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OHIO SAVINGS AND LOAN CRISIS AND COLLAPSE
OF ESM GOVERNMENT SECURITIES , INC .

HEARING
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON
GOVERNMENT OPERATIONS
HOUSE OF REPRESENTATIVES
NINETY-NINTH CONGRESS
FIRST SESSION

APRIL 3, 1985

Printed for the use of the Committee on Government Operations

U.S. GOVERNMENT PRINTING OFFICE
50-923 O

50-923 0-85--1

WASHINGTON : 1985

COMMITTEE ON GOVERNMENT OPERATIONS
JACK BROOKS, Texas, Chairman
FRANK HORTON, New York
DON FUQUA, Florida
JOHN CONYERS, JR., Michigan
THOMAS N. KINDNESS, Ohio
ROBERT S. WALKER, Pennsylvania
CARDISS COLLINS, Illinois
WILLIAM F. CLINGER, JR., Pennsylvania
GLENN ENGLISH, Oklahoma
ALFRED A. (AL) MCCANDLESS, California
HENRY A. WAXMAN, California
LARRY E. CRAIG, Idaho
TED WEISS, New York
HOWARD C. NIELSON, Utah
MIKE SYNAR, Oklahoma
JIM SAXTON, New Jersey
STEPHEN L. NEAL, North Carolina
PATRICK L. SWINDALL, Georgia
DOUG BARNARD, JR., Georgia
THOMAS D. (TOM) DELAY, Texas
BARNEY FRANK, Massachusetts
DAVID S. MONSON, Utah
TOM LANTOS, California
ROBERT E. WISE, JR., West Virginia
JOSEPH J. DIOGUARDI, New York
BARBARA BOXER, California
JOHN G. ROWLAND; Connecticut
SANDER M. LEVIN, Michigan
RICHARD K. ARMEY, Texas
MAJOR R. OWENS, New York
JIM LIGHTFOOT, Iowa
JOHN R. MILLER, Washington
EDOLPHUS TOWNS, New York
JOHN M. SPRATT, JR. , South Carolina
JOE KOLTER, Pennsylvania
BEN ERDREICH, Alabama
GERALD D. KLECZKA, Wisconsin
ALBERT G. BUSTAMANTE, Texas
MATTHEW G. MARTINEZ, California
WILLIAM M. JONES, General Counsel
JOHN E. MOORE, Staff Administrator
STEPHEN M. DANIELS, Minority Staff Director and Counsel

COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE
DOUG BARNARD, JR., Georgia, Chairman
LARRY E. CRAIG, Idaho
JOHN M. SPRATT, JR., South Carolina
PATRICK L. SWINDALL, Georgia
JOE KOLTER, Pennsylvania
JIM SAXTON, New Jersey
BEN ERDREICH, Alabama
ALBERT G. BUSTAMANTE, Texas

EX OFFICIO
JACK BROOKS, Texas

FRANK HORTON, New York
PETER S. BARASH, Staff Director
DONALD P. TUCKER, Chief Economist
STEPHEN R. MCSPADDEN, Counsel
JAMES M. PATES, Counsel
(II)

7723

CONTENTS

Page
1
Hearing held on April 3, 1985 .....
Statement of:
Baker, Linda, Schreiber-, finance director, city of Pompano Beach, FL ....... 653
Barnard, Hon. Doug, Jr., a Representative in Congress from the State of
Georgia, and chairman, Commerce, Consumer, and Monetary Affairs
1
Subcommittee: Opening statement
Batties, Tom, chief deputy superintendent and general counsel, Ohio
174
Division of Savings and Loans
Beason, Donald R., president and chief executive officer, Financial Insti332
tutions Assurance Corp. of North Carolina ...........
Bulman, Paul E., commissioner of banks, Commonwealth of Massachusetts .........
422
Brown, Charles H. , Jr., director, Division of Savings and Loan, State of
377
Maryland..............
Burns, James L., Jr., executive vice president, the Co-operative Central
356
Bank, Boston, MA
7
Celeste, Richard F., Governor, State of Ohio
198
Gray, Edwin J., Chairman, Federal Home Loan Bank Board ........
Hathaway, Pamela A., executive vice president, Pennsylvania Savings
Association Insurance Corp .....
312
Hogg, Charles C. , II, president, Maryland Savings-Share Insurance Corp ... 304
240
Horn, Karen N., president, Federal Reserve Bank of Cleveland ......
55
Hunsche, Donald, executive vice president, Ohio Deposit Guarantee Fund .
King, George C., administrator, savings and loan division, North Carolina
383
Department of Commerce .... .........
347
Lapidus, Leonard, executive vice president, Mutual Savings Central Fund
Luken, Hon. Thomas, a Representative in Congress from the State of
Ohio ................
47
McEnteer, Ben, secretary, department of banking, Commonwealth of
403
Pennsylvania .....
Martin, Preston, Vice Chairman, Board of Governors, Federal Reserve
230
System
673
Neild, William E., mayor, city of Beaumont, TX ……………………………..
Oakar, Hon. Mary Rose, a Representative in Congress from the State of
49
Ohio ....
Selby, H. Joe, Senior Deputy Comptroller for Bank Supervision, Office of
257
........
the Comptroller of the Currency.
Shad, John S.R. , Chairman, Securities and Exchange Commission, accompanied by Charles Harper, associate regional administrator, Miami
438
Branch Office, and Dan Goelzer, general counsel .
Tew, Thomas, attorney, Finley, Kumble, Wagner, Heine, Underberg,
Manley & Casey, equity receiver over ESM companies, accompanied by
481
Laurie S. Holtz, C.P.A., Holtz & Co. , Miami, FL..
Wylie, Hon. Chalmers P., a Representative in Congress from the State of
32
Ohio ......
Letters, statements, etc., submitted for the record by:
Baker, Linda, Schreiber-, finance director, city of Pompano Beach, FL:
660-672
Prepared statement ............
Beason, Donald R., president and chief executive officer, Financial Institutions Assurance Corp. of North Carolina: Prepared statement ........... 334-346
Brown, Charles H., Jr., director, Division of Savings and Loan, State of
............. 379-382
Maryland: Prepared statement ...
(III)

IV

Page
Letters, statements, etc., submitted for the record by-Continued
Bulman, Paul E., commissioner of banks, Commonwealth of Massachu424-428
setts: Prepared statement .............
Burns, James L., Jr., executive vice president, the Co-operative Central
........... 360-367
Bank, Boston, MA: Prepared statement ..
Celeste, Richard F., Governor, State of Ohio: Attachments to prepared
10-17
statement ......
Gray, Edwin J., Chairman, Federal Home Loan Bank Board:
297
Information concerning $8 million loss ...
202-230
Prepared statement ...
Hathaway, Pamela A., executive vice president, Pennsylvania Savings
.... 317-331
Association Insurance Corp.: Prepared statement
Hogg, Charles C. , II, president, Maryland Savings-Share Insurance Corp.:
307-312
Prepared statement .
Horn, Karen N., president, Federal Reserve Bank of Cleveland: Prepared
243-257
statement ......
Hunsche, Donald, executive vice president, Ohio Deposit Guarantee Fund:
60-173
Prepared statement ...............
King, George C., administrator, savings and loan division, North Carolina
385-402
Department of Commerce: Prepared statement ...
Kolter, Hon. Joe, a Representative in Congress from the State of Pennsyl6
vania: Opening statement ............
Lapidus, Leonard, executive vice president, Mutual Savings Central
349-356
Fund: Prepared statement .........
McEnteer, Ben, secretary, department of banking, Commonwealth of
.... 406-421
Pennsylvania: Prepared statement ................
Martin, Preston, Vice Chairman, Board of Governors, Federal Reserve
233-239
System: Prepared statement .......
Neild, William E., mayor, city of Beaumont, TX: Prepared statement ..... 677-687
Oakar, Hon. Mary Rose, a Representative in Congress from the State of
Ohio:
Article from the Wall Street Journal entitled "Bank Board Chairman's Cool Initial Response to Ohio Crisis Linked by Some to GOP
Politics"
53
March 18, 1985, letter to Chairman Gray, Federal Home Loan Bank
52
Board, re Federal deposit insurance
Selby, H. Joe, Senior Deputy Comptroller for Bank Supervision, Office of
.... 261-282
the Comptroller of the Currency: Prepared statement .
Shad, John S.R. , Chairman, Securities and Exchange Commission: Pre443-470
pared statement ............
Tew, Thomas, attorney, Finley, Kumble, Wagner, Heine, Underberg,
Manley & Casey, equity receiver over ESM companies: Prepared state....... 498-652
ment .....
Wylie, Hon. Chalmers P., a Representative in Congress from the State of
...... 35-42
Ohio: Prepared statement ....
APPENDIXES
Appendix 1.-Private deposit insurance systems .....
A. Summary chart, characteristics of State/private insurance funds as
of April 1, 1985 .........
B. Survey of State/private insurance funds
1. March 20, 1985, questionnaire to State/private deposit insurance
funds regarding policies, operations, and powers .......
2. Questionnaire responses
C. June 12, 1985, letter to Subcommittee Chairman Barnard from Federal Reserve Board Chairman Volcker, regarding discount lending
to nonfederally insured depository institutions from January 1980
to June 1985 ..........
Appendix 2.- National Association of Securities Dealers (NASD) documents
concerning ESM Securities, Inc. , and Ronnie R. Ewton ......
A. NASD board of governors decision in re: District Business Conduct
Committee v. Hibbard & O'Connor Securities, Inc., dated October
23, 1975 ............
B. ESM's broker-dealer application to NASD (excerpts), dated November
19, 1975 .............

691
691
696

696
706

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1049

1049
1066

V

Page
Appendix 3.-The SEC investigation of ESM Government Securities, Inc.,
1977-81 ...............
A. Amended SEC order of investigation, dated January 10, 1978.
B. Text of SEC v. ESM Government Securities, Inc., (U.S. Fifth Circuit
Court of Appeals), dated May 18, 1981 ......
Appendix 4.-The SEC investigation of American Bancshares, Inc., 1978-81 .....
A. Letter from Daniel L. Goelzer, general counsel, SEC, to Hon. Doug
Barnard, Jr., dated June 12, 1985.
B. SEC internal memo, "Telephone conversation with Louis Frank,
OCC, re American Bancshares," dated July 13, 1978 ...........
C. SEC order of investigation, dated November 28, 1978 ...........
Appendix 5.-The SEC investigation of Marvin Warner's proxy fight with
.......
Century Banks, Inc., 1981-82 ......
A. Letter from Steven W. Arky to Gary Lynch, Assistant Director of
Enforcement, SEC, dated October 12, 1981.
B. Lynch's response letter, dated October 20, 1981 ..........
Appendix 6.-The SEC's investigation of Home State Financial Services, Inc.
(HSFS), 1984-85 .........
A. SEC internal memo, "Chronology of Staff Inquiries Concerning Repurchase Transactions Between ESM Government Securities, Inc.,99
and Home State Financial, Inc. (now Home State Savings Bank),
undated ..........
B. Letter from John F. Murphy, Branch Chief, Division of Corporation
Finance, SEC, to HSFS, dated February 27, 1984 .......
C. HSFS internal memo from David J. Schiebel to Marvin L. Warner
concerning ESM, dated July 11 , 1984
D. Followup letter from Murphy to HSFS, dated August 7, 1984 ........ .....
E. HSFS internal memo concerning meeting between SEC officials and
HSFS, dated August 21, 1984 ....
F. Followup letter from Murphy to HSFS, dated August 24, 1983 ....... .....
G. Home State's amendments to SEC form 10-Q for quarter ending
June 30, 1984, dated September 28, 1984 .....
H. Followup letter from Murphy to Home State dated December 12,
1984 .......
I. Letter from Home State to SEC, dated December 18, 1984 ..
J. Followup letter from Home State to SEC, dated January 3, 1985 ....
K. Letter from Home State to Murphy, dated January 21, 1985...............
Appendix 7.-Federal Reserve documents ...........
A. Letter from H. Terry Smith, vice president, Federal Reserve Bank of
Atlanta, to board of directors, American Bancshares, Inc. , dated
March 18, 1977 ..... ......
B. Comments of First Marine Bank, Inc., in opposition to ComBanks'
application to acquire control of First Marine (excerpts), dated
October 31, 1980
Appendix 8.-Federal Home Loan Bank Board documents...............
A. Documents relating to the FHLBB's supervision of Unity Savings
Association (Chicago, IL) ..........
1. Interim examination report, dated October 10, 1980
2. Unity response to FHLBB, dated November 20, 1980 ....
3. Examination report, dated January 6, 1981
4. Cease-and-desist order, dated February 27, 1981 .........
5. Special limited examination report, dated March 23, 1981 ..............
B. Internal FHLBB memo regarding proper accounting treatment of
dollar reverse repos and loans of securities, dated January 29, 1980.
C. Internal FHLBB memo regarding over collateralization of reverse
repos, dated July 13, 1981
D. Memo from American Savings & Loan official to FHLBB concerning
the "unwinding agreement" with ESM, dated March 23, 1985 ...........
E. Letter from Marvin L. Warner to FHLBB regarding exam of American, dated November 1 , 1984 .............
F. Letter from Ronnie R. Ewton to FHLBB regarding exam of American, dated November 21 , 1984 ........

1076
1076
1079
1088

1088
1091
1092

1095
1095
1100
1101

1101
1104
1118
1119

1125
1128

1133
1143
1146
1147
1148
1151

1151

1155
1247
1247
1247
1251
1259
1271
1277
1285
1287
1289

1292
1296

VI

Appendix 9.-FDIC documents..........
A. Letter and attachments from William M. Isaac, Chairman, FDIC, to
Hon. Doug Barnard, Jr., concerning the Ohio thrift crisis and ESM ,
dated April 1, 1985..............
B. Letter and attachments from Robert V. Shumway, Director, Division
of Bank Supervision, FDIC, to Hon. Doug Barnard, Jr., concerning
ESM, dated May 9, 1985 ......
Appendix 10.-Miscellaneous documents ..........
A. Letter from Hon. Doug Barnard, Jr., to Steven J. Arky, dated March
27, 1985 .....
B. Letter from Danny O. Crew, assistant city manager, city of Pompano
Beach, FL, to Hon. Doug Barnard, Jr., dated April 2, 1985 .......
C. Letter from Hon. Gerald Lewis, comptroller of the State of Florida, to
Hon. Doug Barnard, Jr., dated May 15, 1985 ..
D. Documents relating to ComBanks' investments with ESM, 1981
E. Letter from Arky, Freed to Alexander Grant & Co., regarding ESM,
dated January 31 , 1985...............
Appendix 11.-Press materials....
A. "Miami Bank Indicted on Charges of Laundering Illicit Drug
Money," the New York Times, December 14, 1982 ........
B. "Marvin Warner: Horse Trader in Florida Banks," Florida Trend,
March 1983......
C. "Behind the ESM Collapse," the New York Times, March 14, 1985 ......
D. "The SEC Is Probing Alexander Grant Audits of Collapsed ESM's
Books, Sources Say," the Wall Street Journal, March 15, 1985 ..........
E. "Home State Chief Put Assets to Work," Cleveland Plain-Dealer,
March 17, 1985
F. "Closing of Ohio S&L's After Run on Deposits Is One for the Books ,"
the Wall Street Journal, March 18, 1985 .
G. "Regulatory Failure on ESM," the New York Times, March 30, 1985 ..
H. "Founders of ESM Lived High," Miami Herald, March 31, 1985
I. "ESM Doubts Led to Firing, Ex-Banker Said," Cleveland PlainDealer, April 19, 1985 ......
J. "Warner, Pals Undid Life's Work, Angry Miami S&L Founder Says,"
Cleveland Plain-Dealer, April 21 , 1985.
K. "State Can't Keep Up With Securities," Miami Herald, April 28, 1985
L. "Regulator Ignored ESM Warning Signals," Miami Herald, April 28,
1985 .....
M. "How Many Hats Can Steve Arky Wear?", the American Lawyer,
May 1985 .....
N. "The Rise and Fall of Marvin Warner," Business Week, May 6, 1985 ..
O. "Bank Crisis Figure Shoots Self to Death," Washington Post, July 24,
1985 ...........

Page
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1373
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1391

OHIO

SAVINGS

· LAPSE

OF

AND

ESM

LOAN

CRISIS

GOVERNMENT

AND

COL-

SECURITIES ,

INC.

WEDNESDAY, APRIL 3, 1985

HOUSE OF REPRESENTATIVES,
COMMERCE, CONSUMER,
AND MONETARY AFFAIRS SUBCOMMITTEE
OF THE COMMITTEE ON GOVERNMENT OPERATIONS,
Washington, DC.
The subcommittee met, pursuant to notice, at 8:30 a.m., in room
2154, Rayburn House Office Building, Hon. Doug Barnard, Jr.
(chairman of the subcommittee ) presiding.
Present: Representatives Doug Barnard, Jr., John M. Spratt, Jr.,
Joe Kolter, Ben Erdreich, Albert G. Bustamante, Larry E. Craig,
Patrick L. Swindall, and Jim Saxton.
Also present: Representatives Jack Brooks, Thomas N. Kindness,
Mary Rose Oakar, Thomas A. Luken, Marcy Kaptur, and Bob
McEwen.
Staff present: Peter Barash, staff director; James M. Pates, counsel; Stephen R. McSpadden, counsel; Eleanor M. Vanyo, secretary;
Faye Ballard, clerk; Scott Fisher, minority professional staff, Committee on Government Operations; and Dean T. Scott, subcommittee staff, on detail from the General Accounting Office .
OPENING STATEMENT OF CHAIRMAN BARNARD
Mr. BARNARD. The Subcommittee on Commerce, Consumer, and
Monetary Affairs will come to order.
On March 4, the Securities and Exchange Commission obtained a
Federal court order forcing ESM Government Securities of Fort
Lauderdale, FL, into receivership. The collapse of this little-known
Government securities dealer precipitated a disquieting chain of
events unprecedented in the recent history of our Nation's financial markets.
The crisis began with the insolvency of Home State Savings
Bank of Cincinnati, a $ 1.4 billion thrift institution which had extensive business dealings with ESM; and it ended with nervous
international money markets bidding up the price of precious
metals and bidding down the price of the dollar.
In between these events, the Governor of Ohio ordered a bank
holiday of the State's 70 privately insured thrifts; the Ohio Deposit
Guarantee Fund, whose entire reserves of $ 127 million may have
been exhausted by the Home State failure, was placed under the
control of a conservator; hundreds of Federal bank examiners were
(1)

2
dispatched to Ohio to prevent the thrift crisis from spreading and
to speed the conversion of S&L's from private to Federal deposit insurance; the FSLIC and FDIC were swamped with calls from anxious S&L officials in other States seeking information on how to
apply for Federal deposit insurance; and, dozens of municipalities
and financial institutions across the country faced the bleak prospect of combined losses totaling $350 million or more.
Today, the Commerce, Consumer, and Monetary Affairs Subcommittee of Government Operations begins hearings in an effort to
determine whether the Ohio thrift crisis and the events that preceded it were avoidable; whether the major private deposit insurance systems in other States are secure; and, whether the Federal
apparatus that supervises our Nation's financial and securities
markets is sufficiently competent and aggressive to prevent a repetition of the Ohio situation or at least to minimize the damaging
consequences of any repetition .
The subcommittee seeks specific answers to the following questions:
What did the Federal banking agencies and the SEC each know
about the business conduct of ESM Government Securities and the
ethics of its principals and when did they know it? Was information developed by one agency regularly shared with other supervisory agencies at the Federal and State levels? Were enforcement
responses to ESM's tactics coordinated? If not, why not? What
types of changes need to be made in our regulatory structure to
assure such cooperative action?
Did the Federal Reserve and the Home Loan Bank Board perform adequately in responding to the Ohio emergency? Should the
Federal banking agencies establish, on a permanent basis, a standby rescue program for dealing with any similar occurrences in the
future?
Did the Ohio thrift regulatory officials perform their supervisory
responsibilities adequately?
Do the major private deposit insurance systems in the various
States and elsewhere have the necessary procedures and policies to
avoid an Ohio situation? Can these systems, either alone or together with their thrift supervisory agencies, properly monitor and prevent unsafe and unsound banking practices? And do these private
systems need to be strengthened, and if so, how?
The collapse of ESM Government Securities and the devastating
impact of that event on financial institutions and municipalities
across the country is a vivid illustration of the fragile interrelationships that exist among providers of our Nation's financial services.
A failure on one financial sector can quickly spread to others and
the results can be devastating. The failure of a securities dealer or
a financial institution because of fraud is not a victimless crime.
Just ask the citizens of Ohio, or the taxpayers of Beaumont, TX;
Pompano Beach, FL; Toledo, OH, and other cities. Just ask the depositors and the arms-length stockholders of S&L's that did business with ESM.
Last October, this subcommittee issued a report entitled "The
Federal Response to Criminal Misconduct and Insider Abuse in the
Nation's Financial Institutions." It concluded that one-half of all
commercial bank failures and one-quarter of all thrift failures are

3
caused by insider criminal misconduct. Within the recent past,
fraud also appears to have played an important role in the collapse
of a number of nonregistered Government securities dealers like
Drysdale, Lion Capital Group, Winters Government Securities, and,
of course, ESM . Within the past few weeks , a growing number of
major banks have admitted to significant violations of the currency
reporting requirements of the Bank Secrecy Act. In combination ,
these events and these admissions raise understandable concerns
about our financial system.
While I believe that our Nation's financial markets are vigorous
and essentially honest, a repetition of the Ohio episode could deal a
crushing blow to the public's confidence in the integrity of those
markets. It is essential, therefore, that this hearing lead to a significant strengthening of Federal and State regulatory systems that
supervise financial markets.
It has been suggested by some that this committee is playing
with a political football in this investigation . Well, let me set the
record straight. This committee has a long and excellent record of
financial institution and regulatory investigations without the least
tint of political association .
Again, we are dealing here today in risky financial transactions
over many years, longer than any period of office of most individuals appearing today. Even more importantly, they involve the loss
of hundreds of millions of dollars to financial institutions and municipalities, thereby affecting depositors and taxpaying citizens .
Investigations and studies of this committee are independent of
any political party or any officeholder.
Let me also note at this time that in yesterday's paper, it was
announced that Attorney General Meese had outlined a program to
better coordinate criminal prosecution of bank crime. I would like
to say that this is directly related to the study that was made by
this committee last year and is a typical example of the work that
this committee aspires to perform.
This morning we are very fortunate and pleased to have with us,
the Honorable Richard F. Celeste, Governor of the State of Ohio.
Governor, at the outset, thank you for taking your time to be
with us today. I know it was of some inconvenience to fly in from
Ohio today and I know that you are on a limited schedule, but we
certainly do appreciate the contribution that you can make to this
investigation today. And I would also like to note that there are
several distinguished members of the Ohio delegation that are with
us today and I want to welcome them to this hearing. Time permitting, I hope that we will be able to accommodate all of you as participants in this hearing.
We will ask if any of you would like to make formal statements,
and if so, we would welcome those statements.
Governor, again we welcome you to be with us today and we will
accommodate your entire testimony in the record . Without objection, his entire testimony will be entered into the record. If you
care to summarize, you may do so at your own discretion . But
before you begin, I would like to ask the distinguished senior minority member of this committee for an opening statement.
Mr. CRAIG. Thank you very much , Mr. Chairman .

