assets to be acquired. The first figure generally represents the bidder’s
perception of the value of the customer base; the second amount reflects the bidder’s
perception of the imbedded losses and the level of risk associated with the assets.6
6. The latter figure results in a net payment from the FDIC to the acquirer. For example, if the acquirer assumes
responsibility for $100 in deposits and views the assets with a book value of $100 as being worth $80, then the
acquirer will expect a $20 payment from the FDIC to make up the difference.

M A N A GI N G T H E C R I S I S

Least Cost Analysis
In selecting the resolution method, the FDIC has changed procedures over the years.
Before 1991, the FDIC could effect any resolution transaction that was less costly than a
deposit payoff. While the estimated cost of the resolution method has always been
important, the FDIC at times considered other factors before making its final selection.
Deposit payoffs were at times discouraged because of the effect that type of resolution
method had; it reduced the availability of local banking services in smaller communities.
The FDIC also looked at broad issues such as the effect certain resolution methods may
have on banking stability and on discouraging shareholders and creditors of insured
institutions from excessive risk-taking actions. At times, the FDIC also considered the
effect the selected method had on increasing the inventory level of loans being serviced
by the FDIC. In 1991, because of a change in the law, the FDIC amended its failure
resolution procedures to accept the “least cost” bid.7
The least cost procedures require the FDIC to choose the resolution method in
which the total amount of the FDIC’s expenditures and liabilities incurred (including
any immediate or long-term obligation and any direct or contingent liability) has the
lowest cost to the deposit insurance fund, regardless of other factors.8
The FDIC determines the least costly resolution transaction by evaluating all
possible resolution alternatives and computing costs on a present value basis, using a
realistic discount rate. The overall cost to the FDIC of a failed institution depends on a
number of factors, including the following:
• The difference between book values of assets and liabilities of the bank;
• The levels of uninsured and insured liabilities;
• The premium paid by the acquirer;
• Losses on contingent claims;
• The realized value of assets placed in liquidation by the FDIC; and
• Cross guarantee provisions against affiliated institutions.9

7. Least cost is terminology used by the FDIC to refer to the bid alternative for a failing institution in which the
total amount of the FDIC’s expenditures and obligations incurred is the least costly to the deposit insurance fund
of all possible resolutions for that failed institution.
8. The only exception is if there is a finding of “systemic” problems affecting the financial marketplace. Such a
finding requires a two-thirds vote of the FDIC’s and the Federal Reserve’s boards of directors and concurrence by
the secretary of the Treasury after consultation with the president of the United States.
9. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 included a cross guarantee provision that allows the FDIC to recover part of its resolution cost by seeking reimbursement from affiliated
institutions. That provision was designed to prevent affiliated banks or thrifts from shifting assets and liabilities
among themselves in anticipation of the failure of one or more of the institutions.

O VER V I E W O F T H E R E S OL U T I O N PR O C E S S

In most cases, the FDIC will receive at least one bid that is less costly than the
estimated cost of liquidation.10 If the bid includes assumption of all deposits, including
uninsured deposits, the premium paid must be at least as large as the losses that would
have been incurred by customers with uninsured deposits in a payoff in order for the bid
to be considered less costly.
FDIC Board Approval
The FDIC staff submits a written recommendation to the FDIC Board of Directors
requesting approval of the resolution transaction. The recommendation includes a copy
of the least cost analysis and information about the share of the estimated loss that
should be absorbed by customers with uninsured deposits. It also addresses whether an
advance dividend should be paid to customers with uninsured deposits so they can
receive a portion of their claim while the FDIC proceeds with the resolution and
disposition of the remaining assets.
The FDIC Board of Directors is ultimately responsible for determining the least
costly transaction. The board may direct that the winning bid determination be delegated to the appropriate division director. After the board approves the transaction, the
FDIC staff notifies the acquirer, all unsuccessful bidders, and the chartering agency. The
FDIC then arranges for the successful acquirer to execute the appropriate legal documents before the closure. At that time, the FDIC staff meets with the acquirer to
coordinate the mechanics of the closing procedures.

Closing the Institution
The final step in the resolution process occurs when the institution is closed, and the
assets that the acquirer purchased and the deposits that it assumed are transferred to the
acquirer. The chartering authority closes the institution and appoints the FDIC as
receiver. The FDIC, as receiver, is then responsible for settling the affairs of the bank
or thrift, which includes balancing the accounts of the institution immediately after
closing; transferring certain assets and liabilities; and determining the exact amount of
payment due the acquirer (the liabilities assumed, less the assets acquired and the
premium). The settling of various accounts between the receiver and the acquirer is
called “settlement.”

10. From 1980 through 1994, out of 1,617 failing or failed bank situations handled by the FDIC, 1,188 banks,
or 74 percent, resulted in purchase and assumption agreements. Deposit payoffs or insured deposit transfers (IDTs)
were used in 296 cases, or 18 percent of the total. Open bank assistance accounted for 133 transactions, or 8 percent
of the total.

M A N A GI N G T H E C R I S I S

Usually by the next business day, the acquirer will reopen the bank or thrift premises, and the customers of the failed institution with insured funds automatically
become customers of the acquiring bank and can gain access to their money. As receiver,
the FDIC is responsible for operating the receivership, including collecting any of the
failed bank’s assets retained by the receiver and satisfying the claims against the receivership of the failed institution. In cases where the FDIC provides continuing assistance,
such as in a loss sharing transaction, the FDIC will monitor the assistance payments
during the duration of the agreement, typically over several years.

Resolution Time Line
The entire resolution process is generally carried out in 90 to 100 days, not including
the settlement timeframes. It begins when the chartering authority advises the FDIC
that an insured institution is in imminent danger of failing and ends when the chartering authority appoints the FDIC as receiver. Sometimes the usual resolution process
cannot be fully completed before the institution fails, however, such as in cases of sudden or severe liquidity problems. In those instances, the FDIC usually does not have
time to prepare a review of the assets on site,11 leaving a greater likelihood the FDIC will
retain the failed institution’s assets while structuring a more immediate solution for the
institution’s deposits and other liabilities. Three primary alternatives available in the face
of such time pressure are a transfer of only the insured deposits,12 a deposit payoff, or
the formation of a bridge bank. A bridge bank is a newly created national bank designed
to maintain the operations of an institution until a more permanent solution can be
completed.13

11. When there is insufficient time to perform an on-site review, the FDIC uses its research model to value all or
most of the assets. The research model is based on the FDIC’s historical recovery experience for six broad categories
of assets belonging to a sample of prior bank failures.
12. A transfer of insured deposits (insured deposit transfer) is a variation of a deposit payoff in which another financial institution takes responsibility for paying insured depositors the amounts they are owed. See Chapter 3,
Evolution of the FDIC’s Resolution Practices.
13. For further information, see Chapter 6, Bridge Banks.

he FDIC’s resolutions methods evolved
from passing few failed bank assets with
little risk to an acquiring institution to
passing most failed bank assets and
sharing the risk with the acquiring
institutions.

CHAPTER 3

Evolution of the FDIC’s
Resolution Practices

Introduction
This chapter reviews the various approaches employed by the Federal Deposit Insurance
Corporation (FDIC) to address the successive waves of bank insolvencies resulting from
high interest rates in the late 1970s and early 1980s, energy and agriculture sector problems in the mid-1980s, and collapsing real estate markets at the end of the 1980s and
early 1990s. It traces the expansion of resolution alternatives from traditional deposit
payoffs and purchase and assumption (P&A) transactions to later variations of those
methods.
Such a review, which could provide enough material for a book unto itself, by necessity must be limited in some ways. As a result, this chapter focuses more on the treatment of assets in bank resolution transactions than it does on the treatment of deposits
and other liabilities. Also, it provides a greater focus on the many smaller failed and failing bank transactions that took place during those years than on the fewer larger bank
failures. Such a focus does not mean the other topics were viewed as less important; they
are covered elsewhere in this study. The treatment of depositors and general creditors is
the focus of chapters 9 and 10, while larger bank failures and the policy issues they raise
receive attention in Part II, Case Studies of Significant Bank Resolutions.

Resolution Strategies of the FDIC
At the beginning of the 1980s, the FDIC’s procedures for resolving failed institutions
were guided by provisions of the Banking Acts of 1933 and 1935 and the Federal
Deposit Insurance Act of 1950. Under the Banking Act of 1933, the FDIC’s sole means
of paying depositors of a failed institution was through a “new bank,” or Deposit

M A N A GI N G T H E C R I S I S

Insurance National Bank (DINB), a national bank of limited life and powers that was
chartered without any capitalization. A DINB allowed for a failed bank to be liquidated
in an orderly fashion, minimizing disruptions to local communities and financial services markets. The FDIC Board of Directors was empowered to issue capital stock of the
DINB and offer it for sale, giving the first opportunity to purchase it to the shareholders
of the failed bank. The Banking Act of 1935 authorized the FDIC to pay off depositors
either directly or through an existing bank. It also gave the FDIC the authority to make
loans, purchase assets, and provide guarantees to facilitate a merger or acquisition. The
added flexibility provided by new resolution powers was considered essential at a time
when many newly insured banks were thought to be at risk of failure.1
The Federal Deposit Insurance Act of 1950 included an open bank assistance
(OBA) provision, granting the FDIC the authority to provide assistance, through loans
or the purchase of assets, to prevent the failure of an insured bank. A bank was eligible
for OBA if the FDIC Board of Directors deemed the continued operation of the institution essential to the community in which it was located. Because of the essentiality
requirement, the FDIC did not use OBA until 1971.2 The FDIC’s authority to provide
open bank assistance was expanded by the Garn–St Germain Depository Institutions
Act of 1982, which eliminated the essentiality test except in instances in which the cost
of open assistance would exceed the estimated cost of liquidating the subject institution.3 The elimination of the essentiality test enabled the FDIC to use OBA more frequently in the 1980s.
At the beginning of the 1980s, the FDIC relied on two basic methods to resolve
failing banks: the purchase and assumption transaction and the deposit payoff. When
determining the appropriate method for resolving bank failures, the FDIC considered a
variety of policy issues and objectives. Four primary issues were (1) to maintain public
confidence and stability in the U.S. banking system, (2) to encourage market discipline
to prevent excessive risk-taking, (3) to resolve failed banks in a cost-effective manner,
and (4) to be equitable and consistent in employing resolution methods.4 Certain secondary objectives also existed, including the desire to minimize disruption to the community in which the failing bank is located and to minimize the FDIC’s role in owning,
financing, and managing financial institutions and assets. With passage of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA) in 1991, which mandated

1. Federal Deposit Insurance Corporation, Federal Deposit Insurance Corporation: The First Fifty Years (Washington, D.C.: FDIC, 1984), 81.
2. FDIC, The First Fifty Years. 94.
3. The Garn–St Germain Act was comprehensive legislation that effected major changes in federal laws governing
the activities of financial institutions. Among the many provisions of the act, two were drafted specifically to enhance the FDIC’s failed bank resolution capabilities. The first provision dealt with open bank assistance, discussed
above; the second authorized the Net Worth Certificate Program, described later in this chapter.
4. John F. Bovenzi and Maureen E. Muldoon, “Failure-Resolution Methods and Policy Considerations,” FDIC
Banking Review 3, no. 1 (fall 1990), 1.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

the use of the transaction that resulted in the least cost to the FDIC, such policy
objectives became secondary in choosing among alternative resolution methods.
Clean Bank Purchase and Assumption Transactions
In purchase and assumption transactions of the early 1980s, the acquiring bank, referred
to as the “assuming bank” or “acquirer,” generally assumed all the failed bank’s deposit
liabilities and certain secured liabilities. The acquirer also purchased certain assets and
received financial assistance from the FDIC. The P&A agreement listed the assets purchased and specified the respective rights, obligations, and duties of the assuming bank
and the receiver.
At that time, for two reasons, it was common for an acquirer to bid on and purchase
a failing institution without performing due diligence. First, the FDIC wanted to maintain secrecy about impending failures to avoid costly deposit runs; it was concerned that
allowing due diligence teams access to a failing bank's premises would arouse fears about
an imminent closing. Second, because only “clean” assets, such as cash and cash equivalents, were passed, due diligence was not required by bidders.5 Bidders would determine
the value of the bank on the basis of their knowledge of the local community and on
deposit information provided by examiners.
The FDIC generally did not sell loans to an acquiring institution at the time of resolution. Afterwards, though, loan officers of the acquirer often would review the borrower’s credit file and deposit relationships, pay off original notes, and draw up new loan
documents to be executed by the borrower. Alternatively, to preserve the lender’s collateral position, the FDIC simply might assign notes to the acquirers. Thus, through those
means, assuming banks could acquire large volumes of performing loans following resolution transactions. Nonperforming loans were not acquired by the assuming bank, even
after completing the resolution transaction.
During the early 1980s, selling assets at the time of resolution, or immediately
thereafter, was not a high priority for the FDIC for two reasons. First, because the
frequency of bank failures was still relatively low, the FDIC was not burdened by a high
volume of assets held in receivership. Second, from a supervisory viewpoint, the FDIC
was not eager to place poor quality assets in the portfolios of acquiring banks. Later, as
the number of failures increased and liquidity and workload pressures grew, the FDIC
began to place more emphasis on selling assets as part of the initial resolution transaction. Numerous variations of P&A transactions would be developed over the course of
the 1980s and early 1990s, most of which involved the treatment of a failed bank’s assets
and the purchase of a failed bank’s loans from the FDIC. The P&A transaction
5. Cash equivalents included the bank securities portfolio. Banks generally purchased highly marketable, goodquality notes and bonds, usually either U.S. Government securities or issues from their local area (state, county,
and municipal issues). The securities, if widely traded, were easily priced and would be sold to the acquirers on the
basis of quotes from The Wall Street Journal or quotes obtained from several securities brokers.

M A N A GI N G T H E C R I S I S

Chart I.3-1

Bank Failures by Resolution Method
1980–1994
Straight Deposit Payoffs
120 7.4%
Open Bank Assistance
133 8.2%

Insured Deposit Transfers
176 10.9%
Purchase and Assumptions
1,188 73.5%

Total Bank Failures = 1,617

remained the dominant resolution method
used by the FDIC through the 1980s and
early 1990s. Of the 1,617 failing and
failed institutions handled by the FDIC
between 1980 and 1994, 1,188, or 73.5
percent, were handled through P&A transactions. (See charts I.3-1 and I.3-2.) Similarly, of the $302.6 billion in assets and
$233.2 billion in deposits at those 1,617
institutions, $204 billion of the assets, or
67.4 percent of the total, and $161.3 billion of the deposits, or 69.2 percent of the
total, were in the 1,188 institutions handled
through P&A transactions. (See charts I.3-3
and I.3-4.)

Sources: FDIC Division of Research and Statistics and FDIC annual
reports.

Chart I.3-2

Purchase and Assumption Transactions
Compared to All Failures and Assistance Transactions
1980–1994
300

Number of Transactions

250

200

150

100

0
P&As
Total

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
7
5
27
36
62
87
98 133
164 174 148
103
95
36
13 1,188
11
10
42
48
80 120 145 203
279 207 169
127 122
41
13 1,617

Source: FDIC Division of Research and Statistics.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Deposit Payoffs
A deposit payoff was executed only if the
FDIC did not receive a less costly bid for a
P&A transaction. In a payoff, no liabilities
are assumed, and no assets are purchased
by another institution. The FDIC must
pay, directly or through an agent, to
depositors of the failed institution the
amount of their insured deposits. The
FDIC determines the amount in each
depositor’s account entitled to deposit
insurance and pays that amount to the
depositor. Early in the 1980s, a customer
would collect a check in the amount of his
deposit balance directly from an FDIC
claim agent on the premises of the former
bank. After that time, a customer would
receive a check mailed by the FDIC
within a few days after the institution’s
closing. In calculating the amount of each
customer’s check, the FDIC would
include all the interest accrued under the
contractual terms of the depositor’s
account through the date of closing.
The two main resolution methods
used by the FDIC in the early 1980s, P&A
transactions and deposit payoffs, differed
in their effect on uninsured depositors. In
a payoff, the FDIC did not cover that portion of a customer’s deposits that exceeded
the insured limit. The owners of uninsured
claims were given receiver’s certificates that
entitled them to a share of collections from
the receivership estate. The percentage of
the claims they eventually received
depended on the value of the bank’s assets,
the number of uninsured claims, and each
claimant’s relative position in the distribution of claims. In contrast, acquirers generally assumed all deposits in a P&A
transaction, thereby providing 100 percent

Chart I.3-3

Failed Bank Assets by Resolution Method
1980–1994
($ in Billions)

Open Bank Assistance
$82.5 27.3%
Insured Deposit Transfers
$10.8 3.6%
Straight Deposit Payoffs
$5.3 1.7%
Purchase and Assumptions
$204.0 67.4%

Total Failed Bank Assets = $302.6
Sources: FDIC Division of Research and Statistics and FDIC annual
reports.

Chart I.3-4

Failed Bank Deposits by Resolution Method
1980–1994
($ in Billions)

Open Bank Assistance
$57.6 24.7%
Insured Deposit Transfers
$9.5 4.1%
Straight Deposit Payoffs
$4.8 2.0%
Purchase and Assumptions
$161.3 69.2%

Total Failed Bank Deposits= $233.2
Sources: FDIC Division of Research and Statistics and FDIC annual
reports.

M A N A GI N G T H E C R I S I S

Chart I.3-5

Straight Deposit Payoffs
Compared to All Failures and Assistance Transactions
1980–1994
300

Number of Transactions

250

200

150

100

0
SDPs
Total

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
3
2
7
7
4
22
21
11
6
9
8
4
11
5
0
120
11
10
42
48
80 120 145 203
279 207 169
127 122
41
13 1,617

Source: FDIC Division of Research and Statistics.

protection to all depositors. In the two decades before the 1980s, most failing banks
were resolved through P&As, and uninsured depositors rarely suffered losses, particularly after 1966, when the FDIC instituted a procedure for competitive bidding to effect
P&A transactions. Bidding—in contrast to negotiated deals with individual acquirers—
increased the likelihood that the FDIC would receive a premium for the failed bank that
would reduce the cost of a P&A transaction relative to a payoff.
Of the 1,617 failing and failed institutions handled by the FDIC between 1980 and
1994, deposit payoffs were used only 296 times, or 18.3 percent of the total. Such payoffs
sometimes involved the use of an agent institution to pay depositors for the FDIC, in
which case they were called insured deposit transfers (IDTs). IDTs accounted for 176 of
the 296 deposit payoffs, or 59.5 percent of the total. (See charts I.3-1 and I.3-8.) Deposit
payoffs generally were used for smaller institutions. While 18.3 percent of the total number of transactions were deposit payoffs, only 5.3 percent of the assets and 6.1 percent of
the deposits of the banks handled by the FDIC between 1980 and 1994 were in the institutions in which the FDIC used deposit payoffs. (See charts I.3-3 and I.3-4.)
In the instances in which the FDIC used deposit payoffs, it was subjected to criticism that its resolution policies were inconsistent and inequitable. Observers pointed
out that uninsured depositors in large banks were less likely to suffer losses than those in

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

small banks because it was easier for the FDIC to arrange P&A transactions to resolve
large failures.6 The P&A approach minimized disruption to local communities and to
financial markets generally, but it appeared to provide unfair protection for uninsured
deposits in larger institutions.
Deposit Insurance National Bank
The Banking Act of 1933 authorized the FDIC to form a new bank called a Deposit
Insurance National Bank to pay off the insured depositors of an insured institution.
After the Banking Act of 1935 granted the FDIC authority to pay off depositors directly
or through an existing bank, DINBs were rarely used. Of the five DINBs created by the
FDIC after 1935, the most well-known was established in 1982 to resolve Penn Square
Bank, N.A. (Penn Square), a $516.8 million institution located in Oklahoma City,
Oklahoma. Before the Penn Square resolution, every bank failure involving assets greater
than $100 million had been handled through a P&A transaction. In the case of Penn
Square, which was declared insolvent by the Office of the Comptroller of the Currency
(OCC) on July 5, 1982 (a federal holiday), the FDIC decided that a P&A transaction
was impractical. Although Penn Square was only a $500 million institution, it had been
able to convince some of the largest banks in the country to purchase more than $2 billion in oil and gas loans that it had originated. Most of those loans were poorly documented, and collection in full was doubtful by the time of the bank failure. Because the
accuracy of loan information provided by Penn Square to the participants was suspect,
the FDIC expected the loans to spawn many lawsuits from participants seeking to
recover part or all of their investments. That expectation, along with other factors, made
it difficult for the FDIC to estimate the losses it could incur on the bank and to evaluate
P&A bids for the institution. Given the circumstances, the FDIC decided to effect a
payoff of the bank by using a DINB, thus limiting its maximum potential loss to the
approximately $250 million in insured deposits.
At closing, depositors with balances in excess of the insurance limit had their
insured deposits transferred to the DINB, while the excess became a claim against the
receivership. Receivers’ certificates totaling $459.1 million were issued to claimants, who
eventually received around 70 percent of their claims from the net sale and liquidation
proceeds of the failed bank’s assets. The FDIC’s resolution cost was $65 million, which
represented 12.6 percent of assets at the date of resolution. 7

6. Before 1982, the largest bank failure handled through a payoff was the $78.9 million Sharpstown State Bank
in Houston, Texas, in 1971. See Irvine H. Sprague, Bailout (New York: Basic Books, 1986), 117.
7. See Part II, Case Studies of Significant Bank Resolutions, Chapter 3, Penn Square Bank, N.A.

M A N A GI N G T H E C R I S I S

New Resolution Alternatives
The sustained period of high and volatile interest rates, coupled with an erosion of traditional funding sources through disintermediation, had a serious effect on the capital levels and earnings of FDIC insured institutions. Mutual savings banks (MSBs) were
particularly affected by rising interest rates because those institutions held large portfolios of long-term, fixed-rate mortgages. MSBs were chartered in 19 states, although 95
percent of the total deposits in MSBs were in 9 states: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Washington.8 In 1975, there were about 450 MSBs compared to nearly 5,000 savings and
loan associations and approximately 14,600 commercial banks. The average asset size of
the MSBs was $254 million compared to $69 million for savings and loan associations
and $66 million for commercial banks.
By 1982, the MSBs were losing $2 billion annually.9 In many instances, the market
value of MSBs’ assets fell to 25 to 30 percent below outstanding liabilities.10 The FDIC
faced the possibility of incurring significant losses for a problem—high interest rates—
that it thought was transitory. The FDIC’s major concern was how to control the costs
of resolving failing savings banks while avoiding raising the public’s concern over the
stability of savings banks in general.
Income Maintenance Agreements
One of the FDIC’s primary strategies was to force weaker savings banks to merge into
healthier banks or thrifts by guaranteeing a market rate of return on the acquired assets
through an income maintenance agreement. The FDIC paid the acquirer the difference
between the yield on acquired earning assets and the average cost of funds for savings
banks, thereby assuming the interest rate risk. If interest rates declined to where the cost
of funds was below the yield on earning assets, the acquirer was required to pay the
FDIC. The FDIC entered into those agreements only if the resulting institution was
viable.
Between 1981 and 1983, the FDIC used income maintenance agreements to resolve
11 of the assisted mergers of FDIC insured mutual savings banks. (See table I.3-1.)
Because they were merged into operating institutions, those banks did not fail, and
depositors and general creditors suffered no losses. In most cases, however, the failing
bank’s senior management was requested to resign, and subordinated noteholders
received only a partial return of their investments. Because MSBs have no stockholders,

8. National Fact Book of Mutual Savings Banking, 1980 (Washington, D.C.: National Association of Mutual Savings Banks), 17.
9. FDIC, The First Fifty Years, 99.
10. FDIC, The First Fifty Years, 99.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Table I.3-1

Income Maintenance Agreements
($ in Millions)
Date
Bank Name

Location

Assets

Acquirer

Comments

11/4/81 Greenwich Savings

New York,
NY

$2,475

Metropolitan S.B.*
(Renamed CrossLand
in 1984)

Failed in
1992

12/4/81 Central S.B.

New York,
NY

910

12/18/81 Union Dime S.B.

New York,
NY

1,453

Buffalo S.B.
(Renamed Goldome
Bank for Savings in 1984)

Failed in
1991

1/15/82 Western NY S.B.

Buffalo, NY

1,025

Buffalo S.B.
(Renamed Goldome)

Failed in
1991

1,002

Marquette
National Bank

703

First Interstate
National Bank

2/20/82 Farmers & Mechanics S.B. Minneapolis,
MN

Harlem S.B.
(Renamed Apple Bank
for Savings in 1983)

3/11/82 Fidelity Mutual S.B.

Spokane,
WA

3/26/82 New York Bank
for Savings

New York,
NY

3,404

Buffalo S.B.
(Renamed Goldome)

Failed in
1991

4/2/82

Philadelphia,
PA

2,126

Philadelphia
Savings Fund Society
(Renamed Meritor S.B.)

Failed in
1992

Syracuse
Savings Bank

Failed in
1987

Dollar S.B.
(Renamed Dollar
Dry Dock Savings Bank)

Failed in
1992

Syracuse Savings Bank

Failed in
1987

Western Savings Fund
Society

10/15/82 Mechanics Savings Bank

Elmira, NY

2/9/83

New York,
NY

2,452

Dry Dock Savings Bank

10/1/83 Auburn Savings Bank

Totals

11 Institutions

* Savings Bank
Sources: FDIC annual reports, 1981 to 1993.

Auburn, NY

133

$15,738

M A N A GI N G T H E C R I S I S

the FDIC did not have to concern itself with interests of existing stockholders. While
the cost savings of the program are difficult to quantify, the Income Maintenance Agreement Program successfully provided the resulting merged institution with a safety net
until the interest rate scenario became more favorable. Interestingly, as shown in the far
right column of table I.3-1, 8 of the 11 merged institutions that were saved by income
maintenance agreements in early 1980s eventually failed as a result of the real estate
crisis of the late 1980s.
Net Worth Certificates
The FDIC developed another resolution strategy: the Net Worth Certificate Program
(NWCP). The program’s purpose was to buy time for savings banks to correct rate sensitivity imbalances and restore capital to acceptable levels. The Garn–St Germain Act of
1982 enabled any insured institutions that met statutory requirements to apply for
capital assistance in the form of net worth certificates.
Under the program, institutions received promissory notes from the FDIC representing a portion of current period losses in exchange for certificates that were to be
considered as part of the institution’s capital for reporting and supervisory purposes.
Although the Garn–St Germain Act did not prescribe a formula based on specific
capital levels, the FDIC established a working formula to semi-annually purchase certificates equal to between 50 percent and 70 percent of the institution’s net operating
loss.
Originally, the FDIC provided assistance only to institutions with a positive level
of capital. Later, it limited eligibility to institutions having a minimum capital ratio of
1.5 percent and established other requirements for participants. To be eligible, the
FDIC required an institution to develop a business plan based on reasonable economic
assumptions over reasonable time periods. Participating savings banks were prohibited
from allowing insider trading and speculative management activity. To raise additional
capital, if the need subsequently arose, the institutions also agreed to convert from
mutual to stock form at the FDIC’s request.
The Net Worth Certificate Program allowed solvent, well-managed institutions
to survive until the results of restructured balance sheets produced profitable operations or until the banks could arrange unassisted mergers with stronger institutions.
Of the 29 savings banks in the plan, 22 required no further assistance and eventually
extinguished their net worth certificates. Seven savings banks required additional
assistance from the FDIC; four repaid all assistance, and three merged into healthy
institutions with FDIC assistance.11 (See table I.3-2 for a list of the 29 institutions
that were in the Net Worth Certificate Program. See charts I.3-6 and I.3-7 for the

11. Federal Deposit Insurance Corporation, Office of Research and Statistics, “Open Bank Assistance: A Study of
Government Assistance to Troubled Banks from the RFC to the Present,” (May 1990), 12.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

number of institutions and volume of
assets that were involved in the NWCP
by year.)
Insured Deposit Transfers

Chart I.3-6

Number of Banks in
Net Worth Certificate Program
1982–1993

12. FDIC, 1983 Annual Report, 12.

Number of Banks

25
20
15
10
5
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
15 23
23 21
12
3
3
3
3
3
2
0

Sources: FDIC annual reports 1982–1993.

Chart I.3-7

Dollars in Net Worth Certificate Program
1982–1993
($ in Millions)
800
700

Dollars in Program

In 1983, the FDIC introduced a new type
of transaction, the insured deposit transfer
(IDT). In contrast to a straight deposit
payoff, an IDT involves the transfer of
insured deposits and secured liabilities of
the failed bank to a healthy institution that
agrees to act as the FDIC’s agent. The
agent bank makes available to the depositors of the failed bank a “transferred
deposit” account, which the depositor may
continue to maintain at the agent bank.
Alternatively, the depositor may withdraw
the balance and close the account. In an
insured deposit transfer, the FDIC as
receiver retains all the assets and the uninsured and unsecured liabilities of the failed
institution. As part of the transaction, the
FDIC makes a cash payment matching the
amount of the transferred liabilities to the
assuming bank. Often times, the bank acting as agent will use some of that cash to
purchase some of the failed bank’s assets
from the FDIC. The IDT reduces the disruption caused by a deposit payoff to
insured depositors and to the local community. It also reduces the FDIC’s administrative costs in handling the failures
because the agent bank acts as the paying
agent for the FDIC and disburses insured
funds to depositors.12
From 1983, when they were first used,
through 1994, there were 176 insured
deposit transfers. (See chart I.3-8.) With

600
500
400
300
200
100
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
$175 377 579 705 526 315 322 234 154 132 25
0

Sources: FDIC annual reports 1982–1993.

M A N A GI N G T H E C R I S I S

Table I.3-2

Net Worth Certificate Program
($ in Millions)
Assets Certificates
at Entry (Max. Held)

Bank Name

Location

Date Retired

Auburn Savings Bank*

Auburn, NY

$125.6

$1.6

Retained by
Syracuse S.B. in 1983–
Assisted Merger

Beneficial Mutual

Philadelphia, PA

1,628.7

18.9

1991

Bowery Savings Bank*

New York, NY

4,999.4

220.1

1992

Cayuga County Savings Bank

Auburn, NY

190.0

1986

Colonial Mutual Savings Bank

Philadelphia, PA

70.7

1984–Acquired

Dime Savings Bank of NY, FSB

New York, NY

6,393.7

72.1

1986

Dime S.B. of Williamsburgh

New York, NY

573.8

3.6

1987

Dollar Dry Dock Savings Bank†

New York, NY

4,972.8

41.3

1986

Dry Dock Savings Bank*

New York, NY

East River Savings Bank, FSB

New York, NY

1,777.5

26.4

1987

Eastern Savings Bank

New York, NY

786.0

13.7

1986–Merger

Elizabeth Savings Bank

Elizabeth, NJ

31.7

1983–Merger

Emigrant Savings Bank

New York, NY

2,968.5

90.0

1991

Greater New York Savings Bank

New York, NY

1,816.8

23.1

1987

Home Savings Bank

White Plains, NY

427.4

5.6

1986–Assisted Merger

Inter-County Savings Bank

New Paltz, NY

123.4

1.6

1986

Lincoln Savings Bank, FSB

New York, NY

2,090.3

65.9

1987

National S.B. of the City of Albany

Albany, NY

391.2

1.1

1985

See Dollar Dry Dock S.B.‡

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Table I.3-2

Net Worth Certificate Program
($ in Millions)

Continued
Assets Certificates
at Entry (Max. Held)

Bank Name

Location

Niagara County Savings Bank

Niagara Falls, NY

291.9

1986–Merger

Orange Savings Bank

Livingston, NJ

531.1

3.5

1984–Assisted Merger

Oregon Mutual Savings Bank

Portland, OR

260.0

1.5

1983–Assisted Merger

1,371.3

5.0

1986

Rochester Community Savings Bank Rochester, NY

Date Retired

Roosevelt Savings Bank

New York, NY

858.9

5.8

1986

Sag Harbor Savings Bank

Sag Harbor, NY

203.6

1.4

1987

Savings Fund Society of
Germantown

Bala Cynwyd, PA

1,373.1

17.8

1987

Seamen’s Savings Bank, FSB†

New York, NY

1,825.5

31.3

1986

Skaneateles Savings Bank

Skaneateles, NY

136.1

1986

Syracuse Savings Bank*

Syracuse, NY

1,180.5 See Auburn
S.B.§

1987–Assisted
Merger

Williamsburgh Savings Bank

New York, NY

2,215.1

64.0

Totals

29 Institutions

$39,614.6

$718.1

1987–Merger

* Failed or assisted while in Net Worth Certificate Program (NWCP).
† Failed after NWCP participation.
‡ Certificates issued to Dry Dock S.B. were retained when acquired by Dollar S.B. Subsequently, Dollar Dry Dock acquired
additional certificates.
§ Certificates issued to Auburn S.B. were retained when acquired by Syracuse S.B. Syracuse S.B. failed in 1987.
Source: FDIC, “The Mutual Savings Bank Crises,” History of the Eighties—Lessons for the Future: An Examination of the Banking
Crises of the 1980s and Early 1990s (Washington, D.C.: Federal Deposit Insurance Corporation, 1997).

M A N A GI N G T H E C R I S I S

Chart I.3-8

Insured Deposit Transfers
Compared to All Failures and Assistance Transactions
1980–1994
300

Number of Transactions

250
200
150
100
50
0
IDTs
Total

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
0
0
0
2
12
7
19
40
30
23
12
17
14
0
0
176
11
10
42
48
80 120 145 203
279 207 169
127 122
41
13 1,617

Source: FDIC Division of Research and Statistics.

deposits totaling $9.5 billion, the failed banks for which the FDIC used IDTs were
relatively small, representing only 4 percent of the total deposits of banks that failed
from 1980 to 1994. (See chart I.3-4.)
The FDIC also developed a variation of the insured deposit transfer in which
uninsured depositors were issued an advance dividend based on a conservative estimate of
the recovery value of the failed bank’s assets.13 That type of transaction, known as a
modified payoff, provided uninsured depositors with greater liquidity without eliminating
the need for them to exercise market discipline before making deposits in an institution
with higher risks.

13. An advance dividend is a payment made to uninsured depositors immediately after a bank fails; it is based on
the estimated value of the receivership’s assets.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Chart I.3-9

300

250

60
50

200

40
150
30
100
20
50

10
0

0
Ag. Bank Failures
All Bank Failures
Percentage Ag. Banks

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1
11
9.1

1
10
10

7
42
16.7

6
48
12.5

25
80
31.3

62
120
51.7

60
145
41.4

58
203
28.6

33
279
11.8

17
207
8.2

Percentage of Agricultural Banks

Number of Transactions

Agricultural Bank Failures versus All Bank Failures
1980–1990

1990 Totals
12
169
7.1

282
1,314
21.5

Source: FDIC, Chapter 8, "Banking and Agricultural Problems of the 1980s," History of the
Eighties—Lessons for the Future: An Examination of the Banking Crises of the 1980s and Early 1990s
(Washington, D.C.: Federal Deposit Insurance Corporation, 1997).

Resolution Responses to Bank Failures from 1984 to 1986
Banks with a concentration of assets, mainly loans, in the energy and agricultural sectors
began appearing on the FDIC’s problem bank list in 1982 and were being resolved by
1984. Agricultural and energy banks were defined as banks having 25 percent or more of
their loans in agricultural or energy loans. A total of 345 banks, most with deposits of
$30 million or less, either failed or received FDIC assistance between 1984 and 1986.
Of that total, 147, or 42.6 percent, were agricultural banks.14 (See chart I.3-9.)
“Put” Options
Another approach the FDIC took in responding to the new wave of bank failures was
the modification of its treatment of assets under the P&A transaction. In earlier years,
the FDIC passed a limited portion of the failed bank’s assets to an acquiring institution.
Generally, only cash, federal funds sold, and securities were passed to the acquirer. As the
number of bank failures increased, however, the FDIC began to consider methods and
incentives for passing more of the failed bank’s assets to the acquirer.

14. No records could be found that would indicate the number of energy banks that failed during this period.

M A N A GI N G T H E C R I S I S

To a certain extent acquirers were willing to take more assets, but not necessarily as
many as the FDIC would have liked, given the sudden increase in the number of bank
failures. To induce an acquirer to purchase additional assets, the FDIC would offer a
“put” option on certain assets that were transferred. Two option programs for purchasing assets that the FDIC typically offered to acquirers in clean bank transactions were
the “A Option,” which passed all assets to the acquirer and gave them either 30 or 60
days to put back those assets they did not wish to keep, and the “B Option,” which gave
the acquirer 30 or 60 days to select desired assets from the receivership. The number of
days offered under each option depended on the complexity of the asset portfolio.
Structural problems existed, however, with both of the option programs, because an
acquirer was able to “cherry pick” the assets, choosing only those with market values
above book values or assets having little risk while returning all other assets. Also, acquirers tended to neglect assets during the put period before returning them to the FDIC,
which adversely affected their value.
In late 1991, the FDIC discontinued the put structure as a resolution method and
replaced it with the loss sharing structure and loan pool structure. During the mid1980s, however, the put option was seen as a way to preserve the liquidity of the insurance fund by passing more assets to acquirers, thus lowering the amount of cash
payments to assuming banks.
Forbearance Programs
A resolution strategy the FDIC used was forbearance, which exempted certain distressed
institutions that had been operating in a safe and sound manner from capital requirements. The first formal forbearance program was the Net Worth Certificate Program,
established in 1982. Under the Garn–St Germain Act, insured institutions could apply
for capital assistance in the form of net worth certificates. Under the program, institutions received FDIC promissory notes representing a portion (between 50 percent and
70 percent) of current period operating losses in exchange for certificates that were considered part of regulatory capital. A total of 29 savings banks participated in the program, of which 22 required no further assistance and 7 required additional assistance.
Of the 29, 26 eventually repaid all assistance and the remaining 3 merged into healthy
institutions. The Net Worth Certificate Program is described in more detail earlier in
this chapter.
Forbearance also was used in March 1986 when federal regulators issued a joint policy allowing the temporary Capital Forbearance Program for agricultural banks and
banks with a concentration of energy credits. The program was directed at well-managed, economically sound institutions with concentrations of 25 percent or more of
their loan portfolios in agricultural or energy loans. Eligible banks were required to have
a capital ratio of at least 4 percent, and their weakened capital position had to be a result
of external problems in the economy and not a result of mismanagement, excessive operating expenses, or excessive dividends. Ultimately, a total of 301 agricultural and energy

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Table I.3-3

Results of the Capital Forbearance Programs*
Agricultural and Energy Sector Banks
Regulatory
Joint Policy

CEBA Loan Loss
Amortization

301

Assets ($ in Billions)

$13.0

$0.5

Avg. Size of Bank ($ in Millions)

$43.2

$15.2

236

Number of Banks in Program

Number of

Banks that Survived†

Number of Banks that Failed

sector institutions with assets of approximately $13 billion participated in the regulatory
forbearance program. Overall, the capital ratio and return on assets of the banks
improved by year-end 1989, a trend that mirrored improving economic conditions in
the agricultural and energy markets. However, 65 of the banks in the regulatory forbearance program subsequently failed.
In 1987, Congress provided additional relief to agricultural lenders by permitting
banks serving predominantly agricultural customers to defer accounting recognition of
agricultural-related loan losses. The Loan Loss Amortization Program, adopted as part
of the Competitive Equality Banking Act (CEBA) of 1987, allowed banks to amortize
those losses over a seven-year period. Only institutions with less than $100 million in
total assets and with at least 25 percent of their total loans in qualified agricultural credits were eligible for the program. Qualified institutions were judged to be economically
viable and fundamentally sound, except for needing additional capital to carry the weak
agricultural credits. Congress’s intent with the agricultural Loan Loss Amortization Program was to allow “fundamentally sound banks to weather (the current) storm.”15 A
total of 33 banks participated in the program. Of those, 27 had survived as independent
institutions a year after leaving it, while 2 merged and 4 failed.
See table I.3-3 for a summary of the regulatory and legislative forbearance programs.

15. Congressional Record, 100th Congress, 2d sess., March 26, 1987, S.3941.

M A N A GI N G T H E C R I S I S

Open Bank Assistance
The failure of Penn Square in 1982 caused wide-ranging repercussions throughout
the banking industry. The most serious result was the subsequent resolution of
Continental Illinois National Bank and Trust Company (Continental), Chicago, Illinois, in 1984. In the years preceding its insolvency, Continental had followed a highrisk expansion strategy based on the rapid growth of its loan portfolio funded by volatile, short-term liabilities. The bank developed extensive international operations;
established divisions to render specialized services to the bank’s oil, utility, and
finance company customers; and developed a separate real estate department to make
commercial and home loans. At its peak in 1981, Continental was the largest commercial and industrial lender in the United States. As of March 31, 1984, shortly
before its resolution, the bank held approximately $40 billion in assets.
Because of the many energy loan participations Continental had purchased from
Penn Square, the Oklahoma City institution’s failure had a disastrous effect on Continental. The participation loans contributed significantly to the more than $5.1 billion
in nonperforming loans held by Continental as of year-end 1982. Following the shock
of Penn Square, management was unable to reverse the adverse asset quality and income
trends, and confidence in Continental was severely shaken. As a result, a rapid and massive electronic deposit run began in May 1984.
The FDIC decided that a payoff of Continental could cause panic in the financial
and banking markets. Irvine Sprague, a former chairman of the FDIC who was a
member of the FDIC’s Board of Directors at that time, wrote about Continental:
Insured deposits were then estimated at about $4 billion, barely 10 percent of
the bank’s funding base. At first glance, a payoff might have seemed a temptingly cheap and quick solution. The problem was there was no way to project
how many other institutions would fail or how weakened the nation’s entire
banking system might become. Best estimates of our staff. . . were that more
than two thousand correspondent banks were depositors in Continental and
some number—we talked of fifty to two hundred—might be threatened or
brought down. . . . The only things that seemed clear were not only that the
long-term cost of allowing Continental to fail could not be calculated, but also
that it might be so much as to threaten the FDIC fund itself.16
As part of the FDIC’s initial response to the crisis, and in a significant departure
from its approach to failed bank resolutions, the FDIC announced that all depositors,
both insured and uninsured, would be protected in any subsequent resolution of
Continental. The open bank assistance transaction that ultimately was used to resolve
Continental sparked a policy debate about whether certain banks were truly “too big to

16. Irvine H. Sprague, Bailout (New York: Basic Books, 1986), 155.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

fail” and whether they were deserving of special treatment not available to smaller
institutions.17
While the term “open bank assistance” gained national recognition with the
Continental transaction, the FDIC has been authorized to provide OBA since
1950.18 Since the Continental transaction, OBA has been transformed by the legislative process and public policy.19 Open bank assistance occurred when a distressed
financial institution remained open with government financial assistance.20 Generally, the FDIC required new management, ensured that the ownership interest was
diluted to a nominal amount, and called for a private sector capital infusion. The
FDIC also had used OBA to facilitate the acquisition of a failing bank or thrift by a
healthy institution and provided financial help in the form of loans, contributions,
deposits, asset purchases, or the assumption of liabilities. Generally, the majority of a
failing institution’s assets remained intact. Because minimizing cost to the insurance
fund is the ultimate goal, the FDIC structured OBA in several ways. Major critics of
OBA, however, claimed that shareholders of failing institutions benefited from government assistance, even though most of the OBA transactions required the shareholders of the failing institutions to significantly dilute their ownership interests.
The FDIC’s authority to provide open bank assistance has changed over time
because of legislative and policy concerns; authority was broadened in the 1980s and
then restricted in the 1990s. Since passage of FDICIA, before the FDIC could provide
OBA, it had to establish that the assistance was the least costly to the insurance fund of
all possible methods for resolving the institution. The FDIC could deviate from the least
cost requirement only to avoid systemic risk to the banking system. The appropriate federal banking agency or the FDIC also had to determine that the institution’s management was competent; had complied with all applicable laws, rules, and supervisory
directives and orders; and had never engaged in any insider dealings, speculative practices, or other abusive activities. Finally, the FDIC could not use insurance funds to
benefit shareholders of the failing institution.
From 1980 through 1994, the FDIC provided OBA to 133 institutions out of 1,617
total failures and assistance transactions, or about 8 percent of the total. (See chart I.310.) Nearly 75 percent of all OBA transactions were completed in 1987 and 1988. Beginning with 1989, the FDIC moved away from providing OBA and entered into only seven
OBA transactions from 1989 to 1992. There have been no OBA transactions to date
since 1992.

17. See Part II, Case Studies of Significant Bank Resolutions, Chapter 4, Continental Illinois National Bank and
Trust Company.
18. Federal Deposit Insurance Act of 1950, U.S. Code, volume 12, section 1823(c)(1).
19. See Chapter 5, Open Bank Assistance, for additional information on the FDIC’s use of OBA.
20. Several types of “assistance to open banks” include forms of cash and non-cash assistance. To the FDIC, the
term “open bank assistance” refers specifically to a resolution method whereby the FDIC gives financial assistance
to a troubled bank or thrift to prevent its failure.

M A N A GI N G T H E C R I S I S

Chart I.3-10

Open Bank Assistance Transactions
Compared to All Failures and Assistance Transactions
1980–1994
300

Number of Transactions

250

200

150

100

0
OBAs
Total

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
1
3
8
3
2
4
7
19
79
1
1
3
2
0
0
133
11
10
42
48
80 120 145 203
279 207 169
127 122
41
13 1,617

Source: FDIC Division of Research and Statistics.

The Banking Crisis in the Southwest
Between 1987 and 1989, a total of 689 banks either failed or required FDIC assistance.
Approximately 71 percent of those failures were in Texas, Oklahoma, and Louisiana,
with the majority of the failures in Texas. By 1988, 9 of the 10 largest banking entities in
that state required FDIC resolution. The concentration of failures in the Southwest that
occurred in the late 1980s has been attributed to several factors.21 The first was the volatility of oil prices, which rose sharply between 1973 and 1981, declined moderately
between 1981 and 1985, and then fell 45 percent in 1986. The second factor was the
explosive growth in real estate development that led to a greater than 25 percent office
vacancy rate in Texas’s major metropolitan areas between 1986 and 1989. The third factor was the change in composition of commercial banks’ loan portfolios. Concentrations
in relatively high-risk loans such as land development and commercial and industrial

21. John O’Keefe, “The Texas Banking Crisis: Causes and Consequences, 1980-1989,” FDIC Banking Review 3,
no. 3 (winter 1990), 2, 3.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Table I.3-4

Bank Failures in the Southwest
1980–1994
Year

Total Bank Failures

Bank Failures in
the Southwest*

Bank Failures in the
Southwest as a Percentage of
Total Bank Failures

1980

1981

1982

1983

1984

1985

120

1986

145

1987

203

110

1988

279

214

1989

207

167

1990

169

120

1991

127

1992

122

1993

1994

1,617

813

Totals

* The Southwest as defined here includes Arkansas, Louisiana, New Mexico, Oklahoma, and Texas.
Source: FDIC Division of Research and Statistics.

loans increased through the mid-1980s, exposing banks to the effects of falling land
prices and diminishing cash flows of borrowers. A fourth factor was the infrequency of
bank examinations in the mid-1980s. (See table I.3-4.)
The Southwest banking crisis was qualitatively different from the interest rate
driven crisis of the early 1980s. In the earlier crisis, many failing banks actually had
high-quality loan portfolios and took advantage of regulatory forbearance to ride out
temporarily adverse economic conditions. Forbearance was not a viable option in the
new crisis. The FDIC was faced with large numbers of failing banks with high levels of
nonperforming real estate loans that demanded quick action. In response to that situation, the FDIC began using two new resolution methods: the bridge bank and the
whole bank purchase and assumption transaction. Both methods allowed assets to

M A N A GI N G T H E C R I S I S

remain in private sector hands and minimized the FDIC’s cash outlays required to
consummate failing bank resolutions.
Bridge Banks
The Competitive Equality Banking Act of 1987 authorized the FDIC to create bridge
banks to resolve failing institutions. A bridge bank is a full-service national bank chartered by the Office of the Comptroller of the Currency and controlled by the FDIC. Initially, a bridge bank was operated for two years, with a one-year extension, which later
was amended by the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) of 1989 to provide three one-year extensions. Bridge banks, which provide
the FDIC time to arrange a permanent transaction, are especially useful in situations in
which the failing bank is large or unusually complex. In general, the FDIC may establish
a bridge bank if the board of directors determines it to be cost effective; that is, establishment of a bridge bank is in accordance with the cost test (before December 1991) or the
least cost test (after December 1991). The FDIC used its bridge bank authority for the
first time on October 30, 1988, when Louisiana banking authorities closed Capital
Bank and Trust Company in Baton Rouge.
A bridge bank may be resolved through a purchase and assumption transaction (the
most common method), a merger, or a stock sale. Of the 32 bridge banks resolved, all
but 2 were short term, lasting seven months or less. The two long-term bridge banks
established to resolve the First RepublicBanks and the MCorp banks technically were
resolved within seven months (transactions with acquirers were consummated), but
their status as bridge banks lasted beyond the resolution date because the FDIC owned
stock in the bridge banks. Bridge bank status terminated when the acquirer bought the
FDIC’s interest and obtained a regular national bank charter. The change in status
occurred after approximately thirteen months with the First RepublicBanks and twoand-one-half years with the MCorp banks.
Preference for Passing Assets
In the 1980s, the FDIC was able to select any available resolution method, as long as
the method chosen was less than the estimated cost of paying off the depositors and liquidating the failed bank’s assets.22 As the banking crisis became more acute in the second half of the decade, the FDIC tended to choose transactions that allowed a large
proportion of a failing bank’s assets to pass to the acquirer. That preference was exercised for a variety of reasons.
22. The FDIC developed its cost test in 1951 in response to congressional criticism of the FDIC’s preference for
facilitating deposit assumptions for failing banks over payoffs. Assumptions resulted in de facto deposit insurance
of all depositors, whereas payoffs protected only insured depositors. The cost test was subsequently used to determine whether an assumption (or other transaction) would be cheaper than a payoff.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

First, the FDIC became concerned that the accumulation of assets would have a disastrous effect on the insurance fund. Former Chairman L. William Seidman, noting that
before this time, emphasis had not been placed on the sale of assets at resolution, wrote:
This was not a serious problem in an agency with very few failed banks, and
when the FDIC insurance fund had lots of cash . . . But it could be disastrous as
the number of bank failures increased . . . The strategy of holding on to assets
would swallow up all our cash very quickly . . . Cash had never been a problem
at the FDIC, with billions in premium income on deposit at the Treasury. But
my calculations showed that on the basis of the way we were doing things, if
you took the FDIC forecast of bank failures from 1985 to 1990, our cash
reserve of $16 billion would be wiped out well before the end of the decade.23
Second, although there is no empirical evidence, it was generally believed that after
an asset from a failing bank was transferred to a receivership, the asset would suffer a loss
in value.24 Loans have unique characteristics, and prospective purchasers need to gather
information about the loans to properly evaluate them. Such “information cost” is factored into the price that the outside parties are willing to pay for the loans. That cost
tends to be greater on assets from failed banks. In addition, a loss in value can occur
because of the break in the bank-customer relationship. When a customer values a banking relationship, the customer is willing to work with the bank. However, when a customer merely has an obligation to pay and anticipates no continuance of a business
relationship, that customer may not be as willing to pay his debt in full.
Third, as the FDIC began having to manage an extremely large portfolio of failed
bank assets caused by the growing number of bank failures in the late 1980s, several
logistical problems began to develop, and it therefore became more desirable to pass
assets to acquirers rather than incur the added costs of acquiring, maintaining, and
subsequently remarketing those assets.
Fourth, the FDIC simply considered it more appropriate for private assets to remain
within the private marketplace.
Finally, the FDIC saw the sale of higher percentages of assets at resolution as a way
to minimize disruption in the communities in which failing banks were located.
Whole Bank Transactions
The whole bank purchase and assumption transaction is a variation of the P&A transaction, distinguished by the fact that virtually all the failed bank’s assets are passed to the

23. L. William Seidman, Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas (New York:
Times Books, 1993), 100.
24. This loss of value is known as the “liquidation differential.” Frederick S. Carns and Lynn A. Nejezchleb, “Bank
Failure Resolution: The Cost Test and the Entry and Exit of Resources in the Banking Industry,” The FDIC
Banking Review 5 (fall/winter 1992), 1-14.

M A N A GI N G T H E C R I S I S

acquirer with the institution’s liabilities for
a one-time cash payment. Whole bank
Number of Whole Bank Transactions
transactions represent the most dramatic
1987–1992
attempt by the FDIC to pass assets from
failed banks quickly back into the private
80
sector. Whole bank transactions were per70
ceived to offer certain important advan60
tages over other methods of transactions.
50
Because loan customers of the failed insti40
tution continued to be serviced by an
30
ongoing bank, the effect on the local com20
munity was minimized. In addition,
10
whole bank transactions slowed the
0
1987
1988
1989
1990
1991
1992
growth in the volume of assets held by the
19
69
42
43
24
5
FDIC for liquidation. Starting in 1987,
when the FDIC implemented 19 whole
Source: FDIC Division of Resolutions and Receiverships.
bank transactions, the whole bank P&A
joined the clean bank P&A, the insured
deposit transfer, and the straight deposit
payoff as the FDIC’s standard methods for resolving failures. In 1988, 69 of the 279
failed bank resolutions were whole bank transactions. Whole bank transactions were also
widely used in 1989, 1990, and 1991, when they constituted 20.3, 25.4, and 18.9
percent of all resolutions, respectively.25 With the introduction of the least cost test,
however, the number of successful whole bank bids declined. Because a whole bank bid
constitutes a one-time payment from the FDIC, bidders tended to bid very conservatively to cover all potential losses. Conservative whole bank bids could not compete with
other transactions on a least cost basis. Overall, the FDIC completed 202 whole bank
transactions between 1987 and 1992, or 18.2 percent of the total number of transactions during that period. (See chart I.3-11.) The failed banks handled as whole bank
transactions had $8.2 billion in total assets.
Whole bank bids were almost always offered on an all-deposit basis, requiring any
winning bidder to agree to assume both the insured and the uninsured deposits.
Number of Transactions

Chart I.3-11

Other Variations of Transaction Structures
Other variations of P&A transactions existed between the clean bank P&A that passed
few assets to the acquirer and the whole bank P&A that passed virtually all assets. The
modified P&A required the winning bidder to purchase the cash and securities, and
usually the installment loans as well as all or a portion of the mortgage loan portfolio.

25. FDIC Division of Finance.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Occasionally, multi-family loans also were included. Typically, between 25 percent and
50 percent of the failed bank’s assets were purchased under a modified P&A structure.
The loan purchase P&A required the winning bidder to assume a smaller portion of the
loan portfolio, usually just the installment loans, in addition to the cash and securities.
Typically, a loan purchase P&A transaction would pass between 10 and 25 percent of
the failed bank assets. With each of those variations, deposits were treated the same
during the 1980s; all of them were protected and passed to the acquirer.
Sequential Bidding
The FDIC’s preference for passing assets to acquirers was made corporate policy
formally on December 30, 1986.26 The FDIC Board of Directors established an order
of priority for six alternative transaction methods on the basis of the amount of assets
passed to the acquirer.27
In accordance with the transaction hierarchy established by the board, whole bank
purchase and assumption bids were considered first. If any whole bank bids were
received that passed the cost test, the remaining bids were not considered and the most
cost-effective whole bank P&A bid was selected as the winner. If no whole bank bids
were received or passed the cost test, the remaining transactions were considered in the
preferential order. When evaluating P&A bids, the FDIC gave priority to those transactions through which the highest volume of assets could be sold. Thus, modified P&As
took priority over loan purchase P&As, and loan purchase P&As took priority over
clean bank P&As. If any P&A bids passed the cost test, the best P&A bid was selected as
the winning bid. If no P&A bids were received or passed the cost test, all the acquirers
originally asked to bid would be contacted again and asked to submit a whole bank
deposit insurance transfer and asset purchase bid. If none of the preferential transactions
were acceptable, the FDIC would make a direct payoff to the insured depositors and
liquidate the assets of the failed bank.
The sequential bidding procedures employed by the FDIC accomplished what it
set out to achieve: transfer assets back to the private sector and preserve the FDIC’s
liquidity. By determining the priority order of transactions according to the amount
of assets purchased by the assuming institution, the FDIC clearly maximized its transfer of assets to the private sector, reducing its cash outlays and preserving liquidity.
That action likely came at the expense of somewhat higher overall resolution costs

26. The policy was called the Robinson Resolution (named after Hoyle Robinson, Executive Secretary of the FDIC
from May 7, 1979, to January 3, 1994). The resolution provided delegations to FDIC staff that allowed prioritizing
the types of resolutions to be considered. The Robinson Resolution was revised and reissued in July 1992 and May
1997 to reflect the changes mandated by FDICIA.
27. The six transaction types named were, in order of preference, whole bank purchase and assumption, whole
bank deposit insurance transfer and asset purchase, purchase and assumption, deposit insurance transfer and asset
purchase, deposit insurance transfer, and straight deposit payoff.

M A N A GI N G T H E C R I S I S

than otherwise would have been the result had bidders been able to choose simultaneously from a wider range of bidding options. By 1991 the FDIC abandoned
sequential bidding. Indeed, it could no longer have been used even if viewed as desirable given FDICIA and its least cost test.

End of the Nationwide Real Estate Boom
The Tax Reform Act of 1986 removed the favorable tax treatment afforded investments in real estate. Commercial real estate markets throughout the country had
been overbuilt in the boom period of the 1980s, resulting in high vacancy rates and
falling property values. For those reasons, new construction came to a standstill as
the U.S. entered the 1990-91 recession. Banks that had lent heavily in the real estate
sector experienced a sharp decline in the credit quality of their loan portfolios. As
the 1980s came to a close, the Southwest banking crisis was being eclipsed by severe
problems elsewhere, particularly in the Northeast.28 To illustrate, bank failures in
Louisiana (an oil patch state) decreased from 21 in 1989 to 5 in 1991, while bank
failures in Massachusetts rose from 1 in 1989 to 14 in 1991. Following the pattern
set by the Southwest in the 1980s, the regional economy in the Northeast expanded
in the 1980s, with many financial institutions growing rapidly through increased
lending (particularly in commercial real estate) and/or acquisitions. The subsequent
collapse in real estate prices, combined with a regional recession during the late
1980s and early 1990s, led to the failure of many banks in the Northeast.29 Between
January 1, 1990, and December 31, 1992, 111 FDIC insured banks with approximately $83 billion in assets failed in the Northeast. Those failures represented
approximately 27 percent of the total number of bank failures, but more significantly, 67 percent of the total assets of failed banks for those years. Losses from
northeastern bank failures totaled $9.6 billion, or 76 percent of total FDIC failure
resolution costs. In 1991 alone, 52 Northeast banks with assets of $48.5 billion (78
percent of total failed bank assets) failed, with a cost to the FDIC of $5.5 billion
(91 percent of total FDIC failure resolution costs). (See chart I.3-12 for a comparison of the number of bank failures in the Northeast and Southwest.)
The geographic distribution of bank failures was not the only aspect of the banking
crisis that was changing. The volume of assets held by institutions that failed in 1991
totaled $62.5 billion, a fourfold increase over the 1990 total of $15.7 billion.

28. The Northeast region as defined here includes the six New England states (Connecticut, Maine, Massachusetts,
New Hampshire, Rhode Island, and Vermont) plus New Jersey and New York.
29. For more information, see Chapter 10, “Banking Problems in the Northeast,” History of the Eighties—Lessons
for the Future: An Examination of the Banking Crises of the 1980s and Early 1990s (Washington, D.C.: Federal
Deposit Insurance Corporation, 1997).

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Chart I.3-12

Comparison of Bank Failures in the Northeast and Southwest
1986–1995

Number of Failed Banks

200

150

100

Northeast
Southwest

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

0
54

4
110

1
214

5
167

16
120

52
41

43
36

4
10

4
0

1
0

Source: FDIC Division of Finance, Failed Bank Cost Analysis, 1986–1995.

Furthermore, the total assets of banks on the FDIC’s problem bank list at year-end 1991
were $609.8 billion, a sharp increase over the $408.8 billion at the previous year end.30
The heavy losses sustained by the banking industry as a result of the widespread real
estate problems had a direct influence on the FDIC insurance fund. At year-end 1990,
the insurance fund declined to $4.0 billion. In 1991, for the first time in history, the
insurance fund technically dropped below zero, to a negative $7.0 billion, as the FDIC
booked $16.3 billion of reserves in anticipation of possible future bank failures. Actual
cash on hand was $9.3 billion.

Legislative Responses to the Crisis
In 1989 and 1991, Congress passed two major pieces of legislation in response to the
bank crisis: the Financial Institutions Reform, Recovery, and Enforcement Act and the
Federal Deposit Insurance Corporation Improvement Act.

30. FDIC, 1991 Annual Report, 15.

M A N A GI N G T H E C R I S I S

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
While most provisions of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 addressed the savings and loan crisis, the law also addressed losses incurred
by the FDIC insurance fund in situations in which an affiliated institution within a
multi-bank holding company failed. In 1989, FIRREA added section 5(e) to the Federal
Deposit Insurance Act. Section 5(e) was designed to prevent affiliated banks from shifting assets and liabilities in anticipation of failure of one or more of their number in an
attempt to retain value for the owners, while depriving the FDIC of that value and
increasing the FDIC’s costs. The law provided for “cross guarantees” to be established
among affiliated institutions: The FDIC was empowered to apportion loss among all the
banks within the affiliated group in the event that one or more of the related institutions
failed. The failure of the MCorp banks, Dallas, Texas, in particular, precipitated the
cross guarantee statute. In the resolution of MCorp in March 1989, the holding
company refused to agree to contractual cross guarantees. Only 20 of the banks could be
closed; the FDIC was unable to force the five viable banks to contribute their value to
the resolution. Since the addition of section 5(e) in August 1989, the FDIC, using the
cross guarantee provisions, has been able to close affiliated banks that would otherwise
have remained open and to sell the entire group of affiliates at the same time. That strategy was used notably in resolving the First City, N.A., Houston, Texas; Bank of New
England, N.A., Boston, Massachusetts; and Southeast Bank, N.A., Miami, Florida.31
The Federal Deposit Insurance Corporation Improvement Act
In December 1991, President Bush signed into law the Federal Deposit Insurance Corporation Improvement Act. Observers of the financial services industry have described
FDICIA as “the most important banking legislation since the Banking Act of 1933.”32
While the law touched a wide range of regulatory areas, certain provisions—particularly
those pertaining to prompt corrective action (PCA) on failing institutions and to least
cost resolutions—had profound effects on the way the FDIC conducted failed bank
resolutions.
FDICIA requires federal regulators to establish five capital levels, ranging from wellcapitalized to critically undercapitalized, that serve as the basis for prompt corrective
action. As an institution’s capital declines, the appropriate regulator must take increasingly stringent measures. The sanctions begin with restrictions on deposit gathering for
depository institutions that are not well-capitalized and culminate with the closing of
institutions that have been critically undercapitalized for a prescribed period. The law is
31. See Part II, Case Studies of Significant Bank Resolutions, Chapter 5, First City Bancorporation of Texas, Inc.,
Chapter 8, Bank of New England Corporation, and Chapter 9, Southeast Banking Corporation.
32. George G. Kaufman and Robert E. Litan, eds., Assessing Bank Reform: FDICIA One Year Later (Washington,
D.C.: The Brookings Institution, 1993), 19.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

intended to protect the insurance system and the taxpayers by resolving troubled banks
while the institutions can still absorb their own losses.
One of the aspects of PCA that most directly affects the FDIC’s approach to resolutions prescribes mandatory measures for critically undercapitalized institutions (those
banks with a ratio of tangible equity to total assets equal to or less than 2 percent). FDICIA requires that, not later than 90 days after an institution falls into the critically
undercapitalized category, a conservator or receiver must be appointed. The FDIC may
grant up to two 90-day extensions of the PCA period if it is determined that those
extensions would better protect the insurance fund from long-term losses.
Under FDICIA, if the FDIC does not liquidate a failing institution (conduct a
deposit payoff), then it must pick the least costly resolution transaction available. All
bids must be considered together and evaluated on the basis of comparative cost; other
policy considerations cannot be factored into the determination of the appropriate
transaction. As discussed earlier, FDICIA compelled the FDIC to consider more transaction options than in the past to make certain that all plausible least cost structures are
offered.

Responses to FDICIA: Resolution Strategies, 1992 to 1996
The passage of FDICIA in 1991 had a significant effect on the FDIC’s resolution practices.
In addition to eliminating the FDIC’s preference for passing assets, it also eliminated the
automatic assumption that all deposits were to be passed to acquirers. After FDICIA, alldeposit transfer bids were at a relative disadvantage compared to insured deposit transfer
bids. FDICIA also influenced the FDIC to reduce its resolution cost by allowing the FDIC
to sell asset pools to banks that were not assuming the deposits, selling a failed bank’s
branches to different banks, and entering into loss sharing agreements on certain asset pools.
“Insured Deposits Only” Bidding
Under the various P&A asset purchase structures offered post-FDICIA, the FDIC gave
bidders the option of bidding on insured deposits only. Previously, P&A bids required
that the acquirer assume all the failed institution’s deposits. Because an insured deposits
only bid does not have to compensate the FDIC for the additional cost of covering 100
percent of the uninsured depositor’s claim, it is easier for an insured deposits only bid to
pass the least cost test. Additionally, as the FDIC began offering that option on an
increasingly regular basis, acquirers discovered that the effects of not covering the uninsured depositors were less detrimental than they had once thought. The results of the
change on acquirer bidding behavior are immediately apparent. (See chart I.3-13 for the
number of failed banks in which the uninsured depositors were both protected and
unprotected from 1986 through 1995.) On average, 82 percent of all banks failing
between 1992 and 1995 were resolved in a manner that did not provide full protection

M A N A GI N G T H E C R I S I S

to uninsured depositors, compared with 17 percent between 1986 and 1991. Perhaps
more significantly, 85 percent of all the deposits in banks that failed between 1986 and
1991 were in banks in which all deposits were protected compared to only 15 percent of
the deposits in failed banks between 1992 and 1995.
Asset Pools
In addition to allowing bidders the option of choosing between an all-deposit or an
insured deposit bid, the FDIC was also seeking ways to provide more flexibility for the
purchase of assets. Potential acquirers often were reluctant to assume large loan portfolios that did not fit their current business strategies. As a result, FDIC officials decided
that for banks with a diverse loan mix, it would be preferable to separate the loan portfolio into pools of homogeneous loans and to market those loans separately from the
deposit franchise. The individual asset pools were smaller than the asset pools offered
under the loan purchase or modified P&A options, and they included loans of similar
collateral, term, and structure. Moreover, the FDIC structured the pools according to
the preferences of acquirers within a given geographic location. It often grouped

Chart I.3-13

Uninsured Depositor Treatment
1986–1995
100
90

Percentage of Failed Banks

80
70
60
50
40
30
20
10
0
1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Uninsured
Protected (%)

Uninsured
Not Protected (%)

100

Source: FDIC Division of Finance, Failed Bank Cost Analysis, 1986–1995.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

nonperforming loans, other real estate, and other loans that did not conform with one
of the established pool structures into a single pool, which, depending on the overall
quality of the pool, might be offered for sale. In transactions offering asset pools, the
FDIC gave acquirers the option of linking their bids for the asset pools with their franchise bids. The linked bid was evaluated as one all or nothing bid. Such a strategy was
intended to provide an additional level of flexibility. While certain acquirers did not
wish to purchase the assets of the failed bank, for others it was in fact essential to
acquire a substantial portion of the assets. In some acquisitions, banks bid on deposit
franchises substantially larger than their current deposit bases. For those institutions, it
was more difficult to reinvest a large cash payment received from the FDIC, and they
therefore needed to acquire a large portion of the performing assets to maintain a positive net interest margin. In fact, for transactions completed between 1992 and 1994,
virtually all the assets passed to acquirers were part of asset pool bids, which were made
contingent on the selection of the bank as the winning franchise bidder.
Branch Breakups
Sometimes acquirers were unwilling to assume all the deposits of a multi-bank or multibranch operation. At other times, the FDIC could obtain a better price for the franchise
by selling each branch separately rather than marketing the institution in one transaction. The FDIC used this branch breakup method occasionally in the 1970s and early
1980s, usually when competition for the entire franchise was expected to be limited.
Later in the 1980s it began marketing some of the institutions’ branches individually
when it was determined that there was an opportunity to increase the price of the
franchise or sell more of the assets of the former bank through the resolution process.
Certain disadvantages exist with branch breakup transactions. Electronic data processing costs are generally higher than in whole franchise deals, and it is more difficult to
complete transactions within the required timeframes. Further, branch breakups require
one of the acquiring institutions to be “lead” acquirer and provide backroom operations
for all the other acquirers during the transition period. Failing institutions with little
franchise value or with geographically concentrated branches are considered poor
candidates for branch breakup resolutions.
By offering failing institutions on both a whole franchise and branch breakup basis,
the FDIC expanded the universe of potential bidders by allowing smaller institutions to
participate along with larger institutions interested in only certain branches or markets.
The number of successes the FDIC experienced with completing branch breakups
shows that, generally, that method results in more bidders and higher premiums.
Loss Sharing Transactions
In 1991, the FDIC developed loss sharing transactions as another variation of the purchase and assumption transaction. Loss sharing was originally designed to (1) transfer as

M A N A GI N G T H E C R I S I S

many assets as possible to the acquiring bank, and (2) have the nonperforming assets
managed and collected by the acquiring bank in a manner that aligns the interests and
incentives of the acquiring bank and the FDIC. The loss sharing transaction evolved
into a vehicle that allowed the FDIC to successfully resolve the unique problems associated with marketing large banks. Large banks can be more difficult to market, because
they typically have sizeable commercial and commercial real estate loan portfolios. In
the past, acquiring institutions had been extremely reluctant to acquire commercial
assets in FDIC transactions for several reasons. First, the time allowed to perform due
diligence was usually very limited. Often, the FDIC had to accommodate numerous
potential acquirers who wished to perform due diligence at the target institution, and all
acquirers had to complete their reviews before the bid submission date. That requirement allowed very little time for a given acquirer to perform more than a cursory review
of loans in the commercial portfolio. In addition to that limitation, many acquirers did
not wish to purchase large portfolios of commercial loans that they did not underwrite.
In many cases, the underwriting criteria of the failed bank were extremely poor before
failure, and acquirers wished to avoid the additional costs associated with completing
workouts of large commercial loans that became a problem. Finally, before 1992, almost
every region of the U.S. had been experiencing declining markets for commercial real
estate, and even when acquiring banks were willing to acquire the commercial real estate
portfolios, their bids were usually too low, because they had incorporated a large
discount into their bids to compensate for the potential risk.
Loss sharing was designed to address those concerns by limiting the downside risk
associated with acquiring large commercial loan portfolios, which was accomplished by—
• providing for the FDIC to cover 80 percent of any losses on commercial and
commercial real estate loans purchased by the acquirer;
• reimbursing acquiring institutions 80 percent of all expenses, except for overhead
and personnel expenses, incurred in relation to the disposition or collection of
shared loss assets; and
• providing catastrophic loss coverage on a 95 percent basis beyond a “transition
amount” if the acquirer ultimately had losses that exceeded the FDIC’s estimate
of the overall loss on shared loss assets.33
Shared loss assets consist primarily of commercial and commercial real estate loans,
although some earlier agreements included additional loan categories. By limiting an
acquirer’s exposure to a maximum of 20 percent, the FDIC hoped to pass most of the
failed bank’s assets to an acquirer while still receiving a substantial bid premium for the
deposit franchise. The loss share transaction was employed generally for failing banks

33. For further details, see Chapter 7, Loss Sharing.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

Table I.3-5

FDIC Loss Share Transactions
1991–1994
($ in Millions)
Transaction
Date
Failed Bank*

Location

09/19/91

Southeast Bank, N.A†

Miami, FL

10/10/91

New Dartmouth Bank

10/10/91

Resolution Cost
Total Resolution as Percentage
Assets
Costs of Total Assets
$10,478

0.00

Manchester, NH

2,268

571

25.19

First New Hampshire

Concord, NH

2,109

319

15.14

11/14/91

Connecticut Savings Bank

New Haven, CT

1,047

207

19.77

08/21/92

Attleboro Pawtucket S.B.

Pawtucket, RI

595

5.41

10/02/92

First Constitution Bank

New Haven, CT

1,580

127

8.01

10/02/92

The Howard Savings Bank

Livingston, NJ

3,258

2.67

12/04/92

Heritage Bank for Savings

Holyoke, MA

1,272

1.70

12/11/92

Eastland Savings Bank‡

Woonsocket, RI

545

3.30

12/11/92

Meritor Savings Bank

Philadelphia, PA

3,579

0.00

02/13/93

First City, Texas-Austin, N.A.

Austin, TX

347

0.00

02/13/93

First City, Texas-Dallas

Dallas, TX

1,325

0.00

02/13/93

First City, Texas-Houston, N.A.

Houston, TX

3,576

0.00

04/23/93

Missouri Bridge Bank, N.A.

Kansas City, MO

1,911

356

18.62

06/04/93

First National Bank of Vermont Bradford, VT

225

14.97

08/12/93

CrossLand Savings, FSB

7,269

740

10.18

$41,384

$2,511

6.07

Totals/Average

Brooklyn, NY

M A N A GI N G T H E C R I S I S

with commercial loan portfolios in excess of $100 million. (See table I.3-5 for a
summary of loss share agreements from 1991 to 1994.)

Resolution Costs
The 1,617 banks that failed (or required open bank assistance) between 1980 and 1994
had $302.6 billion in assets. The FDIC’s cost for handling the failures was $36.3 billion,
or about 12 percent of the assets in the banks that required FDIC financial assistance.
The FDIC’s annual failure resolution costs steadily grew during the 1980s, along
with the rise in bank failures. The years between 1987 and 1992 were exceptionally costly.
The FDIC’s failure resolution costs exceeded $2 billion in each of those years. In 1988,
the costs peaked at $6.87 billion. Costs exceeded the $6 billion mark in 1989 and 1991 as
well. (See chart I.3-14.) To put the costs in perspective, FDIC insured commercial banks,
Chart 1.3-14

Resolution Costs by Year of Failure
1980–1994
($ in Billions)
8
7

Resolution Costs

6
5
4
3
2
1
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Resolution
$0.03 0.66 1.17 1.43 1.63 1.01 1.73 2.03 6.87 6.21 2.89 6.04 3.71 0.65
Costs
No. of
11
10
42
48
80 120 145 203
279 207 169
127 122
41
Bank Failures
Total Assets
of Failed Banks $8.08 4.97 11.55 7.27 36.53 8.40 6.82 9.24 52.66 29.40 15.73 62.47 44.55 3.53

1994 Totals
0.21 $36.27
13

1,617

1.41 $302.63

Costs are as of December 31, 1995. The amounts are routinely adjusted with updated information from
new appraisals and asset sales that ultimately affect the asset values and projected recoveries from active
receiverships.
Figures include open bank assistance transactions.
Sources: FDIC Division of Research and Statistics and FDIC annual reports.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

the group that pays the insurance premiums to cover those costs, earned an average of
$18.2 billion a year during 1987 to 1992. During the same period, the FDIC’s bank failure costs averaged $4.6 billion, or 25 percent of the industry’s total earnings.
Looking at the FDIC’s annual resolution costs as a percentage of failed bank assets
shows no clear pattern. (See chart I.3-15.) Because of the dominance of the Continental
OBA transaction in 1984, the ratio is a relatively low 4.48 percent in that year. The late
1980s show relatively high cost-to-asset ratios, exceeding 20 percent in 1986, 1987, and
1989. In those years, in spite of a large number of failures and a weak economy, few
dominant, sizeable failures pulled down the averages. The 1990s, with its gradually
improving economy, proved to be less costly than the 1980s.
A strong correlation exists between bank asset size and failure resolution costs as a
percentage of assets. Chart I.3-16 shows that for smaller bank failures, those of banks
with less than $500 million in total assets, the overall failure resolution cost is about 20
percent of assets during 1980 to 1994. As bank asset size increases, the ratio steadily
declines, reaching 6 percent for banks with more than $5 billion in assets.
The economies of scale associated with handling larger bank failures make it difficult to discern trends over time in the FDIC’s cost for handling the “typical” bank

Chart I.3-15

Resolution Costs as a Percentage of Total Assets
1980–1994
30

0
1980

Costs/Assets (%) 0.38

1981

1982

1983

13.28 10.12 19.69

1984

1985

1986

1987 1988

1989 1990

4.48 11.99 25.36 21.95 13.03 21.14 18.37

Figures include open bank assistance transactions.
Sources: FDIC Division of Research and Statistics and FDIC annual reports.

1991 1992
9.66

1993

1994

8.32 18.41 14.82

100

M A N A GI N G T H E C R I S I S

failure. One way to look at possible trends without the dominant influence of the larger
bank failure is to look at the median of the FDIC’s bank resolution costs over time. (See
chart I.3-17.) A look at the median FDIC resolution cost shows a dramatic jump in the
1983 to 1985 timeframe, when the economy was weakening and the steady increase in
the annual number of bank failures was beginning. During 1984 and 1985, the median
cost rose to over 30 percent of failed bank assets. The ratio declined for the remainder of
the 1980s, but it was still above 20 percent in each of those years. During the 1990s, the
ratio dropped further, into the teens.
Another way of looking at resolution costs is by transaction method. (See tables I.36 through I.3-9 for annual trends in the FDIC’s failure resolution costs by transaction
method.) This review by transaction method reveals a relatively high cost of deposit
payoffs, whether they are straight deposit payoffs or insured deposit transfers. In addition, OBA transactions were less costly than P&A transactions. It is difficult, however,
to draw firm conclusions from that type of comparison. Historic bidding procedures
generally did not allow for open competition among transaction methods. Open bank
assistance was used for a greater percentage of larger bank resolutions, so they cannot be
directly compared to the others. Because of the FDIC’s preference for P&A transactions
over deposit payoffs, it is difficult to draw any conclusions there as well. The FDIC used
Chart I.3-16

Resolution Costs by Asset Size
as a Percentage of Total Assets
1980–1994
20

0
Bank Failures
with TA Greater
than $5 Billion

Bank Failures
with TA $1 Billion
to $5 Billion

Bank Failures
with TA $500 Million
to $1 Billion

Bank Failures
with TA less
than $500 Million

Average/
Total

Costs as Percentage
of Total Assets (TA)

6.00

11.63

14.79

19.69

11.98

Number of Failures

1,530

1,617

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

101

deposit payoffs in the worst situations, those where no one really wanted the failed bank
franchise in a P&A transaction.
The P&A transaction, the most frequently used method, shows high costs (in excess
of 20 percent of failed bank assets) from 1980 through 1987, except in 1982 when the
cost-to-asset ratio was only 6.6 percent. (See table I.3-6.) The 1982 ratio, however, is an
aberration caused by one large bank failure that had zero cost to the insurance fund.
From 1988 through 1994, those costs were below 20 percent of assets, dropping to
single digits in 1991 and 1992. During those two years, the FDIC handled several larger
banks (Bank of New England, Southeast, Goldome, and CrossLand Savings Bank) at
relatively low costs.
Table I.3-7 shows the relatively low costs for open bank assistance transactions. As
previously stated, the lower costs are due in part to the larger average size of the banks
handled by this method rather than to any inherent advantage of the method itself. This
effect of the larger asset size can be seen in the Continental transaction, which, with
$33.6 billion in assets, was 40.7 percent of the total assets of all OBA transactions; yet
Continental’s cost-to-asset ratio was only 3.3 percent of assets. Factors other than size
also are relevant. The average cost of the OBA transactions for banks with less than $500

Chart I.3-17

Median Bank Resolution Costs as a Percentage of Total Assets
1980–1994
35
30
25
20
15
10
5
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

1991 1992 1993 1994

Costs/Assets (%) 14.21 16.12 15.67 26.46 30.84 31.36 25.71 23.57 20.75 22.31 18.76 19.42 15.77 18.17 18.29

Figures include open bank assistance transactions.
Sources: FDIC Division of Research and Statistics and FDIC annual reports.

102

M A N A GI N G T H E C R I S I S

million in assets was only 7.8 percent, which is well below the cost for other types of
small bank transactions. This lower cost suggests that handling those institutions
relatively early helped to hold down their overall costs.
The costs associated with straight deposit payoffs (see table I.3-8) and insured
deposit transfers (see table I.3-9) as a percentage of failed bank assets peaked later in the
1980s when the economy was weak and the country experienced the largest number of
bank failures. Those banks often were unmarketable institutions that no one would
purchase. In 1989, the average cost of the nine deposit payoffs was 44 percent of the
failed banks’ assets.

Table I.3-6

Costs for Purchase and Assumption Transactions
1980–1994
($ in Millions)
Number of
Year
P&As

Assets at
Resolution

Deposits at
Resolution

Costs as of
12/31/95

Costs/Assets
(%)

1980

$114.4

$195.7

$28.4

24.83

1981

30.1

52.5

7.9

26.25

1982

1,195.6

1,026.7

79.4

6.64

1983

4,211.1

2,920.0

1,334.9

31.70

1984

1,567.8

1,400.6

431.5

27.52

1985

1,894.7

2,030.1

535.7

28.27

1986

4,791.9

4,710.9

1,213.0

25.31

1987

133

4,255.4

3,927.5

1,161.0

27.28

1988

164

37,802.8

23,967.9

4,840.9

12.81

1989

174

27,001.7

20,952.9

5,325.6

19.72

1990

148

13,241.6

11,578.9

2,148.4

16.22

1991

103

60,803.2

47,826.1

5,547.5

9.12

1992

42,481.7

36,565.6

3,196.8

7.53

1993

3,217.3

2,905.4

552.6

17.18

1994

1,405.1

1,233.6

208.3

14.82

1,188

$204,014.4

$161,294.4

$26,611.9

13.04

Totals/
Average

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

103

Table I.3-10 shows the FDIC’s costs for the more significant types of purchase and
assumption transactions. The 202 whole bank P&A transactions conducted between
1987 and 1992 cost the FDIC $1.4 billion, or 16.7 percent of total assets. The 24 failed
banks resolved through loss share transactions conducted between 1991 and 1993 cost
the FDIC $2.3 billion, or 5.5 percent of total assets. The 962 other P&A transactions
accounted for $22.9 billion in cost, a 14.9 percent cost-to-asset ratio.
It is difficult to draw any strong conclusions from the charts and graphs shown in
the resolution costs section other than to point to the fact that larger banks cost less to
resolve on a cost-to-asset basis than do smaller institutions. Many factors determine the
overall recovery rate of each bank that fails, including the selected method of resolution,
Table I.3-7

Costs for Open Bank Assistance Transactions
1980–1994
($ in Millions)
Number of
Year
OBAs

Assets at
Resolution

Deposits at
Resolution

Costs as of
12/31/95

Costs/Assets
(%)

1980

$7,953.0

$5,300.0

$ 0.00

0.00

1981

4,886.3

3,729.0

653.9

13.38

1982

9,770.0

8,373.3

1,018.2

10.42

1983

2,890.0

2,420.7

71.3

2.47

1984

34,147.9

17,945.0

1,111.3

3.25

1985

5,895.9

5,510.4

359.1

6.09

1986

718.8

585.6

97.4

13.55

1987

2,515.6

2,118.0

160.2

6.37

1988

13,539.0

11,501.2

1,594.5

11.78

1989

5.7

6.4

2.3

40.35

1990

15.9

15.6

2.3

14.47

1991

83.8

80.4

3.1

3.70

1992

34.9

33.5

0.6

1.72

1993

0.00

1994

0.00

133

$82,456.8

$57,619.1

$5,074.2

6.15

Totals/
Average

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

104

M A N A GI N G T H E C R I S I S

the bank’s financial condition at the time of failure, and the economic conditions of the
region. In the middle to late 1980s, when the economy was weaker and fewer banks
were interested in purchasing the franchise of a failed institution, the costs of the resolutions were higher. As the economy improved in the 1990s, fewer banks failed and the
costs decreased.

Conclusion
In the banking industry, the 1980s began with only a few bank failures but ended with
an average of more than 200 a year. Likewise, in the early 1980s, the FDIC had little
experience in handling more than an occasional small bank failure. By 1994, however,
Table I.3-8

Costs for Straight Deposit Payoffs
1980–1994
($ in Millions)
Number
Year
of SDPs

Assets at
Resolution

Deposits at
Resolution

Costs as of
12/31/95

Costs/Assets
(%)

1980

$16.1

$15.0

$2.3

14.29

1981

54.2

48.0

1.1

2.03

1982

581.3

536.1

71.0

12.21

1983

129.7

123.1

12.0

9.25

1984

334.4

306.4

19.7

5.89

1985

279.9

247.1

78.7

28.12

1986

555.0

513.5

203.7

36.70

1987

337.7

302.2

116.3

34.44

1988

130.5

122.6

38.3

29.35

1989

580.9

499.3

257.5

44.33

1990

844.3

731.2

250.9

29.72

1991

65.9

59.4

18.4

27.92

1992

1,136.2

1,013.0

279

24.56

1993

309.5

270.7

101.9

32.92

1994

0.00

120

$5,355.6

$4,787.6

$1,450.8

27.09

Totals/
Average

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

105

the FDIC had gained considerable experience in handling failed and failing banks. In
fact, from 1980 to 1994, the FDIC’s successful adjustment to constantly changing
circumstances in the arena of bank failures led to security for insured depositors: no
insured depositor lost any money, and in every case, insured deposits were paid
promptly. Such actions meant that, unlike the experience of the early 1930s, the public
maintained its confidence in the banking system, and financial stability was preserved.
As the resolution process evolved, the FDIC devised new resolution methods for
adjusting to the changing environment. On the asset side, the FDIC ’s resolutions methods evolved from passing few failed bank assets with little risk to an acquiring institution
to passing most failed bank assets and sharing the risk with the acquiring institution. As
special circumstances arose, such as the mutual savings bank failures in the early 1980s,

Table I.3-9

Costs for Insured Deposit Transfers
1980–1994
($ in Millions)
Number of
Year
IDTs

Assets at
Resolution

Deposits at
Resolution

Costs as of
12/31/95

Costs/Assets
(%)

1980

0.00

1981

0.00

1982

0.00

1983

43.1

43.6

13.9

32.25

1984

481.6

455.4

72.7

15.10

1985

331.9

285.8

34.0

10.24

1986

748.2

688.9

213.6

28.55

1987

2,129.2

1,810.2

590.0

27.71

1988

1,210.4

1,130.8

392.5

32.43

1989

1,814.1

1,553.7

629.4

34.69

1990

1,627.5

1,465.1

487.4

29.95

1991

1,520.6

1,256.4

467.6

30.75

1992

897.9

831.3

231.2

25.75

1993

0.00

1994

0.00

176

$10,804.5

$9,521.2

$3,132.3

28.99

Totals/
Average

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

106

M A N A GI N G T H E C R I S I S

the agricultural bank failures in the mid-1980s, and the larger commercial real estate–
induced bank failures in the late 1980s and early 1990s, the FDIC handled each situation in a manner that allowed most of the institutions’ assets to remain in the private
sector. Overall, from 1980 to 1994, the FDIC was able to pass 76 percent of failed bank
assets to the acquiring institutions. That action not only preserved liquidity for the
FDIC, but also assisted significantly in the economic recovery of the local communities.
On the liability side, the FDIC devised new methods to ensure that depositors of
failed banks would receive their funds quickly, thus minimizing any disruption to the
financial system. The FDIC’s purchase and assumption transactions gave depositors
virtual immediate access to their money. In those instances in which a P&A transaction
was not attainable, the FDIC developed the insured deposit transfer and paid advance
dividends to expedite the return of funds to depositors. That approach resulted in
minimizing the disruption to the depositors and local communities.
Given the magnitude of the problem, the FDIC’s flexibility with assets and liabilities
helped resolve 1,617 failed and failing banks at arguably a relatively low cost to the insurance fund. The overall resolution cost to the FDIC of $36.3 billion was about 12 percent
of the failed and failing banks’ assets. When compared to the savings and loan crisis,
those costs were low, not only in absolute terms but also on a per asset basis.
During this period, the FDIC also learned some important lessons that are relevant to
the future: (1) Bridge banks, loss sharing, asset pools, cross guarantees, branch breakups,
advance dividends, and insured deposit transfers all appear to have been useful developments; (2) open bank assistance, sequential bidding, put options, income maintenance
agreements, and net worth certificate programs all served a purpose for the situations in
which they were used; and (3) it became clear that, to have an adequate source of liquidity,
the insurance funds need to be strong. Although minor when compared to the liquidity
shortages in the savings and loan situation, the FDIC’s lack of liquidity in the late 1980s
and early 1990s influenced certain resolution decisions. For example, designing put
options and sequential bidding helped put assets back into the private sector quickly,
thereby preserving the FDIC’s liquidity. In retrospect, however, those methods may not
have minimized the overall cost to the insurance fund. Such unintentional consequences,
while perhaps minor when put in perspective, nonetheless are of some concern.

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

107

Table I.3-10

Costs for Different Types of
Purchase and Assumption Transactions
1980–1994
($ in Millions)
Whole Bank P&A
Transactions
Assets
at
Resolution

FDIC's
Costs

P&A Transactions
with Loss Sharing
Costs/
Assets
(%)

Assets
at
No.
Resoof
Trans. lution

Other P&A Transactions
Costs/
Assets
(%)

No.
of
Trans.

Assets
at
Resolution

Costs/
FDIC's Assets
(%)
Costs

Year

No.
of
Trans.