4
Let me say at the outset a special thanks for the very fair and
bipartisan way you have approached this concern and this issue.
You are to be commended and your staff is to be commended for
the effort you have become involved in.
Once again we enter a new chapter in our book of failed financial institutions in America. As in prior cases, we are faced with
similar questions. What happened? Why did it happen? And how
did it happen?
Some of those answers will be forthcoming shortly during today's
hearings. But another question needs to be asked. When will it
stop? If we fail to address this question and soon, the American
people will lose any faith they still have in our very important
banking system. I fear the days of hiding one's savings under the
mattress or 40 paces due north from the south side of the barn will
occur once again and that, of course, cannot be tolerated.
Many people would like to point fingers toward deregulation as
the reason behind recent bank failures -a notion that I believe is
seriously flawed. We are supposed to have a federal system of
checks and balances which allows financial institutions to expand
in the marketplace while at the same time ensuring stability and
public confidence in our banking industry. For some reason, the
status quo does not work as well as it should. Unfortunately, the
Federal Government's checks and balances is intertwined in a massive layer of bureaucracy. It is this bureaucracy which allows those
individuals who want to take advantage of the system to oftentimes do so.
It is now known that several Federal agencies were aware of
ESM Government Securities, Inc.'s activities years ago, yet failed
to communicate their alarm to other Federal agencies. The State of
Ohio was well aware of Home State's financial dealings with ESM
and failed to stop them. Deregulation did not prevent the Federal
and State governments from acting.
Last week's committee hearings on Vice President Bush's task
group report on regulation of financial services proposed ways to
improve Federal regulations of financial institutions. I am going to
review that report again to see if it contains a proposal requiring
all Federal banking and thrift regulators to sit down together once
a month, or once every other month, or once quarterly to discuss
problem institutions and/or their investments. If they are not required to meet regularly they should be. If they cannot communicate together voluntarily then they should be legislated to do so.
Likewise, the task force report suggests giving States more authority to regulate their State-chartered institutions. Obviously, the
State of Ohio will not be used as an example of how well a State
can oversee its chartered institutions. Nor should it be said that all
State-chartered, private insurance corporations are improperly
managed and regulated . Nevertheless, Congress will have to establish stringent guidelines before States take over greater regulatory
powers.
Finally, Mr. Chairman, Ed Gray, Chairman of the Federal Home
Loan Bank Board, has recently received unfair attacks for the role
he and the Federal Savings and Loan Insurance Corporation
played in assisting the Ohio thrifts. Newspaper headline seekers
have suggested that partisan politics were involved in his decision-

LO

5
making during the Ohio thrift crisis. I find such remarks incorrect.
The members of the subcommittee are well aware of the condition
of FSLIC. I believe Chairman Gray acted in a prudent and highly
professional manner by not succumbing to the pressures to immediately bring the Ohio thrifts into the FSLIC fund without first doing
his required homework on each thrift. His first priority is to ensure
financial soundness of FSLIC. Placing more bad apples into a
basket that already has its share of bad apples would not be a responsible action. I am sure the thousands of savings and loans associations which are members of the FSLIC also appreciate the
manner in which Chairman Gray has responded to this crisis.
Let me thank you, Mr. Chairman, and welcome Governor Celeste
before our committee. I look forward to hearing from him.
Mr. BARNARD. Because of the Governor's schedule this morning,
we are going to accommodate him first and then we will have questions from the panel and then we would like to have the testimony
of Members of Congress who are here today; specifically, the Honorable Chalmers P. Wylie, the Honorable Thomas A. Luken, the
Honorable Mary Rose Oakar, and the Honorable Thomas N. Kindness, if they would so like.
Mr. KOLTER. Mr. Chairman.
Mr. BARNARD. Yes, Mr. Kolter.
Mr. KOLTER. May I submit an opening statement for the record,
please?
Mr. BARNARD. Without objection, that statement will be entered
into the record.
[The opening statement of Mr. Kolter follows :]

6

OPENING REMARKS FOR
CONGRESSMAN JOSEPH KOLTER
BEFORE THE
GOVERNMENT OPERATIONS COMMITTEE
COMMERCE, CONSUMER AND MONETARY AFFAIRS SUBCOMMITTEE
ROOM 2154 RAYBURN HOUSE OFFICE BLDG.
APRIL 3, 1985 - 8:30 A.M.
Mr. Chairman, the events of the last several weeks, have sensitized the American
public to the problems facing the Nation's banking system.

The closing of the thrift

institutions in Ohio was just another link in what seems to be a long chain of events
that have caused the public to ask just what is going on in the Nation's banking system .
While I realize that financial deregulation has brought much change for the better,
it has also brought much uncertainty. My deep concern is that people with no real idea
of what financial deregulation is all about, will feel less secure about their savings in
the future.

Confidence in the banking system is paramount to maintaining public trust

and faith.
Mr. Chairman, I would like to thank you for calling this hearing today. It is most
timely. I am here to learn more about what occurred in Ohio and for a status report
from the witnesses scheduled to testify.
Mr. BARNARD. Do any other Members have a statement? Mr.
Saxton.
Mr. SAXTON. Thank you, Mr. Chairman. I would just like to note
for the record and for the interest of those who are here with us
this morning and for the public as well, that the perspective from
which I believe this committee comes is not one that we wish to
express tremendous immediate concern as to the health and welfare of our financial institutions across this country.
This is one of a series of hearings that we have held relative to
this subject. As the background that we set here in Washington for
financial transactions relative to banks and thrift institutions has
changed, because of deregulation, because of various changes that
have happened on the Federal level, it has changed the financial
workings of our financial institutions. And because that has happened, it is necessary for Congress to constantly monitor and
watch, not only as the situation has developed in Ohio, but all
across the country. And I think it is important to point out to the
public and to those who are here today that we are not here because we expect some immediate catastrophe to happen with our
banking institutions. It is because we are looking down the road
and we are here today in a sense in a preventative way, to take
whatever action may be necessary so that in the future we do not
have to look at these kinds of situations in retrospect but rather we

7
are here today to look at them in the future in order to prevent
these kinds of occurrences from happening again.
And once again, if I can just emphasize that we do not expect, we
do not think, in fact, we are sure that FSLIC and FDIC are currently able to handle their intended function.
And so today we are here to look at the Ohio situation, to try
and find out what happened in Ohio, to try and determine whether
or not we need to make changes in our system so that these occurrences do not happen in the future.
Thank you, Mr. Chairman.
Mr. BARNARD. Governor Celeste.
STATEMENT OF RICHARD F. CELESTE, GOVERNOR, STATE OF
OHIO
Mr. CELESTE. Thank you very much, Mr. Chairman, and members of the subcommittee, and particularly Representatives from
the State of Ohio.
During the past 4 weeks I have become directly and deeply involved in a crisis which threatened the underpinnings of Ohio's
thrift industry, and frankly, part of the fabric of our Nation's
highly sophisticated financial system.
Four weeks ago this morning, Cincinnati's morning newspaper
headlined the fact that Home State Savings, Ohio's largest privately insured savings and loan institution, had suffered a severe loss
in connection with the massive fraud at ESM Government Securities in Fort Lauderdale, FL, compounded by a false audit report.
After 3 days, well over $ 100 million had been withdrawn from
Home State by worried depositors, about a third of the assets of the
private Ohio Deposit Guarantee Fund were used up to meet the
Home State run, and as officers of Home State and ODGF worked
to find a buyer, the institution closed its doors.
On Sunday, March 10, the superintendent of the Ohio Savings
and Loan Division in the Department of Commerce, appointed a
conservator to protect the more than 70,000 remaining depositors
in Home State and the $520 million they still have on deposit
there .
The State of Ohio moved as quickly as it could to protect the half
million depositors at the 71 remaining privately insured thrifts. By
the following Wednesday evening, in record time and with strong
bipartisan support, Ohio had passed an emergency appropriation of
$50 million as a loan to a new, private insurance fund for those
other S&L's, none of which had been tainted with the losses involved in the collapse of ESM .
But depositor fears outran legislative efforts. By Thursday,
March 15, runs had spread to a growing number of institutions in
Cincinnati and elsewhere. Officials of several thrifts had come to
Washington and had pronounced private insurance dead, and Federal officials at this stage indicated that this was, in the first instance, a State problem requiring a State remedy.
At 5:30 a.m. on Friday, March 25, after reviewing a series of options with affected savings and loan executives, State legislative
leaders, key administration personnel, and Federal regulatory officials, I determined that there was a high probability that one or

∞
more of the S&L's would not be able to keep open that day and
that additional failures would seriously jeopardize at least 70 other
institutions.
I ordered a 3-day holiday for the privately insured thrifts so that
we could establish an orderly plan for the reopening of all these
institutions with sufficient protection to rekindle depositor confidence. I might add that in close cooperation with the Federal Reserve Board and its Chairman, Paul Volcker; and Mrs. Karen
Horn, president of the Federal Reserve Bank of Cleveland; the Federal Home Loan Bank Board and its Chairman, Edwin Gray; and
Dr. Charles Thiemann, president of the Home Loan Bank of Cincinnati, we are getting these institutions reopened -stronger than
ever, and in record time.
As of this morning, 10 working days after passage of special legislation requiring Ohio's S&L's to apply for and qualify for FSLIC
or FDIC, we have reopened 29 institutions, representing more than
40 percent of the depositors. And these institutions, I might add,
are stronger than ever.
With this brief summary, let me indicate to you four recommendations, Mr. Chairman, that I would draw as lessons from the past
4 weeks for you and members of the committee.
First, the immediate and specific cause of this crisis was largescale fraud in an unregulated Government securities trading company in Florida. If ESM were healthy today, if its audited statements were accurate, we would not be holding this hearing this
morning.
The Federal Government must provide greater oversight of those
who make the market for Government securities, a market which I
understand from a recent Wall Street Journal article is trading at
$70 billion a day.
Second, apparently Ohio's supervision of our privately insured
S& L's was sufficient to identify a problem at Home State. "Too
many eggs in one basket," according to my commerce director, Ken
Cox. But our regulatory process proved insufficient to cure the
problem.
I am sharing with you-as attachment A to my testimony-several public accounts which highlight this serious concern, going
back over two administrations . I have ordered my director of commerce and my superintendent of savings and loans to review both
our procedures and our statutory authority and to recommend
changes.
I have also strongly supported the appointment of a special prosecutor, who is now at work, and asked that his original charge be
expanded to include a report "of any deficiencies which may have
occurred in the State regulation of Home State Savings Bank and
recommendations of any changes which ought to be made in State
law, regulations, personnel, and practices in order to protect
against a situation such as this ever arising again. " He has agreed
to this further assignment .
The State of Ohio must provide stronger regulation of our Statechartered thrifts and possibly other financial institutions . That is
the second lesson I draw from this experience.
Third, despite reassurances by my former superintendent of savings and loans to the contrary, and I have attached as attachment

9
B his memo to me in early January, the Ohio Deposit Guarantee
Fund fell short in two important respects. First, relating to public
misperception, and the second, relating to private insufficiency.
On public misperception- most depositors believe that the
"Ohio" in Ohio Deposit Guarantee Fund meant that the State of
Ohio stood behind the fund. This misperception was so widespread
that in the April 1 issue of Business Week, it is still referred to as a
private, State-guaranteed fund . Depositors should know the full
and accurate facts about who stands behind such private guarantee
funds.
Second, in terms of private insufficiency-even though ODGF enjoyed a capital-to-asset ratio of 2.7 percent, roughly $ 138 million of
capital to $5 billion of covered assets, the fund proved insufficient
to withstand the failure of its largest member. Thus, to my understanding the history of Mississippi and Nebraska was substantially
repeated.
At a minimum, States with private deposit guarantee funds must
assure that their capital and reserves are capable of handling the
possibility of failure of their largest member institution . For our
part in Ohio, we are insisting on Federal insurance, or an acceptable guarantee from a parent big enough and strong enough to cover
every single deposit.
Finally, it was apparent in the days immediately preceding my
decision to protect depositors in Ohio's thrifts by closing them that
there were no well-charted emergency powers by which Federal
regulatory agencies could have helped us to head off the crisis.
Closing 71 S&L's, most of them healthy but threatened by a growing loss of confidence, meant that our State's problem became part
of a larger set of considerations. Such extraordinary State action
should be unnecessary in the future.
As our national and international financial system grows more
complex, more fast paced, and more interdependent, I strongly
urge not more day-to-day intervention at the Federal level, but
more readily accessible emergency powers to intervene directly and
early in situations which could, left to run their course, do damage
far beyond one thrift or one State.
I want to thank you very much for this opportunity to share the
Ohio perspective with you this morning.
[Attachments to Mr. Celeste's prepared statement follow: ]

10

The Columbus Dispatch/Tuesday, March 19, 1985
Even though Home State directors pledged in 1983 to lessen
the S& L's involvement with
E.S.M., the transactions instead
increased, reaching more than
$600 million that year. Home
State had $1.4 billion in net
warned in '82
worth and assets.
W. Tyler, director of
deman said he feared that furc- theWarren
Ohio Department of Coming Home State out of the merce
By Michael Curtin
from
January 1983 to Feb.
DispatchGeneral AssemblyReporter
transactions too quickly would
said hewas aware Home
Who knew what when? And bring down boththe S&L and the 2,1985,
cate had problems, but had no
Guarantee Fund.
why wasn't something done Ohio Deposit
Because Home State was the idea they were solarge. The Diviabout it?
sion
of Savings and Loan Associr
t
its
fund,
the
of
membe
larges
Those are the questions state
is within the Department
Tegislators will ask in an investi- failure would have jeopardized ations
ofCommerce.
gation of the collapsed Home the fund, Wideman said.
"I CAN'T SAY we were
State Savings Bank, which trig"It seemed obvious to me that
gered a crisis of confidence in, the amount of required assis- unaware there was attention beand the closing of, 69 privately tance would have been fatal to ing paid to Home State," said
Tyler, who now is director ofthe
the fund," he said.
insured savings and loans.
"I was prepared to deal with Ohio Environmental Protection
When legislators ask their
Agency.
"But there was attention
questions, they will hear Clark the loss of one institution," Wipaid on a regular basis to a
W. Wideman, former superinten- deman said. "It was the very being
number
of companies" in a.vardent ofthe Ohio Division of Sav- significant way the failure of iety of regulated
areas.
ings and Loan Associations, say Home State would have affected
Tyler said he had no direct
the guarantee fund" that prethe red flag went up in 1982.
knowledge
of
the
communication
the intervention, he said.
THAT WAS when Wideman's vented
"I COULD NOT determine between the Division of Savings
examiners reported that Home anything more appropriate to do andLoan Associations and Home
State, owned byprominent Dem- than to jawbone and armtwist," State, saying it was "the sole
berat Marvin L. Warner, was Wideman said. "We did the best authority of thesuperintendent."
dangerously overinvested in we could. So far as I can tell,the
Tyler said he was more than
E.S.M. Government Securities guys who came in after us did surprised
by Home State's faiInc., which failed March 4.
lure
and the amount and comthe
same
thing."
"There was a tremendous essentially
's
Wideman successor, C. Law- plexity of the E.S.M. transac
amount of hand-wringing at the rence Huddleston, who served tions. "I thought I understood a
top levels" of the division, said from
February 1983 to January repurchase agreement," he said.
Wideman, who was appointed by 1985, said
he could not comment. "It's an amazing story."
then-Gov. James A. Rhodes and
first order of business is
"The
served from September 1978 to
to get it (the S&L closings) reFebruary 1983.
Home State's unusually large solved. I don't want to detract
and risky investments in repur- from that effort."
However, other sources with
chase agreements - in which
cash was borrowed in exchange experience in the division confirmed there were continuing effor securities of greater value
prompted him "to jawbone and forts by the division and by
armtwist" in an attempt to get the ODGF to persuade Home
the S&L to reduce its dealings State to reduce its dealings with
with E.S.M. of Ft. Lauderdale, E.S.M.
"WE ENTERTAINED the
Fla., Wideman said in an interless-than-well-placed hope that
view.
ALTHOUGH THE superin- Home State could wind out of
tendent has the authority to or- those transactions," Wideman
der divestiture in such cases, Wi- said.

Home

State

11

THE PLAIN DEALER, SUNDAY, MARCH 31 , 1985.

Regulators

to propose

stricter laws for S& Ls
CINCINNATI (AP) — Ohio's savings and loan regulations turnedoutto
be inadequate in the wake of the
Home State Savings Bank collapse,
and politicians and regulators have
decided it is time for changes.
John Mongeluzzo, state Commerce
Department staff lawyer, says talks
already have begun within the departmentondrafting new legislation.
Lawrence Kane, a Republican special prosecutor appointed by Attorney
General Anthony Celebrezze, has been
asked to make recommendations for
regulatory procedures while investigatingthecase.
"One of the problems with the S&L
laws as theystand is that wecanbark,
but wecannot bite," Mongeluzzo said.
"The laws, as stated, ... are very
vague. "
Two former directors of the loan
division agreed on the need to
strengthen state enforcement laws.
Clark Wideman, superintendent
from September 1978 to January 31,
1983, said he and other officials knew
years ago that their regulatory
powers were not enough.
“But at the same time, we were all
cognizant that this was the era of
deregulation.
"Proposing tougher laws with more
teeth in them was swimming
upstream against the tide," Wideman
said
Former Assistant Attorney General
Roger Sugarman said it has long been
clear that judges frowned if the state
threatened to issue a " cease and
desist" order to stop a state-chartered
thrift from engaging in "unsafe and
unsound activities.
"Youhave to have more than just

'One ofthe problems
with the S&L laws as
they stand is that we
can bark, but we cannot
bite'

suspicions to convince a judge that a
cease and desist order is needed," said
Sugarman, who served from 1980 to
1982.
Wallace Boesch, S&L superinten
dent from 1972 to 1974, said today's
regulations are better, but not good
enough.
"WhenIwasin there, wedidn't even
have the cease and desist power.
That's only about 4 years old. All I
could do was browbeat people, or, if
their assets were used upto the point
where ...the public's money was
becoming endangered, I could go to
the attorney general and ask for
orders toclose them down. But there
was nothing in between."
Boesch complained that although
state examiners can look at thrift records every 18 months, they cannot
examine the books of holding companies that own such thrifts. But state
bank examiners can.
State Rep. William Batchelder, R4,
of Medina, said, "The superintendent
of savings and loans has enough
power.All he has to do is exercise his
muscle. "
Rick Spencer, Commerce Depart
spokesma
ment 31
division
n, saidsixtheless
examiners,
only
its
than has
highest level in recentyears.
Salaries range from $ 16,300 to
$30,430 a year, Spencer said.
Commerce Director Kenneth Cox,

formerCommerce Director J. Gordon
Peltier and Wideman all said the state
knew Home State had invested a dangerously large amount of money with
ESM Government Securities Inc., of
Fort Lauderdale, Fla., as early as
1982.
But state officials under former
Gov. James A. Rhodes and Gov.
Richard F. Celeste took no legal
actions to stop Home State. Celeste
has said his administration knew of no
problems with Home State before
1983.
Wideman said Home State officials
promised him in 1983 that they would
phase outtheir ESM dealings. Instead,
the Cincinnati thrift doubled its stake
in ESM.
Disaster struck after the U.S.
Securities and Exchange Commission
closed ESM on March 4. The securities
firm owed its creditors $300 million.
Home State, which was state-chartered, suffered a $144 million loss
from ESM's closing, and a four-day
run by depositors in 33 branches
removed about $ 154 million more
before the thrift closed March 9.
On March 15, Celeste closed the
other state-chartered thrifts when
depositor runs started on some of
them. Depositors withdrew an estimated $60 million in one day from the
thrifts, which were insured by the privately operated Ohio Deposit GuaranteeFund.
Ohio law would have allowed state
officials to stop the Home Statedisas
ter by ordering directors fired and
imposing a cease and desist order
after a public hearing,officials said.
The superintendent could fine any
thrift officer up to $10,000 for ignoring the orders. The superintendent
could also close the thrift and appoint
a conservator, which was done.

BUREAU
PO

California
Nebraska
.and

60
two
to
response
"la
Minutes
."
prophesy

COLUMBUS
Richard
F.Gov.
Celeste
assured
was
7inemo
maJan.
and Ohio
ofSavings
Division
Ohio
the
from
."
Loan
pri
Ohio's
that
Associations
vately
insured
thrifts
were
safer
than
insurance
deposit
state
falled
in
funds

SHARKEY
By
ANNE
MANY

198529
MARCH
FRIDAY
DEALER
PLAIN
THE

Celeste
said s
week
last
the
memorandum
was
his
first
awarenes
Ohio
dhad
guarant
fund
.Haeposit
e ee
memora
the
"afcalled
alse ndum

-TV
CBS
on
reports
the
about
Nebraska
California
funds
,tand
he
Celeste
tohe
statutory
,"Tmemo
sald
regulatory
and
shortcomings
that
existed
inexist
those
states
not
lado
soundness
system
ofthe
.
SavState
,Home
later
months
Two
after
Cincinnati
of
Bank
Ings
Government
ESM
Securites
inclosed
Inc.
"
Florida
his 7.
.Tled
failed
toaronun
Home
State
and
several
other
pri-

Lawrence
,it.
.CIndeed
was
Hudd
leston
superintendent
,former
of
Ohio's
memorandum
,sS&Lintheaid
s
stringent
Ohio
regulations
has
and
annual
Independent
ensure
to
audits
After
6TV
Jan.
the
Hudd
segment
rcalls
,"Ieceived
wrote
home
atleston
depositors
from
institution
and
managers
.This
happened
never
has
inmy
-ynd
,two
atenure
suggests
ear
."
can
nervousnessmake
damaging
potentially
received
10
Tmay
division
. hecalls
exist
between
(a9.m.
nd
)o9.30
Jan.
n
Huddleston
explained
that
Califor

vately
thrifts
insured
.
Ohio
in

1956
.
state
in
law

."⚫
tions

."
funds

,Hime
fund
Nebraska
uddleston
said
,dThe
oes
full
any
have
-tnot
by
avand
olunteer
employees
isrun
Oboard
Deposit
."hio's
Guarantee

thrifts
insures
nia
Nebraska
and
,"both
banks
industrial
insures
of
something
are
acwhich
of
ross
between
redit
sunion
aácmall
and
loan
with
,bcompany
ut
restric
fewer
tions
the
on
types
of
investments
they

Huddleston's
January
memoranDeposit
Ohio
stated
dum
Guarantee
thrifts
-breacked
strin
,“aFund
more
gently
industrial
are
than
regulated
assets
.The
guaranteed
.tobanks
sav
than
ishigher
fund
the
of
ratio
ings
federally
(the
FSLIC
insured
),system
fund
instiand
of
capital
average
the
than
ishigher
tutions
instituFSLIC
memorandum
The
out
point
not
did
are
thrifts
and
banks
insured
federally
backed
by
federal
government
.the
constitution
Ohio
prohibits
.The
pledg
ing
enterprivate
back
to
money
state
prises
.The
by
created
was
ODGF
California
Huddleston
the
described
"as
funds
Nebraska
and
flawed
fatally
failure
."todoomed
and
Huddleston
:
declared
accurately
depend
"All
institutions
financial
on
could
not
confidence
,and
depositor
depositor
."without
confidence
exist
"60
the
said
memorandum
The
deposi
revealed
"segments
Minules
Caliand
Nebraska
in
money
lost
tors
,"but
fornia
the
why
explain
not
did
.
failed
funds
insurance
Ohio
the
that
regrettable
isI"t
subject
isthe
Fund
Guarantee
Deposit
the
because
concerns
depositor
of
supervision
and
structure
inadequate
)and
California
Nebraska
(the
of

."
basket
inone
eggs
many

thas
supervisory
-afFund
ull
ime
staff
and
condition
the
monitors
which
practices
of
companies
insured
."its
State
officials
admit
concern
was
expressed
Home
about
Savings's
State
extensive
investments
ESM
in
Securi
Commerce
.Ohio
ties
Department
Director
Home
said
Cox
Kenneth
State
hwarned
"was
about
aying
too

State
&
S
c
L
hief ry
told
Celest
e
Janua
in
all
was
OK

12

Beacon
Journal
Akron

March
,1Friday
29
985

13

gered a statewide closing order ings & Loan and thus will meet
by Celeste March 15.
the requirement for federal insurCeleste
This week, a second savings ance, which Mayflower already
and loan was placed temporarily has. East Side was to reopen for
under a conservator after reports full services today, McAlister
that some of its officers withdrew said.
misled
their money improperly in the He said East Side will be the
wake of Home State's troubles.
among the privately insured
The conservator was called in 27th
S&Ls that now have been given
Wednesday.
for federal
insurance orapproval
with
have merged
Robert B. McAlister , current conditional
current
McAlisteofr, savings
RobertB.
by memo state
superintendent
federal
inhave
institutions
that
and loans, said the conservatorIt said Ohio's ship ofthe Oakmont Savings and surance. These have been allowed
Loan Co. in Cincinnati ended to- to open their doors for unlimited
business, he said.
S&Ls were safe day
McAlister allowed Oakmont to Meanwhile, the owner of Home
reopen Thursday after closing it State, Cincinnati financier MarAssociated Press
Wednesday to investigate reports vin L. Warner, 65, has denied any
CINCINNATI - A Jan. 7mem- that one or more officers had wrongdoing and claims he is as
orandum from a former state drawn their own money out in much a victim as the savings and
savings and loan superintendent violation of a March 13 state or loan association's depositors.
assured Gov. Richard F. Celeste der.
Warner, who has kept his
that Ohio's privately insured sav.
Oakmont president Howard whereabouts secret since Home
ings and loans were safer than Thiemann
said the institution has State's closing, made a statement
troubled state deposit insurance
its application for fed- Thursday through a public relafunds in California and Nebraska. completed
eral insurance and would be open tions firm..
The memo, made public Thurs for
business today.
"For 30 years, I have taken
day, was in response to two 66 "My wife, children
and I have pride in Home State Savings, the
Minutes reports on CBS-TV about our life's savings in Oakmont
and service it has rendered to its dethe Nebraska and California we will make no withdrawals
," positors and the community.
funds.
prepared statement.
said
he
in
a
regulatory
statutory
and
"The
"Now, the bank and its deposishortcomings that existed in Information gathered about the tors, along with my family and
those states do not exist in Ohio," incident has been turned over to myself, have become the victims
the memo said.
the special state-appointed prose of what appears to be a massive
Celeste has said the memo was cutor looking into Ohio's savings fraud,” he said.
his first indication that Ohio had and loan crisis.
"It is my hope that officials in
a deposit guarantee fund. He Federal and state bank exam- Ohio
will handlethis issue in such
called the memo "a false prophe iners and Thomas Batties, the a way that every depositor
and
sy."
superintenddeputy
debenture
state's
chief
holder
will get every
he said.
A text ofthe memo was made ent of savings and loans, were penny back,”
public Thursday by Celeste at a back at Oakmont on Thursday to
conference with newspaper edi- finish reviewing thebank's books.
" The bank's doors have been
tors in Columbus.
Battles declined to say when the locked, and my associates and I
investigation
completed
January
would be
memo, by C. LawThe
have not been given the opportu
rence Huddleston, said, "All fi- but said Oakmont would be al nity to help reopen its doors or
nancial institutions depend on de- lowed to stay open and that the assist in its sale. I do not know
how long this will take, but it is
positor confidence, and could not
exist without depositor confi- savings and loan is able to meet my prayer that this will be soon, "
dence."
its money demands.
Warner said.
The erosion of confidence At his daily news briefing on Warne
r is one of 12 Home State
caused the collapse of Home the savings and loan situation, officia
ls named in a $432 million
State Savings Bank in Cincinnati, McAlister announced that East
by lawyers on
which remains under a conserva- Side Building & Loan of Cincin civil suit filed
Home State conservator Arlo
tor, and a run on other savings nati has worked out a merger Smith'
claimi
behalf
savs
ng the were
and loan associations that trig agreement with Mayflower Savings and loan's problems
caused by their negligence and
reckless mismanagment. Warner
did not refer to the suit.

14

A

COM

STATE OF OHIO
Department of Commerce
Two Nationwide Plaza Columbus, Ohio 43215

MEMORANDUM

January 7, 1985

To:

The Honorable Richard F. Celeste
Governor of Ohio
Speaker Vern Riffe
President Paul Gilmore

From:

C. Lawrence Huddleston, Superintendent
Division of Savings and Loan Associations

Re:

60 Minutes spots on private insurance of deposit accounts.

Each of the past two weeks, CBS has run investigative spots on "60 Minutes"
about the failed state deposit insurance funds in California and Nebraska. The
California Fund insures "Thrift and Loans," the Nebraska Fund insures "Industrial
Banks." Ohio does not have these types of institutions, both of which are
something of a cross between a credit union and a small loan company, but with
fewer restrictions on the types of investments they can make.
Last Monday, after the "60 Minutes" piece on California, two institutions
reported significant outflows, although neither could be classified as a "run."
• The Division and many institutions received telephone inquiries.
After the latest piece, aired January 6 , I received calls at home from depositors
and institution managers. This has never happened in my two-year tenure, and
suggests a potentially damaging nervousness may exist. The Division received 10
calls between 9 and 9:30 on January 7.
In the event that you wish to respond to constituent inquiries, we have attached
the statements being made by this office, plus a copy of our special edition
Newsletter mailed to the institutions after the December 26 "60 Minutes"
broadcast.

CLH:gre
Attachments

cc: Warrem W. Tyler

15

Ohio Savings and Loan Superintendent C. Lawrence Huddleston today issued a
statement. in response to recent "60 Minutes" investigative reports on the
failures of an Industrial Bank in Nebraska and a Thrift and Loan in California,
and the "insurance pools which were to protect depositors.
"Both the Nebraska and California insurance corporations have deficiencies not
shared by the Ohio Deposit Guarantee Fund:
•

Ohio - Selective underwriting of savings and loans by Fund
Nebraska/California - must insure Industrial Banks and Thrift and Loans

·

Ohio - Fund has full-time professional staff
Nebraska/California - no staff at all, á mere mail order pool of money.

·

Ohio - Fund exercises supervision over member savings institutions
Nebraska/California - no supervision of any kind over activities of
insured banks.

Ohio - Fund requires monthly report
Nebraska/California - No reporting required
Ohio - Fund has more than $40 million in reserves and approximately
$130 million available to cover losses
Nebraska/California - Nebraska fund, according to our information had
only $2 million.

Ohio - Fund insures only savings and loans
Nebraska/California - Funds insured industrial banks
The Ohio Deposit Guarantee Fund is a mutual deposit guarantee fund authorized
by state law in 1956. The Fund and its member institutions are examined at
least every 18 months by the Ohio Division of Savings and Loan Associations.
The State has required annual independent audits. Ohio's savings and loans are
more stringently regulated than are industrial banks. The assets to guaranteed
savings ratio of the Fund is higher than FSLIC, and the average capital of Fund
institutions is higher than FSLIC institutions.
In short, the Ohio Division of Savings and Loan Associations views the Nebraska
and California "insurance funds" as fatally flawed and doomed to failure. The
statutory and regulatory shortcomings that existed in those states do not exist in
Ohio.
All financial institutions depend on depositor confidence, and could not exist .
without depositor confidence. "60 Minutes" revealed that citizens lost money in
Nebraska and California, but did not explain why the "insurance" funds failed. It
is regrettable that the Ohio Deposit Guarantee Fund is the subject of depositor
concerns because of the inadequate structure and supervision of the funds.
The Ohio Deposit Guarantee Fund meets the requirements of Ohio law and the
regulations of the Division of Savings and Loan Associations.

16

The Ohio Deposit Guarantee Fund has been in existence since 1956. It is
different from the troubled Industrial Bank Fund in Nebraska in several
important respects. The Nebraska fund has no full-time employees and is
run only by a volunteer board of directors. Ohio's Deposit Guarantee Fund
has a full-time supervisory staff which monitors the condition and practices of its insured companies. Ohio's Deposit Guarantee Fund investigates
and qualifies those it insures before insurance of accounts is granted
whereas the Nebraska fund is obligated to admit all who apply, irrespective
of quality.

The Ohio Deposit Guarantee . Fund is chartered and examined by the
Superintendent of Savings and Loan Associations of the State of Ohio. No.
depositor has ever lost money in any institution with Guarantee Fund
coverage. The Ohio Deposit Guarantee Fund has more than $130 million .
available to cover depositor losses, and earned more than $ 10 million
dollars on its investments in 1984.

17
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Rapid

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Regulatory

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Review

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& LOAN

Special Edition ' .

Richard F. Celeste
Governor

WarrenW.Tyler|
Director
An Equal OpportunityEmployer

C.Lawrence Iluc
Superintend
December 1

On the CBS evening news December 26 there was a news story on the failure of the
California Thrift Guarantee Fund. The Division has received inquiries from customers
⚫ of institutions insured by the Ohio Deposit Guarantee Fund, and several Fund-insured
companies have also received inquiries about Ohio's Fund as a result of the CBS story.
The Superintendent and the Division have worked diligently in both the General
Assembly and the Congress to insure the continued right of states to authorize private
insurance of accounts. The Ohio Deposit Guarantee Fund - and similar funds in North
Carolina, Massachusetts and Maryland -differ dramatically from the failed bank fund
in Nebraska and the failed Thrift and Loan fund in California. Lest the Ohio Savings
and Loan industry be damaged by unsupportable comparisons, we thought it important
to share the differences in protection Ohioans enjoy over funds in other states.
The California and Nebraska funds are simply pools of money. We are informed they
must insure all who apply, have no full-time employees, exercise no supervision or
control over member institutions and have no authority of any kind to take steps to ..
prevent or control problems.
By contrast, the Ohio Deposit Guarantee Fund exercises discretion over who they do
and do not insure (having, refused insurance to applicants in the past 18 months), has a
full-time professional staff, exercise comparatively rigid supervisory controls over
selected member institutions, and have virtually unlimited contractural authority over
those institutions. In addition, the Fund itself is regulated by the Division of Savings
and Loan Associations in roughly the same manner as we would regulate a savings and
loan association..
The Ohio Deposit Guarantee Fund has 72 member. institutions. The Fund earned in
excess of $10 million (net) in the 12 months ended June 30, and now has reserves in
excess of $100 million...
In summary, the statutory and regulatory shortcomings that permitted the failure of
the California and Nebraska Funds do not exist here in Ohio where the Legislature has
provided more authority to the regulatory structure. The savings institution community in Ohio can be helpful to depositors by understanding that, compared to nonsupervisory funds in other states, a significantly better operating environment is
enjoyed by the Ohio Deposit Guarantee Fund.

18
Mr. BARNARD. Thank you very much, Governor. Governor, it appears that there are 41 savings and loans that still remain closed
in Ohio. What are the prospects for those 41?
Mr. CELESTE. Mr. Chairman, I believe the prospects for those 41
and particularly for the depositors in those 41 institutions, are very
good. Most have made application for FSLIC insurance. And we estimate that a good number of them, 10 to 20, are likely to be processed by the same expeditious processing which the Federal Home
Loan Bank has been assuring us in the past 2 weeks.
There are a group of them who have indicated the desire to find
a strong partner . For them, merger is really important for them to
operate safely in the future, and we have retained an investment
banker and working with the superintendent of savings and loans
to assist in that process and facilitate it.
For the remaining group, which really falls in between the first,
relatively easy to process, and the latter, who need a strong partner, we are looking at the possibility of some kind of shared entry
into the FSLIC in which the State uses what we now have on the
table which is about $60 million . I mentioned $50 million- that has
been increased to about $60 million-to see if there is not a way in
which we can help them meet the capital requirements, help them
maintain the standards which FSLIC expects of them properly so
that they can qualify. So it is our hope that we can get all of them
open reasonably quickly. It is important to the depositors that they
have that access to their funds.
Mr. BARNARD. Governor, there is substantial evidence that the
Ohio Thrift Division knew many years ago about the massive
unsafe and unsound financial transactions between Home State
and ESM, but failed to do anything about it until it was too late.
Do you have any plans to improve your thrift supervisory division so as to minimize the possibility of any future failures?
Mr. CELESTE. Mr. Chairman , as I pointed out in my testimony, I
think it is vitally important that we do precisely that. I look forward both to the recommendations of my own director of commerce
and of the person I have installed who is fresh and from outside is
the superintendent of savings and loans , as the changes we should
make, both of a statutory nature and of a procedural nature, possibly including the additional personnel. In addition, I think it is
very important to take quite seriously the report of the special
prosecutor who will be looking at all of the implications of how this
matter was handled, and I intend to do so.
Mr. BARNARD. Have you gotten any indication from your State
supervisor - and you mentioned this in your testimony -why it was
difficult to determine this connection between Home State and
ESM even though you said that it was acknowledged that they
knew about it, but it was difficult to disassociate it? Could you
elaborate on that to some degree?
Mr. CELESTE. I can tell you what has been reported in the press . I
have not had the results of any of the investigative work at this
point and in terms of what was reported in the press, on several
occasions plans were put in place, and in fact may have been under
way to find a way to disinvest in- if that is a proper term - in
ESM. The problem was how to manage that in such a fashion that
you did not cause a crisis that you sought to avoid. In other words ,

19
whether it was by public exposure of a concern that might cause a
loss of depositor confidence through the mechanics available to the
superintendent and his staff, or whether it was through substantial
losses that might be incurred by a plan that required the sale of
their investments in an unfavorable situation .
Mr. BARNARD. The problem is that first of all we are mindful
that the supervisory forces of Ohio did make an attempt to separate the two. In other words, that Home State could buy back their
repos. But the irony of it was that while a plan was made to decrease the amount, it actually increased.
Mr. CELESTE. You are asking the same questions that I am asking
of both my superintendent and of a special prosecutor to examine.
am not sure when a plan was put in place. I am not sure what evidence we have of a commitment on both sides to see to it that that
plan was implemented . That is part of what we have to determine.
I come back to this fact. If ESM had not practiced fraud and if
the audited statements were accurate, we would not be confronting
this issue in this situation today.
Mr. BARNARD. This is what our concern is. Because fraud was
evident even back in 1977, and this is where we just――
Mr. CELESTE. There has never been evidence of fraud, Mr. Chairman. Excuse me, Mr. Chairman. There has never been evidence of
fraud to my knowledge conveyed to anyone in Ohio's Department
of Commerce, Division of Savings and Loan.
Mr. BARNARD. We will be coming back to this time and time
again today. Because we can trace the knowledge of ESM through
many Federal agencies, as well as State agencies. And credit
unions. And it is just hard for us to understand why this information was not considered serious.
Governor, I believe you announced yesterday that an out-of-State
purchaser had been found for Home State . Can you provide us with
any of the details of this purchase? Or any further information?
Mr. CELESTE. Mr. Chairman I have learned to be very cautious in
the last 4 weeks in the matters of banking, as you yourself I am
sure are from your own experience in the field . No one is more understandably conservative than are the leaders of the banking community. Let me say this. At the time at which we recognized the
dimensions of the crisis at Home State, Home State officers themselves were, and the representatives of the Ohio Deposit Guarantee
Fund were in discussions with an Ohio bank about the possibility
of a sale. Home State was then also presented to other banks in
Ohio and out-of-State banks. In the past week, we have had an indication of substantial interest with the framework for moving forward. For an out-of-State bank to acquire Home State in Ohio and
to operate it as a bank would require change in our State law and
that matter is now in the hands of more attorneys than I would
like to think of this morning to try to work it out.
Mr. BARNARD. But you still have a deposit base at Home State of
over $500,000.
Mr. CELESTE. We have a deposit base of about $520 million , in 34
well-located branches and I am happy to say that.
Mr. BARNARD. Are you getting any help in this possible acquisition by the Federal Reserve, the FDIC, or the Home Loan Bank
Board?