1980

$114

$28 24.56

1981

$30

8 26.67

1982

1,196

1983

4,211

1,335 31.70

1984

1,568

432 27.55

1985

1,895

536 28.28

1986

4,792

1,213 25.31

1987

570

90 15.79

114

3,685

1,071 29.06

1988

2,931

551 18.80

34,872

4,290 12.30

1989

1,339

276 20.61

132

25,663

5,050 19.68

1990

2,314

299 12.92

105

10,928

1,850 16.93

1991

903

137 15.17

15,903 1,098

6.90

43,997

4,312

1992

102

7.84

25,256 1,188

4.70

17,124

2,000 11.68

1993

225

33 14.67

2,992

520 17.38

1994

1,405

208 14.80

Totals/
Averages 202

$8,159 $1,361 16.68

FDIC's
Cost

24 $41,384 $2,319

5.60

962

Sources: FDIC Division of Research and Statistics and FDIC Division of Finance.

6.61

9.80

$154,472 $22,932 14.85

108

M A N A GI N G T H E C R I S I S

Table I.3-11

Bank Failures by Location
Ranked by Number of Bank Failures
1980–1994
($ in Thousands)
Number
of Failed
Banks

Total
Bank
Assets

FDIC’s
Resolution
Costs

Texas

599

$92,973,964

$13,612,645

14.64

37.04

Oklahoma

122

5,504,937

1,460,113

26.52

44.59

California

5,445,302

1,061,335

19.49

49.97

Louisiana

4,401,121

1,088,554

24.73

54.30

Kansas

1,561,223

347,580

22.26

58.57

Colorado

989,252

277,217

28.02

62.21

Massachusetts

26,124,470

3,375,599

12.92

64.87

Missouri

3,075,528

535,963

17.43

67.41

Iowa

721,125

116,627

16.17

69.88

Florida

14,965,281

920,709

6.15

72.29

Minnesota

1,579,218

196,940

12.47

74.64

Tennessee

2,331,813

778,258

33.38

76.87

New York

49,108,444

5,115,311

10.42

78.97

Illinois

34,302,370

1,213,368

3.54

81.01

Nebraska

343,342

71,151

20.72

83.06

Connecticut

17,685,983

2,415,691

13.66

85.03

Wyoming

375,109

117,122

31.22

86.27

Oregon

575,551

66,382

11.53

87.32

Arizona

434,486

88,904

20.46

88.37

New Hampshire

4,908,983

1,014,347

20.66

89.36

New Jersey

6,658,401

470,659

7.07

90.23

New Mexico

714,363

183,713

25.72

90.91

Arkansas

191,678

42,711

22.28

91.59

Utah

446,839

80,564

18.03

92.27

Montana

209,164

40,392

19.31

92.89

Indiana

291,556

33,422

11.46

93.51

107,903

18,869

17.49

94.06

Location

North Dakota

Costs/ Cumulative
Assets Percentage
(%) of Failures

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

109

Table I.3-11

Bank Failures by Location
Ranked by Number of Bank Failures
1980–1994
($ in Thousands)

Continued
Location

Number
of Failed
Banks

Total
Bank
Assets

FDIC’s
Resolution
Costs

Alabama

$285,516

$21,975

7.70

94.62

Alaska

2,862,202

615,834

21.52

95.11

South Dakota

659,667

16,887

2.56

95.61

Kentucky

120,678

21,947

18.19

96.04

Virginia

284,769

40,691

14.29

96.47

Puerto Rico

336,849

111,926

33.23

96.78

Ohio

140,193

4,067

2.90

97.09

District of Columbia

2,285,178

351,803

15.39

97.40

Pennsylvania

13,705,317

43,803

0.32

97.71

West Virginia

77,174

13,743

17.81

98.02

Washington

758,588

54,119

7.13

98.27

Rhode Island

1,140,025

48,945

4.29

98.45

Georgia

88,003

20,383

23.16

98.64

Michigan

129,832

22,994

17.71

98.82

Mississippi

286,729

28,160

9.82

99.01

North Carolina

70,760

6,863

9.70

99.13

Wisconsin

74,129

3,259

4.40

99.26

Maryland

55,771

7,777

13.94

99.38

Maine

2,224,770

5,614

0.25

99.51

Hawaii

11,798

1,762

14.93

99.63

Vermont

260,755

44,706

17.14

99.75

Idaho

61,231

17,244

28.16

99.81

Delaware

612,745

249

0.04

99.88

South Carolina

62,790

20,879

33.25

99.94

Nevada

8,789

0.00

100.00

1,617

$302,631,664

$36,269,776

11.98

Totals/Averages

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

Costs/ Cumulative
Assets Percentage
(%) of Failures

110

M A N A GI N G T H E C R I S I S

Table I.3-12

Bank Failures by Location
Ranked by Resolution Costs
1980–1994
($ in Thousands)
Number
of Failed
Banks

Total
Bank
Assets

FDIC’s
Resolution
Costs

599

$92,973,964

$13,612,645

14.64

37.53

New York

49,108,444

5,115,311

10.42

51.64

Massachusetts

26,124,470

3,375,599

12.92

60.94

Connecticut

17,685,983

2,415,691

13.66

67.60

122

5,504,937

1,460,113

26.52

71.63

Illinois

34,302,370

1,213,368

3.54

74.97

Louisiana

4,401,121

1,088,554

24.73

77.97

California

5,445,302

1,061,335

19.49

80.90

New Hampshire

4,908,983

1,014,347

20.66

83.70

Florida

14,965,281

920,709

6.15

86.24

Tennessee

2,331,813

778,258

33.38

88.38

2,862,202

615,834

21.52

90.08

Missouri

3,075,528

535,963

17.43

91.56

New Jersey

6,658,401

470,659

7.07

92.86

2,285,178

351,803

15.39

93.83

Kansas

1,561,223

347,580

22.26

94.78

Colorado

989,252

277,217

28.02

95.55

Minnesota

1,579,218

196,940

12.47

96.09

New Mexico

714,363

183,713

25.72

96.60

Wyoming

375,109

117,122

31.22

96.92

Iowa

721,125

116,627

16.17

97.24

336,849

111,926

33.23

97.55

Arizona

434,486

88,904

20.46

97.80

Utah

446,839

80,564

18.03

98.02

Nebraska

343,342

71,151

20.72

98.21

Oregon

575,551

66,382

11.53

98.40

758,588

54,119

7.13

98.55

Location
Texas

Oklahoma

Alaska

District of Columbia

Puerto Rico

Washington

Costs/
Cumulative
Assets Percentage of
(%)
Total Costs

EVO LU T I ON O F T H E F D I C ’S R E S O LU T I O N PRA C T I C E S

111

Table I.3-12

Bank Failures by Location
Ranked by Resolution Costs
1980–1994
($ in Thousands)

Continued
Cumulative
Costs/
Assets Percentage of
Total Costs
(%)

Number
of Failed
Banks

Total
Bank
Assets

FDIC’s
Resolution
Costs

Rhode Island

$1,140,025

$48,945

4.29

98.68

Vermont

260,755

44,706

17.14

98.80

Pennsylvania

13,705,317

43,803

0.32

98.93

Arkansas

191,678

42,711

22.28

99.04

Virginia

284,769

40,691

14.29

99.15

Montana

209,164

40,392

19.31

99.27

Indiana

291,556

33,422

11.46

99.36

Mississippi

286,729

28,160

9.82

99.44

Michigan

129,832

22,994

17.71

99.50

Alabama

285,516

21,975

7.70

99.56

Kentucky

120,678

21,947

18.19

99.62

South Carolina

62,790

20,879

33.25

99.68

Georgia

88,003

20,383

23.16

99.73

North Dakota

107,903

18,869

17.49

99.79

Idaho

61,231

17,244

28.16

99.83

South Dakota

659,667

16,887

2.56

99.88

West Virginia

77,174

13,743

17.81

99.92

Maryland

55,771

7,777

13.94

99.94

North Carolina

70,760

6,863

9.70

99.96

Maine

2,224,770

5,614

0.25

99.97

Ohio

140,193

4,067

2.90

99.99

Wisconsin

74,129

3,259

4.40

99.99

Hawaii

11,798

1,762

14.93

100.00

Delaware

612,745

249

0.04

100.00

Nevada

8,789

0.00

100.00

1,617

$302,631,664

$36,269,776

11.98

Location

Totals/Average

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

FIRREA created the RTC on
August 9, 1989. The RTC
headquarters were
established in
Washington, D.C.

he sheer volume of assets, combined
with the funding issues and the changing
economy, significantly affected the
evolution of the RTC’s resolution
strategies.

CHAPTER 4

Evolution of the RTC’s
Resolution Practices

Introduction
On August 9, 1989, the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) of 1989 abolished the Federal Savings and Loan Insurance Corporation
(FSLIC) and the Federal Home Loan Bank Board (FHLBB) and created the Resolution
Trust Corporation (RTC). The RTC’s primary mission was to manage and resolve failed
thrift institutions for which a conservator or receiver was appointed. Initially, Congress
gave the Federal Deposit Insurance Corporation (FDIC) the authority and responsibility to act as the RTC’s “exclusive manager.” The FDIC managed the RTC’s activities
until November 27, 1991, when the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act (RTCRRIA) separated the RTC from the FDIC.
Figure I.4-1 shows the impact of FIRREA.
During the RTC’s existence from August 9, 1989, to December 31, 1995, it was
responsible for resolving 747 insolvent thrifts with assets of $402.6 billion. (See table
I.4-1.) The final cost to taxpayers for that cleanup activity is estimated to be $87.5 billion.1 The scope and magnitude of such a cleanup effort was unprecedented, yet essentially was completed in just six and one-half years. On December 31, 1995, the RTC
was shut down, and its remaining work was transferred back to the FDIC.
This chapter focuses on an important part of the RTC’s overall activity: the evolution of its resolution practices. Later chapters will discuss the RTC’s asset disposition
activities in greater detail.

1. Because of a number of factors, including the sale of assets in receivership and updated appraisals, this figure
is adjusted periodically. The most recent estimate of RTC losses, as of December 31, 1996, is $86.4 billion.

114

M A N A GI N G T H E C R I S I S

Figure I.4-1

Impact of FIRREA
1989

1990

1991

1992

8/9/89

1993
8/8/92

FDIC completes
resolution of all thrifts
that failed before
January 1, 1989, or that
were assisted before
August 9, 1989

RTC merges or liquidates all thrifts declared insolvent during the period
from January 1, 1989, through August 8, 1992, and manages the assets
of those institutions until its closing date. This was later extended to
September 30, 1993.

FSLIC insures thrifts

FDIC, using funds
in a Savings Association Insurance Fund,
replaces RTC in
resolving thrifts

FDIC insures thrifts

Source: RTC , 1989 Annual Report.

Background
In early 1989, while the executive branch worked on a legislative proposal to solve the
thrift crisis, the FHLBB, the FSLIC, and the FDIC developed preliminary plans for the
RTC’s resolution policies and practices through an interagency relationship that authorized the FDIC to manage thrift conservatorships and receiverships and to develop operating policies and guidelines. The primary focus during that developmental phase was to
evaluate and assess the magnitude of the thrift problems and to develop operating strategies for marketing and selling troubled thrift institutions and disposing of their assets.
FIRREA established the RTC Oversight Board whose purpose, in conjunction with
the RTC and FDIC, was to develop and establish strategies and policies for the RTC.
Activities focused on six broad areas: (1) thrift resolution, (2) asset disposition, (3) affordable housing, (4) conflicts of interest and ethical standards, (5) external relations, and (6)
administration. Membership of the RTC Oversight Board included the secretary of the
Treasury, who served as chairman; the chairman of the Federal Reserve Board; the
secretary of Housing and Urban Development; and two people from the private sector, to

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

115

Table I.4-1

Thrift Failures Resolved by the RTC
1989–1995
($ in Millions)
1989

1990

1991

1992

1993

1994

1995

Totals

Number of Thrift
Failures

318

213

144

747

Conservatorships

318

207

123

706

Accelerated
Resolution
Program

Total Assets at
Failure

$141,749

130,247

79,034

44,885

6,105

129

426

$402,575

Total Assets at
Resolution

$89,144

81,166

47,344

22,480

4,170

129

426

$244,859

Total Assets
Retained Post
Resolution by RTC

$61,396

53,209

35,418

15,486

3,560

387

$169,527

Total Deposits at
Failure†

$112,919

98,672

64,847

33,698

4,823

124

408

$315,491

Total Deposits at
Resolution

$85,930

69,062

40,336

21,672

3,101

124

407

$220,632

* Includes two institutions resolved with P&A transactions before conservatorship that were not in the Accelerated Resolution Program.
† Total deposits as reported in the quarter before failure.
Source: FDIC Division of Research and Statistics.

be appointed by the president of the United States.2 The RTC Oversight Board also
appointed a president and chief executive officer (CEO) to help manage its operations,
and in October 1989, the board appointed Daniel P. Kearney as the first president and
CEO. In early 1990, William Taylor from the Federal Reserve Board succeeded Kearney;
Taylor would later serve as chairman of the FDIC (1991-1992).

2. Originally, the RTC Oversight Board consisted of Secretary of the Treasury Nicholas F. Brady; Chairman of
the Federal Reserve Board Alan Greenspan; and Secretary of Housing and Urban Development Jack Kemp. Two
independent members were named by President George H. W. Bush and confirmed by the Senate in the spring of
1990: Phillip Jackson, Jr., an adjunct professor at Birmingham Southern College in Birmingham, Alabama, and
Robert Larson, president and chief executive officer of The Taubman Company, Inc., a national real estate development and property management firm in Bloomfield Hills, Michigan.

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M A N A GI N G T H E C R I S I S

Chart I.4-1

The RTC invited public entities and
private parties, including potential acquirConservatorships by Asset Size
ers of failed thrifts, representatives of community groups, and agencies in related
Thrifts greater than $500 Million
industries such as housing, to participate in
139 20%
developing the RTC’s overall resolution
policies and plans. As a result, the case resThrifts $100 to $500 Million
274 39%
olution mission and policy framework,
when fully established, emerged as a product of governmental, private, and public
entity collaboration. The RTC then took
39%
on the responsibility of implementing the
mission and policy.
During the development of FIRREA
Thrifts less than $100 Million
293 41%
and the transition of work from the FSLIC
to the RTC, certain key developments and
planning initiatives took place. On FebruSource: FDIC Division of Research and Statistics.
ary 7, 1989, the FDIC entered into a management agreement with the FHLBB and FSLIC, under which the FHLBB and FSLIC
authorized the FDIC to exercise management authority regarding all insolvent thrifts for
which a conservator was appointed.
The FHLBB and FSLIC agreed to make their staffs available to help the FDIC perform its duties under the agreement. Because the FDIC lacked statutory authority and
funding to resolve failed thrifts during the developmental phase, its primary activity
between the date it entered into the management agreement and the enactment of
FIRREA on August 9, 1989, was taking control of and managing 262 failed thrift institutions with $115.3 billion in total assets. By year-end 1989, 56 thrifts had been added
to the RTC’s conservatorship program and 37 had been resolved, leaving a total of 281
thrifts in conservatorship.

Overview of the RTC’s Use of Conservatorships
A conservatorship is established when a manager (in this case, the RTC) has been
appointed to take control of a failing financial institution to preserve assets and protect
depositors. Banks and thrift institutions can be placed in conservatorship; however, conservatorship was used almost exclusively by the RTC, and before that, by the FSLIC in
the resolution of thrifts.3 With the passage of FIRREA in 1989, Congress granted the
3. The FDIC has used its conservatorship authority only once: to resolve CrossLand Savings Bank, FSB,
Brooklyn, New York, a savings association. That action is discussed further in Chapter 6, Bridge Banks, and in Part
II, Case Studies of Significant Bank Resolutions, Chapter 11, Crossland Savings Bank, FSB.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

RTC the authority to act as conservator.4 Legislators set up a conservatorship to provide
many of the same benefits to the RTC as a bridge bank did for the FDIC.
The RTC used conservatorships extensively to aid in the resolution of failing savings and loans (S&Ls). Upon its creation, the RTC immediately assumed responsibility
for 262 thrift institutions already in conservatorship. From inception to June 30, 1995,
the RTC managed a total of 706 institutions in the conservatorship program, with the
number of conservatorships peaking at 353 in 1990. By the end of June 1995, the
RTC had resolved all 706 conservatorships. (Chart I.4-1 shows the distribution of
those conservatorships by asset size.)
Reasons for a Conservatorship
The conservatorship was a useful tool for resolving the thrift crisis. In early 1989, with
no funds and staff available to simultaneously resolve the large number of failing thrifts,
the government needed a mechanism to place the thrifts under its direct supervision
while they could be marketed and sold. The RTC was expected to manage the thrifts
assigned to its conservatorship program for a period no longer than necessary to complete all actions related to resolving the insolvent thrifts, such as selling or liquidating
the thrifts, transferring deposits to thrift acquirers, or paying out insured deposits to
depositors. Many savings and loans were in conservatorship for long periods of time,
because the number of insolvent thrifts was large, staff resources were limited, and funding was periodically interrupted.
Conservatorship Process
The conservatorship process began when the Office of Thrift Supervision (OTS) closed
an insolvent savings and loan and appointed the RTC as receiver.5 The OTS executed a
pass-through receivership in which all deposits, substantially all assets, and certain nondeposit liabilities of the original institution instantly “passed through the receiver” to a
newly chartered federal mutual association, subsequently known as “the conservatorship.”6 The OTS then appointed the RTC as conservator of the new institution, which
placed the RTC in control of the institution. To achieve its goals and objectives, the RTC
assigned a managing agent and one or more asset specialists, who were also RTC employees, to the institution in conservatorship. The RTC retained the majority of the former

4. Before FIRREA, the FSLIC had the authority to act as conservator for failed savings and loans. That authority
originally was granted by the National Housing Act of 1934.
5. The OTS was established on August 9, 1989, by FIRREA to assume supervisory and regulatory authority over
federal and state savings associations and state savings and loan holding companies.
6. Uninsured depositors were treated the same as insured depositors and were moved to the conservatorships.
That practice lasted until September 1993, and from that point, uninsured deposits were left with the first receivership and not moved to the conservatorship.

117

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M A N A GI N G T H E C R I S I S

institution’s employees, who continued to perform the same functions they had before
conservatorship; however, the day-to-day management and ultimate authority was given
to the RTC-appointed managing agent. The managing agent’s role was to ensure that
management of the institution adhered to the RTC’s policies and procedures, while the
asset specialist would assist the managing agent with asset management and disposition.
The objectives of the conservatorship were to (1) establish control and oversight
while promoting depositor confidence; (2) evaluate the condition of the institution and
determine the most cost-effective method of resolution; and (3) operate the institution
in a safe and sound manner pending resolution by minimizing operating losses, limiting
growth, eliminating any speculative activities, and terminating any waste, fraud, and
insider abuse. Shrinking an institution by curtailing new lending activity and selling
assets was also a high priority.7
At the time the conservatorship was resolved, either through a sale or deposit payoff,
the institution again was placed into a receivership (the second recievership). Both
receiverships, the initial pass-through receivership and the second receivership, paid
unsecured creditors and other claimants on a pro rata basis according to the recoveries
within each receivership.

Overview of Resolution Activity
Provisions of FIRREA outlined several objectives for the RTC in its resolution and liquidation activities. Those objectives were to (1) maximize the net present value return
from the sale or other disposition of the thrifts or the assets of the thrifts; (2) minimize
the influence on local real estate and financial markets; (3) make efficient use of received
funds to resolve the failed thrifts; (4) minimize the amount of any loss from resolutions;
and (5) maximize the preservation of available, affordable residential properties for lowand moderate-income individuals.
With most of the RTC’s senior personnel coming from the FDIC, the RTC initially
was managed by the FDIC and followed the same statutory policies and procedures.
That management approach meant that the emphasis during the resolution period generally was on purchase and assumption (P&A) transactions. Deposit payoffs usually
were considered last resorts. Like the FDIC, the RTC employed a sequential bidding
process that favored P&As, which generally protected all depositors against loss.
The RTC marketing process was more public than the FDIC’s because the troubled
status of RTC-controlled institutions was widely known. Like the FDIC, the marketing
process for insolvent S&Ls began with the acquisition of a list of acceptable bidders
from the FDIC’s examination division.8 The RTC then placed advertisements in The

7. RTC, 1989 Annual Report.
8. Institutions on this list were deemed viable both before and after a potential acquisition from the RTC.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

Wall Street Journal and other major publications listing by name each insolvent thrift
that was for sale. The RTC’s resolution staff would also check its database for investors
and consultants who had previously expressed an interest in that institution or in similar
types of thrifts and invite those groups to participate in the resolution without preclearance from the FDIC. Such clearance ultimately was necessary, however, before any
bidder could acquire a failed S&L.
Next, the RTC valued the institution’s assets. The asset valuation was one of the
principal components of the RTC’s cost test, which compared all the bids submitted,
under each of the structures offered, to determine the least costly option.
After completing an information package that provided detailed schedules of the
institution’s assets and liabilities for potential bidders, the RTC held a bidders’ conference. To each of the parties attending the conference the RTC distributed the information package, the bidder’s instructions, the proposed resolution structures, a draft set of
legal documents, the projected time line for the resolution, and the requirements from
the regulatory authorities. After the meeting, potential bidders would perform their own
due diligence to determine what they would submit as a sealed bid.
The RTC worked to develop a resolution process with standard procedures, legal documents, and forms to be used for all resolutions. Potential acquirers would need to become
familiar with just one set of resolution procedures and documents and would not be subjected to costly time-consuming negotiations. The RTC intended that the standardized
approach would maximize participation by potential acquirers of failed thrifts nationwide.
The vast majority of the RTC’s resolutions were P&A transactions. Of the 747 institutions resolved by the RTC, 497 institutions (66.5 percent) were handled through
P&As, 158 (21.2 percent) were insured deposit transfers (IDTs), and 92 (12.3 percent)
were straight deposit payoffs. Deposit payoffs (IDTs and straight deposit payoffs) generally were used for smaller institutions. While 33.5 percent of the total number of transactions were deposit payoffs, only 17.9 percent of the deposits at resolution were
handled as deposit payoffs. (See chart I.4-2.) The RTC did not use open bank assistance.
In 153 transactions, or approximately 21 percent of all resolutions, the RTC used
branch breakup transactions. Of the total branch breakup transactions, 119 were P&A
transactions and 34 were IDTs. (See table I.4-2 for a summary of the various resolution
transactions conducted by the RTC.)
The RTC asset disposition strategy gradually became very different from the FDIC
asset disposition model. The FDIC asset disposition strategy has typically emphasized
the sale of the maximum amount of the failed bank’s assets to the bank acquirer at resolution. The RTC, on the other hand, gradually focused its efforts on selling assets from
the conservatorships or receiverships, and it often tried to sell only a limited amount of
the failed thrift assets to the acquirer at the resolution. The RTC and FDIC approached
asset disposition differently for the following reasons.

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M A N A GI N G T H E C R I S I S

Table I.4-2

RTC Resolution Methods by Year of Resolution
1989–1995
Resolution Method

1989

1990

1991

1992

1993

1994

1995

Totals

Straight Deposit Payoff

Insured Deposit Transfer

124

Standard Purchase and
Assumption

150

127

378

Branch Purchase and
Assumption

119

Branch Insured Deposit
Transfer

315

232

747

Totals

Sources: FDIC Division of Research and Statistics and RTC annual reports.

Volume of Failed Assets
As soon as the RTC was created, it faced a torrent of failed thrift assets. In 1989, it was
named conservator for 318 failed thrifts having total assets of $141.8 billion, and in
1990, was named conservator for 213 failed thrifts that had total assets of $126.5 billion. That volume of failed assets was unprecedented. In comparison, in 1989 the FDIC
had 207 failed banks having total assets of $29.4 billion, and in 1990, it had 169 failed
banks having total assets of $15.7 billion.
Control of Failed Assets
After the RTC had been appointed conservator, it gained control of the failed thrift
assets.9 With the average conservatorship lasting 13 months, the RTC had ample opportunity to sell the most marketable assets at this juncture. During the conservatorship
period, it sold or collected $157.7 billion in failed thrift assets. Under normal circumstances, those assets would most likely have passed to the acquirer at resolution. The
RTC, however, was not faced with the same set of resolution circumstances as the FDIC.

9. During its lifetime, the RTC acquired $402.6 billion in assets at the time of failed thrift takeover. The conservatorships obtained another $77.5 billion in assets as a result of new loan originations, asset purchases, and other
adjustments.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

Resolution Scheduling

121

Chart I.4-2

RTC Failed Thrift Deposits

Because the RTC depended on Congress
by Resolution Method
for resolution funding, it did not have com1989–1995
plete control over its resolution schedule.
($ in Billions)
When funding became available, the RTC
would simultaneously market several dozen
failed thrifts for resolution in the interest of
Insured Deposit Transfers
stopping ongoing operating losses for those
$31.0 14.0%
conservatorships as soon as practicable. The
marketing periods typically would last for
Accelerated Resolution Program
$20.2 9.2%
only a couple of months depending on the
number of bidders who were interested.
That situation created several bidding and
Straight Deposit Payoffs
$8.4 3.8%
logistical problems for the RTC and for the
potential bidders: (1) The RTC could have
Purchase and Assumptions
$161.0 73.0%
a shortage of qualified acquirers given the
large number of failed thrifts in certain
markets; (2) potential thrift acquirers had
Total Failed Thrift Deposits = $220.6
their own limits on the number of thrifts
that they could consider for a bid; (3) it
Sources: FDIC Division of Research and Statistics
and RTC annual reports.
could also take a successful bidder several
months to fully assimilate a large RTC
transaction before they were able to consider another failed thrift acquisition; and (4) a
sufficient amount of time and resources was not available for potential bidders to perform a comprehensive due diligence on many of the failed thrift asset portfolios. Initially, the RTC encouraged the failed thrift acquirers to purchase as many assets as
possible at resolution. Asset putback provisions were adopted to allow the acquirer to
perform a more thorough due diligence after the resolution. Initially, the RTC was able
to sell $75.3 billion in failed assets to the thrift acquirer at resolution; nearly $22 billion
of these assets were later put back to the RTC.10
As the RTC’s asset disposition strategies evolved, they placed far more emphasis on
selling assets while they were in the conservatorship or receivership process and less
emphasis on transferring assets with liabilities during the resolution process. That shift
in emphasis meant that the RTC’s asset disposition strategies took on relatively greater
importance.11

10. The RTC asset sales at resolution contrast with the FDIC experience in which $230 billion of the $302.6
billion in failed bank assets handled by the FDIC between 1980 and 1994 were sold to the failed bank acquirer as
part of the resolution.
11. The RTC’s asset disposition strategies are discussed in chapters 12 through 17.

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M A N A GI N G T H E C R I S I S

The results were different for thrift deposits. Of the $315.5 billion in deposits
handled by the RTC, $94.9 billion (30.1 percent) were withdrawn by depositors while
the institution was in conservatorship. The remaining $220.6 billion in deposits (69.9
percent) were transferred to assuming institutions or paid off during the resolution
process. (See table I.4-1.)

RTC Funding and Early Initiatives
RTC funding actually was needed for two purposes: loss funding and working capital.
In fulfilling its commitment to protect insured depositors, the federal government
needed to make funds available to the RTC for both purposes. Working capital was the
portion of the funding that the RTC was able to recover by selling the assets of the insolvent S&Ls. The funds were paid back with interest. The portion of the funding that the
RTC was unable to recover (the assets of those S&Ls that were not worth as much as the
obligation to depositors) was covered by loss funds. Those funds, however, were not
recoverable; they were permanent taxpayer contributions for financing the RTC.
In contrast to the FDIC, which could rely on insurance premiums paid by banks,
the RTC had no internal source of funds. It relied on congressional appropriations and
other indirect sources to fund its operations. Also, because appropriations to pay for
insolvent S&Ls were never popular, the RTC often found itself hampered by delays in
obtaining funding. It received its funding in stages, with each stage requiring separate
legislation and congressional approval. The legislative involvement made long-term
planning of the resolution process difficult at best.
In FIRREA, the RTC was initially provided $50.1 billion in funds to carry out its
mission of resolving troubled thrift institutions. The $50.1 billion represented a portion
of necessary “loss funds” to cover the present value cost of the embedded losses existing
in insolvent and likely insolvent institutions at that time. Of the $50.1 billion, $18.8
billion was appropriated by Congress (on budget), with the remaining $31.3 billion
placed off budget. Of the $31.3 billion off budget, $30.1 billion was raised through
long-term borrowings by an off budget funding entity, the Resolution Funding Corporation (REFCORP), and $1.2 billion was provided by the Federal Home Loan Banks
(FHLBs).12 Provisions of FIRREA also established funds for the payment of interest on
the bonds issued by REFCORP to come from payments from the FHLBs, the U.S.
Treasury, and the RTC. In 1997, the FHLBs were paying $300 million per year for
REFCORP bond interest and the U.S. Treasury was paying the rest.
In 1989 Congress specified that the $18.8 billion “on budget” portion of the money
had to be used before the end of the current fiscal year. The immediate problem then

12. RTC, Annual Report of the Thrift Depositor Protection Oversight Board and the Resolution Trust Corporation for
the Calendar Year 1995, (Washington, D.C.: RTC), Appendix, Table A.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

became not so much whether adequate funds would be available but whether billions of
dollars in funding could be used in an effective manner within an extremely short time
frame. Since the RTC was created on August 9 and the fiscal year would end 52 days
later, on September 30, little time was available for the new agency to get up and running and also use $18.8 billion.
To use the money efficiently, the RTC took its less marketable institutions, the ones
deemed unlikely to attract a purchaser in a P&A transaction, and conducted straight
deposit payoffs and IDTs. Between August 9 and September 30, the RTC completed 24
of those resolutions, which were cash-intensive transactions, because all insured deposits
were paid by the RTC. The RTC still would have to liquidate the assets, however, to
partially reimburse itself for its initial cash outlay. Of the 37 resolution transactions the
RTC completed in 1989, 30 were deposit payoffs.
Those initial transactions were significant because they helped to cut off some of the
larger losses that were building up daily. The institutions chosen for those early deposit
payoffs were among those that were paying the highest rates on their deposits. By paying
off those depositors, the RTC could stop incurring those costs.
The other way the RTC used the initial $18.8 billion was by replacing high-cost
funding in its conservatorships. When certificates of deposit (CDs) paying high rates
matured, the RTC would not renew them at the same high rate. It would offer rates at or
somewhat below market rates. Those depositors, many of whom were there just for the
high rates, would then withdraw their money. During the first two months of its existence, the RTC funded such withdrawals with part of the $18.8 billion it needed to use by
the end of September. Those early actions—the deposit payoffs of the unmarketable
institutions and the elimination of high-cost deposits—helped hold down the overall cost
of handling insolvent S&Ls. Furthermore, the RTC’s efforts to reduce high-cost funds
also helped bring down the high rates that S&Ls had to pay for deposits, thus increasing
earnings for an industry that sorely needed it. For example, before August 9, 1989, the
average yield on a one-year CD at an S&L was 71 basis points higher than the yield on a
bank CD. By March 1990, however, that difference had been reduced to 22 basis points,
which translated into an industry savings that could exceed $1 billion per year.13
Few people believed the initial $50.1 billion in funding would be adequate to
handle the RTC’s workload of insolvent S&Ls; rather, they viewed it as a substantial
down payment to get the RTC started. That attitude became apparent in the spring of
1990 as resolution costs began to rise. FDIC Chairman L. William Seidman testified to
the Congress just six months after the RTC began that the RTC would spend the original $50.1 billion in FIRREA “loss funding” by the fall of 1990.14 As a result, the March
1991 RTC Funding Act and the November 1991 Resolution Trust Corporation
13. Remarks of FDIC Chairman L. William Seidman before the National Press Club, March 21, 1990.
14. Chairman Seidman also testified to the Congress in October 1989, two months after the RTC began, that the
RTC lacked working capital, which was already becoming a constraint upon the pace of the RTC’s resolution activity.

123

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M A N A GI N G T H E C R I S I S

Refinancing, Restructuring, and Improvement Act (RTCRRIA) provided funds of $30
billion and $25 billion, respectively, to the RTC.15 The RTCRRIA legislation, however,
required that the funds be used before April 1, 1992. Finally, on December 17, 1993,
Congress passed the Resolution Trust Corporation Completion Act (Completion Act)
of 1993, which removed the RTCRRIA April 1, 1992, deadline on “usage of funds,”
and the RTC was authorized to use up to $18.3 billion, the remaining balance of the
$25 billion initially authorized under RTCRRIA to finish its mission. The Completion
Act also extended the deadline of the RTC’s appointment as conservator or receiver for
S&Ls from September 30, 1993, to a date not later than July 1, 1995.
It also became clear that the RTC would require funds to meet working capital
requirements. After the RTC used a portion of the initial $18.8 billion to eliminate the
high-cost deposits at the conservatorships, the issue of working capital became a subject
of debate between Congress and the administration. On February 20, 1990, after
months of discussion and review of difficult funding options, the oversight board authorized the RTC to borrow from the Federal Financing Bank to meet working capital
needs. That agreement provided $11 billion to the RTC during the first quarter of
1990, with additional quarterly borrowings to be authorized thereafter.
The funding process and the related delays increased the cost of resolving the troubled savings and loan associations. The pace of resolutions had to conform to the availability of funds. When funding was available, the number of resolutions increased and
kept pace with the establishment of new conservatorships. Sometimes the pace of the
resolution process was fast. Other times, the pace was painfully slow. The longest delay
was a 21-month period from March 31, 1992, to December 17, 1993, when the RTC
was without loss funding and resolution activity was severely reduced. The pace of resolutions followed the availability of funding, and resolution delays kept thrifts in conservatorship longer, which increased conservatorship operating losses. Those losses were
$5.4 billion in 1989 and decreased steadily each year. In 1992, they were $669 million,
but because of the reduced resolution activity from the lack of funding, in 1993, conservatorship operating losses increased that year to $1.3 billion. Resolution delays and conservatorship operating losses led to increased resolution costs because of the relatively
high carrying cost of maintaining assets in failed thrifts.16 Funding delays had a significant effect on how long an institution remained in conservatorship. (See table I.4-3.)
Before FIRREA’s passage, when no conservatorships were resolved, thrifts averaged 454
days in the conservatorship program. After the passage of FIRREA, with the exception
of 1991 and 1992, the average time until resolution for thrifts put into conservatorship
was less than a year.

15. RTCRRIA also extended the RTC’s authority to accept appointments as conservator or receiver from August
8, 1992 (set in FIRREA) to September 30, 1993; redesignated the RTC Oversight Board as the Thrift Depositor
Protection Oversight Board (TDPOB) and restructured its membership; abolished the RTC Board of Directors;
removed the FDIC as exclusive manager of the RTC; and created the Office of Chief Executive Officer of the RTC.
16. RTC, Office of Research and Statistics, “The History of RTC Funding.” Unpublished document.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

125

Table I.4-3

Conservatorship Institutions
1989–1995
Conservatorships
Established
Pre-FIRREA 1989
(2/7-8/8)
Post-FIRREA 1989
(8/9-12/31)

Average Number of Days
until Resolved

Conservatorships
Resolved

262

454

356

1990

207

323

309

1991

123

429

211

1992

596

1993

350

1994

—

1995

—

706

412

706

Totals
Source: RTC, 1995 Annual Report

Initially, the RTC had so many S&Ls in conservatorship, it had to set priorities in
its resolution schedule. It decided to handle the most unmarketable S&Ls first. If an
institution were suffering large operating losses, it was scheduled early in the resolution
calendar. If an institution’s losses were small, it was left in conservatorship and scheduled
for later resolution.17
The case priority process was significant because it acknowledged the RTC’s limitations regarding the large number of insolvent thrifts in conservatorship and the limited
financial resources available. It enabled the RTC to select for resolution those institutions that presented the best opportunity for minimizing costs to the RTC or those that
had a higher rate of deterioration because of operating losses, eroding core deposit bases,
and loss of key personnel. The priority process also considered the amount of funding
available to cover the losses and the estimated cost of resolving each institution.

17. “Strategic Plan for the Resolution Trust Corporation” (report), (Washington, D.C.: RTC Oversight Board,
1989).

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M A N A GI N G T H E C R I S I S

Operation Clean Sweep
After the RTC’s initial flurry of activity to use $18.8 billion by the end of the third quarter of 1989, its resolution process slowed down. Lawmakers, as well as banking and
thrift industry officials, who worried about assets being dumped on weakened real estate
markets began demanding that the RTC market all conservatorship institutions as
widely as possible and that the RTC be more flexible so that acquirers would purchase
more of the assets at the time of resolution. As a result of those pressures, the RTC
focused on encouraging whole thrift transactions to maximize the retention of assets in
the private sector and to minimize the amount of cash needed from the RTC. Whole
thrift transactions entailed passing most of the failed institution’s assets to the acquirer
along with its liabilities. That approach, however, had distinct disadvantages. Whole
thrift resolutions required an acquirer with loan workout expertise, thereby limiting the
number of interested bidders. Similarly, such transactions required extensive due diligence by potential bidders, which was lengthy and expensive. Those factors increased
the degree of uncertainty that potential acquirers faced, resulting in substantial risk
premiums in the final bid prices. Furthermore, many of the failed institutions had little
going-concern value, and bidders showed little appetite for thrift assets, especially
because, at the same time, most banks were tightening their credit standards under
regulatory pressure and signs of a slower economy.
Compounding the obstacles to the RTC’s resolution efforts was an increasingly hostile economic and risk-averse market. Many investors believed an oversupply of thrift
and bank charters existed. To illustrate, of the 7,500 parties invited to bid on the 52
institutions resolved through the first quarter of 1990, only 263 actually performed due
diligence, and only 194 actually submitted bids. Furthermore, of the 52 resolutions,
only two transactions resulted in whole thrift transactions.18 Those results suggest that
potential acquirers did not see great value in buying failed thrifts in their entirety, and
that what limited franchise value existed was attributable almost exclusively to the
deposit franchise.
Meanwhile, while the pace of resolutions was slowing, the takeover of additional
institutions into conservatorships was increasing. By the end of the first quarter of 1990,
the RTC had taken over 405 institutions in 40 states with more than $200 billion in
assets, leaving about 350 institutions still in conservatorship with $180 billion in assets.
Furthermore, it was becoming clear to most people familiar with the industry that the
RTC’s workload would continue to rise; some estimated that it would double, with the
RTC having to take over another 250 to 350 institutions with up to $200 billion in assets.
As a result, by the spring of 1990, the RTC was coming under increased criticism
and pressure from Congress and others to accelerate the resolution of the conservatorship

18. Testimony of RTC Oversight Board Acting President and CEO William Taylor before the Committee on
Banking, Finance and Urban Affairs, United States House of Representatives, April 2, 1990.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

institutions. Critics in the industry and on Capitol Hill, who once warned the RTC not
to dump assets on weak real estate markets, were now pressuring for action to quicken
the pace of the resolutions.
In response, on March 21, 1990, FDIC and RTC Chairman L. William Seidman,
in a speech to the National Press Club, announced that the RTC would sell or liquidate
141 conservatorship institutions by June 30, 1990. “Operation Clean Sweep” was a
term that was used to describe the resolution of all 141 conservatorship institutions.
That initiative was intended, in part, to demonstrate that progress was being made and
to maintain credibility with potential investors and acquirers. In addition, the initiative
was designed to quickly dispose of those institutions in order to spend the funds then
available as quickly as possible so that the RTC could return to Congress for additional
funding before the next election cycle began. Even though the S&L cleanup was less
than a year old, it clearly needed more funding as an increasing number of savings and
loans failed each week with no signs of a slowing pace. The S&L cleanup clearly was also
becoming a politically unpopular exercise, indicating that additional funding for the
RTC would be difficult to obtain.
Many industry commentators inside and outside the agency expressed skepticism
about the RTC’s ability to meet its ambitious goals. The RTC’s plan represented a sharp
acceleration from the pace of its resolutions to that date and surpassed any previous resolution pace undertaken by the FDIC. In addition to accelerating its pace, the RTC was
still trying to come up to speed in its start-up phase of operation. It employed about
2,300 people, the majority of whom were new hires. Most of the staff were located in
the field, in four regional offices—Atlanta, Kansas City, Dallas, and Denver—and 14
other consolidated offices.
To accomplish its aggressive goal, senior RTC management visited each of the RTC
regional offices to “sell” the plan to staff. The plan stated that headquarters staff, located
in Washington, D.C., would handle any resolutions with valued assets above $500 million (major resolutions) and staff in the field offices would handle those resolutions
valued under $500 million (field resolutions).
On June 30, 1990, the RTC exceeded its goal of 141 resolutions; it completed resolution transactions for 155 failed S&Ls with total assets of $44.4 billion and total deposits of $38.7 billion. The total initial cash outlay by the RTC was approximately $32
billion, and the total cost of those transactions is estimated to be $18 billion. Of the 155
resolutions, 78 transactions with $36.6 billion in assets were P&A transactions, 59
transactions with $6.4 billion in assets were IDTs, and 18 transactions with $1.4 billion
in assets were straight deposit payoffs. The institutions resolved under Operation Clean
Sweep were located in 31 states, with the largest concentration in Texas (34 institutions
with $6.9 billion in total assets), California (19 institutions with $7.8 billion in total
assets), Illinois (11 institutions with $0.8 billion in total assets), Kansas (9 institutions
with $1.2 billion in total assets), Louisiana (9 institutions with $0.6 billion in total
assets), and Florida (8 institutions with $8.0 billion in total assets). Operation Clean

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Sweep included institutions of all sizes, ranging from $6.3 million to $6.8 billion in
assets, with 18 institutions having assets above $500 million at the time of resolution.
Operation Clean Sweep was successful in rebuilding confidence in the RTC’s effort.
Insured depositors received protection, and the accounts of the vast majority of depositors transferred to a healthy depository institution with little, if any, disruption in
service. Substantial cost savings were achieved because the RTC had targeted conservatorships with the highest operating costs for resolution. Those institutions typically had
paid above-market rates to attract and retain deposits, which also caused healthy banks
and thrifts in the area to pay a market premium for their deposits. In addition, those
efforts represented a significant step toward reducing the backlog of insolvent, government-controlled S&Ls that were competing against privately owned institutions. By
reducing the backlog, the RTC was able to move forward with its original operating plan
of completing 50 to 75 resolutions each quarter. In addition, by resolving the 155 conservatorship institutions, the RTC was able to reduce the number of insolvent institutions in conservatorship from 350 to 247, despite the addition of 52 new
conservatorships during the quarter.
Operation Clean Sweep, however, also had some negative consequences. For one,
the RTC’s inventory of assets greatly increased; the RTC retained more than half of the
assets from the 155 institutions, including a large share of the institutions’ problem
loans, owned real estate, and junk bonds. In addition, the effects from closing so many
conservatorships so quickly contributed to accounting and back office problems that
plagued the RTC for several years afterwards.
Put Options
To pass more assets to acquirers, the RTC also used the “put options” method. Because
most acquirers did not want to purchase those assets, the RTC decided to require the
purchaser to take most of the failing thrift assets but gave them an option that would
require the RTC to repurchase most of the assets at a later date. The RTC used put
options extensively during the first year of its existence, selling approximately $40 billion of assets subject to put options. The approach for passing more assets of failed
thrifts did not work, however, because too many assets were coming back; in fact,
acquirers returned more than $20 billion of those assets to the RTC.
One problem that led to the return of assets to the RTC appears to be the limited
time acquirers had to evaluate the assets. After an institution closed, acquirers could purchase the assets and return them to the RTC over a 30- to 90-day period, which did not
give the acquirer adequate time to review the assets. Those assets contained a wide
variety of types of collateral and generally were poorly underwritten. In addition, some
of the acquirers were experiencing problems with their own asset portfolios and did not
want to take on any additional risk.
In the spring of 1990, in response to the time problem, the RTC extended the
option period to 18 months for some assets, to give the acquirers the time necessary to

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

evaluate and perhaps retain the assets. That policy, however, exacerbated the existing
problems with the initial policy on put options. In some cases, assets were not being
properly serviced before being put back to the RTC. In other cases, acquirers “cherry
picked” the assets and kept only those they could sell at a profit. In addition, the limited
due diligence before bidding did not allow acquirers to include the potential profits in
their bids. Ultimately, the problems led to substantial delays in the final sale and
ultimate resolution of those assets.

Development of New Initiatives
As the RTC obtained a stable source of working capital, it eliminated the need to force
franchise acquirers to buy assets and was able to return to the resolution strategy that it
originally envisioned. Because of the large volume, variety, and quality of assets held by
insolvent thrifts, the RTC needed to develop more flexible and efficient programs and
asset sale initiatives. The RTC’s marketing and selling approach had to attract a diverse
client base, including some potential acquirers with a strong interest in assets only.
Separating Assets from Liabilities
One of the RTC’s primary goals was to prepare conservatorships for resolution by shrinking the size of failed institutions. Reaching that goal involved curtailing new lending,
reducing expenses, and selling assets. (Liquid assets such as securities and mortgage-backed
securities were the most marketable and the easiest to sell.) Most attractive to acquirers
were performing single-family mortgage portfolios. By 1990, the RTC began to use other
asset sales methods, such as auctions, bulk sales, and securitizations. Because those sales
methods required large numbers of assets (such as commercial and real estate loans), their
closure helped speed the downsizing of conservatorships. Ultimately, the subsequent delays
in the RTC’s receiving funding prolonged the life of conservatorships, which forced the
RTC to reassess how it should deal with conservatorship assets. The RTC decided that it
should market performing mortgage portfolios immediately upon entering conservatorship to avoid decay in the value of those assets through prepayments. That decision caused
the percentage of assets passing to acquirers at resolution to decrease as those marketable
assets were sold. The rapid, cost-effective sale of conservatorship assets was instrumental in
preparing the institution for a smooth resolution.19
Removing assets from conservatorships for sale caused the asset side of the conservatorship balance sheet to shrink, because few new loans were being made. The liability
side of the balance sheet also shrank from deposit runoff. The longer an institution
stayed in conservatorship, the more the deposit base deteriorated. Such deterioration

19. RTC, 1990 Annual Report.

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was caused by the lower rates offered to depositors, compared to the higher rates offered
before conservatorship, and the publicity from the government takeover.
The RTC’s approach for resolving failed S&Ls contrasted with how the FDIC typically resolved failed banks. When the FDIC handled a resolution, it tried to sell as many
assets as possible to the bank that was assuming responsibility for the failed institution’s
liabilities. Only after the resolution process was complete would the FDIC consider
marketing assets to nondepository institutions. The RTC, however, made a conscious
decision to separate many of the assets from the liabilities and to develop broader asset
marketing strategies. Indeed, that step was critical to the RTC’s efforts to dispose of
$402.6 billion in assets within a few years.
In June 1991, the RTC modified its resolution philosophy and eliminated requiring
acquirers to purchase assets in order to buy the deposit franchise. To the extent that
assets were available to sell at resolution, winning acquirers were given the option to purchase pools of similar loans at a price set by the RTC. As a result of the success of the
transactions instituted by the RTC, the FDIC decided to institute a similar loan pool
option in its resolution transactions.
In 1992 and 1993, when lack of funding reduced the ability of the RTC to resolve
many of the conservatorships, it focused its attention on selling the assets out of the conservatorships before their resolution. By that time, the RTC had developed a national
loan sale program and securitization program, which disposed of many of the assets
while they were still in conservatorship.20
With adequate funding, the separation of assets from liabilities and the broader
marketing of assets at or near the time of resolution was a little easier for the RTC than
for the FDIC, because the RTC’s inventory of institutions was already in conservatorship and was being managed by the RTC. That factor made it easier to gather information about the assets to prepare for a sale. Also, unlike the FDIC, which conducted
resolutions as soon as a bank closed, the RTC had already taken control of the institutions and thus had no need for secrecy.
Branch Breakups
During 1990, the number of institutions being resolved through payoffs and IDTs,
together with the decreasing deposit premiums received for failed thrifts, caused the
RTC some concern. In addition, commercial banks protested that they were being
excluded from bidding on the best deposit franchises because of their size. Those negative resolution trends resulted in part from a decline in the financial health of large bank
holding companies and their inability to make acquisitions. Without their participation,
the large size of those thrifts limited the amount of competition. In response, the RTC
initiated the branch breakup transaction to increase bidder participation, competition,

20. For more information, see Chapter 13, Auctions and Sealed Bids, and Chapter 16, Securitizations.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

and flexibility for the resolution process. Because the branch breakup approach enabled
potential acquirers to bid on individual branch offices of failed thrifts, it appealed to a
much broader group of potential investors. The RTC marketed institutions through
branch breakup transactions unless their accounting systems were incapable of handling
multiple acquirers.
Beginning in the spring of 1990, the RTC marketed failed thrifts as either
“standard” or “branch” P&A transactions. As the branch transaction evolved, it became
a variation of the standard P&A transaction and included similar terms and conditions.
The branches of a particular institution were offered under two structures: “core” and
“limited” branch P&As. Under the core branch transaction, the acquirer assumed a
specified group of deposits and obtained an exclusive option to purchase fixed assets
associated with the failed thrift’s headquarters and other branch offices designated part
of the core branch group. The acquirer of the core branch also purchased no-risk assets
associated with the core branch group of offices and received purchase options on earning assets at market prices. The core acquirer performed the administrative and operational responsibilities associated with the post-resolution phase of the transaction.
Limited branch transactions were structured for individual branches or branch clusters other than the designated main office and any branches included in the “core”
agreement. Limited branch acquirers obtained the branch offices and the deposits, cash,
and other loans on deposits directly attributable to the branch offices. They also received
exclusive call options to purchase designated fixed assets and to assume leases and other
contracts associated with the respective branch offices.
Initially, the RTC offered only deposits and a limited amount of no-risk assets
through the limited branch transaction, assigning most of the earning assets to the core
branch transaction. In response to changing market demands, the RTC gave limited
branch bidders an opportunity to bid on earning assets similar to the core branch and
standard transaction bidders. That move was a deviation from the RTC’s historical resolution approach of selling earning assets only through all-deposit transactions. The RTC
later enhanced the branch transaction format to permit bidders to submit multiple bids
for the failed institution’s branch offices and related assets.
To further increase the level of competition and to give smaller branch bidders the
opportunity to more successfully compete against larger bidders, the RTC allowed such
branch bidders to link their individual branch bids together or form “consortium” bids
by pooling their premium dollars with other branch bidders. That process transformed
branch bids into standard P&A bids through the process of submitting one bid premium for all or most of the failed institution’s branch offices. The RTC facilitated the
structure of consortium bids, but it entered into agreements with only one acquirer (the
lead acquirer) with whom the closing and post-closing processes were conducted. The
other participants in a consortium bid were not involved in direct agreements with the
RTC; instead, they entered into legal agreements to purchase the failed institution’s
branch offices from the lead acquirer.

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Consortium bid structures facilitated all branches being sold under the same deposit
option and accomplished the RTC’s policy objective of treating all depositors in a single
institution equally from a deposit insurance perspective.
The branch breakup transaction became a successful modification to resolution procedures. Branch breakup bids were the winning bids in 153 of the 747 resolutions (20.5
percent). As time went by, the branch breakup transaction became an increasingly more
significant resolution method. (See table I.4-1.) In 1994, more than 40 percent of the
resolutions involved a branch breakup transaction. Furthermore, of the 52 resolutions in
1994 involving two or more branch offices, half involved branch breakup transactions.
The RTC found that by offering the branch breakup transactions, competition increased,
which resulted in additional savings to the RTC through increased premiums and fewer
deposit payoffs. For example, in 1994, in those branch transactions in which at least one
entire institution bid was also received, the RTC received an additional aggregate premium of approximately $84 million by selecting the individual branch bids instead.
Furthermore, in seven instances, the RTC did not receive any entire institution bids that
could have resulted in a deposit payoff if the branch bids had not been available.
The Accelerated Resolution Program
Effective July 10, 1990, the RTC and the Office of Thrift Supervision jointly initiated
the Accelerated Resolution Program (ARP) on the premise that early intervention in a
troubled thrift could create significant savings for taxpayers. Placing an institution with
franchise value in conservatorship had the potential of raising rather than limiting the
ultimate cost of resolving the institution and selling its assets. Because the publicity surrounding the conservatorship caused a runoff of core deposits and performing loans, the
RTC and OTS designed the ARP initiative to initiate the marketing and sale of troubled
savings associations before they were declared insolvent by the OTS and placed into
conservatorship under RTC control. The ARP usefulness was limited, however, because
it could not be fully used in 1992 and 1993 when the RTC had no funding.
Initially, institutions selected for sale through the ARP process were perceived to
have a high franchise value and already had attracted viable, cost-effective proposals
from prospective acquirers, which indicated substantial private sector interest. Also, the
troubled institutions’ management had to agree to participate in the process by signing
consent agreements and cooperating with the RTC and the regulators.
After gaining consent from the institution’s management, the RTC conducted the
resolution process in the same manner as conservatorship institutions with some minor
changes. First, the RTC did not seek broad market interest through public advertisement. The overall marketing process was more selective and confidential than the
RTC’s typical conservatorship process. In most ways, the ARP approach resembled the
FDIC’s historical approach to soliciting bids for troubled banks. In addition to soliciting bidders on its National Marketing List, the RTC reached regional institutions and

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

investors with the help of the OTS and the thrifts’ own management, who assisted with
the marketing process.
Second, the asset valuation process and due diligence typically involved reviewing
more of a thrift’s assets because, under the ARP, substantially all of the assets were available for sale at the time of resolution. Transaction documents (purchase and assumption
agreements and mortgage loan sale agreements) were modified to offer standard representations and warranties on single-family mortgage loans in lieu of the put back
provisions, or put options, that the RTC offered under its conservatorship resolutions.
The remaining terms in the ARP P&A contract were similar to the standard P&A
contract offered by the RTC when it resolved institutions in the conservatorship program. After 1991, the language in the contract terms in the conservatorship and ARP
resolution documents became identical. A major difference regarding resolution still
existed between the programs; in the conservatorships, many of the assets were sold
before the resolution, while in the ARPs, all the assets were available for sale at the time
of resolution.
Initially, ARP transactions were structured so that residential mortgages were offered
exclusively to deposit acquirers; the ARP resolution process excluded asset-only acquirers
from purchasing assets. In 1991, the RTC decided to market most single-family residential mortgages simultaneously to both deposit-only and asset-only acquirers, which
expanded its customer base and created more competition. The vast majority of the
loans were sold to asset-only acquirers at prices substantially above the RTC’s valuations.
The ARP process evolved in a similar manner to the options of conservatorship resolutions, which included selecting optional asset pools, linking deposit-only with asset-only
bids, and branch bidding. Of the 747 resolutions completed by the RTC, 39 institutions, or 5 percent, were sold through the ARP process.
The RTC’s method for handling ARP transactions was similar to the FDIC’s historical method: It avoided using a conservatorship and was generally accomplished in a
short time with limited bidder solicitations.
Least Cost Transactions
Another modification to the bidding process came as a result of the language contained
in the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991,
which required the RTC to choose the least costly resolution. Initially, the RTC
marketed thrifts through a sequential resolution approach under various purchase and
assumption transactions. If the initial attempt was unsuccessful, the RTC reoffered the
thrift to the same potential acquirers under an insured deposit transfer. If the reoffer
process was unsuccessful, the failed thrift was resolved by a deposit payoff. In response to
FDICIA, the RTC and the FDIC replaced the sequential approach with a bid process in
which they offered acquirers the choice of buying all the deposits or only the insured
deposits. That change resulted in a much higher percentage of resolutions in which only
insured deposits were transferred to an acquirer.

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Effect of Entrance and Exit Fees
A provision of FIRREA placed limits on the ability of insured depository institutions to
change from a Bank Insurance Fund (BIF) member to a Savings Association Insurance
Fund (SAIF) member or from a SAIF member to a BIF member for a period of five
years. That provision was designed to stabilize membership base and insurance assessment rates. Also, by charging institutions participating in conversions both an exit and
entrance fee to the appropriate insurance fund, the provision attempted to prevent dilution of the deposit insurance funds. Acquirers seeking transactions that would involve
conversion from SAIF to BIF would be subject to exit fees from SAIF and entrance fees
to BIF (or vice versa). Early in the RTC’s history, those fees amounted to 1.5 percent of
core deposits for a bank buying a failed thrift. For many thrifts the fee was more than
they were worth and prevented conversion to the BIF.
However, FIRREA allowed for transactions in which a BIF institution could acquire
SAIF institutions and have the acquired deposits remain insured by SAIF. In such
instances, the BIF institution paid no exit and entrance fees, and the acquirer continued
to pay the SAIF insurance premium. Such transactions, termed “Oakar” transactions,
were designed to level the playing field for banks when competing with thrifts for thrift
acquisitions and also enhance the acquisition of failing thrifts by banks.21 Virtually all
acquisitions from the RTC by banks were handled as Oakar transactions.

Resolution Initiatives for Minorities
The RTC was committed to preserving and increasing the total number of minority
owned depository institutions. To achieve those objectives, the RTC developed and
administered programs for minority participation, including the Minority Resolution
Program (MRP), which evolved over time as a result of legislation. (The RTC was able
to develop a much more extensive minority preference program, which allowed the RTC
to offer more assistance to minority purchasers, than the FDIC could develop because
specific legislative provisions were governing resolution of the RTC controlled thrifts
that did not apply to the FDIC.)
Initial Program
To comply with section 308 of FIRREA, the RTC initiated a plan aimed at preserving
the minority ownership of failed minority thrifts. Under that section, bidders of the
same ethnic identification as that of the previous owners were allowed to bid separately.

21. The term “Oakar” transaction was derived from the name of the FIRREA provision’s author, Congresswoman
Mary Rose Oakar.

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Only if that bidding process proved unsuccessful (that is, no bids were less costly than a
payoff) was the institution offered to all other potential investors.
The RTC also made available to qualified acquirers interim capital assistance (ICA)
of up to two-thirds of the required capital for the acquisition. Although not a specific
requirement of FIRREA, that financing approach initially was designed to act as shortterm bridge financing until the acquirer could raise permanent capital. Because of the
inability of many of the minority acquirers to attract permanent capital over a short
time, however, the RTC lengthened the loan repayment term to at least two years and
finally to five years. The ICA loans carried an interest rate equal to the RTC’s cost of
borrowing (approximately the six-month Treasury rate plus 12.5 basis points). Because
the RTC, in its cost analysis, discounted the cash flow from the ICA note at the RTC
cost of funds, the loan was considered to be cost neutral. If the discount rate had been
increased to adjust for risk of default, the RTC would have realized a substantial cost for
the $56.9 million of ICA notes that they issued. Minority investors preferred the RTC
financing, because the interest rate was much lower than comparable financing.
RTCRRIA Modifications
In November 1991, RTCRRIA amended section 12 of U. S. Code 1441(a) to require
the RTC to reoffer failed nonminority owned institutions, or branches thereof, to
minority owned institutions if it received no other acceptable offers through the conventional marketing efforts (rebidding initiative). In addition, the RTC’s existing policy on minority resolutions was made a part of the law. Early in the marketing process,
the RTC attempted to notify and inform all potential acquirers, including minority
investors, that the RTC would consider accepting bids from minority investors if the
institution, or branch thereof, was not sold through normal marketing efforts. If the
RTC did not receive a bid that was less costly than a payoff without a request for
interim capital assistance, it reoffered the institution, or branch thereof, to minority
investors that had made their interest known to the RTC. The bids received under the
special initiative were required to represent a lower cost to the RTC than that of paying
off the failed thrift’s insured deposits. Generally, that reoffer period lasted a few days
and did not delay the closing of the failed institution. If the reoffer attempt was unsuccessful and the failed institution remained unsold, the RTC resolved the institution
through a deposit payoff. Under that initiative, it also made ICA available to eligible
minority owned institutions.
The RTC also offered minority bidders an option to purchase performing loans
equal to 100 percent of deposits acquired at an immediate market value determined by
the RTC. That option was designed to provide the acquirers with a source of earning
assets. Because the loans would be sold at market value, that provision was considered
“no cost”; but, it caused the RTC significant difficulty because the acquirers had lower
opinions of the value of the loans than did the RTC. The program sold more than $300
million of loans to 10 minority acquirers. In three other cases, the RTC and the acquirer

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could not agree on a mutually acceptable value for the loans. Those option agreements
were terminated with the RTC making cash payments totaling $1.4 million to the
acquirers.
The RTC Completion Act of 1993
In December 1993, the RTC Completion Act of 1993 amended section 21 of the
Federal Home Loan Bank Act and revised the manner in which institutions were structured for sale, as well as the initial bid analysis process. The statute required that the
RTC give “bidding preference” to an offer from a minority owned depository institution
to acquire any failed depository institution, or any branch thereof, located in a neighborhood in which 50 percent or more of the residents were minorities, as part of the Predominantly Minority Neighborhoods (PMN) Program. Because the bidding preference
was subject to the least cost test, it was limited. Minority bidders were permitted to submit a second bid if their initial bid was within 10 percent of the otherwise winning lowest bid by a nonminority bidder. The option to purchase performing loans at market
value and ICA were also available to the minority acquirers.
The RTC executed the special PMN Program by simultaneously offering institutions and branch offices to all potential acquirers through normal marketing efforts and
specifically identifying all PMN institutions and branch offices. As a result, the RTC
offered institutions having branch offices located in PMN neighborhoods under individual branch and cluster branch transactions. Additionally, under separate provisions of
the FHLB Act, section 21(A)(s), the RTC made owned banking facilities located in predominately minority neighborhoods available to minority owned financial institutions
on a rent-free basis for five years. The cost of that separate provision of the law was not
included in the least cost test completed for the resolution transaction.
Results of the Minority Resolution Program
The RTC’s Minority Resolution Program attracted widespread interest among minority
investors, and the RTC’s National Marketing List included nearly 500 interested minority investors. Furthermore, the RTC MRP was relatively successful in preserving minority
ownership of the failing minority owned thrifts. Of the 29 minority owned thrifts
involving 95 branch offices, 24 institutions, or 83 percent, were sold to acquirers, thus
maintaining bank services in those communities. Of those 24 sales, 15 institutions, or 63
percent, preserved the same ethnic minority ownership. Of those 15 institutions, 7
received interim capital assistance totaling $14.3 million. In addition, under the rebidding
initiative, minority investors acquired two entire previously nonminority owned thrifts,
with a total of eight offices, and three branches of another nonminority owned thrift,
and one acquirer obtained $3.2 million of ICA in those transactions.
The RTC resolved 23 nonminority thrifts that had 69 branch offices located in
PMNs. Minorities acquired 31 of the branch offices, or 45 percent, in those transac-

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137

tions. The aggregate amount of ICA provided was $39.4 million. Under the PMN
Program, the RTC also made rent-free banking facilities available to 11 acquirers.

Resolution Costs
The 747 institutions that the RTC resolved between August 9, 1989, and year-end 1995
had $402.6 billion in assets before failure. Unlike the FDIC, however, the vast majority
of those institutions were not sold immediately after failure, but instead were placed into
conservatorship and were later resolved after significant asset shrinkage. The 747 institutions at time of resolution had $244.9 billion in assets. The RTC’s cost for handling
those failures was estimated at December 31, 1995, to be $87.5 billion, or about 22
percent of the assets at time of failure.
The $87.5 billion in costs was almost twice the initial $50.1 billion FIRREA
appropriation, but it was substantially less than the high end of the range that the U.S.
Treasury predicted at the peak of the cycle in June 1991 of close to $130 billion in 1989
present value costs or $160 billion in absolute dollars.
Also, the RTC’s resolution costs were
skewed by the fact that the majority of
institutions resolved in 1990 and 1991 Chart I.4-3
were institutions that had been put into
RTC Resolution Costs
conservatorship by the RTC in 1989 and
1989–1995
1990. A large number of those institutions
($ in Billions)
had been insolvent for some time, were
located in declining real estate markets (for
$60
example, the Southwest), and had little
$50
franchise value remaining. Approximately
$72 billion, or 82 percent, of the total RTC
$40
resolution costs resulted from those 531
$30
institutions that were put into conservatorships or were resolved through the ARP
$20
during 1989 and 1990. (See chart I.4-3.)
$10
Another gauge of those institutions’ poor
$0
financial condition is that 239 of those 531
1989 1990 1991 1992 1993 1994 1995 Total
institutions, or 45 percent, were resolved
Resolution $51.08 $20.84 $10.77 $4.18 $0.61 $0.02 $0.06 $87.56
through straight deposit payoffs or insured
Costs
depositor transfers. To put those costs in
perspective, the FDIC’s bank failure costs Costs are as of December 31, 1995. The amounts are routinely
with updated information from new appraisals and
totaled only $9.1 billion for 1989 and adjusted
asset sales that ultimately affect the asset values and projected
1990.
recoveries for active receiverships.
Looking at the RTC’s annual thrift res- Sources: FDIC Division of Research and Statistics and RTC annual
olution costs as a percentage of failed thrift reports.

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M A N A GI N G T H E C R I S I S

Chart I.4-4

RTC Resolution Costs as a Percentage
of Total Assets
1989–1995
40
35
30
25
20
15
10
5
0
1989 1990 1991 1992 1993 1994 1995
Costs/
Assets

36.03% 16.00% 13.63% 9.31%

Average

9.97% 11.93% 14.75% 21.75%

Sources: FDIC Division of Research and Statistics and RTC annual
reports.

assets shows a pattern of decreasing costs
until 1993 when costs begin to rise
through 1995. (See chart I.4-4.) The ratio
is extremely high at 36 percent for those
thrifts failing in 1989. Again, the RTC
expected that ratio because those institutions were the worst off financially and
had little, if any, franchise value. For 1992
and 1993, as the economy gradually began
to improve in most of the nation, those
years show relatively low cost-to-asset
ratios, between 9 and 10 percent. Cost-toasset ratios for 1994 and 1995 increased.
In those years, only four failures (two ARP
transactions each year) occurred; three of
those failures were in California, which
was still suffering economically.
Athough a correlation exists between
thrift asset size and failure resolution costs
as a percentage of assets,

Chart I.4-5

Resolution Costs by Asset Size
as a Percentage of Total Assets
1989–1995
35%
30%
25%
20%
15%
10%
5%
0%
Thrift Failures
with TA Greater
than $5 Billion

Thrift Failures
with TA $1 Billion
to $5 Billion

Thrift Failures
with TA $500 to
$1 Billion

Thrift Failures
with TA less
than $500 Million

Average/
Total

Costs as Percentage
of Total Assets (TA)

13.94

20.81

30.93

30.19

21.75

Number of Failures

597

747

Sources: FDIC Division of Research and Statistics and RTC annual reports.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

139

that correlation is less pronounced than
Chart I.4-6
that expressed for bank failures. (See chapMedian RTC Resolution Costs
ter 3, Evolution of the FDIC’s Resolution
as a Percentage of Total Assets
Practices.) While bank failure costs show a
1989–1995
steadily declining cost ratio as bank size
increased, thrift costs are almost identical
40%
for thrift failures less than $500 million
35%
(30.2 percent) and those between $500
30%
million and $1 billion (30.9 percent). The
25%
RTC resolution costs as a percentage of
20%
total assets does not drop until the total
15%
assets increase to more than $1 billion and
10%
continues to fall, reaching 13.9 percent for
5%
thrifts with more than $5 billion in assets.
0%
(See chart I.4-5.)
1989 1990 1991 1992 1993 1994 1995
The economies of scale associated
Costs/Assets 35.59% 18.45% 11.51% 9.86% 9.71% 11.52% 13.05%
with the handling of larger thrift failures
make it difficult to discern trends over
Sources: FDIC Division of Research and Statistics and RTC annual
time in the RTC’s cost for handling the
reports.
“typical” thrift failure. One way to look at
possible trends without the possible dominant influence of the larger thrift failure is to look at the median of the RTC’s thrift resolution costs over time. (See chart I.4-6.) However, the median RTC resolution costs are
quite similar to those costs previously shown in chart I.4-4. This median cost would
again seem to indicate the lower correlation between size and cost for RTC resolutions
compared to the FDIC resolutions.
Another way of looking at resolution costs is by transaction type. Chart I.4-7 shows
the average resolution cost as a percentage of assets by transaction type for all RTC resolutions between 1989 and 1994. As expected, the ARP and P&A transactions have the
lowest average cost ratio compared to the straight deposit payoffs and insured deposit
transfers. Tables I.4-4 through I.4-7 show annual trends in the RTC’s failure resolution
costs by transaction type. It is interesting to note that, for thrifts failing in 1989, all
transaction types, including the P&As, show much higher cost ratios compared to the
more recent years. The RTC resolution costs (as a percentage of assets) for thrifts failing
in the other years (1990 to 1995), however, are similar to the cost ratios for bank failures
occurring during those years. Interestingly, with the 1989 costs excluded, the resolution
costs as percentage of assets at takeover for P&A transactions are similar to the ARP
transactions.
Much of the data in this cost section is presented for informational purposes and
not for drawing specific conclusions. As was the case with the FDIC cost data shown in
chapter 3, it is difficult to point to any one factor to determine what had the largest
effect on costs. The poor condition of the thrifts that had been left unresolved and had

140

M A N A GI N G T H E C R I S I S

Chart I.4-7

RTC's Costs for Failed Thrift Resolutions
as a Percentage of Assests by Resolution Type
1989–1994
Resolution Costs as a % of Assets

0.6
0.5
0.4
0.3
0.2
0.1
0
P&A

ARP

IDT

SDP

19.71%

12.88%

30.60%

53.07%

Average Resolution Cost = 21.76%

Sources: FDIC Division of Research and Statistics
and RTC annual reports.

Table I.4-4

RTC’s Costs for Purchase and Assumption Transactions by Year of Failure
1989–1995
($ in Millions)
Year

Number of
P&As

Assets at
Takeover

Assets at
Resolution

Cost as of
12/31/95

Costs/Assets
at Takeover (%)

1989

147

$ 97,112.0

$ 61,650.0

$ 32,187.6

33.14

1990

141

113,800.0

71,798.9

17,503.9

15.38

1991

116

64,426.0

34,638.8

9,426.5

14.63

1992

35,426.0

13,035.8

2,715.8

7.67

1993

5,818.0

3,924.2

561.0

9.64

1994

1995

458

$316,582.0

$185,047.7

$62,394.8

19.71

Totals/
Average

Sources: FDIC Division of Research and Statistics and RTC annual reports.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

141

Table I.4-5

RTC’s Costs for Straight Deposit Payoffs by Year of Failure
1989–1995
($ in Millions)
Year

Number
of SDPs

Assets at
Takeover

Assets at
Resolution

Costs as of
12/31/95

Costs/Assets
at Takeover (%)

1989

$ 7,553.0

$4,880.2

$5,003.6

66.25

1990

3,963.0

2,570.1

1,265.1

31.92

1991

232.0

170.3

46.9

20.22

1992

22.0

7.6

14.8

67.27

1993

243.0

201.7

44.6

18.35

1994

1995

$12,013.0

$7,829.9

$6,375.0

53.07

Totals/
Average

Sources: FDIC Division of Research and Statistics and RTC annual reports.

Table I.4-6

RTC’s Costs for Insured Deposit Transactions by Year of Failure
1989–1995
($ in Millions)
Year

Number
of IDTs

Assets at
Takeover

Assets at
Resolution

Costs as of
12/31/95

Costs/Assets
at Takeover (%)

1989

120

$37,084.0

$22,613.9

$13,885.6

37.44

1990

8,853.0

3,165.9

1,513.8

17.10

1991

6,271.0

4,430.9

574.6

9.16

1992

1993

1994

1995

158

$52,208.0

$30,210.7

$15,974.0

30.60

Totals/
Averages

Sources: FDIC Division of Research and Statistics and RTC annual reports.

142

M A N A GI N G T H E C R I S I S

Table I.4-7

RTC’s Costs for Accelerated Resolution Program Transactions
by Year of Failure
1989–1995
($ in Millions)
Year

Number
of ARPs

Assets at
Takeover

Assets at
Resolution

Costs as of
12/31/95

Costs/Assets
At Takeover (%)

1989

1990

$3,631.5

$554.3

15.26

1991

8,105.0

8,104.2

724.9

8.94

1992

9,436.7

1,449.2

15.36

1993

43.7

3.2

7.32

1994

128.9

15.4

11.95

1995

466.2

62.9

13.49

$21,812.0

$21,811.2

$2,809.9

12.88

Totals/
Average

Sources: FDIC Division of Research and Statistics and RTC annual reports.

deteriorated before the involvement of the FDIC and the RTC in 1989 certainly
increased the cost of those receiverships. The economic conditions, particularly the
decline of real estate prices, especially for commercial real estate, profoundly affected the
costs for the RTC in its disposal of the failing thrift institutions and their assets. They
not only produced a wave of commercial mortgage loan foreclosures, followed by the
failure of thrifts in the Southwest, New England, and California, but also added to the
decline in the value of RTC sales prices and premiums received for the sale of thrift
deposits. As the nation moved further into the 1990s, however, lower interest rates,
improved real estate markets, and a stronger economy reduced the number of thrift failures and also reduced the resolution costs for the RTC. The stronger economy and lower
interest rates resulted in higher premiums on the sale of deposit liabilities and increased
the value of assets sold during that period.
Another factor influencing the ultimate resolution costs for the RTC was inadequate or delayed funding. As previously discussed in this chapter, interruption of funding occurred before passage of each of the three funding bills. The longest and most
significant delay occurred for a 21-month period starting from April 1, 1992, through
December 17, 1993. During that 21-month period, resolution activity was severely
reduced. The delays in resolution funding tended to leave the institutions operating in
conservatorship status much longer than the RTC would have preferred. Because of the
large percentage of nonperforming assets, those institutions’ liquidity needs were funded
through deposit liabilities. If those institutions had been resolved promptly, carrying

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

costs would have been reduced because assets retained by the RTC were funded at RTC
borrowing rates rather than at the higher insured deposit rates. In addition, allowing
failed institutions to continue to operate may also have weakened competing healthy
institutions; the RTC largely mitigated that potential adverse effect, however, by placing
those institutions into conservatorship while awaiting final resolution.
Those losses, however, are lessened to some extent by the fact that after the RTC
had access to working capital, it was able to reduce its funding costs. Furthermore, the
delays in RTC funding could have been more expensive over the 21-month period were
it not for the more favorable macro-economic conditions. As previously mentioned, the
stronger economy reduced the number of anticipated thrift failures over that period. To
the extent that some of those institutions would have been closed if funding were
available, this earlier action would have increased the cost to the RTC.

Conclusion
The RTC’s use of conservatorships and resolution methods was born out of a need to
take quick command of a potentially disastrous situation. Upon its creation, the RTC
immediately assumed responsibility for 262 thrift institutions already in conservatorship
and faced the possibility of assuming responsibility for many more. Placing the failed
institutions into conservatorship allowed the underfunded and understaffed RTC to
manage, operate, and resolve those failed institutions while continuing to provide
services to the institutions’ depositors. From inception in 1989 to sunset in 1995, the
RTC managed a total of 706 institutions in the conservatorship program and resolved
all failed thrift institutions by the end of 1995. In every case, no insured depositor lost
money and insured deposits were paid promptly.
The sheer volume of assets, combined with the funding issues and the changing
economy, significantly affected the evolution of the RTC’s resolution strategies. As the
resolution process evolved, the RTC devised new resolution methods to adjust to its
changing environment. Initially, the RTC focused on eliminating some of the institutions with the larger carrying costs by quickly paying off the depositors of its unmarketable institutions and by replacing the high-cost deposits of those remaining
conservatorships that paid the most for deposits. Those initial transactions were significant because they helped to cut off some of the larger losses that were increasing daily.
However, they also reduced liquidity and resulted in a majority of the assets being
retained by the RTC.
As the resolution process evolved, the RTC made a conscious decision to separate
the marketing of the assets from the marketing of the liabilities and to develop broader
asset marketing strategies. In contrast with the FDIC’s focus on selling as many assets as
possible to the acquiring bank, the RTC’s resolution strategies focused more on how to
sell the deposit franchise. Such a shift in emphasis meant that the RTC’s asset disposition strategies took on a relatively greater importance outside of the resolution process.

143

144

M A N A GI N G T H E C R I S I S

Regarding deposit franchises, the RTC developed new methods that enabled it to
sell a large number of institutions in a short period of time. The RTC marketed widely
and offered multiple bidding options. Unlike the FDIC, the RTC was able to market
those institutions publicly because the identity and the problems of the institutions in
conservatorship were already well known to the public. The RTC’s focus on branch
breakup transactions increased bidder participation, competition, and flexibility in the
resolution process and ultimately led to increased premiums.
Such flexibility with assets and liabilities helped the RTC accomplish its mission
one year ahead of schedule, with the RTC closing on December 31, 1995. From 1989 to
1995, the RTC resolved 747 failed thrifts (706 through conservatorship, 39 through
ARP, and 2 that were neither placed into conservatorship nor resolved through ARP).
Of the original $402.6 billion in failed thrift assets, only $7.7 billion, or 2.5 percent,
were transferred to the FDIC upon the RTC’s closure.
The RTC’s experience, like the FDIC’s, points to the importance of a strong insurance fund. As mentioned in chapter 3, to have an adequate source of liquidity, the insurance funds need to be strong. The RTC’s lack of funding (and also the inadequate
funding for FSLIC before that) influenced certain resolution decisions. Early attempts at
whole thrift transactions and the use of put options are two examples of developments
designed to put assets back into the private sector quickly, thereby preserving the RTC’s
liquidity. In retrospect, however, those methods may not have minimized the overall cost
to the insurance fund. Also, the lack of funding kept thrifts in conservatorship longer,
which increased conservatorship operating losses. The overall resolution cost estimte of
the RTC’s sunset of $87.5 billion was about 22 percent of the failed thrifts’ assets.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

145

Table I.4-8

Thrift Failures by Location Ranked by Number of Thrift Failures
1989–1995
($ in Thousands)
Number
of
Failed
Thrifts

Thrift
Assets
at
Resolution

Thrift
Assets
at
Failure

Resolution
Costs

Costs /
Thrift Assets
at
Failure (%)

Cumulative
Percentage
of
Failures

137

$43,328,927

$57,575,000

$25,908,011

45.00

18.34

California

45,529,855

85,696,000

11,321,265

13.21

28.11

Louisiana

6,274,435

9,365,000

3,926,380

41.93

35.07

Florida

22,939,697

35,171,000

6,627,297

18.84

41.63

Illinois

7,548,788

12,080,000

1,414,926

11.71

48.19

New Jersey

12,101,097

24,502,000

3,576,281

14.60

52.74

Kansas

4,976,735

16,604,000

1,905,179

11.47

55.82

Mississippi

1,494,275

2,609,000

687,300

26.34

58.37

Pennsylvania

10,654,226

18,000,000

3,128,702

17.38

60.91

Arkansas

2,425,428

4,568,000

2,309,681

50.56

63.32

Ohio

5,548,728

8,987,000

638,642

7.11

65.73

Oklahoma

3,454,305

5,128,000

714,758

13.94

68.14

Virginia

7,647,459

11,549,000

2,354,685

20.39

70.55

Colorado

2,660,846

4,026,000

1,925,109

47.82

72.82

Georgia

2,607,818

4,422,000

594,800

13.45

74.97

New York

10,517,031

14,778,000

3,104,777

21.01

76.97

Maryland

3,588,714

8,045,000

1,071,638

13.32

78.85

Missouri

6,293,372

7,798,000

1,499,980

19.24

80.72

Iowa

1,669,255

3,194,000

288,120

9.02

82.33

Alabama

1,779,178

3,998,000

508,891

12.73

83.80

New Mexico

2,431,608

4,236,000

1,964,688

46.38

85.27

Tennessee

1,154,458

1,813,000

335,273

18.49

86.75

Arizona

12,276,776

19,400,000

5,761,817

29.70

87.95

North Carolina

1,890,034

3,301,000

433,977

13.15

89.16

Connecticut

713,236

1,029,000

200,329

19.47

90.23

Nebraska

1,352,614

1,823,000

545,276

29.91

91.30

Massachusetts

5,316,082

6,457,000

1,349,711

20.90

92.10

South Carolina

716,092

1,436,000

155,483

10.83

92.90

Minnesota

2,255,491

3,706,000

961,990

25.96

93.57

Location

Texas

146

M A N A GI N G T H E C R I S I S

Table I.4-8

Thrift Failures by Location Ranked by Number of Thrift Failures
1989–1995
($ in Thousands)

Continued
Number
of
Failed
Thrifts

Thrift
Assets
at
Resolution

Thrift
Assets
at
Failure

Resolution
Costs

Costs /
Thrift Assets
at
Failure (%)

Cumulative
Percentage
of
Failures

Utah

$2,140,015

$2,990,000

$565,616

18.92

94.24

Indiana

268,852

349,000

49,477

14.18

94.78

Michigan

532,336

1,295,000

88,986

6.87

95.31

West Virginia

142,547

248,000

20,326

8.20

95.85

Wyoming

224,737

309,000

43,088

13.94

96.39

Kentucky

458,440

484,000

49,944

10.32

96.79

North Dakota

589,419

1,157,000

163,165

14.10

97.19

Oregon

3,737,290

7,022,000

350,216

4.99

97.59

Washington

1,441,134

2,079,000

111,553

5.37

97.99

Wisconsin

300,722

453,000

91,045

20.10

98.39

Alaska

262,683

314,000

205,380

65.41

98.66

Maine

58,192

131,000

27,657

21.11

98.93

New Hampshire

125,384

364,000

50,073

13.76

99.20

Rhode Island

1,362,336

1,967,000

162,435

8.26

99.46

South Dakota

187,124

198,000

35,218

17.79

99.73

Nevada

252,373

252,000

7,323

2.91

99.87

Puerto Rico

1,629,356

1,667,000

317,411

19.04

100.00

Delaware

0.0

100.00

District of Columbia

0.0

100.00

Guam

0.0

100.00

Hawaii

0.0

100.00

Idaho

0.0

100.00

Montana

0.0

100.00

Vermont

0.0

100.00

747 $244,859,500 $402,575,000

$87,553,879

21.75

Location

Totals/Average

Sources: FDIC Division of Research and Statistics, RTC annual reports, and RTC statistical abstracts.

EVO LU T I ON O F T H E R TC ’S R E S O LU T I O N PRA C T I C E S

147

Table I.4-9

Thrift Failures by Location Ranked by Resolution Costs
1989–1995
($ in Thousands)
Number
of
Failed
Thrifts

Thrift
Assets
at
Resolution

Thrift
Assets
at
Failure

Resolution
Costs

Costs /
Thrift Assets
at
Failure (%)

Cumulative
Percentage
of
Failures

137

$43,328,927

$57,575,000

$25,908,011

45.00

29.59

California

45,529,855

85,696,000

11,321,265

13.21

42.52

Florida

22,939,697

35,171,000

6,627,297

18.84

50.09

Arizona

12,276,776

19,400,000

5,761,817

18.84

56.67

Louisiana

6,274,435

9,365,000

3,926,380

11.71

61.16

New Jersey

12,101,097

24,502,000

3,576,281

14.60

65.24

Pennsylvania

10,654,226

18,000,000

3,128,702

11.47

68.81

New York

10,517,031

14,778,000

3,104,777

26.34

72.36

Virginia

7,647,459

11,549,000

2,354,685

17.38

75.05

Arkansas

2,425,428

4,568,000

2,309,681

50.56

77.69

New Mexico

2,431,608

4,236,000

1,964,688

7.11

79.93

Colorado

2,660,846

4,026,000

1,925,109

13.94

82.13

Kansas

4,976,735

16,604,000

1,905,179

20.39

84.31

Missouri

6,293,372

7,798,000

1,499,980

47.82

86.02

Illinois

7,548,788

12,080,000

1,414,926

13.45

87.64

5,316,082

6,457,000

1,349,711

21.01

89.18

Maryland

3,588,714

8,045,000

1,071,638

13.32

90.40

Minnesota

2,255,491

3,706,000

961,990

19.24

91.50

Oklahoma

3,454,305

5,128,000

714,758

9.02

92.32

Mississippi

1,494,275

2,609,000

687,300

12.73

93.10

Ohio

5,548,728

8,987,000

638,642

46.38

93.83

Georgia

2,607,818

4,422,000

594,800

18.49

94.51

Utah

2,140,015

2,990,000

565,616

29.70

95.16

Nebraska

1,352,614

1,823,000

545,276

13.15

95.78

Alabama

1,779,178

3,998,000

508,891

19.47

96.36

North Carolina

1,890,034

3,301,000

433,977

29.91

96.86

Oregon

3,737,290

7,022,000

350,216

20.90

97.26

Tennessee

1,154,458

1,813,000

335,273

10.83

97.64

Puerto Rico

1,629,356

1,667,000

317,411

25.96

98.00

Location

Texas

Massachusetts

148

M A N A GI N G T H E C R I S I S

Table I.4-9

Thrift Failures by Location Ranked by Resolution Costs
1989–1995
($ in Thousands)

Continued
Number
of
Failed
Thrifts

Thrift
Assets
at
Resolution

Thrift
Assets
at
Failure

Resolution
Costs

Costs /
Thrift Assets
at
Failure (%)

Cumulative
Percentage
of
Failures

$1,669,255

$3,194,000

$288,120

18.92

98.33

Alaska

262,683

314,000

205,380

14.18

98.57

Connecticut

713,236

1,029,000

200,329

6.87

98.79

North Dakota

589,419

1,157,000

163,165

8.20

98.98

Rhode Island

1,362,336

1,967,000

162,435

13.94

99.17

South Carolina

716,092

1,436,000

155,483

10.32

99.34

Washington

1,441,134

2,079,000

111,553

14.10

99.47

Wisconsin

300,722

453,000

91,045

4.99

99.58

Michigan

532,336

1,295,000

88,986

5.37

99.68

New Hampshire

125,384

364,000

50,073

20.10

99.73

Kentucky

458,440

484,000

49,944

65.41

99.79

Indiana

268,852

349,000

49,477

21.11

99.85

Wyoming

224,737

309,000

43,088

13.76

99.90

South Dakota

187,124

198,000

35,218

8.26

99.94

Maine

58,192

131,000

27,657

17.79

99.97

West Virginia

142,547

248,000

20,326

2.91

99.99

Nevada

252,373

252,000

7,323

19.04

100.00

Delaware

0.0

100.00

District of
Columbia

0.0

100.00

Guam

0.0

100.00

Hawaii

0.0

100.00

Idaho

0.0

100.00

Montana

0.0

100.00

Vermont

0.0

100.00

$244,859,500 $402,575,000

$87,553,879

21.75

Location

Iowa

Totals/Average

747

Sources: FDIC Division of Reserarch and Statistics, RTC annual reports, and RTC statistical abstracts.

The FDIC Mutual
Savings Bank Team
worked hundreds of
hours during 1982
handling the assisted
mergers of eight failing
mutual savings banks
with healthy
institutions. The
members are (from
left): William R. Watson,
Roger A. Hood; Dennis
A. Olson; Douglas H.
Jones; Barbara I.
Gersten; Robert P.
Gough, Team Leader;
Mary R. Warhol; Louise
E. Wright; Kathy A.
Johnson; William J. Via,
Jr.; and William H.
Roelle.

he term “open bank assistance” gained
national recognition in 1984 when the
FDIC provided assistance to Continental
Illinois National Bank and Trust
Company, Chicago, Illinois.

CHAPTER 5

Open Bank Assistance

Introduction
Open bank assistance (OBA) occurs when a distressed financial institution remains open
with government financial assistance. The federal government has used various forms of
OBA since the Great Depression.1 Generally, with open bank assistance, the Federal
Deposit Insurance Corporation (FDIC) required new management, ensured that the
ownership interest was diluted to a nominal amount, and called for a private sector infusion of capital. The FDIC also used OBA to facilitate the acquisition of a failing bank or
thrift by a healthy institution. The FDIC’s overall goal in using OBA was to minimize
the cost of a failing bank to the deposit insurance fund. The FDIC also provided open
bank assistance for public policy reasons, such as maintaining public confidence and
maintaining banking services to a community. A major criticism of open bank assistance
has been that shareholders and other creditors of the failing institution benefited from
the assistance provided by the government.
Chapter 3, Evolution of the FDIC’s Resolution Practices, mentions several resolution strategies used by the FDIC during the 1980s to help merge weak mutual savings
banks (MSBs) into healthier banks or thrifts (through income maintenance agreements)
or to provide time for distressed institutions to find solutions to problems caused by
external developments in the economy (through net worth certificates and capital forbearance programs). The focus of this chapter, however, is not on net worth certificate
and capital forbearance programs, but on those transactions, such as assisted mergers
and related income maintenance agreements, in which the FDIC provided direct financial assistance to an operating institution to prevent its failure.
1. The Reconstruction Finance Corporation (RFC), a federal government agency, began operations in 1932 by
making loans to open banks, trust companies, railroad companies, and other financial institutions. It also could
subscribe to the preferred stock of an institution in need of capital.