20
Mr. CELESTE. Yes. I think we have had very close cooperation by
all of the Federal regulatory agencies in the effort to consider a
buyer, a purchaser, for Home State.
Mr. BARNARD. Governor, how would you rate the performance of
the Federal Reserve and the Federal Home Loan Bank Board in responding to Ohio's thrift crisis?
Mr. CELESTE . Mr. Chairman and members of the committee, I
would say that there have been two time periods in which we have
dealt. The time period before the declaration of a bank holiday and
the time since. I think that the view generally was what we had up
until the time I declared the holiday and closed these institutions
was a State problem and it required a State remedy. That there
was no obvious way in. I think you mentioned some kind of a Federal standby authority. That does not exist today for this kind of a
situation. And so I would say as Governor of Ohio I had to seek a
remedy on our own terms essentially.
Certainly, there was a recognition of the seriousness of the problem at every stage of the way, and willingness to provide advice
and support in trying to understand and get our hands around that
problem on the part of the Federal Reserve and the Federal Home
Loan Bank.
Since the declaration of the holiday, we have had extraordinary
cooperation. In fact, before that I should say we had Federal Home
Loan Bank, or Federal Reserve examiners and others in to help.
They came in early to take a look at what might be done in order
to assure liquidity at the point at which we reopen institutions.
Mr. BARNARD. What has been the response of the financial institutions that were closed in your [bank] holiday? Were they responsive to that affirmatively or did they feel like it was unnecessary?
Mr. CELESTE. Mr. Chairman, two institutions chose to remain
open in spite of the superintendent's order on Friday morning that
the holiday began. One vice president announced that he knew his
customers and he was confident that they could continue to be
open. By noon, he had closed his institution and said the Governor
was right and he would stay closed as long as the Governor required him to be closed.
I met with about 130 individuals who represented these 71 institutions the Sunday evening in which the holiday was to come to an
end, at that point contemplating emergency legislation to require
Federal insurance and to keep them closed until we had secured it.
In those conversations which lasted about an hour and a half,
there was an opportunity for the executives to speak face to face
with me. The vast majority of them expressed appreciation for the
fact that they were closed. I said that I would like a written request that I keep them closed . I think understandably they deferred on that matter, but they did offer a rising indication of their
opinion. Ninety-five percent of them asked me to keep them closed .
But after the meeting about 95 percent of them said that they
really would rather be open the next morning.
Now, to me that is perfectly understandable. These are individuals whose business is to be there to do business with their depositors and with their customers. And I think it is very difficult for
any of them to go out and say on Main Street, " I do not want to be
open this morning." But certainly to the Governor, they indicated

21
their desire to stay closed, to have a procedure that would expeditiously get them Federal insurance, either FSLIC or FDIC, depending on the circumstances. And that is what we have achieved.
Mr. BARNARD . The fact that so few, comparatively, asked for use
of the Fed's discount window, as opposed to the availability of the
discount window, does that indicate to you that the management
felt confident that they could withstand this crisis?
Mr. CELESTE. I think what happened is that the crisis moved selectively from 1 or 2 institutions to 4 or 5 to perhaps 7 of the 71
that were experiencing severe runs on the day before the institutions were closed . Forty of these institutions were concentrated in
a media market in southwestern Ohio where they were being belabored by some who urged them that it was time to panic , take your
tents, take your cots, lineup in front of the institutions and there
were people sleeping overnight in front of a growing number of institutions as Friday dawned. I think it is fair to say that the circumstance was moving very rapidly, and up to that point in time,
no one at the Federal Reserve had really had an opportunity to
make a judgment about the quality of assets against which these
institutions might borrow at the discount window.
Mr. BARNARD. Governor, let me ask this question. With all of
this experience behind you, will you be proposing that your State
deposit insurance fund, as well as your State supervisory agency,
be strengthened from the standpoint of what it can require of bank
management as to management, capital, and other management
practices?
Mr. CELESTE. Mr. Chairman, yes, I will. In fact, during the course
of this crisis, we issued orders on the kind of trading that could be
done, withdrawals, compensation dividends, that might be undertaken by the 71 institutions that were involved. It is my feeling
that we have to be more aggressive . I need guidance from those
who are investigating exactly what has happened . And the advice
of my director of commerce. But I intend to see that strengthened.
Mr. BARNARD. You may check a note from the FDIC and the
FSLIC. The Congress gave them the power of cease and desist a
number of years ago. We certainly would strengthen their hands.
Mr. CELESTE. Mr. Chairman , we have a cease and desist power in
the State law that requires an opportunity for public hearings
shortly after the order is imposed and that problem of public hearing is one that raises often the very difficulty that one is trying to
avoid.
What I have learned in this is that cash is not the most important ingredient in our banking system. It is confidence. And anything which undermines that confidence is really a greater threat
than whether the cash is there at the withdrawal window. And so I
am concerned that we reexamine how we strengthen our ability to
set standards and enforce them in ways that avoid the danger of
undermining confidence.
Mr. BARNARD. I have one final question and that is: What is your
best estimate as to when the depositors of Home State will be paid
off and whether they will recover all of their deposits?
Mr. CELESTE. My goal has been from the outset to try to make
them whole in the Home State situation . I have been reluctant to
make a commitment because it may require standing behind our

22
efforts at sale or something else by the State of Ohio that will be
quite likely before the general assembly in the next several days . It
is my feeling that we will work urgently in the next few days to
have in place a mechanism that gets Home State reopened, gets
the depositors protected 100 cents on the dollar, but that is probably a matter of a couple of weeks, not a couple of days, to be done.
Mr. BARNARD. How would you recommend, based upon this very
difficult episode, that the Federal supervisory agencies can do a
better job of protecting those who deal with Government securities
dealers?
Mr. CELESTE. But surely, Mr. Chairman, if there is information
available to Federal regulatory agencies about potential problems
at any Government securities dealer, I think that information
ought to be available to the State regulatory agencies who deal
with financial institutions. I am not familiar enough because my
background is not banking and finance to give you a technically
strong answer, but as a chief executive officer of a State concerned
about a panorama of potential problems, certainly good information about potential difficulties in a timely way is the single most
important resource that we can look forward to.
Mr. BARNARD . Thank you . Mr. Craig.
Mr. CRAIG. Thank you very much, Mr. Chairman .
Governor Celeste, we appreciate your openness and frankness
about this critical issue.
Have any depositors in Ohio lost money yet?
Mr. CELESTE. No depositors in Ohio at this point have lost money.
Mr. CRAIG. There has been no money lost?
Mr. CELESTE. That is right. There may be some, officers and
shareholders at Home StateMr. CRAIG. I used the word "depositor."
Mr. CELESTE. Who are also depositorsMr. CRAIG. I see.
Mr. CELESTE [ continuing]. Who may have money at risk.
Mr. CRAIG. Would you tell us the relationship the State government has in Ohio with the Ohio Deposit Guarantee Fund?
Mr. CELESTE . Currently, of course, the superintendent has appointed a conservator so that the Ohio Deposit Guarantee Fund is
really within the supervision, directly of our division .
Mr. CRAIG. Where was it prior to closing——
Mr. CELESTE. It was a private guarantee fund established under a
statute passed in the mid-1950's which was subject to some supervision by the division of savings and loans but which operated independently and by virtue of bylaws adopted by the participating institutions. And operated with an assessment from them. I believe
that one of its officers will be here shortly and probably could give
you a better evaluation or description of that relationship.
Mr. CRAIG. There was no State regulatory responsibility or direct
oversight of this fund?
Mr. CELESTE. I believe that the superintendent could exercise a
regulatory authority——
Mr. CRAIG. But I mean there was no quarterly or monthly or
Mr. CELESTE. To my knowledge, there was no quarterly or monthly supervisory review of the Ohio Deposit Guarantee Fund. You
will see in my testimony a memorandum that was prepared for me

23
and for legislative leaders about the fund by our superintendent of
savings and loans back at a time when public questions were raised
because of the Nebraska situation.
Mr. CRAIG. What type of people then made up the advisory board
or the control board or what the proper title is of the fund itself?
Mr. CELESTE. You will have to ask the-I apologize.
Mr. CRAIG. You are not aware of that?
Mr. CELESTE. I am not aware of that. I assume it was the officers
of some of the participating institutions. But for accurate information I would defer to the officer of the Ohio Deposit Guarantee
Fund.
If I may, Mr. Chairman and Mr. Craig, point out again that the
"Ohio" in the Ohio Deposit Guarantee Fund was in many respects
misleading.
Mr. CRAIG. Apparently misunderstood, too .
Mr. CELESTE. Of course, misunderstood .
Mr. CRAIG. The reason I asked those questions is because our investigation showed the rather notorious dealings of ESM were well
known nationwide, in part by a lot of people starting in the late
1970's, by bankers and by savings and loans people. Yet, we seem
to have had a phenomenal inability to communicate the Federal involvement and the Federal concern versus knowledge on the part
of those who are active at State levels with similar responsibilities
to our Federal regulatory groups to understand the magnitude of
the problem, and therefore, some continued to do business with
this group.
Let me then ask the question, Governor, why did you not place
the full faith and credit of the State of Ohio behind the Ohio Deposit Guarantee Fund?
Mr. CELESTE. Under our constitution, on the advice of the Ohio
attorney general, we could not do that. We could make a specific
commitment to a private, nonprofit fund of an appropriation . We
did that in the case of the second fund. There was no willingness
on the part of the members of the general assembly-leadership of
the general assembly-to undertake that with respect to Home
State.
Mr. CRAIG. So in other words, this is why you created the new
fund?
Mr. CELESTE. That is exactly right. Because it was not subject to
the massive hemorrhage caused by the ESM failure and that was
the reason for commitment to a new fund.
Mr. CRAIG. How many supervisors of the Ohio Division of Savings and Loan Association has there been since 1984?
Mr. CELESTE. Since 1984, the superintendent of savings and loan
indicated to me his intention to resign in about November 1984,
but actually stepped down in mid-January. We appointed an acting
superintendent at that time, Thomas Batties, who was a member of
the legal staff at the division. He was made superintendent during
this crisis because under our law he could not sign any binding document unless he were serving as the superintendent. But the superintendent who I appointed, Robert McAllister, was appointed
about 2 weeks ago this time.
Mr. CRAIG. So there have been approximately three during that
time?

24
Mr. CELESTE. There really have been two and an acting person
who was made superintendent in order that his signatures have
the full power of the office.
Mr. CRAIG. What is the responsibility of that office?
Mr. CELESTE. That office has all of the regulatory authority. As a
matter of fact, in terms of examination reports, the ability to act
on those examination reports, it is in the hands of the superintendent. Even the director of the department in which that division is
placed does not have authority under our statute to review examination reports or to act on those examination reports.
Mr. CRAIG. He does not have authority?
Mr. CELESTE. The director of the department does not have authority.
Mr. CRAIG. But this gentleman does?
Mr. CELESTE. This individual does have that responsibility. That
is exactly right.
Mr. CRAIG. Do you know why the first person resigned?
Mr. CELESTE. No. I think part of it may have had to do with a
quarrel over that authority in which the director chose to exert his
leadership as director in terms of all of the divisions in his department. And on that score, I would support the director, let me say,
rather than the superintendents.
Mr. CRAIG. In October of 1983, the superintendent of the division
of savings and loan instructed Home State to wind down its transaction with ESM. In January 1984, all the directors of Home State
agreed to a program of winding down ESM's relationship . I understand all directors agreed except one . Do you have any idea who
that dissenter was?
Mr. CELESTE. No, I do not. The information you are providing me
is not information that I have directly. My view, and I would go
back to this, is that we must examine every aspect of this transaction to determine what is involved and what the lessons are for our
regulatory operations.
Mr. CRAIG. And your supervisor or the superintendent of the division of savings and loan did not communicate those transactions
to the Office of the Governor?
Mr. CELESTE. Absolutely not. The first time that the Office of the
Governor became familiar with the problem at Home State was the
evening before the article appeared in the Cincinnati Inquirer.
Four weeks ago last evening. That was the first evidence, the first
expression of concern with respect to Home State and its operations period.
Mr. CRAIG. Well, then, who does the superintendent report to?
Mr. CELESTE. The superintendent reports to the director of commerce, but the superintendent has the responsibility to deal with
those problems and if he does not of his own accord walk forward
and say this is a problem, if he believes he is handling the problem ,
it would be as in any other agency, his responsibility to do that.
Mr. CRAIG. And then the director of commerce you say is the
title that he reports to?
Mr. CELESTE. That is right.
Mr. CRAIG. Ultimately then would report to you?
Mr. CELESTE. That is right.
Mr. CRAIG. And he brought this information to you?

25
Mr. CELESTE. No. No one-but let me go back. No one brought
this information.
Mr. CRAIG. You read it in the newspaper?
Mr. CELESTE. We had a call and I could not tell you exactly from
whom-the call to my chief of staff on Tuesday evening, the day
after the SEC had closed ESM, saying that there was a serious concern about the impact which the ESM situation would have on
Home State Savings because of the extent of Home State's investment. My own personal knowledge of this really began the next
morning with the publication of the Cincinnati Inquirer story.
Mr. CRAIG. Thank you. Thank you, Governor. Thank you , Mr.
Chairman.
Mr. BARNARD. Mr. Spratt.
Mr. SPRATT. Mr. Chairman, I yield to my distinguished colleague
and chairman of the Government Operations Committee, Mr.
Brooks, if he would like to proceed ahead of me.
Mr. BROOKS. I will let the members go on and question the Governor. We are glad to have you here, Governor. And I will make a
brief statement after you leave.
Mr. CELESTE. Thank you very much.
Mr. BROOKS . I know he has a time problem .
Mr. BARNARD. The Governor does have a time problem and I
would like to be able to accommodate that time as much as possible. Mr. Spratt.
Mr. SPRATT. Governor Celeste, thank you for appearing here on
rather short notice.
Could you tell us, even though it did not happen on your watch,
what motivated the State of Ohio to create the Ohio Deposit Guarantee Fund in 1958?
Mr. CELESTE. Mr. Chairman, I cannot tell you. I think it was
probably a determination that these that there should at least be
an alternative for the State-chartered institutions to Federal insurance, but I was not a member of the general assembly at that time,
although I am older than I look, and feel older than I look . And
was not-frankly, the first time I heard of the Ohio Deposit Guarantee Fund was when a memo unsolicited came to my office from
the superintendent, the January memo which is part of my testimony, saying these are the circumstances involving it. And so I am
not familiar with its history.
Mr. SPRATT. Do I understand your testimony correctly to mean
that the State, the Governor's office, and the State legislative leaders, are now rethinking that decision? It seems to me that you are
saying that you are going to require in the future either a big
enough parent for a guaranteed fund to assure adequate coverage,
or Federal insurance. Are you abandoning the idea of a mutually
held State-administered guarantee fund?
Mr. CELESTE. Mr. Chairman, Mr. Spratt, we have abandoned it.
We have passed legislation that requires that these previously insured ODGF institutions, privately insured institutions, must apply
for Federal insurance, must show evidence that they would qualify
for Federal insurance or must-and then the superintendent can
exercise discretion- or must have a parent who can provide a guarantee in proper form to satisfy the superintendent that all depositors are protected.

26
We, for example, have several loan associations who do not have
mortgage portfolios that are not your traditional savings and loan,
would not qualify for FSLIC insurance, but have very strong parents and there is a firm guarantee of all of the amounts of the deposits in writing with the superintendents, probably as strong a
guarantee as you can get anywhere. But that is the only alternative to Federal insurance as far as this Governor is concerned and
as far as our general assembly is concerned for the future, in my
judgment.
Mr. SPRATT. Fine . I would like to ask more questions, but in light
of the time constraints on all of us, I will pass up. Thank you for
being here.
Mr. CELESTE. Thank you.
Mr. BARNARD. Mr. Saxton.
Mr. SAXTON. Governor, in previous hearings this committee has
had relative to FSLIC and FDIC, one of the considerations that we
have taken note of is proposed regulations by those agencies to regulate the amount of direct investment by thrift institutions and
banks of various kinds. I am curious to know if you know offhand
what percentage of Home State's net worth was invested in ESM?
Mr. CELESTE. I think that substantially about half of its assets
were in ESM at that time. Its net worth was- or equity was very
small. I do not have that information in front of me directly, but I
think there are people here who could answer that for you.
Mr. SAXTON. Our conversations with FSLIC and FDIC have indicated that a safe level might be 5 or 10 percent of its worth.
Mr. CELESTE. I think that is right.
Mr. SAXTON. And your indication is that Home State had perhaps 50 percent of its net worth invested in ESM?
Mr. CELESTE. Yes, Mr. Chairman. Yes. Of its assets. Actually substantially more than its net worth.
Mr. SAXTON. Does the State audit for this type of information?
Mr. CELESTE. Yes, we do. And, Mr. Chairman, Mr. Saxton, in my
testimony I have shared with you some articles that spell out the
concerns that have been expressed over a number of years by those
involved. I think our examiners flagged this problem. I think that
the question was how do you cure the problem and whatever reasons for the failure to cure that problem are now the matter of investigation, an investigation I strongly support.
And we point out also it is not simply Home State that brings us
together this morning, but the fact of closing 71 other institutions.
None of them invested in ESM. To my knowledge, none of them
had this same kind of a problem. And one of the points I would like
to emphasize is that unfortunately healthy strong institutions and
a very strong thrift industry in Ohio suffered because of the failure
at Home State as a result of massive fraud at ESM .
Mr. SAXTON. Then if I am hearing you correctly, you are indicating to us that somehow the State had knowledge that this large
amount of investment was directly invested in one firm and either
could not or did not do anything to remedy the situation?
Mr. CELESTE. That is exactly right. I think the second lesson I
point out is that we were able to identify the problem, but not cure
the problem. And that is a matter of serious concern in terms of
our regulatory capabilities.

27
Mr. SAXTON. In light of that, would you say-was anyone in your
administration aware of Home State's difficulties before the crisis
actually occurred?
Mr. CELESTE. Well , I assume that the superintendent of savings
and loan was working with them on that. And I think the record
will show that and that is part of what will be examined, both by
the new superintendent and my director of commerce , new director
of commerce, and by a special prosecutor.
Mr. SAXTON. One final question, Mr. Chairman.
In light of what has happened, do you feel that this subcommittee should make recommendations relative to major changes as
they affect private insurance companies?
Mr. CELESTE. Yes.
Mr. SAXTON. Thank you .
Mr. BARNARD. Mr. Kolter.
Mr. KOLTER. Thank you , Mr. Chairman.
Governor, do you and your banking people in Ohio feel that possibly the Home State Bank problems could have been avoided if the
Federal securities regulators had been more vigorous, perhaps
strong?
Mr. CELESTE. Mr. Chairman, Mr. Kolter, if vigor was the problem, I suppose that will be identified . It may have been communicating information clearly if there were concerns as the chairman
and others have indicated about the quality of business practices at
ESM . There is no question in my mind that if ESM were healthy
today, we would not have had the problem at Home State.
Mr. KOLTER. Do you believe the Federal response to the banking
crisis in your State was satisfactory?
Mr. CELESTE. I am having a very satisfactory relationship with
all of the Federal regulatory authorities during the last 2 weeks,
and I think there is a real question about-let me take it back.
Before the bank holiday, there is a real question about how any of
the Federal regulatory authorities stepped in to help. And I am not
sure there is a clear path for that to happen.
Mr. KOLTER. Thank you, Governor.
Mr. CELESTE. Thank you.
Mr. BARNARD. Mr. Swindall.
Mr. SWINDALL. Governor Celeste, if I understand your testimony
correctly, you are stating that in spite of the fact that your capitalto-asset ratio was really not that unlike the capital-to-asset ratio
we have with federally insured
Mr. CELESTE. Better, as I understand it.
Mr. SWINDALL. Better. That the real flaw came in the fact that
under your State constitution you are prohibited from really putting the full faith and credit of revenue, tax revenue. Is that essentially correct?
Mr. CELESTE. Mr. Chairman, Mr. Swindall, I think there are two
aspects of a problem. The first, that even with a well-capitalized
fund in relationship to the largest institution, it was not sufficient
to meet that. One of the advantages I think of FSLIC and the rest
is that though they may not have the same capital-to-assets ratio,
there is no single institution that can put the same kind of call on
the fund, if it is in trouble.

50-923 0-85--2

28
The other aspect of it, of course, is that the State of Ohio-the
legislature of the State of Ohio cannot pass a resolution like the
one the Congress passed in 1982 saying that the full faith and
credit of the U.S. Government, in this case, the government of the
State of Ohio, is behind this institution. We have a debt limitation.
We balance our budget and we are required to make specific appropriations for specific purposes.
Mr. SWINDALL. But there was no prohibition whatsoever from
you as Governor putting into effect some action that would have
called on workers' compensation fund, pension funds, revenues
from lottery profits, or for that matter any "nontax revenue," to
back up and give what was in effect full faith and credit and is it
not true that former Gov. Jim Rhodes said that is precisely what
he would have done in the same situation?
Mr. CELESTE. Mr. Chairman, as all the Members of Congress
know, States have only one Governor at a time, and this Governor
did talk to the leaders of the general assembly, both parties, who
indicated that they were not prepared to recommend the appropriation of any money at that point in time in connection with the
situation at Home State. And so a Governor cannot unilaterally
commit funds of the State, nor should a Governor be able to, any
more than I think that the President could commit funds of this
country .
Mr. SWINDALL. But, Governor, what you are saying to us is that
some other solution for future problems needs to be solved. But my
point is that under extraordinary circumstances, extraordinary
leadership is necessary and had extraordinary leadership been
taken in this situation we might well have avoided the panic that
occurred from literally weeks of floundering, rather thanMr. CELESTE. Mr. Chairman, Mr. Swindall, let me make sure the
record is correct here. Extraordinary leadership was exercised,
both by the Governor and the Ohio General Assembly. Now, there
were no weeks involved . There were 3 days involved between the
time in which the story broke and the substantial loss at Home
State Savings and the time in which the president of Home State
closed his doors on a Saturday morning. We placed Home State
into a conservatorship on Sunday. That is less than a week.
During that time, I met with legislative leaders to propose potential remedies. We had two problems. Home State directly, and 71
other institutions which were part of a private insurance fund
threatened themselves because Home State's hole was so big it
could absorb all of that fund and leave them, for all practical purposes, uninsured. In that time, the Ohio General Assembly at the
request of the Governor prepared legislation and within 3 days
passed legislation appropriating $50 million, a step which I am told
by Chairman Volcker and others was unprecedented by any State
in an effort to protect those other institutions.
So I think that before you make a judgment about both the
nature of leadership and the causes for panic in Ohio, it would be
important to recognize the extraordinary nature of the steps that
were taken and the fact that today those depositors are protected
and those institutions are reopening stronger than ever.
Mr. SWINDALL. In closing, you do, however, concede that in retrospect it might well have been better to have pledged those nontax

29
revenue related assets of the State in support of full faith and
credit, rather than
Mr. CELESTE. Mr. Chairman, Mr. Swindall, no , I do not concede
that at all.
Mr. SWINDALL. Thank you.
Mr. BARNARD. Time has expired . Mr. Bustamante .
Mr. BUSTAMANTE. Mr. Chairman, let me yield some of my time to
my colleagues from Ohio. I would like to yield to the gentlelady
from the State of Ohio, Mary Rose Oakar.
Mr. BARNARD. Ms. Oakar is recognized.
Ms. OAKAR. I want to thank the chairman for yielding to me. I
want to thank the chairman for allowing us to sit with the committee. The chairman and I serve on the full Banking Committee together and I have great respect for the chairman and my colleagues on this committee.
Governor, I just simply want to compliment you on your statement today. I think that your spirit of openness was very, very important and the leadership you provided in those critical days was
important.
You cannot say it, but I later will, and you have stressed that
you have gotten tremendous cooperation in the last 2 weeks and
know you got very fine cooperation from the Federal Reserve prior
to your decision to close the banks, but I intend to pursue politics
involved and I just wanted to make that statement for the record
and thank you for being here.
Mr. BARNARD. Mr. Kindness . A member of the overall committee.
Mr. KINDNESS. Thank you , Mr. Chairman, and Governor Celeste,
we welcome you here today, but I think you would agree, Dick,
that we have got to stop meeting like this.
I am concerned about a phase of the matter that is bound to
have been overlooked in the process of quickly responding to the
difficult situation with which you and the general assembly were
faced, and that is some of the very small savings and loans, to the
people who are depositors in those institutions. They have just as
much concern about being able to get access to their funds for necessary purposes as do depositors of the larger ones that may qualify for FSLIC coverage, but they are too small . And one of them
happens to be the Summerville Savings & Loan in our area, in
Preble County, and I believe there may be one or two in that small
category.
Is it contemplated by the legislation passed by the general assembly that the only out for those small institutions-that one I mentioned happens only to be open 1 day a week. It is a very small
operation. Is the only out for them to merge into another savings
and loan?
Mr. CELESTE. Mr. Chairman, Mr. Kindness, I do not know that
the only out is for them to do that. There may be other vehicles
under discussion. I might say that one of the things I learned in
my conversations with Chairman Gray and his staff was that size
in and of itself is not a factor in determining eligibility for Federal
insurance. There are others with respect to their providing fulltime service and things of this sort. But our hope would be to work
with those small savings and loans. Again, many of them healthy
and many of them providing essential services over several genera-

30
tions to a community to ensure that their depositors are protected
and that that service continues to be available to them in some
fashion. Merger may be the only or the best recourse in some
areas, but I do not want to make that judgment at this point in
time.
Mr. KINDNESS. The door is not closed at any rate to those small
ones?
Mr. CELESTE. That is right.
Mr. KINDNESS. In the functioning of the State of Ohio under
chapter 135 of the Ohio Revised Code, there is a State board of deposit whose minutes made by the State treasurer's office, I believe
it is, are prima facie evidence in any court of what the transactions
were that were dealt with by the State board of deposits . In December, there was a deposit or a purchase of a certificate of deposit by
the State of Ohio of a million dollars in a transaction with Home
State. At that time, according to press reports at any rate, there
was knowledge that ESM and Home State were so intertwined that
there was great difficulty to be contemplated there. Do you have
any information that you could share with the committee as to
why the taxpayers' moneys were put at risk in Home State in that
critical period of time?
Mr. CELESTE. Mr. Chairman, Mr. Kindness, I do not. No. 1 , I am
not sure that-again, we are talking about press reports today
about a situation in December where that knowledge may or may
not have been communicated either formally or informally to the
people who had to make the decision.
The Governor does not sit on the board of deposit, as you know,
so I have not been involved. I would be happy to try to find out for
you what the thinking was in the decision on that deposit, how it
was recommended and whether there was any discussion or debate
before submitting it to the board of deposit or whatever.
Mr. KINDNESS . And if I as a citizen of Ohio were to request a
copy of the records relating to that transaction of the State board
of deposit, you would have no objection to my obtaining that infor
mation?
Mr. CELESTE . More than that, I would help you and I would pay
the postage .
Mr. KINDNESS . I thank you . Thank you , Mr. Chairman.
Mr. BARNARD. Governor, I realize that you are on a tight schedule. We have already exceeded it by 15 minutes. And let me say to
the committee that as a part of this official record, if you would
furnish us any questions that you would like to ask of the Governor or any of these other witnesses, we will see that those questions are answered at your direction and they will be part of the
record as a part of your questioning. And so, without objection, we
will do that.
And I want to say at this time we are delighted to have with us
Congresswoman Kaptur and also a very important member of the
Banking Committee and we appreciate your being here this morning.
Governor, with that we want to again say thank you for being
here this morning. Your testimony has been very helpful, and we
will very possibly be in touch with your office as to this information.

31
Mr. CELESTE . Thank you very much, Mr. Chairman and members
of the committee. I want to express my appreciation for this opportunity to share this experience with you. I want to emphasize
again, if I may, that I believe the financial institutions, including
those thrift institutions in Ohio that have been affected, are
healthy and they are emerging from the closing stronger than ever.
But I think all of us can do a better job and look forward to the
results of your recommendations.
Mr. BARNARD. We can all take some very definite lessons from
Ohio, both from the Federal standpoint as well as the State standpoint, as well as Congress . So we hope that we can do something.
Thank you very much .
Mr. CELESTE. Thank you very much.
Mr. BARNARD. Next I would welcome an opening statement from
our very, very distinguished chairman of the Government Operations Committee who has permitted us to have this hearing today.
I will now recognize the honorable chairman , Mr. Jack Brooks.
Mr. BROOKS. Thank you very much, Mr. Chairman . I want to
take this opportunity to express my appreciation to you and the
very able members of the Commerce, Consumer, and Monetary Affairs Subcommittee for undertaking this timely and much needed
investigation into the conditions surrounding the collapse of ESM
Government Securities and the financial difficulties ESM's failure
has brought to public investors throughout our country.
In the past 3 years, six Government securities dealers have
failed, costing investors hundreds of millions of dollars. These investors include individuals, municipalities, banks, savings and loan
associations , public and private pension funds.
My hometown, Beaumont, TX, lost over $20 million when ESM
failed. Later this afternoon we will hear from Beaumont mayor,
Bill Neild, and other representatives of organizations victimized by
ESM's chicanery .
While the circumstances surrounding the failures of ESM, Drysdale Government Securities, Cosmark, Inc., Lombard-Wall, R.T.D.
Securities and the Lion Capital Group differ from case to case, we
can observe certain common characteristics. They were all heavily
engaged in the growing National Government securities market.
They made extensive use of a relatively new financial instrument
called the repurchase agreement. And they were not under the
active supervision of any Federal regulatory agency. Taken together their failures have had a far-reaching negative impact on the
public's confidence in the stability of our capital markets.
It seems to me that part of our job here today is to begin the arduous task of discovering answers to the following questions. What
were the causes of ESM's failure? We know they are thieves, but
how did we allow them to operate that way? Who is responsible?
Who could have avoided with proper Federal regulatory supervision these problems? And what can we do to prevent such failures
from occurring in the future, other than everybody being as smart
as the Chase National Bank was when they lost their $30 million
in one of these same scams?
You know, this does not just happen out in the hinterlands,
where the unsophisticated people operate. Oh, those big operators
right next to Wall Street, deep pocket boys, they dropped about 32

32
in one of these operations. Now, hopefully the answers to these and
other questions should give us some factual base upon which to
construct the system of governing the operations of both the Government securities market and those who would participate in this
market. At the very least, such a system should offer the American
people and the public investor a guarantee that their Federal Government is doing what it ought to do to ensure that our country's
financial markets are fair and efficient and free of obvious fraudulent activities and operations.
Thank you, Mr. Chairman.
Mr. BARNARD. Mr. Chairman, you certainly have set the stage for
some very interesting inquiries this afternoon and I hope that you
will find time to be back with us so you can hear some of the answers.
Mr. BROOKS. I will be back with you.
Mr. BARNARD . Good. We now have with us Congressman
Chalmers Wylie of Ohio. Congressman Wylie is the senior minority
member of the Banking Committee and a distinguished member of
the Ohio delegation.
Chalmers, we are delighted to have you here with us this morning. And we would like to hear your testimony at this time. I understand that you have a lengthy statement, which we will, of
course, without objection make part of the official record, and you
may summarize as you desire.
STATEMENT OF HON. CHALMERS P. WYLIE, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF OHIO
Mr. WYLIE. Thank you very much, Mr. Chairman, and members
of the Subcommittee on Commerce, Consumer, and Monetary Affairs.
I thank you for the opportunity to participate in this important
hearing on the collapse of the private deposit insurance fund in
Ohio which resulted from the failure of ESM Government Securities, Inc., in Florida, and I appreciate the warm welcome which you
have extended to me, Mr. Chairman. The chairman is a very valuable member of our Banking Committee, very knowledgeable on
banking matters and what he is doing today is providing an excellent service for all of us. And we thank you for that.
I do have a statement which I would ask to be included in the
record, and at this point I would summarize the highlights of that
statement.
Whenever a crisis such as the one which occurred in Ohio in the
aftermath of ESM debacle takes place, we are reminded of just how
important public confidence in the safety and soundness of depository institutions is to the health of the Nation's economy. The depositors have to come first in this instance and to date we have
heard that no depositor in the 71 S&L's which were closed by the
Governor has lost any money as a result of the crisis affecting
State-chartered savings and loans in Ohio. And I hope the same is
true for the depositors of the Home State Bank also.
Depositors in institutions insured by the Ohio Deposit Guarantee
Fund have suffered great inconvenience as a result of being denied
the use of their money for a period of time and some are still re-

33
stricted in the amount they can withdraw even after the institutions have reopened .
We have a responsibility, Mr. Chairman, not only to our constituents in this country but to everyone who relies on the stability of
our Nation's economy, to learn whatever lessons can be learned
from the Home State-ESM fiasco and to take the steps that are
necessary to maintain public confidence in insured depository institutions.
have
During my years of service on the Banking Committee,
participated in many inquiries concerning failures of depository institutions. In my experience the causes of these failures tend to fall
into three categories: (1) problems associated with deteriorating
"spreads" between the cost of funds and the earnings from sound
investments; (2) problems associated with the quality of the assets,
as has occurred with mortgage loans, business and agricultural
loans, and international loans where the value of the property or
the earning ability of the borrower were improperly estimated; and
(3) where a dominant individual took advantage of weak or nonexistent internal controls or external supervision to impose an imprudent investment policy on the institution .
A preliminary conclusion can be drawn that the Home StateESM crisis falls into the third category as have most of the largest
failures. To recite the list of large failures which threatened public
confidence in depository institutions is also to list those cases in
which a dominant individual was able to circumvent internal controls or agency regulations designed to safeguard the assets of the
institution. To mention a few, Franklin National, the Texas and
Georgia banking scandals, U.S. National Bank of San Diego, Penn
Square, Continental, Financial Corp. of America and Empire all
fall into this category, Mr. Chairman, and I ultimately suspect that
Home State will join them.
The Federal Home Loan Bank Board and the Federal Reserve
did yeoman service in making their personnel, right up to the
chairmen, available to deal with the situation as it was breaking.
And may I say that I was in on this from almost the beginning.
And I take this opportunity again to express my gratitude to Chairman Gray and Chairman Volcker and to reaffirm my confidence in
their dedication to preserving the safety and soundness of the Nation's financial system.
You asked the question in your hearing today whether the ESM
collapse that triggered Home State's insolvency might have been
avoided if Federal securities regulators had been more diligent or
whether the SEC should have additional supervisory powers to protect investors.
Now, my staff has examined the most recent form 10-Q filed by
Home State Savings as a publicly traded company with the Securities and Exchange Commission . It is easy to read this document,
Mr. Chairman, and learn that out of $1.4 billion in assets, approximately half were invested in reverse repurchase agreements with a
single securities firm and that Home State seemed to have more of
the characteristics of a mutual fund than of an institution in the
business of making home mortgage loans. It would be interesting to
find out how they filed their tax return.

34
I suspect that many deficiencies will be found in the disclosures
made by Home State. Yet enough information was provided that
one might expect a regulator or a fiduciary to ask further questions . In fact, we have some information provided by the National
Credit Union Administration that indicates that some people did
take advantage of the information they were able to obtain about
Home State and avoided involvement in the transactions that
caused so much grief to so many institutions. Moreover, according
to last Sunday's Cleveland Plain Dealer, former Ohio State commerce director, Kenneth Cox; former commerce director, J. Gordon
Peltier; and former superintendent of savings and loans, Clark
Wideman quote "all said the State knew Home State had invested
in a dangerously large amount of money with ESM Government
Securities , Inc., of Fort Lauderdale, FL, as early as 1982."
It is certainly appropriate for this subcommittee to consider
whether additional measures are needed, but warning signals were
not heeded which could have prevented the failure. With the help
of the Federal regulators, the damage was contained.
You asked another question. Given the state of the Nation's
thrift industry, is there a need to strengthen, modify or replace the
current system of State/private deposit insurance? And I think it is
fair to say that confidence was restored when FSLIC insurance and
FDIC insurance were made available to these institutions in Ohio.
But the fact of the matter is, as you know, Chairman Gray, who is
here and will testify later, has been saddled with some unprofitable
portfolios on residential mortgages vis-a-vis the FSLIC fund. The
chairman of the full Banking Committee, Mr. St Germain, and I
introduced legislation providing for risk-related insurance to try to
assist him in that regard .
Congress I think does need to act and act promptly with regard
to the situation as we have found it in Ohio. I think, Mr. Chairman, what I would like to do is to close at that point and suggest
that if there are any questions that I would be willing to try to
answer them.
Thank you very much .
[Mr. Wylie's prepared statement follows:]

35

Statement of
Rep . CHALMERS P. WYLIE , Ohio
April 3 , 1985
Subcommittee on Commerce , Consumer
and Monetary Affairs
Committee on Government Operations
Hearings on the collapse of ESM Government Securities , Inc. , and its
impact on privately insured Ohio thrifts

Mr. Chairman :

Thank you for the opportunity to participate in this important
hearing on the collapse of the private deposit insurance fund in Ohio
which resulted from the failure of ESM Government Securities , Inc. in
Florida .

My reason for accepting your invitation to appear today , Mr.

Chairman , is stated very succinctly in your own remarks as part of the
announcement of these hearings :

" The public's confidence in the nation's

financial markets could be eroded by a repetition of the Ohio-ESM episode .
That must not be allowed to happen . "

Whenever a crisis such as the one which occurred in Ohio in the
aftermath of the ESM debacle takes place , we are reminded of just how
important public confidence in the safety and soundness of depository
institutions is to the health of the nation's economy .

I am pleased to be

able to report that to date no depositors have lost any money as a result
of the crisis affecting state -chartered savings and loans .
.. depositors will be made whole in the very near future .

Hopefully, all

Governor Celeste ,

state and federal officials , including Members of the Ohio congressional
delegation , have worked long hours in order to speed the arrangements for
the reopening of as many of the institutions as possible .

At this point I

must commend Federal Reserve Board Chairman Paul Volcker , Cleveland

36

Federal Reserve Bank President Karen Horn , Federal Home Loan Bank Board
Chairman Ed Gray, for being available and for the long hours they and
their able staff put in to contain the Ohio situation .

Meanwhile,

depositors in institutions insured by the Ohio Deposit Guarantee Fund have
suffered great inconvenience as a result of being denied the use of their
money for a period of time and restricted in the amount they can withdraw
even after the institutions reopen.

As the Chairman knows , because we serve together on the Subcommittee
on Financial Institutions of the Banking Committee , the Subcommittee held
a hearing last week on regulations proposed by the Federal Home Loan Bank
Board concerning direct investments by institutions insured by the ' SLIC .
Near the conclusion of the hearing Chairman St Germain made a statement
that helped to put the Ohio situation in perspective .

He noted that

fluctuations in the value of the dollar in international money markets
have been ascribed to concern over the condition of thrift institutions in
Ohio and commercial banks in Texas .

Having just returned from Europe I

can attest to the fact that people in financial circles there are very
much aware of Ohio and Texas . We therefore have a responsibility not only
to our constituents in this country but to everyone who relies on the
stability of our nation's economy to learn whatever lessons can be learned
from the Home State- ESM fiasco and to take the steps that are necessary to
maintain public confidence in insured depository institutions .

37

With that introduction , I will proceed to address the specific
questions you set forth in your announcement .

Circumstances surrounding the Ohio thrift situation , adequacy of
federal agency responses .

During my years of service on the Banking

Committee , I have participated in many inquiries concerning failures of
depository institutions .

In my experience the causes of these failures

tend to fall into three categories :

1 ) problems associated with

deteriorating " spreads " between the cost of funds and the earnings from
sound investments ; 2 ) problems associated with the quality of the assets ,
as has occurred with mortgage loans , business and agricultural loans , and
international loans , where the value of the property or the earning
ability of the borrower were improperly estimated ; and 3 ) where a dominant
individual took advantage of weak or nonexistent internal controls or
external supervision to impose an imprudent investment policy on the
institution .

Every day brings new information on the Ohio situation , and it is
certainly too soon to pass ultimate judgment .

It certainly is not my
purpose to pass judgment on other such private insurance funds in other

states .

In fact , one of the purposes of this hearing is to collect and

evaluate the available information .

Still , a preliminary conclusion can

be drawn that the Home State - ESM crisis falls into the third category , as
have most of the largest failures .

To recite the list of large failures

which threatened public confidence in depository institutions is also to
list those cases in which a dominant individual was able to circumvent
internal controls or agency regulations designed to safeguard the assets

38

of the institution .

Franklin National , the Texas and Georgia banking

scandals , United States National Bank of San Diego , Penn Square ,
Continental , Financial Corporation of America and Empire all fall into
this category , and ultimately , I suspect Home State will join them.

As for the adequacy of the responses to the crisis by the Federal
Home Loan Bank Board and the Federal Reserve , I have already said that
these agencies did yeoman work in making their personnel , right up to the
chairmen , available to deal with the situation as it was breaking .

I take

every opportunity to express my gratitude to Chairmen Gray and Volcker and
to reaffirm my confidence in their dedication to preserving the safety and
soundr.ess of the nation's financial system .

Whether the ESM collapse that triggered Home State's insolvency might
have been avoided if federal securities regulators had been more diligenti
or whether the SEC should have additional supervisory powers to protect
investors .

My staff has examined the most recent Form 10-Q filed by Home

State Savings Bank as a publicly traded company with the Securities and
Exchange Commission .

Any number of people could look at this filing and

get differing insights as to the nature of Home State , but it is
remarkable how much of what eventually turned out to be questionable
operations of Home State was set forth right in this publicly available
filing .

It is easy to read this document and learn that out of $ 1.4

billion in assets , approximately half were invested in reverse repurchase
agreements with a single securities firm and that Home State seemed to
have more of the characteristics of a mutual fund than of an institution
in the business of making home mortgage loans .

The scheme of the

39

securities regulations has always been based on disclosure and on the
assumption that people will have the means to protect themselves if there
is adequate disclosure .

I suspect that many deficiencies will be found in

the disclosures made by Home State .

Yet , enough information was provided that one might expect a
regulator or a fiduciary to ask further questions .

In fact , we have some

information provided by the National Credit Union Administration that
indicates that some people did take advantage of the information they were
able to obtain about Home State and avoided involvement in the
transactions that caused so much grief to so many institutions .

Moreover ,

according to last Sunday's Cleveland Plain Dealer , former Ohio State
Commerce Director Kenneth Cox , former Commerce Director J. Gordon Peltier,
and former Superintendent of Savings and Loans Clark Wideman " all said the
state knew Home State had invested a dangerously large amount of money
with ESM Government Securities , Inc. , of Fort Lauderdale , Florida , as
early as 1982. "

It is certainly appropriate for .this Subcommittee to consider whether
additional measures are needed , but it has been my experience on the Banking Committee that many failures take place not because there is inadequate regulation or disclosure but because regulators and to a lesser
extent investors failed to take advantage of the information systems that
are in place .

I do not mean to say that these systems will prevent

failures , but when properly implemented , they can contain the damage
caused by failures , so that they do not threaten the financial system as a
whole .

Warning signals were not heeded which could have prevented the

40

failure .
contained .
function .

With the help of the federal regulators , the damage was
We look to the regulators to perform the information
It is our job to oversee their performance on a continuing

basis .

Given the state of the nation's thrift industry , whether there is a
need to strengthen , modify or replace the current system of state/private
deposit insurance .

Chairman Gray has testified with remarkable candor

before both of our Subcommittees concerning the situation that confronts
the thrift industry and its regulator .
tangible net worth .

There is a virtual absence of

The size of the FSLIC as a percentage of deposits is

near its all -time low.

Some institutions are still saddled wich

unprofitable portfolios of residential mortgages while others are engaging
in new activities and growing at an unmanageable rate .
imposed a quarterly assessment of 1 /32% of assets .

The Bank Board has

It has provided

additional support staff to the regional Home Loan Banks and has asked
Congress for money for more supervisory staff .

The Bank Board has adopted

a regulation on net worth and the regulation on direct investment that was
the subject of the hearing last week before the Financial Institutions
Subcommittee . Chairman Gray has submitted a proposal for risk-based
insurance premiums , which Chairman St Germain and I have introduced by
request as H.R. 1680 , The Insured Institutions Improvements Act of 1985 .
FDIC Chairman Bill Isaac also has devised his own proposal which Chairman
St Germain and I introduced at his request as H.R. 1833 , The Federal
Deposit Insurance Improvements Act of 1985.
doing all they can in my opinion .

In short the regulators are

Now it's time for Congress to act .

41

The hearing last week , which gave us an opportunity to hear from
Chairman Gray , from the S& L Commissioner of Texas , and from
representatives of the major trade groups for the thrift industry
dramatized the need for Congress to address the issue of deposit insurance
reform.