152

M A N A GI N G T H E C R I S I S

Background
To prevent an insured depository institution from closing, the FDIC provided open
bank assistance in the form of loans, contributions, deposits, asset purchases, or the
assumption of liabilities. In many OBA transactions, the FDIC provided a cash contribution to restore deficit capital to a positive level (referred to as “filling the hole”), with
the bank’s investors providing the additional capital to capitalize the institution
adequately. For larger OBA transactions, the use of an FDIC note or loan to fill the hole
was a common practice. The FDIC also covered losses for a specified amount on a pool
of assets over a specified period of time. Since being authorized to use open bank assistance in 1950, the FDIC has provided open bank assistance to 137 institutions with
more than $80 billion in assets. (See table I.5-1.)
The FDIC’s authority to provide open bank assistance has changed over time
because of legislative and policy concerns. In general, the FDIC’s authority was broadened in the early 1980s and restricted in the early 1990s. Currently, under the Federal
Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, before the FDIC
may provide OBA, it must determine that the assistance is the least costly option to the
insurance fund of all possible methods for resolving the institution. It must also decide
that the assistance is necessary to meet the FDIC’s obligation of providing insurance
coverage for the insured deposits. The FDIC may deviate from the least cost requirements only to avoid “serious adverse effects on economic conditions or financial stability” or “systemic risk failure.”2 The appropriate federal banking agency or the FDIC
must also determine that the institution’s management has been competent and complied with all applicable laws, rules, and supervisory directives and orders, and that it has
never engaged in any insider dealings, speculative practice, or other abusive activity.
Finally, under the Resolution Trust Corporation Completion Act (RTCCA, or Completion Act) of 1993, which amended the Federal Deposit Insurance Act (FDI Act) of
1950, the FDIC is prohibited from using the insurance fund to benefit shareholders of a
failing or failed institution. To date, there have been no OBA transactions since 1992, in
part because the legislative changes made it more difficult to complete those types of
transactions.

Statutory Basis and Policy Implications
Open bank assistance has been transformed by the legislative process and public policy.
(See table I.5-1.) Until 1950, the FDIC had basically two alternatives for dealing with
failed and failing banks: close the institution and pay off the insured depositors, or

2. Such a finding requires a two-thirds vote of the FDIC’s and the Federal Reserve’s boards of directors and concurrence by the secretary of the Treasury after consultation with the president of the United States.

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arrange for the institution’s acquisition. In 1950, however, the FDIC sought legislation
to provide assistance to banks to prevent their failure. The FDIC sought the authority
because of concern that the Federal Reserve may have been reluctant to lend to banks
with temporary funding problems, particularly nonmember banks. The Federal Reserve
opposed the FDIC’s request for authority, considering it an infringement on its lender of
last resort function. Eventually, however, Congress provided the FDIC the authority to

Table I.5-1

Summary of
Open Bank Assistance Transactions
Significant Legislation

Federal Deposit
Insurance Act of 1950
(essentiality test)

Garn–St Germain*
(less costly than a
liquidation)

CEBA* (bridge bank
authority)

FIRREA*
(repeal of tax benefits)

FDICIA* (least cost test)
Totals

Year

Number of Banks
Receiving Open
Bank Assistance

Total Number of
Bank Failures and
Assistance Transactions

1950-1970

1971-1979

1980

1981

1982

1983

1984

1985

120

1986

145

1987

†19

203

1988

‡79

279

1989

207

1990

169

1991

127

1992

122

137

1,718

1950-1992

* Garn–St Germain: Garn–St Germain Depository Institutions Act of 1982; CEBA: Competitive Equality Banking Act of
1987; FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act of 1989; FDICIA: Federal Deposit Insurance
Corporation Improvement Act of 1991.
† Includes 11 BancTexas institutions that were part of one transaction.
‡ Includes 59 First City Bancorporation institutions that were part of one transaction.
Source: FDIC Division of Resolutions and Receiverships.

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provide open bank assistance, but it imposed restrictive language related to the
circumstances under which such assistance could be given.3 Basically, the FDIC could
grant OBA if the institution’s continued existence was determined to be “essential” to
providing adequate banking services in the community.4 The law and legislative history
of the act, however, did not provide details on how to arrive at the essentiality finding,
nor did it define the community. The law merely made references to the “discretion” of
the FDIC Board of Directors and the “opinion” of the board. It was clear, however, that
the authority was not intended for widespread use, and the FDIC therefore rarely used
open bank assistance.
It was not until 1971, when the FDIC declared Unity Bank and Trust Company
(Unity), Boston, Massachusetts, to be “essential,” that the FDIC first provided open
bank assistance. In total, before 1980, it used OBA only four times.5 Although the
FDIC determined that those four institutions receiving OBA were “essential,” it did
nothing to clarify the issue of how to define “essentiality.” It did determine that Unity
and one of the other institutions, both of which served inner city neighborhoods, were
“essential” to at least a portion of the communities they served. The FDIC declared
another bank was “essential” to provide temporary funding so a purchaser could be
found. In the fourth instance the institution was declared “essential” because it was partially owned by Delaware and was the state’s sole depository.
In 1980, the FDIC provided open bank assistance to First Pennsylvania Bank, N.A.
(First Penn), Philadelphia, Pennsylvania.6 With assets of $8 billion and deposits of $5.3
billion, First Penn was Philadelphia’s largest bank and the 23rd largest in the nation; its
failure would have been the largest in U.S. history up to that time. That OBA transaction was notable because of its size and because the FDIC determined that the bank
was “essential,” mainly because of its size. In addition, it would have been almost impossible to arrange an acquisition because interstate mergers were not yet allowed, and only
one other bank in the state was big enough to handle it; but any merger of the two
would have had serious antitrust complications. Furthermore, the closing of such a large
bank would have had serious repercussions, not just in the local market, but possibly
nationwide as well.

3. Federal Deposit Insurance Act of 1950, U.S. Code, volume 12, section 1823(c)(1).
4. For a discussion of the history of the essentiality issue, see Henry Cohen, “Federal Deposit Insurance Corporation Assistance to an Insured Bank on the Grounds That the Bank is Essential in Its Community,” Congressional Research Service (October 1984).
5. Before 1980, the essentiality doctrine was used for the $11.4 million Unity Bank and Trust Company (Boston,
MA, 1971); the $1.5 billion Bank of the Commonwealth (Detroit, MI, 1972); the $150 million American Bank
and Trust Company (Orangeburg, SC, 1974); and the $426 million Farmers Bank of the State of Delaware (Wilmington, DE, 1976).
6. The First Penn transaction is discussed in further detail later in this chapter and in Part II, Case Studies of
Significant Bank Resolutions, Chapter 2, First Pennsylvania Bank, N.A.

O PE N B A N K A S S I S T A N C E

Open bank assistance was used 14 times from 1981 to 1983 to help resolve the
mutual savings bank crisis.7 Centered in New York City and the Northeast, those MSBs
were much larger in terms of total deposits than the average commercial bank. The sheer
magnitude of the problem could have resulted in enormous losses in the FDIC’s insurance fund as well as in a loss in confidence in the savings bank industry. In 1981, the
FDIC provided open bank assistance by arranging mergers to assist three New York City
savings banks—Greenwich Savings Bank, Central Savings Bank, and Union Dime Savings Bank—with total assets of $4.8 billion. In total, in 1981 and 1982, the FDIC used
mergers to resolve 11 failing MSBs, with total assets of $14.7 billion and total deposits
of $12.1 billion.
As a result, during that period, the FDIC pushed for additional flexibility in handling larger bank failures. In 1982, the FDIC received broader authority to provide
open bank assistance with the passage of the Garn–St Germain Depository Institutions
(Garn–St Germain) Act. The FDIC no longer had to satisfy the “essentiality” test to
provide open bank assistance. An institution could receive OBA if the FDIC Board of
Directors determined that the amount of assistance was less than the estimated cost of
liquidating the institution. Only if the cost of the assistance would exceed the cost of
liquidating the institution would the FDIC have to make a finding of “essentiality.”
Because of the broader authority, the use of open bank assistance increased. Garn–St
Germain also included provisions, despite FDIC reservations, whereby savings banks
could apply for net worth certificates.8 Although the certificates were essentially a paper
exchange of notes, they did allow many of those institutions to survive, and they significantly reduced the FDIC’s use of assisted mergers. After 1982, the FDIC completed
only six additional assisted mergers of MSBs.
In 1986, to provide guidance to FDIC insured banks in danger of failing, the FDIC
revised its 1983 policy statement on open bank assistance concerning the general conditions and terms that a request should encompass. The policy statement was revised
because the number, size, and complexity of bank failures had increased dramatically, as
had requests for assistance. The revised 1986 policy statement required that—
• The FDIC’s cost in providing assistance be less than if it took alternative action
(which at the time was considered to be the cost of liquidation);
• The assistance proposal provide for sufficient capitalization including capital infusions from non-FDIC sources; and
• The financial effect of the assistance upon shareholders and subordinated debt
holders of the bank or the bank’s holding company approximate the effect on
those parties had the bank failed.

7. The MSB transactions are discussed in further detail later in this chapter.
8. Net worth certificates are discussed in greater detail in Chapter 3, Evolution of the FDIC’s Resolution
Practices.

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The statement also covered renegotiations of management contracts, avoidance of
an equity position for the FDIC in a bank, the FDIC’s preference not to acquire or
service the assets of assisted banks, responsibility for pursuing legal claims against bonding and insurance companies, and fee arrangements.9
The FDIC completed the majority of OBA agreements (with 98 institutions) in
1987 and 1988.10 Those transactions represented approximately 20.3 percent of the total
OBA and failure transactions during those years. The first of several reasons for the
increase in OBA transactions was the FDIC’s policy to communicate to bankers the deficiencies of their assistance proposals and allow them to make adjustments to conform to
the policy statement. If the proposal cost less than liquidation, staff would recommend
the open proposal without requesting closed bank bids. The second reason for the
increase in OBA transactions was the federal income tax benefits, including the relaxed
rules for tax-free reorganizations, favorable rules regarding carry forwards of net operating
losses, and favorable tax treatment of assistance payments received by the failing banks
from the FDIC.11 In 1989, however, with passage of the Financial Institutions Reform,
Recovery, and Enforcement Act (FIRREA), many potential tax benefits associated with
open bank assistance were repealed.12
The number of OBA transactions decreased significantly after 1988. Of the 625
failed or failing banks the FDIC handled from 1989 through 1992, only 7 were
resolved by OBA. The decline in open bank assistance can be attributed, in part, to the
following factors:
• In 1989, the FDIC began comparing the cost of OBA proposals within a competitive bidding process. In most cases, the closed proposals were less costly to the insurance fund,13 or the proponents for open bank assistance failed to satisfy the criteria.
• As mentioned above, the passage of FIRREA in 1989 repealed many of the
potential tax benefits associated with open bank assistance. Furthermore, the
FDIC had to consider any tax benefits when evaluating bids.
• The FDIC was dissatisfied with the difficulty that occurred in negotiating and
9. FDIC News Release, “FDIC Revises Policy on Assistance to Failing Banks,” PR-189-86 (December 2, 1986).
10. In 1987, 11 of the 19 assistance transactions were with BancTexas Group institutions. For 1988, 59 of the 79
assistance transactions were with First City Bancorporation of Texas, Inc., institutions.
11. Thomas D. Phelps and Sean M. Scott, “Investment Opportunities Afforded By Open Bank Assistance,” Banking Expansion Reporter (February 6, 1989), 8-10.
12. FIRREA repealed certain provisions of the Technical and Miscellaneous Revenue Act (TAMRA) of 1988,
which allowed purchasers of failing institutions to take advantage of certain tax benefits. While TAMRA was in
effect, the FDIC attempted to ensure that the tax benefits effectively accrued to the insurance fund by reducing the
amount of assistance provided for both open and closed transactions.
13. Closed bank transactions offer advantages over open bank transactions because, in a closed bank transaction,
contingent liabilities could be eliminated, burdensome leases and contracts could be terminated, and troublesome
assets could be left in the receivership. Furthermore, uninsured depositors and unsecured creditors could share in
the loss.

O PE N B A N K A S S I S T A N C E

completing the open bank assistance agreement with First City Bancorporation of
Texas, Inc. (First City), Houston, Texas. Negotiations with bondholders and
shareholders that began in 1987 took nine months to complete because of
significant differences between the parties.14
• The Competitive Equality Banking Act (CEBA) of 1987 authorized the FDIC to
establish a bridge bank, which allowed the FDIC additional time to find a permanent solution for resolving a failing bank. Furthermore, with a bridge bank,
the FDIC could simply leave all bondholders’ and shareholders’ claims behind in
a receivership, and the bondholders and shareholders would have no bargaining
power. The FDIC handled the three largest bank failures in 1989 using the
bridge bank structure.
The effects of the savings and loan (S&L) crisis also influenced open bank assistance. Many observers, including members of Congress, associated the term “open
bank assistance” with the forbearance policies used by the Federal Home Loan Bank
Board in resolving troubled S&Ls in the 1980s. Furthermore, the need for taxpayer
assistance to the thrift industry created tremendous controversy and criticism.
In April 1990, the FDIC’s policy was revised to reflect certain amendments to section 13(c) of the FDI Act and the addition of section 13(k)(5) as enacted in FIRREA.
Section 13(k)(5) dealt with open assistance to troubled savings associations that were
not in the conservatorship program of the Resolution Trust Corporation (RTC). None
of the S&Ls that applied to the FDIC for open assistance were approved, however,
because they failed to meet the criteria factors.
The FDIC’s 1990 Statement of Policy on Assistance to Operating Insured Banks
and Savings Associations retained some of the criteria from the 1986 policy statement
and added several new factors.15 Some of the important new factors were as follows:
• Acceptance of proposals would be within a competitive bidding process;
• Institutions requesting assistance had to agree to unrestricted due diligence by all
parties cleared by the FDIC; and
• Proposals had to quantify limits on indemnities and guarantees.
In 1992, the FDIC again revised its policy statement for open bank assistance.
The revision mainly reflected changes mandated by FDICIA, which included a possibility of “early resolution” of institutions that are troubled and the requirement that

14. The First City transaction is described later in this chapter and in Part II, Case Studies of Significant Bank
Resolutions, Chapter 5, First City Bancorporation of Texas, Inc.
15. FDIC, Financial Institution Letter, “Policy Statement on Assistance to Operating Insured Banks and Savings
Associations,” April 6, 1990, FIL 27 90.

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failing institutions generally be resolved in the manner that is least costly to the
deposit insurance fund. Furthermore, the policy statement indicated that the FDIC
would need to make certain findings regarding ongoing management of the
institution.16
With the passage of Section 11 of the RTC Completion Act, which amended Section 11(a)(4) of the FDI Act, the FDIC was prohibited from using insurance fund
monies in any manner that benefited any shareholder of an institution that had failed
or was in danger of failing, except in the case of a systemic risk determination. Today,
given those requirements, the expectation is that open bank assistance will be used
rarely, if at all.

Use of Open Bank Assistance
Of the open bank assistance transactions implemented by the FDIC from 1971 to 1992,
the most notable cases are summarized below, beginning with First Penn in 1980 and
ending with First City in 1988.
First Penn (1980)
On April 28, 1980, the FDIC, the Federal Reserve, and the Office of the Comptroller of
the Currency jointly announced a $500 million assistance package to ensure the viability
and continued strength of First Penn, a subsidiary of First Pennsylvania Corporation of
Philadelphia and the largest bank in Philadelphia.17 The assistance was in the form of
$500 million in five-year subordinated notes: the FDIC provided $325 million, and a
group of leading banks in the nation and in the Philadelphia area provided $175 million. A $1 billion bank line of credit through access to the Federal Reserve discount
window supplemented the notes.
The assistance agreement between First Penn and the FDIC provided that the
FDIC’s loan would be interest free for the first year and would bear a rate for the
remaining four years of 125 percent of the yield on the FDIC’s investment portfolio.
The assistance agreement diluted First Penn’s shareholders’ interest by providing the
FDIC and the bank lenders with 20 million warrants for stock purchases in the bank’s
holding company, executable at $3 dollars per share. On November 15, 1983, twoand-one-half years after receiving the assistance, First Penn, through a stock offering
and restructuring of its debt with the bank lenders, was able to pay off the remaining
loan with the FDIC early. In addition, it paid the FDIC $13 million to repurchase 6.5

16. Section 13(c)(8) requires management of the resulting institution to be competent and to be in compliance
with applicable laws.
17. For further details, see Part II, Case Studies of Significant Bank Resolutions, Chapter 2, First Pennsylvania
Bank, N.A.

O PE N B A N K A S S I S T A N C E

million of the warrants (half of the warrants that it held). On May 29, 1985, the
FDIC sold its remaining 6.5 million warrants to First Penn for $30.1 million.18 By
using that open bank assistance strategy, the FDIC was able to resolve one of the largest troubled banks in the country (at that time), ultimately at no cost to the FDIC’s
insurance fund.
Mutual Savings Banks (1981 to 1983)
The FDIC completed 14 open bank assistance transactions between 1981 and 1983, all
of which involved assisted mergers of mutual savings banks located primarily in the
Northeast. The problem the FDIC faced with those savings banks was quite different
from any faced earlier in its history. Asset quality was not the problem with MSBs;
rather, it was the rising interest rates in the early 1980s. The FDIC’s major concern was
keeping the cost of resolving the failing MSBs at a reasonable level without undermining
public confidence in the savings bank industry or in the FDIC.
The primary method the FDIC used was assisted mergers in which failing savings
banks merged with healthier banks or thrifts. In most of the cases, to facilitate the
merger, the FDIC would assume the interest rate risk by entering into an income maintenance agreement with the acquirer. The FDIC would pay the acquiring institution the
difference between the yield on acquired earning assets and the average cost of funds to
savings banks for some number of future years. Income maintenance agreements
were used in 11 of the 14 assisted mergers during that period. In some cases, the
FDIC also supplemented the assistance with an up-front cash payment, an additional
dollar payment in the future, or purchased assets.
The FDIC handled the first MSB transaction through a mixture of bid and negotiation. In subsequent transactions, the FDIC defined certain bidding ground rules and
then entertained bids in a variety of forms.
Because those savings banks did not fail but were merged into operating institutions, depositors and general creditors suffered no losses. In most cases, however, the
failing bank’s senior management was replaced and any subordinated noteholders
received only a partial return of their investment.19 Generally, the FDIC negotiated with
noteholders, forcing them to take a lower interest rate and/or an extended maturity. In
pursuing that policy, the FDIC weighed the cost of not wiping out the noteholders (by
closing the bank) against offsetting considerations, including possible lawsuits to delay
the transactions, greater flexibility for the acquiring institution in continuing leases and
other contractual arrangements, cooperation from state supervisors, and the possible
effect on deposit outflows in other MSBs.
18. Irvine H. Sprague, Bailout (New York: Basic Books, 1986), 105.
19. In a few cases, senior management was not replaced and, in each case, it was determined that the current
management was not considered the cause of the problem. In some cases, the management that remained had
been brought on to clean up an already troubled or failing institution.

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The FDIC’s use of assisted mergers and income maintenance agreements was
designed to provide participating MSBs time to restructure their balance sheets and
remain solvent until interest rates became more favorable. Although the cost savings of
the program are difficult to quantify, the program did achieve those goals.
Continental Illinois National Bank and Trust Company (1984)
The term “open bank assistance” gained national recognition in 1984 when the FDIC
provided assistance to Continental Illinois National Bank and Trust Company (Continental), Chicago, Illinois. At its peak in 1981, Continental was the largest commercial
and industrial lender in the United States and had purchased energy loan participations
from Penn Square Bank, N.A., Oklahoma City, Oklahoma. The loans contributed significantly to the more than $5.1 billion in nonperforming loans that Continental held,
resulting in eroding confidence in the bank and, ultimately, in a rapid and massive electronic deposit run that began in 1984. On May 17, 1984, the FDIC gave its assurance
to protect all depositors and other general creditors of Continental against loss. A temporary capital infusion of $2 billion was made to stabilize liquidity concerns and to halt
the run on deposits until a permanent solution could be arranged. The FDIC’s options
in resolving Continental were to pay off the customers with insured deposits, merge the
institution with a healthier bank, or provide direct open assistance.
Because of the negative consequences for other banks and the economy, the FDIC
ruled out a payoff of customers with insured deposits. It was estimated that “almost
2,300 small banks had nearly $6 billion at risk in Continental; 66 of them had more
than their capital on the line and another 113 had between 50 and 100 percent.”20
The FDIC also did not view merging Continental as a viable option because prospective purchasers would need a significant amount of time to evaluate the bank. In
addition, a merger would require significant FDIC financial involvement to protect
against the uncertainties.21 More significantly, perhaps, the FDIC saw little outside
interest in acquiring Continental.
After ruling out the first two options, the FDIC elected to provide direct assistance
to Continental. The permanent solution involved replacing senior management, purchasing $4.5 billion in problem loans for $3.5 billion, and injecting $1 billion in capital.
In exchange, the FDIC received 80 percent ownership in the parent company, Continental Illinois Corporation.22 As a result, the shareholders of the parent company
suffered an immediate 80 percent dilution of their investments, and the shareholders

20. William M. Isaac, Chairman, Federal Deposit Insurance Corporation, “Statement on Federal Assistance to
Continental Illinois Corporation and Continental National Bank Presented to Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and Urban Affairs, House
of Representatives,” October 4, 1984, 3.
21. Isaac, 3.
22. Isaac, 4-5.

O PE N B A N K A S S I S T A N C E

became subject to losing their remaining investment, depending on the losses suffered
by the FDIC in collecting the problem loans.23 In the end, losses on the problem loans
would reduce their investment to zero. Bondholders of the parent company, however,
were protected and did not lose any of their investment.
The open bank assistance agreement with Continental was controversial for several
reasons. Some critics objected simply to the notion of a government agency acquiring a
majority equity interest in a bank, often using the word “nationalization” to describe the
assistance package. Others objected to the fact that the FDIC guaranteed all depositors
and other general creditors, thus assuming their share of loss and removing the market
risk. Still others objected to the bondholders of the holding company not suffering any
loss and the apparent possibility that the shareholders might retain some of their investment as well. Finally, relating to all those issues and far outlasting the immediate aftermath, critics raised the issue of “too big to fail.”24 That issue would create resentment by
many smaller banks because of their belief that the FDIC treated larger failing banks
differently from smaller ones.
Although the FDIC’s decision was controversial, the open bank assistance provided
to Continental accomplished the objectives of stabilizing liquidity, preventing Continental’s failure, and restoring Continental’s capital to an adequate level. The OBA also
proved to be cost-effective for the FDIC. In 1991, the FDIC sold its remaining 26 percent equity holding in Continental, thus completing the return of Continental to private ownership and producing a net gain of $200 million on the $1 billion of capital
originally provided. Dividend income on the stock amounted to an additional $202
million. The final resolution cost for handling Continental was about $1.1 billion, or
3.3 percent of Continental’s assets at the time of assistance.25
BancTexas Group, Inc. (1987)
Alaska Mutual Bank and United Bank of Alaska (1987 to 1988)
In 1987, the FDIC provided open bank assistance to 19 banks, 11 of which were subsidiaries of BancTexas Group, Inc. (BancTexas), a $1.2 billion bank holding company
headquartered in Dallas, Texas. The FDIC completed the OBA transaction with BancTexas on July 17, 1987. The transaction included a one-time FDIC cash contribution of
$150 million to enhance the bank’s capital, as well as an infusion of additional capital
from a rights offering to shareholders and a standby pool of new private investors
organized by The Hallwood Group, Inc., a New York-based merchant banking concern.

23. Isaac, 4.
24. Most of the institutions considered “too big to fail” were actually closed; however, certain troubled institutions
were considered too large to be resolved by paying off only their insured depositors. A more accurate name would
be “too big to pay off all depositors.”
25. For additional detail, see Part II, Case Studies of Significant Bank Resolutions, Chapter 4, Continental Illinois
National Bank and Trust Company.

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The one-time FDIC injection of cash resulted in a fixed cost to the insurance fund and
was a relatively simple transaction. The FDIC assumed none of the bank’s problem
assets and obligations; instead, the new investors and managers of the new holding company agreed to carry out their own strategies for dealing with the problem assets and for
maintaining the bank’s capital.
It was also 1987 when the FDIC gave preliminary approval for open bank assistance
to merge Alaska Mutual Bank and United Bank of Alaska, both in Anchorage, Alaska.
The resulting newly formed institution had about $1.3 billion in assets and represented
the largest banking institution in Alaska. That transaction, completed in January 1988,
was similar to the BancTexas transaction because it was also a fixed-cost transaction (a
one-time-only FDIC cash contribution) and included new equity capital raised from a
new private investor group organized again by The Hallwood Group, Inc.
In both the Texas and Alaska cases, however, the OBA proved to be insufficient to
withstand the continued deterioration of the depressed regional economies. The newly
formed Alaska institution remained open for about 15 months before closing in April
1989. BancTexas lasted a little more than two years before closing in January 1990. The
resolution costs for those two institutions amounted to $77.4 million and $64.6
million, respectively.
Because of the failure of the Texas and Alaska banks, most of the later proposals for
open bank assistance required the FDIC to protect an acquiring institution from losses
of the failed bank’s assets for a specified period.
First City Bancorporation of Texas, Inc. (1987 to 1988)
In 1987, the FDIC agreed in principle to provide open bank assistance to First City. At
that time, the $11 billion bank holding company, with 60 bank subsidiaries, was in
severe financial condition. The banks were heavily dependent on energy and real estate
loans, and when their condition began deteriorating with the decline of those markets,
First City approached the FDIC about providing open bank assistance.
Although the FDIC’s standard practice with failing banks was to protect all depositors against loss, there was little interest in protecting holding company bondholders or
shareholders or the bank’s management. The problem with open bank assistance was the
difficulty in treating bondholders and shareholders as if the bank had failed when those
creditors and investors had to approve OBA. The FDIC and other bank regulators,
however, were reluctant to close the First City banks, given their regulators’ view that all
of Texas’s major banks were facing financial difficulties because of the region’s economic
difficulties and, thus, were susceptible to a loss of public confidence and deposit runs.
All of these factors resulted in a nine-month effort to carry out an OBA transaction
that was acceptable to bondholders and shareholders, as well as to the FDIC. Although
the FDIC wanted to minimize returns to those groups, the bondholders and shareholders wanted to maximize those returns. The FDIC’s leverage in the negotiations was that
the banks were failing and could be closed by the primary regulators. The bondholders’

O PE N B A N K A S S I S T A N C E

and shareholders’ leverage was the knowledge that closing the bank was not the action
taken with Continental.
In April 1988, the FDIC provided $970 million in capital notes to 59 of First City’s
subsidiary banks.26 A new private investor group, which raised $500 million in new capital through a stock offering, assumed control of the holding company. The ownership
of First City’s existing shareholders was reduced to less than 2 percent of the total equity.
In addition, the agreement required the transfer of approximately $1.7 billion in nonperforming and troubled assets to a separate entity created to service such assets; that
transfer was funded by notes from the First City subsidiary banks. In the OBA transaction, the FDIC did not purchase any assets held by the assisted banks; it received warrants to purchase 5 percent of the common stock of First City and also purchased $43
million of junior preferred stock convertible into 10 percent of the common stock.
Finally, most holders of First City’s preferred stock and publicly held, long-term debt
agreed to substantial concessions as a requisite to the transaction. However, as with the
BancTexas and Alaska OBAs, the assistance was insufficient. All remaining First City
banks were closed in 1992 at no cost to the FDIC.
The First City case marked the beginning of the end for open bank assistance
transactions. The FDIC was dissatisfied with the difficulty involved in completing a
transaction. It had been asking Congress for bridge bank authority that would give it
far greater leverage in such situations, and by August 1987, Congress passed legislation
that gave the FDIC that authority. With a bridge bank, the FDIC could simply leave
all bondholders’ and debt holders’ claims behind in a receivership, while transferring a
failed bank’s assets and other liabilities to a bridge bank controlled by the FDIC until it
could be sold or liquidated. With a bridge bank, bondholders and shareholders would
have no bargaining power. Incidentally, the 1992 resolution of First City involved the
establishment of 20 bridge banks.

Savings and Loans
In the early 1980s, the Federal Savings and Loan Insurance Corporation (FSLIC), like
the FDIC, used income maintenance agreements and net worth certificates for institutions incurring a “spread problem.” In a period of rising rates, institutions were not
able to increase rates earned on assets to keep pace with the rising costs of deposits and
borrowed funds. In the middle and late 1980s, because of increased credit quality problems and its own lack of liquidity, the FSLIC primarily focused on assisted mergers
involving the merger of an unhealthy institution with a healthier institution. To
26. Of the 60 bank subsidiaries, 59 were in Texas and 1 was in South Dakota. One Texas subsidiary, McAllen State
Bank, McAllen, Texas, was closed by the Texas Banking Commission on April 19, 1988. One day later, the FDIC
Board of Directors approved the open bank assistance transaction. For further detail, see Part II, Case Studies of
Significant Bank Resolutions, Chapter 5, First City Bancorporation of Texas, Inc.

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M A N A GI N G T H E C R I S I S

facilitate the merger, the FSLIC would enter into longer term assistance agreements
with the acquirer. Because most of the failing S&Ls were mutual in form (no stockholders), there were no windfalls for stockholders. When stockholders owned a failing
S&L, the FSLIC resolved the institution with an assisted, whole institution purchase
and assumption (P&A) transaction. Claims of existing shareholders were left with the
receiver of the failed institution. In only a few instances did the FSLIC provide OBA to
an institution that was owned by stockholders.
From 1989 through 1995, the RTC was responsible for handling failing and failed
savings and loans. During 1990, the RTC considered using open bank assistance
transactions to resolve well-managed, but undercapitalized, S&Ls; but Congress
opposed the idea, and the RTC never completed any OBA transactions.

Conclusion
Open bank assistance has been used infrequently by the FDIC. From 1980 through
1994, the FDIC provided OBA transactions in only 65 cases. Those cases involved 133
institutions, or only 8 percent of the 1,617 institutions that failed or received assistance
during that period. The FDIC used OBA to resolve failing institutions in a variety of
different circumstances. Open bank assistance was most effective when it was used selectively to resolve a specific type of problem. In the early 1980s, although the FDIC used
OBA transactions to assist the weakened MSBs, OBA use reached its pinnacle in stabilizing the liquidity crisis at Continental. In the mid- to late 1980s, the FDIC used OBA
more frequently to keep open several larger banking institutions that were suffering from
regional economic problems. Open bank assistance in those cases, however, was less successful, and several of those assisted institutions later failed.
After the Continental transaction, many people perceived that open bank assistance
was used only for larger banks. Although the FDIC has provided open bank assistance
to failing banks of all sizes, it has played a more prominent role in resolving larger failing
banks. Of the 65 cases in which OBA was used, 30 transactions, or 46 percent of the 65
cases, were for banks with total assets of less than $50 million. However, the average
asset size of banks handled through OBA was $620 million, compared to an average
asset size of only $148 million for closed bank transactions. Furthermore, although
OBA was used for only 8 percent of the 1,617 institutions that failed or received assistance from 1980 to 1994, it was used for more than 24 percent of the $302.6 billion in
failing or failed bank assets during that period.
In addition, OBA became synonymous with the phrase “too big to fail,” thereby
heightening the controversy over whether large banks and small banks were resolved
equitably. However, “too big to fail” was an inaccurate phrase. In reality, large banks did
fail, shareholders lost their investments, and management was removed during that
period. In practice, most large bank failures were handled by P&A transactions, in
which uninsured depositors and creditors received 100 percent of their funds. P&A and

O PE N B A N K A S S I S T A N C E

OBA transactions therefore treated uninsured depositors and creditors in a similar
fashion. However, shareholders in an OBA did have a better chance of receiving some
funds.
If some banks were truly too big to fail (or, more accurately, were too big for depositors to suffer any losses), the obvious corollary was that most banks were not too big to
fail and that uninsured depositors could suffer losses. While recognizing the inequities of
that practice, the FDIC also wanted to minimize local economic disruptions. Therefore,
from the 1980s through the early 1990s, the FDIC often selected a resolution method
that protected all depositors, even in smaller banks.
Another concern about OBA and the too big to fail issue was that OBA might
lessen market discipline. However, in almost all OBA transactions completed by the
FDIC from the 1980s through the early 1990s, the institutions were either mutual in
form and had no shareholders, or the existing stockholders of the assisted institution suffered substantial losses of their investment. As part of the typical OBA transaction, the
ownership position of existing shareholders was diluted to a minimal amount, typically
about 5 percent. In some OBA transactions, shareholders did retain a higher percentage
initially; however, the percentage was subject to decreases based on the ongoing financial
condition of the bank. For example, at Continental, shareholders whose 100 percent
ownership was initially diluted to 20 percent later received almost nothing because of
additional losses suffered by the FDIC. For uninsured depositors and creditors, the
FDIC generally believed that payoffs to ensure depositor discipline usually affected only
unsophisticated depositors, whereas sophisticated depositors usually got out of failing
institutions long before they failed.
The primary benefits of OBA transactions are listed below.
• OBAs were a cost-effective method for resolving failing institutions. The cost of
OBA transactions (approximately 6.2 percent of the bank’s assets at resolution)
from the 1980s through the early 1990s was lower than that of other methods.
However, because each failing bank situation was unique and because all but two
of the OBA transactions were completed before the “least cost” requirement, one
cannot conclude that OBA transactions were always the most cost-effective
transactions.
• OBAs minimized disruption to the local community.
• New investors assumed some of the risk and typically brought new capital to the
institution.
• Usually, OBA transactions kept a majority of the assets in the private sector.
The primary disadvantages of OBA transactions are as follows:
• Contingent liabilities remained with the troubled institution.
• Customers with uninsured deposits and general creditors were protected by

165

166

M A N A GI N G T H E C R I S I S

OBAs, thus potentially reducing marketplace discipline. Furthermore, although
shareholders suffered substantial losses on their investments, they did receive
some benefit compared to what they would have received in a closed bank
transaction.
• The time necessary for a troubled institution to put together assistance proposals
and to complete negotiations was sometimes outside the FDIC’s parameters for
resolving failing institutions.
• Weak institutions were allowed to remain open and compete with nonassisted
institutions.
In 1989, the FDIC began moving away from providing open bank assistance and,
from 1989 to 1992, entered into only seven OBA transactions. To date, there have been
no OBA transactions since 1992. OBA transactions ceased because of problems experienced with some of the latter transactions, including problems in negotiating the transactions (for example, in the case of First City), and because of a series of legislative
changes, which either restricted the use of OBAs (for example, the least cost provision)
or broadened the alternatives available to the FDIC to resolve large bank failures (for
example, bridge bank authority).

Table I.5-2

Open Bank Assistance Transactions
(1980–1994)
($ in Millions)

Institution Name

State

Number
of
Failed
Banks

04/28/80 First Pennsylvania Bank, N.A.

$7,953.0

$5,300.0

$0.0

0.0

11/04/81 Greenwich Savings Bank

2,529.9

1,881.2

465.1

18.4

12/04/81 Central Savings Bank

918.6

675.7

127.3

13.9

12/18/81 Union Dime Savings Bank

1,437.7

1,172.2

61.5

4.3

01/15/82 The Western New York SB

1,022.0

890.2

30.2

3.0

02/20/82 Farmers & Mechanics SB

980.4

789.4

52.4

5.3

03/11/82 Fidelity Mutual Savings Bank

689.1

550.5

44.5

6.5

03/11/82 United States Bank of Newark

674.7

578.4

77.3

11.5

03/26/82 The New York Bank for Savings

3,403.0

2,779.7

751.4

22.1

Date

Total
Assets

Total
Deposits

Costs/
Assets
Costs
(%)

O PE N B A N K A S S I S T A N C E

167

Table I.5-2

Open Bank Assistance Transactions
(1980–1994)
($ in Millions)

Continued

Institution Name

State

Number
of
Failed
Banks

04/02/82 Western Saving Fund Society

$2,112.8

$1,956.8

$29.3

1.4

09/24/82 United Mutual Savings Bank

832.9

777.9

33.1

4.0

10/15/82 Mechanics Savings Bank

55.3

50.6

0.0

02/09/83 Dry Dock Savings Bank

2,500.0

2,038.0

59.4

2.4

08/05/83 Oregon Mutual Savings Bank

260.0

251.3

11.9

4.6

10/01/83 Auburn Savings Bank

130.0

131.4

0.0

05/17/84 Continental Illinois

33,633.0

17,450.4

1,104.0

3.3

09/28/84 Orange Savings Bank

514.9

494.6

7.3

1.4

05/31/85 Bank of Oregon

106.3

93.7

18.8

17.7

08/16/85 The Commercial Bank

89.0

76.0

0.0

10/01/85 Bowery Savings Bank

5,278.8

4,938.4

334.5

6.3

12/31/85 Home Savings Bank

421.8

402.3

5.7

1.4

04/16/86 The Talmage State Bank

9.6

8.9

1.5

15.6

08/15/86 State Bank of Westphalia

4.3

4.1

0.0

08/30/86 Mid Valley Bank

40.2

38.2

0.2

0.5

11/24/86 Bank of Oklahoma, N.A.

468.2

349.9

78.8

16.8

11/26/86 Bank of Commerce

67.3

65.6

11.3

16.8

12/29/86 Bank of Kansas City

118.8

108.2

5.2

4.4

12/31/86 Citizens Bank & Trust Co.

10.4

10.7

0.4

3.8

02/25/87 American National Bank

10.3

9.1

1.1

10.7

02/26/87 Central Bank & Trust Co.

28.3

28.0

0.0

05/13/87 Syracuse Savings Bank

1,200.0

1,100.0

0.0

06/05/87 Security Bank of Rich Hill

12.9

12.7

0.2

1.7

07/17/87 BancTexas

1,192.6

900.0

150.0

12.6

07/31/87 Valley Bank of Belgrade

18.6

16.9

3.0

16.1

Date

Total
Assets

Total
Deposits

Costs/
Assets
Costs
(%)

168

M A N A GI N G T H E C R I S I S

Table I.5-2

Open Bank Assistance Transactions
(1980–1994)
($ in Millions)

Continued

State

Number
of
Failed
Banks

Total
Assets

Total
Deposits

10/16/87 Commercial Bank, N.A.

$23.8

$22.2

$4.5

18.9

12/03/87 Crossroads Bank

26.0

26.1

1.3

5.0

12/29/87 The Falun State Bank

3.1

3.0

0.1

1.6

01/07/88 The Peoples State B&T Co.

40.6

40.0

5.5

13.6

01/13/88 The Jefferson Guaranty Bank

287.4

270.0

57.5

20.0

01/27/88 Citizens State Bank

30.1

29.3

0.8

2.6

01/28/88 Alaska Mutual Bank

822.6

676.7

170.7

20.8

01/28/88 United Bank Alaska

462.5

419.1

170.7

36.9

02/12/88 American National Bank

27.2

24.7

0.0

03/15/88 Morehead National Bank

8.2

7.8

1.0

11.9

04/15/88 Burns State Bank

4.1

3.6

0.6

14.6

04/20/88 First City Texas

11,200.0

9,400.0

1,100.8

9.8

04/20/88 Bank of Santa Fe

101.2

93.7

22.3

22.0

04/25/88 Bond County State Bank

6.6

6.4

0.6

9.1

04/28/88 Citizens Bank of Tulsa

8.8

8.7

1.9

21.6

05/18/88 The American State Bank

67.3

63.5

2.6

3.9

06/14/88 Bank of Imboden

17.8

17.2

2.2

12.4

07/14/88 Texas Bancorp Shares, Inc.

76.5

74.2

12.1

15.8

07/15/88 Oak Forest National Bank

8.8

8.6

1.4

15.9

08/09/88 Security State Bank

16.8

16.3

0.2

1.2

09/16/88 Guaranty National Bank

22.0

23.0

4.2

19.0

11/16/88 Alliance Bank, N.A.

9.6

12.0

4.1

42.7

12/21/88 Baton Rouge B&T Co.

114.9

115.3

18.0

15.7

12/30/88 Tracy Collins B&T Co.

206.0

191.0

17.4

8.5

01/31/89 Metropolitan National Bank

5.7

6.4

2.3

40.7

Date

Institution Name

Costs/
Assets
Costs
(%)

O PE N B A N K A S S I S T A N C E

169

Table I.5-2

Open Bank Assistance Transactions
(1980–1994)
($ in Millions)

Continued

State

Number
of
Failed
Banks

Total
Assets

Total
Deposits

09/12/90 The Pawnee National Bank

$15.9

$15.6

$2.4

15.1

09/16/91 First Bank and Trust

29.7

28.8

0.6

2.1

10/02/91 The Gunnison B&T Co.

22.3

21.4

1.5

6.6

12/04/91 The Douglass Bank

31.9

30.2

1.0

3.1

10/16/92 Freedom Bank

21.7

20.9

0.4

1.7

12/10/92 Citizens State Bank

13.2

12.6

0.2

1.5

Totals/Average

133

$82,457.0

$57,619.3 $5,074.3

6.2

Date

Institution Name

Source: FDIC Division of Research and Statistics.

Costs/
Assets
(%)
Costs

hen banks face a poor regional economy
and a sudden or severe liquidity crisis,
the bridge bank structure allows time to
evaluate the bank’s condition and
address outstanding problems before
the marketing and sale of the bank.

CHAPTER 6

Bridge Banks

Introduction
On August 10, 1987, Congress signed into law the Competitive Equality Banking Act
(CEBA) of 1987, which authorized the Federal Deposit Insurance Corporation (FDIC)
to establish bridge banks. A bridge bank is a temporary national bank chartered by the
Office of the Comptroller of the Currency (OCC) and organized by the FDIC to take
over and maintain banking services for the customers of a failed bank. It is designed to
“bridge” the gap between the failure of a bank and the time when the FDIC can implement a satisfactory acquisition by a third party. An important part of the FDIC’s bank
resolution process for large or complex failing bank situations, a bridge bank provides
the time the FDIC needs to take control of a failed bank’s business, stabilize the situation, effectively market the bank’s franchise, and determine an appropriate resolution.
See chart I.6-1, which shows the FDIC’s use of bridge banks.
Background
Between 1987 and 1994, the FDIC used its bridge bank powers only 10 times; however,
most of those instances involved multiple related bank failures. The 10 situations in
which the FDIC used its bridge bank authority resulted in the creation of 32 bridge
banks into which the FDIC placed 114 individual banks.1 Those banks had total assets

1. Throughout this chapter, a distinction is made among (1) individual banks, (2) bridge banks, and (3) bridge
bank situations. Number (1) refers to the number of individual failed banks that were put into bridge banks; (2)
refers to the number of bridge banks that were created to handle the individual banks; and (3) groups all individual
banks within a holding company into one “situation” that was handled by the FDIC with its bridge bank authority.
For example, First RepublicBanks’ 41 individual banks were placed into two bridge banks. Table I.6-1 shows the
results of those distinctions.

172

M A N A GI N G T H E C R I S I S

Chart I.6-1

300

250

200

40
150
30
100

20
10

10
0
1987

1988

1989

1990

1991

1992

1993

Number of Banks

$ in Billions

Number and Total Assets of FDIC's Bridge Banks by Year
1987–1994

1994

Bridge Bank Assets
All Failed Bank Assets
Total Number of Bridge Banks
Total Number of Failed Banks

Source: FDIC Division of Research and Statistics.

of about $90 billion. Between 1987 and 1994, bridge banks made up only a small portion (10 percent) of the total bank failures, but they represented a substantial portion
(45 percent) of the total assets of failed banks. See table I.6-1 for details of the 10 bridge
bank situations.
Bridge banks are designed to aid in the resolution of complicated, large failing
banks. Seven of the 10 instances in which the FDIC used its bridge bank authority
involved assets of more than $1 billion. (See chart I.6-2.) The largest bridge bank situation was for First RepublicBanks (Texas), with $33.4 billion in assets at resolution.
The location of the bridge banks reflects the economic problems of the late 1980s
and early 1990s. All but 3 of the 32 bridge banks were located in the Southwest or
Northeast. In the Southwest, 23 bridge banks were in Texas and 1 was in Louisiana. In
the Northeast, two bridge banks were in Connecticut and one each was in Massachusetts, Maine, and Vermont. The remaining three bridge banks were in Delaware, Florida, and Missouri.
When the FDIC establishes bridge banks, it intends that the banks will be interim,
rather than permanent, solutions for failing banks. Each bridge bank that the FDIC
created has lasted less than seven months, with the exception of two early bridge banks,
the First RepublicBanks (Texas) and the MCorp banks. In those two instances, acquirers
were selected early in the bridge bank process, but because the FDIC took an equity
position as part of the banks’ resolutions, the bridge bank periods were extended. First

BRIDGE BANKS

173

Table I.6-1

The FDIC’s Use of Bridge Bank Authority
1987–1994
($ in Thousands)
Bridge
Bank
Failure
Situations Date

Bridge Banks

Number of
Failed
Banks

Total
Assets

Total
Deposits

$386,302

$303,986

32,835,279

19,528,204

*582,350

*164,867

10/31/87

1 - Capital Bank & Trust Co.

07/29/88

2 - First RepublicBanks (Texas)

08/02/88

3 - First RepublicBank (Delaware)

03/28/89

4 - MCorp

15,748,537

10,578,138

07/20/89

5 - Texas American Bancshares

*4,733,686

*4,150,130

12/15/89

6 - First American Bank & Trust

1,669,743

1,718,569

01/06/91

7 - Bank of New England, N.A.

*14,036,401

*7,737,298

01/06/91

8 - Connecticut Bank & Trust Co., N.A.

*6,976,142

*6,047,915

01/06/91

9 - Maine National Bank

*998,323

*779,566

10/30/92

10 - First City, Texas-Alice

127,990

119,187

10/30/92

11 - First City, Texas-Aransas Pass

54,406

47,806

10/30/92

12 - First City, Texas-Austin, N.A.

346,981

318,608

10/30/92

13 - First City, Texas-Beaumont, N.A.

531,489

489,891

10/30/92

14 - First City, Texas-Bryan, N.A.

340,398

315,788

10/30/92

15 - First City, Texas-Corpus Christi

474,108

405,792

10/30/92

16 - First City, Texas-Dallas

1,324,843

1,224,135

10/30/92

17 - First City, Texas-El Paso, N.A.

397,859

367,305

10/30/92

18 - First City, Texas-Graham, N.A.

94,446

85,667

10/30/92

19 - First City, Texas-Houston, N.A.

3,575,886

2,240,292

10/30/92

20 - First City, Texas-Kountze

50,706

46,481

10/30/92

21 - First City, Texas-Lake Jackson

102,875

95,416

10/30/92

22 - First City, Texas-Lufkin, N.A.

156,766

146,314

10/30/92

23 - First City, Texas-Madisonville, N.A.

119,821

111,783

10/30/92

24 - First City, Texas-Midland, N.A.

312,987

289,021

10/30/92

25 - First City, Texas-Orange, N.A.

128,799

119,544

10/30/92

26 - First City, Texas-San Angelo, N.A.

138,948

127,802

174

M A N A GI N G T H E C R I S I S

Table I.6-1

The FDIC’s Use of Bridge Bank Authority
1987–1994
($ in Thousands)

Continued
Bridge
Bank
Failure
Situations Date

Number of
Failed
Banks

Bridge Banks

Total
Assets

Total
Deposits

10/30/92

27 - First City, Texas-San Antonio, N.A.

$262,538

$244,960

10/30/92

28 - First City, Texas-Sour Lake

54,145

49,701

10/30/92

29 - First City, Texas-Tyler, N.A.

254,063

225,916

11/13/92

30 - Missouri Bridge Bank, N.A.

2,829,368

2,715,939

01/29/93

31 - The First National Bank of Vermont

224,689

247,662

07/07/94

32 - Meriden Trust & Safe Deposit Co.

6,565

Totals

114

$89,877,439 $61,043,683

Data for Total Assets and Total Deposits are as of resolution.
Data marked with an asterisk (*) are from the quarter before resolution.
Source: FDIC Division of Research and Statistics.

Chart I.6-2

Bridge Bank Situations in which Assets Were Greater than $1 Billion
1987–1994
($ in Billions)
35
30

Dollars

25
20
15
10
5
0
First
RepublicBanks

Bank of
New England
Banks

MCorp
Banks

First
City
Banks

Texas
American
Bankshares

Missouri
Bridge
Bank,N.A.

First
American
Bank & Trust

33.4

22.0

15.7

8.9

4.7

2.8

1.7

Source: FDIC Division of Research and Statistics.

BRIDGE BANKS

RepublicBanks (Texas) lasted for a little more than a year, from July 29, 1988, to August
9, 1989, and MCorp operated from March 28, 1989, until October 28, 1991, for a total
of 31 months. Although the bridge banks were in existence for a long period of time,
they were under the control of the acquiring banks, which had contributed part of the
banks’ capital.

Reasons for a Bridge Bank
When a large bank with a complex structure, such as a multi-bank holding company, is in
danger of failing, creating a bridge bank allows the FDIC to take control of the bank and
stabilize it. It also enables the FDIC to gain sufficient flexibility for marketing the bank.
After the bank is under the FDIC’s control, the additional time allows for a thorough
assessment of the bank’s condition and a complete evaluation of alternate forms of resolution. Additional time also allows for due diligence by all interested parties. All of those
functions can be performed without inhibiting the day-to-day operations of the bridge
bank for its depositors.
Public disclosure of serious financial problems at a large bank can cause sudden
liquidity problems that could result in the closing of the banks if they are not stabilized
quickly. After a bridge bank is established, the FDIC can lend directly to the bridge
bank and provide assurance to insured depositors that their money is safe. The alternative to creating a bridge bank may be to use a straight deposit payoff or, at best, an
insured deposit transfer. Usually, in situations such as liquidity failures, far less advance
preparation has taken place (compared to a situation in which asset quality problems
have built up over time), so creating a bridge bank gives the FDIC and potential bidders
an opportunity to review the bank in a more stable environment. In the case of multiple
bank failures within a holding company, such as First RepublicBanks (Texas), bridge
banks can facilitate the handling of multiple failures in a short time.

Bridge Bank Operations
The FDIC’s bridge bank authority permits the creation of a national bank, and the
FDIC has broad powers to operate, manage, and resolve that bank. Initially, the FDIC
establishes bridge banks for two years maximum, with the possibility of up to three oneyear extensions. A bridge bank operates in a conservative manner, while serving the
banking needs of the community. It accepts deposits and makes low-risk loans to regular customers. Its management goal is to preserve the franchise value and lessen any disruption to the local community. For the early bridge banks, such as First RepublicBanks
(Texas) and MCorp, the FDIC had an acquirer before the bridge bank was organized or
shortly thereafter. The FDIC entered into a management agreement with the acquirer,
who made almost all decisions concerning bank operations. The acquiring bank

175

176

M A N A GI N G T H E C R I S I S

managed the bridge bank under that contract until the acquisition was finalized. For the
later bridge banks, the FDIC would select a chief executive officer (CEO) from the private sector or FDIC senior staff to conduct day-to-day operations. It would then
appoint a board of directors, composed of senior FDIC personnel and the CEO, for the
bridge bank. The bridge bank board, along with the CEO and management, is responsible for developing a strategic plan to meet the goals recommended and for addressing
any operational issues confronting the bank. The bridge bank board is also responsible
for reviewing and approving the bank’s business plan and for assuming other management and oversight duties. The FDIC board retains authority to effect a final resolution
of the bank and approve the sale of bank assets.
Lending
In the early bridge bank transactions, little lending took place until the acquiring bank
took control. In the later transactions, in which the FDIC would be in control for a
longer time, however, the bridge bank would attempt to maintain a presence in the local
community to prevent a significant outflow of commercial and retail loan customers.
Specifically, the bridge bank would be expected to make limited loans to the local community and to honor the previous institution’s commitments that would not create
additional losses, including funding the completion of unfinished projects.
Assets
The bridge bank staff completes an inventory to identify, evaluate, and work out troubled assets. It develops realistic market values for assets and assigns appropriate loss
reserves. The bridge bank may sell assets if such an action is suitable. For a period of up
to 90 days after the bridge bank begins operations, assets that could benefit from the
powers of the receivership or assets that would be difficult to sell to a franchise acquirer
can be transferred by the bridge bank management to the receivership. The assets transferred from the bridge bank to the receivership would be those with the most problems
and the least potential for improvement, including nonperforming loans, owned real
estate, subsidiaries, assets in litigation, and fraud-related assets.
The bridge bank management attempts to maintain the quality of the assets that
remain in the bank and, to the extent possible, work out or reduce nonperforming
assets. Under the latter scenario, the bank focuses on a workout program that offers a
greater chance for recovery than alternatives such as foreclosure and litigation. Another
cost-effective option is a compromise settlement. The CEO, in consultation with the
bridge bank’s board of directors, makes the final decision on the most appropriate type
of asset workout.

BRIDGE BANKS

Liabilities
Before the failing bank is closed, the FDIC must decide whether to pass all deposits or
only insured deposits to the bridge bank. Before the passage of the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) of 1991, all the deposits were
passed to a bridge bank. Since FDICIA, the FDIC has passed only insured deposits to a
bridge bank when there is an expected loss to the receivership; uninsured depositors
share in any loss with the FDIC. Those depositors are entitled to their proportionate
share in the liquidation of the receivership. Usually, most unsecured nondeposit creditors are also left with the receivership. Secured creditors are passed to the bridge bank,
along with their collateral.
Like any other bank that has assumed deposits from the FDIC, the bridge bank
must notify depositors that their accounts have been transferred to the bridge bank. In
turn, depositors must contact the bank within 18 months to claim their deposits.
Unclaimed deposits are subject to state escheat laws and are turned over to the respective
state if they are not claimed. Bridge bank management also decides whether to maintain
or change the interest rates paid on deposits by the failing bank. The FDIC requires that
rates remain the same for the first 14 days and that the bank provide depositors 7 days’
notice of a rate change. Customers can withdraw their funds without penalty until they
enter into new contracts with the bridge bank.
Liquidity
The FDIC reviews the failing bank’s liquidity during the bridge bank preparation phase.
It monitors liquidity levels to determine if the bridge bank can meet its own funding
needs or if it needs access to the FDIC’s revolving credit facility. The bridge bank also
attempts to reestablish lines of credit and correspondent banking relationships that were
maintained by the failing institution.

The FDIC’s Experience with Bridge Banks
Passage of CEBA in 1987 authorized the FDIC to create bridge banks to resolve failing
institutions. According to CEBA, the FDIC may establish a bridge bank if the board of
directors determines that such an action is cost-effective; that is, that the action is in
accordance with the cost test (before December 1991) or the least cost test (after
December 1991).
The FDIC used its bridge bank authority for the first time on October 30, 1987,
when the Louisiana banking commissioner closed Capital Bank & Trust Company,
Baton Rouge, Louisiana, and placed the failed bank into a bridge bank. On May 23,
1988, Grenada Sunburst System Corporation, Grenada, Mississippi, acquired the bridge
bank. The FDIC determined that using the new bridge bank authority was the most

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cost-effective way to preserve existing banking services and give sufficient time to
arrange a permanent transaction.2
Some of the early bridge banks—First RepublicBanks (Texas), MCorp, and Texas
American Bancshares—involved many banks within a holding company.3 First RepublicBanks (Texas) combined 40 failed banks into one bridge bank; MCorp combined 20
failed banks into one bridge bank; and Texas American Bancshares combined 24 failed
banks into one bridge bank.
First RepublicBanks (Texas), MCorp, and Texas American Bancshares were large
multi-bank holding companies whose banks failed during 1988 and 1989. During that
period, the FDIC’s policy was to sell large institutions in total rather than by part or by
branch, so the holding company’s failed banks were combined into one bridge bank.4
In each case, all deposits, including uninsured deposits, were transferred to the bridge
bank. At the time those banks were bridged, the test for establishing a bridge bank was
whether the cost of organizing and operating the bridge bank was less than the cost for
liquidating the failed bank. Acquirers were either selected before going into the bridge
bank, as with First RepublicBanks (Texas) and Texas American Bancshares, or shortly
thereafter, as with MCorp. The FDIC sold each bridge bank to one acquirer. In those
cases, the acquiring institution operated the bridge bank under a management
agreement, while negotiating the final terms of the transaction.
Bank of New England (1991) and the Use of Cross Guarantee Authority
On August 9, 1989, Congress signed into law the Financial Institutions Reform,
Recovery, and Enforcement Act (FIRREA). The law focused primarily on the thrift
crisis, but also included significant provisions for bank failures. The cross guarantee provision of FIRREA allowed the FDIC to recover part of its costs of liquidating or aiding a
troubled insured institution by assessing those costs against the solvent insured
institutions in the same holding company.
The first time the FDIC used the cross guarantee in connection with a bridge bank
was with the Bank of New England (BNE), Boston, Massachusetts, failure on January 6,
1991. BNE, Connecticut Bank & Trust Company, N.A. (CBT), Hartford, Connecticut, and Maine National Bank (MNB), Portland, Maine, were all subsidiaries of the
Bank of New England Corporation. BNE was considered the flagship bank and was
significantly larger than the other two banks. BNE’s failure was attributed to rapid
growth, particularly in commercial real estate lending, which was adversely affected by
deterioration of the local economy. Following an announcement of major increases in
2. FDIC, 1987 Annual Report.
3. See Part II, Case Studies of Significant Bank Resolutions, Chapter 6, First RepublicBank Corporation, and
Chapter 7, MCorp.
4. First RepublicBanks Corporation also had a credit card subsidiary located in another state (Delaware), which
was placed in its own bridge bank and was sold in a separate transaction.

BRIDGE BANKS

loan loss reserves and an erosion of deposit funding, BNE experienced severe liquidity
problems and subsequent failure. Because BNE experienced heavy deposit withdrawals,
the FDIC used the essentiality provision of Section 13(c) of the Federal Deposit Insurance (FDI) Act to help stabilize the situation and explicitly guaranteed all deposits,
including uninsured deposits, in all three banks.5 CBT failed at the same time as BNE
because of losses on federal funds sold to BNE. Using the cross guarantee provision,
MNB was assessed with the FDIC losses for BNE and CBT, causing MNB’s failure.
The FDIC placed each of the three institutions into a separate bridge bank, transferring all deposits and most assets. The FDIC marketed the bridge banks individually and
as a total package. On April 22, 1991, the FDIC Board of Directors awarded the three
bridge banks to Fleet/Norstar Financial Group (Fleet). Fleet managed the banks on an
interim basis until the sale closed on July 14, 1991.6
First City Bancorporation of Texas, Inc. (1992) and Least Cost Resolution
On December 19, 1991, Congress signed FDICIA into law, an act that had far-reaching
effects on the FDIC. The law’s provision for least cost resolutions had a major effect on
bridge banks. Before FDICIA, the FDIC could select any resolution method as long as
it was less costly than a payoff of insured deposits and a liquidation of the assets.
FDICIA, however, requires the FDIC to choose the least cost alternative in resolving
failing institutions. The least cost provision can be waived only in a systemic risk situation in which the least cost resolution of a failed institution would have a serious effect
on economic conditions or financial stability.7 Before establishing a bridge bank, the
FDIC prepares a cost analysis comparing the estimated operation and resolution costs of
the bridge bank to the cost of liquidation. The FDIC can establish a bridge bank only if
it is the least costly resolution method.
Following the open bank assistance (OBA) transaction between the FDIC and the
First City Bancorporation of Texas, Inc. (First City), in 1988, First City continued to be
affected by the poor quality of its loan portfolio and experienced additional losses on
real estate.8 In October 1992, the two largest First City banks in Houston and Dallas
were found insolvent and closed. The remaining 18 First City banks were closed after

5. A bank was deemed essential when, in the opinion of the FDIC Board of Directors, the continued operation
of the bank was essential to providing adequate banking service in the community. Ultimately, the provision would
come under scrutiny by Congress because large banks were being treated differently than small banks.
6. FDIC, 1991 Annual Report.
7. The provision was the result of a reaction to the perceived FDIC policy of “too big to fail,” and as a result, in
all future bridge banks only insured deposits will be placed in the bridge bank, except in cases of systemic risk or
cross guarantee in which there is no loss in the bank. Any case of systemic risk must be approved by the secretary
of the Treasury in consultation with the president of the United States.
8. See Chapter 5, Open Bank Assistance, for a discussion of the 1988 open bank assistance transaction for First
City and Part II, Case Studies of Significant Bank Resolutions, Chapter 5, First City Bancorporation of Texas, Inc.

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the FDIC exercised its cross guarantee authority to assess the other subsidiaries for
anticipated losses from the Houston and Dallas banks.
Each of the 20 banks was placed in an individual bridge bank. By separating the
banks, an individual sale of each bank was possible. Unlike previous multi-bank bridge
banks, such as First RepublicBanks (Texas), in which the bridge bank was made up of 40
individual banks and was purchased by one acquirer, the First City bridge banks could
have had one acquirer or different acquirers. By selling each bank separately, the FDIC
opened the door for smaller institutions to join the resolution process and generally
increased interest from banks of all sizes. Previously, the FDIC had sold only one large
institution, American Savings Bank, New York, New York, by breaking the branch network into parts or clusters and selling them to several acquirers.
To comply with the least cost requirement, the FDIC analyzed each of First City’s
banks to determine if a loss was anticipated. In the four banks in which the FDIC
projected a loss—those in Houston, Dallas, San Antonio, and Austin—uninsured
deposits were not passed to the bridge banks but stayed with the receiverships. The
remaining 16 better-capitalized banks passed all deposits to the bridge banks. In February 1993, the FDIC sold the First City bridge banks to 13 acquirers in transactions that
were projected to result in no loss to the Bank Insurance Fund (BIF). It sold 3 of the 20
bridge banks with loss share arrangements, which were five-year assistance agreements
that provided protection on certain assets sold in the resolution. Loss share arrangements, which after 1991 became standard resolution tools for larger banks with more
than $500 million in assets, followed the FDIC’s preference for keeping bank assets in
the private sector.9
Initially, at the time of failure in October 1992, the uninsured depositors of the
Houston, Dallas, San Antonio, and Austin banks received an advance dividend of 80
percent of their claims on the receivership. In January 1993, when it became apparent
that losses at Dallas, San Antonio, and Austin were likely to be less than projected, the
FDIC made an additional 10 percent advance dividend to the uninsured depositors of
those three banks (thus increasing their cumulative advance dividend to 90 percent).
The receivership eventually was able to pay uninsured depositors, other creditors, and
bondholders 100 percent of their claims. It was even able to return some funds to the
failed bank’s stockholders.
Smaller Bridge Banks (1993 to 1994)
In January 1993, the FDIC placed The First National Bank of Vermont (FNB), Bradfood, Vermont, in a bridge bank. Although FNB was smaller than most bridge banks,
with $225 million in assets, the FDIC placed it in a bridge bank because Vermont
statutes did not include emergency provisions for an interstate acquisition of a failing

9. See Chapter 7, Loss Sharing, for more detail.

BRIDGE BANKS

institution, thus severely limiting the number of potential bidders. Moreover, the FDIC
could not use section 13 of the FDI Act, which allowed the FDIC to market institutions
on an interstate basis before interstate branching was allowed, because section 13 is
applicable only to banks with more than $500 million in assets. Section 13, however,
can be used in the case of a bridge bank. In addition, FNB was created by a merger of
three banks in July 1992, but the operations of the banks had not been merged when
FNB failed, making resolution activities such as data gathering and due diligence difficult. A bridge bank structure gave the FDIC the time necessary to prepare the institution for sale. It also gave the FDIC an opportunity to offer the bank to both in-state and
out-of-state bidders. On June 4, 1993, New FNB was sold to Merchants Bank, Burlington, Vermont.
Another small institution, The Meriden Trust & Safe Deposit Company (Meriden),
Meriden, Connecticut, was an FDIC insured institution based on its charter as a depository institution and on its past deposit activities, although it no longer made loans or
accepted deposits from the public. Meriden, with assets of $6.6 million, primarily operated a trust department. Meriden became critically undercapitalized and failed when it
was assessed on October 16, 1992, for cross guarantee liability by the FDIC in connection
with Meriden’s failed affiliate, Central Bank (Central), Meriden, Connecticut. Both Meriden and Central were owned by Cenvest, Inc., Meriden, Connecticut. In court, Cenvest,
Inc., challenged the FDIC’s assessment of Meriden with Central’s losses, partly on the
basis that Meriden was not an insured depository institution. Because of the protracted
litigation between the FDIC and Meriden, it was uncertain when the FDIC would be
able to appoint itself receiver. On June 30, 1994, the U.S. District Court in Connecticut
ruled in favor of the FDIC, and for the first time, the FDIC closed an institution and
appointed itself receiver of Meriden on July 7, 1994 (in contrast to being appointed
receiver by the chartering authority). The FDIC was not able to plan and schedule a resolution to occur simultaneously with the self-appointment, so the FDIC used a bridge
bank to provide staff with the necessary time to market the institution to maximize the
FDIC’s recovery on the cross guarantee claim. On October 18, 1994, New Meriden was
acquired by Peoples Savings Bank of New Britain, New Britain, Connecticut.
The FNB and Meriden cases illustrate the versatility of the FDIC’s bridge bank
authority. A bridge bank is not just a valuable tool for the resolution of large failing
banks, but it is also useful for resolving smaller failing institutions with complex issues
that are not easily solved within the 90-day prompt corrective action (PCA) period.10

10. Prompt corrective action is a provision of FDICIA that affects the timing of bank failures. Prompt corrective
action requires that an institution must be closed by its primary regulator if it is “critically undercapitalized” for a
prolonged period. A bank that is critically undercapitalized is defined as having tangible capital that is equal to or
less than 2 percent of total assets. Under previous law, an institution typically was closed only after its capital had
been exhausted.

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Resolution Cost of Bridge Banks
The FDIC applies the least cost test twice in cases in which it uses bridge banks: first,
before a failed bank (or failed banks) goes into the bridge bank and, second, at final
resolution of the bridge bank. The FDIC compares the estimated cost of a bridge bank
and its subsequent resolution to the estimated cost of the two alternatives: an immediate sale without the bridge bank structure or a payoff of deposits. The FDIC determines the estimated cost using several factors such as the cost of operating a bridge
bank, the market value and relative attractiveness of the bridge bank’s assets, and the
premium expected from the eventual sale of the franchise. The FDIC also factors in the
significant negative effect a substantial shrinkage of the deposit base could have on the
amount of premium ultimately received and on the viability of the bridge bank as a
cost-effective resolution mechanism for the failed bank.
The FDIC also must consider another factor: treatment of the uninsured deposits.
In the earlier bridge banks, the FDIC transferred both insured and uninsured deposits to
the bridge bank. In later bridge banks, the FDIC made a determination on the basis of
treatment of the uninsured deposits in keeping with the least cost resolution requirement. If the FDIC’s initial cost analysis, made when a bank is placed in a bridge structure, indicates a loss is going to occur in the bridge bank, the FDIC will transfer only
insured deposits to the bridge bank. It leaves uninsured deposits with the receivership
created when the bridge bank is established. Uninsured deposits and unsecured creditors
that are left with the receivership become claimants of the receivership and share in any
losses.
At the sale of each bridge bank, all deposits in the bank, including uninsured
deposits accepted during the bridge period, will pass to the acquirer. The FDIC determined that the cost savings of leaving the new uninsured depositors behind in a receivership would be outweighed by the impairment of the usefulness of bridge banks as a
resolution method in the future. The bridge bank, however, does not attempt to increase
deposits and, in fact, attempts to limit any new uninsured deposits.
Before forming a bridge bank, the FDIC completes a timetable and strategy for resolution, which varies, depending on whether the bridge bank will be held short term or
long term. Of the 32 bridge banks resolved, all but 2 were short term, lasting seven
months, or less. The two long-term bridge banks, First RepublicBanks and MCorp,
were resolved within seven months but, as a part of the transaction, the FDIC maintained a stock ownership position in each of the new entities. The FDIC expects that
future bridge banks will continue to be short term because the ultimate purpose is to
resolve failing banks as quickly, efficiently, and cost-effectively as possible. Table I.6-2
shows the FDIC’s resolution costs for each situation in which the FDIC used its bridge
bank authority.
It is difficult to make resolution cost comparisons among failed banks because each
failing bank is unique. The problems that led one bank into failure may not be the same
ones that lead another bank into failure. Also, banks vary in their asset mix and a bank

BRIDGE BANKS

183

with certain assets may be more marketable than others; the assets may benefit the sale
of the failing bank franchise and the sale of assets remaining in the receivership after the
bank is sold. In addition, a bank’s regional location may affect the ease with which the
bank franchise and the assets are sold. If the bank’s region is in a severe downturn,
marketing the bank might be more difficult. Indeed, it was the unique characteristics
that a failing bank (particularly a large failing bank) can have that led to the creation of
the bridge bank as a resolution tool.

Table I.6-2

Bridge Bank Resolutions
1987–1994
($ in Thousands)
Time Elapsed
FDIC Resolution
Until
Costs as a
Cost (as of
Resolution
December 31, Percentage
(days)
of Assets
1996)*

Bridge Bank Situations

Total Assets
(as of failure)

Capital Bank & Trust Co.

$386,302

$55,594

14.4

206

First RepublicBanks

33,417,629

3,856,826

11.5

†273

MCorp

15,748,537

2,839,514

18.0

†308

Texas American Bancshares

4,733,686

1,076,760

22.7

147

First American Bank & Trust

1,669,743

388,573

23.3

129

Bank of New England Banks

22,010,866

889,379

4.0

189

First City Banks

8,850,054

0.0

121

Missouri Bridge Bank, N.A.

2,829,368

355,765

12.6

161

The First National Bank of Vermont

224,689

33,638

15.0

126

Meriden Trust & Safe Deposit Co.

6,565

0.0

123

$89,877,439

$9,486,049

10.6

Totals/Average

* For bridge banks with open receiverships, the cost of resolution is the estimated total cost of resolution as of December
31, 1995.
† Acquirers for the bridge banks were chosen within seven months of their inception; the time elapsed represents the time
needed to finalize the transaction. As part of the resolution, the FDIC took an equity position in the bridge banks. The
First RepublicBanks’ bridge bank was terminated after 376 days and the MCorp bridge bank was terminated after 944
days, when the acquirers purchased the FDIC’s stock in each.
NA: Not applicable.
Source: FDIC Division of Research and Statistics.

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M A N A GI N G T H E C R I S I S

Bridge Bank Issues
Several issues regarding the future use of a bridge bank and the effect on uninsured
depositors’ and shareholders’ interests include future effects from passage of FDICIA,
nationalization, depositor discipline, and loss to stockholders.
Future Effects from the Passage of FDICIA
Two key provisions of FDICIA could make the use of bridge banks more likely in the
future.
1. The prompt corrective action provision limits regulatory discretion and requires
that institutions be closed by their chartering authority within 90 days of their
becoming critically undercapitalized (capital is less than or equal to 2 percent).
Before FDICIA, an institution typically was not closed until it was book insolvent. In the case of publicly traded institutions, PCA directives become public
information and could lead to deposit withdrawals and liquidity crises for the
failing bank.
2. FDICIA also restricts the authority of a Federal Reserve Bank (Federal Reserve)
to make advances to institutions that are undercapitalized or critically undercapitalized. By limiting a failing institution’s ability to borrow from the Federal
Reserve banks, FDICIA makes it more likely that failing banks could face
liquidity shortages in the future.
Whether increased liquidity pressures could result in the potential for more bridge
bank transactions will depend on the size, complexity, and other characteristics of the
specific failing institution. Since passage of FDICIA in 1991, numerous banks have
failed because of liquidity crises; however, most have been relatively small, and none
have required the use of a bridge bank.
Nationalization
When the FDIC creates a bridge bank from a failing bank and maintains control of the
bank until it is sold or resolved, the bridge bank is in effect a nationalized bank. Critics
have expressed concern that the government is running a bank and competing against
other nongovernment owned banks. That concern can be mitigated by the short-term
nature of the bridge bank as they are meant to be sold as quickly as possible.
Depositor Discipline
Until 1992, the FDIC protected all depositors, insured and uninsured, in bridge banks.
Beginning with the First City transaction, the FDIC, as required by statute, focused on

BRIDGE BANKS

obtaining the least costly resolution. The FDIC now leaves uninsured deposits with the
receivership when a bridge bank is created and a loss is associated with the failed bank.
The new policy moves responsibility for uninsured deposits from the FDIC to the
depositors themselves and imposes market discipline on the public.
Loss to Stockholders
Before the passage of CEBA, which first enabled the FDIC to establish bridge banks, the
FDIC resolved most large failing banks through open bank assistance. OBAs allowed
holding company shareholders and creditors to retain an interest in the bank, though
their interest was significantly diluted from their previous position. In a bridge bank, the
FDIC transfers liabilities and some assets of the failing bank to the new bridge bank,
while the shareholders’ and creditors’ interests remain with the receivership. The 1988
First RepublicBanks (Texas) transaction was the first large failing bank resolution that
eliminated holding company interests in the new bank. That treatment of the holding
company interests raised concern within the financial sector that it would be more difficult for holding companies to raise capital and would force them to pay a higher rate of
return to lure investors. If anything, such treatment likely has instilled greater market discipline into the system by placing more of the burden on shareholders and creditors of
the holding company to scrutinize large banks and carefully consider their investments.

FDIC Alternative to Use of Bridge Banks
When the FDIC is dealing with insured financial institutions that are not banks (savings
banks and thrifts), it does not have the authority to use a bridge bank; in these situations,
the FDIC can create a conservatorship. The FDIC has used its conservatorship authority
only once, in January 1992, with CrossLand Savings Bank, FSB (CrossLand), Brooklyn,
New York.11 Although the Office of Thrift Supervision (OTS) was CrossLand’s primary
regulator, the bank was insured by the BIF. The FDIC did not use a bridge bank for
CrossLand because it had a thrift charter. When CrossLand was closed by the OTS, the
FDIC was appointed receiver. The FDIC created a new federal mutual savings bank,
which was chartered by the OTS and for which the FDIC was appointed conservator.
The new savings association, CrossLand Federal Savings Bank (New CrossLand),
acquired substantially all the assets and assumed all deposits and certain other liabilities of
the original CrossLand.
In many ways the CrossLand resolution was unique. It was the first time the FDIC
exercised its conservatorship authority. Also, the FDIC determined that the least cost
resolution would be for the FDIC to operate New CrossLand as an ongoing bank with

11. See Part II, Case Studies of Significant Bank Resolutions, Chapter 11, CrossLand Savings Bank, FSB.

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M A N A GI N G T H E C R I S I S

the goal of improving its franchise value, rather than liquidating it. The FDIC carried
out its objective by shrinking New CrossLand to its core franchise, cleaning up its balance sheet (working out bad assets as appropriate), and reducing noninterest expenses.
By the time New CrossLand was ready to be returned to the private sector almost 19
months later, it had reduced total assets by more than $2 billion, closed or sold 45 noncore branches, sold 2 major operating subsidiaries, and reduced the number of employees by 1,200.
Using a method unlike the resolution practice it typically used, the FDIC converted
New CrossLand to stock ownership and sold it through a private placement of stock and
debt to a group of 40 institutional investors for $332 million. The FDIC also received
warrants providing the FDIC the right to purchase one million shares, or 7 percent, of
the common stock of New CrossLand. Finally, to effect the sale, the FDIC entered into
a loss sharing assistance agreement with New CrossLand providing loss coverage on the
commercial and real estate assets.
As of December 31, 1995, the cost to the FDIC for resolving CrossLand was
$739.9 million, a relatively favorable 10.2 percent of CrossLand’s assets at time of failure. That cost is considerably less than the estimated $1.2 billion cost of liquidation,
which was the least costly alternative available in January 1992. Previous marketing
attempts by the FDIC had resulted in no acceptable offers for CrossLand that were less
than the cost of liquidation. In February 1996, New CrossLand was acquired by
Republic New York Corporation (Republic), New York, New York, and the FDIC was
able to exchange its warrants for a price equal to the difference between the exercise
price and Republic’s offer price, resulting in additional cost savings of $10 million to
the FDIC.

Conclusion
The bridge bank vehicle has proved to be a valuable tool for the FDIC and has been
used to resolve some of the largest and most complex failures in recent history. Bridge
banks were created 32 times in 10 failing bank situations between 1987 and 1994.
When banks face a poor regional economy and a sudden or severe liquidity crisis, the
bridge bank structure allows time to evaluate the bank’s condition and to address outstanding problems before the marketing and sale of the bank. Bridge banks have been
used effectively in the past and likely will continue to be useful in the future.

BRIDGE BANKS

187

Table I.6-3

Individual Failed Banks that Were Placed into Bridge Banks
($ in Thousands)
Bridge Date

Failed Institution

Location

Total Assets

Oct. 87

Capital Bank & Trust Co.

Baton Rouge, LA

$386,302

July 88

First RepublicBank-Austin, N.A.

Austin, TX

1,734,407

July 88

First RepublicBank-A&M

College Station, TX

July 88

First RepublicBank-Abilene, N.A.

Abilene, TX

214,305

July 88

First RepublicBank-Brownwood, N.A.

Brownwood, TX

124,218

July 88

First RepublicBank-Cleburne, N.A.

Cleburne, TX

114,816

July 88

First RepublicBank-Clifton

Clifton, TX

77,693

July 88

First RepublicBank-Conroe, N.A.

Conroe, TX

206,393

July 88

First RepublicBank-Corsicana, N.A.

Corsicana, TX

198,593

July 88

First RepublicBank-Dallas, N.A.

Dallas, TX

July 88

First RepublicBank-Denison, N.A.

Denison, TX

141,514

July 88

First RepublicBank-El Paso, N.A.

El Paso, TX

212,114

July 88

First RepublicBank-Ennis, N.A.

Ennis, TX

96,137

July 88

First RepublicBank-Forney

Forney, TX

50,994

July 88

First RepublicBank-Fort Worth, N.A.

Ft Worth, TX

July 88

First RepublicBank-Galveston, N.A.

Galveston, TX

261,089

July 88

First RepublicBank-Greenville, N.A.

Greenville, TX

82,781

July 88

First RepublicBank-Harlingen, N.A.

Harlingen, TX

208,383

July 88

First RepublicBank-Henderson, N.A.

Henderson, TX

120,083

July 88

First RepublicBank-Hillsboro

Hillsboro, TX

63,530

July 88

First RepublicBank-Houston, N.A.

Houston, TX

2,886,126

July 88

First RepublicBank-Jefferson Co.

Beaumont, TX

221,573

July 88

First RepublicBank-Lubbock, N.A.

Lubbock, TX

496,207

July 88

First RepublicBank-Lufkin

Lufkin, TX

218,720

July 88

First RepublicBank-Malakoff

Malakoff, TX

47,978

July 88

First RepublicBank-Midland, N.A.

Midland, TX

616,165

July 88

First RepublicBank-Mineral Wells, N.A.

Mineral Wells, TX

167,841

July 88

First RepublicBank-Mt. Pleasant, N.A.

Mt. Pleasant, TX

142,692

92,090

18,162,609

1,905,148

188

M A N A GI N G T H E C R I S I S

Table I.6-3

Individual Failed Banks that Were Placed into Bridge Banks
Continued
Bridge Date

Failed Institution

Location

Total Assets

July 88

First RepublicBank-Odessa, N.A.

Odessa, TX

July 88

First RepublicBank -Paris

Paris, TX

77,906

July 88

First RepublicBank-Plano, N.A.

Plano, TX

183,784

July 88

First RepublicBank-Richmond, N.A.

Richmond, TX

July 88

First RepublicBank-San Antonio, N.A.

San Antonio, TX

743,428

July 88

First RepublicBank-Stephenville, N.A.

Stephenville, TX

119,699

July 88

First RepublicBank-Temple, N.A.

Temple, TX

163,400

July 88

First RepublicBank-Tyler, N.A.

Tyler, TX

600,406

July 88

First RepublicBank-Victoria

Victoria, TX

173,057

July 88

First RepublicBank-Waco, N.A.

Waco, TX

703,104

July 88

First RepublicBank-Wichita Falls, N.A.

Wichita Falls, TX

287,558

July 88

First RepublicBank-Williamson

Austin, TX

July 88

National Bank of Ft. Sam Houston

San Antonio, TX

614,155

Aug. 88

First RepublicBank-Delaware

Newark, DE

582,350

Mar. 89

MBank Abilene, N.A.

Abilene, TX

189,363

Mar. 89

MBank Alamo, N.A.

San Antonio, TX

687,646

Mar. 89

MBank Austin, N.A.

Austin, TX

591,009

Mar. 89

MBank Brenham, N.A.

Brenham, TX

143,838

Mar. 89

MBank Corsicana, N.A.

Corsicana, TX

190,909

Mar. 89

MBank Dallas, N.A.

Dallas, TX

Mar. 89

MBank Denton County, N.A.

Lewisville, TX

230,149

Mar. 89

MBank Fort Worth, N.A.

Fort Worth, TX

766,273

Mar. 89

MBank Greenville, N.A

Greenville, TX

166,244

Mar. 89

MBank Houston, N.A.

Houston, TX

Mar. 89

MBank Jefferson County, N.A.

Port Arthur, TX

325,646

Mar. 89

MBank Longview, N.A.

Longview, TX

261,253

Mar. 89

MBank Marshall, N.A.

Marshall, TX

217,748

167,958

94,945

41,681

6,973,816

3,098,989

BRIDGE BANKS

189

Table I.6-3

Individual Failed Banks that Were Placed into Bridge Banks
Continued
Bridge Date

Failed Institution

Location

Total Assets

Mar. 89

MBank Midcities, N.A.

Arlington, TX

Mar. 89

MBank Odessa, N.A.

Odessa, TX

322,582

Mar. 89

MBank Orange, N.A.

Orange, TX

158,888

Mar. 89

MBank Round Rock, N.A.

Round Rock, TX

159,912

Mar. 89

MBank Sherman, N.A.

Sherman, TX

274,782

Mar. 89

MBank The Woodlands, N.A.

The Woodlands, TX

165,063

Mar. 89

MBank Wichita Falls, N.A.

Wichita Falls, TX

455,147

July 89

Texas American Bank-Amarillo, N.A.

Amarillo, TX

222,179

July 89

Texas American Bank-Austin, N.A.

Austin, TX

144,372

July 89

Texas American Bank-Breckenridge, N.A.

Breckenridge, TX

July 89

Texas American Bank-Dallas, N.A.

Dallas, TX

227,312

July 89

Texas American Bank-Denison, N.A.

Denison, TX

139,323

July 89

Texas American Bank-Duncanville, N.A.

Duncanville, TX

218,539

July 89

Texas American Bank-Farmers Branch, N.A.

Farmers Branch, TX

July 89

Texas American Bank-Fort Worth, N.A.

Fort Worth, TX

July 89

Texas American Bank-Forum, N.A.

Arlington, TX

July 89

Texas American Bank-Frederickson, N.A.

Fredericksburg, TX

145,123

July 89

Texas American Bank-Galleria, N.A.

Houston, TX

300,022

July 89

Texas American Bank-Greater Southwest

Grand Prairie, TX

40,997

July 89

Texas American Bank-LBJ, N.A.

Dallas, TX

67,192

July 89

Texas American Bank-Levelland

Levelland, TX

198,523

July 89

Texas American Bank-Longview, N.A.

Longview, TX

92,880

July 89

Texas American Bank-McKinney, N.A.

McKinney, TX

168,389

July 89

Texas American Bank-Midland, N.A.

Midland, TX

145,952

July 89

Texas American Bank-Plano, N.A.

Plano, TX

35,503

July 89

Texas American Bank-Prestonwood, N.A.

Dallas, TX

227,312

July 89

Texas American Bank-Richardson, N.A.

Richardson, TX

$369,280

85,676

49,381
1,974,591
66,618

43,059

190

M A N A GI N G T H E C R I S I S

Table I.6-3

Individual Failed Banks that Were Placed into Bridge Banks
Continued
Bridge Date

Failed Institution

Location

Total Assets

July 89

Texas American Bank-Southwest, N.A.

Stafford, TX

$36,015

July 89

Texas American Bank-Temple, N.A.

Temple, TX

68,011

July 89

Texas American Bank-Tyler, N.A.

Tyler, TX

July 89

Texas American Bank-Wichita Falls, N.A.

Wichita Falls, TX

Dec. 89

First American Bank and Trust

North Palm Beach, FL

Jan. 91

Bank of New England, N.A.

Boston, MA

Jan. 91

Maine National Bank

Portland, ME

998,323

Jan. 91

Connecticut Bank & Trust Co., N.A.

Hartford, CT

6,976,142

Oct. 92

First City, Texas-Alice

Alice, TX

Oct. 92

First City, Texas-Aransas Pass

Aransas Pass, TX

Oct. 92

First City, Texas-Austin, N.A.

Austin, TX

346,981

Oct. 92

First City, Texas-Beaumont, N.A.

Beaumont, TX

531,489

Oct. 92

First City, Texas-Bryan

Bryan, TX

340,398

Oct. 92

First City, Texas-Corpus Christi

Corpus Christi, TX

474,108

Oct. 92

First City, Texas-Dallas

Dallas, TX

Oct. 92

First City, Texas-El Paso, N.A.

El Paso, TX

397,859

Oct. 92

First City, Texas-Graham, N.A.

Graham, TX

94,446

Oct. 92

First City, Texas-Houston, N.A.

Houston, TX

3,575,886

Oct. 92

First City, Texas-Kountze

Kountze, TX

50,706

Oct. 92

First City, Texas-Lake Jackson

Lake Jackson, TX

102,875

Oct. 92

First City, Texas-Lufkin, N.A.

Lufkin, TX

156,766

Oct. 92

First City, Texas-Madisonville, N.A.

Madisonville, TX

119,821

Oct. 92

First City, Texas-Midland, N.A.

Midland, TX

312,987

Oct. 92

First City, Texas-Orange, N.A.

Orange, TX

128,799

Oct. 92

First City, Texas-San Angelo, N.A.

San Angelo, TX

138,948

Oct. 92

First City, Texas-San Antonio, N.A.

San Antonio, TX

262,538

148,321
66,699
1,669,743
14,036,401

127,990
54,406

1,324,843

BRIDGE BANKS

191

Table I.6-3

Individual Failed Banks that Were Placed into Bridge Banks
Continued
Bridge Date

Failed Institution

Oct. 92

First City, Texas-Sour Lake

Location
Sour Lake, TX

Oct. 92

First City, Texas-Tyler, N.A.

Tyler, TX

254,063

Nov. 92

Metro North State Bank

Kansas City, MO

685,045

Nov. 92

The Merchants Bank

Kansas City, MO

2,161,323

Jan. 93

The First National Bank of Vermont

Bradford, VT

224,689

Nov. 94

The Meriden Trust and Safe Deposit Co.

Meriden, CT

6,565

Source: FDIC Division of Research and Statistics.

Total Assets
$54,145

he original goals of loss sharing were
to (1) sell as many assets as possible to
the acquiring bank and (2) have the
nonperforming assets managed and
collected by the acquiring bank in a
manner that aligned the interests and
incentives of the acquiring bank
and the FDIC.

CHAPTER 7

Loss Sharing

Introduction
Loss sharing is a feature that the Federal Deposit Insurance Corporation (FDIC) first
introduced into selected purchase and assumption (P&A) transactions in 1991. The
original goals of loss sharing were to (1) sell as many assets as possible to the acquiring
bank and (2) have the nonperforming assets managed and collected by the acquiring
bank in a manner that aligned the interests and incentives of the acquiring bank and the
FDIC. Under loss sharing, the FDIC agrees to absorb a significant portion of the loss—
typically 80 percent—on a specified pool of assets while offering even greater loss protection in the event of financial catastrophe, and the acquiring bank is liable for the
remaining portion of the loss.
Loss sharing can provide benefits to all parties involved when compared to the conventional P&A structure, particularly where nonperforming assets are involved. For
example, by keeping loss share assets in the banking (as opposed to the liquidation) environment, the FDIC may benefit by better preserving the value of the assets. Failed bank
asset portfolios with loss sharing are more attractive to acquirers because the FDIC is
absorbing a significant portion of the loss. Another benefit of loss sharing is that the
asset management and disposition incentives of the acquirer and the FDIC become
more rationally aligned as both parties are sharing in the loss. This common interest
reduces the need for direct FDIC asset disposition oversight and helps provide a more
streamlined disposition process for the loss share assets.
The FDIC has entered into 16 loss sharing agreements that were created to resolve
24 banks that failed between 1991 and 1993. Many of the failed banks were fairly large.
While fewer than 10 percent of banks that failed during that period were resolved using
loss sharing, those transactions accounted for 40 percent of the total failed bank assets.
Loss sharing has evolved into a vehicle that allows the FDIC to better manage some
of the unique problems associated with the marketing of large banks. In the early 1990s,

194

M A N A GI N G T H E C R I S I S

large banks were difficult to market because of their sizable commercial loan and commercial real estate portfolios. The FDIC already had a record amount of assets in liquidation, and the explosive growth of commercial assets in liquidation had become a
critical concern. Acquiring institutions had been extremely reluctant to acquire the
assets in FDIC transactions.
One reason for that reluctance was that the time allotted to perform due diligence
was limited, while the associated costs were high. The FDIC accommodated a number
of potential acquirers who wished to perform due diligence at the failing bank, and all
potential acquirers were required to complete their reviews before the bid submission
date. That constraint often allowed little time for any given acquirer to have more than a
cursory review of a complex commercial loan and real estate portfolio. A thorough due
diligence of a large failed bank could also be rather expensive for a potential acquirer,
with no assurance that it would be the winning bidder.
In addition, many acquirers were reluctant to purchase large portfolios of commercial loans. In many cases, the underwriting criteria of the failed bank were poor and may
have been a primary reason for the bank’s failure. Many potential acquirers wished to
avoid the additional costs associated with managing and working out those problem
assets.
Finally, because almost every region of the United States had experienced declining
markets for commercial real estate in the late 1980s and early 1990s, there was considerable uncertainty regarding collateral values and future economic conditions. Even when
acquiring banks were willing to purchase the commercial real estate loan portfolios, they
typically would incorporate a large discount into their bid to compensate for the risk of
further market declines.
Loss sharing was designed to address those concerns by limiting the risk associated
with acquiring large commercial loan and real estate portfolios and to reduce FDIC costs
and insurance fund outlays by having greater volumes of those banking assets owned
and managed by the banking sector.1 The FDIC accomplished its objective of selling
those types of assets to the acquirer by absorbing a significant portion of any credit losses
on commercial and commercial real estate loans, typically 80 percent for a certain period
of time—ranging from three to five years—during which time the FDIC as receiver
reimbursed the acquiring bank for 80 percent of net charge-offs (charge-offs minus
recoveries) plus reimbursable expenses. During the shared recovery period, the acquiring
bank paid the receiver 80 percent of any recoveries (less any recovery expenses) on loss
share assets previously experiencing a loss. The shared recovery period ran concurrently
with the loss share period and lasted another one to three years beyond the expiration of
the loss sharing period.
Acquiring institutions would assume the remaining 20 percent of loss. By having
the acquirer absorb a limited amount of the credit loss, the FDIC hoped to pass most of
1. Several of the earlier loss share agreements covered loan categories in addition to large commercial loans and
real estate portfolios.