We can and should begin by promptly considering the agencies

proposals .

It is desirable to allow institutions , whether they have state

or federal charters , to have enough flexibility to compete in the
marketplace .

the long run.

In fact , this is necessary if they are to remain healthy in

It is also desirable for state regulators to have an

opportunity to participate in the process of formulating the regulations
of the federal agency that insures the deposits of most state- chartered
institutions .

The crucial issues , however , are who is going to provide

the capital to support the portfolios that insured institutions hold and
who is going to underwrite insurance to protect the system from the
inevitable failures that occur .

More than merely desirable , it is

necessary , it is imperative , that these issues be resolved , and we never
know how much time we have to do it .

What I am suggesting is that we.the Congress must ensure that the
financial system underlying our Nation's economy is strong and healthy .
Public confidence in depository institutions is a key to that strength .
Another key is an efficient and smoothly functioning government securities .
market which is essential both to the Federal Reserve's implementation of
monetary policy and to the U.S. Treasury's financing of the Federal
Government .

Congress needs to act this year to update our banking and

deposit insurance laws , which obviously have not kept pace with the
marketplace .

The deposit insurance reforms proposals from the FDIC and

the FHLBB need to be examined carefully by Congress , just as other

42

modernizing legislation introduced by Chairman Barnard , myself , and many
others of our distinguished colleagues ought to be considered fully in
this session of the 99th Congress .

I would like to address one other issue before concluding .

As most

of the financial community is aware , I have sponsored a bill , H.R. 15 ,
which would permit bank and thrift holding companies to underwrite
mortgage-backed securities and streamline the procedures for bank holding
companies to receive approval to conduct nonbanking activities , within a
regulatory framework designed to provide equitable regulation for all
financial institutions .

I am sometimes asked how I can propose expansion

of the range of activities that can be conducted by depository
institutions holding companies in light of the ESM incident and the recent
disclosure of irregularities in the handling of mortgage -backed
securities .

The argument is often made that these institutions have

enough trouble managing their existing activities that they do not need
new powers , and to grant new powers would only be asking for more trouble
and more scandals .

The point that I want to make today is that no matter what activities
financial institutions engage in , problems will inevitably occur from time
to time .

There will always be people who will try to take advantage of

any system, and there will always be people who will make costly mistakes .
The rational response is not to shut down every activity in which problems
occur .

We could shut down the entire economy that way .

Rather , the

urgent challenge is to require that the institutions be sufficiently
capitalized and that they have adequate systems of internal control .
Then, there should be effective supervision to discover problems and deal
with them in time to safeguard the financial system as a whole .

I look forward to working with Members of this Subcommittee , with my
colleagues on the Banking Committee , with state and federal regulators ,
with industry representatives , and with anyone else who can help address
the pressing issues facing the banking system today .

Thank you again , Mr. Chairman , for the opportunity to testify today .

43
Mr. BARNARD. Thank you very much, Mr. Wylie. You have certainly enumerated many of the things which are certainly on the
minds of this committee and which hopefully, with your leadership,
will be on the minds of the Banking Committee. I think we definitely need a much more indepth study of the insurance funds and
how we can help them, such as the bill that you introduced on
variable-rate premiums, and other legislation .
So we feel like the work of this committee should be very, very
helpful to the Banking Committee and we hope that the Banking
Committee will certainly utilize our report when it is developed.
And we thank you very much for being here this morning.
Mr. WYLIE. You are welcome.
Mr. CRAIG. Mr. Chairman, Congressman Wylie, one of the questions that I have asked insurance fund regulators that is of concern
to me is the inability of the Ohio Deposit Guarantee Fund to respond accordingly. We hear the argument that simply the money
was not there to back it up. And yet I am told that in the situation
where there was $130 million in the Ohio Deposit Guarantee Fund ,
that they could have covered the run on the Home State and then
required other members of the fund to borrow from the Federal Reserve System to meet any shortfall caused by deposit demand for
cash, and in fact, if that had occurred and the fund had responded
as funds are designed to respond, that there would not have had to
have been a banking holiday, there would have been no great concern or public outcry or run on the banks, and in large part, even
Home State, although it would have been taken over by the fund,
could have remained open.
Your experience on the Banking Committee-what is your reaction to that general comment?
Mr. WYLIE. I do not think that the Ohio Deposit Guarantee Fund
could have in fact covered all the possible losses from Home State.
I think that a run, a complete run, by Home State would have depleted the fund. As a matter of fact, the fund had $130 million in it
1 day and about 3 days later, after a run, it had about $90 million.
Mr. CRAIG. I am talking about prerun. With the knowledge that
everyone had as to the situation at Home State, if the fund had
acted properly preclosure, could that not have been avoided?
Mr. WYLIE. That is hindsight and I do not know. I am not in a
position to suggest that something like that could have been done.
After it was discovered that ESM Securities in Florida was going
belly up, and that most of the assets of Home State were invested
in ESM. I think at that point that the fund was clearly inadequate .
Now, how you go about shoring up the fund at that point is a question that I am not in a position to answer.
Mr. CRAIG. But it is a procedural question . I was curious to see
your reaction to it.
Mr. WYLIE. But I think after it was discovered that Home State
had closed that the fund might not be adequate to meet the cashflow demands of the persons who were insured . And this was a private fund. It was not State administered. It was created by a special statute, passed in Ohio in 1955. After that was discovered, the
Chairman of the Federal Reserve Board, and I talked to him twice
on March 13 , was very forthcoming in opening the discount window
as an emergency situation to all of these 71 State-chartered S& L's.

44
Mr. CRAIG. Thank you. Thank you, Mr. Chairman.
Mr. BARNARD. Mr. Spratt.
Mr. SPRATT. I have no questions.
Mr. BARNARD. Mr. Kolter.
Mr. KOLTER. Thank you, Mr. Chairman.
Congressman Wylie, following the interrogation of the Governor,
do you feel now that the investors have once again their own confidence in the system, in the banking system of Ohio-do you feel
the investors are now sure that their money is safe?
Mr. WYLIE. The investors are now sure that their money is safe. I
feel that since they have been given the opportunity to apply for
FSLIC insurance. And may I say that the Federal Home Loan
Bank Board put a lot of extra examiners on the job. They worked
overtime to try to examine the books of some of the companies.
Now, I think that there are now 30 S&L's the Governor said which
have qualified for either FSLIC insurance or FDIC insurance.
The fact of the matter is that in those institutions it is my information that more money has come in in deposits than has gone out
in withdrawals. So this, as far as we in Ohio are concerned, was
not as serious as far as the other FSLIC-insured S&L's were concerned. And the assets in these companies represent less than 10
percent of the assets of all of the savings and loans in Ohio.
Mr. KOLTER. Thank you.
Mr. BARNARD. Mr. Saxton .
Mr. SAXTON. Congressmar Wylie, as a member of the Banking
Committee, let me ask you a question. I have here a copy of the
Ohio Deposit Guarantee Fund constitution, and attached to it are
the rules and regulations by which it operates. There is a section
that deals with investigative authority of the fund. It says "the
fund supervisory staff, at the discretion of the executive vice president of the fund, may at any time enter a member institution for
the purpose of conducting an investigation or an audit. The members shall be required to furnish upon request all the company's
books, records, securities, moneys, and other property needed to
complete investigation of an audit."
I guess the question is that it appears to me that the mechanism
was set through which the proper types of investigations could
have been carried out. The signals were all there to indicate that
such an investigation may have been necessary and yet no such investigation seemed to come forward. And I guess my question is
from our perspective at the national level, how do we know that
private funds carry out those functions? And is there something
that we need to do from a legislative point of view to ensure that
that happens?
Mr. WYLIE. That is a very good question and it may go back to
the question that Mr. Craig asked and maybe I did not respond as
well to his as I should have.
The problem with the Ohio statute and the Ohio Deposit Guarantee Fund, and you have put your finger on it, is that the agreement
as to responsibility is not clear. And if you read those rules and
regulations you will really not find out what the Ohio Deposit
Guarantee Fund is supposed to do for its members in an emergency
situation. And I guess that is the point you were trying to make,
Larry.

45
But the first response, of course, should have come from the Ohio
Deposit Guarantee Funds since they were the insurer. It did not.
And it did not come immediately, why I do not know. The Federal
Government attempted to intervene through the Federal Reserve 2
years ago to try to find out what the responsibility of the Ohio Deposit Guarantee Fund was to its members, and whether the exposure of the State-chartered S&L's, the 72 State-chartered S& L's,
had any impact or effect on the safety and soundness of the banking system. And in the Dimension case, the members of the Ohio
Deposit Guarantee Fund filed a law suit in which they got an injunction against the Federal Reserve from becoming involved in
any way, and the injunction said that the Federal Government had
no nexus, that it could not intervene, and that it could not examine
as to safety and soundness. As one of the persons said, I think it
was a Mr. Griffith from Molitar, at the meeting with the Federal
Reserve Board Chairman , "We are sorry we won that case now. It
would have been better if we had had somebody sort of examining
it."
But the Federal Government at this point, or at that point, had
no responsibility, could not have had any responsibility, and it was
enjoined from doing anything.
think that the Ohio Deposit Guarantee Fund's days are numbered . Or they have ended . And I think maybe we ought to look at
some of the other so-called State funds. Not State funds , private
funds, which insure these State-chartered S& L's.
Mr. BARNARD. Mr. Bustamante.
Mr. BUSTAMANTE. Mr. Chairman, thank you .
Congressman Wylie, my concern was with the initial reaction of
the Federal Reserve to the Ohio bank run. Their initial reaction
was that it was a State problem. However, this changed very quickly with the fluctuation of the dollar.
Can you tell me why this happened? What caused this reaction
or attitude change?
Mr. WYLIE. I really do not think it had anything to do with the
fluctuation of the dollar, but it is amazing how much of an impact
the closing of 72 small State-chartered -well, some of them are
rather large- but State-chartered S&L's in Ohio had on the impact
of the dollar in Europe. And I had an opportunity to discuss this
situation with the editor of the Financial Times and he said there
was not any question but that it had an impact because the headlines in Europe were " banks fail in the United States." It did not
identify that they were State-chartered savings and loans in Ohio,
and so there was a run on the dollar and maybe it is coming down
to a little more realistic level and will help the farmers in the process. Maybe there is some good coming from that.
But you have to understand that the Federal Home Loan Bank
Board operates in a fiduciary capacity. It is their obligation to protect the FSLIC fund, and in that regard, they have to guarantee
against loss. Now, if there is a new application, and Chairman
Gray can answer this better than I can, but if there is a new application for a new charter, they have to have 52 percent net worth.
Most of these State-chartered S&L's did not have 52 percent net
worth. It was suggested that they all be brought in and I was at
the meeting -that they all be brought in en masse. I do not think

46
that the Federal Home Loan Bank Board could do that legally. I
think they had to make some examination up front.
Now, after it was determined that some of the State-chartered
S&L's had a good asset ratio and had net worth above 5 percent-I
think they modified it a little-then they were brought in. But
they had an obligation, as I see it, to the other members of the
FSLIC fund and they had established rules which provided for a 10day period of comment. If someone wanted to comment about a
new application as to whether that would guarantee against loss,
they could do that. Now, they have waived in effect the 10-day rule ,
but at one point during the negotiations the Federal Home Loan
Bank Board was willing to bring in all of the 71 State-chartered
savings and loans if they could get a guarantee from the State of
Ohio that the full faith and credit of the State of Ohio would be
pledged against that. And then it was determined that the State of
Ohio could not legally do that, or could not constitutionally do that,
so they had to back off of that.
But I would say that I think the Federal Home Loan Bank Board
was very cooperative here and I think the Chairman of the Federal
Home Loan Bank Board, Mr. Gray, ought to be complimented for
his part in it.
Thank you, Mr. Chairman.
Mr. BARNARD. Mr. Swindall?
Mr. SWINDALL. Yes. Following up with the constitutional constraints, that constitution in no way prohibits pledging of nontax
revenues, does it? To your knowledge?
Mr. WYLIE. The constitutional provision would not allow the
pledging of tax revenues. Is that your question?
Mr. SWINDALL . Right.
Mr. WYLIE. I do not think it would, no. What the constitutional
provision provides is that you cannot pledge the full faith and
credit of the State of Ohio against the contingent liability. If the
money is there in a separate fund I would assume that perhaps the
general assembly could act.
Mr. SWINDALL. That is my point. You are a former State legislator.
Mr. WYLIE. Yes, sir.
Mr. SWINDALL. And I would just like to know your opinion as to
whether or not the GovernmentMr. BARNARD. I hate to interrupt but we have got a lot of witnesses today and I want him to answer the question. But he is not
an official of the State.
Mr. WYLIE. I am glad you added that caveat. That is kind of a
20-20 hindsight call .
Mr. SWINDALL. Fine. I yield. He knows the question.
Mr. WYLIE. He made the point, yes.
Mr. SWINDALL . Thank you.
Mr. BARNARD. I am going to defer any further questions of you at
this particular time because we do want to hear from other members of the Ohio delegation and we appreciate your being here and
we understand that you have got other things to do.
Mr. WYLIE. Thank you very much for inviting me. I appreciate it.
Mr. BARNARD. We have invited several members of the Ohio delegation to be here this morning, and we certainly welcome them.

47
And we want them to have an opportunity to have something to
say. I would like to encourage all of them though, if they would, to
submit to us something for the record and then we would like for
them to summarize because we have a little scarcity of time.
We are delighted now to have the distinguished Congressman
from Cincinnati, Mr. Thomas Luken. We would like to hear from
you at this time.
STATEMENT OF HON. THOMAS LUKEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Mr. LUKEN. Thank you, Chairman Barnard.
I want to sincerely congratulate you in conducting this, calling
for this examination, and in the way that the hearing has been
conducted. There have been certain issues that have already been
raised, but I believe that I have some particular information about
the events that have come under question .
What I would like to state first, as Congressman Wylie did initially, that the main consideration is depositor confidence. That is
the reason, the lack of depositor confidence, the threatened loss to
depositors, that our international situation , our currency, has been
threatened- has actually fallen . And this has brought involvement
from the President, when he was asked at a news conference, and
by the highest Federal officials.
Now, there is a time for questions, time and a place for questions
and finger pointing, and I think this is one of those times.
But I would like to take us back to March 13. Those events have
been discussed publicly and have been discussed here . And that
was when several of us appeared before Chairman Gray, the Federal Home Loan Bank Board, but I will go back the day before. And
that was when we appeared before the Federal Reserve and Chairman Volcker. Chairman Volcker at that time told the representatives of the thrifts from Cincinnati that what they were looking for
was insurance. That the only thing the Fed could give them was a
discount window. And the discount window at that point was like
throwing an anchor to a drowning man. Because that would not
improve their financial picture, and that is what they would need
ultimately to get into FSLIC.
So that was not really any kind of a solution . The Fed had no
solution and because of the divisions between the Fed responsibility
for FDIC and Federal Home Loan Bank responsibility for FSLIC
there was that division. And incidentally, Chairman Volcker has
publicly recommended a merger of the Federal Home Loan Bank
Board and the Fed. Apparently I only read his statement, but I
read his statement in the press to the effect that he recommends
consideration of a mergerMr. BARNARD. He was talking about the insurance funds, I believe.
Mr. LUKEN. All right. That is what I meant . That is the context-Mr. BARNARD. The FDIC and FSLIC.
Mr. LUKEN. That is what I was referring to in the context, and
that is what I understood, as it has a bearing on this particular situation.

48
So in any event, we did finally meet with Chairman Gray on the
following day, which was March 13, and at that time the reaction of
Chairman Gray-and I point out, there is a time and I think at
this time what should have been the reaction of the Federal authorities was we have a threatened loss of depositor confidence. We
had Home State that was closed . And the runs were occurring and
this was described to him, it was described on the front pages of
the paper. Pictures in the paper.
The reaction of Chairman Gray was insensitive. This is not a
partisan statement. Mr. Gradison and Mr. Wylie so told the Wall
Street Journal . I can quote that, but here is the article . Mr. Wylie
admitted that there was a stall at that time on the part of a stall
is the way he describes-it on the part of Chairman Gray.
We were advised at that time that there was a 10-day waiting
period, a 10-day period of notice that could not be waived. We were
advised that the Federal Home Loan Bank Board did not have any
extra examiners to send in to Cincinnati or to send in to Ohio. We
were advised that it was a State problem, that the savings and
loans of Ohio had plenty of opportunity and had resisted the opportunity to come into FSLIC, and that the depositors - when we
pleaded based upon the depositors potential loss -we were told by
Chairman Gray that the depositors knew that they were investing
in an institution which did not have Federal insurance and therefore they had made their own bed and they could lie in it also.
I think we can learn from history here, and that is the reason I
bring it up. We did have the division. We went to two different
agencies and the buck was passed. And we went to the one agency
who could have done something and I want to emphasize in my
opinion, and I am not a banking expert. I am not the kind of an
expert that some of you may be, but in my opinion if the Federal
Government had responded as it did in the Continental case, it
could have folded these in on March 13 and that is what we pleaded
for, and then examined them and then weeded them out. Nobody
has said that there is any of these 71 institutions that were that
much worse. As a matter of fact, on the average they are better
than the FSLIC. And when we considered what was at risk, depositor confidence throughout this country, I think that the proper reaction- I still think, I said it then and I still think that the proper
reaction which would have avoided any closings was to fold them
into FSLIC. They knew basically. When we talked to Mr. Raiden,
Mr. Gray's counsel, he knew basically what the financial picture
was in these savings and loans, just as he does now.
I have told you what the reaction was. I think that in the future
we should consider bringing together these two institutions . I think
the FDIC and FSLIC-I think as far as the finger pointing is concerned, we had a hearing yesterday in our Energy and Commerce
Committee. I am not going to go into the ESM questions. Let me
just repeat one of the points though that I made at that time,
which has been brought up here, and that is that Mr. Warner was
identified by the conservator from Ohio, the conservator of Home
State, and by Mr. Tew who is going to testify here today, as the
controller of the events at Home State and at ESM . And I think
that is very instructive to know that.

49
So if we could back into that, I think the conservator has already
filed suit against Mr. Warner. I think that the receiver here, Mr.
Tew, should file suit against Mr. Warner. I think he is clearly the
responsible party according to these reports, according to the investigation, according to the investigation of those who looked into it.
He is one of the responsible parties.
We could go into that, but I think my time is about expired. And
I wanted to particularly shed what light I could upon what happened with reference to extending this coverage so that in the
future in my opinion, my recommendation would be, that we look
first, as we did in Continental, to depositor confidence and do whatever is necessary to absolutely avoid-do what is necessary. That is
my opinion.
Mr. BARNARD. Congressman, you have outlined some of the same
concerns that everybody on this committee has, and that is why we
are all so anxious to have a very thorough hearing into many of
these questions that you have brought out. And hopefully, when
this hearing is through and all of our investigations are made, we
will be able to answer all of the questions that you have brought
up this morning which are very substantive, and I think very appropriate, considering the sequence of events that we have been
through since March. So we appreciate your sharing your observations with this committee and I assure you that we are going to
look into every aspect of your testimony.
Thank you very much.
Mr. LUKEN. Thank you , Mr. Chairman.
Mr. BARNARD. Again, I want to say I am delighted to have Mrs.
Oakar with us this morning, Mary Rose Oakar from Ohio, and also
a very prominent member of the Banking Committee and I would
like to hear from you at this time.
STATEMENT OF HON. MARY ROSE OAKAR, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF OHIO
Ms. OAKAR. Thank you, Mr. Chairman, and distinguished members of the committee.
I want to first of all say that I am grateful for this hearing. I
think it is important. You are a very important subcommittee. You
have the role, as you know, of being the chief investigative committee for Congress related to banking issues. And I want you to know,
Mr. Chairman, and others, that I am working on legislation related
to the ESM crisis so that hopefully there will be more scrutiny in
the manner in which S&L's and banks invest with some of these
securities companies. I think it is very, very important that we
really look into that situation .
I also want to say for the record that I believe very strongly as
many of us do in Ohio and elsewhere, that anyone who was engaged in any illegal activity whatsoever be prosecuted . And I know
that an investigation in my State is going on and I hope it comesto fruition.
Mr. Chairman, you know and Congresswoman Kaptur, who is
also a member of the Banking Committee, and others know that
our Banking Committee has seen unbelievable failures in the last
few years. I have been on the committee 8 years and in the last 3

50
or 4 years we have seen enormous failures such as Penn Square.
We have seen Continental of Illinois being propped up with billions
of dollars and we have seen in the S&L area the federally chartered Financial Corp. of America in California . Their subsidiary
American Savings & Loan Co. , was given unprecedented borrowing
power exceeding normal capitalization and we saw the potential
failure even of our major banks in their foreign investments. So
this whole subject of what happens in a crisis transcends whether
S&L's are insured federally or nonfederally.
I think we really have an obligation to see what is going on in
this area in our country.
It should be noted for the record that most of the S&L's in Ohio
were federally insured. My own county, Cuyahoga County for example, and in Cleveland, OH - had one S&L that was nonfederally
insured. It was not a blanket problem in terms of the Federal insurance versus non-Federal insurance. Seventy-one out of about
205 were nonfederally insured . So that most of our institutions are
federally insured, and I think that is important to note.
Mr. Chairman, I do want to raise this issue because you are the
chief investigative committee and I think it is very important to
clear the air on this issue and it in no way takes away from the
scrutiny of what ought to be going on in the Ohio situation. I believe very strongly that Congress created the Federal Reserve
System and the Federal Home Loan Bank Board to function as
Federal regulators and to objectively monitor the investments and
operation of our financial institutions and to make sure that the
actions are in accordance with the principles of safety and soundness . They must protect depositors' moneys: it is extraordinarily
important. Board members have long terms and they are appointed
and they serve as separate entities from Congress and the administration, that the public perceive them, Chairman Volcker, Chairman Gray, and other members of their respective Boards, to be totally objective.
Mr. Chairman, I personally have felt that there were some problems with respect to the manner in which the Ohio S& L's were
treated. I think that, and this is just a personal opinion, that Chairman Volcker and Karen Horn of Cleveland's Federal Reserve ,
acted absolutely expeditiously when they sensed there was an oncoming crisis in Ohio prior to the closing of the privately insured
saving and loans. They rolled their sleeves up. They met with various Members of Congress. I was at a meeting that Chalmers Wylie
called along with the two Members from Cincinnati, in Chairman
Volcker's own boardroom to discuss the S&L's crisis March 13.
Mr. Chairman, I have only praise for their actions. They did
nothing that was not in accordance with the law. No one wants
any regulator to do anything that is not in accordance with the
law. We want them to act in accordance with the law. And I want
to make that clear. I personally do not feel that Ohio S&L's should
have gotten a blanket insurance without scrutinizing first. But our
appeal was to have the actions taken in terms of the possibilities of
Federal insurance, to have them taken expeditiously. No more, no
less. And I felt very strongly that there was stonewalling going on,
and for that reason after the Governor closed the privately insured
S& L's on the previous Saturday, I circulated a letter, which I

51
would like to submit for the record, that a number of Members of
Congress from Ohio signed, both Republicans and Democrats ,
asking the Chairman of the Federal Home Loan Bank Board to judiciously and expeditiously consider the urgent request of the
S & L's in accordance with the law. We felt the need to write this
letter because we felt that there was this absolute lack of energy
going on within that office.
It was not until the following week that the Governor was able
to get the appointment with Chairman Gray. Of course, we have
all seen the Wall Street Journal article which may or may not be
true, but I think it is a very indicting article and I would like to
submit that with your permission for the record. The article links
our crisis in Ohio with GOP politics. Specifically on Friday, March
8, Treasury Secretary James Baker and other Treasury officials
planned a Federal strategy regarding the runs on Ohio thrifts and
they decided not to rescue them because we had a Democratic Governor, and informed Chairman Gray of that point .
At the Banking Committee the other day, Mr. Chairman, and
you were there, Congresswoman Kaptur was there among others, I
asked Chairman Gray two very simple questions: Did you, prior to
March 13 or any day thereafter, get any advice on how to handle
the situation in Ohio from the Secretary of the Treasury or anybody on the staff at the White House?
The second question: Did you in any way get advice from the
White House on how to act before the Governor closed the S&L's in
Ohio that were nonfederally insured?
Chairman Gray's answer was that he could not answer it because
he did not think they were relevant questions . He refused to
answer.
Mr. Chairman, I think that the air has to be cleared on this issue
one way or another. I do not know whether this article is true or
not, but there are some very serious allegations about the integrity
of the Federal Home Loan Bank Board, and its ability to act objectively and nonpolitically.
For this reason, Mr. Chairman, I am asking your committee, because I think it is the proper committee, to investigate the conduct
of the Federal Home Loan Bank Board, its Chairman, and the administration and let the chips fall where they may in terms of how
that situation was handled . And I think that you are the proper
source to do that, Mr. Chairman . I hope you can respond favorably
to do the investigation on this situation and I look forward to a
reply to my letter to you, Mr. Chairman, which you will be receiving in about 30 seconds.
Thank you, Mr. Chairman.
[Letter and article referred to follow: ]

52

Congress of the United States
House of Representatives
Washington, D.C. 20515

March 18 , 1985
The Honorable Edwin J. Gray
Chairman
Federal Home Loan Bank Board
1700 G Street , N.W.
Washington , D.C. 20552
Dear Mr. Chairman :
As you know, some of the state chartered , privately insured Savings
and Loans in Ohio have been experiencing a lack of confidence after
the failure of Home State Savings Bank.
Last week , the Governor declared an emergency bank holiday . It is
our understanding that in the interim , some of the affected Ohio
Savings and Loans are applying for federal deposit insurance with the
Federal Savings and Loan Insurance Corporation .
We would appreciate your agency's judicious and expeditious
consideration of these urgent requests in accordance with the law .
Thank you for your cooperation in this important matter .

Sincerely ,

Ma Rau
Name
Dahar
Mary Rose Dakar
Member of Congress
ress

Hall
&
Tom
Tony HaN
Member of Congress

Dennis Eckart
Member of Congress]

Jo Seiberling
Member of Congress

Mlave
Bob McEwen
Member of Congress

Louis Stokes
Member of Congress

Tom
Hulen
Thomas Luken
Member of Congress

Edward Feighan
Member of Congress

Bin Pradian
Bill Gradison , Jr.
Member of Congress

53

BankBoard Chairman's Cool Initial Response
To Ohio Crisis Linked by Someto GOP Politics
(D., Ohio). "Obviously, it wanted to em- Ohio, according to a Reagan administra
By MONICA LANGLEY
barrasstheDemocratic governor (Richard tion official.
StaffReporterofTHEWALL STREETJOURNAL Celeste) up for reelection soon."
A callwasthen made toMr. Grayto ina group of nerWASHINGTON-When
Themas Luken (D., Ohio) adds,
Treasury officials' conOhio thrift executives flew to Wash- "ItRep.
vous
took the dollar falling and questions form himthisof the
official says, adding, "Ed
ington three weeks ago, Federal Reserve asked of President Reagan at his press sensus,
agreed
with
that the Bank Board
us
Board Chairman Paul Volcker put out the conference before any Bank Board assis- shouldn't save thethrifts;
welcome mat.
tance was provided. Ohio thrifts hadtobe- what he should do." wedidn't decide
comeanational
problem
before
party
poliMr. Volcker immediately took time to
Thomas Healey, just-departed assistant
meet with the executives, whose thrifts tics were removed. "
treasury secretary for domestic affairs,
were backed by a newly insolvent insurMr. Gray, through a spokesman, re- added, "Of course it (the Treasury and
ance fund, and assured them that the Fed fused to comment on administration influ Bank Board decisions) was political . But
would provide cash for runs on their de ence on his initial decision not to provide it's the politics of wanting Washington to
posits by making loans through the Fed immediate federal insurance to the thrifts. ball the state out,but our sayingno. Ithas
discount window. Then he told the execu- But an official involved in the matter in- nothingtodowith Democrats and Republitives to make themselves at home in the siststhe "politics" of itwasn'tpartisanbut cans."
board ofgovernors' conference room and federal versus state responsibility. When A Refusal to Meet With Them
his own office.
asked at a congressional hearing last week
executives came totown
Mr. Volcker instructed two of his top whether he was told how to react, Mr. theWhenthethrift
following Wednesday, Mr. Gray restaffmembersto help the executives plan Gray wouldn't answer the question.
fused
to
them.
see
On Thursday, when he
a strategy to handle the emerging crisis
Executives of privately insured Ohio permitted Republican representatives
from Ohio to see him, and after some reHow Washington Got Involved
sistance, let Democratic Rep. Luken and
one thrift executive join them, Mr. Gray's
Thursday, March7
first comment was: "Why aren't you guys
A run on deposits begins at Home State Savings Bank, which expected
up at the state capitol?"
heavy losses from its dealings with E.S.M. Government Securities Inc.
Mr. Gray then told them he couldn't insure the savings and loans until each instiFriday, March 8.
met a 5%% capital-to-assets ratio
Treasury SecretaryJames Baker and other Treasury officials plan a federal tution
requirement; was individually examined
strategy ifruns begin at other Ohio thrifts. Theydecide not to rescuethe
by
the
Bank Board, "which could take
S&La, and inform Federal Home Loan Bank Board Chairman Edwin Gray,
months," and was subject to a 10-day comwho agrees with the plan.
ment period.
Saturday, March 9
Upon returning to Ohio empty-handed,
the executives privately asked Gov. Ce
Home State closes, citing the run.
leste to closethe thrifts to stopthe runs on
Monday and Tuesday, March 11-12
deposits. Publicly these executives were
Ohiothrifts begin experiencing runs and call the Bank Board asking howto stating they could handle the deposit withget federal insurance. They call their congressmen asking for federal help.
drawals and wanted to stay open, but Mr.
Gray's denial offederal backing terrified
Wednesday, March 13
them,
say the Ohio lawmakers who met
Agroup ofOhio thriftexecutives flies to Washington. Fed Chairman Paul
with Mr. Gray.
Volcker promises loans through the discount window. Bank Board
So when Gov. Celeste, in a closed meetChairman Gray refuses to meetthe executives.
ing with the thrift executives, asked who
Thursday, March 14
wanted to reopen, only four or me 71 execGrayoutlines to the delegation requirements thrifts must meet before he
utives stood up in favor ofreopening, Gov.
Celeste told the lawmakers.
will consider granting federal insurance, and says it could take months.
Even Ohio Republican Rep. Willis Gra
Friday, March 15
dison acknowledges that the Bank Board's
Ohio Gov. Richard Celeste temporarily closes the thrifts.
Initial refusal to aid thethrifts seemed par
ticularly harsh, giventhe Fed's immediate
Monday, March 18
willingnessto intervene. "I wonder, too, if
The dollar begins falling,largely duetothe Ohio crisis.
political considerations were placed above
Tuesday, March 19
confidence in andthe integrity ofthefinancial system," Rep. Gradison says.
The Bank Board agrees to ease requirements for granting insurance.
A Reversal by Gray
Thursday, March 21
The Ohio Republican notes that Mr.
President Reagan, asked about the federal response totheOhio thrift woes,
Gray "reversed himself" the next week
calls it an isolated problem and says that beyond Fed loans, "there isn't
when
the Ohio thrift crisis frightened the
anything forthe federal government to do.”
currency markets, causing the dollar to
plunge. At about the same time, Mr.
Friday, March 22
Volcker was urging Mr. Gray to expedite
The Bank Board begins approving federal insurance for some ofthe thrifts.
the insurance process, even offering inforstemming from the collapse ofHome State thrifts wanted federal insurance from the mation from Fed examiners' reports, and
Reagan was fielding questions
Savings Bank ofCincinnati, and keeptheir Bank Boardtorestore depositor confidence President
federal assistance to Ohio thrifts.
thrifts open. The executives stayed at the in the wake of the Home State failure, about
Mr. Gray suddenly decided that the 10Fed for six hours, using Mr. Volcker'stele- which by itself would wipe out the statephones, typewriters and secretaries.
sponsored insurance fund. Home State was day comment period could be waived, that
requirement could be
A few blocks away, Edwin Gray, chair- closed on Saturday, March 9, following the 5%%tocapital
5%, and that examinations
man of the Federal Home Loan Bank runs stemming from heavy losses in its dropped
be expedited. Shortly after that, the
Board,through whomtheexecutives hoped dealings with the failed E.S.M. Govern- could
Bank Board began approving federal into obtain federal insurance, refused to ment Securities Inc., of Fort Lauderdale, surance
for two or three Ohio thrifts a
meet with them.
Fla.
The night before, high-level Treasury day."Ed Gray was helpful before it was all
The stark difference in the receptions
the Ohio thrift executives received in officials, including Secretary James over," says Rep. Chalmers Wylie (R.,
Washington is being blamed by some here Baker, met for 1% hours to decide what
on partisan politics. Democratic represen- the federal response should be if other pri- Ohio), the ranking Republican on the
tatives, in particular, argue that Fed vately insured Ohio thrifts began experi- House Banking Committee. "I'm sure his
Chairman Volcker understood that a finan- encing runs. The group concluded that if a only motivation in stalling at first was to
cial crisis was building and treated the crisis developed, it should remain a prob- guarantee against loss in the insurance
executives accordingly. But Bank Board lem of the Democratic administration in Fund."
Chairman Gray, a Reagan appointee, was
But questions remain asto what extent
followingorders from the Reagan adminispolitical factors delayedthe Bank Board's
tration not to assist Ohio's Democratic
actions, and a House subcommittee hopes
governor, these lawmakers assert.
to learn more about that at a hearing
"The administration must have given
scheduled tomorrow.
Instructions to Ed Gray not to rescue the
Ohio thrifts," says Rep. Mary Rose Oakar

54
Mr. BARNARD. Thank you , Madam Chairman, and let me assure
you that we intend to cover every one of the subjects which you
have enumerated in your testimony this morning. They have already been a consideration of this committee but we are delighted
to have you here to emphasize your concern about this situation .
Thank you .
Ms. Kaptur, do you have any statement you would like to make
at this time? We are delighted to have you with us this morning.
Ms. KAPTUR. Thank you, Mr. Chairman. I do not really have a
formal statement except to say thank you so much for allowing me
the courtesy to sit in on these hearings. And to encourage you to
get to the bottom of this entire matter.
As you know, one of the municipalities that I represent lost $ 19
million or it appears that it has lost $19 million in this series of
events, and there are certainly a lot of unanswered questions on
various levels. And I would hope that this committee would use its
full powers to bring in the appropriate witnesses and to get the
kind of thorough investigation that I think this question needs so
we find out who really did what and when.
Thank you, Mr. Chairman.
Mr. BARNARD. Thank you very much.
Congressman Kindness, you are going to be with us today. I did
not know whether you wanted to offer any statement at this time.
Mr. KINDNESS . Thank you, Mr. Chairman. I had not planned to
make a statement, but I would suggest that if newspaper articles
are going to be made a part of the record, I have quite a collection
of them from around the State of Ohio that reflect concerns about
graft and corruption in the political sphere and its influence upon
this whole matter, which I had sought not to get into today, but I
would urge upon the chairman that if we are to really investigate
fully what this matter is all about, we will find a whole lot more
meat in the Governor's office, the various departments and agencies that are affected in the State of Ohio than we will find in the
Federal Home Loan Bank Board or the Federal Reserve, and I
would hope that perhaps we could confine this to those areas that
would be productive in terms of finding what the Federal response
really should be.
Thank you, Mr. Chairman.
Mr. BARNARD. Thank you very much.
We are also honored today to have with us Congressman Bob
McEwen of Ohio and, Congressman, we would be delighted to hear
from you if you have a statement at this time.
Mr. McEwEN. Mr. Chairman , thank you very much. It is gracious of you to give me this opportunity and I would just quickly
say that I join my colleagues in expressing a personal interest in
this matter. I too participated in the meetings with the Federal
Home Loan Bank Board and I believe that as Congressman Kindness has said that if we can find some way that in the future the
Federal Government can participate expeditiously and yet not
usurp State authority it would be in the best interests of all of us.
And I thank you very much for the generosity. I would be glad to
submit a statement.
Mr. BARNARD. Thank you very much.

55
Our next witness this morning—our next panel this morning will
consist of Mr. Donald R. Hunsche, executive vice president of what
was the Ohio Deposit Guarantee Fund, and Mr. Tom Batties, who
is chief deputy superintendent and general counsel of the Ohio Division of Savings and Loans. If they would take the podium at this
time, the witness stand.
We appreciate you gentlemen being with us today and participating in this hearing. And I would first recognize Mr. Donald R.
Hunsche and Mr. Hunsche, if you would like to, without objection ,
we will submit your entire testimony in the record . If you feel like
you would like to summarize, that would be at your desire .
STATEMENT OF DONALD HUNSCHE , EXECUTIVE VICE
PRESIDENT, OHIO DEPOSIT GUARANTEE FUND
Mr. HUNSCHE. Thank you, Mr. Chairman. Mr. Chairman, distinguished members of the committee, my name is Donald R.
Hunsche. I am the executive vice president of the Ohio Deposit
Guarantee Fund. I am accompanied today by David S. Cupps and
Roger Yurchuck, my legal counsel .
I have been requested to provide the committee with background
information on the Ohio Deposit Guarantee Fund and then discuss
the Home State Savings Bank situation in three parts.
The first part, prior to the ESM collapse; second, the events from
Saturday, March 2, 1985, the day the fund became aware of the
problem involving ESM, through Sunday, March 10, 1985, the day
the conservator was appointed for Home State; and third, the
events from March 11 through 20, the date the conservator was appointed for the Ohio Deposit Guarantee Fund.
The law authorizing the creation of mutual, nonprofit guarantee
associations for Ohio State-chartered savings and loans was passed
in 1955. Our fund was incorporated in 1956 and commenced business January 2, 1957 , with 69 original members.
The fund was formed because the Federal Savings and Loan Insurance Corporation would not insure companies that were only
open for business less than 30 hours a week, did not have ground
floor locations, or that had assets of less than $1 million . Many of
the initial ODGF members fit into this category.
The original amount of the total deposits guaranteed was about
$200 million. This has subsequently grown to over $4.3 billion . The
fund generally relied on the experience of Massachusetts whose
fund predated Federal insurance.
The fund's assets include a 2-percent deposit from each member
based on savings at that institution. In addition, earnings on those
deposits are retained by the fund to further strengthen the fund.
Members count this 2 percent as a part of their assets.
As of December 31 , 1984, the fund had assets of $ 125,800,000 . The
total amount of guaranteed deposits was approximately $4.3 billion.
The ratio of assets to guaranteed savings amounted to 2.9 percent.
The FSLIC's comparable ratio is approximately three-quarters of 1
percent.
The Ohio Deposit Guarantee Fund has cooperated fully with the
Ohio Division of Savings and Loans throughout its history. The
fund received examination reports of the State as well as quarterly

56
and other reports from all member companies, including Home
State. The reports are reviewed by the fund's department of supervision for the purpose of making recommendations to improve operations of the companies and to assist in the correction of unsafe
practices.
However, the fund does not have legal power to effect compliance. It has no cease-and-desist power. It attempts to achieve compliance by working with State officials and the management of
member companies to have the officers and directors of member
companies agree to make desirable changes.
Beginning on about April 1, 1980, the fund became aware
through a review of reports of Home State's involvement with ESM
Securities. There were at that time repurchase agreements of
about $ 168 million .
The situation again came to our attention in March 1981. At that
time a report revealed an increase to $232 million. That occurred
in July 1980. And there was overcollateralization and too much
concentration with one dealer, namely, ESM.
As I recall, the State questioned the overcollateralization and
claimed there was a violation of borrowing limits; 1982 showed
more of the same. The percentage of overcollateralization increased. Letters were written and meetings held expressing our
concern, stating that such activities were imprudent. We also told
Home State to restructure the transaction.
On February 25, 1983, the fund wrote a letter to Home State
strongly suggesting that it reduce the overcollateralization with
ESM as soon as possible but not later than June 30, 1983, the date
by which the transactions would mature.
A board resolution of Home State agreed to our directive. Later,
the fund was startled to learn that contrary to these directions, the
transactions were dramatically increased in May and June 1983 up
to $550 million.
A meeting was held on October 3 involving representatives of the
fund, the superintendent of the division of savings and loans and
his staff, officials of Home State, and a representative of ESM . At
that point, there was also a significant overcollateralization. We expressed our serious concern . The superintendent, with the fund's
full support and concurrence, instructed Home State to wind down
the transactions and reduce the substantial overcollateralization .
In January 1984, all of the directors with the exception of two
agreed to a program of unwinding the ESM relationship. By July
1984, 60 percent of the transactions had been matched and would
mature in May and June 1985 and would thereupon cease. At least
that is what Home State agreed to.
On March 2, 1985, at approximately 4:15 in the afternoon, the
fund became aware for the first time of a potential problem at
ESM and a potential resultant problem with a loss at Home State.
At that time, Mr. Schiebel, president of Home State, advised us
that he was concerned because the audit report prepared by Alexander Grant & Co. , the auditors for ESM, had been withdrawn on
Friday, March 1 , approximately 24 hours after it was delivered to
him.
We were advised that Home State still had repurchase relationships with ESM and that they were substantially overcollateral-

57
ized. We responded by requesting that the Ohio Deposit Guarantee
Fund be kept fully advised.
On Saturday or Sunday, March 2 or 3, I discussed the matter
with Thomas Batties, as the acting superintendent of the division
of savings and loans.
On March the 5th, the depositors of Home State started a run on
the institution.
On March the 6th, the State of Ohio announced that it was prepared to safeguard the interests of the depositors of Home State
and of all depositors whose funds were guaranteed by the Ohio Deposit Guarantee Fund and that the system in place provided adequate safeguards for depositors at its State-chartered savings and
loans.
The run at Home State continued on Thursday and Friday,
March the 7th and 8th, in spite of the State's announcements. By
Friday evening, March 8, an estimated $ 154 million had been withdrawn. By the close of business on March 8, the Ohio Deposit Guarantee Fund had advanced $45 million in cash to Home State for
the benefit of its depositors.
From approximately Wednesday, March 6, through Saturday,
March 9, the ODGF was aware of negotiations involving a potential
merger or purchase and assumption involving Home State.
On Saturday, March 9, the ODGF had representatives present as
observers at a meeting in Cleveland where bankers throughout the
State of Ohio were informed of the situation and of Home State's
availability as a merger partner.
On Sunday, March 10, the State of Ohio announced the appointment of a conservator and the closing of Home State. Subsequent
to Sunday, March the 10th, the Ohio Deposit Guarantee Fund has
not been kept informed of the events surrounding Home State or
its potential sale.
The fund was not allowed to review the books and records of
Home State so as to make its own independent assessment of the
parameters of the potential loss.
On about March 13, runs began at a few fund-member companies, particularly in the Cincinnati area, creating long lines which
were dramatically played up by the media.
On or about March 13, the State legislature passed legislation
authorizing the creation of a separate deposit guarantee fund and
providing for a loan to that fund . The ODGF was not consulted
about the content or the advisability of the legislation .
On March 15, the Governor visited Cincinnati and announced
the closing of all Ohio Deposit Guarantee Fund companies statewide, even though the problem of runs was confined to the general
Cincinnati area.
Members of the fund were forced to remain closed on March 18
and 19. Institutions which were and are totally uninsured were allowed to remain open throughout this crisis .
On Monday, March 21 , the Ohio Deposit Guarantee Fund received notice that the superintendent of savings and loans had appointed or purported to appoint a conservator for it on the evening
of March 20.
As you might guess, I have not yet had time or sufficiently complete information to reflect thoughtfully on the lessons on the