LO S S S H A R I N G

the failed bank’s commercial and commercial real estate loans to the acquirer while still
receiving a substantial bid premium for the bank’s deposit franchise. Also, by having the
acquirer absorb a portion of the loss, the FDIC was attempting to induce rational credit
management behavior. Eventually, loss sharing was structured to include a “transition
amount” so that if losses exceeded the projected amount, the FDIC and the acquirer
would share the losses on a 95/5 basis, respectively. The transition amount was defined
as the FDIC’s estimate of the loss on the loss share assets acquired by the acquirer. The
transition amount was used by the FDIC to address the acquirer’s concerns about catastrophic losses resulting from limited due diligence time and uncertain collateral values
stemming from deteriorating markets.
The FDIC also expected to reduce resolution costs by keeping assets in the banking
sector rather than placing them into a liquidation mode. The prevailing view was that certain failed bank assets would lose additional value if placed into a receivership or liquidation mode because of the break in the customer-bank relationship. (The loss in value from
placing an asset in receivership was referred to as the liquidation differential.)
An additional benefit of loss sharing is that the structure softens the effect of the bank
failure on the local market by keeping more of the failed bank’s borrowers in a banking
environment. The acquiring bank can more easily work with the borrowers to restructure
problem credits or to advance additional funding where prudent. This “anticredit crunch”
benefit avoids the exacerbation of declining collateral values that could be precipitated by
having a significant amount of local failed bank assets falling into a liquidation mode.

Background
The FDIC entered the early 1990s with record levels of assets in liquidation and dwindling insurance reserves. The number of problem banks hovered near 1,100, and the
amount of assets held by problem banks had increased from $236 billion in 1989 to a
record $609 billion in 1991. A relatively large number of small banks failed during that
period only to be replaced on the problem bank list by a nearly offsetting number of
larger banks (See table I.7-1 and chart I.7-1.)
Many of the new problem banks were exceptionally large and were concentrated
in deteriorating markets in the Southwest and Northeast. Additionally, the portfolio
of problem loans that the FDIC was servicing had escalated to record levels, while
insurance funds were at an all-time low and provided no liquidity. (See chart I.7-2.)
The FDIC needed to develop a feature for resolution transactions that allowed the
FDIC to keep more assets in the banking sector and to better align the interests of
the FDIC and the acquiring bank. That alignment of interests would serve to rationalize the asset management incentives of the acquiring bank and also minimize the
need for active FDIC asset oversight. If successful, that feature would accomplish the
following:

195

196

M A N A GI N G T H E C R I S I S

Table I.7-1

Number and Average Size of Failed Banks and Problem Banks
1988–1991
($ in Millions)
Number of
Bank Failures

Year

Average Total Assets
of Failed Banks

Number of
Problem Banks

Average Total Assets
of Problem Banks

1988

279

$189

1,406

$251

1989

207

142

1,109

213

1990

169

1,046

391

1991

127

492

1,090

559

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

Chart I.7-1

• Reduce resolution costs;

$700

1,600

600

1,400

500

1,200

400

1,000

300

800

• Conserve FDIC cash reserves; and
# of Problem Banks

$ in Billions

Number and Total Assets of Problem Banks
1988–1991

• Limit the explosive growth of
assets in FDIC liquidation, thus
minimizing the need for the
FDIC to hire additional staff.

On September 19, 1991, the FDIC
used the loss share method for the first
100
200
time with the resolution of Southeast
0
Bank, Miami, Florida, which had nearly
1988
1989
1990
1991
$10.5 billion in total assets. Southeast
Total Assets of Problem Banks
Bank was located in a less economically
Number of Problem Banks
troubled region of the country (compared to the Texas or the New England
Source: FDIC annual reports, 1988–1991.
markets) and had attracted the interest
of several relatively strong prospective
acquirers. As such, the FDIC believed that the situation represented an opportunity to
experiment with a new form of resolution—an assistance agreement with loss sharing.
The FDIC worked virtually around the clock with prospective bidders to collectively develop a transaction structure with which all parties were comfortable. In that
transaction, the acquiring bank would assume all assets, including classified and
nonperforming assets (excluding owned real estate and in-substance foreclosure
assets).2 All loans acquired were designated as shared loss assets eligible for coverage
200

600
400

LO S S S H A R I N G

197

$ in Billions

under the loss sharing provisions of the Chart I.7-2
purchase and assumption agreement.
Comparison of the Bank Insurance Fund
The winning bidder in that transaction
and the FDIC's Total Assets in Liquidation
was First Union National Bank of Florida.
1988–1991
That acquiring bank was required to hold
and manage the covered failed bank assets,
$50
with the FDIC agreeing to reimburse the
40
acquirer for a major portion—in that case,
30
85 percent—of the loss on those assets for a
set period of time. The 15 percent level of
20
loss exposure was chosen to be high enough
10
to have the acquirer responsibly manage the
0
shared loss assets—to manage those assets as
if its own money was on the line—but low
-10
1988
1989
1990
1991
enough to dampen the effect of any signifi3
cant error in the initial loss estimate.
Bank Insurance Fund Balance
Book Value of Assets in Liquidation
That loss share agreement required the
FDIC to agree to two major accommodaSource: FDIC annual reports, 1988–1991.
tions in its attempt to have loss sharing
supplant the old large bank resolution
structure (in which the FDIC alone shouldered the responsibility and risk for the failed
bank assets). The first accommodation involved the FDIC’s agreeing to take a note—the
nonaccrual asset note—bearing a nominal rate of interest as a funding mechanism for
the nonaccrual assets. The second accommodation involved the FDIC’s offer to purchase perpetual preferred stock to offset the additional burden on the acquiring bank’s
capital that would be imposed on the acquirer as a result of its ownership of the
classified assets. That stock purchase was designed with features that encouraged the
acquirer to redeem the stock in the near term and enhance the marketability of the stock
should it not be redeemed when expected.
In October 1991, loss sharing played a supporting role in the resolution of seven
failed New Hampshire banks.4 In that situation, the FDIC placed the majority of the
failed bank assets with an outside contractor. It passed the smaller balance, one-to-four-

2. Before that transaction, many large bank resolutions had used a separate asset pool structure in which classified
(problem) assets were segregated into a separate asset pool to be serviced by the acquiring bank. The FDIC retained
all risks of ownership of the separate asset pool, including risks associated with loss in asset values, funding costs,
and expenses. Direct FDIC oversight of the management and operating expenses of the separate asset pool was
necessary because the FDIC was bearing all of the ownership risk.
3. For example, the original estimate of loss on covered assets in the Southeast Bank transaction was $869 million.
As such, the acquirer’s 15 percent risk exposure would amount to $130 million. Under loss sharing, if actual losses
were substantially underestimated (say, by 50 percent), the acquirer would have an additional loss exposure of only
$65 million, an amount that would be painful, but by no means fatal, to the acquirer of the failed bank.
4. See Part II, Case Studies of Significant Bank Resolutions, Chapter 10, The New Hampshire Plan.

198

M A N A GI N G T H E C R I S I S

family residential and consumer loans to the acquirers of the two failed banks using a
loss share structure in which the FDIC would absorb 90 percent of the loss for a period
of three years and receive 90 percent of the recovery on those assets for a period of four
years.
The FDIC completed its next major loss sharing agreement in November 1991 with
the resolution of Connecticut Savings Bank, New Haven, Connecticut. Much of New
England was in recession at the time, including the New Haven area. Centerbank, Waterbury, Connecticut, acquired Connecticut Savings Bank under a loss sharing arrangement in
which the FDIC absorbed 85 percent of the loss on commercial assets and 80 percent of the
loss on consumer assets for a period of two years. The FDIC would receive 60 percent of the
recovery on commercial assets and 40 percent of the recovery on consumer assets covered by
that agreement for a period of three years.5 (See table I.7-2 for an illustration of the variety
of terms for the early loss share transactions.)
In mid-1992, the FDIC conducted a series of meetings to develop a standard loss share
structure. The meetings focused on the following:
• Determining which asset types were most suitable for loss share coverage;
• Developing a “stop-loss” mechanism to limit the acquirer’s exposure to unanticipated losses on the shared loss assets;6 and
• Developing a more “standardized” structure for future loss share transactions to
increase the comfort level with the loss share structure for potential acquirers,
thereby enabling them to be more efficient in performing due diligence and pricing risk. A standardization of terms would also allow the FDIC greater efficiency
in marketing problem institutions and would minimize the need for additional
monitoring resources.
As a result of the meetings, the following was determined:
• The commercial and industrial loans and the commercial real estate loan
portfolios (performing and nonperforming) would sell with a loss sharing provision because those assets typically involved high dollar balances and a greater
variability in risk.
• The one-to-four-family mortgage and consumer loan portfolios (performing and
nonperforming) generally would not be sold with loss share coverage because the
5. The FDIC would share any recovery on a loss share asset under a predetermined formula. Typically, the shared
recovery coverage ratio would be identical to the shared loss coverage ratio for a specified pool of assets. In several
of the earlier transactions, however, the FDIC agreed to provide the acquirer with a larger share of any recoveries
as an incentive to better manage and collect on assets that had been charged off. Examples of the enriched level of
recovery sharing on the credit card portfolio at Southeast Bank, as well as the commercial and, most notably, consumer loan portfolios at Connecticut Savings Bank, are detailed in table I.7-2.
6. Acquirers wanted to limit their risk exposure to unforeseen and catastrophic losses on loss share assets arising
from their limited due diligence time and the uncertain value of collateral located in deteriorating markets.

LO S S S H A R I N G

199

Table I.7-2

Summary of Loss Share Transactions
1991
($ in Millions)

Failed Bank

Southeast of
Dartmouth
West Florida South- Numerica S.B.*
east Bank
New Hampshire S.B.

Amoskeag
BankEast
Nashua Trust
Bank Meridian

Connecticut
S.B.

Acquirer

First Union National New Dartmouth
Bank of Florida
Shawmut

First NH Bank

Centerbank

Acquisition Date

Sept. 19, 1991

Oct. 10, 1991

Nov. 14, 1991

Total Assets
At Resolution

$10,478

$2,269

$2,109

$1,047

Beginning
Amount of Loss
Share Assets

$7,941

$876

$622

$555

Term:
For Shared
Losses

5 years

3 years

2 years

For Shared
Recoveries

7 years

4 years

3 years

All loans except
credit cards
85%/15%

1-4 residential
(less than $191,250)

Commercial
85%/15%†

Credit cards
Yr. 1 - 85%/15%
Yr. 2 - 80%/20%
Yr. 3 - 75%/25%
Yr. 4 - 70%/30%
Yr. 5 - 65%/35%

Consumer
(less than $100,000)

Consumer
80%/20%

All categories
90%/10%
Quarterly threshold

All loans except
credit cards
Percentage
same as
loss share

Percentage
same as
loss share

Shared Loss
Coverage

Shared
Recovery
Coverage

Credit cards
65%/35%
Transition
Amount

Not applicable

Commercial
60%/40%†

Consumer
40%/60%
Not applicable

Not applicable

* S.B. : Savings Bank
† By P&A agreement definition, includes any nonconsumer (multi-family and 1-4 residential) loans.
Sources: FDIC Division of Resolutions and Receiverships reports.

Not applicable

200

M A N A GI N G T H E C R I S I S

risks for those types of assets were considered low and were more easily ascertainable.
• A nonaccrual asset note would be offered to the acquirer to help fund the
nonaccrual commercial assets. That type of note was offered in some of the
earlier transactions and paid a nominal rate of interest. (The possibility of adverse
tax consequences soon ended the attractiveness of that option.)
• The FDIC would share in recoveries on the same basis that it shared in losses.
• The stop loss mechanism could best be implemented via use of the “transition
amount,” which represents the FDIC’s best estimate of the loss on shared loss
assets. It is set so that if asset losses exceed it, the FDIC’s loss coverage is then
increased to 95 percent, and the acquiring bank’s exposure is reduced to 5
percent of the loss over the transition amount. The transition amount successfully addressed acquirers’ concerns of unanticipated loss exposure because of
limited due diligence time and uncertain economic factors in the future.

The General Structure of Loss Sharing
The following sections review the terms and conditions of the most recent loss sharing
P&A agreements, which were the product of the FDIC’s standardization effort
described above. In addition, they include more detailed information regarding the
treatment of shared loss assets, the shared loss and shared recovery mechanisms, transition amounts, reimbursement procedures for shared losses and recoveries, and the
administration of the shared loss agreement.
Shared Loss Assets
Shared loss assets generally consist of commercial and commercial real estate loans. Consumer loans, home equity loans, and residential mortgage loans usually are not covered
in shared loss assets because those loans are of better quality. The relatively small balances of those loans, coupled with their large number of transactions, also make monitoring costs very expensive.
Shared loss assets initially are recorded at the failed bank’s book value and, thereafter, the value of a shared loss asset may be increased by additional advances, capitalized
expenditures, and accrued interest (subject to certain limitations); the value may
decrease by the amount of principal payments received and charge-offs recorded.
Capitalized expenditures are permitted only on owned real estate, and such expenditures
must be capitalized in accordance with generally accepted accounting principles. (Environmental expenditures are excluded from loss share coverage.) Advances cannot exceed
certain specified percentage limitations (generally 10 percent of the book value as of the

LO S S S H A R I N G

commencement date) and are not allowed on any loan on which the acquiring bank has
recorded a charge-off.
Shared loss loans may be amended, modified, renewed, or extended, and substitute
letters of credit may be issued in lieu of original letters of credit. The amount of principal remaining to be advanced on a line of credit, however, may not be increased beyond
the original amount of the commitment. Paydowns on revolving lines of credit may be
readvanced up to the original amount of the commitment. Terms may not be extended
beyond the end of the final quarter through which the receiver has agreed to reimburse
losses under the agreement.
Shared loss coverage ceases upon the sale of an asset or upon the making of advances
or amendments that do not comply with the restrictions described above. Shared loss
coverage also ceases if the acquiring bank exercises collection preference regarding a loan
held in its own portfolio that is made to or attributable to the same obligor as a shared
loss loan.
Shared Loss Arrangement
During the shared loss period, usually the FDIC as receiver reimburses the acquiring
bank for 80 percent of net charge-offs (charge-offs minus recoveries) of shared loss assets
plus reimbursable expenses. The acquiring bank generally pays the receiver 80 percent of
recoveries less recovery expenses on covered assets previously experiencing loss.7
Losses are defined as charge-offs or write-downs of the value of shared loss assets
recorded in accordance with examination criteria. Losses on the sale of real estate are
included, but losses on the sale of shared loss loans are generally excluded.8
Recoveries are defined as collections of (1) charge-offs of shared loss assets and reimbursable expenses, (2) charge-offs recorded by the failed bank (including charge-offs of
consumer and residential loans recorded by the failed bank, whether or not such loan
categories are designated as shared loss assets under the agreement), and (3) gains on the
sale or disposition of real estate.
Reimbursable expenses are defined as out-of-pocket expenses paid during the shared
loss period to third parties (excludes payments to affiliates) to effect recoveries and to
manage, operate, and maintain owned real estate, less income received on other real estate
(amount may be negative). Expenses that are not covered include (1) income taxes; (2)
salaries and related benefits of employees; (3) occupancy, furniture, equipment, and data
7. The term of the shared loss period varies from two to five years. The term of the shared recovery period runs
concurrently with the shared loss period with an additional one to three years. The loss sharing and recovery sharing
percentages may also vary by transaction and by asset category.
8. While losses on the sale of loans are generally excluded to limit the receiver’s exposure to interest rate risk, in
cases where circumstances indicate that allowing the acquiring bank to sell loans may be in the receiver’s best
interest, coverage may be extended to include losses on the sale of loans; however, limitations regarding the dollar
amount of loans that may be sold and the amount of resulting losses that may be eligible for reimbursement are
established.

201

202

M A N A GI N G T H E C R I S I S

processing expenses; (4) fees for accounting and other independent professional consultants (other than legal fees and consultants retained for environmental assessment
purposes); (5) overhead or general and administrative expenses; and (6) expenses not
incurred in good faith or any extravagant expenses.
Transition Amounts
The transition amount is determined by using an estimate of the loss expected on the
assets subject to coverage. Net losses in excess of the transition amount are reimbursed at
95 percent instead of 80 percent; however, the payment of the additional 15 percent
reimbursement is deferred until the end of the agreement.
Certificates and Payments
Acquiring banks are required to file certificates within 30 days of the end of each calendar quarter during the shared loss period and recovery period. Dollar amounts for the
following items must be reported on the certificate: (1) charge-offs, (2) recoveries, (3)
net charge-offs, and (4) reimbursable expenses. If the shared loss amount is positive, the
receiver will reimburse 80 percent of the amount within 15 days of receipt of the certificate. If the shared loss amount is negative, the acquiring bank must remit 80 percent of
the amount with the certificate.
During the recovery period, the amount of recoveries and recovery expenses must be
reported on the certificate. The recovery amount is equal to recoveries less recovery
expenses. The acquiring bank must remit 80 percent of the recovery amount with the
certificate.

Administration of the Shared Loss Agreement
The acquiring bank is required to manage, administer, and collect shared loss assets
consistent with usual and prudent business and banking practices and in a manner consistent with internal practices, procedures, and written policies. It must use its best
efforts to maximize collections and use its best business judgment in effecting chargeoffs. It must maintain separate accounting records for shared loss assets. The acquiring
bank is prohibited from contracting with third parties to provide services if the assuming
bank normally provides the service regarding its own assets that are not subject to loss
sharing.
Within 90 days after each calendar year end, the acquiring bank must furnish the
FDIC a report signed by its independent public accountants containing specified statements relative to the accuracy of any computations made regarding shared loss assets. It
must also perform a semi-annual internal audit of shared loss compliance and provide
the FDIC copies of the internal audit reports and access to internal audit work papers.

LO S S S H A R I N G

Additionally, the FDIC may perform an audit, of such scope and duration as it may
determine to be appropriate, to ascertain the bank's compliance with the assistance
agreement.
The FDIC provides formal procedures to resolve any disputes that may arise in connection with the loss sharing arrangement. The parties are required to make a good faith
effort to resolve a dispute within a 45-day period. Any disputes that cannot be resolved
within that period are submitted for arbitration. Arbitration issues regarding charge-offs
are resolved by the acquiring bank’s chartering authority. Other disputes are resolved by
determination of a review board. Determinations by the chartering authority or review
board are conclusive and binding. See tables I.7-3 and I.7-4 for a summary of loss share
transactions for 1992 and 1993.

Negative Aspects of Loss Sharing
One of the negative aspects of the loss sharing structure is that it requires the FDIC and
the acquirer to take on additional administrative duties and costs in managing the loss
sharing assets throughout the life of the agreement. For some acquirers, the added
administrative duties and costs may be unacceptable, and they may lose interest in bidding. Generally, the FDIC has considered loss sharing only if the pool of loss sharing
assets is of a significant volume, greater than $100 million. Furthermore, many healthier,
smaller banks may not have the appropriate experience in working out problem credits.
As a result, they may either lose interest in bidding or, if they acquire the assets, they
may not have the ability to manage them in the best interests of all involved.

Analysis and Conclusion
The FDIC used loss sharing a total of 16 times to resolve 24 banks that failed between
September 1991 and January 1993. Those 24 failed banks had total assets of $41.4
billion, of which approximately $18.5 billion were covered by loss sharing. Loss share
transactions were extremely successful in keeping failed bank assets in the banking sector
and out of the liquidation mode. Table I.7-5 illustrates that success by comparing the
amount of assets passed to acquirers through the 24 loss share transactions to the
amount of assets passed in the 175 banks that failed during 1991 and 1992 and were
resolved using conventional P&A transactions. The loss share transactions accounted for
$41.4 billion in failed bank assets and were able to pass to the acquirers $18.5 billion
(45 percent) under loss sharing and another $17.8 billion (43 percent) without loss
sharing. As a result, $36.3 billion (88 percent) of failed bank assets were passed to
acquirers and only $5.1 billion (12 percent) of those failed bank assets were retained by
FDIC for liquidation. The 175 P&A transactions during 1991 and 1992 that did not
involve loss sharing accounted for $62.1 billion in failed bank assets and were able to pass

203

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Table I.7-3

Summary of Loss Share Transactions
1992
($ in Millions)
Attleboro
Failed
Pawtucket
Bank
S.B.*

First
Constitution

Howard
S.B.

Heritage
Bank for
Savings

Eastland
S.B.

Eastland
Bank

Meritor
S.B.

First
Federal

First
Fidelity

Fleet
of MA

Fleet
of RI

Mellon Bank

Acquisition Aug. 21,
Date
1992

Oct. 2,
1992

Dec. 4,
1992

Dec. 11,
1992

Total
Assets at
Resolution $595

$1,580

$3,258

$1,272

$473

$72

$3,579

Beginning
Amount of
Loss Share
Assets
$338

$241

$865

$347

$294

$755

Term:
For Shared
Losses
3 years

5 years

3 years

5 years

For Shared
Recoveries 5 years

7 years

5 years

7 years

Commercial

ORE

Acquirer

New Bedford
Institute
for Savings

Shared Loss 1-4 residential Commercial Commercial Commercial Commercial
Coverage Commercial†
ORE‡

ORE

Recoveries
plus
expenses

Recoveries Recoveries
plus
plus
expenses expenses

Recoveries
plus
expenses

All
categories
80%/20%;
greater than
transition
amount:
95%/5%

All
All
categories categories
80%/20%; 80%/20%;
greater than greater than
transition transition
amount:
amount:
95%/5%
95%/5%

All
categories
80/%20%;
greater than
transition
amount:
95%/5%

All
categories
80%/20%;
greater than
transition
amount:
95%/5%

Shared
Recovery
Coverage

Percentage
same as
loss share

Percentage Percentage
same as
same as
loss share loss share

Percentage
same as
loss share

Transition
Amount

$49.3

$49.2

$130

$53

$60

* S.B.: Savings Bank
† Commercial includes multi-family loans.
‡ ORE: Owned real estate.
Sources: FDIC Division of Resolutions and Receiverships reports.

ORE

$38

LO S S S H A R I N G

just $24.3 billion (39 percent) of failed bank assets to the acquirer. As a result, $37.8
billion (61 percent) of those failed bank assets were retained for liquidation by the FDIC.
Even though 122 banks, with total assets of $44.6 billion, failed in 1992, the FDIC,
by using loss sharing, was able to halt the skyrocketing growth of assets in liquidation at
$43.3 billion at year-end 1992. The FDIC was able to manage the situation by using
loss sharing to keep assets out of the liquidation area, as well as by implementing
improved asset disposition measures for assets that were in the liquidation phase. (See
table I.7-6.)
The loss sharing transactions were less expensive than the P&A transactions without
loss sharing. The 24 failed loss share banks had total assets of $41.4 billion and were
resolved by the FDIC at a cost of $2.5 billion, or 6.1 percent of assets at the time of resolution. The 175 banks resolved by P&A without loss sharing had $62.1 billion in failed
bank assets and were resolved by the FDIC at a cost of $6.5 billion, or 10.4 percent of
assets at the time of resolution.
Loss share transactions were less expensive than conventional P&A transactions for
large banks (total assets over $500 million), as well as for small banks (total assets under
$500 million). The FDIC resolved 16 large banks with loss sharing and another 16 large
banks using conventional P&A transactions. The large loss share banks had total assets
of $39.2 billion and cost the FDIC $2.1 billion (5.38 percent of assets) to resolve. The
large failed banks on which loss share was not used had total assets of $47.1 billion and
were resolved at a cost of $4.1 billion (8.66 percent of assets). The FDIC resolved 8
smaller banks with loss sharing and 159 with conventional P&A transactions. The
smaller loss share transactions had $2.2 billion in total assets and were resolved at a cost
to the FDIC of $200 million (9.55 percent of assets). The 159 conventional P&A transactions had total assets of $15 billion and cost the FDIC $2.4 billion (15.82 percent of
assets) to resolve. (See table I.7-7 for a summary of the cost of resolution on P&A
transactions in 1991 and 1992.)
The FDIC’s projected payments on the loss share assets are less than its original estimate of $1.4 billion. As of December 1997, the FDIC expected to make loss share payments of more than $1 billion, or just 74.3 percent of the amount originally forecast.
By December 1997, the loss sharing period for 21 of the 24 failed banks covered by
loss sharing agreements had either been completed or terminated. Less than $310 million of shared loss assets remained, representing less than 2 percent of the beginning
book value for loss share assets. The estimated loss and recovery share payments on those
remaining assets were included in the above cost calculations.
The loss share transaction has been successful for the FDIC in the past and, should
the need arise, is likely to be used in the future.

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Table I.7–4

Summary of Loss Share Transactions
1993*
($ in Millions)

Failed
Bank:

First CityDallas
First CityHouston

First CityAustin

Missouri Bridge
Bank (Merchants
New First
Bank)
National Bank
(Metro North
of Vermont
State Bank)

Acquirer

Texas
Commerce

Frost
National Bank

Boatmen's
First Nat’l Bank
of Kansas City

The Merchants Bank CrossLand Fed

Acquisition
Date

Feb. 13, 1993

April 23, 1993

June 4, 1993

Aug. 13, 1993

Total Assets at
Resolution
$4,901

$347

$2,846

$225

$7,234

Beginning
Amount of
Loss Share
Assets

$1,694

$58

$953

$160

$2,820

Term:
For Shared
Losses

5 years

3 years

5 years

For Shared
Recoveries

7 years

5 years

8 years

Commercial

ORE‡

ORE

1-4 residential
Agriculture
Commercial
ORE

Recoveries
plus expenses

All categories
80%/20%; greater
than transition
amount: 95%/5%

All categories
80%/20%; after
net charge-offs
exceed $179

Shared
Recovery
Coverage

Percentage
same as
loss share

Transition
Amount

$81.2

$5.3

$92

$41

Not applicable

Shared Loss Commercial†
Coverage

CrossLand
Fed

ORE

* All of the banks in this table (excluding New First National Bank of Vermont) were resolutions involving bridge banks that
were created when each constituent bank failed in 1992. New First National Bank of Vermont was created in January 1993
following the failure of First National Bank of Vermont. CrossLand Savings was a savings association that failed in January
1992 and was operated in conservatorship as CrossLand FSB. All of the P&A transactions with loss sharing occurred in 1993.
† Commercial includes multi-family loans.
‡ ORE: Owned real estate.
Sources: FDIC Division of Resolutions and Receiverships reports.

LO S S S H A R I N G

207

Table I.7-5

Analysis of P&A Transactions
With and Without Loss Sharing
1991 and 1992
($ in Billions)
P&A with Loss Sharing*

P&A without Loss Sharing

175

Number of Failed Banks
Total Assets
Passed with Loss Sharing

Percentage

Total Assets

Percentage

$18.5

Passed without Loss Sharing

17.8

24.3

Total Assets Passed

36.3

24.3

5.1

37.8

$41.4

100

$62.1

100

Assets Retained by the FDIC
Total Failed Bank Assets

* Includes the January 1993 resolution of First National Bank of Vermont with assets totaling
$225 million.
Sources: FDIC Division of Research and Statistics and FDIC annual reports.

Table I.7-6

Book Value of Assets in FDIC Liquidation at Year End
($ in Billions)
Year

Asset Balance

1990

$30.9

1991

43.3

1992

43.3

1993

28.0

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

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M A N A GI N G T H E C R I S I S

Table I.7-7

FDIC’s Cost of Resolution as a Percentage of Assets
of P&A Transactions for Failing Banks
1991–1992
Failed Banks with Total Assets over $500 million
Average Cost
of Resolution (%)

Median Cost
of Resolution (%)

With Loss Sharing

5.38

7.77

Without Loss Sharing

8.66

12.21

Failed Banks with Total Assets under $500 million
Average Cost
of Resolution (%)

Median Cost
of Resolution (%)

9.55

6.06

15.82

17.10

With Loss Sharing
Without Loss Sharing

Sources: FDIC Division of Research and Statistics and FDIC annual reports.

Table I.7-8

FDIC Loss Share Transactions
1991–1994
($ in Millions)

Transaction
Date
Failed Bank*

Location

09/19/91

Southeast Bank, N.A†

Miami, FL

10/10/91

New Dartmouth Bank

10/10/91

Resolution
Cost as
Total Resolution Percentage of
Assets
Costs
Total Assets
$10,478

0.00

Manchester, NH

2,268

571

25.19

First New Hampshire

Concord, NH

2,109

319

15.14

11/14/91

Connecticut Savings Bank

New Haven, CT

1,047

207

19.77

08/21/92

Attleboro Pawtucket S.B.

Pawtucket, RI

595

5.41

10/02/92

First Constitution Bank

New Haven, CT

1,580

127

8.01

10/02/92

The Howard Savings Bank

Livingston, NJ

3,258

2.67

LO S S S H A R I N G

209

Table I.7-8

FDIC Loss Share Transactions
1991–1994
($ in Millions)

Continued
Transaction
Date
Failed Bank*

Location

Resolution
Cost as
Total Resolution Percentage of
Total Assets
Assets
Costs

12/04/92

Heritage Bank for Savings

Holyoke, MA

$1,272

$21

1.70

12/11/92

Eastland Savings Bank‡

Woonsocket, RI

545

3.30

12/11/92

Meritor Savings Bank

Philadelphia, PA

3,579

0.00

02/13/93

First City, Texas-Austin, N.A.

Austin, TX

347

0.00

02/13/93

First City, Texas-Dallas

Dallas, TX

1,325

0.00

02/13/93

First City, Texas-Houston, N.A.

Houston, TX

3,576

0.00

04/23/93

Missouri Bridge Bank, N.A.

Kansas City, MO

1,911

356

18.62

06/04/93

First National Bank of Vermont Bradford, VT

225

14.97

08/12/93

CrossLand Savings, FSB

7,269

740

10.18

$41,384

$2,511

6.07

Totals/Average

Brooklyn, NY

* The banks listed here are the failed banks or the resulting bridge bank from a previous resolution, however, it is the
acquirer that enters into the loss sharing transaction with the FDIC.
† Represents loss sharing agreements for two banks: Southeast Bank, N.A., and Southeast Bank of West Florida.
‡ Represents loss sharing agreements for two banks: Eastland Savings Bank and Eastland Bank.
Source: FDIC Division of Research and Statistics.

CHAPTER 8

The FDIC’s Role as Receiver

Introduction
The Federal Deposit Insurance Corporation (FDIC) has three main responsibilities: (1)
to act as an insurer, (2) to act as a supervisor, and (3) to act as a receiver.1 The roles of
insurer and receiver require that the FDIC play an active role in resolving failing and
failed FDIC insured institutions. To maintain confidence in the banking system and to
maintain stability of the financial system, the federal statutory framework governing the
resolution of failed depository institutions was designed to promote the efficient, expeditious, and orderly liquidation of failed banks and thrift institutions. The interactions
between the FDIC as insurer and the FDIC as receiver are important in ensuring that
those objectives are achieved.
As a rule, the FDIC’s role as receiver is independent of its corporate roles as supervisor and insurer.2 The FDIC’s corporate role as insurer is important in the receivership
process. That role helps ensure the stability of the financial system by guaranteeing the
timely funding of deposit insurance and consequent faith in the banking system in times
of stress. The FDIC’s role as receiver is also important. When a depository institution
fails, the FDIC has statutory responsibility to the creditors of the receivership to recover
for them, as quickly as it can, the maximum amount possible on their claims. Just as
importantly, the FDIC’s insurance fund becomes a major creditor, paying insured
depositors the full amount of their claims. When acting as receiver, the FDIC, through

1. The FDIC is the primary federal banking regulator of all state nonmember banks. In that regard, the FDIC
performs safety and soundness examinations, visitations, and investigations.
2. The courts have long recognized the FDIC’s legal ability to operate in different capacities, with its different
capacities conducting arms’ length transactions with each other.

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M A N A GI N G T H E C R I S I S

acts of Congress, uses broad statutory authority and protections that enable it to fulfill
its mission.

Why the FDIC Acts as Receiver
To understand why Congress gave the FDIC receivership powers, it is necessary to go
back to the FDIC’s beginnings and look at the structure of the banking industry and the
economic conditions at that time. The FDIC was created in 1933 to halt a banking
crisis. Nine thousand banks—a third of the banking system in the United States—failed
in the four years before the FDIC was established. The failure of one bank would set off
a chain reaction, bringing about other failures. Sound banks frequently failed when large
numbers of depositors panicked and demanded to withdraw their deposits, leading to
“runs” on the bank. The behavior of depositors was not irrational. They had learned
from hard experience that if they kept their money in banks, it might not be available
when they needed it, and they might lose it all, or a large portion of it.
Before the creation of the FDIC, national bank liquidations were supervised by the
Office of the Comptroller of the Currency (OCC), who had authority to appoint the
receiver and had a permanent staff of bank liquidation specialists.3 Liquidations of state
chartered banks varied considerably from state to state, but most were handled under
the state code provisions for general business insolvencies. By 1933, most state banking
authorities had at least some control over state bank liquidations. The increased incidence of national bank failures from 1921 through 1932, however, created a shortage of
experienced receivers. Furthermore, there was some concern in Congress that receiverships, both national and state, had been doled out as political plums, with the recipients
attempting to make as much commission as possible and to keep the work going as long
as possible.
In general practice, between 1865 and 1933, depositors of national and state banks
were treated in the same way as other creditors; they received funds from the liquidation
of the bank’s assets after those assets were liquidated. On average, it took about six years
at the federal level to liquidate a failed bank’s assets, pay the depositors, and close the
bank’s books—although in at least one case, it took 21 years. Even when depositors
ultimately received their funds, the amount was significantly less than what they had put
into the bank. From 1921 through 1930, more than 1,200 banks failed and were liquidated. From those liquidations, depositors at banks chartered by the states received, on
average, 62 percent of their deposits. Depositors at banks chartered by the federal
government received an average of 58 percent of their deposits. Given the long delays
and the significant risk in getting their deposits, anxious depositors understandably

3. Authority to appoint a receiver for a national bank originated in the National Bank Act of 1864; authority to
appoint a conservator for a national bank subsequently originated in the Bank Conservation Act of 1933.

T H E FD I C ’S R O L E A S R E CE I V E R

withdrew their savings when there was any hint of problems. With the wave of bank failures that began in 1929, it became widely recognized by the federal government that the
lack of funding that resulted from the process for resolving bank failures was contributing significantly to the economic depression in the United States.4
To deal with the economic crisis, the federal government focused on returning the
financial system to stability by restoring and maintaining the confidence of depositors in
the banking system. When it created the FDIC, Congress addressed that problem by (1)
allowing for the FDIC to provide deposit insurance, initially up to $2,500, but now up
to $100,000; (2) giving the FDIC special powers to resolve failed banks; and (3) requiring the appointment of the FDIC as receiver for all national banks. Congress believed
that the appointment of the FDIC as receiver would simplify procedures, eliminate
duplication of records, and vest responsibility for liquidation in the largest creditor
whose interest is to obtain the maximum possible recovery. For state chartered banks,
Congress preferred that the FDIC be receiver, but did allow each state to appoint a
receiver according to state law. By 1934, 30 states had provisions by which the FDIC
could be appointed receiver but, in practice, most often they did not do so. It would be
the rare exception today if the FDIC were not appointed receiver, however, and most
states now require that the FDIC be appointed receiver.

How the FDIC Becomes Receiver
An institution’s chartering authority typically closes a bank when it becomes critically
undercapitalized or unable to meet deposit outflows. The Prompt Corrective Action
(PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of
1991 require that an institution be closed by its primary regulator or the FDIC within a
prescribed period of time after the regulator determines that the institution is critically
undercapitalized (a situation that was defined as tangible equity capital of 2 percent or
less) and does not have an adequate plan to restore the capital to the required levels.5
Following certain procedural requirements, the FDIC may be appointed as receiver
for any insured depository institution if any of the following conditions exist:
• The institution’s assets are less than its deposit and administrative obligations
(insolvency);
• The institution’s assets or earnings have been substantially dissipated because of a
violation of a statute or regulation, or because of any unsafe or unsound practice;
• The institution is operating in an unsafe or unsound condition;

4. C.D. Bremer, American Bank Failures (New York: Columbia University Press, 1935), chapters IV and V.
5. The prescribed timing is 90 days; however, if warranted, the time can be extended by the primary regulator
with concurrence of the FDIC.

213

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M A N A GI N G T H E C R I S I S

• The institution has willfully violated a final cease and desist order;
• The institution’s books, papers, records, or assets have been concealed, or the
institution has refused to submit its books, papers, records, or affairs for inspection by an appropriate regulatory authority;
• The institution is unable to pay its obligations or meet its depositors’ demands in
the normal course of business;
• The institution has incurred or is likely to incur losses that will deplete all or substantially all of its capital, with no reasonable prospect for the institution to
become adequately capitalized without federal assistance;
• The institution has violated any law or regulation, or has engaged in an unsafe or
unsound practice, that is likely to (a) cause insolvency or substantial dissipation
of assets or earnings, (b) weaken the institution’s condition, or (c) seriously prejudice the interests of depositors or the deposit insurance fund;
• The institution, by resolution of its board of directors or shareholders, consents
to the appointment;
• The institution ceases to be an insured institution;
• The institution is undercapitalized and (a) has no reasonable prospect of becoming adequately capitalized, (b) fails to become adequately capitalized when
required to do so, (c) fails to submit an acceptable capital restoration plan to the
appropriate regulatory authority, or (d) materially fails to implement a capital
restoration plan submitted and accepted;
• The institution is critically undercapitalized or otherwise has substantially insufficient capital; or
• The institution has been found guilty of money laundering under federal law.
A depository institution’s charter determines which state or federal regulatory
agency will appoint a conservator or a receiver for a failing institution. For federal savings associations and national banks, the Office of Thrift Supervision (OTS) and the
Office of the Comptroller of the Currency, respectively, are the chartering authorities
responsible for determining when appointment of a receiver is necessary.6 The FDIC
must be appointed as receiver for insured federal savings associations and national
banks. For state chartered savings and loan associations or banks, the FDIC may accept
appointment as receiver by the appropriate state regulatory authority, but it is not
6. The same authority would appoint the FDIC as conservator for the institution if the imposition of a conservatorship were determined to be the appropriate strategy for dealing with a failing institution. However, the FDIC
has never been appointed conservator by the OCC or state regulatory authority and may decline the appointment
if tendered; the FDIC was appointed conservator once by the OTS.

T H E FD I C ’S R O L E A S R E CE I V E R

required to do so. Today, state regulatory authorities virtually always request the
appointment of the FDIC when a receiver is appointed. In the case of state chartered
banks that are members of the Federal Reserve System, the Federal Reserve Board also
may appoint the FDIC as receiver. In certain limited instances, the FDIC may appoint
itself as receiver for insured depository institutions. Congress provided the FDIC that
additional authority in 1991 out of concern that the FDIC depended on the judgment
of individual state chartering authorities or that of other federal chartering authorities
and that it needed an independent basis to protect the insurance fund in a timely manner. Since receiving that power from Congress in 1991, however, the FDIC has closed
an institution and appointed itself as receiver only once, in the 1994 failure of The
Meriden Trust & Safe Deposit Company, Meriden, Connecticut.

General Overview of the FDIC’s Role as Receiver
Congress has entrusted the FDIC with complete responsibility for resolving failed
federally insured depository institutions and has conferred expansive powers to ensure
the efficiency of the process. The FDIC as receiver is not subject to the direction or
supervision of any other agency or department of the United States, or of any state, in
the operation of the receivership. Those congressional provisions allow the receiver to
operate without interference from executive agencies and to exercise its discretion in
determining the most effective resolution of the institution’s assets and liabilities. In
exercising that authority, the FDIC is expected to maximize the return on the assets of
the failed bank or thrift and to minimize any loss to the deposit insurance fund.
As receiver, the FDIC succeeds to the rights, powers, and privileges of the institution and its stockholders, officers, and directors. It may collect all obligations and
money due to the institution, preserve and liquidate its assets and property, and perform
any other function of the institution consistent with its appointment.
The FDIC as receiver is also responsible for liquidating the failed institution’s assets
and using the proceeds to pay proven creditors. Typically, creditor claims are paid
through periodic dividend distributions from the receiver to the extent that liquidation
proceeds are available after expenses and obligations. To promote the rapid return of
liquidity to creditors, including depositors and the banking system, the FDIC is able to
declare “advance” or “accelerated” dividends based on an estimate of recoveries on the
assets retained in receivership.7
As receiver, the FDIC also has the power to merge a failed institution with another
insured depository institution and to transfer its assets and liabilities without the consent
or approval of any other agency, court, or party with contractual rights. Furthermore, the

7. For further information on the payment of dividends, see Chapter 10, Treatment of Uninsured Depositors
and Other Creditors.

215

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M A N A GI N G T H E C R I S I S

FDIC may form a new institution, known as a bridge bank, to take over the assets and
liabilities of the failed institution, or it may sell or pledge the assets of the failed
institution to the FDIC in its corporate capacity.8
In many respects, the powers of a receiver and a conservator are similar. Many of the
statutory powers of a receiver, however, are expressly conferred upon a conservator, while
certain powers are limited to the receiver. The guiding principle is to grant to the FDIC
acting in either capacity those powers and obligations most consistent with performance
of its statutory role. A conservatorship is designed to operate the institution for a period
of time in order to return the institution to a sound and solvent operation. 9 While in
conservatorship, the institution remains subject to the supervision of the appropriate
state or federal banking agency. The conservator’s goal is to preserve the “going concern”
value of the institution. For example, a conservator, like a receiver, is empowered to dishonor or repudiate contracts such as leases, but it may decline to do so if the contracts
would benefit the open institution’s business.

FDIC’s Closing Function
When a bank or thrift is closed by its chartering authority and the FDIC is appointed
receiver, the first task is to take custody of the failed institution’s premises and all of its
records, loans, and other assets. After taking possession of the premises, the FDIC posts
notices to explain the action to the public. It changes locks and combinations as soon as
possible. Then, it notifies correspondent banks and other appropriate parties of the
closing.
The FDIC closing staff, working in conjunction with employees of the failed institution, bring all accounts forward to the closing date and post all applicable entries to
the general ledger, making sure that everything is in balance. The FDIC then creates two
complete sets of inventory books containing an explanation of the disposition of the
failed institution’s assets and liabilities, one set for the assuming institution (if there is
one) and one for the receivership.

The FDIC’s Receivership Functions
A receiver steps into the shoes of an insolvent party with the goal of liquidating the
entity. Federal law grants the FDIC additional special powers. Through those powers,

8. While the FDIC in either its corporate or receivership capacity can establish a bridge bank, to date all bridge
banks have been established by the FDIC in its corporate capacity.
9. Resolution Trust Corporation (RTC) conservatorships differed in their purpose. Instead of operating institutions with the objective of returning them to a sound position, the RTC downsized and stabilized the operations
of the failed institutions until a more permanent solution could be found.

T H E FD I C ’S R O L E A S R E CE I V E R

the FDIC can minimize the receivership estate’s exposure to loss, thereby increasing the
amount available for reimbursement to the FDIC and other creditors. Many reasons for
the special powers include the provision of common standards and uniform expectations
of creditors, shareholders, and the public.
The FDIC’s role and responsibilities when serving as receiver are defined by specific
statutory provisions contained in the Federal Deposit Insurance Act (FDI Act) of 1950.
Those additional powers enable the FDIC to maintain confidence in the national banking system by expediting the liquidation process for banks and thrifts and preserving a
strong deposit insurance fund by maximizing the cost-effectiveness of the receivership
process. The FDIC as receiver is not subject to court supervision, but its decisions are
subject to limited judicial review. The most significant of the additional powers fall into
five broad categories: determining claims, repudiating contracts, placing litigation on
hold, avoiding fraudulent conveyances, and using special defenses.
Determining Claims
The receiver has the power to determine whether to allow or disallow claims. Section
11(d) of the FDI Act sets forth the mechanisms and deadlines for claims against commercial banks and thrift institutions in receivership.
Two basic types of unsecured claims are in a receivership: uninsured deposit claims
and general creditor claims. Uninsured deposit claims are those that may be filed by
depositors who had deposits over the federally insured limit. Uninsured deposit claims
(as well as insured deposit claims) are second only to administrative claims in the priority of creditors.
General creditor claims comprise all other unsecured claims against the receiver for
the failed institution. Those include claims from vendors, suppliers, and contractors of
the failed institution; claims arising from leases; claims arising from employee obligations; and claims asserting damages from business decisions of the failed institution or
receiver.
Promptly after its appointment as receiver, the FDIC publishes a notice to the failed
institution’s creditors, generally in a local newspaper, that they must present their claims
by a specified date (the bar date). All claimants, including those who may have been
suing the failed institution, must then file proof of their claims with the receiver by the
bar date. Failure to submit a claim by the bar date results in a final disallowance of the
claim. After a claim has been filed, the receiver has 180 days from the date of filing the
claim to determine if the claim should be allowed or disallowed.
The payment of any claim (other than claims of secured creditors) depends on the
availability of assets in the receivership estate from which to pay the claim and on
whether the claim is provable to the satisfaction of the receiver. The receiver is authorized, in its discretion and to the extent funds are available, to pay such claims. The
receiver also has the authority, in its sole discretion, to pay dividends on any proven
claim at any time. Even if no funds are currently available for distribution, the receiver

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will provide the proven claimant with a receivership certificate evidencing entitlement to
a pro rata share in the receivership estate.
Since August 10, 1993, the priority for paying allowed claims against a failed depository institution has been determined by federal law. On that date President Clinton
signed the Omnibus Budget Reconciliation Act of 1993, which amended section
11(d)(11) of the FDI Act to establish a national priority scheme for the distribution of
assets from failed insured depository institutions. That amendment, known as the
National Depositor Preference Amendment, provided payment priority to depositors,
including the FDIC as subrogee, over general unsecured creditors. The statute applies to
all receiverships established on or after its enactment. For receiverships established
before that date, distribution of the assets is still determined according to the law of the
chartering jurisdiction, either state or federal.
Under the National Depositor Preference Amendment, after payment of secured
claims, claims are paid in the following order of priority:10
1. Administrative expenses of the receiver;
2. Deposit liability claims (the FDIC claim takes the position of all insured deposits);11
3. Other general or senior liabilities of the institution;
4. Subordinated obligations; and
5. Shareholder claims.
Inasmuch as most liabilities of a failed institution are deposit liabilities, the practical
effect of depositor preference in most situations is to eliminate any recovery for unsecured general creditors.12
Repudiating Contracts
To wind up the institution’s affairs efficiently, a receiver may repudiate contracts of the
depository institution that it deems burdensome. Financial institutions often enter
into contractual or lease arrangements that at the time of bank or thrift receivership are
burdensome in terms of duration or cost, or in terms of need to the receiver. The
power to disaffirm or repudiate a contract simply permits the receiver to terminate the
contract, thereby ending any future obligations imposed by the contract. The receiver
must decide to repudiate a contract within a “reasonable period” or lose its right to do

10. Secured creditors have their claims paid to the extent of the collateral; if they are undersecured, they then have
a claim as a general creditor for the excess over the collateral.
11. Because of the manner in which the FDI Act defines a “deposit,” foreign deposits do not obtain the benefit of
this priority and are paid with the other general or senior liabilities of the institution.
12. For further information on the payment and priority of claims, see Chapter 10, Treatment of Uninsured
Depositors and Other Creditors.

T H E FD I C ’S R O L E A S R E CE I V E R

so.13 In addition, the receiver may be liable for some damages resulting from the
repudiation of a contract; however, those damages are limited to actual, direct
compensatory damages determined as of the date of the receiver’s appointment.14
Placing Litigation on Hold
Following its appointment as receiver, the receiver is responsible for litigation pending
against the failed bank or thrift. However, because the receiver needs time to assess and
evaluate the facts of each case to decide whether and how to proceed, the law permits the
receiver to put litigation on hold, or to “stay” it. That power also extends to litigation
filed after the institution’s failure. The receiver must request the stay for it to become
effective. The courts, however, cannot decline to issue the stay once the receiver has filed
its request.15
When litigation resumes after a stay is lifted, the receiver is generally entitled to have
the controversy resolved in either state or federal court. Typically, when the litigation is
before a state court, the FDIC has the added flexibility to either keep it in state court or
to “remove” it to federal court.
A special statute of limitations exists for actions brought by a receiver. Under the
statute, the receiver has up to six years to file a contract claim and up to three years to
begin a tort suit.16
Avoiding Fraudulent Conveyances
A receiver has the power to avoid certain fraudulent conveyances. Under federal banking
law, a receiver may avoid a security interest in a property, even if perfected, in which the
security interest is taken in contemplation of the institution’s insolvency or with the
intent to hinder, delay, or defraud the institution or its creditors. The receiver may avoid
any transfers made by obligors within five years of the appointment of the receiver.
Those rights are superior to any rights of a trustee or any other party.

13. In giving those powers to the FDIC and the RTC, Congress specifically elected not to impose a particular time
limitation within which the receiver might properly repudiate. Thus, whether the receiver has repudiated within a
reasonable time depends on the circumstances of the case.
14. A different standard of damages applies in the case of qualified financial contracts.
15. A receiver may obtain a stay for 90 days; a conservator is allowed 45 days.
16. Tort actions are lawsuits that seek compensation for a civil wrong (as opposed to a crime) committed by someone against another person. They include lawsuits for personal injury or property damage due to negligence, as well
as suits for libel, false arrest, and other disputes.

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Using Special Defenses
Over the years, both common law and federal statutes have provided certain special
defenses—such as “improperly documented agreements are not binding on the receiver”
and “courts may not enjoin the receiver”—to the FDIC in its role as receiver to allow for
the efficient resolution of the failed institution’s affairs.
Improperly documented agreements are not binding on the receiver. Like bank regulators, the receiver must be able to rely on the books and records of the failed financial
institution to evaluate its assets and liabilities accurately. For the receiver, the ability to
rely on the failed institution’s records in resolving the institution’s affairs is critical in
completing cost-effective resolution transactions, such as the sale of assets to third
parties, and in effectively collecting debts due to the failed bank or thrift.
As a result, both common law (D’Oench Duhme) and the FDI Act, U.S. Code,
volume 12, sections 1823(e) and 1821(d)(9)(A), recognize that, unless an agreement is
properly documented in the institution’s records, it cannot be enforced against the
receiver either to make a claim or to defend against a claim by the receiver. Therefore, an
argument by an obligor on a promissory note that an undocumented, unrecorded side
agreement changes or releases the duty to repay the loan generally will be barred.
The FDIC has issued a policy statement on the use of D’Oench Duhme and similar
statutes.17
Courts may not enjoin the receiver. Congress has provided the FDIC as receiver with
additional protection by prohibiting courts from issuing injunctions or similar equitable
relief to restrain the receiver from completing its resolution and liquidation activities.
For example, the FDI Act bars an injunction to prevent foreclosures or asset sales. Similarly, courts are prohibited from issuing any order to attach or execute upon any assets
in the possession of the receiver. Those statutory provisions, however, do not bar the
recovery of monetary damages.

Settlement with the Assuming Institution
The FDIC and the assuming institution handle most of their post-closing activities
through the “settlement” process. The settlement date may be from 180 days to 360
days after the bank or thrift closing, depending on the failed institution’s size. Adjustments made between the institution’s closing date and the settlement date reflect (1) the
exercise of options by the acquirer, (2) any repurchase of assets needed by the receiver or
“put back” of assets to the receiver by the assuming institution, and (3) the valuation of
assets sold to the acquirer at market prices.

17. See Federal Register 5984 (February 10, 1997).

T H E FD I C ’S R O L E A S R E CE I V E R

Management and Accounting for Receiverships
Each receivership is operated as a separate entity. During the peak years of 1990 to
1992, the FDIC actively managed nearly 1,000 receiverships and terminated on average
110 receiverships each year. In addition, at its peak in 1992, the Resolution Trust Corporation (RTC) actively managed about 650 receiverships. Both the FDIC and the RTC
had to develop and maintain separate accounting for each of those receiverships. As a
result, the agencies developed allocation methods to distribute income and expenses
among the various receiverships.

Professional Liability Claims
The FDIC conducts an investigation into each failed institution to determine if
negligence, misrepresentation, or wrongdoing was committed. Any funds recovered
from those investigations are returned to the receivership. 18

Terminating a Receivership
Receivership termination represents the final process of winding up the affairs of the
failed institution. All significant issues must be resolved before termination. The duration of a receivership varies depending on individual circumstances, such as type of
closing; volume and quality of assets retained by the receivership; and the existence of
defensive litigation, environmentally impaired assets, employee benefit plans, and
professional liability claims.

Conclusion
The FDIC as receiver helps ensure the stability of the financial system in times of stress
by providing for the timely resolution of failed institutions. This stability helps promote
public confidence in the system and restores liquidity to the economy by quickly returning assets of the failed banks to the private sector. In addition, cost-effective receivership
management helps ensure strong insurance funds.
The FDIC’s roles of insurer and receiver have allowed it to make payments to
insured depositors almost immediately after their institution fails and to make subsequent payments to uninsured depositors in a timely manner. This action has minimized the disruption to depositors, mitigated the adverse economic effects of financial

18. For further information, see Chapter 11, Professional Liability Claims.

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institution failures, and promoted public confidence in the banking system during a
time of severe stress in the banking industry. No insured depositor has ever lost any
funds in an FDIC insured institution.

On July 5, 1934, Mrs. Lydia
Lobsiger received the first
federal deposit insurance
disbursement, following
the failure of the Fond Du
Lac State Bank, East
Peoria, Illinois.

lthough the insurance coverage amount is
simple to understand, the process for
determining the insurance coverage is
complex and time-consuming. The FDIC
has to identify and define ownership rights
and capacitities according to statutes.

CHAPTER 9

The Closing Process and the
Payment of Insured Depositors

Introduction
When the Federal Deposit Insurance Corporation (FDIC) was created in 1933, the
financial impact of a bank failure on a bank’s depositors was a major concern. Before
federal deposit insurance, depositors typically would recover 50 percent to 60 percent of
their money from a failed bank’s receivership. Furthermore, depositors often were not
able to obtain those funds for several years, because disbursements were made only when
a failed bank’s assets were liquidated. Consequently, public confidence in the banking
system wavered, and depositor runs became more frequent, thus triggering more bank
closings. Federal deposit insurance was designed to provide greater protection to depositors, thereby enhancing public confidence and leading to greater financial stability.
The first real tests of whether federal deposit insurance could provide sufficient protection to depositors and maintain public confidence during a banking crisis occurred
during the 1980s and early 1990s. This chapter discusses how the FDIC and the Resolution Trust Corporation (RTC) met the challenge and provided timely payments to
insured depositors. The discussion in this chapter begins with a summary of the overall
level of closing activity and a description of how the FDIC conducts the closing process.
The chapter examines how the process for making payments to insured depositors gradually became more sophisticated, allowing the FDIC and the RTC to cope with the
increasing demands that were placed on them during the crisis period.

Summary of Closing Activities of Banks and Savings & Loans
Before 1983, the FDIC had two alternatives for the resolution of a failed bank: the purchase and assumption (P&A) transaction or the direct payment of FDIC deposit insur-

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M A N A GI N G T H E C R I S I S

ance to the depositors of the failed bank (deposit payoff).1 The P&A transaction allowed
a healthy financial institution to acquire all of the failed bank’s deposits. Because all of
the deposits were acquired, it was not necessary to determine which accounts were above
the limits of FDIC deposit insurance. From the perspective of the depositor, the P&A
transaction would appear to be little different than a bank merger.
If the FDIC was unable to find an acquirer for the failed bank’s deposits, then the
only other option was to conduct a deposit payoff. In such a case, a determination of the
amount of FDIC deposit insurance coverage was required for each depositor. A deposit
payoff is a major event for both the FDIC and the depositors of the failed bank. The
FDIC assesses the amount in each deposit account at the time of the bank closing,
determines whether the accounts are within the deposit insurance limits, and pays the
depositor with a check for the insured amount. The FDIC would begin the deposit payment process on the first business day after the bank closing, and anxious depositors
would come to the bank on that day and stand in line to receive their checks. Depositors
having more than the insured amount (currently $100,000) in deposits would meet
with FDIC representatives to determine whether the funds exceeding the insured limit
qualified for separate deposit insurance coverage.
A deposit payoff can be disruptive to the local community. Because the depositors
would be paid the insured balances in their accounts at the time of the bank failure, any
outstanding checks drawn on the accounts would not be paid. The depositors then
would have to quickly establish checking accounts in another local bank and make
arrangements with their landlords, grocers, and other creditors to cover the unpaid
checks.
In 1983, to help alleviate those problems, the FDIC developed a new resolution
alternative: the insured deposit transfer (IDT). Using this method, all of the insured
deposits are transferred to a healthy financial institution and are available immediately.
Outstanding checks are honored, and accounts continue to earn interest at their original
rates. Immediately before the failed bank closed, the FDIC would contact healthy local
financial institutions to request their participation in competitive bidding to acquire the
insured portion of the deposit base. The IDT provides additional benefits because the
acquiring institution gains new customers, and the FDIC obtains resolution cost savings
from the competitive bidding proceeds. Since 1983 the FDIC has used the IDT transaction 176 times (see chart I.9-1) and has conducted 120 deposit payoffs.
The FDIC has found acquirers for approximately 93 percent of the failed bank
deposits (via IDTs and P&As, or by providing open bank assistance), thereby avoiding
the inconvenience and disruption caused by a deposit payoff. From 1989 to 1995, the
RTC conducted 158 IDTs and 92 deposit payoffs (see chart I.9-2) and found a buyer

1. The FDIC also used open bank assistance (OBA), in which an insured bank in danger of failing received
assistance in the form of a direct loan, an assisted merger, or a purchase of assets.

T H E C LO S I N G PR O C E S S A N D T H E PA Y M E NT O F I N S U R E D D E PO S I T O R S

227

Chart I.9-1

Distribution of FDIC Transaction Types
1980–1994
300

Number of Bank Resolutions

250
200
150
100
50
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
OBA
P&As
IDT
Payoff
Totals

1
7
0
3
11

3
5
0
2
10

8
27
0
7
42

3
36
2
7
48

2
62
12
4
80

4
87
7
22
120

7
98
19
21
145

19
133
40
11
203

79
164
30
6
279

1
174
23
9
207

1
148
12
8
169

3
103
17
4
127

2
95
14
11
122

0
36
0
5
41

0
13
0
0
13

133
1,188
176
120
1,617

Source: FDIC annual reports, 1980–1994.

for approximately 88 percent of the failed savings and loan deposit accounts through
IDTs or P&A transactions.
In 1984, FDIC resolution activity began to escalate rapidly. The FDIC resolved a
record number of 80 banks that year, eclipsing the previous high of 77 in 1937. Chart
I.9-1 shows that the number of FDIC bank resolutions increased each year thereafter,
with 279 resolutions in 1988. FDIC bank resolution activity remained high until 1993,
when the number of resolutions fell to 41. The RTC, which was created in 1989,
resolved 315 failed thrifts in 1990 and 232 failed thrifts in 1991. After 1991, the RTC
was able to resolve failed thrifts only as Congress made funding available. As a result,
several failed thrifts operated under conservatorship for several months or years while
awaiting their final resolution.

Summary of the Closing Process
To prepare for the closing of a failing institution, FDIC employees review the financial
and operational information gathered on the institution to determine how many

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M A N A GI N G T H E C R I S I S

Chart I.9-2

Distribution of RTC Transaction Types
1989–1995*
350

Number of Thrift Resolutions

300
250
200
150
100
50
0
P&As
IDTs
Payoffs
Totals

1989
7
26
4
37

1990
172
96
47
315

1991
165
34
33
232

1992
63
2
4
69

1993
26
0
1
27

1994
61
0
3
64

1995
3
0
0
3

Totals
497
158
92
747

* The transactions detailed here are as of time of resolution, not as of time of RTC takeover.
Source: RTC annual reports, 1989–1995.

personnel are needed for the closing. The FDIC appoints a closing manager to oversee
the process and to plan, manage, and coordinate all activities related to the closing. The
primary factors used in determining the number of persons needed for the closing team
are (1) the asset and deposit size of the institution, (2) the number of its branches or
locations, and (3) the type of resolution.
Before the actual closing date, the closing team members learn as much as they can
about the failing institution. The amount of time available to prepare for the actual closing varies. When the failing institution is attempting to recapitalize, the chartering
authority may give it ample opportunity to identify and obtain additional sources of
capital. In other cases, widespread fraud or money laundering may be discovered, and
the chartering authority will close the institution with little advance notice. To avoid a
run on the institution’s deposit base, confidentiality of the closing activity is essential.
The closing team is composed of various subteams that ensure that the resolution is
conducted in an orderly and expedient manner. The primary subteams are listed below:
Asset Team. This team inventories assets consisting of commercial, real estate, and
installment loans; owned real estate (ORE); cash; furniture, fixtures, and equipment;

T H E C LO S I N G PR O C E S S A N D T H E PA Y M E NT O F I N S U R E D D E PO S I T O R S

and other assets such as bank-owned vehicles or repossessed automobiles. Team members review the transaction agreement to determine which assets the assuming institution is buying. The team prepares inventory listings, and the assuming institution signs
receipts acknowledging what it has purchased.
Deposit Team. This team determines which deposits are insured. When there is a
deposit payoff or a transaction in which only insured deposits will pass to the purchasing
institution, the size of this team increases significantly.
The deposit team members, known as claim agents, must be knowledgeable about
the rules and regulations governing deposit insurance. They generally must work long
hours to determine which deposits are insured and which are not. After the team accomplishes this task, the team prepares a list of accounts identifying which deposits are fully
insured and will pass on to the purchasing institution, and which deposits may not be
fully insured and have holds placed on them. If the FDIC has been unable to find an
institution to assume the failed bank’s deposit base, the deposit team is responsible for
preparing payoff checks to pay the depositors. The deposit team also helps the asset
team to identify account holders who have delinquent loans as well as deposits or to
identify a possibility for an offset in cases for which a deposit is being held as collateral
for a loan.2 In all types of resolution transactions, the deposit team identifies and notifies
the general creditors of the failed institution, a process that is similar to that conducted
for a regular bankruptcy.
Accounting Team. This group reconciles the institution’s general ledger accounts and
closes out the failed institution’s books. This task can be arduous if the institution is
large and has a complex accounting system, or if the institution has accounts that are out
of balance and have not been reconciled on a regular basis. This process is similar to
completing a year-end audit.
The accounting team reconciles each general ledger account and compiles a final
balance sheet on the failed institution. From this balance sheet, the team will compile a
new balance sheet (referred to as a pro forma statement) for the assuming institution.
The pro forma statement shows the assets and liabilities the acquirer will have assumed.
The team prepares another pro forma statement for the FDIC that reflects the assets and
liabilities remaining with the receivership. Using these statements, the accounting team
determines the amount of cash that must be wired to the assuming institution. The
initial wire transfer occurs on the next business day.
Settlement Team. This team works with the acquirer to make adjustments over a
120- to 180-day period for income and expense items not previously accounted for in
the initial wire transfer payment. The settlement team also monitors the transaction
agreement to ensure that both the assuming institution and the FDIC comply with all
2. Depositors are allowed to apply the uninsured portion of their deposit accounts to their outstanding loan
balances. The FDIC requires those depositors to provide it with an explicit request concerning the offset. In cases
of delinquent loans, the FDIC may have the right to offset the accounts, regardless of whether they are insured or
uninsured, without an explicit request from the depositor.

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terms and conditions of the agreement. The settlement process allows for the transfer of
funds to and from the assuming institution(s) to pay for assets sold to the assuming
institution under the agreements and to reimburse expenses incurred on behalf of the
FDIC. Examples of assets that would be sold are loan pools, securities, the failed institution’s building(s), and the furniture, fixtures, and equipment in the building(s). Examples of expenses that would be incurred are costs associated with paying the failed
institution’s employees for working over the weekend and certain data processing fees.
Information Support Team. This team communicates and coordinates with the data
processing center, whether that center is on site or off site. The team works with the various subteams to ensure that all of the work for the day has been processed and
forwarded to the processing center, and that the necessary reports are generated and distributed. The information support team also supplies, supports, and maintains the data
processing equipment and software needed by the closing team.
All of the teams focus on the main objective of the closing process: to control,
inventory, and balance the books of the failed institution. The teams complete the
critical tasks that are vital to the success of that process.

Deposit Insurance Coverage
The FDIC’s insurance limit is the maximum insurance coverage available under applicable insurance regulations. The FDIC set the original limit at $2,500 in 1933 and
increased it to $5,000, effective June 30, 1934. That limit remained in effect until 1950,
when it was increased to $10,000 as part of the Federal Deposit Insurance Act. The limit
was increased to $15,000 in 1966, to $20,000 in 1969, and to $40,000 in 1974. In
1974, the insurance limit for time and savings accounts held by state and political subdivisions was increased to $100,000. The FDIC extended that same limit to individual
retirement accounts (IRAs) and Keogh accounts in 1978. The most recent increase
occurred in 1980, when the FDIC raised the maximum insurance coverage to $100,000
for all types of accounts.
Although the insurance coverage amount is simple to understand, the process for
determining the insurance coverage is complex and time-consuming. The FDIC has to
identify and define ownership rights and capacities according to statutes. Deposit
accounts usually fall into the following categories: single accounts, joint accounts,
revocable trusts, irrevocable trusts, corporate and other business accounts, accounts held
by depository institutions in fiduciary capacities, employee benefit plan accounts, IRA
and Keogh accounts, and public unit accounts.
In applying the $100,000 deposit insurance limitation, the FDIC examines the statutory rights and capacities of the accounts. The federal statute has always required the
FDIC to aggregate all deposit balances held in the same right and capacity before applying the insurance limit. Accounts held in different rights and capacities are each insured
up to the $100,000 limit. The FDIC reviews deposit information to make preliminary

T H E C LO S I N G PR O C E S S A N D T H E PA Y M E NT O F I N S U R E D D E PO S I T O R S

determinations on the number of depositors that may exceed the statutory insurance
limit of $100,000. After the deposit team has located and grouped accounts that are
related by name, address, or social security number, the team begins to separate depositor accounts that obviously are fully insured (for example, depositor accounts that are, in
aggregate, under the $100,000 insurance limit) from the depositor accounts that need
additional analysis and documentation to qualify for full insurance coverage.
The FDIC has devoted considerable time and effort in trying to inform the public
about federal deposit insurance coverage. Most of that effort has focused on what is an
insured deposit, and what deposit insurance protection means to a depositor if an institution should fail. Although the rules can be complex, the basic purpose of deposit
insurance is clear.

Evolution of the Closing and the Payment Process for Insured Depositors
In the early 1980s, the closing process and payment of insured depositors in a deposit
payoff was time-consuming, labor intensive, and methodical. The FDIC had a small,
but dedicated field staff of professional claim agents and bank liquidators, supported by
senior Washington Headquarter experts, who came together as a team to handle insured
bank failures throughout the country. The FDIC’s personnel were required to be available on 24-hour notice to travel from their existing failed bank receivership sites to any
geographic location of the United States or its Commonwealth states. Because of the
limited use of automation and modern communication technologies, the majority of the
closed bank work was done manually. If necessary, there were many occasions where
FDIC closing personnel worked around the clock to help prepare the new assuming
bank for reopening and processing of deposit payoff checks. Starting in November
1982, in response to the rapidly accelerating number of failing banks, the FDIC
expanded its liquidation presence by organizing its operations into regions and establishing regional sites in New York City, Atlanta, Chicago, Dallas, Kansas City, and San
Francisco. Those offices were staffed to oversee all liquidation activity occurring within
their geographical territories.
Early Deposit Payment Process
The following steps reflect the time-consuming and labor-intensive process involved in
preparing checks for the payoff of depositors in the early 1980s:
1. All financial transactions conducted before the closing that had not yet been
posted to the institution’s records and customers’ accounts had to be sent to the
institution’s data processing servicer or to the in-house bookkeeping area for processing and recording. That process was completed immediately after the closing
of the institution so that the FDIC would have a current balance sheet for the

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institution as of its closing date. In the early 1980s, most bank data processing
systems were not compatible with the FDIC’s requirements because they were set
up for ongoing bank operations and were incapable of producing financial
reports at other than month-end increments. That processing inadequacy created
some delays in producing final balance sheets.
2. The servicer or in-house processor was instructed to produce deposit statements
showing principal and interest as of the closing date. In some cases, the FDIC
was required to use the financial institution’s manually maintained account ledger cards to produce accurate deposit statements. The servicer also provided a
general ledger, a subsidiary ledger, and loan trial balance reports. If the FDIC was
unable to obtain that information from the servicer over the closing weekend, the
entire process was delayed until accurate information for paying depositors
became available.
3. Deposit statements had to be sorted by hand into alphabetical batches based on
the account title and name. This step was required to identify all deposits in a
certain name or capacity. Each batch was then totaled, and the total of all of the
batches was balanced back to the general ledger. Depending on the number of
deposit accounts, the number of different types of accounts offered to depositors
(such as checking, savings, money market, and certificates of deposit [CDs]), and
the method of recordkeeping of the failed institution, this sorting and balancing
step could take as long as one or two days.
4. The FDIC had to determine insurance coverage for each depositor. That was the
most crucial and time-consuming step in the entire closing process. To determine
insurance coverage, the FDIC had to review all the deposit account records,
apply the proper FDIC insurance regulations to each account, and prepare a
combined account statement for depositors with multiple accounts. After that
step was completed, there would be only one account statement for each depositor. The account statements were then balanced to the general ledger to ensure
that they were accurate.
5. The FDIC created a list of all depositors and the amount of deposit insurance
due to each depositor. That list, known as the deposit liability register, was created from the information on the combined statement and ledger cards and was
then balanced back to the general ledger to ensure accuracy. Because the deposit
liability register was a typed list with five carbon copies, every mistake a typist
made had to be corrected by hand on each copy. Because the majority of deposit
payoffs in the 1970s and early 1980s occurred in small towns where the options
for locating typists were limited, it often was difficult to find enough typists to
get the deposit liability register prepared on time. Sometimes the FDIC contacted local high schools to request that students enrolled in typing classes assist
the payoff team. Even when a closing was located in a large metropolitan area

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where typists were more readily available, the enormity of the typing task still
created a problem. For example, when Sharpstown State Bank, Houston, Texas
closed in 1971, more than 100 typists were needed to prepare the deposit liability
register for that bank’s 27,300 deposit accounts.
6. The deposit insurance checks had to be typed, separated, alphabetized, and
balanced back to the general ledger.
7. Finally, a list had to be prepared and deposit insurance checks had to be held
because of uninsured funds, past-due loans, or overdrafts. Those checks would
then have to be segregated from the other deposit insurance checks.
Before reopening the bank and paying the insured depositors, the FDIC also had to
meet with the security team or local police to discuss safety concerns and prepare a press
release for the local newspapers and radio and television stations announcing when the
payoff would begin. The FDIC also set up offices or private areas for its staff to meet
with depositors who may have had uninsured deposit amounts.
Penn Square Bank, N.A.
Under the Banking Act of 1933, the only vehicle used for paying depositors was the
Deposit Insurance National Bank (DINB), a new national bank chartered without any
capitalization and with limited life powers.3 Two years later, the Banking Act of 1935
gave the FDIC authority to pay off depositors directly or through an existing bank,
rather than through a DINB. The FDIC has used the DINB authority only five times
since 1935; the last occasion was for the closing of Penn Square Bank, N.A. (Penn
Square), Oklahoma City, Oklahoma.
Penn Square, a one-office bank with a separate drive-up facility located in a shopping mall, was the most unusual, most notable, and by far the most difficult closing the
FDIC had handled up to that time. The Office of the Comptroller of the Currency
(OCC) declared the bank insolvent on Monday, July 5, 1982, which was a federal holiday. The failure quickly attracted nationwide attention because it was the largest deposit
payoff in history, and more than half of the bank’s $470.4 million in deposits exceeded
the $100,000 insurance limit. That was not a typical bank failure, for which the total of
uninsured deposits was less than 5 percent of the total of all of the bank’s deposits.
The FDIC established the Deposit Insurance National Bank of Oklahoma City. All
insured deposits in the closed bank were transferred to the DINB, while all assets were
passed to the FDIC as the receiver. Penn Square had made an inordinate number of
high-risk, energy-related loans. Although the bank had less than $500 million in depos-

3. The Banking Act of 1933 authorized the FDIC to establish a Deposit Insurance National Bank to assume the
insured deposits of a failed bank. A DINB had a limited life of two years and continued to insure deposits still in
the bank. Depositors were given up to two years to move their deposit accounts to other institutions.

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its, it originated more than $2.1 billion in loans, which it sold to some of the largest
financial institutions in the country. Furthermore, a large number of credit unions and
savings and loans, as well as some banks, had CDs with Penn Square. Many of those
financial institutions were at risk of insolvency because they were limited to receiving
only the insured portion of their deposits after Penn Square failed. Consequently, those
institutions lost millions of dollars as a result of their dealings with Penn Square.
Planning for this closure was difficult because the FDIC was facing a number of
unusual challenges at the time. The OCC was completing an examination of Penn
Square but was unable to provide the FDIC with information before the actual closing
took place. FDIC personnel were not experienced in dealing with such a large and complex institution and, therefore, had difficulties in determining which accounts were
uninsured. The decision to immediately reopen the institution as a DINB before closing
out the failed institution’s books further compounded the situation.
Moreover, the FDIC did not have a regional structure set up to provide resources
when it was notified of the impending failure of Penn Square. Instead, the FDIC had
staff at individual failed bank sites and a corporate headquarters, where the employees of
the asset management division were located. When the word was given to prepare for
the closing, FDIC staff members who normally handled bank failures were sent to Oklahoma City from individual bank sites all over the country and from Washington, D.C.
The FDIC supplemented that staff with a large number of its bank examiners.
The process for paying the depositors of Penn Square presented a multitude of
problems for the FDIC because the bank’s deposit and loan records were neither accurate nor complete, making it difficult for the FDIC to readily make insurance determinations. The FDIC had little more than 72 hours (Saturday, Sunday, and Monday) to
review 24,538 deposit accounts, totaling $470.4 million, for preliminary insurance
determinations. The closing team worked around the clock over that weekend to determine deposit insurance coverage and prepare for the opening of the DINB. Even with
that extraordinary effort, FDIC personnel could not fully prepare to deal with the sheer
number of depositors or to fully discuss what would happen to a depositor with
uninsured deposits.
On Tuesday, July 6, the Associated Press released an article that described the scene
at the reopening as follows: “Hundreds of depositors seeking their money crowded the
former Penn Square Bank. The bank reopened at 9:00 am and according to FDIC
Chairman, William Isaac, would remain open 24 hours a day if need be. By noon,
nearly 100 people stood outside the bank’s doors in 90 degree heat. A continuous line of
cars went through the drive-in lanes.” The majority of the FDIC staff members had not
previously worked as claim agents; therefore, it was taking an average of three to four
hours for a single customer with uninsured funds to get through the process the first day.
Even though the FDIC had assured depositors with accounts of less than $100,000 that
they were fully insured and that they could continue to write checks on their new
accounts at the newly chartered DINB, the depositors were nervous and came to the

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bank to get their money. It took approximately a week before depositors’ claims began to
be processed in a reasonable time frame.
The claim agents were further challenged by the fact that Penn Square operated in
two locations. It was therefore possible for a depositor to collect insured funds twice,
because it was impossible for the claim agents to contact staff members at the other
location so they could manually cross off the customers they had met with and paid.
The same customer could have gone to the other location later that same day and
received another check. (Technology was not yet advanced enough to offer the FDIC
the convenience of automating the payoff process.)
Another problem, although short-lived, was that some of the local financial institutions would not accept the DINB insurance checks or wanted to put holds on them.
That situation caused a near-panic, as customers who thought they were being paid
returned to the bank complaining that they could neither cash nor deposit their checks.
By Wednesday that situation was resolved when the local institutions agreed to accept
the DINB insurance checks.
In addition, Penn Square’s $2.1 billion in loan participations complicated the offset
process. Initially, the FDIC determined that when a deposit was offset against a loan, the
participant’s share of the offset would be paid in cash. Subsequently, the FDIC determined that that was a noncash transaction and that the participant’s share should be
paid with a receiver’s certificate. The FDIC provided the information to the participants
and requested the return of funds previously sent to them. However, some of the larger
financial institutions sued the FDIC over the offset issue. Ultimately, the courts upheld
the receiver’s position, and the participants were issued a receiver’s certificate.4
Penn Square did serve to remind the FDIC and Oklahoma City that there was no
such thing as a “painless” bank failure. Today the closure of an institution is far less inconvenient to former bank customers than it was in the early 1980s. The lessons learned
from Penn Square were invaluable to the FDIC. Penn Square, as is true for other institutions that have failed, required the FDIC to evaluate and modify its closing process.
Automation of the Deposit Payoff Process
After the Penn Square failure, the FDIC began to automate the deposit payoff process.
In 1982 the FDIC began to use portable computers to store the bank’s depositor database and drive the printers. Switching from manual systems to computer database systems allowed the FDIC more flexibility in creating lists of deposit accounts, enhanced
4. Loan participants usually receive their pro rata share of any payments made by a debtor that augments the
receivership estate. The same holds true if the receiver forecloses on and liquidates the underlying collateral. However, loan participants may suffer a loss greater than they would otherwise incur if the debtors or receivers exercise
their right of offset. Because the offset does not “augment the receivership estate,” there are no proceeds to be passed
on to the loan participants. The loan participants are therefore left with general unsecured claims against the
receivership estate for the amounts they have lost as a result of the offset. The general unsecured claims are likely
to be worth far less than the 100 cents on the dollar that direct proceeds or cash is worth.

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its record-keeping abilities, and increased its efficiency in handling bank failures. Automation, even at this early stage, also increased accuracy while decreasing the amount of
time needed to prepare for a deposit payoff.
Although the automated system did not alter the basic steps necessary to identify
depositors, determine insured and uninsured amounts, produce lists of deposits, and
create checks, it did save considerable time in executing all of those steps. When preparing the automated checks that were paid to insured depositors, the FDIC used the
following steps:
1. Working from the financial institution’s general ledger or other available records,
the closing team members would enter account titles and balances, along with
social security numbers (when available) into a spreadsheet program.
2. They then verified, balanced, and converted the spreadsheet into a database file,
which allowed them to sort several file types (savings accounts, checking
accounts, and certificates of deposit) into one file in any order they desired.
3. The team reviewed the accounts of each depositor to determine if they exceeded
the $100,000 limit. If they did exceed the limit, the database file would flag the
account(s).
4. They printed checks (up to the amount of $100,000) from the database file for
each depositor.
5. Finally, team members kept a record of all payments made to depositors in the
same database file to ensure the accuracy of accounting for check distribution.
The automated process saved a considerable amount of time. FDIC staff still had to
manually enter the initial data and balance to the institution’s general ledger, but the
additional personnel that had been necessary to manually type and correct each of the
five multicolored forms were no longer required.
The FDIC first tested the new system at Western National Bank, a relatively small
bank in Santa Ana, California, that failed on August 27, 1982. The bank had 1,949
deposit accounts totaling $11 million. The automated deposit grouping was run parallel
to the manual tally of accounts just in case the new system did not work. The FDIC
first relied exclusively on the new automated system in a deposit payoff for the
Hohenwald National Bank, Hohenwald, Tennessee, which closed on September 3,
1982. The institution had 4,468 deposit accounts totaling $26.9 million.

Accomplishments Through the Use of Automation and Planning
As computer technology advanced (computer systems became more portable, the disk
storage capacity increased, the database handling capabilities increased, and the price of
the equipment and software fell), the FDIC automated its deposit and closing processes

T H E C LO S I N G PR O C E S S A N D T H E PA Y M E NT O F I N S U R E D D E PO S I T O R S

in an increasingly rapid manner. The technology expedited the manner in which the liquidators could handle institutions with larger depositor bases.
In addition, with increased computerization, the FDIC no longer had to deal with
the problem of not being able to coordinate the payment of insured deposits in multiple
locations (branches) without duplication. It began developing computer network
systems that shared software, communicated routinely through modem connections,
and could accept and convert data downloads from other automated systems.
In 1983, as the FDIC began an effort to improve the automated deposit payoff process, it identified the need for a software program to track depositor information in case
another large financial institution failure resulted in a deposit payoff. The software was
structured to capture an institution’s deposit account rights and capacities, social security numbers, account numbers, balances, and types of deposit as of the date of closing.
The software had the ability to “add in” discovered deposits and withdrawals, compute
the interest accrued through the date of closing, and sort the data in a variety of ways.
More important, it was able to segregate potential uninsured deposits from the general
database. The FDIC used this software just before the closing, and the work was
updated daily until the bank failed and the resolution was completed.
Implementation of the Automated Grouping System and Automated Payout System
In 1987, the FDIC developed the Automated Payout System (APS), which greatly
enhanced the deposit payoff process. When preparing for a payoff, the APS saved significant amounts of time and money by allowing for a direct download of the failed institution’s records into the FDIC’s database. The automation of this step resulted in huge
savings in the amount of time required to input the information and produce depositor
listings from which insurance determinations were made. The APS also printed the payoff checks, the liability register, and the uninsured depositor report. The liability register
produced with APS is a tracking system that identified who should be paid, the amount
to be paid, the type of account, and any holds that the FDIC may have placed; it saved
the claim agents significant time in reconciling or researching the checks and funds
disbursed.
The APS not only saved the FDIC valuable time in preparing for a payoff and having the checks readily available for the depositors, but also increased the FDIC’s
accuracy by automating the transfer of deposit account information and allowing time
for more thorough deposit insurance determinations. The FDIC used the APS successfully for the first time at North Central National Bank, Austin, Texas, which closed on
April 23, 1987.
Two years later, the FDIC developed the Automated Grouping System (AGS) and
combined it with the APS. The AGS/APS could download an institution’s deposit information directly into the FDIC’s database, which could then be aggregated on the basis
of specified identifying fields (including the depositor’s name, social security number,
and address) to determine the appropriate amount of deposit insurance coverage. Before

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the automation of that process, FDIC personnel (anywhere from 5 to 20 or more people) would have to manually alphabetize (or group) the deposit accounts by the same
name, rights, and capacities of the accounts, and combine similar accounts to determine
insurance coverage. Issues would arise about whether a depositor’s name had been duplicated; for example, when a Mary J. Jones and a Mary Jo Jones were listed as depositors.
The claim agent was then required to research the institution’s deposit information to
determine whether Mary J. Jones and Mary Jo Jones were one and the same. With the
implementation of AGS/APS, the FDIC was able to eliminate that time-consuming and
labor-intensive step.
Automating the deposit payoff process also allowed the FDIC to focus its attention
on customer service rather than on the “backroom” operations of the payoff. The FDIC
was then able to handle the payment of depositors in a more expeditious manner. It first
used AGS/APS successfully at Fulshear State Bank, Fulshear, Texas, which closed on
June 8, 1989.
AGS/APS has continued to become more sophisticated. A major enhancement was
the development of the “pass with a hold” feature, which allowed the FDIC to transfer
money to the assuming institution for funds that the FDIC suspected would be insured
after additional documentation proving ownership of the accounts was provided. The
assuming institution was allowed to pay the insured portion to the depositor and to hold
the potentially uninsured portion until an insurance determination could be made. An
example of this feature might have occurred when the failed institution did not keep a
copy of the trust agreement for an account held in trust for a family member. Before the
pass with a hold enhancement, the potentially uninsured funds remained with the
FDIC, and the FDIC then had to initiate a second funding after the additional
documentation was received. With the new enhancement, funds were available to the
assuming institution so they could be immediately released to the customer.
Another enhancement was the development of FDIC internal management reports
that the FDIC used to analyze the deposit base before a closure. The FDIC uses those
reports to identify the deposit composition and ascertain how the institution should be
marketed. An additional improvement was made in how loans and potential offsets were
analyzed and the overall impact of those loans and offsets on the deposit base. The benefit of that enhancement was demonstrated in 1989, when the FDIC completed several
deposit analyses two years before the Bank of New England was put into receivership.
Those analyses provided the FDIC with a clearer picture of the deposit base composition for the Bank of New England and of how different deposit classes would be affected
by the various types of transactions being proposed.
Implementation of U.S. Mail Payoff
In 1988, the FDIC developed the U.S. mail payoff process. The purpose of the process
was to get deposit insurance checks into the hands of insured depositors as quickly as
possible, thereby eliminating the need for depositors to stand in line at the failed institu-

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tion to wait for their checks. The mail payoff process, which made it possible for depositors’ checks to be delivered straight to their mailing addresses, has been used
consistently for depositor payoffs since 1990.
Advance Planning for a Closing
When a bank closure was impending, FDIC planners would review all the financial and
operational information available to prepare for the closing. The FDIC, the OCC, or
the state bank examination staff that was monitoring the failing bank would then forward the information to FDIC liquidation personnel. Beginning in 1988, members of
the FDIC liquidation staff would join the bank examiners on site to directly obtain the
necessary preclosing information. By 1989, members of the FDIC, or the newly created
RTC, closing teams would visit the failing institution to download deposit data.
Because most failed savings and loans were in an RTC-controlled conservatorship
and their employees were under the management of RTC personnel, the RTC closing
team was also able to use the institutions’ employees and data processing systems to prepare for the closing. The RTC developed a national manual that divided the closing into
three stages: preclosing, closing, and postclosing. The work completed during the preclosing stage was critical when the RTC faced a multi-billion-dollar institution with
multiple branch locations and the possibility of multiple acquirers and differing transaction types. Because the FDIC did not use conservatorships, its personnel had to complete their planning off site and without the assistance of the failing institutions’
employees. The following three cases demonstrate the benefits of the emphasis on
advance planning for impending resolutions.
Southwest FSA, Dallas, Texas
In July 1991, the RTC closed and liquidated the Southwest FSA (Southwest), Dallas,
Texas, a large institution with approximately $2.2 billion in deposits and 67 branches
located throughout Texas. Before resolving Southwest, the RTC had prepared for the
possibility of multiple acquirers, and because the institution had multiple computer systems, the RTC had to complete various software changes to enable the institution to be
broken out by branch and sold to those multiple acquirers. The RTC sold the insured
deposits from 45 of the branches to one of two acquirers, and the remaining 22 branches
were resolved through a deposit payoff.
For the uninsured depositors at all 67 branches, the RTC had engaged an
accounting firm to assist in the closing and claims process. If the RTC had not been
able to complete the preclosing computer programming and prepare for multiple
acquirers, its closing team would have experienced operational problems in segregating the appropriate branch customers among the two acquirers and the RTC as the
receiver.

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Columbia Savings and Loan Association, Beverly Hills, California
In September 1991, the RTC closed and liquidated the Columbia Savings and Loan
Association (Columbia), Beverly Hills, California. That resolution involved the largest
deposit payoff of brokered deposits, $2.8 billion, in the history of both the RTC and the
FDIC. In addition to the $2.8 billion in brokered deposits at Columbia, the institution
had approximately $2.3 billion in retail deposits. The retail deposits were transferred to
an assuming institution in an insured deposit transfer, and the brokered CDs were paid
off. The large number of depositors (365,000) and the unique deposit composition
required extensive preresolution planning.
To address the brokered deposit situation, the RTC initiated a meeting with executives of the Depository Trust Company (DTC), the Securities Industry Association
(SIA), and major deposit brokers in New York City. The DTC held the brokered deposits on behalf of the brokers and their clients, while the SIA and the brokers sold their
clients an interest in one of the CDs issued by Columbia. Frequently, the CD was held
in the DTC’s nominee name. Columbia did not have any documentation to determine
who the actual holders of the CDs were, so the RTC thought that it would be wise to
meet with this group to explain the closing and claims process. The meeting was held in
accordance with an earlier agreement between the FSLIC and the SIA that was adopted
by the RTC. The agreement detailed procedures for processing brokered accounts.
The RTC, in addition to meeting with the above-mentioned parties and writing
special computer programming, established additional telephone lines to handle
thousands of calls related to the closing. The brokers were encouraged to provide their
documentation on computer tapes, thus expediting the grouping process and providing
timelier determinations for all depositors. Within nine business days of the resolution,
approximately $2.3 billion (82.1 percent) of the $2.8 billion in total insured brokered
funds at Columbia had been paid.
The Columbia transaction was successful as a result of the preclosure planning and
the meeting, which provided the RTC with an opportunity to learn about the daily
operations of the DTC that were related to ongoing trading of the certificates. That
experience proved to be of further assistance to the RTC and the FDIC when they
developed software and procedures for processing and tracking brokered accounts of
that magnitude.
Guardian Bank, Los Angeles, California
In January 1995, the FDIC closed the Guardian Bank (Guardian), Los Angeles,
California, whose closing is of special interest because of its unique deposit base. The
failure of that institution could have created significant problems for the real estate
industry in Southern California, even though the bank had only 5,419 deposit accounts
totaling $211 million. Approximately 67 percent of Guardian’s deposits were from title
and escrow companies for pending real estate transactions. The deposit base could there-

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fore change dramatically each month, with swings of as much as $300 million. The
transitory nature of those funds made planning for the closing more difficult. Most of
the title and escrow company deposit accounts had multiple owners, ranging from 20 to
1,000. If the escrow funds were not available to complete real estate sales, the impact on
the local economy could have been serious. When Guardian was closed, 1,608, or 30
percent, of the deposit accounts held funds that were potentially uninsured, in comparison to the average bank, in which 5 percent or below of the deposit accounts
could have been uninsured.
The main problem facing FDIC staff was the identification of the owners of the
escrow account funds and the insurability of each owner. If the deposit accounts of the
institution properly reflected the title company’s or escrow company’s interest in the
deposits as a fiduciary or other custodial capacity, and the title or escrow company had
adequate records to support the different escrow account principals, separate insurance
coverage could be provided on the basis of the owners’ rights and capacities. If the
deposit account records did not reflect the fiduciary relationship of the title or escrow
companies, the funds would be insured solely as the funds of the title or escrow company, and then aggregated with all other funds owned in the same capacity. Accordingly,
the title or escrow company would only be provided with $100,000 in deposit insurance
coverage. However, even if separate insurance were to be provided to the individual
principals of the deposit accounts, each escrow principal could be provided with only
$100,000 in deposit insurance coverage. It was therefore necessary to aggregate the
actual names of the account owners with the other depositors of Guardian. That
required running a new grouping or aggregation report every day after the information
was received from the title or escrow companies.
Because of the size and complexity of the accounts involved in the projected
Guardian failure, the FDIC had to do extensive preclosing work. The FDIC used postclosing procedures, developed specifically for that closing, to provide comprehensive
information to the depositors and to clarify what was needed from the title or escrow
companies to prove ownership for deposit insurance purposes. A town meeting was held
on the Monday after the closing to explain the insurance rules and to provide each title
and escrow company with a computer disk and instructions on how to report the ownership and deposit information needed to prove eligibility for insurance coverage. The
State of California Department of Corporations, in cooperation with the FDIC, did
extensive work to ensure that the title and escrow companies were given sufficient notification so that as many as possible could be at the meeting. The FDIC developed the
program for title and escrow deposit accounts reporting specifically for Guardian on the
basis of a similar type of program created for the Columbia closing handled by the RTC
in 1991. The program was extremely successful, with accuracy and prompt turnaround
time being just two of the many benefits.
Guardian also had a large number of employee benefit plan accounts (approximately 550) for labor unions in Southern California. The closing was the first major test
of the pass-through insurance rules governed by the recently enacted Federal Deposit

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Insurance Corporation Improvement Act of 1991.5 The FDIC, on the basis of the new
rules for the acceptance of brokered deposits and notification to employee benefit plan
depositors, was required to determine the dates on which those accounts were opened in
order to determine whether the deposits were eligible for pass-through insurance.
Guardian’s closing required major preplanning concerning handling of the unique
depositor base, the coordination of nationwide staffing for specialized areas, the promotion of a greater commonality of procedures, and the ability to work together on a
national level to serve a specific office and community. All of those challenges were
accomplished with minimal economic disruption to the depositors and communities
served by the failed institution.

Conclusion
The FDIC and the RTC have continually developed their ability to efficiently and
effectively pay deposit insurance proceeds through innovations in automation, training,
and procedures. The increased number and sizes of failing financial institutions, coupled
with the failure of several state-sponsored deposit insurance funds, made the mid-1980s
and early 1990s especially challenging. Nevertheless, the public maintained its
confidence in the federal deposit insurance system and in the ability of the FDIC and
the RTC to handle the failures.
After development of the insured deposit transfer in 1983, the FDIC had a 93
percent success rate in finding acquirers for the failed bank deposit accounts. The
development of the automated grouping system and the ability to service multiple
acquirers made it possible for the RTC to resolve many large thrift failures.
Innovations in the deposit payoff process were also made. The supplementation of
the automated payoff system with the automated grouping system greatly speeded up
the FDIC’s capability to accurately produce deposit insurance settlement checks. The
implementation of the U.S. mail payoff process got those checks delivered quickly to the
depositors’ homes, making the scene of depositors waiting in long lines to get their
money a thing of the past.

5. Section 330.12 of the FDIC’s regulations provides that “pass-through” coverage of $100,000 applies to each
participant’s noncontingent interest in an employee benefit plan account. The availability of this coverage depends
on the capital level of the institution and compliance with the applicable recordkeeping requirements. The capital
level of the institution determines whether the institution is eligible to accept brokered deposits and the employee
benefit plan deposits.

Michelle Slusher of the
FDIC’s liquidation office
in Knoxville, Tennessee,
posts signs informing
depositors about the
closing of First American
Bank for Savings,
Boston, Massachusetts
on October 19, 1990.

ayments are made to creditors with valid
claims through the dividend process.
If no funds are available for immediate
distribution, the claimant receives a
receivership certificate showing
entitlement to a share in the receivership
estate.

CHAPTER 10

Treatment of Uninsured
Depositors and Other
Receivership Creditors

Introduction
A failed bank or thrift receivership has a statutory obligation to identify creditors and
distribute proceeds of the liquidation of assets to these creditors commensurate with
applicable statutes and regulations. Typical receivership creditors include uninsured
depositors, general trade creditors, subordinated debtholders, and shareholders. This
chapter discusses the evolution of the claims process from 1980 to 1994 into a uniform
system now codified in federal law.
The chapter details the history of the order in which the creditors of the various
types of receiverships are paid after the receivership’s assets have been liquidated, and
describes the actual process used to make distributions, known as liquidating dividends,
to uninsured depositors and other creditors with allowable claims. The discussion then
focuses on the history of the treatment of each of the different classes of creditors.

The Administrative Claims Process
The administrative claims process varied among the Federal Deposit Insurance
Corporation (FDIC), the Federal Savings and Loan Insurance Corporation (FSLIC),
and the Resolution Trust Corporation (RTC) and even changed for the FDIC with
the passage of the Federal Financial Institutions Reform, Recovery, and Enforcement
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FDIC Receiverships (Before FIRREA)
Before FIRREA was enacted in 1989, the National Bank Act (NBA) of 1864 required all
creditors with claims against national bank receiverships to file their claims against the
receivership. Unlike FIRREA, the NBA addressed claims issues very generally. The NBA
stated that the receiver should publish notice to claimants in a newspaper for three consecutive months after the receiver had been appointed. It also allowed an unlimited
amount of time up until termination of the receivership for a claim to be filed and determined. The statute further mandated that the proceeds from the sale of assets should be
distributed on a pro rata basis to the creditors. It is important to note that even though
the NBA stated that creditors should file claims against the receivership estate, the courts
allowed lawsuits to be filed without requiring that claimants first go through the claims
process.
State chartered bank receiverships adhered to claims processes outlined in state
liquidation statutes, for which a specific provision existed in most state codes. The actual
steps in the process varied somewhat from state to state, but in general, most states provided for notifying creditors, filing claims, and allowing or disallowing the claims
submitted.
Federal Savings and Loan Insurance Corporation Receiverships (Before FIRREA)
From 1984 to 1989, the Federal Savings and Loan Insurance Corporation contended
that courts lacked subject matter jurisdiction over claims filed against FSLIC receiverships before claims had been presented to the FSLIC. That policy was based on a decision by the Fifth Circuit Court in North Mississippi Savings and Loan v. Hudspeth, 756
F.2d 1096 (1985), involving a compensation dispute between an association and its
former president. As a result of the decision, the FSLIC developed internal procedures
for processing claims.
In October 1988, the Federal Home Loan Bank Board (FHLBB) had attempted to
correct the deficiencies in the claims procedures by promulgating regulations establishing detailed procedures for determining claims filed with the FSLIC as receiver. Several
years earlier, the FSLIC had adopted detailed procedures for deposit insurance reconsiderations (Code of Federal Regulations (C.F.R.), volume 12, section 564.1[d]). The FDIC,
however, had no regulation for reconsiderations and did not adopt the FSLIC regulation
in 1989. Instead, the FDIC and the RTC heard requests for deposit insurance reconsiderations based on internal policies and practices.
In March 1989, the U.S. Supreme Court overruled Hudspeth in Coit Independence
Joint Venture v. FSLIC, 489 U.S. 561 (1989). The court found the claims procedure
deficient because no clear constraints existed for the time it took the FSLIC to make a
determination on claims filed against a receivership. Coit also determined that the
FSLIC procedures improperly gave the FSLIC and the FHLBB authority to make final
decisions without allowing the claimant an opportunity for a de novo judicial review.

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FDIC and RTC Receiverships (After FIRREA)
FIRREA established new procedures for presenting and resolving claims filed by
creditors against failed financial institutions. These claims provisions more closely
resembled the FDIC’s pre-FIRREA procedures and were intended to cure the constitutional problems the Supreme Court had with the FSLIC procedures. FIRREA established a receivership claims process applicable to all federal and state chartered banks and
thrifts, thus standardizing the treatment of all receivership claims filed against either an
FDIC or RTC receivership. The process required that the—
• Receiver post notice in a newspaper of general circulation for three consecutive
months and mail notices to creditors on the books and records;
• Creditors file a claim within the time frame provided in the notice (approximately 90 days from the date of the published notice);
• Receiver make a determination on the claim within 180 days of the date of the
filing unless both parties agreed to an extension; and
• Creditors file suit in a U.S. District Court within 60 days of the date of a denial
or within 60 days to 180 days after the claim had been filed if no determination
had been made.
Both the FDIC and the RTC developed procedures to implement the statute. Over
time, however, and because of the ambiguous nature of some of its provisions, questions
such as ‘Who must file a claim?’ and ‘Does the state court or federal court have jurisdiction over lawsuits filed as the result of disallowed claims?’ arose concerning FIRREA’s
claims procedures.

History of the Claims Priorities and the Payment Process
Before the National Depositor Preference (NDP) Amendment (described later in this
chapter) was enacted, the National Bank Act had established the priority of payment of
unsecured claims for national bank receiverships. Although the NBA did not explicitly
state the claims priorities, the FDIC interpreted the payment order to be as follows:
1. Administrative expenses of the receiver;
2. Deposit liabilities and general creditor claims;
3. Subordinated debt claims;
4. Federal income taxes; and
5. Stockholder claims.

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Individual state laws specified the distribution priorities for receiverships of state
chartered banks and may have incorporated the concept of depositor preference,
depending on the laws of the given state.
The FSLIC claims priorities regulation (12 C.F.R. 569c.11), promulgated in 1988,
was adopted by the FDIC in 1989. The FDIC and the RTC used the regulation for
failed thrift receiverships until 1993. Under the regulation, unsecured claims against the
receiver had the following order of priority:
1. Administrative expenses of the receiver;
2. Administrative expenses for the failed association, provided that such expenses
were incurred within 30 days before the appointment of the receiver, and that
such expenses were limited to reasonable expenses incurred for services actually
provided by accountants, attorneys, appraisers, examiners, or management
companies or to reasonable expenses incurred by employees;
3. Claims for wages and salaries earned before the appointment of the receiver by an
employee of the savings association whom the receiver determined was in the best
interest to retain for a reasonable period of time;
4. If authorized by the receiver, claims for wages and salaries earned before the
appointment of the receiver, up to $3,000 by an employee not retained by the
receiver;
5. Claims for governmental units for unpaid taxes other than federal income taxes;
6. Claims for withdrawable accounts, including those of the FDIC as subrogee, and
all other claims that had accrued and become unconditionally fixed on or before
the date of default, unless the association was chartered and operated in a state
where state law provided priority to depositors over other creditors. In that case,
the depositors had priority over other creditors in both a state chartered or federal
chartered association;
7. Claims other than those that had accrued and become unconditionally fixed on
or before the date of default, including claims for interest after the date of default
on claims under paragraph (6);
8. Claims of the United States for unpaid federal income taxes;
9. Claims that had been subordinated in whole or in part to general creditor claims;
and
10. Claims by holders of nonwithdrawable accounts, including stock.

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National Depositor Preference
The National Depositor Preference Amendment (Public Law No. 103-66 Section 3001
[a]), enacted on August 10, 1993, standardized the asset distribution plan for all receiverships, regardless of the institution’s charter, and gave priority payment to depositors,
including the FDIC as “subrogee” for insured deposits. Because, so far, most liabilities of
failed institutions have been deposit liabilities, the effect of depositor preference in practice has been to eliminate any recovery for unsecured general creditors. Under the NDP
Amendment and related statutes, claims are paid in the following order of priority:
1. Administrative expenses of the receiver;
2. Deposits (the FDIC claim takes the position of the insured deposits);1
3. Other general or senior liabilities of the institution;
4. Subordinated obligations;2 and
5. Shareholder claims.
The Dividend Process
Payments are made to creditors with valid claims through the dividend process. The
payment of any claim depends on two factors: (1) a favorable final determination by the
receiver on the merits of the claim, and (2) the availability of assets in the receivership
estate with which to pay the claim. The receiver is authorized, at its discretion and to the
extent that funds are available, to pay valid claims at any time. If no funds are available
for immediate distribution, the claimant receives a receivership certificate showing entitlement to a share in the receivership estate.
To reduce the hardship on uninsured depositors, in 1984 the FDIC began making
“advance dividend” payments soon after a bank’s closing. The advance dividend percentage is based on the estimated recovery value of the failed bank’s assets. The FDIC did
not pay advance dividends when the value of the failed institution’s assets could not be
reasonably determined at the time of closing.
Advance dividends provided uninsured depositors with an opportunity to realize an
earlier return on the uninsured portion of their deposits without eliminating the
incentive for large depositors to exercise market discipline.

1. Because of the manner in which the Federal Deposit Insurance Act of 1950 defines a “deposit,” foreign deposits
are not accorded the benefit of this priority and are therefore paid with the other general or senior liabilities of the
institution.
2. Any liability of the insured depository for a cross guarantee assessment would receive distributions after subordinated debtholders but before distributions were made to shareholders. See Chapter 3, Evolution of the FDIC’s
Resolution Practices.

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If the FDIC’s actual collections on the assets of the failed institutions exceeded the
advance payments and administrative expenses of the receivership, the uninsured depositors and other creditors received additional payments on their claims. If the total of
actual collections was less than the advance payments and administrative expenses of the
receivership, the FDIC insurance fund absorbed the shortfall.
Between 1984 and 1987, the FDIC authorized advance dividends for 29 of the 118
cases involving insured deposit only resolutions. During the next four years, no advance
dividends were approved. From 1992 through 1994, 176 banks were resolved, for which
103 involved insured deposit only transactions. In 69 of those cases, advance dividends
totaling $274.9 million were paid at resolution, and 9 cases indicate a possible overpayment totaling $324,000, or one-tenth of 1 percent of total advance dividends paid. Of
the nine cases, six were located in California, with five in the Los Angeles area, where
real estate values continued to decline after the failures and assets were liquidated at a
much slower pace than originally had been contemplated.
Advance dividends typically were funded by a loan from the FDIC corporate
account to the receiver, which used the cash to pay the advance dividends to the thirdparty claimants. As the receiver liquidated assets, cash proceeds were used to reduce the
loan balance.
Treatment of Like Classes of Creditors
As the deposit insurer, the FDIC is obligated to satisfy deposit liabilities of a failed institution up to the deposit insurance limit. The FDIC in its corporate capacity then “steps
into the shoes” of the depositor as a claimant and files its subrogated claim against the
receivership estate. The FDIC, like other creditors in the same class, then is paid a pro
rata share of its claim based on the liquidation value of the receivership assets.
In 1978, in First Empire Bank v. Federal Deposit Insurance Corporation, 572 F.2d
1361 (9th Cir. 1978), the Ninth Circuit Court of Appeals (Ninth Circuit Court) ruled
that the FDIC could not arrange a transaction that passed all of a national bank’s assets
and satisfied some of its liabilities in full while failing to satisfy other liabilities, regardless of class, without violating the NBA’s ratable distribution requirement. The decision
had a significant effect on the FDIC for several years thereafter.
Transaction Types: 1980 to 1988
In the early 1980s, the FDIC used two transaction methodologies to resolve failed
banks: the purchase and assumption (P&A) transaction and the deposit payoff. In P&A
transactions, all deposits (insured and uninsured) and most other liabilities transferred
to an acquiring institution. If all liabilities that were at the same priority level as the
deposit liabilities transferred, the FDIC was, in effect, in compliance with the First
Empire decision because all creditors had been treated equally. When some liabilities
were left behind in the receivership that were on par with the deposit liabilities, the

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251

First Empire Decision
In 1973, the United States National Bank of San Diego (USNB), San Diego, California, closed, and
its assets and liabilities were assumed by Crocker National Bank (Crocker). As of the closing date,
USNB had 335,000 depositors with $932 million in deposits. That was the largest financial institution failure since the inception of the FDIC and the first occasion on which the FDIC modified
its standard purchase and assumption (P&A) agreement. In the standard P&A, the liability for
outstanding standby letters of credit (LOCs) transferred to the acquiring institution and continued to be honored.
The FDIC determined that certain standby LOCs might have been fraudulently issued to guarantee the debts of companies controlled by the former president of USNB and his associates.
Potential participants in the P&A, including Crocker, believed that assumption of liability on the
LOCs presented an unacceptable risk; therefore, the LOCs remained with the receiver. The holders
of the suspected fraudulent LOCs were not paid, but were provided with a receiver’s certificate
that would allow them to share in any eventual distribution of funds as USNB’s assets were liquidated. In contrast, the LOCs that were not suspected of fraud were transferred to Crocker and paid
in full when presented.
Two holders of the allegedly fraudulent LOCs, First Empire Bank and Societé Generale, sued
the FDIC, maintaining that USNB’s obligations to them should have been treated in the same
manner as the LOCs assumed by Crocker. A California federal district court held that the FDIC, in
determining not to pay the suspect letters of credit, had properly exercised the discretion granted
to it under federal banking law. That decision was appealed to the Ninth Circuit Court and was
reversed in favor of the holders of the LOCs. In October 1978, the Supreme Court declined the
FDIC’s request to review the Ninth Circuit Court’s opinion. Accordingly, the FDIC had to pay the
holders of the LOCs that were not assumed by Crocker. The First Empire case affected subsequent
P&As and placed more significance on the classes of liabilities transferred.

FDIC made the creditors whole out of the receivership estate (that is, creditors were
paid from the receivership or were given receivership certificates, rather than being paid
from the assuming institution). Once again, all like creditors were treated the same. For
payoff transactions, the FDIC paid the insured portion of the depositor’s account, and
all other creditors (such as uninsured depositors and trade creditors) received a receivership certificate and a distribution that was pro rata with other creditors in their class.
Again, in this type of transaction, all creditors of like classes were treated the same.
Between 1980 and 1982, 39 institutions were closed and resolved using a P&A
transaction, 12 institutions were closed and resolved using a deposit payoff, and 12 institutions received open bank assistance.

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The First Empire decision had significant implications for the resolution of Penn
Square Bank, N.A. (Penn Square), Oklahoma City, Oklahoma. Until 1982, all failed
banks with deposits totaling more than $100 million were handled with P&A transactions, which protected uninsured depositors. In July 1982, Penn Square, with assets of
$517 million, was closed and uninsured depositors were not paid in full.3 The FDIC
decided not to give full protection to uninsured depositors primarily because of the
potential contingent liabilities associated with more than $2 billion in participation
loans. Because of suspected inaccuracies in the loan documentation, the FDIC anticipated multiple lawsuits, which made it difficult to value the bank’s assets and to determine accurately the volume of creditors’ claims. The FDIC also would have to make
whole all creditors if uninsured depositors were given complete protection through a
P&A transaction. With $2 billion of possible claims, a P&A transaction could not be
viewed as less costly than a deposit payoff.
In December 1983, the FDIC introduced new procedures for bank closings
intended to minimize the disruption of bank services generated by deposit payoffs yet
expose uninsured depositors to some degree of risk in the event of a failure. The new
“modified payoff” procedures provided for advance dividends (partial payments to
uninsured depositors and other creditors) on the basis of an estimate of the proceeds
from the liquidation of the assets. In many of the closings handled under the new procedures, an acquirer would be found who was willing to accept the insured deposit liabilities. That type of transaction became known as an insured deposit transfer. The
uninsured depositors and unsecured creditors remained with the receivership and
received pro rata payments based on the liquidation value of the receivership’s assets, an
arrangement in which all creditors were treated the same. The insured deposit transfer
limited the disruption normally caused by a deposit payoff, while promoting some
market discipline for larger depositors.
From 1983 to 1985, the FDIC resolved 248 institutions, the majority of which
(185) were P&A transactions. Deposit payoffs were used in 33 cases, and the newly
created insured deposit transfer accounted for another 21 closings. Open bank assistance
was provided in nine transactions.
Efforts to have uninsured depositors share in the losses of failed banks came to a halt
with the resolution of the Continental Illinois National Bank and Trust Company
(Continental), Chicago, Illinois. Continental had purchased participation loans from
Penn Square that contributed significantly to the more than $5 billion in nonperforming loans held by Continental. In May 1984, a massive deposit run and the inability to
find an acquirer led the FDIC to arrange for open bank assistance (OBA). Concerns
about the effect this action would have on other financial institutions and the magnitude of the potential losses to uninsured depositors prompted the FDIC to issue a press
release assuring full deposit protection. The FDIC’s departure from policy and the

3. See Part II, Case Studies of Significant Bank Resolutions, Chapter 3, Penn Square Bank, N.A.

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extraordinary amount of assistance it extended to Continental implied that the FDIC
might have set a limit on the size of banks for which uninsured depositors were not protected in full, and questions were raised over whether certain banks were “too big to
fail.”4
From 1986 to 1988, the FDIC resolved 395 failed institutions using P&A transactions. OBAs reached a high at 105 transactions, with 89 institutions resolved using
insured deposit transfers. An additional 38 failed banks were resolved using deposit payoff transactions in which depositors received the insured portion of their accounts and
uninsured depositors and other creditors received a portion of their outstanding claims.
Post-FIRREA: 1989 to 1994
FIRREA clarified existing law so that the FDIC’s maximum liability to any receivership
claimant was limited to the amount the claimant would have received if the institution’s
assets had been liquidated. In other words, the unassumed creditors were entitled to
receive only what they would have received in a hypothetical liquidation, even though
assumed creditors received payment in full. The statute also made it clear that the
FDIC, at its sole discretion and in the interest of minimizing its losses, could use its own
resources to make additional payments to any creditor or class of creditors without being
obligated to make the same payment to any other creditor or class of creditors.
After the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of
1991 was signed, the FDIC was required to select the least costly resolution method
available. The requirement had a significant effect on the FDIC’s and RTC’s resolution
practices. Previously, the FDIC had structured most of its transactions to transfer both
insured and uninsured deposits along with a significant amount of failed bank assets.
Under FDICIA, however, when transferring the uninsured deposits was not the least
cost solution, the FDIC began entering into P&A transactions that included only the
insured deposits.
Of the 1,423 closings from 1989 to 1994, 1,063 were resolved with P&A transactions. The insured deposit transfer method was used in another 224 closings, payoffs
accounted for an additional 129 closings, and OBA was provided in 7 transactions.
Unclaimed Deposit Accounts
Before the Unclaimed Deposits Amendment Act (UDAA), which amended the Federal
Deposit Insurance Act (FDI Act), was enacted on June 28, 1993, depositors had been
required to make a claim within 18 months of the appointment of the receiver or lose
their deposit insurance coverage and have their claim be treated as a receivership claim.

4. See Part II, Case Studies of Significant Bank Resolutions, Chapter 4, Continental Illinois National Bank and
Trust Company.

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The UDAA, which applies to all receiverships established after its enactment, allows the
FDIC to make insurance payments available to depositors for 18 months, after which
time all remaining unclaimed funds are offered to the appropriate state. The state can
attempt to locate the depositors for 10 years before the funds revert to the FDIC in its
corporate capacity.

Classes of Creditors (Post-National Depositor Preference Amendment)
The National Depositor Preference Amendment set forth the priority that claims against
the receivership would be paid. This section describes those priorities.
Administrative Expenses of the Receiver
Administrative expenses, the category given first priority of payment, include postappointment obligations incurred by a receiver as part of the liquidation of an institution. It may also include certain expenses incurred before the appointment of the
receiver but determined necessary to facilitate the smooth and orderly transfer of banking operations to a purchasing institution or to obtain an orderly accounting and disposition of the assets of the institution. The expenses may include, but are not limited to,
payments for the institution’s last payroll, guard services, data processing services, utilities, and expenses for leased facilities. Administrative expenses usually do not include
expenses such as severance claims, “golden parachute” claims, and claims arising from
contract repudiations. An interim final regulation (12 C.F.R. 360.4), promulgated in
August 1993, limits the inclusion of expenses within the scope of “administrative
expenses” to those that the receiver determines are “necessary and appropriate” for the
orderly liquidation or other resolution of the institution.
Deposit Liability Claims
The category given second priority applies to any deposit liability of the institution,
including both the insured depositors and the uninsured depositors. Insured deposit
claims are claims by depositors for insured amounts of their accounts at the time of the
appointment of the receiver. Because the FDIC in its corporate capacity satisfies its
deposit insurance obligations and in doing so assumes the rights of the depositors to
make a claim against the institution, the FDIC is almost always the largest creditor of
the receivership.
Uninsured deposit claims are claims filed by depositors whose accounts exceeded
the federally insured limit. These claims are paid on par with the FDIC corporate claim
for the insured depositors.
Depositors with uninsured funds can be classified into one of two broad categories:
(1) depositors unfamiliar with the deposit insurance rules and the financial condition of

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the institutions in which they deposit money, and (2) depositors who are fully aware of
the deposit insurance rules and the financial condition of the institutions with whom
they do business, but are willing to assume a certain level of risk to obtain higher interest
rates on deposits.
Because certain aspects of the deposit insurance regulations were more complicated
than others, there was confusion among certain types of depositors, namely joint and
testamentary account holders. Deposit accounts associated with charity organizations
also caused confusion but usually did not account for a large percentage of the
uninsured.
The receiverships established in the early 1980s were unique because they had a
higher proportion of uninsured funds in relation to the total number and dollar amount

Bank of Credit and Commerce International and Independence Bank
In 1992, the FDIC was affected by the highly publicized Bank of Credit and Commerce International (BCCI) scandal and the eventual closing of the bank by the Bank of England. The closing
affected the treatment of Independence Bank, Encino, California, for which a receiver had been
appointed on January 30, 1992. Allegations that the former managers and operators of BCCI
fraudulently acquired direct or indirect ownership of Independence Bank, along with First
American Bankshares, Inc. (First American), Washington, D.C., led to that closing.
Because of those alleged ties, the FDIC was concerned that a direct payoff of Independence
Bank could cause a deposit panic and a run on the multi-billion-dollar First American. However,
the FDIC was unable to locate an acquirer willing to assume Independence Bank’s 14 branches.
Depository institutions were contacted to see if they would simply help the FDIC pay off the
depositors. Finally, the FDIC secured the assistance of First Interstate Bank, Los Angeles, California. Because First Interstate was only paying the deposits on behalf of the FDIC and not assuming them, the arrangement required new legal documents that were finalized at 2:00 a.m. on
January 31, 1992. The payoff of more than 33,000 accounts was to begin in 14 hours, at 4:00
p.m., that same day.
As part of an overall settlement of the BCCI matters in the United States, the Justice Department assured all U.S. government entities that were owed money by BCCI that they would be
reimbursed for losses incurred as the result of the failure of BCCI. That assurance was crucial to
the FDIC’s decision to make all depositors whole through the payment of deposit insurance.
Depositors were paid from First Interstate branches located close to Independence Bank
branches to avoid media attention that might incite panic at First American. As of year-end
1997, the depositors at Independence Bank had been paid $522 million, of which $21 million
were uninsured deposits. First American remained stable and was subsequently sold to First
Union Corporation, Charlotte, North Carolina, in 1993.

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of accounts. Most of those deposits were either “jumbo” ($100,000) certificates of
deposit or brokered deposits including brokers “chasing” the higher interest rates. In the
mid-1980s, institutions began offering $98,000 certificates of deposit to prevent the
accumulation of uninsured interest. After 1986, that type of uninsured interest was
rarely seen.
Measuring the runoff of deposits before the appointment of a receiver may reveal
the level of consumer awareness over time. The FDIC used two methods to determine
uninsured deposit runoff. First, assuming that uninsured deposit runoff was to some
extent correlated with total deposit runoff, total deposit balances as of the quarter before
intervention were compared to total deposits as of the closing date for receiverships not
yet terminated as of August 1997. From 1986 to 1994, 214 Bank Insurance Fund (BIF)
institutions that had depositors with uninsured funds were closed. Deposit runoff
ranged from 6.25 percent in 1989 to 17.83 percent in 1994. Higher percentages of runoff were experienced from 1986 to 1987 and again from 1993 to 1994 than between
1987 and 1993. It appears that while the number of failures was rising, depositors
became more confident in the insurance system.
The RTC’s insured deposit transactions indicated a much more significant level of
runoff of total deposits than did the FDIC’s, primarily because of the conservatorship
program, which encouraged downsizing. During the height of RTC activity, total deposits decreased dramatically from the quarter before intervention (when a conservator was
appointed) to the date of the final resolution, which could take place several months
later. In 1990, the decline was 36 percent and by 1993, it had grown to 52 percent.
Before the RTC was created, deposit runoff had ranged from 2 percent to 8.5 percent, a
level that was much more in line with the industry average.
Among the many issues resulting from the RTC conservatorship program were
those related to dealing effectively with potentially uninsured depositors who were likely
to be affected by the subsequent final resolution. Although the RTC was under no legal
obligation to provide notice to those depositors, the common presumption of government care prompted the RTC’s initial policy (in July 1990) to encourage the active
reduction of uninsured funds during conservatorship. However, that policy was reversed
in December 1990 when the reduction efforts were criticized as increasing the cost of
resolution by facilitating a runoff of uninsured deposits.
A more difficult analysis was made of the reduction in actual uninsured deposits
over a period of time. A study conducted by the FDIC in February 1996 compared
uninsured deposit estimates prepared before a closing to the actual uninsured deposit
balances as of the closing date. The estimates were completed for cost test purposes and
were cursory in nature. The study suggests that preclosing estimates of uninsured deposits were approximately two to four times higher than the actual uninsured deposits from
1992 to 1994. Table I.10-1 compares the estimated uninsured deposits and the actual
uninsured deposits.
The results of that study may indicate substantial depositor discipline. It is difficult
to draw any firm conclusions, however, because the preliminary determination is based

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Table I.10-1

Estimates of Uninsured Deposits
Compared to Actual Uninsured Deposits
Year

Estimated Uninsured
Deposits/
Total Deposits (%)

Actual Uninsured
Deposits/
Total Deposits (%)

Actual Uninsured
Deposits/Estimated
Uninsured (%)

1992

3.00

1.41

47.0

1993

6.82

2.71

39.8

1994

6.75

1.74

25.8

Source: FDIC, Division of Resolutions and Receiverships.

on an estimate of the uninsured deposit amount rather than on a thorough insurance
determination process that is conducted at the time of closing.
Other General or Senior Liabilities of the Institution
The category given third priority typically comprises all other claims against the receiver,
including claims from vendors, suppliers, and contractors of the failed institution; claims
arising from repudiated contracts; claims arising from employee obligations; tax claims;
and claims asserting damages as a result of business decisions of the failed institution.
The NDP Amendment of 1993 lowered claimants in this category to a priority level
below that of the deposit liabilities, thereby significantly reducing any potential recovery
on these claims. However, before the NDP legislation, many banks and thrift receiverships paid general creditor claims on par with deposits.
Vendors and Suppliers. A trade creditor is any person, company, or corporation that
provides goods or services to an institution before its failure. Examples of vendor claims
include claims concerning advertising, appraisals, check printing, courier services,
employment agencies, insurance, janitorial services, property management fees, office
supplies, and utilities. Because the FDIC bridge banks and the RTC conservatorships
were ongoing entities, discretion was used in determining claims against an initial
receivership. In some instances, and in accordance with applicable P&A agreements, certain bills for goods and services (such as utilities, lease payments, data processing, and
final payroll) were deemed essential to the ongoing operations of the receivership and
therefore were paid as administrative expenses of the receiver or by the FDIC, at its discretion. Claims for less than $500 also were paid in full because of administrative ease
and because the cost to process such claims would exceed that amount.
Repudiated Contracts. The FDI Act, as amended by FIRREA, gives the conservator or
the receiver the power, at the conservator’s or the receiver’s discretion, to repudiate most

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contracts determined to be “burdensome,” providing that the contract is not essential and
the repudiation promotes the “orderly administration of the institution’s affairs.” The
conservator or receiver must decide whether to exercise its power to repudiate within a
“reasonable period” after appointment. A reasonable period for the conservator or the
receiver to exercise its authority under the statute has been subject to interpretation by the
courts. The liability of the conservator or receiver for a repudiated contract is limited to
actual direct compensatory damages that are determined as of the date of appointment.
The damages do not include punitive or exemplary damages, damages for lost profits,
opportunity costs, or damages for pain and suffering.
Service Contracts. If a party entered into a contract with a failed institution and the
FDIC repudiated the contract after the receiver was appointed, claims for services rendered before the appointment would be considered as allowable claims. If the party performed services after the FDIC’s appointment and the FDIC accepted those services
before the repudiation, the party would be paid under the administrative expense category for the services performed.
Leases. A receiver or conservator also has the authority to repudiate any burdensome
lease, whether the receiver or conservator is the lessor or the lessee. If the institution were
the lessee, the lessor would be entitled to a general creditor claim against the receivership
for the payment of contractual rents accruing before the notice of repudiation.
Letters of Credit. In a bank closing, the FDIC typically encounters two types of letters of credit. The first is a commercial LOC that is used by a buyer of goods to ensure
payment to the seller upon delivery. Those LOCs are backed by funds placed in an
account by the buyer. At the time a receiver is appointed, the account, along with the
LOC, usually transfers to an acquiring institution. In the case of a payoff transaction,
the seller may delay delivery of the goods until the buyer obtains a substitute LOC.
Money on deposit would be insured up to the deposit insurance limit.
The second type is the standby LOC, which is backed by a contingent promissory
note from the bank customer to the bank, rather than being backed by actual funds on
deposit, and serves as a guarantee mechanism. The issuing bank agrees to pay a third
party (“the beneficiary”) if the bank’s customer does not honor its contract with or make
payment to a third party, and the bank’s advances are charged against the customer’s
promissory note. The FDIC historically has taken the position that a claim based on a
standby letter of credit is provable against the receiver only if the contingency triggering
payment under the LOC (generally, default by the bank customer) occurred before the
appointment of the receiver. In such a case, the claim would be treated as a general creditor claim against the receivership or, in the case of a collateralized letter of credit, as a
secured claim.
Employee Benefits. Employee benefit plans may be divided into two categories: qualified plans (under title 26 of the Internal Revenue Code) and nonqualified plans (these
usually are unfunded contractual promises to provide certain retirement benefits).
Examples of qualified plans include 401(k) plans, defined benefit plans, and profit-sharing plans. If a failed institution has sponsored a qualified plan, the receiver, upon

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appointment, becomes responsible for the plan.5 Plan assets do not become part of the
receivership estate except in rare instances for defined benefit plans for which a reversion
of funds is created at the plan termination. In this instance, all plan obligations would
have been satisfied before the reversion. The receiver’s objective is to distribute vested
benefits to plan participants and to terminate the plan in accordance with the Internal
Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) requirements, if applicable.
Occasionally, a receivership has a defined benefit plan that is underfunded (the
plan’s assets are insufficient to pay the full benefits owed to the participants). In this situation, two options are considered. One option is a funding contribution from receivership assets that is sufficient to eliminate the deficiency in the plan. The second option is
to transfer the underfunded plan to the PBGC. The decision to choose between the two
options is based on the Employee Retirement Income Security Act (ERISA) of 1974 (as
amended) rules concerning contributions from members of the control group to underfunded plans.
Under ERISA rules, solvent subsidiaries could be required to contribute to the plan
to eliminate the underfunding. If such a situation existed, the receivership would fund
the plan if sufficient assets existed. If no subsidiaries existed, the subsidiaries had minimal assets, or the subsidiaries were insolvent, the plan would be submitted to the PBGC
for future administration and payment of benefits. The PBGC would then file a claim
against the receivership for the liability assumed and would be entitled to dividends.
Individuals who have participated in employee stock ownership plans (ESOPs) and
thus hold shares of stock in the institution probably will not recover anything from the
financial institution’s estate because of the low priority of shareholders’ claims. When the
ESOP assets consist of holding company stock, the ESOP may have some value beyond
the holdings of the failed financial institution.
If a plan is nonqualified (and generally unfunded), a provable claim is satisfied on a
pro rata basis in accordance with applicable claims priorities. Certain types of employeerelated claims arise out of employment contracts, which may also be governed by additional regulations.
Claims for unpaid wages and salaries are usually paid as an administrative expense of
the receiver. All other claims arising out of unfunded plans (such as severance and
deferred compensation plans) are determined to be either allowable or disallowable,
depending on whether the claim was fixed as of the date of appointment of the receiver or
was contingent at that time. Fixed claims are allowable and are classified as a general creditor claim, but claims that are not fixed are disallowed.6 As a general rule, if any rights to
benefits are fixed before appointment of the receiver, the rights “survive” and the claim is

5. See U.S. Code, volume 29, section 1001(16).
6. Under the Code of Federal Regulations, volume 12, section 360.3, the governing priorities regulation for most
savings associations that failed before August 10, 1993, contingent claims may be paid under priority (a)(7).

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Great American Bank, FSA, and Home Federal Bank, FA
Both the RTC and FDIC occasionally had to administer an underfunded defined benefit plan.
For example, the Great American Bank, FSA, San Diego, California, and the Home Federal Bank,
FA, San Diego, California, receiverships were both underfunded by more than $10 million each.
The employees of those institutions were very concerned about the underfunding. After an
analysis of the applicable ERISA and PBGC regulations and the determination that the value of
solvent subsidiaries exceeded the underfunding, the RTC determined that the receiver was
obligated to infuse sufficient money to allow the plan to become fully funded so that participants would receive their full benefit.

allowable. If they have not been fixed, the rights are terminated. For severance plans, a
claim is allowable upon the occurrence of a triggering event (such as termination without
cause or retirement). Exceptions to this general rule have been made when the government participated in the hiring or retention of the employee. Finally, before allowing a
claim for employee benefits under an employment contract, the receiver should consider
whether the contract represented an “unsafe or unsound practice.”
Federal, State, and Local Taxes. Claims of governmental units for unpaid taxes at the
federal, state, and local level may be allowable claims against a receivership. According to
section 15(b) of the FDI Act, U.S. Code, volume 12, section 1825(b), if there are no specific state or federal exemptions, receivers usually are not immune from the following:
• Ad valorem real property taxes;
• Federal employment taxes, including the payment and remittance of the
employee’s portion as well as that of the employer (receiver);
• Federal excise taxes; and
• Federal income taxes. A December 1992 interagency agreement between the IRS
and the RTC, affirmed by the FDIC for RTC receiverships for which the FDIC
is acting as successor receiver, provides that for RTC receiverships, upon certification that “Treasury funds” would be needed to satisfy depositor claims, the IRS
will assess, but not collect, income tax, interest, and penalties from those receiverships. The FDIC, however, asserts that section 7507 of the Internal Revenue
Code prohibits the IRS from assessing or collecting federal income or excise taxes
from most receiverships.
Furthermore, under the IRS regulations issued pursuant to section 597 of the Internal Revenue Code, all federal financial assistance (FFA) usually is allowed to be included
as ordinary income to the receiver at the time the FFA was received or accrued. The collection of the tax is deferred, however, until those receivership assets, the losses of which

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will offset the income, are sold. The IRS therefore attempts to recapture any tax benefits
obtained by the failed bank or affiliate for pre-receivership years. In any event, the regulation under section 597 states that the IRS will not collect taxes on FFA if the burden is
to be borne by the FDIC.
All valid claims for pre-resolution state taxes, and for taxes from which the receivership is not immune, are paid under the appropriate priority system or as secured claims.
A conservatorship usually has no tax immunities.
Receivers typically are immune from the following:
• Personal property taxes.
• Transfer, recording, and documentary stamp taxes, which are taxes imposed on
the privilege of transferring real property, recording deeds, and the like.
• Intangible property taxes, which are taxes on copyrights, patents, stock, money,
and so forth.
• State income, franchise, and privilege taxes. Several states have asserted that FFA
should be treated as income to the failed bank. The FDIC, however, has been
successful in arguing that because the assistance is provided to the receivership, it
therefore is not taxable.
• Sales, use, gross receipts, occupation, and license taxes, if those taxes are imposed
by state law on the receiver. Unless state or local law provides a special exemption, contractors are not exempt from sales or use taxes for property they purchase on behalf of receivers.
• State employment taxes on employers; however, the FDIC has never asserted any
immunity on behalf of receivers from withholding and remitting state income
taxes.
• Other state taxes, including utility and excise taxes.
• Penalties.
Subordinated Obligations
Subordinated obligations represent the fourth priority of claims. Subordinated debtholders are allowed claims on receivership assets only after all claims with a higher priority have been satisfied. As of October 1997, of the 1,107 open receiverships, 27 had
subordinated debt claims filed against them for a total of $906.3 million. Four of the 27
receiverships had paid dividends on those claims for a total of $180.7 million.
Of special interest is a practice that occurred from the mid- to the late 1980s in both
commercial banks and thrifts in which junk bonds were sold in retail branches, sometimes to the elderly who thought they were buying insured certificates of deposit.
Approximately 23,000 of Lincoln Savings and Loan, Irvine, California, investors bought

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more than $200 million in uninsured bonds issued in 1987 and 1988 by American
Continental Corporation (ACC), Lincoln’s parent company. The depositors charged
that they intended to buy insured certificates of deposit, but were steered instead to a
special desk at Lincoln’s 26 retail offices where the ACC bonds were sold. After the
appointment of a receiver, the RTC settled with the ACC bondholders for a lump sum
payment of $21 million.
Shareholder Claims
The fifth priority of claims is shareholder claims. From 1986 to 1994, the FDIC made
distributions to stockholders of 16 receiverships for a total of approximately $40 million, with the largest payment ($22.8 million) occurring in 1989 to shareholders of
Franklin National Bank, New York, New York. Approximately $13 million were distributed to shareholders of Birmingham-Bloomfield Bank, Birmingham, Michigan, which
was terminated in 1993. Frequently the failure of a bank can lead to the inevitable bankruptcy of the holding company. It is important to note that as the institution’s shareholder, only the holding company, not the creditor of a holding company, has a claim
against the assets of the failed institution.

Conclusion
The FDIC’s administrative claims process is an important part of its responsibility to
mitigate the economic effects of financial institution failures. From 1980 to 1994, when
the number of failed institutions rose, the FDIC increasingly emphasized the equitable
treatment of all creditors. The FDIC’s concern about market discipline, response to
legislative initiatives requiring the least costly transaction possible, and changes in payment priority methodology affected how claims were determined and ultimately paid.
Thus, the FDIC’s mechanism for providing payment to uninsured depositors and
other receivership creditors evolved into one that is predictable while meeting statutory
requirements. This process ensures that creditors are treated in an equitable and timely
manner.

he professional liability program
contributed more than $5 billion
in cash recoveries to the
receivership efforts.

CHAPTER 11

Professional Liability Claims

Introduction and Overview
Professional misconduct was a significant factor in the failures of financial institutions
during the 1980s. The Professional Liability (PL) Program at the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC) played an
important role in recovering losses from those failures. This chapter describes the development of professional liability operations at the FDIC and the RTC and provides an
overview of the legal standards and major areas of collection during the period of professional liability activity after the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 was enacted.1
When an insured depository institution fails, the FDIC as receiver—like the RTC
and the Federal Savings and Loan Insurance Corporation (FSLIC) before the RTC—
acquires a group of legal rights, titles, and privileges that are generally known as professional liability claims. These receivership assets are claims under civil law for losses
caused by the wrongful conduct of directors, officers, lawyers, accountants, brokers,
appraisers, and others who have provided professional services to a failed institution. To
collect on these claims, the receiver often must sue the professionals for losses resulting
from their breaches of duty to the failed institution. This specialized group of receivership claims also includes contract rights inherited from the institution under any available director and officer liability insurance policy, and under the fidelity bond insurance
policy that institutions purchase to cover losses resulting from dishonest or fraudulent
acts by their employees.
1. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 abolished the Federal Home Loan
Bank Board and the Federal Savings and Loan Insurance Corporation and gave the FDIC initial responsibility for
the Resolution Trust Corporation and permanent responsibility for operating the new Savings Association Insurance Fund. The FDIC managed the RTC’s activities until November 27, 1991, when the Resolution Trust Corporation Refinancing, Restructuring and Improvement Act (RTCRRIA) separated the RTC from the FDIC. The
RTC existed from August 9, 1989, to December 31, 1995.

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The main objectives of the FDIC’s PL Program are first to investigate all potential
claims inherited from each receivership, and then to recover losses based on meritorious
claims in a cost-effective manner. Although more than $5 billion have been collected on
professional liability claims, that amount is only a partial recovery of much larger losses
to the deposit insurance fund (or, in the RTC’s case, to the taxpayer) resulting from professional misfeasance and malfeasance. Professional liability claims are complex and contentious and often require many years and substantial investments in investigation and
litigation before any actual recovery is realized.
Professional liability activities are closely related to important matters of corporate
governance and public confidence. The FDIC’s PL Program helps to strengthen the perception as well as the reality that directors, officers, and other professionals at financial
institutions are held accountable for wrongful conduct. To this end, the complex collection process for PL claims is conducted in as consistent and fair a manner as possible.
Potential claims are investigated carefully after every bank and savings and loan failure
and are subjected to multi-layered review by the FDIC’s attorneys and investigators
before a final decision is rendered on whether and how to proceed. A lawsuit on any particular claim is filed only after attempts at resolution through settlement are made. At
the FDIC, the final decision about whether to file suit typically rests with the board of
directors. At the RTC, the decision to file suit typically was delegated to senior managers
in the Legal Division and the Office of Investigations, and only the largest claims went
to the chief executive officer (CEO).
No claim is pursued by the FDIC unless it meets both requirements of a two-part
test. First, the claim must be sound on its merits, and the receiver must be more than
likely to succeed in any litigation necessary to collect on the claim. Second, it must be
probable that any necessary litigation will be cost-effective, considering liability insurance coverage and personal assets held by the defendants.
A number of meritorious civil cases have not been pursued because insufficient reliable sources of recovery were available to justify the cost. Wrongdoers, however, can still
be held accountable. The FDIC, the RTC, and the FSLIC have referred various civil
matters to the supervisory and enforcement arm of the appropriate regulatory agency.
The agencies also have made thousands of criminal referrals and provided ongoing
support to the Justice Department on matters involving suspected criminal activity.
Since 1980, the courts have ordered more than a billion dollars in restitution against several thousand criminals formerly affiliated with failed institutions, including numerous
directors, officers, and other professionals. Of the total criminal restitutions ordered,
however, less than 10 percent have been paid to the FDIC.
The Professional Liability Program involved an enormous range of complex law and
fact issues that were negotiated and litigated on a case-by-case basis in jurisdictions all
over the country (and in some foreign countries). The program recovered a substantial
amount of money and should have a beneficial effect on professional conduct at both
present and future financial institutions.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

Professional Misconduct as a Significant Factor in Financial
Institution Failures During the 1980s
The Professional Liability Program is an important part of the effort to recover losses
from insured depository institution failures. That became clear at the beginning of the
emerging crisis in the early 1980s, when concerns about financial institution fraud
began to surface.2 Before FIRREA’s enactment and throughout the years of its implementation, regulators, independent commissions, and legislative bodies have concluded
that professional wrongdoing played a significant role in the depository institution crisis
of the 1980s and 1990s. For example, an early systematic study by the Office of the
Comptroller of the Currency (OCC) found that of the 171 national banks closed by the
OCC between 1979 and 1987, more than 90 percent suffered from significant mismanagement, 35 percent suffered from insider abuse, and 11 percent were victims of fraud.3
In October 1988, the U.S. House of Representatives Government Operations Committee stated that misconduct by insiders and affiliated borrowers had contributed to the
insolvency of at least one-third of failed commercial banks and more than 60 percent of
all failed thrifts, resulting in tremendous costs to the federal deposit insurance funds.4 In
addition, a 1992 report to Congress by the General Accounting Office (GAO) concluded that “a key component of these failures was wrongdoing, including negligence
and fraud, on the part of directors, officers, and other professionals associated with the
institutions.”5
In July 1993, a national commission, created to study the causes of the financial
institution crisis of the 1980s, reported to the president and Congress on its new
research, public hearings, interviews, and review of existing work in that area.6 The
national commission concluded that there had been “unprecedented fraud and abuse”
by persons connected with failed institutions, although that was not the sole cause of the
crisis, and that “fraud and misconduct were important elements in the savings and loan
(S&L) debacle.”7,8 The national commission found a “continuum of abusive practices”
2. House Committee on Government Operations, Federal Response to Criminal Misconduct and Insider Abuse in
the Nation’s Financial Institutions, H.R. Rep. No. 1137, 98th Cong., 2d Sess., 1984.
3. Office of the Comptroller of the Currency, Bank Failure: An Evaluation of the Factors Contributing to the Failure
of National Banks, June 1988, 21. See also Report on Director and Officer Liability Insurance and Depository Institution Bond Pursuant to Section 220(b)(3) of the FIRREA, September 13, 1991, 26 (“Regardless of whether precisely
the same result would be found in a survey of current bank and thrift failures, the OCC study—and the FDIC's
experience—make[s it] clear that mismanagement is very common in failed depository institutions.”)
4. H.R. Rep. No. 982, 101st Cong., 2d Sess., 1990, 5.
5. “Bank and Thrift Failures: FDIC and RTC Could Do More to Pursue Professional Liability Claims,” Testimony of the U.S. General Accounting Office before the Senate Committee on Banking, Housing, and Urban Affairs, June 2, 1992 (hereafter called the 1992 GAO Report), Summary Statement & 17.
6. National Commission on Financial Institution Reform, Recovery, and Enforcement, Origins and Causes of the
S&L Debacle: A Blueprint for Reform, July 27, 1993 (submitted pursuant to Section 2556 of FIRREA).
7. National Commission, Origins and Causes, ix & 3.
8. National Commission, Origins and Causes, 70.

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ranging from aggressive search for regulatory loopholes to outright fraud by failed institution managers, attorneys, accountants, appraisers, and others.9 Noting that “estimates
of the actual dollar losses due to fraud and misconduct differ widely,” the national commission concluded “that taxpayer losses due to fraud were large, probably amounting to
10 to 15 percent of total net losses.”10
Thus, investigation and pursuit of PL claims were primary concerns after the enactment
of FIRREA and during the subsequent receivership activities at the RTC and the FDIC.

Development of Professional Liability Operations
Before the late 1970s, neither the FDIC nor the FSLIC had receivership staff devoted to
PL matters. However, expertise at both agencies quickly developed thereafter in response
to notable failures such as the Penn Square Bank, N.A. (Penn Square), Oklahoma City,
Oklahoma, liquidation in 1982 and the Continental Illinois National Bank and Trust
Company (Continental), Chicago, Illinois, assistance transaction in 1984. Initially, in
addition to the attorneys assigned to PL matters in each of those cases, and as part of the
institution’s overall resolution process, teams of liquidation and examination personnel
were detailed for extended periods at the location of the failed financial institution. Outside contractors, such as litigation counsel, were retained as necessary.
In 1986, as the frequency and size of failures increased, the FDIC transferred
responsibility for investigating claims from Washington, D.C., headquarters to employees at the consolidated field offices then forming throughout the country. A separate
unit was established in Texas, for example, to handle the large bank investigations in the
Southwest. Dedicated to PL matters, those in-house personnel worked with FDIC lawyers in Washington to investigate and evaluate the claims. Investigation staff included, at
various times and locations, expertise as diverse as certified public accountants, attorneys, commercial lending officers, real estate appraisers, former bank examiners, and
even geologists and petroleum engineers. To meet the shifting geographic focus of
receivership activity, FDIC staff and offices were relocated from the Southwest and West
Coast in the early 1980s to the Northeast later in the decade.
The FDIC developed consistent procedures for managing the claims and any necessary litigation. The investigation of losses incurred by the failed institution begins at its
closing, when investigation specialists enter the institution with the first group of closing
personnel and conduct interviews with institution managers and other key personnel.
Meanwhile, other team members retrieve important documents, searching office by
office for relevant records such as loan files and minutes of board meetings. After all
records have been collected, inventories are completed. For larger institutions hundreds,

9. National Commission, Origins and Causes, 8 & 14.
10. National Commission, Origins and Causes, 69-71.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

or even thousands of boxes of documents might be retrieved. Keeping accurate inventories and documenting the custody of the records are especially important if litigation
becomes necessary. After all documents have been retrieved and initial interviews completed, documents are removed from the failed institution to an FDIC field office. Over
time these procedures have become increasingly automated and sophisticated.
The principal role of the FDIC investigator is to establish the factual basis for legal
claims, and to identify losses for which the FDIC can pursue recovery in a cost-effective
manner. Working with in-house attorneys and outside litigation counsel, the investigation staff compiles, analyzes, and maintains evidence and documentation to support
claims. It also reviews all functions of the bank. Audits are analyzed for evidence of audit
failure, operational losses are reviewed, and potential claims against professionals are
identified.
Before FIRREA, the FSLIC was developing PL operations in response to thrift failures. The FSLIC relied to a much greater degree on the use of outside contractors when
closing thrift institutions. It engaged private law firms at the outset of a receivership to
investigate and develop PL claims. Supervised by FSLIC attorneys at the Washington
office, the outside firm would be responsible for resolving all types of assets, including
PL claims, from the particular receivership. The FSLIC did not develop a significant inhouse capacity for investigating PL claims.

Professional Liability Operations After FIRREA
As manager of the FSLIC Resolution Fund after FIRREA, the FDIC assumed directly
from the former FSLIC the responsibility for resolving claims arising from thrifts that
failed before 1989. When the FSLIC PL claims transferred to the FDIC, a small group
of in-house attorneys at the FDIC was suddenly managing a large caseload of claims
arising from hundreds of failed thrifts as well as banks.11 A Professional Liability Section
(PLS) within FDIC’s newly reorganized Legal Division was formed to handle all FDIC
and RTC PL matters arising nationwide. Although all of RTC’s PL matters involved
only failed thrift institutions, most of which had been closed by the Office of Thrift
Supervision (OTS), many non-RTC PL claims also arose from thrifts, most of which
had been FSLIC institutions.
In late 1989, the FDIC established in Dallas its first office of professional liability
attorneys outside its Washington, D.C., headquarters. The addition of those attorneys
brought PLS staffing to 60 lawyers. During 1990, additional RTC teams of investigators

11. Even before FIRREA’s enactment in August 1989, the FDIC had become responsible for thrifts placed in conservatorship or receivership beginning in February 1989. By the time of FIRREA’s enactment, the FDIC-managed
thrifts totaled 253. When that caseload was combined with an existing caseload of approximately 500 failed banks,
some of the 22 FDIC professional liability attorneys each had responsibility for 50 bank and thrift failures. See
1992 GAO Report, 8.

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were established in 4 regional and 14 field offices. By the end of 1990, a national network of offices employed almost 400 investigators and staff in the RTC Office of Investigations. The FDIC assigned separate teams of PLS lawyers to oversee all investigations
and litigation arising from nearly 500 RTC receiverships. In early 1991, the RTC established a separate PLS section within the independent Legal Division. The section was
staffed initially by transferring attorneys from the FDIC PLS, most of whom had
already been dedicated to RTC matters. Thereafter, the separate staffs at the RTC and
the FDIC grew significantly through new hires; by April 1992, a total of 175 in-house
lawyers at the RTC and the FDIC were assigned to PL work.
Shortly after its separation from the FDIC, when the RTC decided to decentralize
its PL operations, staff in the RTC field offices began to report to their respective
regional counsels and directors, rather than through the Washington, D.C., headquarters. Most lawsuits and settlement recommendations by regional staff were approved
under delegated authority in their respective regions. The FDIC, in contrast, retained its
reporting lines through Washington, D.C., and all suits and settlements arising nationwide were approved by the same senior management. In 1993, Congress reversed the
RTC’s decentralization of PL operations, mandating that an RTC assistant general
counsel direct the investigation, evaluation, and prosecution of all PL claims.12
During its lifetime, the RTC investigated potential claims arising from more than
740 failed thrifts. The RTC brought a PL lawsuit or achieved settlement before filing
suit in matters from 444 institutions, which constituted nearly 60 percent of the total
institutions it handled.13 The RTC pursued claims against directors and officers for a
third of the total number of institutions that it handled. The 559 civil professional liability actions that the RTC filed, inherited, or defended fall into a wide variety of categories, including 274 suits related to director and officer liability, 126 attorney
malpractice suits, 46 fidelity bond matters, and 43 accounting malpractice matters.
Some of the 274 director and officer claims brought by the RTC, however, involved
insurance coverage actions out of the same institution for which a separate suit was filed.
From 1980 through 1995, the FDIC investigated all PL claims after each of the
more than 1,600 depository institution failures for which it had direct responsibility for
resolution. The FDIC brought claims specifically against directors and officers in less
than one-fourth of the bank failures occurring between 1985 and 1992. As manager of
the FSLIC Resolution Fund, the FDIC handled approximately 300 thrift institutions
from 1990 to 1996, and from 1990 to 1995, the FDIC managed 361 PL cases initiated
during this period. Thus, the FDIC filed, inherited, or defended more than 800 professional liability lawsuits. The figure for total non-RTC professional liability lawsuits

12. That mandate was part of a number of RTC management reforms directed by Congress under the RTC Completion Act of 1993, Pub. L. No. 103-104, codified at U.S. Code, volume 12, section 1441a (w)(10).
13. Final Report of the Resolution Trust Corporation Professional Liability Section and Office of Investigations, April
1996 (submitted to Congress by FDIC pursuant to the RTC Completion Act of 1993) (hereafter called the Final
RTC PLS Report), 5.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

includes all thrift claims inherited by the FDIC from the FSLIC after the enactment of
FIRREA, as well as professional liability suits from commercial bank failures that
occurred during the early 1980s.
The RTC PL function transferred to the FDIC upon the RTC’s statutory “sunset”
on December 31, 1995. As of January 1, 1996, the FDIC inherited an additional 193
RTC thrift institutions with open investigations, uncollected settlements, or litigation
and 196 RTC professional liability lawsuits pending at RTC’s sunset. The RTC’s PL collections had peaked the previous year (1994) at $512 million. The FDIC’s PL collections had peaked earlier, with cash recoveries of $610 million during 1992. Within a
year after the RTC’s consolidation back into the FDIC, professional liability staffing and
workload had wound down to levels comparable to the period before FIRREA, although
recoveries from continuing PL operations remained substantial.

Significant Issues and Events in Professional Liability Claims Litigation
The FDIC and the RTC investigated thousands of potential PL claims arising from the
financial institution failures of the 1980s. Most of those claims were closed following
investigation, either because it was already clear that they lacked strong factual and legal
support on the merits, or because adequate resources from which the claim could be collected cost-effectively appeared not to be available. Of the claims that were pursued,
most eventually were resolved through settlements. To reach settlement, however, the
FDIC and the RTC usually had to file a lawsuit and engage in some litigation.
The duration and cost of PL litigation increased during the years after enactment of
FIRREA. The FDIC and the RTC achieved a number of large, comprehensive “global”
resolutions, particularly in the accounting and securities industries, but only after substantial and costly litigation. Meanwhile, success in obtaining cash recoveries from meritorious director and officer claims diminished during the years after FIRREA’s
enactment. Fewer claims were covered by accessible liability insurance, while the most
culpable individuals at failed institutions usually had few accessible personal assets from
which collections could be made. As cases proceeded through litigation, developing legal
doctrines began to limit the personal liability of former depository institution professionals (especially directors).
Because of the complex and often litigious nature of PL claims, it takes a long time
to settle and collect any proceeds. The “tail” on investigating and litigating professional
liability claims can often run more than a decade from the time of the actual misconduct
until ultimate resolution and collection by the receiver. Indeed, even in late 1997, the
FDIC still had numerous pending lawsuits to recover on PL claims arising from depository institution failures during the 1980s.
The changes in the law governing liability insurance, the evolving standards of liability
for director and officer claims, typical defenses raised, and the specialized areas of accounting, legal malpractice, and securities brokerage are described in the following sections.

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Insurance Coverage for Director and Officer Liability Claims
Director and officer insurance contracts purchased by institutions before failure were a
principal source of recovery for losses resulting from misconduct of culpable directors
and officers before their institutions failed. Depository institutions purchase director
and officer insurance to protect their directors and officers against liability posed by negligence, gross negligence, and breach of fiduciary duty claims. Although the insurance
generally excludes coverage for losses resulting from dishonesty, fraud, and other such
intentional misconduct, such losses potentially are covered by the fidelity bond insurance that all insured institutions are required to purchase pursuant to laws and regulations. Director and officer liability insurance typically covers only claims made with the
carrier during the policy period, whereas fidelity bonds cover losses discovered during
the period the insurance is in force. Both types of insurance contain notice provisions
and various other requirements that can pose obstacles to recovery by the insured institution or its receiver.
Liability insurance and fidelity bonds had been the main recovery source for directors’ and officers’ misfeasance and malfeasance. Beginning in the early 1980s, however,
insurers began to add new exclusionary endorsements to insurance policies sold to financial institutions. One such provision, the “regulatory exclusion,” purported to preclude
any government agency from recovering losses under the policy, even if the losses from
wrongful acts by management would have been paid to other claimants, such as shareholders in a derivative action concerning an open institution.14
Until 1990, the agencies usually defeated regulatory exclusions by arguing that they
were vague, unenforceable, and contrary to public policy. After FIRREA’s enactment,
however, court decisions have largely upheld regulatory exclusions. In fact, six U.S. Circuit Courts of Appeals cases eventually upheld regulatory exclusions as sufficiently clear
clauses negotiated as part of a contract between two parties.15 In reaching their determinations, the courts relied in part on their finding that Congress had expressed no public
policy, in FIRREA or elsewhere, against enforcing regulatory exclusion clauses.
When enacting FIRREA, Congress categorically determined not to address the regulatory exclusion issue directly and, instead, allowed the courts to continue addressing
14. Insurance carriers included other exclusions to bar recoveries by the government, such as an exclusion for classified loans and a variety of coverage termination provisions. Insurance carriers also routinely contested the adequacy of notice when the FDIC and the RTC sought to recover as receivers for the insured depository institution. The
primary subject of coverage disputes between the agencies and the insurance carriers, however, was the regulatory
exclusion.
15. The Sixth Circuit Court, in FDIC v. Aetna Casualty & Co., 903 F.2d 1073 (6th Cir. 1990), was the first Circuit
Court of Appeals to address the issue after FIRREA’s enactment. Two trial courts after FIRREA, however, found
in favor of coverage in particular circumstances. The Colorado Supreme Court, in FDIC v. American Casualty Co.,
843 P.2d 1285 (Colo.1992), held that the regulatory exclusion violated state public policy as evidenced by Colorado’s banking code. A federal district court in Florida held that the regulatory exclusion did not apply to a derivative action filed by a shareholder before the failure of the bank in which the FDIC was later substituted as a party
plaintiff in ACC v. Frogel, Case No. 91-0786 (S.D. Fla. 1993).

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those contract clauses on a case-by-case basis under existing law.16 Congress also directed
the FDIC, Justice Department, and Treasury Department to issue a joint study of provisions that prevented government agencies from recovering under insurance policies purchased by financial institutions such as the regulatory exclusion. The study ultimately
recommended amending FIRREA to assert a federal policy against enforcement of regulatory exclusions and similar clauses.17 However, because Congress took no action on
this recommendation, some courts found that there was no longer any public policy
against enforcing these clauses.
That change in the law greatly hindered the agencies’ efforts to recover losses caused
by culpable officers and directors. Recovering losses from the personal assets of such individuals is typically more difficult and less cost-effective than obtaining indemnification
from carriers under a failed institution’s insurance policies. Moreover, liability insurance
indemnifies losses caused by wrongful conduct of any and all former bank professionals,
whose liability for loss typically was “joint and several.” Resolution of claims with insurance carriers thus does not require allocation of portions of fault to each individual director
and officer. As regulatory exclusions vitiated liability insurance coverage, however, collection efforts shifted to focus more on the particular liability of culpable individuals with
accessible personal assets. Those persons usually were outside directors, rather than former
loan officers. Not surprisingly, the specific standard of care applied to former directors
increasingly became the focus of professional liability litigation.
Standard of Liability for Director and Officer Claims
Long before the 1980s crisis, the legal obligations of directors and officers had been
established in common law (judicial) decisions and in federal and state statutes. Directors and officers of a financial institution owe duties to their institution, its shareholders,
and its creditors, as do directors and officers of corporations in general. The most
important of those legal obligations are the duties of care and of loyalty. As the U.S.
Supreme Court stated more than a century ago, the duty of care requires directors and
officers, when conducting an institution’s affairs, to use the degree of care that ordinarily
prudent and diligent persons would exercise under similar circumstances.18 The duty of
loyalty requires directors and officers to administer the institution’s affairs and to protect
the interests of depositors and shareholders with personal honesty and integrity, and

16. U.S. Code, volume 12, section 1821(e)(12). See also H.R. Rep. No. 54(I), 101st Cong., 1st Sess. 416-17
(1989), reprinted in 1989 U.S. Code Cong. & Admin. News 86, 212-13.
17. “Report on Directors and Officers’ Liability Insurance and Depository Institution Bonds Pursuant to Section
220(b)(3) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989” (September 13, 1991),
reprinted in Regulatory Exclusions Pertaining to Financial Institution D&O Professional Liability Insurance Policies.
Before the House Committee on Banking, Finance, and Urban Affairs, 103rd Cong., 1st Sess. 158 (1993).
18. Briggs v. Spaulding, 141 U.S. 132, 152 (1891).

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prohibits them from advancing their own personal interests or those of others over the
interests of the institution.19
Directors are responsible for selecting and supervising competent officers; establishing business strategies and policies; monitoring the progress of business operations; and
monitoring adherence to policies and procedures required by statutes, regulations, and
principles of safety and soundness. Directors must make business decisions based on
fully informed and meaningful deliberation. Directors need timely, ample information
from officers to discharge board responsibilities and must require officers to respond
promptly to supervisory criticism. Open and honest communication among directors,
officers, and regulators is therefore vital.
Corporate directors and officers are potentially liable for damages resulting from the
breach of their duties. Such liability can flow from breaches of duty that are unintended
but negligent, as well as from misconduct that is either intentional or so reckless or wanton as to imply deliberate intent. Before the 1980s, most state laws imposed the socalled “simple” or “ordinary” negligence standard of liability of corporate directors and
officers in general.20
During the 1980s and early 1990s, however, several states relaxed the simple negligence standards for director and officer liability, instead requiring that liability be
based only on culpable conduct that was grossly negligent or worse. Those states, and
many others that did not amend their general standard of care, also acted to protect
directors and officers with some form of insulating statute.21 State insulating statutes
typically stipulate that a corporation, by amending its bylaws or articles of incorporation, may limit the civil liability of its directors so that their liability for negligent
breach of the duty of care is eliminated completely.22 Typically, state insulating statutes usually do not apply to officers, however, and do not limit liability for breach of
the duty of loyalty.
When enacting FIRREA in 1989, Congress was concerned about state efforts to
insulate directors and officers of federally insured depository institutions from liability
for losses inflicted on the public. Congress therefore preempted state statutes so that
they did not insulate directors and officers from liability for culpable conduct that is

19. Pepper v. Litton, 308 U.S. 295, 306-07 (1939).
20. In at least two states, the liability standard is even stricter for managing financial institutions. The standard
imposes on those directors and officers a duty of care higher than the simple negligence standard applicable to directors and officers of nonfinancial institutions. The standard is stricter because of the fiduciary relationship of institutions that are responsible for handling other people’s money.
21. To date, 46 states have adopted a form of insulating statute. Some of the statutes apply specifically to financial
institutions, and others apply to corporations in general.
22. Beginning in 1987, for example, corporations in Arkansas could specify that directors are not liable for civil
damages except for breach of the duty of loyalty, acts or omissions not in good faith, intentional misconduct, knowing violations of law, or acts giving rise to liability to entities other than the corporation and its stockholders.
Arkansas Code, Section 4-27-202B(3), made applicable to banks by Section 4-26-103(b) and to thrifts by Section
23-37-105.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

grossly negligent or worse. In a new section 11(k) added to the Federal Deposit Insurance Act, Congress provided the following:
(k) Liability of directors and officers
A director or officer of an insured depository institution may be held personally
liable for monetary damages in any civil action by, on behalf of, or at the
request or direction of the Corporation [FDIC], which action is prosecuted
wholly or partially for the benefit of the Corporation—
(1) acting as conservator or receiver of such institution,
(2) acting based upon a suit, claim, or cause of action purchased from,
assigned by, or otherwise conveyed by such receiver or conservator, or
(3) acting based upon a suit, claim, or cause of action purchased from,
assigned by, or otherwise conveyed in whole or in part by an insured
depository institution or its affiliate in connection with assistance provided under section 1823 of this title,
for gross negligence, including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including
intentional tortious conduct, as such terms are defined and determined under
applicable State law. Nothing in this paragraph shall impair or affect any right
of the Corporation under other applicable law.
The federal courts soon agreed that, for claims filed by the FDIC and the RTC on
behalf of state chartered institutions, section 11(k) preempted only state insulating statutes, not other state laws like standards of care.23 However, the courts disagreed over
whether section 11(k) preempted federal common law and whether, for federally
chartered institutions, it also preempted state simple negligence standards of care. The
U.S. Supreme Court resolved this basic issue when it held that state law, not federal
common law, provides the liability standard for directors and officers, and that section
11(k) provided a gross negligence floor for the FDIC claims in states with insulating
statutes.24 In other words, a state statute allowing directors to insulate themselves from
all liability for breaches of their duty of care does not bar FDIC claims based on gross
negligence. The ruling is consistent with the FDIC’s long-standing internal policy of
pursuing only “outside” director claims for which the facts show that the culpable
conduct rises to the level of gross negligence or worse.25
Although most state law definitions of gross negligence are consistent, some definitions vary. A few states have attempted to redefine gross negligence as willful or intentional

23. See, for example, FDIC v. Canfield, 967 F.2d 443 (10th Cir. 1992) (en banc), cert. denied, 506 U.S. 993
(1992).
24. Atherton v. FDIC, 117 S. Ct. 666 (1997).

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misconduct, at least for FDIC professional liability cases. Not enough cases have been
litigated under these statutes to clearly indicate what effect they actually will have. Directors and officers are generally protected from liability, however, if they have acted in good
faith and with due care, and if they have made fully informed business decisions within the
scope of their authority and without personal interest or self-dealing.
During the 1980s and early 1990s, the OCC, the OTS, and the FDIC developed
several guides for directors: The Director’s Book, first published by the OCC in 1987
and revised in March 1997; the Director Information Guidelines, published by the
OTS in 1989; the FDIC General Counsel’s statement titled “New FDIC Guidelines
Issued to Clarify the Responsibilities of Bank Directors and Officers,” dated December 17, 1992, and the FDIC Pocket Guide For Directors, reprinted November 1997.
The FDIC guidelines clarify FDIC policies concerning professional liability suits.
They describe the duties and responsibilities expected of depository institution directors and officers, discuss the differences in the way the FDIC analyzes claims against
inside directors as opposed to those against outside directors, describe factors considered in filing suits, and note procedures used by the FDIC in authorizing civil
lawsuits.
Defenses to Liability
After the FDIC has demonstrated that the defendants acted wrongfully under the applicable legal standard, it must then show that the conduct caused a reasonably certain
measure of damages. Defendants to professional liability claims invariably raise a number of defenses, which fall into such predictable categories as the following:26
• The defendant’s obligation for any losses was discharged in bankruptcy;
• Other people bear a portion of the responsibility (the “comparative fault”
defense);
• The regulators are at fault and should have stopped the defendant (the “contributory fault” defense);

25. An “inside” director is a person such as a member of a shareholder control group or an officer responsible for
running some part of the daily operations of the institution. Insiders have more knowledge of the institution’s operations, and they are responsible for ensuring that the institution complies with laws and regulations and for implementing the policies and business objectives promulgated by the board of directors. Because outside directors
are neither officers nor control group members, they do not know as much about the institution’s daily operations
as do insiders.
26. The simplest defense is a general denial of liability. That defense is also the most powerful because if the FDIC
is persuaded that it has mistaken the facts, it will voluntarily dismiss its claims. For example, the FDIC dropped
some claims after the sunset of the RTC after it determined that the claims were not meritorious or no longer costeffective. That situation rarely occurs, however, because each claim is extensively investigated before the FDIC decides to pursue it.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

• The FDIC cannot sue the defendant because the officers of the failed institution
knew what the defendant was doing (the “imputation” defense);
• It is too late to sue (the “statute of limitations” defense); or
• The FDIC’s conduct after failure made things worse rather than better (the “failure to mitigate” or “mitigation” defense).
Before a judge or jury can decide whether any of these defenses are applicable, a preliminary question has to be decided: What law governs? More specifically: Is the right to
assert a particular defense determined by state law or by federal law? That issue was
extensively litigated for several years following FIRREA’s enactment. After decisions
made by many federal district courts and several federal courts of appeals, the issue eventually rose to the U.S. Supreme Court. In 1994, that court held that state, not federal,
law governs the issue of whether a defendant can assert an “imputation” defense against
the FDIC.27
O’Melveny & Myers v. FDIC settled the question of “what law governs” the assertion
of the “imputation” defense. It left undecided, however, the question of “what law governs” the assertion of other defenses to professional liability claims. Later, the Supreme
Court also addressed the governing law issue in the standard of care context in Atherton
v. FDIC when it held that state law sets the standard of conduct as long as the state standard (such as simple negligence) is at least as strict as the federal statute.28,29
One defense frequently raised is the expiration of the “statute of limitations.”
When wrongdoers have dominated the board of a failed institution, the FDIC has
argued that the statute of limitations did not expire because of the doctrine of “adverse
domination.” According to this doctrine, the clock stops running for the statute of limitations on a lawsuit against corporate wrongdoers as long as those same people control
the board of directors. The theory behind the doctrine is that the wrongdoers would
not have sued themselves, and that no one else could sue them until they were out of
power. Not every state accepts this theory, and the states that do accept it impose different conditions on the right to invoke it. So far, three federal courts of appeals (RTC v.
Artley, FDIC v. Cocke, and FDIC v. Dawson) have agreed that state, rather than federal,
law governs concerning the operation of any “adverse domination” doctrine.30 Those
decisions have in practice established rules that are usually very difficult to meet, unless
one can show intentional—as opposed to grossly negligent—misconduct. However,

27. O’Melveny & Myers v. FDIC, 114 S.Ct. 2048 (1994).
28. Atherton v. FDIC, 117 S.Ct. 666 (1996).
29. See U.S. Code, volume 12, section 1821(k). This federal statute sets a “gross negligence” floor, which applies
as a substitute for state law standards that are less stringent.
30. RTC v. Artley, 28 F.3d 1099 (11th Cir. 1994); FDIC v. Cocke, 7 F.3d 396 (4th Cir. 1993), cert. denied, 115
S.Ct. 53 (1994); and FDIC v. Dawson, 4 F.3d 1303 (5th Cir. 1993), cert. denied, 112 S.Ct 2673 (1994).

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because the Supreme Court has declined to review those decisions, they remain the
governing laws in the states within their circuits.31
Defendants in professional liability suits also have argued that the FDIC, while acting as receiver for a failed financial institution, did not take all the reasonable measures it
could have to seek out or take advantage of business opportunities to minimize the losses
on the transactions for which damages are claimed. The argument is typically raised as
the affirmative failure to mitigate defense, and sometimes also as part of the comparative
and contributory fault defenses. To date, three federal courts of appeals (FDIC v. Bierman, FDIC v. Mijalis, and FDIC v. Oldenburg) have held, as a matter of federal common
law, that such defenses are not available to defendants in professional liability cases,
regardless of what a state’s law may provide.32 Those courts found that Supreme Court
decisions and other long-standing federal precedents establish the need to protect from
“second-guessing” in litigation the discretionary conduct undertaken by federal officials
in the course of liquidating failed financial institutions and implementing FIRREA’s
complex statutory scheme of policy mandates. Most courts considering such defenses
after O’Melveny and Atherton have found that this federal rule precluding such defenses
continues to be appropriate because of the potential for significant conflict between a
federal interest and state law, if a state law were allowed to permit courts or juries to
second-guess the discretionary judgments made by federal officials in the course of liquidating the assets of federally insured depository institutions.
Recoveries From Accountants
From the 1980s through the early 1990s, federal regulations required all thrifts to hire
independent outside accountants to audit the institutions annually, to verify the institutions’ annual financial statements, and to review management’s internal control mechanisms. Many banks also contracted for outside audits. Accountants agreed to conduct
their audits in accordance with generally accepted accounting principles (GAAP). Those
principles include standards for planning and executing the audit, including guidelines for
testing evidence supporting entries or disclosures. GAAP is a complex body of accounting
literature and decisions that is frequently subject to more than one interpretation.
31. Of the various state law defenses asserted by defendants, the statute of limitations arguments were the most
detrimental to FDIC efforts to collect on professional liability claims. As a result, otherwise meritorious claims, for
many hundreds of million dollars in losses, were eliminated outright. The FDIC therefore proposed to Congress
that it amend FIRREA to make it clear that lawsuits could be brought unless the state limitations statute had expired five or more years before the failure of the financial institution. The amendment would have eliminated the
“adverse domination” issue in most cases. Ultimately, Congress amended the FDIC’s proposal and enacted a fiveyear rule that applied only to cases of fraud and intentional misconduct and not to cases of gross negligence. Thus,
except for situations involving fraud and intentional misconduct, state law continues to govern, in at least three
circuits, when and how the doctrine of “adverse domination” will be applied to stop the running of the clock for
bringing suits.
32. FDIC v. Bierman, 2 F.3d 1424 (7th Cir. 1993); FDIC v. Mijalis, 15 F.3d 1314 (5th Cir. 1994); and FDIC v.
Oldenburg, 38 F.3d 1119 (10th Cir. 1994).

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

In most cases, auditors issue “unqualified” opinions that an institution’s financial
statements are presented fairly in all material respects. The auditor may qualify the opinion, however, noting any observed deviations from GAAP. In some instances, an institution’s finances may be so shaky that the accountant issues a “going concern” letter
questioning whether the institution will survive. When an accounting firm does not give
an institution an unqualified opinion, the institution sometimes tries to replace it with
another firm.
For most banks and thrifts, the most important issue in the audit report is the loan
loss review. Banks and thrifts are required to write down the value of loans that are substantially and permanently impaired. However, write-downs may decrease stock prices,
may threaten jobs, and even more seriously, may cause an institution’s capital to fall
below the minimum percentage of total institution assets that is required under federal
regulation. Institutions with less than the minimum required capital are subject to more
stringent supervision and restrictions and possibly to receivership. Regulators frequently
require such institutions to either raise more capital or close. The amount of an institution’s capital also determines the extent to which an institution can make further loans
to generate income.
The audit of internal controls is a review of management’s procedures for detecting
problems, such as faulty underwriting, fraud, and noncompliance with regulations. Regulations require, in addition to the annual audit opinion, that the independent accountant issue an annual management letter identifying internal control problems. This
letter must be submitted to the regulators, and management is required to respond to
criticisms in the management letter.
The basic elements of an accounting malpractice claim are as follows:
• A clear and unambiguous breach of the duty to perform a competent audit in
compliance with GAAP. Examples of such breaches include failing to perform an
adequate sample of delinquent loans, failing to require a write-off of loans that
have been “permanently impaired,” allowing securities that are readily marketable
to be reported at book value rather than their lower market value, or failing to
include an important internal control deficiency in the management report.
• Materiality, which occurs when the mistake on the financial statement is large
enough to be significant in the overall context of the institution.
• Causation and damages, which occurs when the error causes a loss to the
institution.
To establish causation the FDIC must show what management or the regulators
would have done had they known the truth about an institution’s financial condition. In
some cases, causation is relatively straightforward. For instance, if the board knew that
the institution, which reported income in a fiscal year, actually had a loss, it could not
lawfully have paid a dividend. However, proof of causation is usually difficult. The

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FDIC and the RTC typically claim as damages the losses on loans made after an accountant should have issued an opinion that an institution was in dire financial straits.
During the 1980s and early 1990s, accounting malpractice lawsuits proved to be
immensely complex and expensive, and accounting firms mounted formidable defenses.
Considerable uncertainty existed about how juries would view the huge, technical cases
that featured opposing experts opining on the complexities of GAAP accounting. In the
early 1980s, the FDIC lost an expensive accounting malpractice lawsuit involving the
failure of Continental. Later, the FDIC spent more than $35 million in outside counsel
costs alone when it pursued claims against Ernst & Young and that firm’s audit of the
Butcher banks in Tennessee. After nine months of trial in 1991, but before any verdict,
Ernst & Young settled the case as part of a comprehensive global resolution of all potential liability arising from banks and thrifts that had failed previously. Other global settlements were made by several other national accounting firms during the next few years.
From the 1980s to the early 1990s, the “Big Six” accounting firms had audited
more than a thousand failed institutions. As a result, the FDIC and the RTC, as well as
the OTS, had potential claims against the accounting firms involving numerous institutions. In some cases, the total damages that were identified dwarfed the assets of the
entire accounting firm and its insurance coverage. In discussing the claims and potential
settlement, some of the firms expressed an interest in settling all claims with the FDIC,
the RTC, and the OTS, rather than addressing one claim at a time.
The agencies had already demonstrated a commitment to fully litigate such claims
in the Butcher banks case, as well as other high-profile institutions like Lincoln Savings
and Loan (Lincoln), Irvine, California, and Centrust Federal Savings Bank (Centrust),
Miami, Florida. It became apparent that the cost of litigating those claims would probably consume most of the accounting firms’ insurance assets, as well as hundreds of millions of dollars in agency costs. Consequently, the FDIC, the RTC, and the OTS
formed an interagency task force to negotiate across-the-board settlements.
Spurred by its exposure in the expensive Butcher banks litigation, in September
1992 Ernst & Young became the first accounting firm to enter into a global resolution,
including a settlement payment of $400 million. By the end of 1993, KPMG Peat Marwick settled for $186.5 million, and Deloitte & Touche settled for $312 million. In
1995, Arthur Anderson settled for more than $100 million. In addition, those firms
agreed to establish an extensive training program for accountants who would be auditing
federally insured depository institutions. Two other Big Six firms settled individual cases
with the FDIC. All told, $1.15 billion on accounting claims were recovered by the
FDIC and RTC, with about $1 billion of that total being recovered through the four
global settlements discussed above. As a result, very few claims actually went to trial, and
many potential claims were resolved without incurring further costs of collection.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

Attorney Malpractice Claims
Banking is a law-intensive business. Lending, in particular, may entail a myriad of transactions, usually involving complex collateral arrangements. Insured institutions, in addition to being subject to general principles of corporate governance, are subject to special
rules and regulations designed to keep them safe and sound and to protect depositors.
An insured institution can be regulated by more than one governmental agency, at both
the state and the federal levels.
Attorneys play an important role in advising banks about how to do business in
compliance with these complex rules. Sometimes, the scope of the attorneys’ employment is limited to closing a particular loan transaction. In other institutions, outside
attorneys play a central role at the institution; for example, by serving as the general
counsel or as a member of the board. Lawyers who serve central roles in corporate governance may be held to a higher standard than a layperson.33
Not surprisingly, among the thousands of potential claims investigated the FDIC
and the RTC found that some attorneys had made serious mistakes that damaged their
client institutions. The FDIC and the RTC filed a total of 205 attorney malpractice
suits arising from less than 10 percent of all failed institutions. From those cases and
some prelitigation settlements, the agencies recovered more than $500 million, averaging about $2.5 million for each suit filed. Most of the cases were settled at an early stage
in the litigation. The primary source of recovery in most of the cases was attorney malpractice insurance policies.
As is true for other professional liability claims, attorney malpractice cases require a
breach by the individual or the firm of a duty to a client institution, as well as damages
caused by the breach. The claims ran the gamut, from simple failure to record a lien to
allegations that attorneys played a central role in aiding and abetting a criminal CEO in
deceiving shareholders and regulators. Many attorney malpractice claims involved the
attorney’s failure to advise the client institution about violations of regulations and statutes, usually concerning imprudent loans. For example, attorneys have failed to alert a
bank’s board that a loan to a nominee borrower was really a loan to an insider designed
to skirt credit concentration restrictions such as the “loans-to-one-borrower” regulation.
A controversial issue in those cases is what standard of knowledge the lawyer must
have of the insider’s conduct to be liable: actual knowledge, intentional ignorance, or
“constructive” knowledge (what the attorney should have known under the circumstances). A related issue is the extent to which a lawyer has a duty to investigate suspicious representations of bank officers. If a lawyer learns of an illegal transaction, the
lawyer has a duty to go to the board of directors, if necessary, to advise them of the violation or to withdraw from the representation.

33. See Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968).

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The largest attorney malpractice recoveries involved powerful insiders at the client
institution, who had little respect for the rules and pressured outside professionals to
overlook violations and even to help conceal matters from the institution’s directors or
regulators. When the lawyers succumbed to these pressures, they were treating the CEO
rather than the institution as the client. The lawyers forgot that their job was to serve the
interests of the entire institution, not those of the CEO or controlling shareholder. Some
particularly egregious cases included allegations that the attorney aided and abetted the
CEO in breaches of fiduciary duty, such as the PL suits involving Lincoln’s CEO
Charles Keating and Centrust’s CEO David Paul.
The largest attorney malpractice recoveries arose from the RTC receiverships of
Lincoln and Centrust, two institutions dominated by strong CEOs who eventually
were convicted of bank fraud. The RTC recovered a total of $120 million from seven
different firms serving as regulatory counsel for Lincoln and another $48 million from
settlements with two firms representing Centrust.
Securities Broker Claims: Drexel Burnham Lambert, Inc., and Michael Milken
The FDIC has recovered more than $1.1 billion on securities claims against Drexel
Burnham Lambert, Inc. (Drexel), and Michael Milken, the head of Drexel’s “junk
bond” unit. Beginning in the early 1980s, Michael Milken targeted thrift institutions as
a large, federally insured pool of capital that could be used to finance his junk bond
efforts. Through Drexel, Milken engineered a campaign to exert improper influence on
investment decisions at thrifts, including illegal bribes and misrepresentations concerning the value, liquidity, and risk associated with the junk bonds. Drexel also performed
underwriting services for several huge thrifts, such as Centrust and Columbia Savings
and Loan Association, Beverly Hills, California, through which substantial proceeds
from various Drexel activities were invested. In fact, the acquisition of Lincoln by
Charles Keating was facilitated by proceeds derived from a Drexel underwriting.
In early 1990, the RTC and the FDIC established a joint task force to oversee a
nationwide investigation into the losses suffered by failed thrifts caused by improper
activities related to Drexel and junk bonds. Within the year, the joint task force identified failed financial institutions that had traded in junk bonds underwritten by Drexel,
reconstructed numerous, complex trading histories, quantified losses resulting from the
trading, and amassed the oral testimony and documentary evidence necessary to evaluate and prosecute possible claims. The agencies filed multiple claims and lawsuits against
Drexel, Milken, and their partnerships. The claims included those filed in the Drexel
bankruptcy proceedings on behalf of 45 failed financial institutions for losses exceeding
$11 billion and those for treble damages under the federal Racketeer Influenced and
Corrupt Organization (RICO) statute. The FDIC and RTC were by far the largest
claimant among the thousands of claims filed in federal bankruptcy court and took the
lead in litigating all civil claims for securities fraud against Drexel.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

In January 1991, the agencies filed a class action suit against Milken and numerous
other former Drexel managers on behalf of 53 failed thrifts. The lawsuit involved more
than 1,600 different issues of junk bonds and several hundred Milken partnerships that
were used to implement unlawful securities schemes. The monumental litigation
required production of more than 20 million pages of documents from numerous FDIC
and RTC sites nationwide. In March 1992, slightly more than a year after all claims
were filed, the parties negotiated global agreements to resolve all pending litigation
between the claimants, including the FDIC, the RTC, and private-sector class action litigants, and all named defendants, including Drexel, Milken, and more than 500 former
Drexel and Milken partnerships and employees. The Drexel and Milken claims were
resolved through highly complex structured settlements entailing periodic cash payments over time, particularly as the large bankruptcy of the Drexel brokerage house itself
was resolved. A comprehensive resolution of the Drexel bankruptcy litigation was established through an amended plan of reorganization that was finally approved in March
1992. The plan set aside a percentage of Drexel’s bankruptcy estate to satisfy the claims
of securities litigants, pooled claims related to securities fraud against Drexel, and established a pro rata distribution plan for securities claimants. In resolving all pending civil
claims against him, defendant Milken agreed to pay $950 million in cash, plus future
distributions from liquidation of his other assets. The Drexel bankruptcy plan called for
periodic cash distributions to all claimants totaling at least $1.3 billion as sums were
derived from the unwinding of Drexel’s bankrupt operations. Under those settlement
arrangements, approximately 40 percent of the total payments would be paid to the
RTC and the FDIC, as opposed to the numerous other settling claimants.
As of December 1996, more than $1.1 billion had been collected by the FDIC since
the courts approved the Drexel and Milken settlements in 1992. Of the total amounts
collected, approximately $515 million are attributed to the settlement with Milken and
related parties, and approximately $606 million are attributed to the resolution of the
Drexel bankruptcy proceeding. Most of the settlement payments (93.5 percent) to the
agencies were paid to the RTC, thus reflecting that damages in the Drexel and Milken
matter fell mostly on failed thrift institutions, rather than on commercial banks.
Criminal Restitution Activities
FDIC staff members coordinate professional liability activities with the Justice Department whenever criminal conduct by professionals is suspected at a failed institution.
The underlying loss that is the basis for a PL claim, especially a fidelity bond claim, may
also be the basis for a criminal proceeding. Such conduct and the resulting loss ultimately may be the basis for a criminal restitution order that is payable by the wrongdoer
to the FDIC as receiver of the failed institution.
During investigations the FDIC investigators and attorneys are alert to any evidence
of possible criminal wrongdoing. Whenever appropriate, they make criminal referrals to
the Justice Department and the FBI. From the 1980s to the early 1990s, many thou-

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sands of such referrals were made. After FIRREA’s enactment, the FDIC and the RTC
set up offices and criminal units dedicated specifically to facilitating the cooperative
effort begun by interagency bank fraud working groups.34 Staffed by agency attorneys
and investigators with professional liability expertise, the criminal units were mandated
to assist federal law enforcement authorities in their investigations and to help U.S.
attorneys in any prosecutions. In addition to preparing criminal referrals, the criminal
units also coordinated agency responses to grand jury subpoenas and, later, efforts to
locate and recover assets subject to court-ordered restitution.
Under the Victim and Witness Protection Act, criminal restitution is available to the
receiver of failed financial institutions that were victims of bank fraud.35 An order of restitution may be mandated as part of the defendant’s criminal sentence and is often made a
condition of probation. The process of obtaining a restitution order begins when a defendant charged with bank fraud is found or pleads guilty in a criminal proceeding. At that
time, a request for restitution is prepared for submission to the court before sentencing.
Usually written in the form of a letter to the sentencing judge, the restitution request documents the losses that the criminal conduct caused the institution, sets forth an analysis of
the receiver’s standing to obtain restitution under the Victim and Witness Protection Act,
and requests a specific amount of restitution. Under the act’s provisions, the court considers a number of factors in arriving at a restitution amount, such as the amount of losses to
the victim, the financial resources of the defendant, and the financial needs and earning
ability of the defendant and the defendant’s dependents. The assistant U.S. attorney
responsible for the criminal case is provided with an advance copy of the restitution letter,
which usually is sent to the court by the prosecutor shortly before sentencing.
Since 1988, when the Justice Department and the banking agencies implemented
their coordinated task force approach to the problem, more than 5,500 individuals have
been convicted of various major financial institution fraud crimes.36 Approximately onethird of those convicted felons were former directors and officers of their institution, and
the remainder includes a significant number of attorneys, accountants, and other professionals. Courts have ordered them to pay several billion dollars in restitution to the
defrauded institution or, in the case of an institution’s failure, to the FDIC. The FDIC
continues to work actively with the Justice Department to collect outstanding criminal restitution orders. Most of the criminal defendants have very limited assets. The FDIC has
therefore succeeded in collecting only approximately $100 million to date in FDIC and
34. Begun in the mid-1980s, the groups encompassed the Treasury Department and the Securities and Exchange
Commission, as well as the Justice Department and various bank and thrift regulatory agencies. In addition to the
National Bank Fraud Working Group in Washington, numerous local working groups and task forces existed
nationwide. The working group network facilitated the resolution of myriad interagency issues and sometimes
disparate goals.
35. See U.S. Code, volume 18, section 3579.
36. The Justice Department includes as a “major” financial institution fraud any case in which the fraud or loss
exceeded $100,000; the defendant was an officer, director, or shareholder; or the scheme involved multiple
borrowers at the same institution.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

RTC criminal restitution. Professional liability investigators and attorneys at the FDIC
and the RTC played an integral role in the coordinated law enforcement effort.37

Outcomes and Results
Total professional liability collections from January 1986 to December 1996 exceeded
$5 billion. From 1990 through 1995, in particular, the FDIC and the RTC together
collected a total of $4.5 billion from all professional liability operations. Of that total,
$2 billion were collected on behalf of the FDIC receiverships, and $2.5 billion from the
RTC (including the Drexel and Milken recoveries). See table I.11-1 for a summary of
the professional liability recoveries and outside counsel expenses.
Of the $4.5 billion, the FDIC and the RTC collected more than $1.2 billion on
accounting liability claims, mostly from the global settlements with four national auditing firms. Operations at the two agencies contributed in approximately equal proportion to the $500 million collected on attorney malpractice claims during the six years
after FIRREA’s enactment. The agencies recovered $1.3 billion on director and officer
claims. During this period, the agencies also collected approximately $300 million from
fidelity bond insurers for dishonest or fraudulent acts covered under those specialized
insurance contracts.
From 1990 through 1995, most of the costs for professional liability operations
were for outside counsel.38 The RTC often retained counsel to investigate potential
claims for a large number of failed thrifts, as well as to pursue any resulting litigation.39
The FDIC usually retained outside counsel only after it appeared likely that a lawsuit
would be approved and the assistance of outside counsel would be required to conduct
the litigation. Because of the complexity and resource-intensive nature of the cases,
however, both agencies used outside law firms to bring most of the lawsuits.40

37. See the 1995 Department of Justice Financial Institution Fraud Special Report (final report prepared by the
special counsel for financial institution fraud).
38. As shown in table I.11-1, $1 billion were spent on outside counsel, consultants, and experts from 1986 through
1996. Outside counsel expenses attracted significant public and congressional interest. See, for example, Professional Liability and the RTC Contracting With Lawyers, Subcommittee Hearing on General Oversight, Investigations,
and the Resolution of Failed Financial Institutions Before the House Committee on Banking, Finance, and Urban
Affairs, 103d Cong., 1st Sess., March 30, 1993.
39. The FDIC has conducted its PL investigations using its own staff of investigators and attorneys, and occasionally supplemented that staff with outside contractors and consultants. The RTC adopted a different practice, not
only because of the heavy workload that was imposed immediately on a newly established operation, but also because the RTC, as an agency scheduled to terminate at the expiration of its mission, sought to minimize the hiring
of permanent staff.
40. The use of outside counsel is the predominant practice for large receivers and other insurance company enterprises that manage liability claims. Beginning in 1993, the FDIC set up separate in-house litigation units within its
PLS. Those units have handled a modest part of the professional liability caseload, but have been effective in
resolving cases and reducing outside counsel costs. They also have allowed the FDIC to pursue some smaller meritorious cases that otherwise would not have been cost-effective.

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Conclusion
Professional misconduct was a notable factor in the enormous losses resulting from the
financial institution crisis of the 1980s and the early 1990s. The professional liability
program was therefore an important part of receivership operations. Sifting through
hundreds of failures, the FDIC and the RTC reviewed thousands of potential claims
relating to conduct by former directors, officers, attorneys, accountants, appraisers,
brokers, and other professionals formerly affiliated with failed banks and thrifts. The
agencies actively pursued those claims that were both strong on the merits and likely to
be cost-effective in light of accessible assets and insurance coverage. In the end, the professional liability program contributed more than $5 billion in cash recoveries to the
receivership efforts.
The professional liability program yielded benefits to the public in addition to the
actual cash collections by the agencies. Those advantages are most apparent in the area
of criminal restitution and law enforcement. The professional liability program also had
an effect on awareness of professional standards, which directly benefits the public by
enhancing discipline among professionals.
Not surprisingly, the professional liability program at the FDIC and the RTC was
controversial from the start, spawning nationwide discussion and debate over basic legal
and policy principles. Many of the professionals sued were respected people in their
communities, and some were public figures and politicians. Although many of the
claims involved outright fraud, most of the lawsuits alleged that the professionals were
grossly derelict in performing their duties to the failed institution. Thus, most defendants in professional liability lawsuits are honest citizens who neither committed crimes
nor specifically intended to cause the failure of the institutions. It was therefore inevitable that the professional liability program would be the subject of substantial public
interest, including numerous hearings before Congress.
Defendants frequently accused the FDIC and the RTC of being too aggressive in
bringing lawsuits. They charged that the agencies were seeking to impose new, stringent
standards of conduct retroactively. Others criticized the agencies for bringing too few
suits and for settling claims for amounts that were insufficient, considering the extent of
the losses or the defendant’s personal assets. Still other critics contended that sensitivity
to professional liability lawsuits has made it difficult for financial institutions to obtain
good professionals at banks and thrifts.

PR O F ES S I ON A L L I A B I L I T Y CL A I M S

287

Table I.11-1

Professional Liability Recoveries and Outside Counsel Expenses
1986 - 1996
($ in Millions)
FDIC
Year

Recoveries

RTC

Outside Counsel Cost

Recoveries

Outside Counsel Cost

1996*

$81.1

$15.1

$114.8

$33.0

1995

231.7

22.1

222.7

75.7

1994

239.9

33.2

511.6

100.0

1993

266.5

43.5

364.3

134.6

1992

609.8

85.2

288.4

69.8

1991

319.3

87.0

31.7

49.8

1990

363.1

79.6

11.2

3.4

1989

147.9

32.0

4.2

N/A‡

1988

90.0

20.8

1987

71.5

15.2

1986

83.3

10.9

$2,504.1

$444.6

$1,548.9

$466.3

Drexel/Milken†

1,028.8

106.0

$2,577.7

$572.3

Subtotals†

Totals

$2,504.1

$444.6

* Although all recoveries are by the FDIC after the December 31, 1995, sunset of the RTC, collections can
still be traced to thrift institutions inherited by the FDIC.
† The recoveries and costs to the RTC under the Drexel/Milken global settlements are reported separately, below this subtotal line, and as part of the line showing total recoveries and costs for the FDIC
and the RTC. Approximately 6.5 percent of collections under the Drexel/Milken settlements were allocated to thrift institutions managed by the FDIC under the FSLIC Resolution Fund. Those relatively
smaller Drexel/Milken collections to the FDIC are not reported separately, but are included within the
annual figures for the FDIC above.
‡ Not applicable
Source: FDIC, Legal Division.

The Radisson Lord
Baltimore Hotel, a
registered historic
landmark near the Inner
Harbor in Baltimore,
Maryland, was sold by the
FDIC at its December 1992
auction for $8.5 million.

uring the crisis years, the FDIC and RTC
acquired approximately $410 billion in
assets that were targeted for asset
disposition. By the end of 1997, less than
$5 billion of those assets remained with
the FDIC.

CHAPTER 12

Evolution of the
Asset Disposition Process

Introduction
This chapter provides an overview of the various asset disposition methods employed by
the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC) in their various capacities. The chapter also describes how the FDIC and the
RTC adapted their asset disposition methods to meet the enormous challenges during
the 1980 through 1994 period. Chapters 13 through 17 describe in greater detail the
evolution and issues associated with specific asset disposition methods.
Between 1980 and 1994, the FDIC handled the resolution of 1,617 failing or failed
banks with total assets of $302.6 billion, and from 1989 to 1995, the RTC resolved 747
failing or failed thrift institutions with total assets of $402.6 billion. During 1980 to
1989, the Federal Savings and Loan Insurance Corporation (FSLIC) also acquired a
significant volume of assets when it resolved 550 thrifts with total assets of $219 billion.
Altogether, from 1980 to 1994 these agencies resolved 2,912 banks and thrifts with
assets of $923.8 billion. (See chart I.12-1.) (In 1995, the RTC resolved two thrifts with
assets of $0.4 billion.)
The FDIC disposed of the majority of the assets in failed or failing banks at the time
of resolution by selling them to assuming banks. Of the $302.6 billion in failed bank
assets, about $230 billion, or 76 percent, were sold immediately at resolution to assuming banks. The remaining $72 billion in assets were retained by the FDIC and disposed
of over time. Those remaining assets were usually the most difficult and problematic to
resolve.
The RTC sold a relatively smaller percentage of assets at the time of resolution, and
instead disposed of the assets either during conservatorship (before closing) or after
completion of the resolution transaction. Of the $402.6 billion in assets from failed
thrifts handled by the RTC, $75.3 billion, or 18.7 percent, were handled at the time of

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M A N A GI N G T H E C R I S I S

resolution. Of the remaining $327.3 billion in assets, $157.7 billion, or 39 percent, were
disposed of while the institutions were in conservatorship, and $169.6 billion, or 42.3
percent, were retained by the RTC for disposal after resolution. The more liquid or easier-to-sell assets often were the ones sold during conservatorship, while the harder-tosell assets usually were sold after completion of the resolution process.
The volume of bank and thrift assets in liquidation rose steadily in the 1980s and
peaked in the early 1990s. The rise corresponded with the dramatic surge in bank and
thrift failures discussed in chapters 2 through 7. The FDIC’s asset portfolio peaked at
$43.3 billion in 1991 and the RTC’s at $83.1 billion in 1991. Combined bank and
thrift assets in liquidation peaked in 1991 at $126.4 billion. (See chart I.12-2.) To put
that number in the proper context in terms of assets, the FDIC/RTC would have been
the second largest financial institution in the country at that time.
The disposition methods discussed in this chapter (and in chapters 13 through 17)
relate to the liquidation of approximately $410 billion in assets that the FDIC and RTC
did not sell to an assuming bank during the resolution process. After resolution, the
FDIC needed to liquidate $72 billion in assets from failed banks, along with an

Chart I.12-1

Combined Number of Failures (Banks and S&Ls)
1980–1994
600
550
500

Number of Failures

450
400
350
300
250
200
150
100
50
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Totals
FSLIC
RTC
FDIC

11
11

120

145

203

Totals

115

106

174

205

251

185
279

8
318
207

213
169

144
127

59
122

9
41

2
13

550
745
1,617

464

533

382

271

181

2,912

Figures include FDIC and FSLIC open bank assistance transactions.
Source: Reports from FDIC Division of Research and Statistics.

EVO LU T I ON O F T H E A S S E T D I S P O S I T I O N PR O C E S S

291

Chart I.12-2

Combined Bank and S&L Assets in Receivership
1980–1994
($ in Billions)
150

Assets at Year End

120

0
FDIC
RTC*

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
$1.8

1.8

2.2

4.3

10.3

9.7

10.9 11.3

9.3

25.9
$8.0

30.9
59.3

43.3
83.1

43.3
64.3

28.1
40.7

16.7
22.9

*Does not include $47.3 billion of assets in conservatorship.
Source: FDIC Division of Resolutions and Receiverships and RTC Statistical Abstract.

additional $11 billion in assets received from the FSLIC. The RTC needed to liquidate
$327 billion in assets not sold to assuming banks.
Generally, all three agencies had two basic policy goals for disposing of the assets of
failed financial institutions: (1) to dispose of the assets as soon as possible without upsetting local markets, and (2) to maximize the return to receiverships. The factors and
methods used to decide when to hold versus when to sell assets, or when to litigate
versus when to compromise, evolved in response to the circumstances of the times. At
the beginning of the crisis years (1980 to 1994), the FDIC used in-house staff to liquidate assets one at a time. By the end of the crisis years, more sophisticated methods had
evolved, including securitized sales of assets and equity partnerships with private-sector
firms.

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M A N A GI N G T H E C R I S I S

Asset Disposition at the FDIC Before 1980
Between the Great Depression and the 1980s, few banks failed, and those that did were
relatively small. Between 1934 and 1979, a total of 566 banks failed, or, on average,
about 12 per year.1 Those banks had total assets of about $9.2 billion, or an average of
$16.3 million per bank. Excluding three larger bank failures in the 1970s, the average
asset size of the banks that failed during that period was only about $3.7 million.
Although there were not many bank failures or failed bank assets before the 1980s,
the majority of the assets in the banks that did fail were retained by the FDIC for liquidation. Of the 566 bank failures between 1934 and 1979, 315, or 55.7 percent, were
deposit payoffs, and 251, or 44.3 percent, were purchase and assumption (P&A) transactions. In a deposit payoff, the FDIC retained all of the failed bank’s assets. In a P&A
transaction, a large portion, usually at least 50 percent, of the assets was retained.
Even though the FDIC retained most failed bank assets for liquidation, the pre1980 asset disposition workload was not significant. Because of the large number of failures in the early to mid-1930s, assets in liquidation peaked at $136 million in 1940 (the
value in current dollars is $1.6 billion). Over the next three decades, however, the number of failures decreased, and the volume of assets in liquidation, which was only $2 million in 1952, did not reach the 1940 level again until 1971. The FDIC liquidation
activity did escalate in the 1970s, as several large banks failed in 1974, and the volume of
assets in liquidation reached $2.6 billion. By the end of the decade, the volume had
decreased somewhat to a total of $1.9 billion, but was well above the pre-1970 totals.
During the FDIC’s early years, when few banks failed, a team of career FDIC
employees, perhaps no more than two or three people, depending on the bank’s size, was
sent to manage the receivership. The FDIC team hired failed bank employees on a
temporary basis to assist the career staff in the liquidation process. After several years,
when the workload decreased sufficiently, the FDIC would shut down the receivership,
close the office, and dismiss the temporary employees. After a receivership closed, the
career employees would move to the site of another failed bank to set up receivership
operations. Thus, the FDIC employees lived a fairly nomadic lifestyle, never staying in
one place for more than a few years at a time.
Early procedures for disposing of assets were relatively straightforward. In a P&A
transaction, the first step was to see if any additional assets could be sold to the acquiring bank. The acquiring bank would look at its list of new depositors to see if those
depositors had loans held by the receivership. If they looked like good customers, the
acquiring bank would purchase and rewrite the customer’s loan and pay off the debt
held by the FDIC as receiver. Usually, the FDIC offered no discounts. This process
would go on for several weeks as the bank figured out which assets it wanted and which
ones it would leave behind. The process worked well during periods of stable or

1. If one excludes the failures in the 1930s, the average number drops to 6.2 per year.

EVO LU T I ON O F T H E A S S E T D I S P O S I T I O N PR O C E S S

decreasing interest rates because borrowers were not at risk of a significantly higher
interest rate on their new loans. In addition, the acquiring bank was not at risk of holding a new loan with a below-market rate of interest if it renewed the loan at or near the
existing rate. However, during periods of increasing interest rates, it was not to the borrower’s advantage to pay off existing loans that had more favorable rates of interest. In
those instances, if the loans were not in default, the FDIC would have to hold them to
maturity, a situation that sometimes resulted in the FDIC’s retaining a larger portion of
the failed bank’s assets than it was accustomed to owning.
After the assuming bank completed its activity, the FDIC would focus on liquidating the remaining assets. Although few written policies and procedures were in place at
the time, the FDIC preferred that borrowers find refinancing and pay their loans off in
full. If borrowers could not obtain refinancing from the assuming bank, the FDIC asked
them to look elsewhere. If refinancing was not available, the FDIC expected borrowers
to meet the terms of their loans and pay them off in full at maturity. The FDIC’s field
staff had little flexibility in offering discounts or compromises at reduced value. While
not done on a widespread basis, the staff would receive authority from Washington to
settle for reduced amounts to the extent necessary.
During the 1950s and 1960s, the FDIC would “offset” the amount a borrower
owed on all delinquent loans against that person’s deposit balance, thereby reducing the
overall payment to the depositor and ensuring that the FDIC collected a higher, if not
full, amount on the loan. For performing loans, the FDIC often withheld offsetting
deposits pending individual negotiations. Usually, the result was that deposits and loans
were “netted” against one another so that only the remaining balance was paid by or
owed to the FDIC.
That approach reduced the FDIC’s initial outlay of funds for payoff cases. From
1934 to 1965, 8 percent of the deposit accounts and 5.3 percent of the total deposits in
resolutions handled as deposit payoffs were paid by offsets.2 The FDIC did not keep
similar records on withheld deposits because they were negotiated and ultimately
resolved.
The offsets and withholding method of collection, however, had an adverse effect
on local communities. Depositors could not use their funds until decisions could be
made about offsets. In addition, once decisions were made, the failed bank’s customers
often had less liquidity than they had before. The issue received considerable attention
in 1963 when the Chatham Bank of Chicago, Chicago, Illinois, failed, and the payoff
had significant repercussions for the local community. As a result of that failure, the
FDIC changed its policy so that it offset only delinquent loans or officers’ and directors’
funds against potential liability, and it stopped the practice of offsetting or withholding
all mutual loans and deposits. Depositors with funds over the insurance limit retained
the right to offset those amounts against loans to the failed bank. That strategy usually

2. FDIC, 1965 Annual Report, table 124.

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M A N A GI N G T H E C R I S I S

worked to the depositors’ advantage because, although they owed the full amount of
their loans, they would probably collect less than full value on uninsured funds in the
absence of the offset or netting arrangement.
In the 1970s, three notable bank failures signaled a new era for the FDIC’s asset disposition activities. Those failures included the United States National Bank, San Diego,
California, in 1973, with assets of $1.3 billion; the Franklin National Bank, New York,
New York, in 1974, with assets of $3.6 billion; and the Banco Credito y de Ahorro Ponceno (Banco Credito), Ponce, Puerto Rico, in 1978, with assets of $712 million. Those
three large bank failures caused a substantial increase in assets in liquidation, which in
turn prompted the FDIC to begin re-evaluating its asset disposition practices.
During the late 1970s, with rising interest rates, prospective purchasers would not
pay full book value for loans. In 1976, to facilitate sales in that environment, the FDIC
issued a directive that stated that loans (especially mortgage loans) could be priced
according to their current market value and sold. The directive suggested that the FDIC
would not hold such loans, nor collect payments for their future value, but would
instead sell them for their present value. As a result, in 1976, the FDIC conducted a
mortgage loan sale at a small liquidation office in New Jersey and from 1976 to 1979
conducted approximately 10 competitive residential and commercial mortgage loan
portfolio sales (known as bulk sales) totaling approximately $50 million.
During that period, P&A agreements also gave assuming banks exclusive rights to
purchase mortgage loans at a discount within 60 days after a bank failure. As a result, in
1978, the FDIC sold about 5,000 mortgage loans in one transaction and a $100 million
mortgage loan portfolio in another transaction after the Banco Credito failure.3

Asset Disposition Activities After 1980
In the early 1980s, bank closing activities began a steady rise that peaked in the early
1990s. As a result, bank assets in receivership also increased dramatically. The FDIC
faced many new challenges, as bank closing activities were directly affected by regional
economic factors. The Midwest and Plains states experienced an agriculture crisis that
led to the closing of many farm banks and the acquisition of a large volume of agriculture-related loans. Real estate values declined in California, resulting in an increase in
bank closings and assets in receivership on the West Coast. In the Southwest, problematic energy loans led to the closure of many banks, the most infamous being Penn
Square Bank, N.A., Oklahoma City, Oklahoma. In the Northeast, the FDIC dealt with
the savings bank crisis. Recognizing that the volume of bank closings and assets in liquidation could no longer be administered efficiently from Washington, D.C., the FDIC

3. Stephen Douglas, on-site FDIC liquidator, excerpt from an interview.

EVO LU T I ON O F T H E A S S E T D I S P O S I T I O N PR O C E S S

expanded and decentralized its organizational structure. It also began exploring new and
creative ways of disposing of the rapidly increasing volume of assets.
Regionalized Liquidation Activities
Beginning in November 1982, in response to the rapidly accelerating number of “problem banks,” the FDIC began to expand its liquidation and claims presence by organizing its operations into regions. It opened regional offices in Atlanta, Chicago, Dallas,
Kansas City, New York City, and San Francisco, making those offices responsible for all
liquidation activities occurring within their geographical territory.
Later, each region became responsible for several consolidated offices that the FDIC
established at different locations within the region’s territory. As banks were closed, the
assets retained would be brought into the nearest consolidated office for liquidation,
generally within three months. That new approach provided economies of scale and
improved asset marketing techniques by presenting opportunities for packaging similar
loan products from different failed banks for sale to private investors.
One of the key monitoring methods the FDIC used to measure consolidated office
performance was the cost-to-collect ratio. FDIC management estimated that, based on
historical experience, it would cost an average of $.10 to collect $1.00 from the assets
held in inventory at each consolidated office. It used the 10 percent rule as an informal
gauge of consolidated office performance. National competition among consolidated
offices for the lowest cost-to-collect ratio also affected asset disposition strategies. Consolidated offices were quick to get on board with bulk sale initiatives because of the low
cost and high return of disposing of assets in bulk.
Reorganization of liquidation operations provided the FDIC with the flexibility to
adapt its operations to meet the expanding workload of the crisis years. Such regionalization was accompanied by delegations of authority and additional field responsibility.
The regional and consolidated offices also provided a firm base of operations that contributed to the orderly absorption of the FSLIC in 1989, the start-up of the RTC that
same year, and the transition of the RTC into the FDIC in 1995.
The Energy Crisis
The fall of crude oil prices in 1981 had a severe effect on banks in energy-producing
southwestern states. The gasoline shortage in the 1970s had convinced the public that
crude oil supplies were limited, and projections made by experts at that time indicated
that crude oil prices could increase to $100 per barrel. The price of crude oil did increase
rapidly to more than $40 per barrel, thus validating the projections and causing the valuation of estimated reserves in the ground to increase exponentially. Almost any loan
amount was considered reasonable, based on those leveraged values. That sense of
security created a frenzy to lease acreage, drill discovery wells, estimate reserves from the
preliminary production, and rush to lease more land. The increasing demand drove up

295

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M A N A GI N G T H E C R I S I S

the prices of leases, supplies, and all services. Even though the income from production
still took months or years to recoup the cost of drilling, loan volume continued to
increase. As interest rates rose during that period, banks continued to lend, and the projected profits enticed borrowers to agree to the higher rates. When the bottom fell out of
crude oil prices, energy loan losses increased and many banks fell into insolvency.
As a result, the FDIC acquired a large portfolio of energy loans and related assets
and, at one time, became the largest owner of drilling rigs in the world. The FDIC hired
employees from the local regions with the knowledge and skills to resolve those specialized assets. Over time, FDIC staff became more knowledgeable in energy lending as
well. They were required to identify the exact type of ownership interest in a gas or oil
well held as collateral and interpret the attendant legal instruments. They also had to
understand reserve estimations and the values assigned from cash flow projections.
Because of the collapse of the energy market and poor loan documentation, collection of loans was difficult. The FDIC relied on secondary sources of recovery such as
calling letters of credit and selling collateral equipment.
Agricultural Crisis
In the early 1980s a severe downturn in the agriculture sector began to take its toll on
agricultural banks. By 1985, agricultural bank failures had peaked at 62 for the year,
accounting for more than 51 percent of total bank failures. The FDIC as receiver was
then in the business of working out distressed farm credits.
The disposition of agricultural loans acquired from failed banks started off poorly.
The majority of field liquidation staff and regional management had little knowledge of
agricultural operations and lending practices. Farm or livestock operations are usually
seasonal, with cash flow occurring at different times from year to year, depending on
when the crops or livestock are sold. Farm borrowers were accustomed to borrowing
funds for living expenses or paying at the time of sales. At the time, releasing proceeds
from the sale of collateral or advancing money to borrowers for such expenses were
uncommon practices for the FDIC. Compounding the problem was the fact that the
FDIC’s field staff had limited delegated authority. Typically, requests for advances or
releases of proceeds to borrowers had to go to the regional office. Delays in processing
such requests impaired the farmers’ ability to pay their bills, make critical purchases, and
develop business plans.
Smaller community banks had maintained the practice of repeatedly renewing their
farm loans. Such renewals were usually done on a quarterly basis, depending on the
needs of the farmer. The FDIC told farmers to refinance their loans at other banks, but
in most cases there were few good banks from which to borrow. Thus, one of the FDIC’s
basic collection practices of moving good customers to good banks did not work in the
agriculture crisis, and entire communities were affected.
In response to complaints that the FDIC’s collection policy was harsh and demanding, the FDIC held town meetings immediately after farm bank failures to explain its

EVO LU T I ON O F T H E A S S E T D I S P O S I T I O N PR O C E S S

policies and procedures to local communities. In addition, the FDIC provided its staff
and management with training and written agricultural guidelines to help them handle
this crisis. Furthermore, the FDIC put programs in place to keep agricultural loans
within the banking system or to sell them immediately after a bank’s failure. To
encourage sales to the private sector, the FDIC offered discounts on the portfolios.
By early 1986, the FDIC had entered into an agreement with the Farmers Home
Administration (FmHA), under which the FmHA and the FDIC would provide personnel at bank closings, make direct loans, and help farmers restructure their debt. That
program helped the FDIC verify collateral values and compromise debt. It also provided
on-the-job training for less experienced liquidators. Up to that time, the FDIC’s collection efforts had been geared toward “stemming” the losses and not increasing outstanding debts. In response to the agricultural crisis, the FDIC adapted its techniques to
acknowledge that in rural lending it may be necessary to advance funds to ensure that
the value of collateral, such as crops and livestock, would be maintained.
Moreover, as a result of the farm crisis, the FDIC learned to be more sensitive to the
public’s perception of its actions and to be more flexible in applying collection techniques according to the type of loan and borrower. Those lessons proved invaluable as
the 1980s progressed.

Creation of the Resolution Trust Corporation
In August 1989, Congress enacted the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) and provided for the establishment of the Resolution Trust
Corporation to resolve the savings and loan (S&L) crisis. The RTC immediately inherited 262 conservatorships from the FDIC, which had acted in the place of the FSLIC as
conservator for the insolvent institutions. Headquartered in Washington, the RTC
opened regional offices in Atlanta, Dallas, Denver, and Kansas City. It also established 14
consolidated offices and 14 sales centers. Initially staffed with FDIC employees, the RTC
hired additional employees from the private sector and, in 1991, reached its staffing peak
at 8,614 employees.
Although the resolution of insolvent institutions was the initial priority of the RTC,
disposition of assets retained from those institutions would become the RTC’s biggest
challenge. The 262 conservatorships initially acquired by the RTC contained assets of
$115 billion. Shrinking those institutions by curtailing new lending activity and selling
assets was a high priority.
For the most part, the RTC also continued to place institutions into conservatorship
before resolution. During its lifetime, the RTC disposed of $157.7 billion in assets from
institutions while they were in conservatorship. It retained an additional $169.6 billion
in assets, which it disposed of after resolution.
The asset disposition methods the RTC used were driven mostly by the legislative
mandate of FIRREA. FIRREA required that assets be disposed of in a manner that (1)

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maximized return and minimized loss, (2) minimized the impact on local real estate and
financial markets, and (3) maximized the preservation of the availability and affordability of
residential property for low- and moderate-income individuals. FIRREA further required
that the RTC hire private-sector contractors for asset disposition if such services were available in the private sector and if the use of those services were practicable and efficient.
One of the RTC’s biggest challenges was balancing the requirement to sell assets
quickly while obtaining the highest possible price without being accused of “dumping.”
The challenge was especially difficult when the RTC was attempting to dispose of hardto-sell real estate properties. The RTC also had to face criticism for packaging assets only
for institutional investors. That criticism resulted in the RTC’s development of small
investor programs designed to include a wider range of potential investors.
About one-half of the RTC’s assets were commercial and residential mortgages. The
other half consisted of owned real estate, other loans, other assets (including subsidiaries), and securities. The RTC placed nonperforming loans, owned real estate, and some
of the other assets with contractors and usually placed performing loans with conventional loan servicers. Those assets were then disposed of through various initiatives, such
as loan sales, auctions, securitizations, and partnerships with private-sector firms. Those
methods of disposition are discussed below and in chapters 13 through 17.

Developing Asset Marketing Activities
As bank resolutions and assets in liquidation began increasing in the 1980s, the FDIC
could no longer effectively and efficiently dispose of assets without changing its
methods. Several factors influenced the FDIC to move toward selling loans rather than
holding them to maturity.
At that time, high interest rates had caused rapid deterioration in the value of the
FDIC’s relatively large commercial and residential mortgage portfolio. Because of the
rising rates, the FDIC had to retain the loans rather than sell them, as it had done in the
past. The growing cost to the receiverships caused by the reduction in value prompted a
review of existing policies.
In addition, consolidated offices were strained by continuously hiring more staff,
leasing more space, and expanding their operations as assets from failed banks continued
to mount. It was no longer practical to assign all assets to account officers and work
them individually in house. A $1,000 asset required an account officer, an asset file,
booking of the asset to an asset management system, and the same labor-intensive
support activities required for a $1,000,000 asset. By selling smaller assets, the FDIC
would be able to maximize the efforts of its account officers by allowing them to focus
on the larger, more complex assets.
Before 1980, asset marketing in the FDIC had been fairly limited. Early attempts
focused primarily on pricing and selling assets, such as performing or residential
mortgages and installment loans for which established markets were already in place.

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From 1982 through 1984, as asset inventories increased and bank closing activity
accelerated, FDIC policies began to emphasize bulk sales for broader classes of assets,
including delinquent and charged-off loans. In 1984, the FDIC formalized the loan
sales program and officially labeled it “bulk sales,” which later was called “asset marketing.” The program’s purpose was to accelerate the disposition of assets acquired from
failed banks. Implementation of the program occurred within the various regional
offices, consolidated offices, and field sites, with policy oversight coming from Washington, D.C. Consolidated offices set up specialized staff to work exclusively on loan
sales. Because no established markets existed at that time, the intent was to build those
markets with small (less than $25,000 in book value) delinquent loans. The FDIC
began by offering a pipeline of small products in the market. The total book value of
each package ranged from $1 million to $2.5 million. Over time, FDIC offices created
substantial lists of potential buyers, which led in 1987 to a computerized national database accessible by all offices. After potential buyers were included on the database, they
would receive announcements of sales that met their interests.
FDIC management held the position that all assets were potential candidates for
sale. Yet, it also was a time of experimentation. Although the FDIC marketed large nonperforming commercial mortgages together, they generally were bid for individually,
with mixed results. During that time, before the sealed bid approach became the
accepted bidding method, the FDIC tested several different bidding mechanisms. It was
not until the 1990s that large portfolio sales (upward of $100 million and more in book
value) became a significant part of the FDIC’s marketing program.
In 1990, the FDIC contracted with a national mortgage servicer to handle the
increasing volume of performing commercial and residential mortgage loans. An FDIC
sales force, assisted by an adviser and due diligence firms, sold the serviced mortgages.
The focus on the sale of assets was a major milestone in the evolution of asset disposition methods within the FDIC. From 1986 to 1994, the FDIC sold more than
800,000 loans with a total book value of more than $20 billion.
RTC asset marketing occurred in several ways. Initially, loan sales were conducted
from conservatorships using that institution’s staff. As the RTC formalized its operations, regional sales centers became involved in packaging and selling assets. In September 1990, the RTC established a national sales center in Washington, D.C., that
assumed direct responsibility for overseeing the sale of assets. A capital markets group in
Washington, D.C., also put together securitized sales of residential and commercial
mortgages.
In the field, as institutions failed, the RTC contracted out nonperforming assets to
asset managers, while using conventional loan servicers to service performing loans. The
various asset marketing vehicles of the RTC would then package assets from contractors
and servicers for sale.
By 1990, the RTC was relying predominantly on private-sector firms to evaluate,
package, and market loan portfolios. The use of private firms, particularly those with
established reputations, lent more credibility to the RTC’s valuation methodology, due

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diligence work, and marketing techniques. Furthermore, FIRREA required the agency
to use the private sector whenever that strategy was deemed efficient and cost-effective.
The RTC used seller financing as a marketing tool for portfolio sales on a much
larger scale than did the FDIC. The RTC’s use of seller financing came about after a
nationwide decline in real estate markets and a credit crunch that forced the agency to
adopt more aggressive marketing tools.
The RTC also differed from the FDIC in its asset valuation procedures. With the
exception of its handling of performing loans, the FDIC generally relied on in-house
staff to value assets for bulk sale purposes. To arrive at values, account officers estimated
projected collections from all sources of recovery, subtracted anticipated expenses, and
applied a present value to the cash flows.
The RTC, however, relied on an asset valuation methodology developed in coordination with a real estate and financial consulting firm. That methodology attempted to
value individual assets as investors would perceive their value. The RTC relied predominantly on actual net cash flows, and gave less weight to other more subjective sources
of recovery. In general, RTC procedures resulted in lower estimates of value, thus
enhancing its ability to find acceptable bids and sell assets more rapidly.
Both agencies used reserves to set base prices for portfolio sales and required wide
marketing to ensure maximum competition. The RTC, however, tended to be more
market oriented and more inclined to let the market “speak” concerning the acceptability of bids. In contrast, the FDIC was driven more by appraisals and relied more on
internal reserves to set guideposts for determining the acceptability of bids.

Representations and Warranties
Representations and warranties are a set of legally binding statements by the seller
intended to assure buyers that the assets being sold meet certain qualitative expectations. They are accompanied by obligations to “cure” conditions that are breaches of
the original representations, as well as remedies available to the investor if the condition cannot be cured. Such remedies may require a repurchase or substitution of an
obligation.
Consistent with an ongoing effort to be more market oriented and generate maximum competition and sales results, the RTC initially gave more representations and
warranties associated with loan sale packages than did the FDIC. The majority of the
FDIC loan sales were small, nonperforming loan sales that required only limited representations and warranties to market successfully. The warranties stated that there (1)
had been no discharge in bankruptcy of debt represented by the loan(s), (2) was no
“voidance” of the debt obligation by any court, and (3) had been no release of the
debtor by the seller or the failed institution. The representations and warranties generally had a life of 120 days. Beginning in 1993, the FDIC offered more extensive

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warranties that were generally consistent with RTC and industry standards on two
large sales of nonperforming commercial real estate loans.
FDIC sales of performing residential mortgage loans carried more comprehensive
representations and warranties consistent with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)
guidelines and had a longer life of five years.
In May 1990, after consulting with Fannie Mae and Freddie Mac, the RTC began
to provide “market-standard representations and warranties” with most of its whole
loan sale programs, excluding auctions, for single-family loan assets and mortgage
servicing rights. The representations were identical to those required by Fannie Mae
and Freddie Mac in sales to them and were recognized as the customary, or marketstandard, representations in the secondary mortgage market. The RTC offered the representations and warranties directly in its corporate capacity. Coverage for loan documentation deficiencies was limited to a maximum of a five-year discovery period.
Compensation for any breach of representation discovered during that period would be
provided for the life of the loan, but only to the extent that actual losses were incurred
as a result of such a breach.
In August 1990, the RTC broadened the scope of the representations and warranties
it provided to conform with those customarily given in the secondary mortgage market.
The RTC increased the duration of coverage for loan documentation deficiencies from
five years to the life of the loan and authorized the repurchase or substitution of another
qualified loan if a defect was found that would be adverse to the buyer. The RTC also
established the policy that it would provide the representations and warranties in its
capacity as receiver of the failed institution, with a guarantee by the RTC in its corporate
capacity.
In July 1991, the RTC extended the customary secondary market representations
and warranties to sales of whole consumer, multi-family, and commercial loans. The
market-standard representations and warranties for multi-family and commercial mortgage loans included environmental representations. Depending on the quality of the
loan, the dollar amount of the outstanding principal balance, and the type of underlying
real property, the RTC offered one or more of the following environmental representations and warranties:
• “Where is, as is” sale;
• Environmental inspection before bidding;
• Six-month indemnification for large balance assets (with a book value equal to
or greater than $500,000) with monetary cure or repurchase if material
contamination was demonstrated; or
• Life of loan indemnification for small balance assets (with a book value less than
$500,000), with monetary cure or repurchase if material contamination was
demonstrated.

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By 1994, the RTC and the FDIC offered generally comparable representations and
warranties for sales of similar loan products, partly because in some instances, such as
the bulk sale of performing and nonperforming commercial real estate mortgages
(including securitization), the RTC set the market standards. In other instances, the
secondary market had already set the acceptable level of representations and warranties,
and the RTC and the FDIC then adopted those standards.

Securitizations
The FDIC usually sold performing residential mortgage loans through whole loan sales.
In 1986, the FDIC conducted an experimental securitized sale, but it did not use securitized loan sales as a major asset disposition method. The RTC, however, used securitized
sales as a means to meet its FIRREA mandate of maximizing return on assets while also
liquidating assets expeditiously.
In October 1990, the RTC established a securitization program to facilitate the sale
of mortgage loans, which were the largest single category of assets in the RTC inventory.
From June 1991 to June 1997, 72 RTC and 2 FDIC securitized transactions closed, representing loans with a book value of $42 billion for the RTC and $2 billion for the
FDIC. Almost 500,000 residential, multi-family, commercial, mobile home, and home
equity loans were securitized. RTC and FDIC securities are traded in capital markets
worldwide.
The ultimate analysis of the securitization versus the whole loan sales disposition
methods will not be determined until the actual losses realized by the reserve funds are
known. Generally, the greater the “seasoning” of the security, the less the default and loss
experience caused by principal paydown and equity buildup in the underlying properties. In retrospect, securitization allowed the RTC and, to a lesser extent, the FDIC to
dispose of a large quantity of loans under severe time constraints at prices that might not
have been realized if subjected to a market of whole loan buyers.4

Partnership Programs
The RTC and, to a much more limited extent, the FDIC used partnership programs
with private-sector partners as an asset disposition method. In response to the FIRREA
mandate to maximize recovery, the RTC concluded that for certain types of assets,
equity-retaining transactions might yield greater returns than if assets were sold outright.
Joint ventures (equity partnerships) were structured between the RTC, acting as a
limited partner (LP), and a private-sector investor, acting as a general partner (GP). The

4. See Chapter 16, Securitizations.

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RTC contributed asset pools (usually subperforming loans, nonperforming loans, and
owned real estate [ORE]) and arranged for financing to the partnership. The GP
invested both equity capital and asset management services. After the debt was paid off,
the remaining proceeds were usually split according to the ownership percentage each
respective partner held. The RTC believed that the net present value of the residual
income stream, when added to the up-front cash receipts, would be greater than the
total proceeds that would have been received from a direct asset sale.
Between December 1992 and October 1995, the RTC created a total of 72 equity
partnerships, with a total book value of $21.4 billion, which were marketed and
consummated by the RTC National Sales Center in Washington, D.C. In total, the
RTC structured and offered seven types of equity partnerships.
In 1993, in response to a perception that small investors were being excluded from
the equity partnership program, the RTC initiated a special series of partnerships that
were grouped geographically so that small investors would be able to more readily
participate.
The RTC created Asset Management and Disposition Agreements (AMDAs) in
response to FIRREA, which mandated the review, analysis, and possible renegotiation of
the FSLIC assistance agreements. The AMDA partnership structure required that both
the acquirer (GP) and the FDIC (LP) would have equity at risk. The GP’s private
investors, in addition to contributing to the partnership’s capital, accepted responsibility
for the management and disposition of the partnership’s assets. In return, the GP
received distributions from the net recovery on the partnership’s assets, but received no
management fee.
Although the RTC created only two partnerships using the AMDA structure, their
portfolios were sizable because the assets were from two of the largest thrift failures ever
resolved by the FSLIC. The AMDA partnerships generated $2.4 billion in cash, of
which $2.1 billion was paid to the FDIC as manager of the FSLIC Resolution Fund
(FRF).
In general, the RTC’s and the FDIC’s experiences with the partnership programs
have proven to be a viable alternative to conventional methods of asset disposition.5

Use of Outside Contractors
During the 1980s, another major asset disposition method, in addition to asset
marketing, evolved when the FDIC began to use outside contractors to handle large
bank failures.
In September 1984, the FDIC entered into a five-year assistance agreement with
Continental Illinois National Bank and Trust Company (Continental), Chicago,

5. See Chapter 17, Partnership Programs.

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Illinois. Under the agreement, the FDIC acquired approximately $5.2 billion of the
bank’s problem loans and other assets and assigned them to “Continental Bank as
Administrator.” Continental liquidated the assets under the supervision of the FDIC.6
The contracting method continued to be used for several subsequent large failures in the
mid-1980s. In those cases, the FDIC contracted the asset disposition work with affiliates
of acquiring banks.
Those early contracts evolved into the use of Asset Liquidation Agreements (ALAs)
and Regional Asset Liquidation Agreements (RALAs). Initially, ALAs were asset management and disposition agreements between the FDIC and asset management organizations that were affiliates of the acquiring bank. ALAs later developed into contracts
between the FDIC and private-sector contractors that were not necessarily affiliated
with the acquiring bank. The ALA program was designed to facilitate the disposition of
distressed assets, primarily nonperforming loans and owned real estate. However, the
pools sometimes contained performing loans and failed bank subsidiaries. Ten asset
management contracts were issued from 1988 to 1993 that handled assets with a book
value totaling $32 billion.
Because those agreements provided for “cost plus” reimbursement (costs plus incentive fees), the FDIC reimbursed all of the contractors’ operating expenses and overhead,
which insulated servicers from risk and did not provide incentive to control overhead. In
early transactions, incentive fees were a fixed percentage of gross collections, and a
deferred incentive fee was provided, depending on the assuming bank’s ability to
increase the value of the pool over the life of the agreement. Later contracts used more
complicated formulas, such as basing incentive fees on the ratio of cumulative net collections to gross pool value. The goal was to maximize the net present value of cash flows
generated from liquidation of the pool.
After favorable experiences with ALA contracts in connection with large bank
failures, the FDIC created RALAs for asset pools generally below $500 million in book
value. From November 1992 to June 1993, the FDIC issued four RALA contracts to
four private-sector contractors, which handled assets with a book value of $1.2 billion.
RALA contracts, which were not cost-plus arrangements, contained a three-tier fee
structure composed of management, disposition, and incentive fees. The actual fees on
the four contracts were less than 5 percent of gross collections. The RALAs were
designed to be monitored by an oversight committee of FDIC personnel to ensure that
assets were liquidated, managed, and converted to the highest net present value cash
equivalent.
The RTC used private-sector contractors as a matter of practical necessity, as well as
in response to the legal mandate to employ the private sector. FIRREA required the

6. See Part II, Case Studies of Significant Bank Resolutions, Chapter 4, Continental Illinois National Bank and
Trust Company.

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RTC to hire private-sector contractors for asset disposition if such services were available
in the private sector and if such services were practicable and efficient.
The Standard Asset Management and Disposition Agreement (SAMDA), first
issued in August 1990, was a contract between the RTC and a private-sector contractor
for the purpose of managing, collecting, and disposing of distressed assets in a portfolio
of any size. The Standard Asset Management Amendment (SAMA) amended a SAMDA
contract, reducing the scope of work from asset management and disposition to asset
management only. During the course of the SAMDA program, the RTC issued 199
SAMDA contracts, including SAMDA contracts that contained SAMAs, to 91 different
contractors. SAMDA contracts paid management, disposition, and incentive fees. In
addition, all asset-specific expenses were passed through the contracts, except for the
contractor’s overhead.
FIRREA also mandated that the RTC would include minority- or women-owned
businesses (MWOBs) among its contractors. In the early 1990s, the FDIC also
established an MWOB program for contracting.
Contractors played a major role in the crisis years. At the FDIC, the $33.2 billion in
assets disposed of by ALAs and RALAs represented 46 percent of the $72 billion in
assets the FDIC acquired for disposition between 1980 and 1994. Almost all of RTC’s
assets were placed with asset managers or loan servicers.7

Real Estate Sales
Financial institutions that failed usually had significant inventories of owned real estate
that they had acquired as a result of deteriorating loan portfolios. As a result of the
failure of financial institutions, the FDIC also acquired main bank office buildings and
branch office buildings. After resolution, during the asset disposition process, the FDIC
also acquired ORE. It acquired properties by foreclosure, deeds-in-lieu of foreclosure,
and acceptance of properties in settlement of loan obligations.
Although ORE properties represented a small percentage of total assets for both the
FDIC and the RTC, their disposition was highly visible and attracted much public
attention. The FDIC and the RTC were criticized for holding properties too long or
selling below market value and adversely affecting real estate markets. In the late 1980s,
to promote sales and to respond to the criticism, the FDIC introduced policies and procedures to begin auctioning the properties in a manner that was more consistent with
private industry standards. The concern for mitigating the effects of large blocks of
properties coming onto an already-depressed real estate market carried over to the
operation of the RTC. FIRREA included language requiring the RTC to sell real estate
for no less than 95 percent of appraised (market) value. In 1991, to facilitate lagging

7. See Chapter 14, Asset Management Contracting.

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sales and burgeoning inventories, that language was amended to reduce the minimum
sales price to no less than 70 percent of appraised value.
The FDIC primarily used broker listings to sell ORE. Properties would be appraised
and listed for sale with a broker, and any offers would be passed on to the FDIC account
officer. The account officer would then counteroffer or accept the offer; either action
was subject to the approval of the appropriate delegated authority.
The RTC used its SAMDA contractors to dispose of ORE. Contractors would list
with brokers and approve sales under their own delegated authority or under RTC-delegated authority.
The FDIC and RTC also disposed of ORE through the auction process. The FDIC
began holding ORE auctions in the late 1980s. Those sales consisted primarily of large
inventories of small, hard-to-sell properties. The RTC initially prohibited auctions
because of the perception that they would adversely affect real estate markets. By 1990,
the RTC’s ORE portfolio had grown so dramatically that the traditional method of
using brokers was insufficient to dispose of large volumes of properties. By March 1991,
the RTC had procedures in place for auctions, resulting in regional, national, and in
some cases, international marketing. The FDIC and RTC national and regional auctions of non-distressed properties in the late 1980s and into the 1990s met with considerable success; average sales prices ranged from the high 80th percentile to the mid 90th
percentile of the appraised values. The 1996 year-end aggregate average FDIC ORE
sales-price-to-appraised value ratio was 94.7 percent.
The FDIC had also conducted national auctions for large commercial properties,
the first of which was held in New York City in March 1989. Other national auctions
followed, with satellite hookups in multiple cities.8

The Affordable Housing Program
Marketing and sales of owned real estate were affected in both the FDIC and the RTC
by legally mandated affordable housing programs. FIRREA established the framework
for such programs and required that the RTC implement an affordable housing program. The purpose was to provide home ownership and rental housing opportunities
for families with very-low-, low-, to moderate incomes. Section 40 of the FDIC
Improvement Act (FDICIA) of 1991 required that the FDIC establish an affordable
housing program for the same purpose. FDICIA anticipated federal funding through
congressional appropriations, but funding did not take place until fiscal year 1993.
During 1992, the FDIC implemented the affordable housing program without appropriated funds and focused on the sale of single-family properties to income-eligible
buyers.

8. See Chapter 13, Auctions and Sealed Bids.

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With appropriated funds came credits and grants of up to 10 percent of a negotiated
sales price for eligible buyers of single-family properties. Fiscal year 1994 saw increased
funding and the broadening of restricted sales to include multi-family properties to
nonprofit entities and governmental agencies.
The year 1995 also saw the merger of the RTC and the FDIC’s affordable housing
management and staff, as set forth in the Resolution Trust Corporation Completion Act
(Completion Act) of 1993. The FDIC continues to operate an affordable housing
program, but its nature is limited because appropriated funds are no longer available.9

Environmental Problems and Issues
In the early 1990s, the FDIC and the RTC developed environmental programs to
prepare and train staff to oversee implementation of federal and state environmental
statutory provisions, as well as internal policies and procedures. Environmental specialists provide technical advice and recommendations on assets that have highly complex
environmental problems or are controversial for environmental reasons. Environmental
laws, issues, and risks are significant to the FDIC because they affect asset marketability,
valuation, and liability, and they potentially expose insurance funds to losses.
The environmental programs were premised on identifying hazardous environmental conditions or substances, such as underground storage tanks; lead-based paint;
damaged, friable asbestos; and special environmental resources, including wetlands,
habitats of endangered species, and nationally significant historic sites. The FDIC uses
information on environmental hazards to evaluate its potential legal and financial liabilities associated with an asset and how those liabilities would affect foreclosure, purchase,
sale, loan workout, or seller financing. Information on special environmental resources
assists the FDIC in identifying applicable laws that affect an asset’s development potential and in evaluating legally permissible uses that affect its appraised value, as well as the
marketing strategy that yields the highest potential return.
To help identify assets with environmental conditions during the S&L crisis, the
RTC engaged national contractors with expertise in resource identification and
deployed a series of contracting instruments for environmental site assessments. The
RTC contracted with The Nature Conservatory, a national nonprofit conservation
organization, to identify natural resources, including endangered species, property
covered by the Coastal Barrier Improvement Act, and rare natural communities.
Because of the volume of failed S&L assets with environmental conditions, the RTC
executed various disposition strategies for those assets, including the use of national
sales. The RTC completed two national sales of assets with environmental hazards and
one national sale of assets with special resources. In addition, field offices conducted

9. See Chapter 15, Affordable Housing Programs.

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sales of environmentally distressed properties. The RTC also adopted environmental
representations and warranties for loans collateralized by real estate that were securitized
or sold into trust arrangements to maximize its returns while allowing assets that may be
found to breach environmental provisions at some point in the future to be repurchased.
Because its portfolio of properties with environmental hazards had grown, the
FDIC conducted a nationally marketed sale. When marketing and selling real estate
properties “as is,” both the FDIC and the RTC took into account the cost of hazard
remediation or corrective action to be done by the purchaser. Consequently, the price of
the property was reduced by the estimated cost to remediate.
A primary difference between the RTC’s and the FDIC’s sales of real estate with
environmental hazards was the RTC’s use of “buyer remediation agreements.” The
RTC, as part of its standard sales documents, established requirements for buyer remediation, including an asset-specific statement and schedule of work, an escrow account for
funding such remediation from the sale proceeds, and a system for determining when
remediation had been completed.
The FDIC also prefers to have the buyer remediate properties with environmental
conditions, but it sells such properties “as is” without formally requiring that the buyer
take any corrective action. The FDIC predominantly sells properties with environmental conditions through standard broker listing agreements, and sales documents
usually have disclosure and buyer indemnification provisions. Unlike the RTC, however, the FDIC generally discloses only factual information about a property, not the
recommendations of an environmental professional or the costs to remediate.

Disposition of Subsidiaries and Other Assets
Liberalization of banking and savings and loan regulations in the late 1970s and early
1980s allowed financial institutions in the United States to use the corporate structure
to establish subsidiary companies that were used to engage in what were hoped to be
profitable nonbank activities. Through those vehicles, the S&Ls, and the banks to a
lesser degree, either conducted real estate development projects directly or used the
corporate structures to make partnership investments in real estate–related activities.
Partnership structures were either general or limited, and in many cases the financial
institution’s role was that of managing general partner (MGP), with all attendant
responsibilities and liabilities. Many S&Ls, in addition to conducting real estate activities, created finance subsidiaries to take advantage of interest rate spreads between the
institution’s cost of funds and rates available on various collateralized mortgage obligations or mortgage-backed securities. The banks also established subsidiaries to handle
trust work for their parent bank or S&L. Insurance subsidiaries were also prevalent and
often proved to be quite profitable for the bank or S&L.
Liquidating those corporate and partnership entities proved to be an expensive and
challenging activity for the FDIC and the RTC. Some corporate entities were sold as

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whole companies, usually for the tax benefits that belonged to the corporate corpus. In
most cases, however, individual assets of the subsidiary were sold through normal FDIC
and RTC marketing channels. Liabilities of the companies were satisfied, and then the
corporation was legally dissolved.
When capital market assets such as mortgage-backed securities, stock portfolios,
bond portfolios, and specialized hedge fund–type investments were encountered, the
RTC responded by creating a capital markets branch that had the expertise needed to
dispose of those specialized assets. Dissolving partnership interests usually involved the
same asset disposition activity; however, less formality was encountered in the legal
dissolution of the general partnership form.

Treatment of Unfunded Commitments
Up until the mid-1980s, FDIC liquidators operated under the direction that they had
the right to disaffirm all executory contracts, such as outstanding loan commitments,
made before a bank failed. Such commitments included construction loans with
construction activity in process, land development loans, bridge loans, revolving lines of
credit, and letters of credit.
During this period, the liquidators had very little written guidance about unfunded
loan commitments other than that, as a receiver of a failed bank, the FDIC had the
authority to disaffirm such commitments. Lacking such guidance and without much
analysis, liquidators routinely notified borrowers that their loan commitments were no
longer in effect. Because the majority of borrowers tended to be small- to medium-sized
companies, they usually were forced to make other financial arrangements so that their
companies would not fail.
Eventually, the FDIC realized that a more reasonable approach would both benefit
the borrowers and help the FDIC maximize its return on assets. For example, at a bank
closing in 1984, the FDIC agreed to continue funding revolving lines of credit secured
by accounts receivables. The portfolio was then quickly marketed for sale. That
approach saved many of the individual customers from going out of business while also
maintaining the value and marketability of the portfolio. A sale was then consummated
shortly after the bank closing, thus benefiting all concerned.
By the 1990s, the FDIC had formalized a policy that considered the significant
impact of funding commitments on the borrower’s business, employees, and community. It stated that every reasonable effort should be made to lessen the effect of bank
failure on borrowers by providing or facilitating interim relief whenever possible. It also
stated that account officers should explore all possible avenues of assistance for the
borrower. The FDIC wanted borrowers and the public to understand its willingness to
consider funding loan or credit commitments, as well as its desire to help receivership
borrowers make a smooth transition to a permanent source of funding. In accordance
with that new philosophy, the FDIC conducted borrower seminars to discuss how the

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FDIC would proceed concerning outstanding loan commitments and provided
representatives to answer any related questions.

Conclusion
During the crisis years, the FDIC and RTC acquired approximately $410 billion in
assets that were targeted for asset disposition. By the end of 1997, less than $5 billion of
those assets remained with the FDIC. The liquidation of this enormous volume of assets
was accomplished in a timely and efficient manner.
In the early and mid-1980s, the FDIC began a gradual shift to asset marketing and
the use of private-sector contractors to handle the increasing volume of bank assets. By
the 1990s the FDIC and RTC had built on those early methods and were using sophisticated methods to dispose of assets. Those methods evolved in response to legislative mandates, changing marketplaces, public perception, and the volume of assets that were
acquired. Markets were created that had not existed before as asset disposition methods
were finely honed to create the greatest returns for financial institution receiverships.
Both agencies displayed an ability to adapt to the rapidly changing economic
environment and markets, as well as to explosive asset growth. They faced severe challenges, such as the volatility of workload, fluctuating staffing levels, extensive travel, and
multiple office relocations, while having to operate in a “fishbowl” of public and governmental scrutiny. Post-crisis challenges for the agencies’ staff have been equally difficult
because of the merger of the RTC into the FDIC and the subsequent downsizing of the
FDIC that followed a decreasing workload.

he banking and thrift crisis caused an
unprecedented volume of assets to be
transferred to the FDIC and the RTC. In
response to an overwhelming workload,
both the FDIC and the RTC experimented
with disposition strategies to facilitate
disposition at prices that maximized the
overall return.

CHAPTER 13

Auctions and Sealed Bids

Introduction
This chapter reviews the use of auctions and sealed bid marketing strategies by the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation
(RTC). It examines how the FDIC and the RTC marketed loans through the sealed bid
process, how they used auctions to sell loans, and how they used sealed bid sales and
auctions to sell real estate that they held.
Asset disposition methods evolved from a strategy whereby FDIC account officers
managed individual delinquent loans from beginning to end to a later strategy in which
account officers managed loans using asset marketing techniques and auction or sealed
bid marketing strategies in single, planned marketing events aimed at the disposal of a
high volume of loans. Those strategies focused primarily on the disposition of nonperforming loans and real estate and, to a lesser extent, of performing loan portfolios.

Background
During the early 1980s, the FDIC adopted a workout strategy for dealing with acquired
nonperforming loans. That strategy usually involved assigning delinquent loans to
specific account officers, who would be responsible for negotiating repayment, restructure, or settlement of the debts with borrowers. To bring about final debt resolution,
they frequently had to use litigation, foreclosure, or sale of available collateral. The
strategy was similar to the approach that private and public entities used in handling
delinquent loans.
As early as 1976, with the packaging and sale of performing residential and
commercial mortgages that originated out of the Birmingham-Bloomfield Bank in a

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suburb of Detroit, Michigan, the FDIC began exploring the potential of whole loan
sales. In the same year, there were several other whole loan sales; however, the FDIC did
not make a concerted effort to package loans for resale until 1984.
Several factors prompted the move toward selling loans. First, the late 1970s and
early 1980s were periods of record high interest rates that caused rapid deterioration in
the value of the FDIC’s mortgage portfolio. The growing cost to the receiverships,
caused by severe value erosion, inspired a review of policy guidance. Second, failing bank
activity was on the increase and the FDIC saw its receivership asset holdings increase to
record levels. To avoid the volatility associated with holding assets, the FDIC adopted a
policy of selling performing loans in large packages as early as practicable. It based prices
on prevailing market interest rates and loan quality. Essentially, the FDIC sold the packages as sealed bid loan sales at the point of loan acquisition, or soon thereafter, and
elected not to speculate on the direction of interest rates.
In a sealed bid loan sale, interested bidders submit their bids, usually in a sealed
envelope, for pools they wish to purchase. Each loan pool is sold to the bidder with the
highest bid, assuming it satisfies any minimum acceptable bid or reserve requirements of
the FDIC. Rights and title to the pool are transferred to the purchaser upon receipt of
the bid price, usually payable by wire or certified check.

FDIC Loan Sales Program
By the end of 1984, the FDIC initiated a formal loan sales program, known as the Asset
Marketing Program, to accelerate the disposition of assets acquired from failed banks.
Implementation of the program originated with the various regional offices, consolidated offices, and field sites with policy oversight from Washington, D.C.
The FDIC’s asset marketing efforts at that time were directed toward performing
loans of all types and sizes. As workload increased, the FDIC began to emphasize the sale
of nonperforming loans, especially those with small individual balances (generally under
$10,000). Although small loans made up the vast majority of the number of loans held
by the FDIC, in the aggregate their total value represented a small fraction of the value
of the receivership portfolios. Thus, by accelerating the disposition of those small loans,
account officers could focus on larger loans that offered higher recoveries. In many cases,
smaller loans were service intensive and efforts to collect on those loans were comparable
to servicing larger loans with much higher realizable values. The first FDIC sale of nonperforming loans was conducted by the Atlanta office in the fourth quarter of 1985. It
was a small sale conducted under regional authority with a value of approximately $1.5
million.
The FDIC packaged loans in pools based on size, asset quality, asset type, and
geographic location. Asset types included installment paper, residential real estate mortgages, commercial mortgages, agricultural loans, charged-off loans, loans secured by
mobile homes, timeshare loans, other real estate mortgages, business loans, and

AU C T I O NS A ND S E A LE D B I D S

unsecured paper. Account officers assigned individual asset values based on projected
cash flows and established minimum reserve prices for each package. The FDIC initially
relied exclusively on in-house staff to perform all tasks associated with identifying,
preparing, pricing, marketing, and closing loan sale transactions. By the late 1980s and
early 1990s, however, it occasionally used contractors to run open outcry auctions and
perform due diligence on performing mortgage portfolios and large nonperforming
sales; but predominantly, the FDIC used in-house resources.
After firmly establishing asset marketing as an important liquidation strategy, the
momentum in the loan sales area began to increase. By the end of the third quarter of
1986, the FDIC had closed 101 sales for the year, resulting in the transfer of 104,000
distressed loans to the private sector. Nationally, goals were set to dispose of all loans
with individual balances of $5,000 or less. In several regions, the target was raised to
$25,000. Because those loans were severely distressed, selling prices averaged in the 2
percent to 10 percent of book value range. The FDIC enjoyed substantial savings, by
avoiding long-term servicing costs.
An important outgrowth of the asset marketing effort was increased emphasis on
selling loan portfolios immediately after bank failure, which was in contrast to previous
strategies in which the FDIC assigned individual assets to account officers for long-term
collection activity with the possibility of packaging the assets in pools for sale. In many
cases, the FDIC was successful in selling small portfolios soon after a bank failure. For
example, in 1986, with the Southwest experiencing a substantial number of bank failures, the Dallas and Oklahoma City offices were forced to pursue portfolio sales immediately upon bank failure. The Dallas office successfully sold a portfolio of performing
and nonperforming assets from two new receiverships and packaged the assets according
to size and asset quality.
In 1987, 574 sales transactions resulted in the disposition of 91,123 loans. (See
table I.13-1.) The total book value sold was $860.4 million and actual sale proceeds
were $303.3 million, which was equivalent to 92 percent of the estimated value. Because
the FDIC was unwilling to provide financing at that time, all transactions were on a
cash basis. That year, the FDIC began experimenting more aggressively in the asset
marketing arena. It examined bulk sales as a means of selling the remaining portfolios of
entire offices that were winding down and ready to be closed. By the first quarter of
1988, the FDIC was able to sell most of the remaining loans in the St. Joseph, Missouri,
office. Similarly, the FDIC sold roughly 2,500 loans with a book value of $54.5 million
before closing the Omaha, Nebraska, office. The FDIC expanded and contracted its
office locations throughout the 1980s and 1990s. When a large number of banks failed
in one part of the country, the FDIC would set up an office close to the customers of
those banks. As the local economies improved and fewer banks were closed, the FDIC
reduced the number of its office locations in those parts of the country. To effectively
reduce the remaining loan inventory of a closing office, the FDIC would arrange a sale
of as many of the saleable assets as possible before that office closed.

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Also in 1987, the FDIC developed a data processing program that selected loans
within specific, predetermined parameters to be packaged for sale. If the loans were performing, the program had the ability to price the package. If the loans were nonperforming, the system could not compute the price, and internal staff or outside
contractors would individually value the assets.
As the Asset Marketing Program grew in size and complexity, the FDIC developed
policies to cover the basic parameters for conducting sealed bid sales. Those policies
established delegation of authority, uniform procedures for estimating asset values,
methods for establishing minimum or reserve prices, reporting requirements, appropriate information on disclosure to bidders, guidelines for sale of larger loans, and guidelines for sale of government guaranteed loans.
By using the Asset Marketing Program as a loan disposition strategy in the late
1980s and early 1990s, the FDIC was able to reduce the burden of acquiring a high volume of loans and to increase the liquidity of its insurance fund. The FDIC concentrated
on three types of loan sales: small assets, severely distressed assets, and performing loans.

Table I.13-1

FDIC Sealed Bid Loan Sales
($ in Thousands)

Year

Number of
Loans Sold*

Book
Value

Estimated
Value

Sales
Price

Sales Price as
a Percentage
of Book Value

1986

128,779

$341,983

$156,606

$177,993

52.1

1987

91,123

860,360

331,071

303,338

35.3

1988

71,865

875,419

315,490

276,061

31.5

1989

28,284

493,132

213,597

210,778

42.7

1990

106,668

1,341,397

673,515

645,596

48.1

1991

143,462

2,119,000

1,413,000

1,452,000

68.5

1992

96,529

4,094,093

3,157,408

3,253,847

79.5

1993

136,347

5,386,787

3,338,579

3,332,402

61.9

1994

63,780

4,562,358

2,608,154

2,654,237

58.2

866,837

$20,074,529

$12,207,420

$12,306,252

61.3

Totals/
Average

* Includes performing and nonperforming loans.
Source: FDIC Division of Resolutions and Receiverships.

AU C T I O NS A ND S E A LE D B I D S

RTC Loan Sales Program
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989
mandated that the RTC dispose of its assets in a manner that would maximize the net
present value return from the sale or other disposition of savings institutions and their
assets. Early on, the RTC implemented the Bulk Sale Program, which initially focused
on the RTC’s vast holdings of performing residential and commercial mortgages. At
first, the RTC adopted the FDIC methodology of internally packaging and selling asset
portfolios, which was a logical step, given that, at that time, most of the RTC staff and
the key managers were FDIC employees.
Like the FDIC, the RTC characterized and formulated its sealed bid sales to ensure
maximum exposure to investors and purchasers and to secure the highest possible
return. The RTC marketed its sealed bid sales widely and opened them to all bidders
who either prequalified or paid an up-front “admission” fee. It grouped loans in homogeneous pools by size, asset type, performing or nonperforming status, quality, geographic distribution, and maturity. Other similarities also existed between the FDIC and
RTC programs. For example, both agencies priced portfolios using a discounted cash
flow methodology, which guided decisions regarding appropriate reserves for each transaction. Both employed aggressive and broad marketing tactics to ensure the maximum
level of competition; as a rule, they always accepted the highest conforming bid.
Some critical differences developed between the agencies, however, in how they conducted sales. The RTC had a unique mission, and workload demands were virtually
unprecedented. Also, it was a taxpayer-funded agency. Because of its relatively short life,
the RTC had to hire many private-sector employees who had different philosophies than
the FDIC had on the best strategies to use in selling assets.
By 1990, the RTC was relying predominantly on private-sector firms to evaluate,
package, and market its loan portfolios. Wall Street investment houses, as well as other
firms with comparable credentials, routinely assisted in all phases of selling those portfolios. The RTC relied on private-sector firms for a number of reasons. First, the RTC
was reluctant to hire the additional thousands of employees that would have been necessary to successfully manage the large workload. Second, the RTC portfolio included
sophisticated portfolios of securities, real estate projects, and other assets the size and
complexity of which exceeded the training and technical skills of most of the existing
RTC staff; such portfolio management required the expertise of professionals in the private sector. Third, because the RTC was selling in a depressed market, its use of private
firms, particularly those with established reputations, lent more credibility to its valuation methodology, due diligence work, and marketing techniques. Finally, the legislation
creating the RTC required the agency to use the private sector whenever it was deemed
efficient and cost-effective.
By September 1990, the RTC established a national sales center in Washington,
D.C., which assumed direct responsibility for overseeing the sale of assets. It then set up
regional sales centers in each field office. The RTC contracted out more of the work

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associated with the sales to private firms. One set of contracts was for the due diligence
and evaluation work that involved identifying saleable assets, preparing files for investor
review, evaluating the product, and pricing. The second set of contracts was for financial
analysis from advisers who were responsible for making recommendations on appropriate packaging, marketing methods, negotiations, bid evaluation, and final closing.
The RTC adopted the use of seller financing as a marketing tool for nonperforming
asset portfolio sales. That development came about because most of the RTC’s assets were
real estate based, and disposition was hampered by a nationwide decline in the real estate
markets, which forced the agency to adopt a more aggressive posture to achieve loan sales.
Structured Transactions
In 1991, to boost the demand for nonperforming multi-family and commercial mortgages and other real estate, the RTC formally introduced the Structured Transaction
Program. A structured transaction was a form of portfolio sale created to achieve a high
volume of portfolio sales, as opposed to the sale of commercial assets on an individual
basis. The national sales center, and subsequently the regional sales centers, conducted
structured transactions by structuring the portfolios into packages based on input from
investor groups. They generally organized the packages by institution, by groups of specific products (for example, office buildings, nursing homes, golf courses, offices, and
hotels and motels), or by geographic location. They then offered the structured portfolios for competitive bidding. The preferred transaction was one that had 50 to 100 assets
and a book value between $100 million and $150 million.
The RTC supplied three types of financing: bridge, term, and step-rate. Bridge
financing was set up to be refinanced within two years. Term financing typically was a
seven-year fixed payment loan to be repaid from the disposition of the asset pool over
the life of the loan. Step-rate financing had an initial interest rate below current market
rates that progressively increased over the term of the loan. If held to maturity, the interest rate on a step-rate loan eventually would exceed the market rate available at the time
of settlement. The RTC designed the step-rate loans to accommodate cash flows from a
pool of assets; initially, they might be insufficient to pay a market rate of interest, but as
cash flows increase over time, payments on increasing interest rates could be maintained.
The direct costs for selling $19.6 billion in book value of assets through the Structured Transaction Program was approximately $173 million, or 0.9 percent of the value
of loans sold. Because structured transactions garnered proceeds of $10.7 billion, however, direct costs represented 1.62 percent of recoveries. (See table I.13-2 for a summary
of the RTC structured transactions.)
Asset Valuation Procedures
In determining its asset valuation procedures, the RTC first looked at how the FDIC
operated. At the FDIC, which relied on in-house staff to value assets for bulk sale

AU C T I O NS A ND S E A LE D B I D S

319

Table I.13-2

Summary of RTC Structured Transactions
1990–1995
($ in Thousands)

Year

No. of
Transactions

Book
Value

Derived
Investment
Value*

Sales
Price

Sales Price as
a Percentage
of Book Value

1990

$362,088.8

$259,189.5

71.6

1991

5,203,268.9

4,018,809.0

3,246,103.2

62.4

1992

8,615,621.1

4,451,556.7

4,013,784.0

46.6

1993

5,421,141.9

2,969,252.8

3,153,523.6

58.2

1994

28,303.5

28,367.3

100.2

1995

$19,630,424.2

$11,830,010.8

$10,700,967.6

54.5

Totals

* Derived investment value (DIV) was an internal RTC reference to a means of calculating the net present value of a nonperforming loan. It was used to establish reserve prices for assets to be sold as whole loans and as a benchmark for
nonperforming loan sales.
Source: RTC Megaport Automated Information System.

purposes, account officers would estimate projected collections from all sources of recovery (collateral, guarantors, borrowers, and so forth), subtract anticipated expenses, and
apply a present value to the cash flows to arrive at an individual asset’s estimated value.
The RTC decided to turn to the private sector. Because the sheer volume of work was
beyond the RTC in-house capability, it hired private professional firms to perform due
diligence and asset valuation work.
The RTC relied on an asset valuation methodology developed by a national real
estate and financial consulting firm. That methodology, known as the derived investment value (DIV), attempted to value individual assets packaged for portfolio sales as
investors would perceive the value of those assets. Cash flow projections were based predominantly on actual cash flows generated by collateral with little, if any, weight given
to increased “lease-ups,” guarantor and borrower financials, or other sources that were
more speculative and subjective. Critics of DIV believed the methodology systematically
generated lower valuations than were appropriate. Critics of the FDIC’s approach
believed, however, their valuations were unduly optimistic and relied too heavily on inhouse staff projections that failed to adequately discount for marketplace realities.
Although both agencies used reserves to set base prices and required wide marketing
to ensure maximum competition, the RTC was more inclined to accept bids that were
lower than anticipated, thereby relying on the philosophy that the properties were only
worth what reasonable bidders were willing to pay. The FDIC’s approach was more

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M A N A GI N G T H E C R I S I S

appraisal driven and relied more on internal reserves to set guideposts for determining
the acceptability of bids. If the bids were not comparable with the internally derived
value, they were rejected.

Representations and Warranties
Representations and warranties are a set of legally binding statements drawn by the seller
to give buyers the assurance that assets being sold meet certain qualitative expectations.
They are accompanied by obligations to cure conditions that are breaches of the original
representations, as well as remedies available to the investor, if the condition cannot be
cured. Such remedies may require the seller to repurchase or replace an asset in the original pool.
Consistent with an ongoing effort to be market oriented and generate maximum
competition and sales results, the RTC initially gave more representations and warranties associated with loan sale packages than was customary at the FDIC. By 1994, the
RTC and the FDIC offered generally comparable representations and warranties for the
sale of similar loan products. In some instances, such as in the bulk sale of performing
and nonperforming commercial real estate mortgages (including securitization), the
RTC set the standards. In other instances, such as in large bulk sales of performing residential and multi-family mortgages, the secondary market had already established the
acceptable level of representations and warranties.
The majority of the FDIC loan sales consisted of small, nonperforming loans that
required only limited representations and warranties. The warranties stated that (1)
there had been no discharge in bankruptcy of debt represented by the loan(s), (2) there
was no voidance of the debt obligation by any court, and (3) there had been no release
of the debtor by the seller or the failed institution. The representations and warranties
generally had a life of 120 days.
FDIC sales of performing residential mortgage loans carried more comprehensive
representations and warranties consistent with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)
guidelines and a longer life of five years. In 1993, the FDIC offered more extensive warranties that were generally consistent with the RTC and industry standards on two large
pilot bulk sales of nonperforming commercial real estate loan sales. The warranties were
extended to a six-month life.
In May 1990, the RTC began to provide standard representations and warranties
with most of its whole loan sale programs, excluding auctions, for single-family loan
assets and mortgage servicing rights. The representations were devised after consulting
with Fannie Mae and Freddie Mac. They were identical to the representations required
by Fannie Mae and Freddie Mac in sales to them and were generally recognized as the
customary or standard representations in the secondary mortgage market. The RTC
offered representations and warranties directly in its corporate capacity. The duration of

AU C T I O NS A ND S E A LE D B I D S

the coverage for loan documentation deficiencies was limited to a five-year discovery
period. Compensation for any breach of representation discovered during that period
would be provided for the life of the loan, but only to the extent that actual losses were
incurred as a result of such a breach.
In August 1990, the RTC extended its representations and warranties to conform
with those customarily granted in the secondary mortgage market. It increased the duration of the coverage for loan documentation deficiencies from five years to the life of the
loan and authorized the repurchase or substitution of another qualified loan if a defect
was found that would have been adverse to the buyer. The RTC also established the policy that the insolvent institution would provide the representations and warranties that
the RTC would then guarantee.
In July 1991, the RTC extended the customary secondary market representations
and warranties to sales of whole consumer, multi-family, and commercial loans. The
standard representations and warranties for multi-family and commercial mortgage
loans included environmental representations. Depending on the quality of the loan, the
dollar amount of the outstanding principal balance, and the type of collateral security,
the RTC offered one or more of the following environmental provisions:
• “Where is, as is” sale;
• Environmental inspection before bidding;
• Six-month indemnification for large balance assets (with a book value equal to or
greater than $500,000) with monetary cure or repurchase if material contamination was demonstrated; or
• Life of loan indemnification for small balance assets (with a book value less than
$500,000), with monetary cure or repurchase if material contamination was
demonstrated.

Loan Auctions
The FDIC and the RTC have considerable experience with all types of loan and real
estate auctions. Historically, auctions were used to sell real estate or assets such as equipment, automobiles, and trucks; however, both agencies expanded the use of that strategy
to include pools of both performing and nonperforming loans.
The process was generally the same for the FDIC and the RTC, although initially
no formal internal policies existed for auctions. Both agencies stratified loan portfolios
into pools for sale based on various criteria: geographic area, asset type, asset quality,
asset maturity, and other parameters. Using the appropriate valuation methodology, they
valued the loan pools. They then developed a bidder’s information package providing
information regarding the auction, the availability of loan information for review by

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bidders, and the requirements that bidders must meet to bid and purchase loans at the
auction.
The FDIC and RTC packages included the procedures, terms, and conditions of
the sale. The loan sale agreements were not negotiable; however, the FDIC or the RTC
could modify them before the auction and notify bidders of those modifications.
Potential bidders then would return the certification statements and forms before any
release of loan information and file review by the potential bidder. The certifications
provided bidder qualifications and acknowledged that, according to the criteria provided, the bidders had no ethical conflicts in purchasing assets from the FDIC or the
RTC and had the financial means to complete the transaction. In addition, each person who would be reviewing or had access to the loan data had to sign and return a
confidentiality agreement. The agreement acknowledged that the loan information
provided for review before the auction would be kept confidential and used only for
the potential bidder’s use.
Approximately four to six weeks before a scheduled auction, the FDIC and RTC
allowed all interested and qualified potential bidders to review loan file information.
The information was indexed for every loan in a package and included the available
loan file documents, credit reports on the borrowers, and payment histories. The
FDIC and RTC did not warrant the correctness of any documents.
At the beginning of the auction, announcements were made that governed the
sale. The bidding then commenced for each loan package. For those loan packages
with a reserve price, the auctioneer would announce that the package would be sold
after the reserve price had been met. Successful bidders signed a high-bid acknowledgment and surrendered their “earnest money” checks. When bidders were finished for
the day, they were escorted to the contract signing room, where a loan sale agreement
was executed.
The terms of purchase required the bidder to wire sufficient funds to increase the
deposit under the loan sale agreement to 10 percent of the purchase price within 48
hours of the close of the auction. Within 10 business days of the last day of the
auction, the balance of the purchase price had to be wired to the seller. No contingencies existed in the loan sale agreement for financing, and the FDIC and RTC did not
provide seller financing.
Neither the FDIC nor the RTC provided representations or warranties on the loan
packages sold, but both did provide very limited repurchase provisions. Buyers had
120 days from the closing date to make claims regarding loan qualification for repurchase by the FDIC under the terms of the loan sale agreement (one year from closing
for title defects). Buyers had 180 days from the transfer date to make claims regarding
loan qualifications for repurchase by the RTC. After that time, no claims were
accepted.

AU C T I O NS A ND S E A LE D B I D S

323

FDIC Open Outcry Auctions
By 1987, while managing more than $11 billion in assets, the FDIC began experimenting with public auctions for selling loans. In August 1987, the FDIC conducted its first
open outcry auction of loans. The auction took place in the Wichita, Kansas, office and
consisted of 15 separate pools of loans charged off by banks before their failure. A total
of 1,166 assets with an unpaid balance of $10,345,576 were sold for $176,078, or
approximately 1.7 percent of the unpaid balance before expenses. Fifty-two bidders,
each paying a registration fee of $2,500, participated in the auction. The FDIC paid the
auctioneer a setup fee of $5,000, plus 5 percent of the purchase price on pools that sold
for 5 percent or less of book value, and an additional 2.5 percent for those sold above
that amount; the FDIC split the advertising costs 50/50 with the auctioneer. The assets
were offered without representations or warranties and on an all-cash basis.
The auction of charged-off loans led to the FDIC’s adoption of a strategy for other
loans that was similar to its approach for sealed bid bulk sales; that is, implementation
was cautious and, generally, only smaller, more distressed assets were pooled for sale. The
FDIC had few loan auctions, more often choosing to adopt the sealed bid approach.
The largest loan auction held by the FDIC was in 1995; it generated a relatively small
$10.6 million in sales proceeds. See table I.13-3 for a summary of FDIC loan auctions
held after the auction of charged-off loans.

Table I.13-3

FDIC Loan Auctions
($ in Thousands)
Aggregate
Book
Value

Number
of
Loans Sold

Number
of
Pools Sold

Sales
Price

Sales Price as a
Percentage of
Book Value

Oak Brook, IL

$7,983.3

392

$2,430.0

30.4

Oct. 1988

San Fran, CA

15,227.1

473

3,523.6

23.1

Oct. 1988

Lafayette, LA

15,093.2

N/A

Jan. 1989

Dallas, TX

15,838.4

794

2,359.9

14.9

Jan. 1990

Irvine, CA

9,491.8

983

2,360.0

24.9

June 1995

Dallas, TX

58,840.8

1,438

10,570.0

18.0

$122,474.6

4,117

109

N/A

Auction
Date

Location

Oct. 1987

Totals

N/A: Not available.
Source: FDIC Division of Resolutions and Receiverships.

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RTC Regional Loan Auctions
The RTC conducted its first regional loan auction in June 1991. After conducting 11
more regional loan auctions between June 1991 and December 1992, the RTC began
conducting loan auctions nationwide.
The RTC held regional loan auctions to sell the large inventory of small loans that it
had acquired. At the beginning of the RTC’s operations, each regional office had its own
information system. The large number of assets to be converted to those regional systems, along with the lack of sophistication of many of the failed thrifts’ own systems, put
enormous strain on the resources of the regional offices. As a result, the asset data on the
regional information systems was not always accurate. The development of a new, integrated information system for the RTC assets necessitated that the current inventory of
small assets be sold so that the new system could be effectively started and staff efforts
could be focused on large, complex assets in the RTC’s inventory. See table I.13-4 for a
summary of RTC regional loan auctions.

Table I.13-4

RTC Regional Loan Auctions
($ in Thousands)
Sales
Price

Sales Price as
a Percentage
of Book Value

$32,653.1

57.8

4,056

23,280.0

37.6

24,517.5

3,299

5,030.0

20.5

Denver, CO

93,698.7

5,437

46,410.0

49.5

April 1992

Atlanta, GA

203,995.1

3,366

105,875.0

51.9

May 1992

San Antonio, TX

24,359.4

1,319

4,259.0

17.5

Aug. 1992

San Antonio, TX

17,114.3

1,046

6,175.0

36.1

Sept. 1992

Valley Forge, PA

78,243.0

689

21,210.0

27.1

Oct. 1992

Dallas, TX

46,030.0

796

28,500.0

61.9

Dec. 1992

Phoenix, AZ

19,059.4

7,133.0

37.4

Dec. 1992 *

Houston, TX

648,442.2

657

7,172.5

1.1

Dec. 1992 *

Atlanta, GA

58,840.8

44,000

9,377.0

15.9

$1,332,723.6

68,680

473 $297,074.6

22.3

Location

June 1991

Chicago, IL

$56,492.6

3,970

June 1991

Denver, CO

61,930.6

July 1991

Dallas, TX

Dec. 1991

Totals/Average

Book
Value

Number
of Loan
Number of
Loans Sold Pools Sold

Auction
Date

* These two regional loan auctions consisted primarily of judgments, deficiencies, and charge-offs (JDCs)
Source: FDIC Division of Resolution and Receiverships.

AU C T I O NS A ND S E A LE D B I D S

RTC National Loan Auction Program
The National Loan Auction Program, which grew out of the regional loan auctions,
began in September 1992. Altogether, the RTC conducted eight national loan auctions,
with the last one taking place December 13-15, 1995.
Under the direction of the national sales center, the RTC established the national
loan auction to provide a common forum for the RTC field offices to market their hardto-sell loans. The overall goal was to achieve the highest possible prices by providing sufficient concentrations of like assets in geographically similar locations that would attract
numerous potential bidders and elicit strong competition. Originally designed to sell
only nonperforming loans, the criteria were expanded in 1994 to include marginally
performing loans. National Loan Auction V, which was held in September 1994, was
the first auction to offer performing loans; specifically, they were performing loans that
were not securitizable, were underperforming, or had other problems that rendered
them unmarketable by other means.
Central to the success of the National Loan Auction Program was the establishment
of the RTC auction center in Kansas City, Missouri, which housed all loan files. There,
bidders were able to perform due diligence on copies of files (either documents or
microfiche) that had been sent from field offices to the auction center. With its state-ofthe-art facilities, including 175 computer workstations available at all times to accommodate investors, the auction center provided for four weeks of investor file review
before each auction.
In an effort to maximize the sales price, the RTC stratified loans to produce homogenous packages. The sales staff first sorted the loans based on performing versus nonperforming status, then by asset type, geographic location, and lien position. Stratification
was also controlled to some degree by the RTC Completion Act (Completion Act) of
1993 and by the principles of the RTC’s Small Investor Program. That program was
designed to appeal to small investors who wished to purchase RTC assets but lacked the
resources to bid on the large asset portfolios the agency had been offering for sale. Before
requirements of the Completion Act changed the playing field, nonperforming real
estate loans with balances of more than $1 million were sold in multi-asset packages. To
make the auction accessible and affordable for the relatively small investor, the RTC’s
Small Investor Program sales staff attempted to stratify the loans in a way that would
keep the average package size under $2 million.
By trying various combinations of media and by tracking the sources of investor
inquiries, the RTC determined that a heavy emphasis on direct mail, with support by
limited exposure in The Wall Street Journal and a few major regional papers, provided
excellent results. In addition, auctioneers made direct calls to previous buyers, as well as
to important prospective buyers, to solicit their involvement.
The RTC encouraged investors to do their own due diligence; provided them with
all available information about the loans, including trial balance loan detail; and permitted them to view all the documents in the individual loan files. For a nonrefundable fee

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M A N A GI N G T H E C R I S I S

of $250, each investor could receive either a diskette with all the trial balance information or access to the same information on a computer network by modem. Contractor
and RTC personnel were on hand to assist investors and answer questions.
While the investors reviewed loan documents, RTC personnel evaluated packages
and set reserves. In general, reserves for performing loans were based on market yields,
and reserves on nonperforming loans were based on either a percentage of the appraised
value of the underlying collateral, or on a percentage of the book value based on the
historical results achieved on like assets sold at previous auctions.
Typically, because of the number of packages offered, an auction lasted two or three
days. Although many investors took advantage of preregistration, many registration procedures were completed each auction day. RTC attorneys worked with the auction contractor and the bidders to complete documents and to collect the $50,000 deposit
required each day of the auction.
Loan auction experience led the RTC to believe that (1) loan auctions were costeffective only when the asset inventory was above a critical level; (2) small regional auctions were just as effective as large-scale national auctions; (3) reserve pricing was critical
for the sale of difficult, more complex products as a means to guide the market value;
and (4) performing standard assets did not need reserve pricing. The bidders would
easily establish a market price for those assets. See table I.13-5 for a summary of the
RTC National Loan Auction Program results.
The RTC viewed conducting auctions as a successful method for selling a large
inventory of small value loans or as a way to reduce its inventory before closing an office.
It viewed sealed bid loan sales as more successful when the inventory was smaller, or in
the “normal” course of business. The RTC believed that the competitive atmosphere of
an open-outcry auction generated higher prices for loan pools than did other sales methods. On the downside, those auctions sometimes resulted in logistical problems after the
sales event. Sometimes delays in accounting for the sales led to contractors continuing to
manage sold assets and even, in some cases, resulted in assets being sold to more than
one buyer. Overall, the RTC believed that its auctions were entirely suitable for the sale
of nonperforming loans and nonstandard loans that were hard to sell by other methods.

Real Estate Sales Programs
The disposition of real estate was not of great concern to the FDIC until the early
1990s. Before 1989, the FDIC’s inventory of real estate received from bank failures averaged only about $300 million, peaking at $600 million in 1987. Beginning in 1989, the
level of inventory increased dramatically as the pace of bank failures increased. In 1989,
FDIC’s inventory of real estate jumped to $5 billion, representing 19 percent of the
FDIC’s total assets in liquidation; it would later peak at $6 billion by year-end 1991. In
comparison, the RTC ended 1989 with $14.6 billion in real estate; it would peak at
$18.1 billion by year-end 1990. In 1991, the RTC began offering seller financing to

AU C T I O NS A ND S E A LE D B I D S

327

Table I.13-5

RTC National Loan Auction Program
($ in Millions)
Sales Price
as a
Percentage
Sales
of Book
Price
Value

Number Number
Costs as a Costs as a
of
of Number
Percentage Percentage
Loans Packages
of Total
of Book
of Sales
Sold
Sold Buyers Costs
Value
Price

Auction
Number
and Date

Book
Value

I
Sept 92

$416

$248

59.62

6,966

196

$5.2

1.25

2.10

II
March 93

501

249

49.70

17,814

190

3.8

0.76

1.51

III
Aug 93

673

335

49.78

11,198

311

4.5

0.67

1.34

IV
April 94

318

191

60.06

5,809

225

2.8

0.88

1.47

V
Sept 94

399

223

55.89

8,814

317

3.5

0.88

1.57

VI
Dec 94

370

229

61.89

9,786

258

3.7

1.00

1.62

VII
May 95

353

231

65.44

7,178

296

3.9

1.10

1.69

VIII
Dec 95

569

403

70.83

5,349

336

3.2

0.56

0.79

Totals/
Averages $3,599 $2,109

58.60

72,914

2,129

505 $30.6

0.85

1.45

Source: RTC National Loan Auction Program Database.

encourage real estate sales in reaction to a market that was severely distressed and lacked
more traditional sources of financing.
Sealed Bids
The FDIC has always made a regular practice of employing a sealed bid process for real
estate sales. Unlike bulk sales or auctions, sealed bid events were almost always single
asset sales until the early 1990s. At that time, the FDIC’s inventory increased to such levels that sealed bid marketing efforts included multiple assets, although bids were
accepted on individual real estate properties. Typically, sales were advertised in a variety
of newspapers, with specific bid dates established. Contract terms were generally all cash,
and winning bidders were required to make nonrefundable earnest money deposits. The

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M A N A GI N G T H E C R I S I S

RTC also made regular use of sealed bids and operated under procedures similar to those
of the FDIC. Generally, sealed bid sales satisfied agency requirements for broad marketing and competitive bidding. In addition, they set a certain date for selling the property,
assuming an adequate bid was received. The RTC usually established reserve prices based
on a percentage of appraised value. Sealed bid sales, which typically ran for 30 to 60
days, were conducted directly by the account officer or through the services of an
exclusive listing broker, known as a lead broker.
The sealed bid process gives all interested parties an opportunity to submit their
offers under structured guidelines. The process levels the playing field and eliminates
any potential inquiries concerning possible unequal treatment of participants. The process also requires buyers to submit their bids in conformance with the sealed bid instructions, bid format, and prescribed deadlines—or risk being disqualified. The sealed bid
sale method has been effective for larger, higher profile assets for which the target market
is primarily national in scope and a rapid and extensive marketing campaign seems
appropriate. In the early 1990s, the process also facilitated a faster sale, which proved
effective for properties that were experiencing significant negative cash flows or holding
costs.
Real Estate Auctions
By the late 1980s, the FDIC periodically began holding real estate auctions to dispose of
large inventories of relatively small real estate properties such as condominiums and
vacant lots. The FDIC saw those sales as opportunities to unload large numbers of
labor-intensive properties. During that time, the use of real estate auctions was generally
limited to small and distressed properties and connoted the image of a “fire sale,” in
which the seller was willing to accept heavily discounted prices to unload undesirable
real estate.
Interestingly, fear of a fire sale mentality, or the “dumping” of assets, was prevalent
when the RTC was created. As a result, FIRREA included language requiring the RTC
to sell real estate for no less than 95 percent of market value—defined as appraised value.
Consequently, in the early stages of the RTC’s existence, real estate auctions were prohibited for fear that they would aggravate already distressed markets, reduce prices generally, erode collateral values, and damage the financial standing of banks and thrifts that
were heavily invested in real estate markets.
By 1990, the RTC real estate inventory was more than $18 billion and efforts to sell
the inventory through normal channels, such as brokers, were insufficient to move substantial amounts of property. Congressional concerns about the RTC’s slow pace in selling assets, the cost of carrying the inventory, difficulties in managing large numbers of
assets, and the continuing decline in real estate prices generally began to change outside
perceptions of how the RTC should proceed.
In March 1991, the RTC approved a new real estate pricing policy for all real estate
sales and, particularly, authorized the use of auctions to sell real estate. The resulting

AU C T I O NS A ND S E A LE D B I D S

effect was significant. The RTC determined that its auctions would require extensive
marketing efforts with large-scale regional, national, and possibly international exposure. It planned to sell properties in absolute auctions if the property had an established
market value below $100,000 and if the property had been widely exposed to the market. The RTC would reserve the right to reject any offers that were made in the absence
of a competitive bidding environment. It planned to sell all other properties at auctions
with reserve prices set at levels to take into account the benefits of an expedited sale,
including savings of holding costs and marketing costs. To stimulate bidding, the RTC
could set reserve prices at less than the expected sale price, accepting under no circumstances less than 70 percent of the current appraised value, adjusted for any savings of
sales expenses or costs as a result of an expedited sale. As the RTC and the FDIC saw
their inventories increase substantially and both began acquiring larger real estate
properties, they both initiated large-scale national auctions.
National Real Estate Auctions
To promote sales and to respond to criticism that the RTC was slow in disposing of
assets, the RTC created the National Satellite Auction. The first of its kind, the auction,
based in Dallas, Texas, was scheduled for November 15, 1990, with satellite transmission to nine U.S. cities, as well as to London and Tokyo. More than 71 commercial
properties were expected to be included with an aggregate value of $500 million. Notwithstanding the best of efforts and intentions, the auction was ultimately canceled
because the auctioneer was unable to meet a contract commitment for funding. It was a
rocky start for the RTC’s auction efforts, but the RTC continued to embrace the
national auction methodology.
Through its national sales office, the RTC planned, coordinated, and executed
many major asset sales, including the sale of real estate pools worth more than $100 million. The RTC held many national real estate sealed bid sales including the 1992 offering of its first structured portfolio of hotel properties and related loans, which had a
book value of approximately $237 million, and one national real estate auction in
November 1991. The office conducted a number of other national sales of unique properties such as mini-warehouses, shopping centers, and nursing homes. The office also
developed the National Land Fund strategy to dispose of the hard-to-sell land assets. 1
The FDIC also saw opportunity in employing large-scale real estate auctions. In
March 1989, the New York office coordinated the first nationwide auction of large real
estate holdings. At the auction, conducted at Christie’s in New York City, 14 properties
were sold for $40.7 million, a significant 99.4 percent of their aggregate appraised value.
In December 1991, the FDIC held its first national satellite real estate auction.
Properties included in the auction were from 23 states and consisted of 178 commercial

1. For more information, see Chapter 17, Partnership Programs.

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M A N A GI N G T H E C R I S I S

properties with an aggregate appraised value of $443 million. With satellite hookups in
five cities, the event attracted 1,000 bidders and yielded $240 million in cash, plus
notes. Of the 178 properties exposed to the market, 115 were placed under sales contracts at an aggregate price equivalent to 82 percent of the portfolio’s appraised value.
The FDIC offered seller financing on properties with an appraised value of more than
$500,000 and also offered a 5 percent cash discount on those properties.
In 1992 and 1993, the FDIC conducted its second and third national satellite real
estate auctions. In addition to selling many properties at auction, the FDIC discovered
that the promotion leading up to the events could result in sales before the actual auction date. Typically, a group of properties were targeted for auction. To maintain
adequate inventory for the sale and show good faith to investors who spent considerable
time and money performing due diligence on those properties, the FDIC typically froze
property sales at about the time information packets and brochures were distributed.
Investors already interested in properties on the market and scheduled for auction could
be threatened by the prospect of having to bid for the property in an open outcry auction environment for fear of either paying a higher price or losing the property
altogether. Consequently, a significant number of investors acted to lock in the purchase
of the property before the freeze date, thus bringing about earlier sales than might have
otherwise occurred.
As inventory levels and asset sizes no longer supported a large national initiative, the
FDIC suspended the use of national auctions after 1993 and, instead, relied principally
on smaller regional initiatives. See table I.13-6 for a summary of the FDIC national auction results.

Conclusion
The banking and thrift crisis caused an unprecedented volume of assets to be transferred
to the FDIC and the RTC. In response to an overwhelming workload, both the FDIC
and the RTC experimented with disposition strategies to facilitate disposition at prices
that maximized the overall return.
The experience gained from the period clearly indicates that sealed bid sales and
auctions are effective marketing strategies for disposing of distressed assets in a timely
and effective manner. The multitude of variables involved in evaluating independently
unique assets, timeframes, and situations makes it difficult to determine which approach
is more acceptable or will generate better returns in a given situation. Sufficient experience has occurred in both the public and private sectors, however, to substantiate both
strategies as reasonable approaches to disposing of real estate, loans, and other assets,
especially when a large volume of distressed assets needs to be sold within a relatively
short time.
In either marketing strategy, the FDIC found that it was important to have good
information about the assets before marketing them, because they brought a better price

AU C T I O NS A ND S E A LE D B I D S

331

when the bidders were able to receive good information before bidding. The RTC, more
so than the FDIC, found itself with an extraordinary volume of assets. As a result, unlike
the FDIC, which up to a point was able to take the assets in, manage them for a short
period, clean them up, and then sell them, the RTC generally did not have the luxury of
time and would market assets without much prior due diligence. For that reason and
because the assets held by the RTC were, on the whole, of a lesser quality, the FDIC was
generally able to receive a better sales price.

Table I.13-6

FDIC National Auction Results
($ in Thousands)

1992 Auction

Number

Appraised
Value

Sales
Price

Sales Price as
a Percentage of
Appraised Value

Properties in the Auction

270

$599,497

—

Total Sold at Auction

218

474,365

$412,170

86.9

Financed Sales

153

373,091

328,665

88.1

101,274

83,505

82.5

144

282,477

261,805

92.7

Number

Appraised
Value

Sales
Price

Sales Price as
a Percentage of
Appraised Value

Properties in the Auction

197

$398,138

—

Total Sold at Auction

165

345,138

$312,231

90.5

Financed Sales

100

219,810

195,514

89.0

125,329

116,718

93.1

Cash Sales
Sold Before Auction

1993 Auction

Cash Sales

Source: FDIC Division of Resolutions and Receiverships.

lthough it cannot be said that one type of
asset management contract worked
better than another type, the privatesector contractors generally performed
well under any type of contract, when
they were given the proper incentives.

CHAPTER 14

Asset Management Contracting

Introduction
This chapter reviews the types of asset management and disposition contracts used by the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC).
The analysis includes a discussion of the evolution, strengths, and weaknesses of those contracts.

Background
During the 1970s and the early 1980s, the FDIC used its internal staff to conduct most
of its asset disposition activity. As the number of failures rose and the total volume of
assets to be liquidated increased, the FDIC found it more difficult to perform those
functions entirely with in-house personnel.
In the mid-1980s the FDIC first began using contractors to manage and dispose of
distressed assets with the resolutions of Continental Illinois National Bank and Trust
Company (Continental), Chicago, Illinois,1 and First National Bank and Trust Company of Oklahoma City, Oklahoma City, Oklahoma. By the late 1980s, however, it was
standard practice for the FDIC to use contractors for the management and disposition
of assets retained from some of the larger bank failures. The RTC, with its large volume
of assets, used asset management contractors from the outset.
From 1988 to 1993, the FDIC used 14 asset management contracts to liquidate
assets with a book value of more than $33 billion, or more than 45 percent of the postresolution assets the FDIC retained for liquidation. The RTC issued 199 Standard Asset

1. See Part II, Case Studies of Significant Bank Resolutions, Chapter 4, Continental Illinois National Bank and
Trust Company.

334

M A N A GI N G T H E C R I S I S

Management and Disposition Agreements (SAMDAs) to 91 contractors from 1991 to
1993 to cover assets with a book value of $48.5 billion.
Continental Illinois National Bank and Trust Company, Chicago, Illinois
On September 26, 1984, the FDIC entered into a five-year assistance agreement with
Continental Illinois Corporation, the holding company of Continental. In exchange for
assuming Continental’s $3.5 billion debt to the Federal Reserve Bank (Federal Reserve)
and providing Continental with an additional $1 billion in capital, the FDIC received
$1 billion in preferred stock and assets with an unpaid balance of $5.2 billion. Those
assets had a book value of $4.5 billion at the time of the transaction, and a further writedown to $3.5 billion was made on the date of the assistance agreement to reflect the
assets’ troubled status. On the same date, the FDIC and Continental entered into a servicing agreement under which Continental managed the poor-quality assets. While the
FDIC owned the assets, Continental set up a special unit called the FDIC Asset Administration (FAA) to manage and dispose of the assets.
About 50 percent of the problem assets were large loans to the energy industry, 20
percent were complex international shipping loans and loans to foreign companies, 20
percent were securities, and approximately 10 percent were commercial mortgages and
construction loans secured by large commercial real estate projects from all over the country. As assets were liquidated, portfolio collections2 were used first to pay the expenses of
administering the pool, which included items such as the administrator’s salaries and
overhead. Next, collections were applied to the payment of the interest, then the principal, of the Federal Reserve debt.
FAA’s asset management staff at its peak totaled more than 250 employees. The
FDIC’s oversight staff, who were located in the bank, consisted of 7 to 12 specialists
who were hired to oversee such areas as oil and gas, owned real estate, and international
lending. Another five FDIC employees were accountants and attorneys. An oversight
committee composed of FDIC staff reviewed only FAA’s asset management and disposition decisions, because the FAA oversight committee had no authority to make disposition decisions. The committee also reviewed FAA’s accounting and budgeting systems
and processes for accuracy and ensured that FAA complied with the FDIC’s policies and
procedures.
FAA had unlimited restructuring, settlement, and sales authority on the assets, but
there was a capital expenditure limit of $50,000 per expenditure and an aggregate
annual capital expenditure limit of $100,000 per asset. FAA had no authority to approve
indemnifications, and the FDIC field and regional offices had very limited indemnification authority. Because indemnification was a standard feature in international,

2. Portfolio collections were defined as gross collections less authorized asset-related expenses. Continental
reported only portfolio collections to the FDIC, so the gross collection amount is unknown.

A S S E T M A N A G E M E N T CO N T R A C T I N G

multi-bank transactions and Continental was, to a large extent, a “banker’s bank” participating in such loans, many workout situations involving indemnifications had to be
approved at FDIC headquarters in Washington, D.C. Some problems were encountered
in getting a prompt turnaround from FDIC headquarters to obtain the necessary
approvals for large workouts involving multiple banks as participants. Consequently, the
FDIC decided that when overseeing an asset pool containing large, complex assets such
as those at Continental, there were advantages to having more decentralized delegated
authority.
The FAA had a “cost-plus” asset management contract, under which the FAA was
reimbursed for the cost of its expenses plus incentive compensation, which was based on
a tiered scale ranging from 0.6 percent to 2.25 percent of net collections.3 Incentive
compensation for the first tier was 0.6 percent times the aggregate net collections
between $250 million and $1 billion. That percentage increased incrementally through
a total of four tiers to 2.25 percent of net collections between $3 billion and $3.5
billion.
The incentive fees paid to FAA during the life of the servicing contract were a
relatively low $8 million because of the large interest payments made on the Federal
Reserve debt. That amount represents only 0.34 percent in incentive compensation for
FAA of the $2.4 billion in portfolio collections. FAA’s recovery rate ($2.3 billion in net
collections4 to $4.3 billion in book value reductions5) was 53 percent. Discounting collections to estimate a net recovery rate ($1.9 billion in net present value of net collections to $4.3 billion in book value reductions) results in a recovery rate of 44 percent.6
The servicing agreement entered into with Continental was the first of its kind for
the FDIC. The FDIC’s experience in this case suggested that the cost of using the
private sector to service assets was relatively low and that the contractor’s overall performance was satisfactory. The servicing agreement spared the FDIC from having to hire
hundreds of people to manage the $5.2 billion in distressed assets.

3. Net collections for the purposes of FAA’s incentive compensation were defined as portfolio collections (net of
all asset-related expenses) less the administrator’s reasonable direct expenses, such as salaries and overhead, as well
as the FDIC’s expenses and interest expenses on the Federal Reserve debt.
4. Net collections here are defined as net collections before interest payments on the Federal Reserve debt over
the five-year term of the agreement. As a result, net collections equaled $2.4 billion in portfolio collections less $91
million in expenses, which includes administrative expenses ($70 million), FDIC expenses ($13 million), and incentive fees ($8 million).
5. Book value reductions are defined as the decrease in book value of all types of assets resulting from such activities as the collection of loan principal, the sale of an asset, the forgiveness of debt, and the write-off or donation of
an asset.
6. Although the original termination of the Continental servicing contract was September 26, 1989, the contract
was terminated instead in October 1988, at Continental’s request. The FDIC actually serviced the assets for the
last 11 months of the five-year contract. Approximately 85 percent of the net collections within the five-year period
were achieved during the four-year period when Continental administered the pool.

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First National Bank and Trust Company of Oklahoma City, Oklahoma City, Oklahoma
On July 14, 1986, approximately $1.5 billion in assets of the failed First National Bank
and Trust Company of Oklahoma City were placed in an asset pool under a purchase
and assumption transaction. First Interstate Bank, Oklahoma City, the acquiring bank,
set up a subsidiary corporation, Consolidated Asset Management Company (CAMCO),
to administer and liquidate the $1.5 billion asset pool.
The CAMCO contract was similar to the FAA contract in that it had a cost-plus
feature. The term of the contract was for five years, and the FDIC oversight staff had no
authority to make asset disposition decisions. The CAMCO contract was also like the
FAA contract because the contractor had unlimited sale and settlement authority, and
incentive compensation was based on the dollar volume of net collections. All expenses
were paid by the FDIC and netted against collections before the incentive fee was paid.
One difference in the CAMCO contract was that it was between the FDIC and an
affiliate of the acquiring bank, rather than with the bank itself. That precedent was followed by other banks that later entered into asset servicing agreements and allowed the
“good” bank to further insulate itself from the “bad” bank’s activities. In addition, the
percentages that applied to the various tiers of net collections in the incentive compensation formula were higher in the CAMCO contract than those in the FAA contract or in
later agreements. As a result, the CAMCO contract was more expensive for the FDIC
than was the Continental contract. The higher percentages were included because of the
low overall incentive compensation paid to FAA. In this case, though, the percentages
proved to be too generous and gave CAMCO fairly high returns. CAMCO received
approximately $31 million in incentive compensation over the course of the contract,
which represented about 12 percent of the $255 million in net collections. Subsequently,
the FDIC decided to pursue a more standardized type of asset management agreement to
set more appropriate rates of return for asset management contractors. The new type of
contract became known as the Asset Liquidation Agreement.

Asset Liquidation Agreements
The Asset Liquidation Agreement (ALA) was a contract between the FDIC and an asset
management contractor for the purpose of managing and disposing of distressed assets.
It was designed for asset pools with an aggregate book value greater than $1 billion. Ten
ALA contracts were issued between 1988 and 1992 and achieved book value reductions
of $30.5 billion. For the same time period, approximately 45 percent of all the FDIC’s
assets were managed by ALA contractors. All of the ALA contracts were completed by
the end of 1996; any remaining assets were transferred back to the FDIC when the
contracts concluded.
The term of an ALA contract was normally five years with no renewal options.
Several contracts were ended early by mutual agreement; the average duration of the 10

A S S E T M A N A G E M E N T CO N T R A C T I N G

ALA contracts was four years and five months. The objective of the ALA was “…the
maximization of the present value of net cash flows.”
The ALA contract was similar to the FAA and CAMCO contracts in that it was a
cost-plus contract in which the FDIC reimbursed the contractor for all operating
expenses and overhead, including salaries, benefits, and limited bonuses of the contractor’s employees.7 The contractor often paid higher bonuses to its employees, but those
bonuses were not reimbursable. In addition to the contractor’s salaries and overhead, the
FDIC reimbursed the contractor for all asset-related expenses. Such expenses included
asset searches; foreclosure fees; appraisals; environmental reports; property taxes; and all
legal, accounting, and consulting fees related to the management and disposition of the
asset pool.
Because of certain companion agreements, acquiring banks of the first eight ALA
contracts were able to put additional failed bank assets back to the FDIC through the
vehicle of the ALAs if it was determined that the assets should have been classified at the
time of the failed bank’s resolution. One of the changes made to the “put option” was
that in some of the later contracts, the acquirer was penalized for the length of time it
took to put back the assets. For example, in the first year there was no penalty, and the
FDIC would purchase qualified assets at their book value. During the second year of the
contract, however, the FDIC would buy the assets back at a 2 percent discount from
book value, and in the third year the FDIC imposed a 5 percent discount.
Evolution of the ALA Program
At first, the ALA contracts were negotiated between the FDIC and an asset management
organization that was an affiliate of the acquiring bank. Later, ALAs evolved into competitively bid contracts between the FDIC and private-sector contractors who did not
have to be affiliated with the acquiring bank.8 The ALA program was designed to facilitate the disposition of distressed assets, primarily nonperforming loans and owned real
estate, although the pools sometimes contained performing loans.
The first three ALA contracts occurred in 1988 and 1989 and contained the
distressed asset pools of the failed First RepublicBanks, MBanks, and Texas American
Banks, all of which were in Texas.9 The primary difference between those contracts and
the ones that followed was that the assuming bank owned and held title to the assets. A
7. The FDIC could deny expenses if it determined that the costs were excessive or improper or if the contractor
was found to be negligent. The contractor’s nonreimbursable expenses included items that were not directly related
to the liquidation, collection, and management of the pool assets, such as severance plans or any employee benefits
that the FDIC considered to be excessive.
8. Only three ALA contracts were competitively bid. Those included the First RepublicBanks (AMRESCO) contract and the last two ALA contracts involving seven banks in New Hampshire (BONHAM) and Dollar Dry Dock
Bank (JERNE). (See table I.14-2.)
9. See Part II, Case Studies of Significant Bank Resolutions, Chapters 6 and 7, First RepublicBank Corporation
and MCorp., respectively.

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subsidiary of the assuming bank usually managed the special asset pool. The FDIC paid
the assuming bank the difference between the book value and the estimated market
value of the failed bank’s assets assigned to the pool. When the assets were later sold or
settled, the FDIC also paid the assuming bank the difference between the original estimated market value and the actual value obtained on the assets. Likewise, if the sales
price of an asset was greater than its original estimated market value in the pool, the difference accrued to the FDIC. Therefore, although the assuming bank held the assets in
title, it did not assume all the normal risks of ownership. By having the assuming bank
fund the bad assets, the FDIC reduced its initial cash outlay, thereby preserving the
liquidity of the bank insurance fund. However, this strategy raised the overall cost of the
transactions to the FDIC because the assuming banks had higher funding costs than did
the FDIC. After being given adequate sources of liquidity, the FDIC no longer used that
type of funding mechanism.
In the first ALA contract with First RepublicBanks, the incentive fee paid to the
contractor was tied to a fixed percentage of gross collections on the pool and limited to a
gross dollar amount over the life of the contract. It soon became apparent that this type
of contract presented some problems, so the FDIC adjusted the incentive formula on
the next two contracts by basing the fee on a percentage of net, rather than gross, collections. Net collections were defined as gross collections less all allowable expenses associated with the pool. The use of net collections rather than gross collections forced the
contractor for the first time to take into consideration its cost of collections. In the first
ALA contract, the contractor had no motivation to reduce its costs because the FDIC
reimbursed all of its expenses and the expenses did not affect the contractor’s fee.
Another change to the management contract was that the incentive fee percentage
decreased over the life of the contract. For example, the contract might pay 3 percent of
net collections the first year, 2 percent the second year, 1 percent the third, and so on.
The contract was changed to gradually pay a reduced percentage fee to induce the contractor to dispose of the pool more quickly. That change was considered an improvement over the fixed percentage given in the first ALA contract because it rewarded the
contractor on the basis of the time value of money. Also, the FDIC eliminated the dollar
limitation on total fees collectable since that could be a disincentive to a contractor
toward the end of the contract.
The first three contracts also provided an opportunity for an additional incentive
fee at the end of the contract if it was proven that the contractor had improved the value
of the pool over the earlier “mark-to-market” value. The formula used to determine this
value was a complicated one that considered all collections made over the life of the
pool and required the valuation of the remaining assets in the pool at the end of the
contract. After the first three contracts, that clause was eliminated because there was no
evidence that it was effective as an incentive to the contractors to improve collections. It
also proved difficult and costly to implement because of the requirement of a mark-tomarket valuation on the remaining assets upon termination of the contract.

A S S E T M A N A G E M E N T CO N T R A C T I N G

The fourth through the eighth ALA agreements occurred in quick succession from
February to August 1991. There was little structural difference among those five contracts, although the variables used in the incentive fee formula for each contractor were
unique. Some primary changes from the first three contracts were that the assets
assigned to the contractors were no longer marked to market, and the FDIC, rather than
the acquiring bank, owned the assets.
After analyzing the results of the first three contracts, the FDIC also made some
major modifications to the way that it calculated the incentive fee. Rather than basing
the incentive fee on a decreasing percentage of net collections, the FDIC took the opposite approach and started paying the incentive fee at an increasing percentage of net collections. The FDIC realized that it was harder to motivate the contractor from the
middle of the contract term to the end, when collections were more difficult to achieve.
Also, as the pool decreased in size, fewer assets were generating income, so the incentives
needed to be enhanced for the latter period of the contract. Furthermore, since the ALA
contracts were all cost-plus contracts, the FDIC needed an additional incentive to
ensure that the contractor made every effort to keep its expenses to a minimum.
To address those concerns, the FDIC developed a more complicated incentive fee
formula. The new incentive fee was keyed to the ratio of cumulative net collections to
the asset pool’s gross pool value. The cumulative net collection amount in the incentive
fee formula was derived by deducting the funding costs and twice the amount of the
contractor’s reimbursable expenses from the gross collection amount. The gross pool
value was defined as the aggregate book value remaining in the pool. The formula also
increased the incentive fee percentage as the ratio of cumulative-net-collections-to-grosspool-value increased.
The addition of the factor regarding funding costs to the formula had a negative
effect on the incentive fee if the pool balance remained at a high level. The contractor
therefore had a strong incentive to reduce the pool balance either through collections
and sales of nonperforming assets or through writing off the worthless assets in the pool.
The doubling of the expense costs in the incentive compensation formula heightened
the contractors’ awareness of the need to control expenses. The result was that ALA contractors decreased staffing and other expenses fairly quickly as assets were liquidated and
the workload declined.
The FDIC made another change to the incentive fee structure because it wanted a
strong internal audit function for each of those ALA contracts. In the earlier contracts,
it was difficult to direct the contractor to spend funds in that area because the costs
attributed to the audits resulted in a reduction in the contractor’s incentive fees. To correct this problem, the FDIC deducted audit costs from the contractor’s total expenses
in the formula that determined the incentive fees.
In the first three contracts, assets could be added to the pools only if they originated
at the failed bank that was the source of the initial contract. Although this restriction
helped for bookkeeping purposes if the assets were later put back to the FDIC, it proved
inflexible and a hindrance to the operation of the ALA program. The later contracts

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were changed to allow the FDIC to add additional assets from any source. That
provision allowed the FDIC the flexibility to group loans to one borrower even if they
originated at different banks. It also allowed the FDIC to add additional assets from a
newly failed bank to an existing ALA contract, thereby saving the FDIC the time and
expense of bidding out another contract. The option also allowed the FDIC in a later
ALA contract to combine assets from a particular geographic area into one pool to better
service its loan customers. The knowledge that additional assets could be added to their
pools further motivated the contractors to outperform other contractors.
A major change that occurred in the final two (ninth and tenth) ALA contracts was
that the asset pools were competitively bid to outside asset management firms. This
process was in contrast to the earlier one, in which the contract terms were negotiated
with the successful acquirer of the failed institution. After the contracts were competitively bid, the result was lower incentive fees to the contractors. Although it might seem
that the FDIC would have made that change from the beginning to lower its costs, there
were several reasons that the change occurred toward the end of the ALA program
period, rather than at the beginning. At the inception of the ALA program, the FDIC
did not believe that a sufficient number of qualified private-sector asset management
firms existed to ensure a competitive bidding environment. Because the ALAs were costplus contracts covering asset pools with book values of more than $1 billion, the FDIC
needed to have a high level of confidence in the asset management firm that it would
select. In addition, the acquiring bank, rather than the FDIC, owned the assets in the
first four ALA contracts, which were consummated from late 1988 to early 1991.
Because the FDIC did not hold title to the assets, it was not in a position to competitively bid out the asset servicing contracts. By 1992 the FDIC determined that a sufficient number of qualified, experienced ALA contractors and RTC asset management
contractors that managed troubled assets existed to provide competition.10 The FDIC
therefore was comfortable about competitively bidding out the last two ALA contracts.
Table I.14-1 shows the Bank One New Hampshire Asset Management (BONHAM) fee
structure, which is an example of one of the actual ALA compensation schedules.
Oversight and Operational Controls
An on-site oversight staff composed of FDIC employees managed the ALA contractors.
The number of oversight staff ranged from 5 to 10 employees, depending on the size of
the contract. The duties of the FDIC oversight staff were related primarily to the
disposition of assets. An oversight committee was composed of two FDIC employees
and one contractor employee. The committee normally had unlimited delegations of
authority in asset disposition matters, thus permitting prompt decision making,

10. The RTC Standard Asset Management and Disposition Agreement contractor program is described later in
this chapter.

A S S E T M A N A G E M E N T CO N T R A C T I N G

341

promoting the contractor’s credibility in negotiations with borrowers, and enabling the
contractor to close transactions expeditiously.
The oversight committee members and the FDIC oversight staff performed many
of the same asset management and disposition functions that were normally performed
in an FDIC field office, such as reviewing the largest assets to ensure the proper handling
of high-profile or sensitive asset-related issues. The FDIC staff also approved the asset
management and disposition procedures prepared by the contractor, addressed congressional and media concerns, and reviewed and approved the contractor’s annual audit
plan, budget, business plans, staffing levels, and salary structure. In addition, the FDIC
staff reviewed and analyzed the contractor’s overall expenses and collections and monitored the ALA agreement, a task that involved coordinating the interpretation of the
contract with other divisions within the FDIC and working with legal staff on asset disposition and litigation issues.
The FDIC’s financial compliance oversight function included a review of the contractor’s monthly financial reporting packages, appropriate accounting methodologies,
compliance with the contract, and audit reports prepared by the contractor’s internal
audit department. The FDIC’s financial compliance staff reviewed the contractor’s
accounting policies for compliance with receivership accounting requirements and
examined the contractor’s accounting manuals for compliance with the FDIC’s

Table I.14-1

Bank One New Hampshire (BONHAM)
Incentive Compensation Schedule
Net Collection Tier *

Contractor’s Compensation (%) †

Less than or Equal to Zero

0.0

Greater than Zero to 16%

0.2

Greater than 16% to 25%

0.5

Greater than 25% to 32%

1.0

Greater than 32% to 39%

1.5

Greater than 39% to 43%

2.5

Greater than 43%

4.5

The net collection tiers represent the ratio of cumulative net collections to gross pool value. These
tiered percentage ranges were the same in all of the ALA contracts. The imputed funding cost used in
the calculation of net collections was determined by applying the one-year U.S. Treasury constant
maturity rate to the average book value of the current month.
† The contractor’s compensation represents the percentage of net collections that the contractor would
retain at each level. These compensation schedules were bid by or negotiated with the contractor, and
they differed in each contracting schedule.
Source: FDIC/BONHAM ALA contract dated February 12, 1992.

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requirements. In addition, they tried to find ways to reduce expenses and fees that
were paid by the FDIC; this task involved a review of the contractor’s cost allocation
methods.
The FDIC’s oversight staff inspected the contractor’s files, monitored goals against
actual results, reviewed portfolio sale cases, and followed up on problems noted in
previous site visitations. They also reviewed owned real estate sales and the real estate
appraisal process and analyzed property management procedures, lease agreements, and
the property tax abatement process. Although the number of FDIC oversight staff was
limited, they had sufficient authority to serve as a check-and-balance system for the ALA
contractor and to provide direction on how the FDIC wanted the assets to be liquidated. For instance, the FDIC oversight staff approved the salaries of the contractor and
also comprised the majority on the oversight committee that determined which expenses
were reimbursed, approved or disapproved asset settlements and sales, and either
removed assets from a pool or approved the addition of new assets.
Sources of Assets for the Asset Liquidation Agreements
Table I.14-2 summarizes the sources of assets assigned to the ALA program, as well as
other pertinent information.
Financial Performance of the ALA Program
Table I.14-3 summarizes the performance of the FDIC’s 10 ALA contracts from the
inception of the program in November 1988 through June 30, 1996.
Table I.14-2

Sources of Assets Assigned to ALA Contractors
($ in Billions)

Failed
Bank
First RepublicBanks

MBanks
Texas
American
Banks

Total
Assets
at
Failure

Assuming
Bank

Servicing
Contracts

Book
Value of
Assets
Assigned
to Servicer

$33.4

NCNB Texas,
National Bank

AMRESCO, a
subsidiary of
NCNB Texas

$12.0

March 28, 1989 15.7

Bank One,
Texas, N.A.

Bonnet, a
subsidiary of Bank
One

July 20, 1989

FAMCO, a
subsidiary of
Team Bank, N.A. Team Bank

Number
of
Date
Receiver- of
ships
Failure

July 29, 1988

4.7

4.2

1.3

A S S E T M A N A G E M E N T CO N T R A C T I N G

343

Table I.14-2

Sources of Assets Assigned to ALA Contractors
($ in Billions)

Continued

Failed
Bank
Bank of New
England, N.A.,
Connecticut Bank
& Trust Co., and
Maine National
Bank
Maine Savings
Bank

Goldome

CityTrust and
Mechanics and
Farmers Savings
Bank

Seven banks in
New Hampshire †

Number
Date
of
Receiver- of
Failure
ships

Assuming
Bank

Servicing
Contracts

Book
Value of
Assets
Assigned
to Servicer

January 6, 1991 22.0

RECOLL,
Fleet Bank of
Massachusetts, a subsidiary
of Fleet
N.A.

February 1,
1991

1.2

Fleet Bank of
Maine

RECOLL,
a subsidiary
of Fleet

0.5

8.7

Manufacturers
and Traders
Trust
Company *

Niagara Asset,
a subsidiary
of Key Bank

0.6

Niagara Port,
a subsidiary
of Key Bank

1.1

CARC,
a subsidiary of
Chase Manhattan
Bank of
Connecticut

1.5

Dollar Dry Dock
Bank (and other
Connecticut banks) 4
Totals

Total
Assets
at
Failure

103

May 31, 1991

August 9, 1991

October 10,
1991
Various in 1991
and 1992

7.5

3.1

Chase
Manhattan Bank
of Connecticut,
N.A.

4.4

First New
BONHAM,
Hampshire
a subsidiary
Bank and New
Dartmouth Bank of Bank One

1.7

6.0

Emigrant
Savings Bank
(and others)

JERNE,
a third-party
contractor

1.5

$99.2

$31.9

Later purchased by Key Bank, Buffalo, New York.
Three of these failed banks, which were Dartmouth Bank, New Hampshire Savings Bank, and Numerica Savings Bank,
FSC, were acquired by New Dartmouth Bank. The other four failed banks were acquired by First New Hampshire Bank
and included Amoskeag Bank, Nashua Trust Company, Bank Meridian, N.A., and BankEast. (Both New Dartmouth Bank
and First New Hampshire Bank entered into loss sharing assistance agreements with the FDIC on October 10, 1991 as
well. See Chapter 7, Loss Sharing, for additional information.)
Source: FDIC Division of Resolutions and Receiverships.
†

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M A N A GI N G T H E C R I S I S

ALA Program Recovery Rates and Expense Ratios
Table I.14-4 is a summary of the book value reductions, gross collections, expenses, and
net collections of the ALA program.
Strengths and Weaknesses of the ALA Program
The use of ALA contracts played a key role in the FDIC’s approach to the management
and disposition of bank assets that it received from bank failures in the late 1980s and
early 1990s. The ALA contracts provided a means for the FDIC to handle the high volume of assets it received from the largest banks that failed. From 1988 to 1992, the
FDIC contracted on 10 occasions with outside asset management companies to service
$32 billion of assets from failed banks. Those assets represented approximately 45 percent of the residual assets of failed banks that remained with the FDIC during those
years. Although the ALA contract is compared later in this chapter to the two other
types of asset management contracts that the FDIC and RTC used, the following is a
brief overview of some of the strengths and weaknesses of the ALA program.
As an alternative to building up its permanent staff for a short period of time
(approximately three to five years), the FDIC was able to contract out the management
of the assets. The contractors could hire staff more quickly than the FDIC could, and
the ALA fee schedule provided the contractor with a strong incentive to maximize the
recovery on the pool assets. Because of the effect of the doubling of expenses on the
incentive fee, the contractors were conscious of their staffing costs and therefore downsized quickly as the asset pools were reduced.
The full delegated authority given to the on-site oversight committee was an important factor in timely decision making concerning the assets. To ensure that this authority
was not abused, the FDIC assigned some of its most experienced personnel to the oversight committees. The FDIC also set up a review function to ensure that the actions of
the oversight committee were reasonable and that those of the contractors were consistent with FDIC policies and procedures.
By eliminating the internal audit costs from the formula that determined the
contractors’ incentive fees, the FDIC emphasized the importance of the contractors’ use of strong internal controls. Because the pools of assets contained a total
of more than $30 billion, it was important for standards to be in place to guard
against the potential for waste, fraud, and abuse. The FDIC’s Office of the
Inspector General audited the large contracts annually and, for the most part,
concluded that adequate controls were in place.
As additional ALA contracts were established, the FDIC was able to improve
portions of the ALA structure as the FDIC learned from its experience with previous
contracts. Primarily, the changes that were made to the standard ALA contract refined
the way incentive fees were calculated to improve the quality of the contractor’s
performance.

A S S E T M A N A G E M E N T CO N T R A C T I N G

345

Table I.14-3

ALA Program Financial Performance Summary
Inception of Contract through June 30, 1996
($ in Millions)
Book
Value
(plus Markto-Market) Gross
Total
Net
Reductions Collections Expense Collections*

Total
Expenses/
Gross
Collections
(%)

Net
Collections/
Book Value
Reductions
(%)

Contractor
(Failed Bank)

Term
of
Contract

AMRESCO
(FirstRepublic
Banks)

Nov. 1988 to $11,818†
($9,145)
Feb. 1995

$8,553

$1,449

$7,104

16.9

60.1
(77.7)

Bonnet
(MBanks)

Jan. 1990 to
Dec. 1994

4,179†
(3,177)

3,570

591

2,979

16.6

71.3
(93.8)

FAMCO
(Texas American
Banks)

Feb. 1990 to
Jan. 1994

1,318†
(980)

1,082

145

937

13.4

71.1
(95.6)

RECOLL (Maine
Savings Bank)

Feb. 1991 to
Aug. 1995

435

367

295

19.6

67.8

RECOLL (Bank of
New England)

June 1991 to
Dec. 1995

6,450

4,200

634

3,566

15.1

55.3

Niagara Asset
(Goldome)

June 1991 to
Sept. 1995

607

465

376

19.1

61.9

Niagara Port
(Goldome)

Aug. 1991 to
Mar. 1995

1,035

1,184

1,103

6.8

106.6‡

CARC (CityTrust,
Mechanics &
Farmers Savings
Bank)

Aug. 1991 to
Mar. 1995

1,429

826

123

703

14.9

49.2

BONHAM (Various
New Hampshire
banks)

Mar. 1992 to
June 1996

1,704

1,107

166

941

15.0

55.2

JERNE (Dollar Dry
Dock Bank and
other Connecticut
banks)

June 1992 to
June 1996

1,509

835

739

11.5

49.0

$30,484

$22,189

$3,446

$18,743

Totals
*

15.5%

61.5%

Net collections are defined here as gross collections minus total expenses.
This book value is an estimate of the original book value of this pool that entered the ALA program on a “mark-to-market”
basis. The mark-to-market pool values are shown in parentheses for these contractors; mark-to-market valuations were not
required for the other seven ALA pools.
‡
Net collections were considerably higher than average due to the type of assets in the portfolio. The pool consisted of marketable subsidiaries and performing consumer loans with above-market rates.
Source: FDIC Division of Resolutions and Receiverships financial performance report dated June 30, 1996.
†

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M A N A GI N G T H E C R I S I S

The ALA contracts also allowed the FDIC to add and subtract assets without
adjusting the incentive fee formula. That feature was important because many additions
were made to the contracts because of the put process. It was especially advantageous in
New Hampshire, where the assets from 7 failed banks were initially placed into the
BONHAM pool; ultimately, assets from a total of 15 banks that had failed in New
Hampshire were managed in that pool. The FDIC also could pull assets out of the pool
if it felt that the assets could be managed better either in-house or by another contractor.
The cost-plus aspect of the contracts made it easy for the FDIC to direct the contractors to perform additional services that might not have been anticipated in the
original contract. For example, after the ALA contracts were created, the FDIC instituted its Affordable Housing Program. Although that program cost the contractors more
to administer those assets than others in their portfolio did, the additional expense was
not an issue because the ALA contract covered the cost.
A number of weaknesses in the earlier contracts were resolved in later contracts as a
result of the changes described above regarding the incentive fee formula. As shown later
in this chapter, in the comparison of the types of asset management contracts the FDIC

Table I.14-4

Financial Performance of ALA Program
Inception of Program through June 30, 1996
($ in Millions)
Book Value of Assets Assigned to Program
Book Value Remaining at End of Agreements
Book Value Reductions

$31,991
1,507
$30,484

Gross Collections
Less: Expenses
Incentive Fees
Reimbursable Expenses

$22,189
$532
2,914

Net Collections

$3,446
$18,743

NPV of Net Collections*

$16,432

Ratios (%):
Incentive Fees/Gross Collections
Reimbursable Expenses/Gross Collections
Total Expenses/Gross Collections
Gross Collections/Book Value Reductions
Net Collections/Book Value Reductions
NPV of Net Collections/Book Value Reductions

2.4
13.1
15.5
72.8
61.5
53.9

* The calculation of net present value (NPV) of net collections used a 6 percent annual discount factor
and assumed that collections were received evenly over the life of the contract.
Source: FDIC Division of Resolutions and Receiverships financial performance report dated June 30, 1996.

A S S E T M A N A G E M E N T CO N T R A C T I N G

and the RTC used, the biggest disadvantage to using the ALA contract probably would
have been its overall cost. Although the FDIC made adjustments to the fee formulas, the
cost-plus aspect of the contract still placed a large portion of the burden of ensuring cost
efficiencies on the FDIC rather than on the contractor.

Regional Asset Liquidation Agreements
At the beginning of 1992 the FDIC created a Regional Asset Liquidation Agreement
(RALA) that was used for problem assets of smaller institutions. The RALA contract
excluded the cost-plus feature that had been used in the ALA program. RALA contractors were reimbursed only for limited and defined asset-related expenses.11
Four RALA contracts, all of which contained asset pools with less than $500 million
in book value, were issued to private-sector contractors from November 1992 to June
1993. Although the RALA contract was designed primarily to liquidate nonperforming
loans, performing loans represented more than one-third of the book value of RALA
program assets. Book value reductions of $1.2 billion were achieved in the RALA
program, and all assets assigned to RALA contractors had been liquidated or transferred
back to the FDIC by the end of 1996.
Structure of the RALAs
The original term of a RALA was four years, with a single one-year renewal option.
However, the average duration of the four RALA contracts was three years and one
month. The objective of the RALA, as with the ALA, was “…the maximization of the
present value of the net cash flows.”
The RALA contract contained a performance fee structure that was composed of
three elements: management, disposition, and incentive fees. A model was developed
before any RALA contracts were issued that projected a breakdown of the three fee types
as a percentage of total fees and as a percentage of gross collections. (See table I.14-5.)
The management fee was designed to offset the overhead costs that were borne by
the contractor rather than by the FDIC. The RALA contract allowed for payment of a
monthly management fee equal to 1.25 percent (annualized) of the gross collections
expected during the remainder of the contract.12 Therefore, as pool assets were sold or
11. The asset-related expenses of a RALA contract consisted of the cost of appraisals, title reports, asset searches,
lien searches, advertising, insurance, third-party inspections, court costs, and certain outside counsel legal fees. Additional costs that were considered asset-related included all owned real estate operating and liquidation expenses
(including real estate property operating expenses), real estate taxes, property insurance, mortgage interest, property
management fees, accounting and auditing fees, leasing commissions, and marketing and selling expenses.
12. The management fee was paid monthly at a fixed percentage of the current targeted cash value (CTCV) of the
pool. The CTCV was an estimate of gross collections expected during the remainder of the contract. The management fee was fixed at an annual rate of 1.25 percent, or 0.104 percent on a monthly basis, times the CTCV.

347

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M A N A GI N G T H E C R I S I S

Table I.14-5

Projected Mix of Fees in RALA Compensation Model
Type of Fee

Projected Allocation
of Total Fees (%)

Projected Percentage
of Gross Collections

Management Fee

1.25

Disposition Fee

3.00

Incentive Fee

0.75

Totals

100%

5.00%

Source: FDIC Division of Resolutions and Receiverships.

settled and the gross collections projected during the remainder of the contract
decreased, the monthly management fee decreased accordingly.
The disposition fee was designed to be the primary income generator for the contractor. The FDIC decided to pay the contractor an increasing percentage of net collections as overall collections increased. The estimate of the aggregate gross collections
expected from the disposition of the asset pool was referred to as the initial targeted cash
value (ITCV). The disposition fee was based on collections relative to the ITCV. The
model disposition fee structure is shown in table I.14-6.
The contractor was rewarded with increasing percentages of net collections as
cumulative net collections approached the ITCV. That reward was designed to motivate
the contractor to attain the highest possible recovery rates on assigned pool assets,
because the higher percentages could be reached only by achieving higher cumulative
net collections-to-ITCV ratios.
By including net collections in the disposition fee formula, the FDIC encouraged the
contractor to minimize asset-specific reimbursable expenses. In calculating net collections, all reimbursable expenses, as well as the management fees paid to the contractor,
were deducted from gross collections.
The third portion of the contractor’s fee was the incentive fee. Table I.14-7 shows
the manner in which the incentive fee was calculated for each of the RALA contracts.
The incentive fee was similar to the disposition fee in that it rewarded the contractor for
reaching higher levels of the total pool value. It was different in that it tied the contractor’s performance to reaching certain goals within specified periods of time.
In addition, the RALA contract permitted the FDIC to withhold incentive fees
until certain disposition goals of the contract were achieved, thereby motivating the
contractor to dispose of all assets in a pool as soon as possible. The FDIC could retain
one-half of the earned incentive fees until the contractor had disposed of almost all of
the pool’s assets. The retained fees were available for release on a prearranged schedule,
from partial release when 90 percent of the asset pool was liquidated to full release when

A S S E T M A N A G E M E N T CO N T R A C T I N G

Table I.14-6

Model RALA Disposition Fee Structure
Percentage of
Net Collections

To Be Applied to:

2.6

the first 37% of initial targeted cash value (ITCV)

4.6

the next 23% of ITCV

6.4

the next 18% of ITCV

11.2

the next 15% of ITCV

16.2

any net collections thereafter

Source: FDIC Division of Resolutions and Receiverships.

the contractor had liquidated more than 98 percent of the asset pool. The provision was
designed to motivate the contractor to remain focused on liquidating the total portfolio
of assets. The withholding of fees therefore helped to align the contractor’s responsibilities with those of the FDIC.
Each of the RALA contracts was competitively bid out before a contractor was
selected. The FDIC provided the models shown in tables I.14-5 through I.14-7 to bidders after the pools were established. In addition, the FDIC provided the bidders with
its estimate of the ITCV of the pool. The bidding process allowed the contractor to
change two of the variables in the RALA compensation model (the ITCV and the disposition fee percentages) in an effort to win the contract. The bidders performed due diligence on the pool of assets and then either accepted the FDIC’s ITCV or determined
their own estimate of the ITCV. (Three of the four winning bidders used the FDIC’s
suggested ITCV number, and one of the four, Real Estate Recovery, bid an ITCV
amount that was greater than the FDIC’s number.) The higher the contractor established the ITCV, the harder it was to reach the higher level tranches of the incentive fee
and the disposition fee. Similarly, the bidder could change the disposition fee percentage. The lower the percentage, the lower the overall disposition fee. After the bids were
received, the FDIC would analyze the terms of the bids and the effects of the proposed
variables to determine the winning bid.
Competition among the bidders resulted in much lower disposition fees than were
provided to the bidders from the original model. Table I.14-8 shows the actual fee
schedules for each of the four contractors, along with the fee schedule projected in the
original model.
Actual Versus Expected Fees Paid to RALA Contractors
The total fees actually paid to RALA contractors during the life of the RALA program
were 4.5 percent of gross collections, which was under the 5 percent projected in the

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350

M A N A GI N G T H E C R I S I S

Table I.14-7

RALA Incentive Fee Structure
Percentage of
Net Collections

In Excess of the
Following Percentage
of ITCV

Achieved Within the
Following Number of
Months of the Contract

4.5

5.0

9.0

Source: FDIC Division of Resolutions and Receiverships.

RALA compensation model. In that respect, the model worked as intended. However,
the distribution of fees actually paid differed from what had been expected in the
compensation model. For example, actual management fees as a percentage of total fees
generated under the RALA contracts exceeded the model’s expectations by 18 points,
the percentage of actual disposition fees was 43 points less than anticipated, and the
percentage of actual incentive fees surpassed incentive fees projected in the model by 25
points. (See table I.14-9.)
Two factors accounted for the differences between the targeted fees in the model
and the distribution of fees actually paid to RALA contractors. First, assumptions for
targeted rates of collection were built into the compensation model. Those projected
rates were 40 percent in the first year of the contract, 25 percent in the second year, 20
percent in the third year, and 15 percent in the final year. The contractors actually
disposed of their assets more quickly than was projected in the model, thus resulting in
higher incentive fees and lower management fees. On average, the total disposition of
assets occurred 12 months before the contractual end of the agreement.
Second, the bidding process permitted the contractor to change two of the parameters of the model, the initial targeted cash value and the disposition fee. In bidding for
the RALA contracts, three of the winning bidders used the FDIC’s suggested ITCV,
while the fourth winning bidder proposed a higher ITCV than that of the FDIC. All
four winning contractors bid disposition fees that were well below the FDIC’s projected
rates in the RALA model, which resulted in lower disposition fees than was originally
anticipated.
Oversight and Operational Controls
An oversight team composed entirely of FDIC employees managed the RALA contractors
and was responsible for handling individual contracts. (Originally, a separate oversight
committee monitored each RALA contract.) However, after the first year of operation the
FDIC decided that one group of its oversight personnel could effectively control and over-

A S S E T M A N A G E M E N T CO N T R A C T I N G

351

Table I.14-8

RALA Disposition Fee Schedule
Projected Model Versus Actual Contractor’s Bid Fee Percentages
Real Estate
Recovery
Bid (%)

Up to 37% of ITCV

2.60

0.25

2.25

0.75

0.25

Greater than 37%
to 60% of ITCV

4.60

0.50

3.00

0.95

0.50

Greater than 60%
to 78% of ITCV

6.40

0.75

4.75

1.05

0.75

Greater than 78%
to 93% of ITCV

11.20

1.50

6.00

1.50

1.25

Greater than 93%
of ITCV

16.20

5.00

8.00

1.95

1.75

Net
Collections

CSW
Associates
Bid (%)

Aldrich,
Eastman &
Waltch
Bid (%)

RALA
Model
(%)

Northcorp
Bid (%)

Source: FDIC Division of Resolutions and Receiverships

Table I.14-9

Actual Versus Projected Contractor Fees in RALA Program
Inception Through December 31, 1996
Allocation of Total Fees
Type of Fee

Projected (%)

Actual (%)

Percentage of Gross Collections
Projected (%)

Actual (%)

Management Fee

1.25

2.10

Disposition Fee

3.00

0.70

Incentive Fee

0.75

1.70

100

5.00

4.50

Total

Source: FDIC Division of Resolutions and Receiverships.

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M A N A GI N G T H E C R I S I S

see all four RALA contracts from one location. The primary oversight staff for all four
RALA contracts consisted of six FDIC employees during most of the existence of the
RALA program. The RALA oversight committee was delegated limited authority. For
instance, the RALA oversight committee had $5 million of settlement approval authority,
whereas the ALA oversight committee had unlimited settlement approval authority.
Financial Performance of the RALA Program
The performance of all RALA contractors from inception of the agreements (November
1992) through June 30, 1996, is shown in table I.14-10.
Strengths and Weaknesses of the RALA Program
The RALAs were relatively easy to manage and proved to be more cost-effective than
either the ALA or later Standard Asset Management and Disposition Agreement programs. However, it is important to keep in mind that the RALA program was assigned
only $1.2 billion in assets, compared with almost $32 billion in the ALA program and
more than $48 billion in the SAMDA program. The following briefly summarizes the
strengths and weaknesses of the RALA program.
The RALA program’s main strength was that its costs were lower than the other contracting programs used by the FDIC and the RTC.13 The RALA contract was not a costplus contract, which meant that the FDIC reimbursed the RALA contractor for assetrelated expenses but did not pay for the contractor’s overhead. That arrangement made it
easier for the FDIC to control the expenses of a RALA contractor than those of an ALA
contractor and provided the RALA contractor with a greater incentive to control their
overhead costs because those costs directly affected the contractor’s profitability. In addition, less oversight or monitoring was needed because the FDIC was not reimbursing all
of the contractor’s expenses.
Another feature of the RALA program that controlled costs was the requirement for
competitive bidding by the prospective contractors, resulting in disposition fees that
were much lower than anticipated. Also, the FDIC paid the contractor its incentive fees
only if certain collection goals were attained within prescribed time frames. That constraint accelerated the disposition of the assets, which in turn reduced expenses.
The establishment of the ITCV at the inception of the RALA contract improved the
contractor’s performance. The ITCV was used by the contractor as a motivational tool
to attain its disposition goals (which directly affected its compensation fees) and also by
the FDIC to track the contractor’s progress. That built-in incentive structure decreased
the need for the FDIC to undertake a great deal of contractor oversight.

13. The RTC Standard Asset Management Disposition Agreement contractor program is described later in this
chapter.

A S S E T M A N A G E M E N T CO N T R A C T I N G

353

Table I.14-10

Financial Performance of RALA Contractors
Inception Through June 30, 1996
($ in Millions)
Aldrich,
Eastman &
Waltch

Real Estate
Recovery

CSW
Associates

Northcorp

Inception Date

11/2/92

12/8/92

2/12/93

6/1/93

Termination Date

9/30/95

12/31/96

9/30/96

11/30/94

221

893

791

550

2,455

$450

$148

$314

$267

$1,179

100

Initial Targeted
Cash Value (ITCV)

$378

$104

$235

$210

$927

Book Value Reductions

$450

$135

$304

$267

$1,156

Gross Collections
Less: Expenses
Management Fees
Disposition Fees
Incentive Fees
Reimbursable Expenses
Subtotal
Net Collections
NPV of Net Collections

$296

$96

$197

$205

$794

8
1
2
5
$16
$280
$260

2
3
2
4
$11
$85
$77

5
2
3
3
$13
$184
$168

2
1
5
3
$11
$194
$187

17
7
12
15
$51
$743
$692

78.3
3.7
1.7

92.3
7.3
4.2

83.8
5.1
1.5

97.6
3.9
1.5

85.7
4.5
1.9

5.4

11.5

6.6

5.4

6.4

62.2

63.0

60.5

72.7

64.3

57.8

57.0

55.3

70.0

59.9

Initial Number of Assets
Initial Book Value of Assets
Percentage Liquidated
as of June 30, 1996

Ratios (%):
Gross Collections/ITCV
Total Fees/Gross Collections
Reimbursed Expenses/Gross
Collections
Total Expenses/Gross Collections
Net Collections/Book Value
Reductions
NPV of Net Collections/Book
Value Reductions

Source: FDIC Division of Resolutions and Receiverships financial performance report dated June 30, 1996.

Totals

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M A N A GI N G T H E C R I S I S

Another strength of the RALA contract was that the FDIC was permitted to retain a
portion of the incentive fees owed to the contractor until certain goals of the contract
were met. Also, the RALA contract was clearly written and required few modifications
during the four-year history of the RALA program. Thus, few disputes occurred
between the FDIC and the contractor; when there were disagreements, most issues
could be resolved at the oversight level.
The RALA program’s biggest weakness was its lack of flexibility. For example, once
the asset pools and the ITCVs were established at the beginning of the contract, the
FDIC could not add or subtract assets from the contractor’s portfolio. Also, for the
RALA compensation model to work properly, an accurate estimate of the ITCV had to
be made, because the disposition and incentive fees were contingent upon that figure. If
the ITCV was not properly estimated, the contractor could find that there was insufficient compensation for its staff to perform in the manner expected by the FDIC. The
contract had no provision to adjust the ITCV after the contract had been bid out. That
weakness was especially important in the case of a large pool which normally contains
assets with greater book values that are more complex and difficult to value. Therefore,
the establishment of a reliable ITCV at the beginning of a large contract is more
uncertain.
The RALA contract was less flexible than the ALA contract also because it required
the contractors to complete services that may not have been anticipated at the inception
of the contract. Because the contractors were not reimbursed for their indirect costs,
they were reluctant to provide such services. The FDIC therefore faced some resistance
when requesting additional reports or requesting the contractors to endorse programs,
such as the FDIC’s Affordable Housing Program, that raised the contractors’ costs. The
ALA contractors were more willing to accept changes because their costs were passed on
to the FDIC.

Standard Asset Management and Disposition Agreements (SAMDA)
The SAMDA was a contract between the RTC and a private-sector contractor to
manage, collect, and dispose of distressed assets in portfolios of all sizes. Two versions of
the SAMDA were created. The first was known as SAMDA I, which began in August
1990, and the second was called SAMDA II, which started in April 1991.14
A total of 199 SAMDA contracts, of which 160 were SAMDA I and 39 were
SAMDA II, were issued to 91 different contractors. The contracts were similar to the
FDIC’s RALAs in that the SAMDA contracts allowed for the payment of a management
fee, a disposition fee, and an incentive fee. In addition, both types of contracts did not

14. Unless specified, references to SAMDA contracts apply to both the SAMDA I and the SAMDA II versions.

A S S E T M A N A G E M E N T CO N T R A C T I N G

reimburse the contractor for its overhead expenses, but did pay for asset-specific
expenses. One difference between the SAMDA and RALA contracts was that the RTC
required the SAMDA contractor to engage subcontractors for 12 different services, the
cost of which was reimbursed by the RTC. 15
In January 1992 an amendment to the existing SAMDA contracts called the Standard Asset Management Amendment (SAMA) was introduced. The SAMA reduced the
scope of work from asset management and disposition to asset management only. The
SAMA was used in any new contracts issued from January 1992 forward.
At the sunset of the RTC on December 31, 1995, the RTC’s interest in all active
SAMDA contracts, which included 16 active contracts with $2.7 billion in remaining
assets, was assigned to the FDIC. From the inception of the SAMDA program through
December 31, 1996, book value reductions of $46.4 billion were achieved. Table I.1411 summarizes the main differences among the SAMDA I, the SAMDA II, and the
SAMA.
Evolution of the SAMDA Program
Even before RTC was created, FDIC management assigned to work on the thrift crisis
recognized that contractors would have to supplement internal staff in managing and disposing of assets acquired from failed thrifts. By November 1989, the initial RTC research,
asset disposition, and contracting units were researching various asset management and
disposition agreements used by the FDIC, the FSLIC, and other organizations. And, by
February of 1990, RTC management had decided that contractors would be used to manage and dispose of nonperforming assets, service performing assets, and assist in other specific tasks. Work then commenced on developing a standard asset management and
disposition contract for nonperforming assets. The first contract was let in August 1990.
The RTC was required by the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) of 1989 to use contractors. The act specified that the RTC
had to hire private-sector contractors for the disposition of assets if such services were
available, practicable, and efficient.16 Several other legal provisions further complicated
the RTC’s asset management and disposition task. For example, a challenging mission
statement in FIRREA required the RTC to “…manage and resolve institutions…and
dispose of any residual assets in a manner that: (1) maximizes return and minimizes
loss; (2) minimizes the impact on local real estate and financial markets; and (3) maximizes the preservation of the availability and affordability of residential property for
low- and moderate-income individuals.” FIRREA also contained a general requirement
that the RTC “…identify properties with natural, cultural, recreational or scientific
15. The RTC’s 12 mandatory subcontracting services included appraisal services, brokerage services for owned real
estate sales and leasing, property management, title work, construction subcontracting, environmental consulting,
and surveying services.
16. 12 U.S.C., section 1441a(b)(10)(A)(ii).

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Table I.14-11

Summary of the Major Differences Between
the SAMDA I, SAMDA II, and SAMA Programs
Program

SAMDA I

SAMDA II

Number of
Contracts

160

SAMA

NA†

Total

199

Inception
Date of Program

Types of Fees
Paid to Contractor*

Unique Feature of
Fee Determination

Aug. 1990

Management,
disposition, and
incentive fees

Disposition and
incentive fees tied to
individual asset sales

Apr. 1991

Management,
disposition, and
incentive fees

Disposition fees
tied to performance
of entire asset pool

Jan. 1992

Management
and incentive
fees only

NA †

The management and disposition fees were bid by the contractor and varied among the SAMDAs, whereas the incentive fee structure was fixed by the RTC within the contract itself.
†
Not applicable, as the SAMA was an amendment to the SAMDA structure, not a separate contract type itself.
Source: FDIC Division of Resolutions and Receiverships.

values of special significance.”17 In practical terms, that requirement meant that the
RTC had to work closely with conservation agencies on the disposition of environmentally and historically significant properties. Finally, FIRREA and the Resolution Trust
Corporation Refinancing, Restructuring, and Improvement Act (RTCRRIA) of 1991
mandated the RTC to promote the use of minority- and women-owned businesses
(MWOBs) as contractors.
By April 1991, the RTC initiated a major revision to the SAMDA contract, even
though two minor revisions to the standard form had already been made. This time,
many provisions were revised, but the most significant involved changing the focus on
compensation from an individual asset basis to a portfolio basis and how the contract
fees were bid. This contract became known as SAMDA II.
The second major change to the SAMDA structure came in January 1992 with the
SAMA. By this point, national multi-asset sales had become the RTC’s preferred asset
disposition method. Because of this change in disposition strategy, the RTC introduced
the optional SAMA, which eliminated the contractor’s responsibilities to dispose of
assets in designated pools. This permitted the RTC to have nonperforming assets

17. 12 U.S.C., section 1441a(b)(12)(F).

A S S E T M A N A G E M E N T CO N T R A C T I N G

managed by contractors on a decentralized basis and to continue with its strategy of centralized multi-asset sales.
To confirm that the RTC was following the best course of action for the disposition
of assets through multi-asset sales instead of individual asset sales, it did a study. The
study, conducted in December 1992, measured gross and net proceeds from multi-asset
sales against gross and net proceeds obtained from the sales of indidual assets.18 The
study concluded that the gross proceeds obtained from multi-asset portfolio sales were
not significantly different from the gross proceeds (as a percentage of book value)
received from similar assets that were disposed of individually in the SAMDA program.
However, after all direct and indirect expenses were included, the net recovery from
multi-asset portfolio sales was significantly higher than from individual asset sales
because of a faster disposition rate and shorter holding periods, which resulted in lower
expenses. The conclusion reinforced the RTC’s decision about the increasing emphasis
on the use of multi-asset sales and reducing interest in individual asset restructures and
sales, which had been the specialties of SAMDA contractors.
Overall, the SAMDA program worked well. As the pool of assigned assets diminished, one-year extension periods were replaced with six-month extensions, and many
contracts were allowed to expire. Any remaining assets were transferred to other
SAMDA contracts. At the beginning of 1995, which was the RTC’s last year of existence, 53 of the 199 SAMDA contracts were still active. Because no new assets were
being placed into the program and many asset pools were a small fraction of their original inventory, it was more economical for the RTC to use fewer contractors. Therefore,
the RTC decided to either consolidate SAMDA assets to the best-qualified contractors
or bring them in-house in preparation for the consolidation of the RTC into the FDIC
at the end of 1995. During 1995, 37 SAMDA contracts were allowed to expire, and 16
SAMDA contracts remained active at the RTC’s sunset date of December 31, 1995, that
were transferred to the FDIC for ongoing management. More than 95 percent of the
assets assigned to SAMDA contractors were sold or settled during the life of the
SAMDA program.
Structure of the SAMDA Contract
The initial term of most SAMDA contracts was three years with two one-year extension
options. When available, additional assets were added to the initial pool of assigned
assets, and most of the assets assigned to SAMDA contractors were sold or settled within
two years. The average duration of all SAMDA contracts was approximately three years
and three months. The general goal of a SAMDA contractor was “…to achieve the expeditious sale of the portfolio of assets at the highest net present value in a manner that

18. The study was called the Hard-to-Sell Asset Review Project and was published by the RTC Asset Management
and Sales Division.

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minimizes detrimental effects of such sales on local real estate and financial markets and
enhances the national stock of low- and moderate-income properties.” A SAMDA contractor had to comply with all applicable RTC regulations, policies, procedures, and
directives. Furthermore, the contractor was required to act as a fiduciary for the assets
under the agreement.
One objective of the SAMDA contract was to provide contractors with sufficient
flexibility to manage and dispose of RTC assets without having to seek approval from
RTC staff for routine matters or transactions. Also, the contract was designed to enable
the RTC to properly control the asset management and disposition process, to ensure
that a contractor’s efforts were consistent with the policies and procedures of the RTC.
Another objective of the SAMDA program was to make sure that adequate records and
reporting were established for review and audit. The program also sought to establish an
incentive compensation structure that would motivate the contractor to maximize net
collections and reward the contractor for collections earlier, rather than later, in the contract’s term. Those objectives reflected several of the RTC’s goals, which included minimizing its internal staff through the use of private-sector contractors and expeditiously
returning assets to the private sector to minimize the cost of resolving the savings and
loan crisis.
A SAMDA contractor assumed responsibility for all assigned assets, including the
preparation of a preliminary plan for administering the assigned assets and the preparation of an asset management and disposition plan, or AMDP, for each asset in the portfolio. The contractors also managed and serviced the assets and were charged with
disposing of the assets in a manner that maximized the net recovery. After the AMDP
was approved, the SAMDA contractors generally pursued a compromise and settlement
strategy with borrowers for nonperforming loans. If that strategy failed, the collateral
was acquired through foreclosure or repossession, and then sold.
For owned real estate assets, SAMDA contractors generally listed the properties with
real estate brokers, negotiated sales, arranged for approval of sales, and helped the RTC
to close sales. SAMDA contractors were restricted from conducting multi-asset sales,
although many of the contractors contributed assets to RTC multi-asset sales events.
Each contractor received limited delegations of authority to take asset-related actions,
such as entering into a settlement or selling a property. Asset disposition decisions that
were beyond the authority of a SAMDA contractor were approved at the appropriate
level of RTC delegated authority.
SAMDA I Series
The SAMDA I series contract provided for the payment of a management fee, a disposition fee, and an incentive fee. In their bid, prospective contractors would specify a dollar
amount that would be their monthly management fee for the initial pool of assets. The
monthly management fee was then divided by the sum of the estimated recovery values
(ERVs)19 of the assets in the initial pool to obtain a percentage relationship. The result-

A S S E T M A N A G E M E N T CO N T R A C T I N G

ing percentage was applied each month against the current month’s remaining ERVs to
determine the actual management fee to be paid to the contractor. For example, if the
fixed monthly bid management fee was $20,000 and the ERV of the initial pool of assets
was $12 million, then the result would be 0.167 percent. That percentage would then
be multiplied by the current month’s remaining ERV to obtain the monthly management fee to be paid to the contractor. The result was a proportional reduction in the
monthly management fee as the volume of assets declined.
Like the management fee, prospective contractors also bid a disposition fee,
although this was expressed as a percentage of net cash collections (all asset specific gross
cash received less expenditures) arising from each asset. The disposition fee payable was
a function of the bid amount and the relationship between net collections and the asset’s
ERV. This disposition fee payment schedule is shown in table I.14-12.
The third SAMDA I fee was the incentive fee, which was designed to motivate a
contractor to dispose of assets earlier rather than later. The incentive fee percentages
were fixed by the RTC contract and were not subject to bid by the contractor. The
incentive fee was 20 percent of the earned disposition fee if the asset was disposed of
during the first contract year and 10 percent if the asset was disposed of during the second contract year. Incentive fees could only be earned if assets were disposed of during
the first two years of the contract.
Additionally, to minimize the prospect of the contract expiring with high-carrying
cost assets remaining, the RTC retained 15 percent of all disposition fees payable as a
holdback. From this holdback, the RTC deducted all cash expenditures incurred from
contract inception for any assets remaining in the portfolio on expiration.
SAMDA II Series
The SAMDA II contract also provided for payment of a management fee, disposition
fee, and incentive fee. Unlike the SAMDA I contract, however, prospective contractors
bid only one number (known as the “contractor’s bid”), which in turn was used to calculate all fees paid under the contract.
The management fee, expressed on an annual basis as a percentage of the estimated
value of the asset portfolio, was set to be one-fourth of the effective disposition fee rate.
RTC management believed that this ratio would sufficiently motivate contractors to dispose of assets rather than hold them to earn management fees. Because this structure
caused the earning of significant fee income not to coincide with the occurrence of a
contractor’s internal expenses, however, the management fee in the SAMDA II contract
was paid at a 50 percent higher rate during the first six months of the contract. Accordingly, the additional management fee income covered the additional expenses incurred
19. The RTC’s estimated recovery value (ERV) was the sum of the net present value of the future cash flows for
all assets in the pool. An ERV was determined for each asset entering the SAMDA I program when the asset pool
was formed; that value was normally used throughout the life of the asset.

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Table I.14-12

SAMDA I Disposition Fee Payment Schedule
Disposition Fee Payable
(Expressed as a Percentage of the Fee Bid)
25
50
100
150

Net Collections/ERV Ratio (%)
0 to 50
51 to 90
91 to 110
Greater than 110

Source: FDIC Division of Resolutions and Receiverships.

with a new portfolio, such as producing asset management and disposition plans and
developing reporting and information systems. This provision was added to allow contractors with little working capital—generally minority- or women-owned firms—to
competitively bid for contracts.
Unlike the SAMDA I series, disposition fees in the SAMDA II contract were based
on the collection of cash during a particular time period and not upon the occurrence of
an event, such as an asset sale. The determination of disposition fees varied because it
used a cumulative ratio of the net proceeds of the pool (NPP) to the total recovery value
of the pool (RVP). The NPP was defined as gross cash receipts less all expenses, such as
earned management fees, all costs associated with mandatory subcontracts,20 taxes
assessed against the assets in the pool, costs to insure owned real estate assets, imputed
carrying costs, and legal fees. The RVP was the sum of the ERVs of all assets remaining
in the pool.
The disposition fee schedule for the SAMDA II contract was designed to provide
increasing incentive compensation as the NPP realized by the contractor increased in
relation to the RVP. Accordingly, for every additional dollar collected beyond 50 percent
of the initial RVP, the contractor was compensated at increasingly higher rates not just
for each future cash receipt, but for all previous collections.
One of the expenses factored into the calculation of the NPP was an imputed carrying cost assessment. That assessment was calculated using an annual interest rate of 7
percent that was applied to the remaining RVP of the pool on a monthly basis. The
result was that the imputed carrying cost offset the management fee as an incentive to
carry an asset. That feature was designed to motivate the contractor to sell the assets as
quickly as possible in order to maximize the NPP.

20. Reimbursable asset-related expenses in both SAMDA I and II contracts included the costs of the 12 mandatory
subcontractors, data processing system conversion costs, asset file reproduction costs, RTC-mandated reports, asset-related legal costs, other reasonable legal costs that were not asset-related, and other costs “related to RTC-mandated activities” that were authorized in writing. One of the 12 mandatory subcontracting categories, “Property
Management, Maintenance, and Leasing,” included owned real estate operating expenses, property taxes, property
insurance, leasing commissions, and tenant improvements.

A S S E T M A N A G E M E N T CO N T R A C T I N G

The SAMDA II contract also provided for the payment of an incentive fee. The
incentive fee increased the NPP (used in the calculation of the disposition fee) by 20
percent for assets disposed of in the first contract year and by 10 percent for assets disposed of in the second contract year. As in the SAMDA I contract, incentive fees could
be earned only if assets were disposed of during the first two years of the contract.
Oversight and Operational Controls
The SAMDA oversight manager was an RTC employee who oversaw the SAMDA contractor. The oversight manager monitored the contractor’s technical performance and
was expected to ensure that the contractor performed and completed all services
required by the contract in a cost-effective and timely manner. In addition to day-to-day
monitoring, the oversight manager reviewed the SAMDA contractors quarterly through
informal site visitations and semi-annually on a formal basis with a team of reviewers.
Also, the RTC Office of Contractor Oversight and Surveillance and the RTC Office of
the Inspector General performed periodic formal reviews or audits.
A major drawback to efficiently controlling operations within the SAMDA program
was the lack of a complete and fully integrated management information system. The
RTC’s contractor information system did not capture all necessary asset data, and the
recording of asset data was incomplete and sometimes inaccurate. Accounting for asset
sales was delayed at times for up to 12 months and was insufficiently monitored for
accuracy. Some contractors were paid disposition fees on sold assets by estimating sales
expenses rather than by providing proper sales documentation. Although the RTC initially tried to use its contractor information system as a full informational database for
management reporting and accounting control, it was in reality effective only as a cash
management system, because of system implementation and data integrity problems.
Financial Performance of the SAMDA Program
The information presented in table I.14-13 is a summary of the performance of the
SAMDA program from its inception through December 31, 1996.
The entire SAMDA program from inception through December 31, 1996, resulted
in gross collections of $23.3 billion, which represents 50 percent of book value reductions and 92 percent of the ERV of the assets sold. Total expenses of $4.4 billion resulted
in an overall expense-to-collection ratio of 19 percent. Net collections of $18.9 billion
accounted for a recovery rate (ratio of net collections to book value reductions) of 41
percent and a net recovery rate (ratio of net present value of net collections to book value
reductions) of 37 percent.

361

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M A N A GI N G T H E C R I S I S

Strengths and Weaknesses of the SAMDA Program
The RTC was formed in August 1989 and was ultimately charged with resolving 747
financial institutions with $402.6 billion in assets. Because of the need to dispose of a
large volume of distressed assets and FIRREA’s mandate to use asset management
contractors from the private sector, the RTC developed the SAMDA program. The
following details the strengths and weaknesses of the program.
One strength of the SAMDA program was that it allowed the RTC to manage and
dispose of a large volume of distressed assets through the use of outside contractors so
that it did not have to significantly expand its work force. In addition, SAMDA contractors generally had sufficient delegated authority to make most of the asset disposition
decisions. A relatively small number of asset disposition cases had to be approved by
higher delegated authority levels.
The SAMDA contracts and a SAMA allowed the RTC to use private-sector contractors to manage a large volume of distressed assets, while the RTC disposed of them via
multi-asset sales transactions. Furthermore, the SAMDA contracts contained targeted
disposition time frames by asset type.
One weakness of the SAMDA program was that too many different contractors (91
in all) were operating under the program, a good number of which were small, start-up
companies. Having so many parties (both contractors and internal oversight staff)
involved in the program significantly contributed to the need for numerous contract
interpretations, the RTC’s difficulty in achieving effective oversight, and problems in
internal operations, such as audits, fee payments, and systems integration.21 Also, performance was inconsistent because many of the start-up companies did not have established track records.
The delayed development of the RTC’s contractor information system and its
implementation difficulties resulted in the system being generally ineffective either as an
accounting and inventory control system or as a management information system for
measuring the performance of contractors. It was effective mainly as a cash management
system.
One weakness of the SAMDA I contract was that it keyed the payment of disposition and incentive fees to the sale of assets individually. That sometimes caused the contractor to concentrate on the larger assets and neglect the lower valued or hard-to-sell
assets.
Another drawback of the SAMDA program was that it was originally designed for a
different asset disposition strategy than the one the RTC eventually pursued. The

21. The SAMDA contracts collectively required more than 260 official interpretations of various provisions of the
contract during their life span. Most of the issues were related to the SAMDA I contract. Those interpretations
generally pertained to the meaning of certain contract language, inconsistencies between actual policy and the language in the contract, and issues involving functional responsibilities, such as the obligations of the contractor after
contract termination or fee calculations that differed under certain conditions.

A S S E T M A N A G E M E N T CO N T R A C T I N G

363

Table I.14-13

Summary of SAMDA Activity
Inception Through December 31, 1996
($ in Millions)
Total Number of SAMDA Contracts
Number of Assets at Inception
Book Value of Assets Assigned to Program:
Loans
Owned Real Estate
Other Assets

199
100,344

$26,937
19,031
2,509
$48,477
2,052
$46,425
$25,255

Less: Book Value Remaining on 12/31/96
Book Value Reductions, Inception through 12/31/96
Estimated Recovery Value of Assets Settled
Gross Collections*
Less: Expenses
Management Fees
Disposition/Incentive Fees
Reimbursable Expenses
Net Collections*
NPV of Net Collections*
Ratios (%):
Gross Collections/Book Value Reductions
Gross Collections/ERV
Total Fees/Gross Collections
Reimbursable Expenses/Gross Collections
Total Expenses/Gross Collections
Net Collections/Book Value Reductions*
NPV of Net Collections/Book Value Reductions*

$23,293
$400
300
3,739
4,439
$18,854
$17,369

50.2
92.2
3.0
16.1
19.1
40.6
37.4

* Collections exclude all loan payments made prior to 1993. In addition, collections for all assets withdrawn for sale by the RTC were imputed at the lesser of 90 percent of an asset’s ERV or its derived investment value (DIV).
Source: RTC Asset Managment System.

change in direction had a significant impact on the operations of the program and
resulted in increasing the cost of administering the program. The SAMDA I contract
did not contemplate that RTC staff would be selling the assets that were transferred into
the SAMDA program. Many SAMDA contractors received disposition fees for SAMDA
assets that the RTC later included in multi-asset sales initiatives.
Another problem was that receivership assets were often stratified by type, then distributed to various Washington-based multi-asset sales programs. Asset pools often consisted of like assets from one or more receiverships, and the RTC usually did not create

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M A N A GI N G T H E C R I S I S

geographically concentrated portfolios. The result was that many SAMDA contractors
had portfolios with geographically diverse assets, which tended to cause inefficiencies in
the management and disposition of such portfolios. In addition, in some cases, the
RTC’s inadequate information systems were severely challenged by the task of providing
a full accounting back to the appropriate receivership.
One element that proved expensive was the RTC’s requirement that SAMDA contractors engage subcontractors for certain areas of expertise. The reimbursable fees for
the subcontractors were, in the aggregate, five times as much as the fees paid to SAMDA
contractors. Also, it was difficult for the RTC to control the subcontractors, mainly
because of the privacy of the contractual relationship between the SAMDA contractors
and their subcontractors. The expenses of the SAMDA program probably would have
been lower if the RTC had not mandated the 12 categories of subcontracting.
The SAMDA I compensation formula may not have provided a strong enough
incentive for contractors to dispose of assets quickly. Furthermore, the ERV, a key
element of the contractor’s compensation formula, was not calculated in a consistent
manner throughout the RTC.
Finally, the administration of the SAMDA program varied throughout the RTC. In
addition, there were frequent changes in the oversight staff, sometimes resulting in
insufficient control over the change of key SAMDA contractor personnel.

Summary of the Three Contracting Programs
Table I.14-14 summarizes the main features of the three asset management programs.
Asset Management Contract Financial Summary
A summary of the 213 ALA, RALA, and SAMDA contracts of the FDIC and the RTC
is shown in table I.14-15. It includes such items as portfolio mix, gross collections, and
net collections.
ALAs Versus RALAs
It is difficult to compare the recoveries of the ALA and RALA programs because they
had very different combinations of asset types and because the starting market value of
their asset pools was not known.22 A direct comparison is further hindered by the fact
that an expense history by asset type is not available for either program.

22. Although the RALA contract did have an ITCV, it represented the sum of all future cash flows, not a market
value.

A S S E T M A N A G E M E N T CO N T R A C T I N G

The expense ratios and the recovery rates of the RALA program are better than
those of the ALA program (as shown in table I.14-15). However, the significant differences in asset composition, asset volume, and regional and macroeconomic conditions
prevailing when the contracts were in effect make a true comparison between the two
programs difficult. If the market values of each of the pools had been accurately determined at the start of each program, it would have been somewhat easier to compare the
results of the ALAs and RALAs. That was not done, though, so overall conclusions on
financial performance are difficult to draw.
The asset pools of the ALAs and RALAs were reviewed for distinctive features that
could affect the recovery results. One of the ALA pools for Goldome, known as the
Niagara portfolio, consisted mainly of readily marketable operating subsidiaries and
performing consumer loans with above-market rates. In the RALA program, one of the
pools, known as the Aldrich, Eastman and Waltch (AEW) portfolio, contained a significant number of performing mortgages that were readily marketable and would not incur
the usual disposition costs.
The overall expense-to-collection ratio of the RALA program was 6.4 percent,
which was less than half of the 15.5 percent ratio for the ALA program. However,
owned real estate made up 15 percent of the assets in the ALA program, whereas no
owned real estate was included in the RALA program.23 Although the net collections-tobook value reductions ratios show that the ALA and RALA programs were somewhat
similar at 61.5 percent and 64.3 percent, respectively, the net present value effect on the
figures widens the gap to 53.9 percent and 59.9 percent. That finding seems to indicate
that the RALA program performed more effectively because of its ability to keep costs
low through the use of the ITCV and by deleting the cost-plus feature that had been
used in the ALAs.
Although significant differences exist between the two programs, some broad observations can be made. For instance, the ALA contracts seemed to work well with larger
asset pools and were adaptable when assets were transferred in or out of the contractor’s
portfolios; however, the ALA contracts required extensive oversight. The structure of the
RALAs controlled costs more effectively than the ALAs did, primarily because RALA
contractors paid for their own overhead and because the ITCV established at the beginning of the contract helped the FDIC to monitor the contractors and also allowed the
contractors to monitor themselves. Although the changes to the later RALA program
improved the performance of contractors, the changes resulted in a loss of flexibility,
because the RALAs did not allow for changes in the asset pools or the ITCV.

23. Although the RALA pools originally did not have owned real estate, a minimal number of properties were
acquired through foreclosure.

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Table I.14-14

Summary of the Structures of the Contractor Programs
Number
of
Asset
Program Contracts Source

Types
of Assets

Term of
Contract

Cost
Fees Paid
Reimburseto Contractor ment

ALA

Large failed
commercial
banks (for asset
pools over
$1 billion in
book value)

Performing and
nonperforming
loans, owned real
estate, and
subsidiary assets
(owned real estate
was 15% of
assigned assets)

5 years

Incentive fee

All reasonable
pool-related
expenses
(cost-plus)

RALA

Small failed
commercial
banks (for asset
pools under
$500 million in
book value)

Primarily
nonperforming
loans, some
performing loans
(no owned real
estate at inception
of contracts)

4 years,
plus one
optional
1-year
extension

Management,
disposition,
and incentive
fees

Pass-through
of asset-specific
expenses,
excluding
overhead of
contractor

SAMDA

199

Failed S&Ls
controlled by the
RTC (various sized
asset pools)

Primarily
nonperforming
loans and owned
real estate
(which was
39% of initially
assigned assets)

3 years,
with three
1-year
renewal
options

Management,
disposition,
and incentive
fees *

Pass-through
of asset-specific
expenses,
excluding
overhead of
contractor

* A majority of the SAMDA contracts were later amended with the SAMA provision that eliminated the disposition fee.
Source: FDIC Division of Resolutions and Receiverships.

SAMDAs Versus ALAs and RALAs
As shown in table I.14-15, the recovery rate (ratio of net-collections-to-book-valuereductions) of the SAMDA program was 41 percent, as compared to 62 percent for the
ALAs and 64 percent in the RALAs. The net recovery rate (ratio of net-present-value-ofnet-collections-to-book-value-reductions) for the SAMDA program was 37 percent, in
contrast to 54 percent for the ALAs and 60 percent for the RALAs. However, a much
higher portion of total assets consisted of owned real estate, and nonperforming loans
were a higher percentage of the loan portfolio in the SAMDA program than in the other
two programs. The overall quality of SAMDA assets was therefore lower than that of the
ALA and RALA assets.
Given the significant differences in the asset mix and asset quality among the three
programs, the only fair way to compare recoveries would be to compare the net recovery

A S S E T M A N A G E M E N T CO N T R A C T I N G

367

Table I.14-15

Summary of Contractor Financial Performance
Inception Through December 31, 1996
($ in Millions)
ALAs

RALAs

SAMDAs

Totals

84,610

2,455

100,344

187,409

Book Value of Assets in Program:
Performing Loans
Nonperforming Loans
Owned Real Estate
Other Assets
Total

$4,091
19,900
4,800
3,200
$31,991

$440
760
0
10
$1,210

$0
26,937
19,031
2,509
$48,477

$4,531
47,597
23,831
5,719
$81,678

Book Value Reductions

$30,484

$1,156

$46,425

$78,065

Gross Collections
Expenses:
Management Fees
Disposition/Incentive Fees
Reimbursable Expenses
Total Expenses
Net Collections
NPV of Net Collections *

$22,189

$794

$23,293†

$46,276

0
532
2,914
$3,446
$18,743
$16,432

17
19
15
$51
$743
$692

400
300
3,739
$4,439
$18,854†
$17,369†

417
851
6,668
$7,936
$38,340
$34,493

72.8
2.4
13.1
15.5
61.5
53.9

68.7
4.5
1.9
6.4
64.3
59.9

50.2
3.0
16.1
19.1
40.6†
37.4†

59.3
2.7
14.4
17.1
49.1
44.2

Number of Assets

The net present value calculations (NPV) used the average one-year U. S. Treasury constant maturity rate during the term
of the contracts and assumed that net collections were received evenly during the term of the contract.
†
Collections exclude all loan payments made prior to 1993. In addition, collections for all assets withdrawn for sale by the
RTC were imputed at the lesser of 90 percent of the asset’s ERV or its derived investment value (DIV).
Source: ALA and RALA data is from the FDIC Division of Resolutions and Receiverships financial performance report dated
June 30, 1996. SAMDA data is from the RTC Asset Management System as of December 31, 1996.

values to the starting market values of the pool. Unfortunately, that comparison is not
possible because of the differences in asset valuation methodology among the three programs. The assets of the SAMDA program were appraised with a different asset valuation technique, which was ERV, than the techniques used in the ALA and RALA
programs, which were gross cash recovery and ITCV, respectively. Without a standard

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M A N A GI N G T H E C R I S I S

asset valuation methodology, one cannot fairly compare the effectiveness of the three
programs.
The expense-to-collection ratio of the SAMDA program was 19 percent in comparison to 16 percent for the ALAs and 6 percent for the RALAs, as shown in table I.14-15.
However, the comparison of the expense ratios does not consider or adjust for the differing asset quality and types among the three programs. The large quantity of owned real
estate in the SAMDA program was a major reason for the 19 percent expense-to-collection ratio when the collections and expenses of the SAMDA program are further segregated by asset type. An analysis of the SAMDA program’s expense ratios and recovery
rates by asset type is shown in table I.14-16.
As shown in table I.14-16, although the expense-to-collection ratio of the total
SAMDA program was 19.1 percent, the expense-to-collection ratio for all non-real
estate assets was 9.5 percent. This table also shows that owned real estate sales represented 40 percent of the book value reductions, but accounted for 70 percent of the
asset disposition expenses.
The 9.5 percent expense-to-collection ratio associated with non–real estate SAMDA
assets was substantially lower than the 15.5 percent expense ratio of the ALA program
and was approximately 3 percentage points higher than the expense ratio of the RALA
program. (See table I.14-15). More than one-third of the assets in the RALA program
were performing loans, but there were almost no performing loans in the SAMDA
program. Although the disposition costs of nonperforming loans were not tracked in
any of the three programs, such costs are known to be substantially higher than those for
performing loans. The reason for those higher costs is mainly the time and effort needed

Table I.14-16

Performance of SAMDA Contractors
Inception Through December 31, 1996
($ in Billions)
Owned Real
Estate Assets

Non–Real
Estate Assets

Total
Assets

$18.7

$27.7

$46.4

Gross Collections
Less: Expenses
Net Collections

$9.6
3.1
$6.5

$13.7
1.3
$12.4

$23.3
4.4
$18.9

Ratios (%):
Gross Collections/Book Value Reductions
Total Expenses/Gross Collections
Net Collections/Book Value Reductions

51.3
32.3
34.8

49.5
9.5
44.8

50.2
19.1
40.6

Book Value Reductions

Source: RTC Asset Managment System.

A S S E T M A N A G E M E N T CO N T R A C T I N G

to explore compromise and settlement options, initiate foreclosure, and take other legal
actions needed to protect the receivership’s interests.
In summary, although the recovery rate of the SAMDA program is substantially
lower and its expense-to-collection ratio is much higher than the other two programs, its
lower quality of assets may have accounted for most of those differences. Because the
market values were not determined for the original portfolios in each of the programs, it
is impossible to make fair comparisons regarding their effectiveness.

Contractor Versus In-House Asset Management and Disposition Strategies
The FDIC has used private-sector contractors in addition to in-house staff to manage
and dispose of distressed assets since the mid-1980s. When determining the suitability
of contracting for such services, the FDIC considers whether using contractors would
provide it with the best financial benefit.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
required the use of private-sector contractors when such needed services were available
in the private sector and when the FDIC determined that the use of such contractors
was “…practical, efficient, and cost-effective.” The main factors the FDIC used when
deciding whether to use contractors included the projected cost of available alternatives
and the collection revenues projected under various alternatives. Staffing flexibility was
also an important factor, as was the availability of asset-specific expertise. Other factors
were a desire to service assets locally (thereby lessening customer disruption) and consideration of certain characteristics that were specific to an individual asset pool.
The FDIC has tracked the cost of the disposition of failed bank assets by year of
failure since 1986. Included in this information are the asset disposition expenses for the
FDIC’s in-house asset management and disposition activities and those for the FDIC’s
asset management and loan servicing contractors. (See table I.14-17.)
As shown in table I.14-17, from 1991 through 1995, the cumulative asset disposition expense-to-collection ratio for ALA and RALA contractors was 14 percent, which
was approximately 2 percent less than the ratio for FDIC’s in-house asset disposition
activities. Legal expenses and accounting costs are included in both in-house and
contractor asset disposition expenses in these calculations. However, the expense-to-collection ratios of the ALA and RALA programs are understated because there were certain “soft costs” included in the administration of the ALAs and RALAs that were not
included in their asset disposition expenses. Those included some costs of contractor
oversight, contractor audits and reviews, Washington headquarters support, and general
receivership administrative expenses. The hidden costs of the ALA and RALA programs
partially offset the 2 percent difference between the expense-to-collection ratios. Therefore, the expense-to-collection ratio for in-house disposition activity was close to the
expense-to-collection ratio of the FDIC’s asset management contractors during this time
period.

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Table I.14-17

Asset Disposition Expenses-to-Collections Ratios
1991 Through 1995
($ in Millions)

Asset Management Entity
In-House
Contractors:
ALA and RALA Contractors
National Loan Servicing Contractors
Subtotals
Totals

Asset Disposition
Expenses/Gross
Collections (%)

Asset Disposition
Expenses

Gross Collections

$2,412

$14,886

16.2

2,421
70
2,491
$4,903

17,137
2,534
19,671
$34,557

14.1
2.8
12.7
14.2

Source: FDIC Division of Finance.

Conclusion
Both the FDIC and the RTC needed to use the expertise of private-sector contractors
for asset management during the 1980s and early 1990s when a huge volume of assets
from failed banks inundated the agencies. The contractors enabled the FDIC and the
RTC to dispose of more than $78 billion in original book value of distressed assets from
1985 to 1996. The hiring of contractors for a relatively short period of time (three to
five years) gave the agencies great flexibility to tailor the needs of an asset pool to the
particular expertise of the private sector asset manager while preserving a core staff of
FDIC and RTC employees. Once a manageable level of distressed assets was reached,
the contracts either expired under their terms or were terminated, and the agencies
moved the assets back in-house to be managed by FDIC and RTC personnel.
Contracting by the FDIC and the RTC evolved over time because of the type and
quality of the underlying assets, the current goals and needs of the two agencies at the
time each contract was entered into, and the lessons learned by the agencies from experience with prior contracts. For example, modifications from earlier contracts better
aligned the interests of the contractors with those of the FDIC and the RTC. In addition, the FDIC and the RTC learned that better results were obtained when they located
their oversight staff as close to the assets (and the contractor) as possible, especially during the first 12 to 18 months of the asset management contract. The agencies also found
that the more stable the continuity of the oversight staff was, the better the contracting
process worked. That was true for most of the ALA and RALA contracts under the
FDIC, but not for many SAMDA contracts with the RTC. Finally, to enable the FDIC
to effectively measure and track a contractor’s performance, the FDIC found that the
estimated market value of the original asset pool should be determined at the inception

A S S E T M A N A G E M E N T CO N T R A C T I N G

of the contract. A standardized asset valuation methodology needs to be instituted and
consistently applied to asset pools at the inception of all asset management contracts.24
Although it cannot be said that one type of asset management contract worked better than another type, the private-sector contractors generally performed well under any
type of contract when they were given the proper incentives. By the end of 1996, all of
the assets assigned to ALA, RALA, and SAMDA contractors had been sold, settled, or
transferred back to the FDIC.

24. The FDIC is in the process (as of early 1998) of fully incorporating a standard asset valuation estimation
(SAVE) methodology into all of its business operations. The SAVE methodology will be used from the time a
financial institution fails until the receivership is terminated.

371

ffordable housing was considered an
area in which the nation could glean
social benefit from the financial crisis by
providing an opportunity for low- to
moderate-income households to realize
their dream of home ownership or to
improve their standard of living at
affordable rent levels.

CHAPTER 15

Affordable Housing Programs

Introduction
The volume of assets handled within the affordable housing programs of the Resolution
Trust Corporation (RTC) and Federal Deposit Insurance Corporation (FDIC) were
relatively minor compared to the total assets sold by both corporations. For the period of
1980 through 1994, in fact, less than one-half of 1 percent of the total assets liquidated
were disposed of in the affordable housing programs. The RTC and FDIC viewed the
programs as significant, however, because of their mission to provide low- to moderateincome housing within a larger program designed to minimize costs and maximize overall returns. Affordable housing was considered an area in which the nation could glean
social benefit from the financial crisis by providing an opportunity for low- to moderateincome households to realize their dream of home ownership or to improve their standard of living at affordable rent levels.
Virtually overnight the RTC became accountable for the disposition of thousands
of properties through its Affordable Housing Disposition Program (AHDP). With the
exception of the Farmers Home Administration (FmHA), no federal agency holding
foreclosed real estate had ever targeted such a volume of property for an affordable
housing program. To reach its goals the RTC implemented many innovative strategies, such as coordinating target marketing with a vigorous seller financing program
geared to low- to moderate-income buyers, nonprofit organizations, and public agencies. During its life, the RTC sold 81,156 units of multi-family properties and 27,985
units of single-family properties to low- to moderate-income and very-low-income
families, or sold them for the benefit of those families.
As part of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, Congress requires the asset disposition efforts of the FDIC to meet five
criteria, one of which is to preserve affordable housing. Because the FDIC does not

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M A N A GI N G T H E C R I S I S

use public funds for its operations, it required a separate federal appropriation for an
affordable housing program. The FDIC first received such public funding in fiscal
year 1993; the funding continued for a three-year period.
The FDIC recognized that the large discount costs associated with placing multifamily properties through an affordable housing program would create a disproportionate drain on its limited appropriations. Therefore, the FDIC Affordable Housing
Program (AHP) initially focused on the sale of eligible single-family properties to
qualified families. As the amount of the annual appropriation increased, the FDIC,
for a short while, also sold multi-family properties. Through its efforts, the FDIC’s
AHP placed 2,073 single-family properties with low- to moderate-income families
and sold 18 multi-family properties, which included 533 units.

RTC Affordable Housing Disposition Program
The RTC Affordable Housing Disposition Program was established by section 501 of
the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of
1989.1 Regulations governing the AHDP were issued in April 1990, with the basic statutory obligation being to ensure the preservation of affordable housing by providing
home ownership and maintaining rental opportunities for moderate-income, lowincome, and very-low-income households. The two components of the AHDP were
the Single-Family Program and the Multi-Family Program. In 1991, with the extensive
amending of FIRREA by the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act (RTCRRIA), the RTC added condominium units to the
AHDP and generally treated them as single-family properties.
The RTC classified households as low-income when their income did not exceed 80
percent of the area median income as established by the U.S. Department of Housing
and Urban Development (HUD). For example, in Denver, Colorado, the income limit
for a one-person household was $27,200, and the income limit for an eight-person
household was $51,300. In Hartford, Connecticut, the income limit for one person was
$28,150, and the income limit for an eight-person household was $53,050. The RTC
classified very-low-income households as those with income that did not exceed 50
percent of the area median income as established by HUD. Rents that could be charged
to those households were restricted according to a formula based on income figures for
the area of the property.

1. Section 21A(c) of the Federal Home Loan Bank Act, as amended by section 501 of the Financial Institutions
Reform, Recovery, and Enforcement Act, U.S. Code, volume 12, section 1441a (1989).

A F F O RD A B L E H O U S I N G PR O G R A M S

Single-Family Program
The Single-Family Program included properties that had four units or less and that fell
within the valuation range specified in the statute. The valuation range varied, but in
1997 was $67,500 for a one-unit house and up to $107,000 for a four-unit property.
Properties had to be sold to qualifying households whose members agreed to live in the
property as their personal residence for at least one year. The properties also could have
been sold in bulk to nonprofit corporations or public agencies that agreed to either rent
to lower-income families (those earning no more than 80 percent of the median income
for the area involved, adjusted for household size) or sell the properties to qualifying
households whose members agreed to live in the properties for at least one year.
To be considered a qualifying household, the household had to have an income that
was no more than 115 percent of the area median income as determined by HUD and
adjusted for household size. An exception to that requirement, provided in the 1991
amendments, permitted the sale of a single-family property to a household that was
renting the property at that time, regardless of income, provided the household
members agreed to occupy the property as their residence for at least one year after
purchase.
The program required potential purchasers to complete certifications of owner
occupancy and of income eligibility, along with the purchase contract. At closing, the
purchaser executed a land use restriction agreement (LURA). The LURA included an
agreement stating that the new owner intended to occupy the property as a principal residence for one year following closing and that the RTC could recapture 75 percent of
the profits if the new owner sold the property within that year. The special warranty
deed given at closing referenced the LURA as follows: “. . . subject also to the covenants
and restrictions set forth in the Land Use Restriction Agreement executed by [Grantor]
and [Grantee] concurrently with this deed.” Condominium properties had the same
residency requirement and recapture provision as the single-family LURA.
When the RTC sold single-family or condominium properties to a nonprofit
organization or public agency, the organization or agency also was encumbered with a
LURA that imposed rental and resale restrictions. The RTC designed that LURA so it
could be released as the organization or agency resold each individual unit, at which
time that LURA was replaced by the standard single-family LURA described above.
From the inception of the AHDP, the RTC sold single-family properties to numerous nonprofit organizations. Although a variety of organizations participated in the
program, the majority tended to be local community-based organizations that
specialized in providing home ownership opportunities for low-income families. Of all
single-family assets sold through the program, 66 percent were in the southeastern and
southwestern areas of the country. (See chart I.15-1.)

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Multi-Family Program
Multi-family properties in the AHDP were those with five units or more that fell below
the value periodically established by HUD. The LURA for a multi-family property
restricted the property’s use for 40 years from the date of closing or 50 years from initial
occupancy, whichever time span was greater; during that time, at least 35 percent of the
units had to be rented to lower-income households. At least 20 percent of the households residing in those properties had to be from very-low-income households. Purchasers of the RTC’s multi-family properties often agreed to increase the percentage of
income-restricted units, even though the RTC’s goal always was to keep a balance of
restricted and unrestricted income households in each property. The LURA was terminated when a property was foreclosed by an institutional lender that was not a party

Chart I.15-1

The RTC's Affordable Housing Disposition Program
Single-Family Properties Sold
Midwest
3,711
16%

VT
2

WA
18
OR
60

NV
28
CA
172

West
3,304
14%

MT
7
ID
9

WY
29

ND
50

MN
220

NB
58
UT
123

KS
612

CD
1,135

AZ
1,465

OK
1,181

NM
376

TX
8,166

AK
5

WI
18

SD
1
IA
215

IL
281

MO
394

Total Sales: 23,916

Source: FDIC Division of Resolutions and Receiverships.

PA
271
OH
313

IN
35

TN
552

MS
178

Southwest
10,597
44%
HI

MI
43

KY
12

AR
157

LA
2,253

NY
47

AL
324

MD
93
WV VA
13 309
NC
456
SC
323
GA
811

FL
2,336

Northeast
1,053
4%

ME
14

NH
75 MA
RI 288
47
CT
144
NJ
165
DC
16

DE
18

Southeast
5,251
22%

A F F O RD A B L E H O U S I N G PR O G R A M S

377

related to the borrower, as long as the foreclosed owner did not later acquire a controlling interest in the property. Of all multi-family assets sold, 70 percent were located in
the southwestern and western areas of the country. (See chart I.15-2.)

RTC Program Components
During the AHDP’s five-year existence, the RTC developed many strategies for
marketing affordable housing. Those strategies, discussed below, include using clearinghouses, retaining technical assistance advisers (TAAs), developing seller financing, establishing repair funding, developing a direct sale program, adjusting the value for a reduced

Chart I.15-2

The RTC's Affordable Housing Disposition Program
Multi-Family Properties Sold
Midwest
107
12%

Northeast
58
6%

WA
4
OR
3

VT
MT
ID

ND
10

MN
25

NY
10

MI
1

WY
IA
5

NB
NV
3
CA
45

UT
3

AZ
87

West
219
24%

KS
12

CD
59

NM
20

LA
26

Total Sales: 930

Source: FDIC Division of Resolutions and Receiverships.

IN
4

OH
5

TN
8

MS
10

Southwest
432
46%
HI

PA
9

KY
4

AR
4

TX
396

AK
2

IL
3

MO
12

OK
15

AL
6

CT
2

NH MA
10
RI
17

NJ
10

DE
WV VA
6
NC
6
SC
5
GA
35
FL
47

DC
1

Southeast
114
12 %

378

M A N A GI N G T H E C R I S I S

price, developing a donation policy, establishing an exclusive marketing period, and using
auctions and sealed bids.
Clearinghouses
The RTC used state housing finance agencies and Federal Home Loan Banks (FHLBs)
as clearinghouses for listing available affordable properties. The lists, which were free to
the public, contained key property information, such as location, description, price, and
the broker contact. The Housing Opportunity Hotline, which the RTC initiated in
Texas for lower-priced, single-family foreclosed properties of eight federal agencies, also
used the clearinghouses.
Technical Assistance Advisers
The RTC retained community-based organizations as technical assistance advisers. They
were nonprofit organizations or public agencies located in every state where the RTC
owned property marketed under the AHDP. TAAs provided training and assistance for
single-family purchasers, who were, for the most part, first-time home buyers. They also
conducted training on how to buy a house, helped the buyers complete the income certifications required by the AHDP, and provided post-closing seminars on the homeowner’s responsibilities, such as those related to maintenance, mortgage, and insurance.
The TAAs also played a significant role in the RTC’s Multi-Family Program. They
helped identify local nonprofit organizations and public agencies interested in owning
multi-family properties. They brought to light for the RTC the fact that many local
public-housing authorities had never considered expanding their programs to include
low-income and moderate-income housing. TAAs helped those agencies and nonprofit
organizations conduct feasibility analyses and also helped identify state and federal
sources of acquisition and rehabilitation financing.
TAAs performed some of the services traditionally provided by brokers; that is, they
brought buyers and sellers together. In addition, TAAs performed many innovative tasks
that were essential if disenfranchised communities with serious housing problems were
to benefit from the affordable housing properties. Among those innovative tasks was
creating a targeted market for the sale of both single-family and multi-family properties.
Seller Financing
Often, an RTC affordable property could not attract conventional financing because of
the property’s location, condition, and income history. In addition, many single-family
buyers and nonprofit corporations eligible for the program could not qualify for acquisition financing with traditional lenders. Because of those financing limitations, the
RTC developed a seller financing program for both single-family and multi-family
properties.

A F F O RD A B L E H O U S I N G PR O G R A M S

379

The program offered 97 percent seller financing on single-family properties and 95
percent financing on multi-family properties sold to nonprofit organizations and public
agencies. Loans totaling $170 million for 5,726 single-family purchases were made. In
addition, the RTC paid the closing costs for its single-family buyers. The RTC also
developed its own underwriting programs with less restrictive requirements than conventional underwriting. That underwriting program was particularly important for nonprofit borrowers because lenders generally view them as poor risks. When analyzing a
multi-family loan application, the RTC’s underwriters focused on the income potential
of the property rather than the capital resources of the borrower.
Under its direct sale program (see details provided later in this chapter), the RTC
also offered bridge loan financing to public agencies. That financing allowed a public
agency to temporarily finance a property for a two-year period until the agency could
locate a nonprofit corporation to purchase the property or arrange conventional financing to finalize its own purchase of the property. If financing was not available, the RTC
could then provide permanent financing on more conventional terms. The RTC made
44 bridge loans to public agencies with an original balance of $58.6 million. The RTC
also provided financing for capital improvements and operating expenses during the
bridge loan period. As an incentive to find a nonprofit buyer, the public agency was eligible to receive 5 percent of the loan balance when the bridge loan was repaid.
Seller financing was important because much of the single-family inventory did not
meet Federal Housing Administration (FHA) standards. Bridge loans were also instrumental in selling multi-family properties to nonprofit organizations and public agencies.
The RTC provided seller financing for 25 percent of single-family properties and for 33
percent of multi-family properties sold. See table I.15-1 for the number of properties
sold using RTC seller financing.

Table I.15-1

RTC Seller Financing
($ in Thousands)
Type
Single-Family

No. of
Properties

Sales Price

Loan Amount

Loan Amount/
Sales Price (%)

5,726

$183,814.2

$170,153.5

92.6

Multi-Family

275

401,367.5

331,872.3

82.7

Bridge Loans

58,645.0

63,069.0

107.5

6,045

$643,826.7

$565,095.8

87.8

Totals

Source: RTC quarterly auction reports.

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M A N A GI N G T H E C R I S I S

Repair Funding
A significant component of the Single-Family Program was its repair program. Properties sold to lower-income buyers had to be in good condition. Because the buyers
would not have the reserve capital necessary for repairs, particularly at the time of closing or shortly thereafter, the RTC committed up to $5,000 to repair each property in
its inventory.
Direct Sale Program
As the result of a legislative amendment, the normal clearinghouse marketing period
designed to sell to the highest bidder was suspended, and the direct sale program started
in May 1992. The program targeted sales of multi-family properties to nonprofit
organizations and public agencies, which the RTC quickly discovered did not have
sufficient capital to purchase those properties. Nor did they have the ability to mobilize
quickly enough to be competitive with private investors. To level the playing field, the
RTC offered two sequential exclusive 30-day marketing periods to public agencies and
nonprofit organizations. If no public agency or nonprofit buyer emerged during that
period, the RTC offered the properties to all qualified buyers.
The initial program offered eligible property to public agencies first, in a 30-day
marketing period. The RTC defined “public agency” as a federal, state, or local governmental or public entity, including a public housing agency, with a jurisdiction to operate in the area where the property is located. Those agencies may have included local
housing authorities, state and local housing finance authorities, community development agencies, state or local mental health or developmentally disabled agencies, school
districts, or publicly chartered institutions of higher learning. The program also made
special RTC bridge financing, with a low down payment, available to those agencies.
If no public agency expressed interest during the marketing period, then nonprofit
organizations became eligible purchasers during an exclusive nonprofit 30-day marketing period. If, at the end of those marketing periods, neither a public agency nor a nonprofit organization expressed interest in purchasing the property, the RTC placed the
property in the clearinghouse for 90 days for marketing to all qualified buyers who committed to the minimum set-aside requirements. If the property remained unsold after
that period, the RTC could sell the property outside the AHDP.
To facilitate the noncompetitive approach, the RTC adopted a bidder evaluation
process, in which it asked interested public agencies and nonprofit organizations to submit a notice of serious interest (NOSI). The RTC then evaluated the NOSIs for the
applicants’ history of community service, history of property ownership and management, nonprofit and public agency legal status, and financing needs. After determining
the organization with the highest overall score, the RTC proceeded to negotiate the sale
of the property.

A F F O RD A B L E H O U S I N G PR O G R A M S

Reduced Price
For multi-family properties marketed after January 1994, the RTC set the actual
purchase price at what was called the affordable market value (AMV). The AMV was
calculated according to a standardized RTC methodology modeled on FHA underwriting guidelines. The RTC used the methodology to adjust the appraised value
downward to reflect the (1) net affect on income of the required 35 percent lowincome set-aside, (2) current and anticipated operating costs, (3) current interest rates
and terms for RTC seller financing, and (4) current physical condition of the property
based on a physical needs assessment and phase I environmental report. The AMV
served as the sales price. Of the properties adjusted, the average AMV was 66.7 percent
of appraised market value. Rather than seeking the highest bidder, the RTC sought a
buyer with the capability to own and manage the low- and moderate-income property
successfully. For single-family properties, initial guidelines required a sales price of 80
percent or greater of appraised value. In March 1991, Congress authorized the RTC to
sell single-family properties with no minimum pricing to benefit more programqualified households.
Donation
Because of the large inventory of assets with nominal value, especially in the southwestern area of the United States, the RTC developed a policy that allowed the donation of a
property to a nonprofit organization or public agency, at no cost, providing the assets
would be conveyed for the public good. Qualifying uses for such conveyances included
single-family and multi-family affordable housing, homeless shelters, transitional housing, day care facilities for children of low- and moderate-income families, open urban
spaces, and assets used for nonprofitable public purposes, as designated by the secretary
of Housing and Urban Development.
More than 1,000 single-family and 73 multi-family assets were donated through
that program. The RTC sometimes placed a demolition LURA on multi-family properties with the requirement that the recipient of the donation replace the structure with
affordable housing.
Exclusive Marketing
Just as the exclusive marketing period under the direct sale program helped nonprofit
organizations and public agencies that sought to purchase multi-family properties, an
exclusive marketing period for single-family properties did the same for low-income
households. Congress established a 90-day marketing period for single-family properties. During that period, the RTC listed the property in the clearinghouse and offered
it exclusively to nonprofit organizations, public agencies, and income-qualified
buyers. The 90-day marketing period gave the RTC’s TAAs adequate time to locate

381

382

M A N A GI N G T H E C R I S I S

qualified buyers, complete the paperwork establishing qualified buyer status, make an
offer, and educate single-family buyers.
Auctions and Sealed Bids
To dispose of a large number of single-family properties, the RTC also used open outcry
auction and sealed bid events as marketing techniques in the AHDP. More than 198
auctions or sealed bid events occurred between 1990 and 1995.
An article in a 1992 edition of the RTC’s The Silver Lining illustrated the positive
side of using open outcry auctions to dispose of single-family properties (see exhibit
I.15-1); however, negatives also were associated with that method of selling to lowincome families. One such negative was that although potential purchasers had the
opportunity to view the property before the auction, some properties were sold sight
unseen, without prior knowledge about the condition of the property. Also, at times,
income certifications were not properly completed, and because of the fast pace of the
auction, purchasers sometimes found themselves bidding more than the property’s
worth.

Difficulties the RTC Faced
In its efforts to meet the strict requirements of FIRREA and other legislation, the RTC
faced a number of difficulties. It had to establish guidelines for determining the nonprofit
status of its applications and for verifying the intent of purchasers to occupy its singlefamily properties. In addition, the RTC had to deal with monitoring land use restrictions
and in facing drawbacks arising from bulk sales of multi-family properties.
Determination of Nonprofit Status
FIRREA established its own criteria for determining nonprofit status rather than using
the criteria established by the Internal Revenue Service (IRS). As a result, the RTC was
involved in determining the validity of a nonprofit corporation’s status under the RTC’s
statute, regardless of its status under the Internal Revenue Code. FIRREA defines a nonprofit as “a private organization (including a limited equity cooperative)—(i) no part of
the net earnings of which inures to the benefit of any member, shareholder, founder,
contributor, or individual; and (ii) that is approved by the Corporation [RTC] as to
financial responsibility.”
Early in the direct sale program, the RTC did not inquire into the nonprofit status
of its applicants. It simply accepted a nonprofit corporation’s own statement. However,
it quickly became apparent that several organizations could not meet the RTC’s definition of “nonprofit” because of their financial arrangements with officers and employees.
As a result, the RTC developed a nonprofit certification requiring information on board

A F F O RD A B L E H O U S I N G PR O G R A M S

383

members’ compensation, property managers’ compensation, and proposed financing
arrangements. The certification requirements were based on IRS cases involving the
validity of nonprofit status under the Internal Revenue Code section 501(c)(3).
Although the certification was useful in providing additional information about the

Exhibit I.15-1

Texas ‘Lone Star’ Sells 989 Properties:
Biggest Affordable Auction Yet
Over 16,000 attended the largest RTC affordable housing auction ever, the Lone Star, running in
nine Texas cities from November 10-19, 1991. The mammoth sale of 989 homes for $29.1 million
revealed some encouraging trends for those seeking sorely needed low-income housing. Chief
among these trends are the following:
• 35 percent of Texas buyers were minorities (18 percent Hispanic, 10 percent Black, 5
percent Asian).
• A majority, or 56 percent, of purchasers had low incomes (under 80 percent of the Texas
area median income). The average household income was $22,902.
• 72 percent of buyers were first-time home buyers.
• Properties sold brought 77 percent of appraised value.
Average sales prices per city ranged from $44,100 in El Paso to $19,600 in Dallas. Average buyer
income per city ranged from $25,100 in Houston to $19,600 in San Antonio. Corpus Christi had
the highest percentage of buyers with incomes under $25,000—84 percent.
Some cities had extraordinary minority participation, such as El Paso, where 89 percent of the
winning bidders were minorities, mostly Hispanic. Houston had 45 percent minority buyers,
almost half of which were Black. Nearly all of San Antonio’s minority purchasers (31 percent of
total) were Hispanic.
Among those was Nery White, 27, a single-parent mother of two boys. White was going
about her business installing a security system for a homeowner in San Antonio, Texas, when her
clients happened to mention there was an RTC auction in town in one week. This wasn’t the first
time she’d heard about it. She got curious. And in one week, she got a condo for $6,000.
“I pay $500 a month in rent,” she related after winning the bid at the RTC auction on November 16. “That’s $6,000 a year. I just bought a condominium for the same amount I paid last year in
rent. But now I have a home for life.”
White was amazed. “I have struggled very hard on the edge, as a taxpayer. But it’s gratifying.
I really need it.”
Source: RTC , newsletter, The Silver Lining, January-February 1992.

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M A N A GI N G T H E C R I S I S

nonprofit buyers, it added an additional cost to the program because it required trained
personnel to evaluate the information and obtain full completion of the certification.
Single-Family Certificate of Intent to Occupy
FIRREA required the purchasers of single-family properties to certify in writing that the
family intended to occupy the property for at least one year. In addition, the family had
to “intend” to occupy the eligible single-family property as a principal residence.
When developing its program documents, the RTC faithfully followed the language
of the statute, not foreseeing that fraudulent buyers would purchase the property for
investment purposes, immediately renting the property without ever having lived there
themselves. The certification language, which required the purchasers to merely recite
their intent to live in the property for one year, made it impossible to prosecute those
buyers successfully.
Subsequently, the RTC revised its certification to include an acknowledgment that
the buyer would occupy the property immediately after closing and that the new owner
had a duty to amend or supplement the certification if there were any changes in occupancy. That revision significantly strengthened the RTC’s position when prosecuting
program fraud, because buyers who did not occupy the property after closing could not
successfully argue that their intent had changed between the time the certification was
executed and the closing.
Also, in contrast to its previous practice of relying on neighbors to call and report program violations, the RTC instituted a 90-day contact letter program. Under that program,
90 days after the closing date, the RTC sent a certified letter to the buyer at the property
address asking the buyer to reaffirm the agreement to live in the property for one year. If
the buyer did not return the requested reaffirmation within a certain time, or the certified
mail was returned indicating the buyer did not live at that address, the RTC referred the
matter to its Office of Inspector General (OIG) to determine if program fraud had been
committed. When the OIG found a program violation, it referred the matter to the U.S.
Department of Justice for civil or criminal prosecution.
Incomplete Land Use Restriction Agreements
Initially, the RTC had great difficulty monitoring its land use restriction agreements.
Early in the program, with its primary focus on maximizing sales, the RTC had established no central collection point for LURAs. As a result, when the RTC later attempted
to locate all LURAs to begin its monitoring and compliance program, it had difficulty
locating the documents and had to recover them from individual property records.
Furthermore, the RTC discovered that the portion of the LURA form stipulating the
number of units restricted to lower-income and very-low-income tenants often had not
been completed.

A F F O RD A B L E H O U S I N G PR O G R A M S

In addition, RTC policy permitted contractors that managed and sold properties on
the RTC’s behalf to close sales using standard documents, without submitting them for
legal review. (For further information, see “Use of Contractors” in this chapter.)
Although many of those contractors were licensed real estate brokers and agents, they
had not been trained in the use of those documents. Many did not complete them
properly or failed to get them signed or recorded.
To correct that problem, the RTC initiated a campaign to train the contractors
involved in its program. Later, it began to assign only one contractor from each of the
field offices to AHDP sales. That contractor was chosen on the basis of previous performance. Ultimately, however, the success of the program depended on the contractor’s
employees and their dedication to the AHDP.
Aggregation of Units in Bulk Sales
Although FIRREA permitted bulk sales of multi-family property with aggregation of
all restricted units in one property, the RTC discovered drawbacks to that approach
early in the program. The sale of 26 multi-family properties to the Transactions
Funding Corporation was the initial event that kicked off a round of media attention
and congressional hearings regarding the policy of bulk sales. (See exhibit I.15-2.) A
key goal of the RTC’s AHDP was that multi-family properties contain a balance of
restricted and unrestricted income households. Some bulk purchasers, however, chose
to aggregate units so that a single property was entirely rent-restricted, while their

Exhibit I.15-2

RTC Closing Largest Affordable Housing Sale to Date—$75 Million
The Resolution Trust Corporation has consummated the largest sale to date under
its Affordable Housing Disposition Program. In November, the RTC sold 26 multifamily properties, located primarily in Texas, for approximately $75 million to
Transactions Funding Corporation, Atlanta, Georgia, an affiliate of General Electric
Capital Corporation, Stamford, Connecticut. The sale was an all-cash transaction,
and was over five times as large as the former largest sale.
"This transaction proves that our program can offer a way for investors to pursue their profit-making objective, while at the same time participate in the effort
to make affordable housing properties available,” said Lamar Kelly, RTC deputy
executive director for asset and real estate management.
Source: RTC, newsletter, The Silver Lining, January-February 1992.

385

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M A N A GI N G T H E C R I S I S

other properties had no restrictions. Administration of the “aggregation” provision in
that manner raised questions regarding the consistency of the approach with the statutory mandate that the RTC conduct operations in a way that “maximizes the preservation of the availability and affordability of residential real property for low- and
moderate-income individuals.” If only a portion of the properties marketed through
the AHDP were actually subject to deed restrictions, then fewer properties were made
available at restricted rents to low-income individuals.
In response, the RTC modified its policy. On June 12, 1992, the RTC initiated a
policy that stated that when more than one multi-family property is purchased from
the RTC as part of the same negotiation, the RTC will require that not fewer than 15
percent of the dwelling units in each separate property purchased be made available to
low-income or very-low-income individuals.2

Use of Asset Management Contractors
The results of initially using standard asset management and disposition agreement
(SAMDA) contractors for the disposition of AHDP-qualified properties proved to be
unacceptable. The SAMDA contractors had no financial incentives to market the properties as prescribed in the affordable housing regulations. Otherwise eligible properties
would be pooled with higher valued, unqualified properties and marketed under standard procedures. Also, SAMDA pools often were not marketed by a SAMDA contractor
in the geographic region of the affordable housing qualified properties.
Those difficulties were addressed by the RTC initiating standard asset management
amendments (SAMAs).3 The SAMAs focused the contractor’s responsibilities on
managing the properties, rather than on disposition of the properties. The responsibility
for disposition shifted from the contractors to the RTC.

Monitoring and Compliance Program
The scope of the initiatives the RTC implemented to meet the requirements of
legislation required the development of a monitoring and compliance program.

2. “Final Statement on Policy on Lower Income Occupancy Requirements for Bulk Sales in the Multi-Family
Affordable Housing Disposition,” Federal Register [57 FR24937], August 11, 1992.
3. For further information, see Chapter 14, Asset Management Contracting.

A F F O RD A B L E H O U S I N G PR O G R A M S

Land Use Restriction Agreements
The land use restriction agreements recorded against multi-family properties and singlefamily properties, which were sold to nonprofit organizations or public agencies, were
effective for the greater of 40 years from the date of closing or 50 years from the date of
initial occupancy. Those LURAs imposed rent restrictions on a percentage of the property’s units through the LURA’s term. The RTC entered into memoranda of understanding with 32 state housing finance agencies and 2 nonprofit organizations that
agreed to monitor compliance for the term of the LURAs.
As part of its monitoring and compliance program to inform and guide the monitoring agencies, the RTC produced the Monitoring and Compliance Manual for the
state agencies and the property owners. The manual contained the necessary forms for
reporting income and tenant information to the monitoring agency, although owners
could also use RTC-developed computer software to file the required reports, which
they had to submit monthly until the property reached full compliance. After the property achieved compliance, the property owner submitted the reports annually. They
also paid required annual fees of $50 per rent-restricted, multi-family unit and $250
per single-family unit to cover monitoring program costs. Property owners could bring
any questions or concerns regarding a LURA on any property to the monitoring
agency. The RTC gave the monitoring agencies the authority to resolve questions about
program enforcement, providing the agency did not contradict state statute or the
LURA. It also gave the monitoring agencies the authority to adjust monitoring fees and
to adopt their own penalties for noncompliance, free from the RTC’s supervision.
Those fees belonged to the agency and were its sole compensation for the monitoring
service.
Under the terms of the loan documents, the LURAs on single-family properties sold
to nonprofit corporations and public agencies terminated upon the subsequent sale of
the single-family property or condominium to a qualified family. At that time, a new
LURA was substituted, releasing the original LURA and imposing the RTC’s one-year
ownership and recapture requirements. If a new LURA was not executed, the original
LURA would remain as the official record.
If an owner failed to comply with the LURA, the RTC or its monitoring agency
might apply to a court for an injunction or the appointment of a receiver to operate the
property. The terms of the LURA entitled the RTC or the agency to reimbursement of
attorney’s fees if it prevailed. Interestingly, both the statute and the LURAs gave affected
very-low-income and lower-income families, state housing finance agencies, and any
agency, corporation, or authority of the United States government the right to enforce
the low-income occupancy requirements.

387

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Recapture of Single-Family Sales Proceeds
Under its LURA, the RTC was entitled to recover 75 percent of net profits if a singlefamily property was sold within one year of its purchase by a qualified buyer. The recapture provision also applied to condominiums. The provision was triggered if the sale
contract was entered into during the year after the original closing, regardless of when
the sale took place. The restriction continued to be used for the RTC single-family
properties that were sold by the FDIC after the RTC was shut down. It was also used for
single-family properties that were originally sold to nonprofit organizations or public
agencies when the properties were resold to qualified buyers.
Recapture and Reinvestment of Profits Agreement
Most multi-family properties sold after May 1992 were sold under the direct sale
program. Those properties were subject to both a LURA and a recapture and reinvestment of profits agreement (recapture agreement). The recapture agreement entitled the
RTC to 50 percent of the net profits from any sale occurring within two years after purchase from the RTC. In addition, if the original owner was a nonprofit organization or
public agency, the owner was required to invest its 50 percent of the profits toward
providing additional affordable housing.
The RTC introduced the recapture agreement after several purchasers immediately
resold their properties and received significant profits. Because the RTC’s AMV was substantially lower than the appraised value, after taking the property’s anticipated income
with restricted units into account, those profits were viewed as an unfair windfall. The
recapture agreement helped the RTC satisfy its goal of increasing the stock of affordable
housing by requiring sellers to reinvest profits into other affordable housing ventures.
Affordable Housing Advisory Board
The Affordable Housing Advisory Board (AHAB), an advisory committee defined by
the Federal Advisory Committee Act, U.S. Code, volume 5, appendix 2, J let. seq., was
established by the Resolution Trust Corporation Completion Act to advise the Thrift
Depositor Protection Oversight Board and the FDIC Board of Directors on policies and
programs related to the provisions of affordable housing.4 The RTC issued the AHAB’s
original charter on March 9, 1994, and the FDIC rechartered the board on February 26,
1996, after the RTC was shut down.
Members of the AHAB are the secretary of HUD, who serves as chairperson; the
chairperson of the Thrift Depositor Protection Oversight Board (or the chairperson’s
delegate); the chairperson of the FDIC Board of Directors (or the chairperson’s dele-

4. In 1991, RTCRRIA replaced the RTC Oversight Board with the Thrift Depositor Protection Oversight Board.

A F F O RD A B L E H O U S I N G PR O G R A M S

gate); four persons appointed by the secretary of HUD to represent the interests of individuals and organizations involved in using affordable housing programs; and two
persons who were members of the former National Housing Advisory Board, which had
provided advice to the RTC Oversight Board.
The Completion Act required the AHAB to meet four times annually, and more frequently if so requested by the FDIC Board of Directors. Meetings were open to the public and included testimony from experts in the field who had personal experience in
purchasing affordable housing properties or wanted to make policy or procedural recommendations before the board. Meetings were held throughout the country, but
primarily in areas where FDIC and RTC affordable housing assets were concentrated.

The Cost of the RTC’s Affordable Housing Disposition Program
The General Accounting Office’s (GAO) audit of the RTC Affordable Housing
Disposition Program in September 1994 attempted to identify the RTC’s costs of
administering the program compared with the sale of other RTC real estate. Several factors prevented both the GAO and RTC management from making conclusive statements regarding the costs of the program. Knowledge of the price at which the RTC
could have sold the AHDP property in its regular disposition program, property holding
costs, and the length of time to sell outside the AHDP were data that the RTC did not
maintain, thereby preventing an accurate cost analysis of the program.
It is possible, however, to make one comparison between the two sets of real estate
transactions. The ratio of sales price to appraised value of an eligible single-family property sold in the program was 75 percent, compared to 80 percent for an eligible property
sold outside of the program. Similarly, the ratio of sales price to appraised value of an eligible multi-family property sold in the program was 70 percent, compared to 74 percent
for eligible properties sold outside the program.5 See table I.15-2 for a comparison of
single-family and multi-family sales under AHDP.
Assuming the same percentages of appraised value could have been obtained for
properties sold in the program as for those sold outside the program, then the RTC
would have forgone approximately $92.8 million in collections through its use of an
affordable housing program. Because eligible properties first had to unsuccessfully go
through a marketing effort as an affordable housing property before they could be sold
outside the program, the loss of income assumption may be reasonable and, if anything,
conservative.

5. Multi-family total appraised value for “sold affordable” is a cumulative total from the program’s inception and
consequently includes assets sold before and after the AMV was used to set the purchase price (see RTC Program
Components, Reduced Price). Data on 184 multi-family properties that had established AMVs show that the
average AMV was 66.7 percent of the appraised value.

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Table I.15-2

RTC Sales of Properties Eligible for the
Affordable Housing Disposition Program
Single-Family
Affordable

Multi-Family

Non-Affordable

Affordable

Non-Affordable

Number of Properties

22,898

10,662

856

377

Number of Units

27,244

13,726

90,794

25,408

Total Appraised Value

$878,455

$342,660

$1,429,751

$401,485

Total Sales Price

$659,033

$272,360

$1,005,831

$297,123

75.0

79.5

70.4

74.0

Sales Price/Appraised
Value (%)

Note: Conveyance sales (properties donated) are not included above.
Source: RTC quarterly auction reports.

The $92.8 million figure does not incorporate the added costs the RTC incurred by
operating the AHDP. When considering the money that was spent on repairs to singlefamily properties (approximately $25 million), closing costs for single-family properties
(approximately $19 million), forgiven application fees for multi-family seller financing
(approximately $355 thousand), and the administrative costs of the TAAs and outreach
programs, all of which were not used for other RTC asset sales, then the added cost to
taxpayers from the program grows to more than $135 million.

The FDIC Affordable Housing Program
The FDIC program was established by section 241 of FDICIA, which amended the Federal Deposit Insurance Act (FDI Act) of 1950, adding section 40, “FDIC affordable housing program.”6 Because the FDIC is privately funded, the program was operational only
to the extent that it received a federal appropriation. The Department of Veterans Affairs,
HUD, and the Independent Agencies Appropriations Act of 1993 provided the AHP’s
first year of funding. Because the AHP was the only aspect of the FDIC’s operations that

6. U.S. Code, volume 12, section 1831q(c)(1).

A F F O RD A B L E H O U S I N G PR O G R A M S

required a separate federal appropriation, it was, by design, administered and accounted
for separately from all other sources of FDIC funding.
Aside from the section 40 provisions pertaining to the appropriated program, section 123 of FDICIA, “FDIC Property Disposition Standards,” requires the FDIC to
conduct its disposition activities in a manner that (1) maximizes present value return,
(2) minimizes losses, (3) ensures adequate competition, (4) prohibits discrimination
based on race, sex, or ethnic group in the consideration of offers, and (5) maximizes the
preservation of the availability and affordability of residential real property for low- and
moderate-income individuals. The final factor, which is related to providing opportunities for affordable housing, is separate and apart from the provisions governing the
appropriated program.
Background
Although modeled after the RTC program, the FDIC Affordable Housing Program was
much smaller in scope. With $5 million of appropriated funds for fiscal year 1993, $7
million for fiscal year 1994, and $15 million for fiscal year 1995 (later reduced to $3.7
million), the AHP provided credits or grants to 2,073 qualified buyers of affordable single-family properties and subsidized the sale of 533 units of affordable multi-family properties. The program included properties held by the FDIC in both its corporate and
receivership capacities obtained from the Bank Insurance Fund, Savings Association
Insurance Fund, and Federal Savings and Loan Insurance Corporation Resolution Fund
institutions. (See table I.15-3.)
Funding and Size of Program
The major difference between the FDIC and RTC affordable housing programs was in
the funding of the programs. The FDIC program was operative only insofar as congressionally appropriated funds, specifically earmarked for its program, were available to
cover the administrative and property subsidy costs incurred by the program. In contrast, the RTC’s program operated with general funds available to the RTC and was not
dependent on a specific appropriation. See chapter 4, Evolution of the RTC’s Resolution
Process, for a discussion of the general difficulties encountered with the congressional
funding of RTC activities.
During the first and second years of the AHP, the appropriated funds were not sufficient to allow the FDIC to discount all of the properties that would have been eligible
for the program. For example, some of the multi-million-dollar apartment projects that
could have been marketed through the program at the time would have resulted in discounts totaling hundreds of thousands of dollars. In response to that issue, the annual
appropriation legislation allowed the FDIC to modify, at its sole discretion, the statutory
requirements so that the available money could be put to the most efficient and beneficial use.

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That discretion enabled the FDIC to concentrate its efforts on single-family properties. Also, the discretionary language allowed the FDIC to be more creative in the way it
provided discounts, which led to the FDIC’s providing credits or grants on properties in
lieu of straight discounts. (See “Credits or Grants” later in this chapter.)
During fiscal year 1995, the FDIC appropriated program was significantly curtailed
because of the congressional rescission of $11.3 million of the $15 million originally
appropriated for that year. Since fiscal year 1995, the FDIC has maintained a limited
nonappropriated program.

Single-Family Program
The FDIC was dependent on congressional appropriations to fund its affordable housing programs. Because the appropriations were not sufficient to fund all the affordable
housing properties it received, the FDIC concentrated the available money on singlefamily properties where the funding needs were modest. From 1993 to 1995, the FDIC
sold 2,400 single-family units for a total sales price of $91.4 million, or 82.6 percent of
the appraised value.

Table I.15-3

FDIC Sales of Properties Eligible for the
Affordable Housing Program
($ in Thousands)

Year

Number of
Properties Sold

Number of
Units Sold

Single- MultiFamily Family

SingleFamily

MultiFamily

SingleFamily

MultiFamily

Appraised Value

Sales Price

Sales Price/
Appraised
Value (%)
Single- MultiFamily Family

1993

980

1,124

208

$49,440

$1,900

$41,566

$650

84.1

34.2

1994

681

808

228

37,381

3,299

30,920

1,223

82.7

37.1

1995

412

468

23,831

1,852

18,934

1,701

79.5

91.8

Totals/
Averages 2,073

2,400

$91,420 $3,574*

82.6

50.7

533 $110,652 $7,051

* The difference between the appraised value and the sales price is the appropriated subsidy.
Source: FDIC quarterly auction reports.

A F F O RD A B L E H O U S I N G PR O G R A M S

393

Property Eligibility
In the AHP, eligible single-family properties included residential properties with
appraised values less than or equal to the FHA mortgage loan limits for particular areas,
and they were subject to maximum statutory caps as shown below:
• One-family units/condos

$101,250

• Two-family units

$114,000

• Three-family units

$138,000

• Four-family units

$160,000

Upon acquiring marketable title to eligible properties and procuring the services of a
listing broker, the FDIC restricted the sale of those eligible properties to low- and moderate-income buyers for the first 180 days. Following that period, if the properties
remained unsold, they were made available to other interested buyers. Of the 4,121
properties available for sale through the AHP, the FDIC sold 58 percent to qualified
purchasers.
Notifications Through Clearinghouses
While conforming with FDICIA, the FDIC notified the appropriate state housing
finance agencies and the FHLBs concerning the availability of eligible properties so that
those clearinghouses could disseminate property information to prospective purchasers.7
Also, recognizing that some properties might ultimately sell for less than their appraised
value, a number of properties with appraised values exceeding the FHA mortgage loan
limits (or statutory caps) were also included on the FDIC’s list of available properties.
Qualified Purchasers
The FDIC defined a qualified purchaser as a household with an adjusted income of less
than 115 percent of the median income for the area in which the property was located,
indexed by the size of the household. Under the FDIC definition for the same geographic area, a household composed of five people would have a higher income qualification threshold than a household composed of two people. To verify qualified
purchasers, the FDIC used a certification process and required the submission of an
income qualification worksheet and supporting documentation.

7. U.S.Code, volume 12, section 1831q(c)(1).

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M A N A GI N G T H E C R I S I S

Credits or Grants
The FDIC made credits or grants available to qualified buyers for an aggregate amount
of up to 10 percent of the purchase price. Those subsidies, paid for entirely with
congressionally appropriated funds, were used in one or more of the following ways:
• As down payment assistance;
• For buying down mortgage points;
• For closing costs;
• For buyer counseling; or
• As direct discounts on purchases.
The subsidies were available during fiscal year 1993 until June 1994, when the FDIC
and RTC developed a buyer’s assistance package for a joint sales initiative. They adopted
the assistance package in the final months of fiscal year 1994 as the standard credits and
grants approach for the duration of the FDIC and RTC programs.
From the assistance package, qualified buyers could receive the greater of 3 percent
of the gross sales price or $1,500 toward customary closing costs. For third-partyfinanced sales, buyers received an additional 7 percent of the gross sales price toward
financing or closing-related costs for a total of 10 percent in buyer assistance. Sellerfinanced sales provided some alternative financing benefits designed to assist the purchaser. (The RTC was required by law to provide information regarding the availability
of seller financing to minority- and women-owned businesses and minority-sponsored
nonprofit organizations.)
Restrictions
Purchasers were subject to the same one-year occupancy requirement that the RTC
enforced. If a property was resold within one year from the settlement date, the
purchaser was required to remit 75 percent of any profit to the FDIC.
Existing Tenants
The FDIC offered existing tenants the opportunity to purchase their residences,
whether or not they were income-qualified, before offering them through the AHP marketing program. Only income-qualified existing tenants were eligible, however, for the
program’s credits or grants.

A F F O RD A B L E H O U S I N G PR O G R A M S

Auctions
The FDIC conducted seven affordable housing auctions. Each of those events involved
the active participation of local lenders, who provided financing for some of the sales.
Participating banks viewed their participation in those auctions as one facet of their
compliance with the Community Reinvestment Act; it allowed them an opportunity to
meet the credit needs and help provide housing to low- and moderate-income households in their community. The FDIC expended a great deal of effort and planning in
conducting those auctions. It gave particular attention to ensuring that all properties
were habitable and had marketable title. Also, the FDIC conducted buyer awareness
seminars for participants to ensure that each prospective purchaser understood the
house-buying process and the rules of the auction.
Donations
Occasionally, the FDIC acquired properties of nominal value that failed to sell under
established marketing procedures. When underlying holding and marketing costs were
taken into consideration, potential future benefits to the FDIC were further diminished.
In those instances, the FDIC often transferred title or otherwise donated properties, at
no cost, to a nonprofit organization or public agency, providing it demonstrated a commitment that the properties would be used for the public good.
The properties owned by the FDIC that qualified for conveyance included singlefamily and multi-family affordable housing, homeless shelters, transitional housing, day
care facilities for children of low- and moderate-income families, open urban spaces, and
assets used for nonprofit public purposes. When appropriate, the FDIC asked the
acquiring party to enter into a LURA to ensure the continued use of the property for the
public good. See exhibits I.15-3 and I.15-4 for comments regarding donated properties.

Multi-Family Program
In response to a Completion Act requirement to unify the FDIC and RTC programs,
the FDIC and RTC ratified a plan to merge the programs when feasible. That agreement, which was approved on April 22, 1994, provided a framework for the FDIC and
the RTC to coordinate their efforts and take advantage of the RTC’s multi-family marketing capabilities. The FDIC and RTC marketed certain FDIC owned multi-family
properties under the provisions of the RTC direct sale program. Marketing of the assets
was the joint responsibility of the FDIC and RTC, while management responsibility
for the properties remained with the FDIC. The joint effort was accomplished within
the limits of the appropriated funds available to the FDIC’s AHP.
Because of funding limitations, the FDIC conducted few multi-family sales through
the AHP. During fiscal years 1993 and 1994, it sold only two multi-family properties on

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M A N A GI N G T H E C R I S I S

a subsidized basis, while fiscal year 1994 brought just one subsidized sale, which was
conducted in cooperation with the RTC and the RTC’s TAAs. During 1994, because
the transactions were economically feasible without the use of a subsidy, the FDIC conducted six additional sales without the use of the appropriated funds. All nine properties
sold in 1993 and 1994 included units set aside for affordable housing. In fiscal year
1995, the FDIC conducted 10 additional subsidized sales. See exhibit I.15-5 for comments regarding a Multi-Family Program sale.
Public, Private, and Nonprofit Cooperation
The FDIC program made extensive use of public, private, and nonprofit sector partners
to leverage its limited resources. Involvement of those parties was evident in FDIC’s auctions, which included the participation by lenders, the Federal National Mortgage Association (Fannie Mae), and community groups. Another example of such cooperation
involved the Massachusetts Bankers Association and some of its affiliate members who
facilitated a donation through the Make-A-Wish Foundation, conveying an FDIC
affordable property to the family of a terminally ill child who had contracted the AIDS
virus. The child’s wish was for his family to finally own a home.
In early 1994, in New England, the FDIC initiated a pilot program of neighborhood revitalization and reinvestment. The program studied an urban area that had
experienced an economic downturn. Part of the effect of the downturn was the number
of foreclosed properties in that area owned by various institutional investors. As a result
of the study, the FDIC implemented initiatives such as a program in Holyoke,

Donations: How They Work to Provide Affordable Housing
Exhibit I.15-3
The Midwest Service Center donated a six-unit apartment building in Kansas City, Missouri,
under the FDIC’s Affordable Housing Program. The recipient was Mennonite Housing, a nonprofit organization established in 1978 for the purpose of rehabilitating property to provide
transitional housing to the homeless and permanent housing for very-low-income senior citizens. This was the second property donation arranged by the Midwest Service Center.
Source: FDIC HomeSteader, 3rd quarter, 1994.

Exhibit I.15-4
On August 1, 1994, the FDIC’s Southwest Service Center donated 18 distressed properties and
three vacant lots located in McKinney, Texas, to the Community Housing Fund, a nonprofit organization. The effort to accomplish these donations was spearheaded by Mary Williford of the
Affordable Housing Program department of the SWSC and Account Officer Marilyn Caldwell.
The Community Housing Fund rehabilitates and builds homes to meet the needs of the lowand moderate-income families throughout the United States.

A F F O RD A B L E H O U S I N G PR O G R A M S

Massachusetts, in which an effective partnership was forged between the FDIC management and the town’s debtors, municipal officials, other agencies, and bankers. They
worked together to facilitate the most cost-effective conveyance of collateral interests in
nominal value, multi-unit properties to the control of municipal authorities for disposition and development.
In Connecticut, the pilot program was instrumental in holding a statewide study
that culminated in legislation to charter revitalization zones and roll back various regulatory prohibitions to community development. The initiative was recognized by the
White House, which, in 1995, entered into a national partnership with the neighborhood revitalization zone effort in Connecticut. The pilot later was adopted throughout
the FDIC.

The Nonsubsidized FDIC Affordable Housing Program
The FDIC Affordable Housing Program under section 40 technically terminated on
September 30, 1995, because Congress did not appropriate funds to support the AHP
in fiscal 1996. However, as noted earlier, the FDIC has another statutory requirement
regarding affordable housing in section 123 of FDICIA, which regulates the FDIC’s disposition of assets when acting in its corporate, receivership, or conservatorship capacities. Section 123 directs the FDIC to conduct its asset disposition operations in a
manner guided by five factors, which include maximizing the preservation of the availability and affordability of residential real property for low- and moderate-income individuals.8 Through section 123, The FDIC implemented an affordable housing program
that could operate without an annual congressional appropriation, yet be consistent
with FDIC’s overall statutory responsibilities.

Key Dates
From the time FIRREA first established the RTC and FDIC affordable housing
programs, many changes and additions altered the programs. See exhibit I.15-6 for a
summary of affordable housing activity by key dates.

8. Section 40(m)(4) of the Federal Deposit Insurance Act, U.S. Code, volume 12, section 1831q(m)(4), provided
that the FDIC would not be liable to any depositor, creditor, or shareholder because the disposition of properties
in accordance with the requirements of section 40 affected the amount of return on such properties. The statutory
protection available under section 40 is not available for the non-appropriated program.

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M A N A GI N G T H E C R I S I S

Conclusion
Although some significant resolution and disposition policies of the RTC were severely
criticized, the Affordable Housing Disposition Program was widely viewed as an important redeeming feature of the government’s handling of the savings and loan crisis.
Congress implicitly stated that if taxpayers had to pay for the savings and loan cleanup,
then something positive, in this case a greater supply of low-income housing, should be
part of the package. During approximately five years of operation, the RTC
accomplished its mission in the area of affordable housing by providing 109,141 units to
very-low-, low-, and moderate-income households.
The success of the RTC’s AHDP, however, came at a high price, although the total
costs that resulted from implementing the program may never be known. As indicated
in the 1994 GAO study, the RTC had not maintained a database for recording all the
costs associated with the AHDP. For example, no means exists for estimating costs for
the effects of reduced pricing caused by the restrictions for targeted purchasers and the
effect on value associated with the LURAs. The conservative estimate in this chapter of
$135 million in added costs, compared to what disposition of assets would have cost
without an affordable housing program, does not include estimates for some of the
unrecorded AHDP costs. The added costs of RTC’s AHDP are not high when viewed in
relation to the total costs of the RTC as a whole, but may well be considered significant
when viewed within the smaller confines of the Affordable Housing Disposition Program itself. The RTC sold more than $2 billion in affordable housing units, compared
to the $402.6 billion in total assets that the RTC managed and sold.
As part of FDICIA, Congress appropriated funds for the FDIC to implement a
limited Affordable Housing Program. Initially, it appropriated $27 million for a threeyear period so that the FDIC AHP would not draw on deposit insurance funds. During

Exhibit I.15-5

Bobbie White House:
Serving Those in Need
The FDIC completed the sale of the property known as the Bobbie White House, located in Boston, Massachusetts, to the Citywide Land Trust for conversion into housing for people with substance abuse problems or AIDS. The Bobbie White House is a part of Victory Programs, Inc., a
Boston-based multi-service agency providing individualized treatment programs to people
recovering from alcohol and drug addiction, particularly those with medical and psychological
problems including AIDS and HIV. The residence is a wheelchair-accessible brick row house containing 13 studio apartments located in Boston’s South End.
Source: FDIC HomeSteader, 3rd quarter, 1994.

A F F O RD A B L E H O U S I N G PR O G R A M S

fiscal year 1995, the appropriation was reduced by $11.3 million, and the program was
effectively terminated. Although the overall size of the FDIC program was far smaller
than the RTC program, the FDIC used appropriated funds to accomplish the objective
set before it: to provide affordable housing to low-income families. The FDIC AHP provided housing for 2,933 lower-income households.
During the financial crisis of the 1980s and early 1990s, the RTC and FDIC were
presented with an unprecedented volume of residential real estate for disposition. Both
agencies took that unique opportunity to work diligently within regulatory guidelines
and restraints to maximize the number of properties that could be placed into the hands
of thousands of low-income households.

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M A N A GI N G T H E C R I S I S

Exhibit I.15-6

Affordable Housing Key Dates
August 1989

FIRREA required that the RTC develop a program for selling residential properties to provide affordable housing opportunities. In response to that provision, the RTC established the Affordable Housing Disposition Program.

January 1990

The RTC Oversight Board gave the RTC authority to implement a 100-unit
pilot program of single-family properties under the AHDP. Broad guidelines
for the program were established.

March 1990

The RTC Oversight Board issued a policy authorizing the RTC to use up to $6
million to purchase mortgage revenue bond commitments with state and
local housing agencies to finance single-family properties under the AHDP.
Over the following six months, the RTC negotiated mortgage revenue bond
commitments in 12 states for more than $200 million. The largest commitment was with the state of Texas. Those bond issues enabled AHDP purchasers to obtain below-market-rate financing to purchase single-family
properties.

July 1990

The RTC Oversight Board issued guidelines for the conveyance of properties
with no reasonable recovery value. Over the course of the RTC’s life, more
than 1,000 properties with no reasonable recovery value were made available to nonprofit and public agencies for public usage. Conveyance uses
ranged from homeless shelters in inner cities to bungalows in the Rio Grande
Valley made available to migrant workers for homeownership. No-cost conveyances in Ft. Worth, Texas, to the Liberation Community were highlighted
on the ABC television network national evening news on July 17, 1991.

August 1990

The AHDP Final Rule was published in the Federal Register. The issuance of
that rule marked the beginning of the AHDP. The RTC Texas office placed 200
multi-family properties for sale under the AHDP.

October 1990

The RTC Oversight Board gave the RTC the authority to sell AHDP properties
at 80 percent of appraised value (as opposed to the FIRREA mandated 95
percent of appraised value).

A F F O RD A B L E H O U S I N G PR O G R A M S

Exhibit I.15-6

Affordable Housing Key Dates
Continued
February 1991

The RTC issued seller financing guidelines authorizing low-down-payment
financing for single-family properties sold under the AHDP. Multi-family properties could be financed under the AHDP with 15 percent down payments.
The RTC held a national training seminar in Washington, D.C., in November
1991 and, over the next six months, held training events in 13 RTC field offices.

March 1991

Congress authorized the sale of single-family properties in the AHDP in conservatorships. Congress also authorized the sale of single-family properties
without regard to a minimum sale price. (Previously, 80 percent of appraised
value had to be achieved.)

June 1991

The RTC Oversight Board approved the RTC’s proposal to provide low-downpayment seller financing to nonprofit organizations and public agencies
under the program.

December 1991

FDICIA implemented the FDIC Affordable Housing Program subject to
receiving a congressional appropriation.

December 1991

The RTC issued its first repair policy providing that up to 25 percent of a property’s sale price (or $5,000, whichever is greater) could be spent on rehabilitation to bring the property up to code to meet lender-required repairs.

December 1991

Congress revised the AHDP to (1) permit direct negotiated sales of multifamily properties with nonprofit organizations and public agencies, and (2)
impose a one-year owner occupancy requirement for purchasers under the
AHDP. The National Housing Advisory Board was created as a forum for providing public input into the AHDP sales process.

May 1992

The first indictment for defrauding the AHDP was handed down to a broker
who helped straw buyers (otherwise eligible buyers who purchased property on behalf of non-eligible buyers) purchase under the program.

May 1992

The AHDP issued a revised rule for carrying out the provisions of the 1991
funding bill.

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M A N A GI N G T H E C R I S I S

Exhibit I.15-6

Affordable Housing Key Dates
Continued
May 1992

The RTC initiated its multi-family direct sale program implementing the program authorized in the 1991 funding bill.

July 1992

The RTC hired four firms to perform underwriting on multi-family seller
financed transactions.

October 1992

The FDIC received its first appropriation of $5 million to operate its program
during fiscal year 1993.

October 1992

The Housing Opportunity Hotline pilot was initiated in Texas with the lowerpriced single-family foreclosed properties of eight federal agencies. That
pilot pivoted off of the RTC’s successful model of using state housing agencies and Federal Home Loan Banks to serve as clearinghouses to provide
interested purchasers with single-family property lists. The Completion Act
expanded the pilot to all 12 FHLBs.

October 1992

A $100 million financing commitment was made by Fannie Mae to purchase
mortgages on multi-family properties sold under the AHDP.

January 1993

The RTC issued its Monitoring and Compliance Manual for monitoring the
long-term affordability of the AHDP. The RTC released a comprehensive
computer package for monitoring those properties. During 1992 and 1993,
the RTC held more than a dozen training events for its state monitoring
agencies and homeowners throughout the country.

February 1993

The RTC was authorized to broaden seller financing policy.

October 1993

The FDIC received a $7 million congressional appropriation for fiscal year
1994.

December 1993

The Completion Act directed that the RTC Affordable Housing Disposition
Program and the FDIC Affordable Housing Program be unified and that the
program take into consideration the experience of the RTC. Unification was
to occur in a manner that best achieved an effective and comprehensive
affordable housing program management structure.

A F F O RD A B L E H O U S I N G PR O G R A M S

Exhibit I.15-6

Affordable Housing Key Dates
Continued
October 1994

The FDIC received a $15 million congressional appropriation for fiscal year
1995.

November 1994

The RTC implemented certain provisions of the Completion Act, which
required that preferences be given to homeless providers who offered to
purchase commercial properties and who purchased certain real estate
owned for homeless housing and shelters. The RTC also established a preference for homeless providers who purchased certain commercial real
estate owned for offices and administrative purposes. RTC’s marketing literature was required to include narrative notifying potential buyers of the
applicability of those provisions. The RTC established additional procedures
to regularly notify homeless provider organizations of the current RTC
inventory.

December 1994

According to the RTC Final Rule, section 1609.12, published in the Federal
Register, October 19, 1994, the RTC had to list all of its single-family and condominium properties and multi-family properties with clearinghouses. The
RTC also formally implemented its direct sale program. It established two
30-day marketing periods for multi-family properties offered under the
direct sale program—an initial marketing period for public agencies and
another for nonprofit organizations. Later, the RTC combined those two
marketing periods into one 45-day period in which it marketed the property
simultaneously to both public agencies and nonprofit organizations. The
RTC was required by the Completion Act to provide information regarding
the availability of seller financing to minority- and women-owned businesses
and minority-sponsored nonprofit organizations.

August 1995

Congress rescinded $11.3 million of the FDIC AHP’s $15 million fiscal year
1995 appropriation, effectively terminating the program.

403

ore than $42 billion (almost 22
percent of the mortgages and more
than 10 percent of all of the RTC’s
assets) were sold through the RTC’s
securitization program.

CHAPTER 16

Securitizations

Introduction
In October 1990, one year after the Resolution Trust Corporation (RTC) was created, a
securitization program was established to facilitate the sale of mortgage loans. This
chapter focuses on the creation, development, and performance of this program.

Overview
Mortgage loans were the largest single category of assets in the RTC’s inventory. In
August 1990, the total volume of those loans held in RTC-controlled institutions was
estimated to be more than $34 billion. The size of this portfolio led the RTC to explore
the concept of securitization as a method for broadening the potential range of mortgage
loan purchasers because the market for mortgage-backed securities was large and well
developed.
Securitization is the process by which assets with generally predictable cash flows
and similar features are packaged into interest-bearing securities with marketable investment characteristics. Securitized assets have been created using diverse types of collateral,
including home mortgages, commercial mortgages, mobile home loans, leases, and
installment contracts on personal property. The most common securitized product is the
mortgage-backed security (MBS). The following types of mortgage loans are most suitable for securitization.

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M A N A GI N G T H E C R I S I S

Conforming Residential Loans
Conforming residential loans are single-family, performing (one-to-four family) mortgage loans that conform to Federal National Mortgage Association (Fannie Mae) and
Federal Home Loan Mortgage Corporation (Freddie Mac) guidelines and/or standards.
In 1997, these agencies had more than $3 trillion of outstanding mortgage securities
backed by conforming residential loans.
Nonconforming Residential Loans
Nonconforming residential loans are single-family, performing (one-to-four family)
mortgage loans that do not conform to Fannie Mae or Freddie Mac standards. Privatesector sellers and government agencies other than FDIC and RTC securitized more than
$159 billion of nonconforming mortgage loans between 1990 and 1997.
Multi-Family Residential and Commercial Loans
Multi-family residential and commercial loans are performing mortgages that secure residential (5+ family) and commercial properties. Although private-sector sellers securitized more than $135 billion of multi-family loans between 1992 and 1997, the market
for these securities is still evolving.
The RTC’s single-family mortgage loan portfolio was unique because most of the
loans did not conform to the standards required by Fannie Mae or Freddie Mac. Because
most of the RTC’s loans were originated for retention in the lender’s portfolio, some of
the loan underwriting criteria deviated from normal secondary market standards. For
example, there were loans with cross-collateralization, loans with nonstandard interest
rate indexes, loans with high loan-to-value ratios, loans with no mortgage insurance, and
many loans that had documentation deficiencies.
The RTC needed not only to maximize the return on its asset sales, but also to liquidate assets expeditiously. Early on, the most common method it used to move assets
quickly was to sell mortgage loans through “whole loan” sales. Three types of whole loan
buyers generally bid on these sales packages: (1) portfolio investors, (2) investment
bankers, and (3) junk buyers. The last two categories of buyers tended to heavily discount any product that could not be readily made into investment-grade quality. Portfolio investors usually did not discount as heavily as the investment bankers and the junk
buyers, if the portfolio generated sufficient yield, the loans were collectable, and the documentation was enforceable. Even though the RTC standardized the review process
implemented by its contractors for due diligence (a thorough review of the individual
loans or properties) and loan sale advisory services, the mortgage loans it held suffered
from credit and delinquency problems and document deficiencies. Consequently, most
buyers of RTC mortgage loan packages tended to be investment bankers and junk
buyers. As a result, the RTC was not generating the return it expected on its whole loan

S E C U R I T I Z A T I O NS

sales. Returns were often in the 85 percent to 90 percent of book value range for
performing residential mortgage loans.
One of the RTC’s most successful whole loan sales took place in the summer of
1990. That sale was referred to as the Atlanta Pilot program, in which $17 billion of residential mortgage loans were sold for prices ranging from 93 percent to 99 percent of
book value. Within months of the Atlanta Pilot program sale, officials at the RTC
received calls from Fannie Mae and Freddie Mac about origination standards for various
thrift institutions that were in the RTC conservatorship program. It was discovered that
many of the loans that were sold in the Atlanta Pilot program had documentation deficiencies that were subsequently corrected by the purchaser. These corrections changed
the status of the loans from nonconforming to conforming, and enabled the purchaser
to submit the corrected loans for resale to Fannie Mae and Freddie Mac. Loans that were
conforming except for the loan balance were subsequently resold to investors through
private securitization programs. In both instances, when the loans were resold, the original purchasers received prices significantly higher than the original purchase price.
These events made it clear that the RTC could receive higher prices by leaving out the
intermediary. As a result, the RTC began to correct documentation deficiencies itself in
order to sell loans directly to Fannie Mae and Freddie Mac. When that was not possible,
the RTC sold loans through its own securitization program.

RTC Agency Swap Program
In October 1990, the RTC Oversight Board adopted a resolution that encouraged the
RTC to use securitization as a method of disposition for financial assets. The board also
directed the RTC to establish a single procedure for facilitating the securitization of
mortgage loans from multiple receivership and conservatorship institutions. In November 1990, the RTC executed “master” agreements with Fannie Mae and Freddie Mac,
thereby enabling the RTC to sell conforming loans directly to the agencies.
Both Fannie Mae and Freddie Mac are government-sponsored entities that purchase
conforming residential mortgage loans from originators and other sellers, package such
mortgage loans into more liquid securities (such as mortgage-backed securities and
participation certificates), add a guarantee of payment of principal and interest, and sell
the securities to investors. An investor in a Fannie Mae or Freddie Mac security receives
guaranteed monthly payments of principal and interest that are generated by the mortgage loans underlying the security. Fannie Mae and Freddie Mac receive a fee from the
mortgage loan seller for guaranteeing the principal and interest payments to the investor,
and also earn interest income on the delay between receipt of principal and interest from
mortgagors and payment to the security investors.
Under the RTC’s Agency Swap Program, the RTC sold for cash, or swapped, for
Fannie Mae or Freddie Mac securities, $6.1 billion of conforming residential mortgages in competitive auctions. In a typical cash sale, Fannie Mae and Freddie Mac bid

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M A N A GI N G T H E C R I S I S

to purchase pools of mortgage loans from the RTC for a cash price that is usually
determined by calculating the amount that Fannie Mae or Freddie Mac received on
the sale of their securities created from such pools, minus their guarantee fee and other
costs. In a swap, the RTC received the Fannie Mae or Freddie Mac securities in
exchange for the mortgage loans and then, with the assistance of Fannie Mae or
Freddie Mac, sold such securities from the RTC's capital markets trading desk.
For both cash sales and swaps, the Fannie Mae and Freddie Mac master agreements
required that the RTC supply credit enhancement for the mortgage loans in the form of
cash collateral withheld from the purchase price by either Fannie Mae or Freddie Mac.
The cash collateral was invested for the benefit of the RTC and then returned to the
RTC when certain criteria were met. In addition, under the Swap Program, the RTC
also competitively bid and sold to servicing firms the servicing rights associated with the
underlying mortgage loans.

RTC Private Securitization Program
In December 1990, a private securitization program was established to sell the loans that
did not conform to Fannie Mae and Freddie Mac standards. This program was established with the following expectations:
1. Enhanced Asset Recovery Values—Securitization should enable the RTC to
reach a much larger base of investors. The market for whole loan sales was
significantly smaller than the market for investors in mortgage-backed securities.
As a result, private-market participants estimated that securitization should
enable the RTC to increase recovery values, as compared to whole-loan sales,
from 0.5 percent to 1 percent for better quality loans and from 2 percent to 10
percent for lower quality loans. The increase in recovery values translated to an
additional $1 billion to $3 billion for taxpayers.
2. Expedited Asset Sales—The securitization process also should enable the RTC to
close loan sale transactions more quickly. In a whole loan sale, the purchaser
required 6 to 12 weeks between the sale date and the closing date to engage in its
own detailed loan file review, in order to verify the due diligence information
prepared by or on behalf of the RTC. In a securitized loan sale, the purchasers of
the securities did not need to perform a second detailed loan file review, but
instead relied on the credit enhancement’s making it possible to close within two
to three weeks after the sale.
In 1990, the RTC would have preferred to issue securities backed by the full faith and
credit of the U.S. government. This feature would have expanded the “universe” of
investors, including foreign buyers. Foreign governments would not need to issue a special ruling to make RTC securities eligible investments for mutual funds, because an

S E C U R I T I Z A T I O NS

RTC government-guaranteed security would probably fit the existing exemption available for Government National Mortgage Association (Ginnie Mae) securities. A direct
guarantee would also enable regulated buyers such as banks and thrifts to be subject to
markedly lower risk-based capital requirements. With a direct government guarantee,
RTC securities would have a zero-risk weight, which is similar to the risk weighting for
Ginnie Mae securities.
The RTC’s Oversight Board did not support the RTC’s issuance of securities backed
by a full government guarantee. That lack of support stemmed partly from concerns
raised by the Department of the Treasury that (1) the government would retain all of the
risk because there was no real asset sale, and (2) issuing a new security with a full faith
and credit guarantee by the U.S. government would compete with the securities issued
by the Treasury. As a result, the RTC did not use a government guarantee to enhance the
credit of RTC securities. Instead, the RTC decided to use cash reserves and other methods to provide credit support. It issued publicly rated mortgage-backed securities for
which the senior securities were rated in the two highest rating categories by at least two
national credit rating agencies.
Another major issue concerning the RTC’s securitization program was personal
liability. Under the Securities Act of 1933, directors, officers, employees, and “controlling persons” of a private corporation may be personally liable for errors or omissions in
a prospectus used to offer and sell securities. Some of the RTC board members were
concerned that they would be sued by investors who purchased RTC securities. The
board obtained a legal opinion stating that RTC directors, officers, and employees have
a strong case for immunity from such personal liability, pursuant to the Federal Tort
Claims Act (FTCA). However, certain ambiguities in the FTCA make it impossible to
render a flat “no liability” opinion. Thus, the securitization program could not begin
until the issue of personal liability was addressed through legislation. In the RTC Funding Act passed in 1991, the U.S. Senate included a provision that provided absolute
immunity from claims based on the 1933 Securities Act, and granted authority to the
agency to indemnify employees against common law and other liabilities that were
awaiting action by the Supreme Court.
The passage of this legislation enabled the RTC to issue securities. In March 1991,
the RTC Board of Directors authorized the filing with the Securities and Exchange
Commission of a shelf registration statement (the RTC Shelf) for the issuance and sale
of mortgage securities backed by residential loans from one or more RTC institutions.
The board also authorized the RTC staff to use competitive procedures to select privatesector firms necessary to implement the securitization of mortgage loan sales. To further
encourage the use of securitization as a primary method for asset sales, then-FDIC
Chairman L. William Seidman announced that the RTC would sell at least $1 billion
per month using the securitization sales structure.

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Securitization Process and Participants
The mortgage loan securitization process of creating a trust to acquire mortgages and
issue pass-through certificates to investors typically involves seven key participants.
These participants are the seller, underwriter, trustee, servicer, rating agency, accountant,
and legal counsel.
The seller is the owner of the mortgage loans sold to the trust and the ultimate beneficiary of the proceeds from the sale of the certificates to investors. The seller may provide some form of guarantee or credit support to enhance the value of the bonds. The
seller will also usually provide certain representations and warranties related to the mortgage collateral.
The underwriter receives individual mortgage loan information, analyzes and structures the portfolio into multiple classes of certificates of varying maturities and interest
rates, and underwrites (purchases) the securities from the seller. The underwriter then
resells the certificates to investors.
The trustee represents the interests of the certificate holders and acts as administrator of the trust. The primary role of the trustee is to compute the amount of monthly
distributions payable to the investors and make appropriate distributions. Each month,
an account statement is prepared by the trustee that summarizes the cash received by the
trust and explains the calculation of the amounts paid to the investors of each class of
securities. The trustee is usually responsible for the preparation of the trust’s income tax
return and the related informational tax filings. The trustee for publicly rated securities
must provide backup servicing for the securitized loans in case the appointed servicer is
unable to service the loans. The trustee must also make advances for delinquent mortgage payments if the primary servicer fails to do so. For this reason, the trustee must
have an unsecured debt or deposit rating of no more than one full rating level below that
of the securities issue (that is, if the RTC issues double A rated securities [AA], the
trustee must have an unsecured debt or deposit rating of single A [A]).
The servicer performs the traditional mortgage loan servicing functions of collecting
and accounting for borrower’s payments and resolving delinquent loans. The servicer
prepares special reports for the trustee and forwards the monthly mortgage collection
payments to the trustee so that investors in the securities may be paid. The servicer also
transmits funds and special reports to the trustee.
Rating agencies evaluate the transaction structure, the underlying pool of assets, and
the expected cash flows, and determine the extent of loss protection that should be provided to investors through various forms of credit enhancement. Securitization transactions typically involve the use of credit enhancement to create securities that have a very
high level of credit quality. To achieve the highest ratings from the national credit rating
agencies, mortgage-backed securities must satisfy cash flow, delinquency, and loss coverage tests that make default almost impossible. The rating agencies have developed loan
loss models to estimate the required level of loss protection for a securitized mortgage
loan pool. They use the Great Depression as a benchmark to estimate the level of losses

S E C U R I T I Z A T I O NS

that may occur if a mortgage pool is subjected to stressful economic conditions. Cash
flow scenarios are run that subject a pool of mortgages to “stress tests” for which losses
and delinquencies are assumed to be two to three times greater than the losses experienced in the Great Depression. The rating agencies monitor the performance of the
transaction over time and adjust credit ratings as appropriate.
An accounting firm performs initial statistical data and accounting validation. The
firm also provides “comfort letters” to underwriters and investors verifying the accuracy
of information printed in the prospectus supplement to the securities offering.
Legal counsel writes and reviews all materials (including the prospectus and the prospectus supplement in the case of publicly offered certificates) related to the offering of
the securities. Counsel also must ensure that the certificates and the underlying mortgage loans satisfy Real Estate Mortgage Investment Conduit (REMIC) eligibility
requirements. In addition, legal counsel prepares the pooling and servicing agreement
and negotiates the terms of the agreement on behalf of the seller, servicer, and trustee.
Counsel also oversees the process of closing the transaction and ensures that all necessary
documentation is prepared and executed.

Transaction Structure
RTC mortgage loans are conveyed to a trust that subsequently issues a series of mortgage-backed securities collateralized by the subject loans. These transactions constitute
the sale of the beneficial interest in the loan portfolio. Almost all mortgage-backed securities are either guaranteed by a government-sponsored entity (Fannie Mae, Freddie
Mac, or Ginnie Mae), or rated by national credit rating agencies (Standard & Poor’s
Rating Services, Moody’s Investors Services [Moody’s], Duff & Phelps Credit Rating
Co., or Fitch Investors Services, L.P.) on the basis of private credit enhancement. The
Oversight Board of the RTC authorized the RTC to use various types of credit enhancement: mortgage pool insurance, bond insurance, bank letter of credit, reserve fund or
spread account, overcollateralization, and senior-subordinated structures.
Because of the cost and difficulty of obtaining third-party credit enhancement (such
as bond insurance, pool insurance, and letters of credit), most private-market mortgage
securitization transactions use some form of internal credit enhancement (for example,
overcollateralization, reserve funds, spread accounts, or senior subordinated structures).
The RTC used a number of sources for credit support, including cash reserve funds,
subordination, excess interest, and overcollateralization. Table I.16-1 illustrates the
structure of a typical RTC securitization transaction using a combination of a cash
reserve fund, subordination, and excess interest as credit enhancements.

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Cash Reserve Funds
For each transaction, cash reserves were funded by the RTC out of the proceeds of the
offering. The funds were held in accounts by a collateral security agent, generally the
same entity as the trustee, and were invested in cash and securities that met the credit
rating agencies’ definition of eligible investments. The reserve fund serves as the
primary and most liquid source of credit support. It is used to protect investors against
all shortfalls and losses, regardless of the cause. The reserve funds cover items such as
delinquent principal and interest, interest rate shortages, and realized losses on
liquidation of assets. The example in table I.16-1 required a $296 million cash reserve
or 26 percent of the mortgage loan’s unpaid principal balance.

Table I.16-1

RTC Securitization Transaction
1994-C1
($ in Millions)
Mortgage Loans
Number of Loans
Number of Financial Institutions
Unpaid Prinicpal Balance

2,117
238
$1,138

Cash Reserve Fund Balance
26% of Unpaid Principal Balance

$296

Bond Classes
Rating:
AAA
AA
A
BBB
BB
B

$740
57
102
68
125
46
$1,138

Interest Rate (%)
Mortgage Loan (WAC)*

9.45

Security (WAC)*

7.45

Excess
* Weighted Average Coupon
Source: FDIC Division of Resolutions and Receiverships.

2.0

S E C U R I T I Z A T I O NS

Subordination
RTC securitization transactions contained one or more subordinate classes. Subordination provides protection to the senior certificate holders by requiring that the junior
certificate holders absorb any shortfalls and losses until the balances are reduced to zero.
Generally, once a senior class of security holders has been paid in full, principal
payments are re-allocated to pay down junior classes of security holders. This feature
preserves the integrity of each transaction and the intention that all senior classes have
priority of payment over the junior classes.
Excess Interest and Overcollateralization
Excess interest is defined as the difference between the interest rate paid to investors by
the security and the interest rate on the underlying mortgage loans. In most RTC transactions, excess interest is used to accelerate the payment of the subordinate security
classes. At the beginning of the transactions, there were significant amounts of excess
interest on RTC securitizations. In some cases, the excess interest is used to replenish the
reserve fund to a certain level before it is distributed to security holders. The result of
using excess interest to retire class balances is that the principal balance of the outstanding securities is reduced relative to the mortgage pool, thus creating overcollateralization.
Such overcollateralization provides an added cushion against losses above the reserve
fund and subordination. Because excess interest is applied to the subordinate classes,
depending on the prepayment experience and the interest rate environment, the prepayment of the subordinate classes may be accelerated. In some instances, the subordinate
classes may pay down at an accelerated rate, some at faster rates than the senior classes.
Changes in the interest rate environment may affect the amount of excess interest available to pay down securities. In a low-rate environment, higher coupon loans (which
produce the greatest amount of excess interest) prepay at faster speeds, thus reducing the
pool’s ability to generate excess interest and slowing the buildup of overcollateralization.
In a stable- to high-rate environment, prepayments are slower, thus allowing the securities to generate excess interest and build up overcollateralization. The flow of funds in a
typical securitization transaction is shown in table I.16-2.
Residuals
The residual cash flow represents the difference between the income stream generated by
a pool of mortgages and the cash flow necessary to fund a series of collateralized
mortgage obligations or real estate trust bonds. Residual value is the economic value or
money received by the bondholder of a transaction when the bonds have been paid off
and cash flows from the mortgage collateral are still being generated. Residual value also
arises when the proceeds amount from the sale of the mortgage collateral as whole loans
is greater than the amount needed to pay outstanding bonds.

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Table I.16-2

RTC Securitization—Flow of Funds

Borrower

Makes monthly
payment of principal
and interest.

Master
Servicer

Trustee/
Custodian

Collects monthly
payments.

Holds certificate
account before
distribution date.

Holds or forwards
payments to eligible
accounts.

Makes payment to
investors.

Tracks payment status
on each loan.

Holds mortgage note
and security
documents.

Advances delinquent
payments on behalf of
borrowers.

Holds and draws on
reserve fund.

Pursues delinquent
borrowers, handles
foreclosures and
liquidations of real
estate owned.

Advances on behalf of
master servicer, if
necessary.

Reports on pool to
trustee, investors, and
the RTC.

Maintains certificates
register.

Monitors payments of
taxes and insurance by
borrowers.

Oversees master
servicer’s performance.

Files insurance claims
if insured loans
default.

Represents interest of
all certificate holders.

Performs tax reporting
for trustee and
investors.

Holds and reinvests
reserve fund amounts,
pays out excess to the RTC.
Calculates payments to
certificate holders.

Source: Lehman Brothers Completed Transactions Book, Security Series 1991-1 (July 1991).

Investors
in
Certificate

S E C U R I T I Z A T I O NS

The First Transaction—Residential Securitization
In June 1991, the RTC began its securitization program with the issuance and sale of
RTC Series 1991-1. This transaction consisted of $426 million of residential loans that
were originated and serviced by Columbia Savings and Loan Association, Beverly Hills,
California, and were nonconforming to Fannie Mae or Freddie Mac standards. The
portfolio consisted of adjustable rate mortgage (ARM) loans that were tied to either sixmonth Treasury bills (T-bills) or the one-year constant maturity Treasury (CMT) index.
The six-month Treasury-indexed loans were adjusted monthly, and the one-year CMT
loans were adjusted on a six-month or an annual basis.

Securitization
During the structuring process for the first RTC securitization transaction, the issue of
whether to include delinquent loans (loans for which payments were more than 30 days
late) in the pool arose. The industry standard is to exclude delinquent loans when forming a collateral pool for any new offering of mortgage securities. This practice exists
because the rating agencies require much higher credit enhancement levels for delinquent loans and diverging from this practice might make the securities appear less
attractive to investors. The concern was that there would be a tremendous pricing
concession associated with the inclusion of these loans, in addition to a substantial
increase in the reserve fund. The underwriter for 1991-1 conducted a sensitivity analysis
to determine the impact of including delinquent loans. The analysis used a “delinquency
pricing concession” to estimate the above-market level yield premium that would be
demanded by investors to compensate for the inclusion of those loans in the pool. As a
result of the analysis, which valued the pricing concession at 0.05 percent, the RTC
decided to include loans that were up to 89 days delinquent in the sale pool. This was
the first time mortgage-backed securitization transactions had included delinquent
loans.
There were six classes, or tranches, of security certificates, one for each of the three
interest rate indexes represented in the loan portfolio and one interest-only (IO) strip for
each of these indexes. These certificates were rated AA by two credit rating agencies. The
loss coverage requirement (cash reserve) determined by the rating agencies was 12 percent in order to issue AA-rated securities. Table I.16-3 illustrates the classes of securities
that were issued in securitization series RTC 1991-1.
The underwriter and the financial adviser reviewed various credit enhancement
options and recommended the use of a reserve fund. They determined that the reserve
fund credit enhancement structure would result in the best combination of favorable
execution of the sale of the certificates, limited recourse to the RTC, and maximization
of net proceeds.

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Table I.16-3

RTC Residential Mortgage Loan Pass-Through Certificates
Series 1991-1
Loan Group A-1

Loan Group A-2

Loan Group A-3

6 month bond equivalent
yield T-bill
(rate adjusted monthly)

1 year CMT
(rate adjusted semiannually)

1 year CMT
(rate adjusted annually)

$380 million
Class A-1

$43 million
Class A-2

$38.5 million
Class A-3

IO
Class X-1

IO
Class X-2

IO
Class X-3

Note: The residual and the IO strips were retained by the RTC as receiver of Columbia Savings and Loan
Association, Beverly Hills, California.
Source: Prospectus supplement for RTC 1991-1.

The AA rated securities (tranches A-1, A-2, and A-3) on RTC Series 1991-1 were
sold at a price of 100.50 percent, 100.75 percent, and 100.75 percent, respectively. All
expenses were deducted from the gross sales proceeds. Expenses included, but were not
limited to, the following items: (1) underwriters’ fees; (2) due diligence fees; (3)
accounting fees; (4) printing fees; (5) rating agency fees; (6) trustee expenses; (7) financial adviser fees; and (8) a cash reserve fund. Expenses for this transaction were approximately $3.5 million, so that the securitization generated net sales proceeds of $425.3
million on $426 million in residential loans.
Subsequent RTC securitization transactions were structured in a manner similar to
the first transaction except for two major differences: (1) the mortgage loans that were
used as collateral for later transactions were originated and serviced by multiple RTC
conservatorship and receivership institutions, as opposed to one institution, and (2) a
cross-index structure was used. In a cross-index structure, the interest rate paid to investors is not tied to any of the interest rates on the underlying collateral (mortgage loans).
The RTC frequently issued securities bearing an interest rate tied to the London Interbank Offered Rate (LIBOR) when the interest rates on the underlying mortgage loans
were tied to U.S. Treasury indexes or cost of funds indexes.1 Use of the LIBOR index
allowed international investors to easily purchase RTC securities, because the securities
were based on a familiar and frequently used interest rate index. International investors
in LIBOR-based RTC securities were able to match their cost of lending to their cost of
funds, thereby boosting international secondary market acceptance of these securities.
1. LIBOR is the interest rate in London that offers “Eurodollars” in the capital markets worldwide. The cost of
funds indexes represent the monthly weighted average cost of funds for depository institutions whose home offices
are in various Federal Home Loan Bank districts.

S E C U R I T I Z A T I O NS

Securities issued with cross-index structures created a basis-risk concern for the
rating agencies. Basis-risk occurs when securities are issued on the basis of a single index
while being supported by a collateral pool containing varying indexes. This situation
creates the risk that the interest to be paid on the securities will exceed the net interest
received on the collateral, thus resulting in a payment shortfall. The rating agencies used
very conservative assumptions based on historical index movements to ensure that there
was enough credit support available to investors to cover this risk. In some of the RTC
securitization transactions, this risk was covered in two ways: by requiring that additional money be added to the cash reserve fund and by using excess interest payments to
accelerate the paydown of classes that were subject to basis-risk.
By October 1991, the RTC completed 12 residential and multi-family securitization transactions totaling more than $5 billion. In the four months since the program’s
first sale, the RTC had become one of the largest issuers of mortgage backed securities;
the volume of mortgage securities issued was exceeded only by Fannie Mae and
Freddie Mac. Before its termination in December 1995, the RTC would complete 45
residential securitization transactions totaling $25 billion. The RTC mortgage-backed
securities were an important component of the overall portfolio of securities traded in
the secondary markets of the United States and Europe.

Commercial Securitization
The RTC has been credited with expanding and educating the marketplace by creating
unique and complex securitization structures to sell its commercial mortgage loans. In
the past, securitization structures had been used to sell performing residential mortgage
loans rather than commercial mortgages because commercial mortgages were perceived
to be riskier because of the lack of homogeneity in loan term, size, and structure. The
securitization of commercial loans evolved from a $6 billion market in 1990 to an $80
billion market in 1997. The commercial securitizations that were completed before
1990 were private placements issued by commercial banks and life insurance companies.
Structures were simple, involving the issuance of one or two tranches of rated certificates
that were secured by one or several commercial properties. Because the collateral
involved o

Full text of Managing the Crisis : The FDIC and RTC Experience, 1980-1994 : Volume One : History

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