58
events or to formulate definitive recommendations. Since the appointment of the conservator for Home State on March 10 , the
Ohio Deposit Guarantee Fund has been denied access to the
records of Home State. Consequently, it is impossible for me to
answer certain questions as raised in your letter of March 22.
It is impossible to discuss comprehensively the ultimate financial
impact of Home State's situation on the Ohio Deposit Guarantee
Fund and its members . This is due to the fact that, one, as noted,
the Ohio Deposit Guarantee Fund has been denied access to the
books and records; second, the ultimate loss of Home State is still
not quantified to our knowledge ; third , no buyer has been found for
Home State, so the purchase price cannot be determined and thus
the impact on the fund cannot be determined; fourth, it is not yet
possible to determine either the collectability of Home State's
claim against the ESM estate and the likely defendants in ESM
litigation or the collectability of claims against directors , officers ,
controlling persons and other potentially liable persons involved in
the Home State situation; and fifth, until Home State is sold we do
not know whether it will be sold in such a way as to preserve the
ODGF members' 2-percent deposits with the fund .
It is also impossible to comment responsibly on the response and
assistance from the Federal Home Loan Bank or the Federal Reserve. The ODGF does not know what the response from the Federal Home Loan Bank Board or the Federal Reserve has been since it
has not been asked for its advice or assistance nor has it been informed directly as to what steps have been taken.
The relationship and interaction with the Ohio Division of Savings and Loans and the Ohio Deposit Guarantee Fund was excellent prior to the Home State Savings Bank closing. Up to March
10, 1985, the fund and the division worked closely to try to resolve
problems of Home State. After March 10, when the conservator
was appointed for Home State, there has been little if any interaction . Subsequent to March 10, no information has been shared .
In summary, as soon as the Ohio Deposit Guarantee Fund
became aware of what it considered to be an inadvisable practice at
Home State, it attempted to cause Home State to cease the practice. Contrary to those directions, Home State increased the dollar
amounts of the transactions and increased the overcollateralization.
Finally, Home State and its directors agreed in writing to stop
the transactions. The fund has no legal power to author or enforce
a cease-and-desist order. It could counsel restraint, but could not
compel it.
A tragic aspect of the situation which is still unresolved is the
fate of the approximately 70 members of the fund . Some are now
insured by the FSLIC. Others will be shortly. But there remain a
significant number of sound, well-managed companies that have
provided good service to their communities and neighborhoods ,
some for 100 years, whose fate is in doubt. The key to their future
is to ensure that the Home State matter is settled promptly and in
a way that protects the members' 2-percent deposit in the fund.
While I believe that, if handled differently, the Home State situation could have been solved through a quick sale or merger and
depositors immediately protected, the problem we now face is to

59
ensure prompt reopening of the remaining fund-guaranteed
companies in such a way that they and their depositors are fully
protected.
To that end, the fund pledges its full support and cooperation.
Mr. BARNARD. Thank you very much.
Mr. HUNSCHE. Thank you, Mr. Chairman.
[Mr. Hunsche's prepared statement follows:]

50-923 0-85--3

60

STATEMENT OF DONALD HUNSCHE , AN OFFICER OF THE
OHIO DEPOSIT GUARANTEE FUND ,
BEFORE SUBCOMMITTEE ON
COMMERCE , CONSUMER AND MONETARY AFFAIRS
OF THE COMMITTEE ON GOVERNMENT OPERATIONS
UNITED STATES HOUSE OF REPRESENTATIVES
WASHINGTON , D.C.

APRIL 3 , 1985

Chairman Barnard :

My name is Donald Hunsche .

I am the Executive Vice

President of the Ohio Deposit Guarantee Fund ( " ODGF " ) .
I would like to provide the Committee with background
information on the ODGF and then discuss the Home State Savings
Bank (" Home State" ) situation in three parts :

( 1 ) prior to the

ESM Securities collapse , ( 2 ) the events from Saturday , March 2 ,
1985 , the day the Fund became aware of a problem involving ESM ,
through Sunday , March 10 , 1985 , the day a conservator was
appointed for Home State , and ( 3 ) the events from March 11 ,
through March 20 , the date a conservator was appointed for
ODGF .

I will conclude with a summary and some observations .
Background
The law authorizing the creation of mutual nonprofit

guarantee associations for Ohio chartered savings and loans was
passed in 1955.

The ODGF was incorporated in 1956 and began

business on January 2 , 1957.

There were 69 original members .

The Fund was formed because the Federal Savings and Loan
Insurance Corporation ( " FSLIC" ) would not insure companies that
were opened for business less than thirty ( 30 ) hours per week ,
did not have ground- floor office space or had less than

61

$1,000,000 in assets .
categories .

Many of the initial ODGF members fit those

Today , many of those members continue to operate in

a similar fashion and serve their neighborhoods , particularly in
the Hamilton County area , as well as small towns throughout the
State of Ohio .

Other original members believed they could

jointly do as good a job as the FSLIC in guarding savers
deposits .
The original amount of total deposits guaranteed was about
$200,000,000 .
$ 4,300,000,000 .

This has subsequently grown to over
The fund generally relied upon the experience of

Massachusetts , whose fund predated federal insurance , and
Connecticut in establishing the rules and operations of the fund .
Then and now there are several totally uninsured companies
in Ohio .

These have not been closed and have not generally , to

my knowledge , been adversely affected by the Home State crisis .
The Fund's assets include a 2 % deposit from each member ,
based on savings at that institution , which is adjusted semiannually each year .

In addition , earnings on the deposits of

members are retained by the Fund to further strengthen the
Fund .

No dividends have been paid for 25 years .

The members

count this 2 % deposit as part of their net worth .
As of December 31 , 1984 , the Fund had assets of
$125,800,000 .

The total amount of guaranteed deposits was

approximately $ 4,300,000,000 .
2.9 % .

This is a ratio of approximately

The FSLIC's comparable ratio is approximately 0.75 % .

-2-

62

The Home State Situation
Prior To ODGF's Knowledge of the Collapse of ESM
By way of additional background , ODGF has cooperated fully
with the Ohio Division of Savings and Loan Associations
throughout its history .

ODGF receives examination reports of the

State , as well as quarterly and other reports from all fund
companies , including Home State .

The reports are reviewed by the

Fund's Department of Supervision toward the end of making recommendations to improve operations of the companies and to assist
in the correction of unsafe practices .

legal power to effect compliance .
power .

However , the Fund has no

It has no cease and desist

It attempts to achieve compliance by working with the the

State and management of insured companies to have the directors
of a company agree to make desireable changes .
Beginning in about 1980 , the Fund became aware , through its
review of reports , of Home State's involvement with ESM
Securities .

There were at that time repurchase agreements of

about $ 100,000,000 .

There was also a modest over- collaterali-

zation and non-uniform maturities .
The situation came to our attention next about March of
1981.

At that time a report revealed over- collateralization and

we noted that there was too much concentration with one dealer ,
namely , ESM .
tion .

There was , however , no explicit lending viola-

Letters were written to and meetings held with officers of

Home State concerning the problem , particularly the over-collateralization .

-3-

63

1982 reports showed more of the same .

Although the amounts

involved would increase and decrease , the trend was upward .
Again , we were concerned with over- collateralization and
concentration of activities with ESM .

Meetings were held with

officials at Home State which were also attended by representatives of the State Superintendents Office .
On February 25 , 1983 , the Fund wrote a letter to Home State
strongly suggesting that it unwind the transactions with ESM and
reduce the over- collateralization as soon as possible , but not
later than June 30 , 1983 , the date the transactions would mature .

:

Later , the Fund was startled to learn that , contrary to

these directions , the transactions were dramatically increased in
May and June of 1983.

A meeting was held in October , 1983 ,

involving representatives of the Fund , the Superintendent of the
Division of Savings and Loans and his staff, officials of Home
State and a representative of ESM .
significant over-collateralization .

At that point there was also
The Superintendent , with the

Fund's full support and concurrence , instructed Home State to
wind down the transactions and reduce the substantial overcollateralizations .

In January , 1984 , all the directors of Home

State , with one exception , agreed to a program of unwinding the
ESM relationship , with a particular emphasis on over-collateralization , and the concentration of transactions with one thinly
capitalized dealer .

-4-

64

It is our understanding that by July , 1984 , the various
transactions had been matched , would mature in June and July of
1985 and would thereupon cease .

At least that is what Home State

agreed to .

The Events of March 2-10
On Saturday , March 2 , 1985 , at approximately 4:15 p.m. , the
Fund became aware for the first time of the potential collapse of
ESM and the resultant potential loss to Home State .

We learned

this at a meeting which I and the Fund's counsel attended .

Also

present were David Schiebel , President of Home State , Nelson
Schwab , Jr. , attorney for and a director of Home State , and
Marvin Warner .

At that time , Mr. Schiebel advised us that he was

concerned because an audit report prepared by Alexander Grant &
Company , the auditors for ESM , had been withdrawn approximately
24 hours after it was delivered to Mr. Schiebel earlier that
week .

We were also told that the withdrawal of the auditor's

opinion caused Mr. Schiebel to engage legal counsel , whom he
authorized to institute an immediate investigation of ESM .

We

were advised that Home State still had a repurchase relationship
with ESM that was substantially over- collateralized .

We

responded by requesting that ODGF be kept fully advised of the
results of the investigation Home State had undertaken in
Florida .

On Saturday , March 2 or Sunday , March 3 , I discussed the
matter with Thomas Batties , at that time acting Superintendent of
the Division of Savings and Loans of the State of Ohio .

-5-

65

Thereafter , ESM's financial posture became the subject of
extensive news coverage in Cincinnati due to the impact it might
have on Home State .
On March 5 , the depositors of Home State started a run on
the institution .
On March 6 , the State of Ohio announced that it was prepared
to safeguard the interests of the depositors of Home State and of
all depositors whose funds were guaranteed by the ODGF and that
the system in place provided adequate safeguards for depositors
at its State chartered savings and loan associations .

The run at

Home State continued on Thursday and Friday , March 7 and 8 , in
spite of the State's announcements .

By Friday evening , March 8 ,

an estimated $ 154,000,000 had been withdrawn .

By the close of

business on March 8 , the ODGF had advanced $ 45,000,000 in cash to
Home State for the benefit of depositors .

On its own initiative ,

Home State announced that it would not be open for business on
Saturday , March 9 , a normal day of business for the Company ,
pending resolution of its pursuit of a merger .
From approximately Wednesday , March 6 through Saturday ,
March 9 , the ODGF was aware of negotiations involving a potential
merger or purchase and assumption involving Home State .

The

negotiations earlier in the week where with the First National
Bank of Cincinnati .

On Saturday , March 9 , the ODGF had

representatives present as observors at a meeting in Cleveland
where bankers from throughout the State of Ohio were informed of
the situation and of Home State's availability as a merger

partner .

Representatives of the Department of Commerce and the

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66

Superintendent were also present as were attorneys , for the State
and the Superintendent of Banks .

Representatives of the Federal

Reserve Board were also present .

The bankers stated that they

were unable to make a rational offer because of the lack of
definitive financial information .
On Sunday , March 10 , the State of Ohio announced the
appointment of a conservator for and the closing of Home State .

The Events of March 11 through March 20
Subsequent to Sunday , March 10 , the ODGF has not been kept
informed of events surrounding Home State or its potential
sale .

Even though a request was timely made , the Fund was not

allowed to review the books and records of Home State so as to
make its own independent assessment of the parameters of the
potential problem .
On Monday and Tuesday , March 11 and 12 , the media continued
to publicize the difficulty Home State was having as a result of
the dealings with ESM .

On Tuesday , March 12 , 1985 , the Fund

retained Mr. John Lyons of a New York firm specializing in sale
of troubled financial institutions .

The Fund then made the

services of Mr. Lyons and his firm available to the State .

On

Wednesday the Fund was informed that the services of Mr. Lyons
were not needed at that time .

Later , we learned that on

Saturday , March 16 , Mr. Lyons ' firm was retained by the State to
assist in the preparation of a bid package .

We have not been

furnished with a copy of the bid package or bidding instructions ,

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67

if any , and the Fund has not been involved in any efforts to sell
Home State since the Saturday meeting on March 9 in Cleveland .
On or about March 13 , runs began at a few Fund member
companies , particularly in the Cincinnati area , creating long
lines which were dramatically played up by the media .
On March 15 , Governor Celeste announced the closing of all
ODGF companies statewide , even though the problem of runs was
confined generally to the Cincinnati area .
On or about March 13 , the State Legislature passed
legislation authorizing the creation of a separate deposit guarantee fund and providing for a loan to that fund .

The Fund was

not consulted about the content or advisability of the legislation .
On March 15 , an organization meeting was held for the
organization of the new deposit guarantee fund , specifically
excluding Home State , based on a deposit of 1 % of member savings
and the lending of $ 50,000,000 by the State of Ohio .

To this

date , to our knowledge , the State of Ohio has not placed its
$50,000,000 in the new fund .
On March 15 , the Governor visited Cincinnati and announced
the closing of all ODGF companies statewide , even though the
problem of runs were confined to the general Cincinnati area .
Members of the Fund were forced to remain closed on March 18 and
19 .

Institutions which were and are totally uninsured were

allowed to remain open throughout the crisis .
they have had no runs to date .

‫ܘ܂‬

To our knowledge ,

68

On March 19 , the Ohio Legislature passed additional
legislation providing for the reopening of ODGF associations on a
limited basis in some cases and on a full basis in others .
On the morning of March 21 , ODGF received notice that the
Superintendent of Savings and Loan Associations had appointed or
purported to appoint a conservator for it on the evening of March

20.

Summary and Conclusions
As you might guess , I have not yet had time or sufficiently
complete information to reflect thoughtfully on the lessons of
the events or to formulate definitive recommendations .

Since the

appointment of a conservator for Home State on March 10 , 1985 ,
the ODGF has been denied access to the books and records of Home
State .

Consequently , it is impossible for me to answer certain

questions as raised in your letter of March 22 .
It is impossible to discuss comprehensively the ultimate
financial impact of the Home State situation on the ODGF and its
members .

This is due to the facts that :

( 1 ) as noted ODGF has

been denied access to the books and records of Home State , ( 2 )
the ultimate loss at Home State is still not quantified to our
knowledge , ( 3 ) no buyer has been found for Home State , so the
purchase price cannot be determined , and thus the impact on the
Fund cannot be determined , ( 4 ) it is not as yet possible to
determine either the collectability of Home State's claims
against the ESM estate and the likely defendants in ESM litigation or the collectability of claims against the directors ,

69

officers , controlling persons and other potentially liable
persons involved in the Home State situation and ( 5 ) until Home
State is sold we do not know whether it will be sold in such a
way as to preserve the ODGF members ' 2 % deposit ( 2 % of savings )
with the Fund .

If a sale can be arranged which protects that

deposit , it would be of great benefit to the members of the Fund
and their depositors .

It is also impossible to comment responsibly on the response
and assistance from the Federal Home Loan Bank Board or the
Federal Reserve System .

Since March 10 , the ODGF has basically

been without communications or information relating to Home
State .

ODGF does not know what the response of the Federal Home

Loan Bank Board or the Federal Reserve System has been since it
has not been asked for its advice or assistance nor has it been
informed directly of what steps have been taken .

Therefore any

comments would be based on hearsay , and I do not believe such a
response would be appropriate .
In response to one of your questions in your letter of
March 22 , the relationship and interaction with the Ohio Division
of Savings and Loan Associations and the ODGF was excellent prior
to the Home State Savings Bank closing .

Up to March 10 , 1985 ,

the Fund and the Division worked closely to try to solve the
problem of Home State .

After March 10 , when the conservator was

appointed for Home State , there has been very little , if any ,
interaction .

Pursuant to Section 1155.16 of the Ohio Revised

Code , examination reports prepared by the Ohio Division of

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70

Savings and Loan Associations were shared with the ODGF .

Sub-

sequent to March 10 , no information has been shared .

Summary
In summary , as soon as ODGF became aware of what it
considered to be inadvisable practices at Home State , it
attempted to cause Home State to cease the practices .

Contrary

to those directions , Home State apparently increased the dollar
amounts of the transactions and increased the over- collateralization .

Finally , Home State and its directors agreed in writing

to stop the transactions .

The transactions still went on .

However , the Fund had no legal power to author or enforce a
cease-and -desist order .

It could counsel restraint , but could

not compel it .
As soon as the Fund became aware of the ESM collapse , it
began working with the State Superintendent .

After the March 10 ,

1985 appointment of a conservator for Home State , the Fund has
been kept out of all negotiations relating to Home State .

In

fact , even today , it does not know the true financial condition
of Home State .
A tragic aspect of the situation which is still unresolved
is the fate of the other approximately 70 members of the Fund .
Some are now insured by the FSLIC .

Others will be shortly .

But

there remain a significant number of sound , well - managed
companies that have provided good service to their communities
and neighborhoods , some for a 100 years , whose fate is in

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71

doubt .

The key to their future is to insure that the Home State

matter is settled promptly and in a way that protects the
members ' 2 % deposit in the Fund .
While I believe that , if handled differently , the Home State
situation could have been solved through a quick sale or merger
and depositors immediately protected , the problem we now face is
to insure prompt reopening of the remaining Fund - insured
companies in such a way that they and their depositors are fully
protected .

It will take the cooperation of the State , the FSLIC

and the Fund to insure this result .

To that end , I am sure the

Fund would pledge its support and cooperation .

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72

NAME OF DEPOSIT INSURANCE FUND :

I.

OHIO DEPOSIT GUARANTEE FUND
(the "ODGF" )

General Information

1.

Type ( s ) of Financial Institution ( s )
whose deposits you insure :
Ohio chartered
savings and loan
associations .

2.

In which state ( s ) do you insure :

3.

A.

B.

Annual premium :

C.

Continuing equity contribution
2% of withdrawal savings ,
or membership deposit :
rounded to the nearest
$100 , adjusted semiannually as of June 30
and December 31 of each
year .

4.

Maximum coverage per account or per
depositor : 100% .

5.

Do you insure brokered deposits : Yes , but members
are controlled by the OGDF Rules and Regulations
as to amounts they can take in brokered deposits
( See Item II ( k ) the ODGF Rules and Regulations
( the " Rules " ) .

6.

Number of insured institutions , by type :

Ohio only .

Cost of initial membership
2% of withdrawable
in your fund , if any :
savings , rounded to
the nearest $ 100 ,
adjusted semiannually as of June
30 and December 31
of each year , plus
pro rata share of
accumulated earnings
at date of acceptance into fund
membership .
None .

73

A.
B.
C.
D.

Under $ 100 million :
$ 100 million to $ 500 million :
$500 million to $ 1 billion :
Over $1 billion :

A.
B.
C.
D.

December 31 , 1984
Assets
Deposits
$ 1,833,006,000
$ 1,699,704,000
$ 1,119,130,000
$1,175,396,000
$ 914,551,000
$ 823,675,000
$1,440,608,000
$ 668,005,000

7.

II .

Aggregate amounts of deposits
insured , by type of institution :

61
7
1
1 (Home State )

$ 4,310,514,000
at December 31 ,
1984 .

8.

Your fund's total usable assets :

9.

Ratio of usable insurance fund
assets to deposits insured : 2.94% at December 31 ,
1984

$ 126,912,430
at December 31 ,
1984
(market value )

Background :
1.

Are you a governmental or private agency and are
you a creation of state law? Please provide a
text or description of your basic statutory
authority .
The ODGF is a non profit , private mutual
corporation created pursuant to Ohio Revised Code
Section 1151.80-92 , as repealed by Amended
Substitute Ohio Senate Bill 119 .

2.

Please provide name of the state agency ( ies ) , if
any , with supervisory authority over your books ,
records , operations , etc.
Ohio Division of Savings and Loans .

3.

If a situation arises where your insurance funds
are inadequate to cover deposit losses , do you
have , by statute :

- 2 -

74

a.

Access to the treasuries of the state ( s ) in
which you operate ; and/or

No
b.

Authority to assess other insured
institutions enough to cover the losses?
Not by statute ; however , Article V of the
ODGF Constitution and Item III ( A ) of the ODGF
Rules provides a method for an assessment .

4.

Are you subject to state limitations as to the
ratio of insurance fund assets to total deposits
insured?

No
5.

Do you have lines of credit already established by
contract on which you can draw at will ? What is
the aggregate dollar limit of established lines of
credit? With what institution or institutions
have these credit lines been established?
The ODGF has a $ 1,000,000 line of credit at the
Bank for Savings & Loan Associations , Chicago ,
Illinois

6.

Do you reinsure your risks with any other
insurance carriers ? Please provide details .
$ 2,000,000 Insurance Company of North America .
$25,000,000 retention rider

7.

Regarding your board of directors :

a.

How is your board of directors selected :
Selected by Nominating Committee and/or
representatives or members at ODGF Annual
Meeting . See Article VIII of the
Constitution .

b.

What rules govern the size and composition of
the board?
See Article VIII of the ODGF Constitution .

C.

Who are the present members of your board?
( Please provide names and principal
affiliations . )

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75

III .

Name

Affiliation

Charles A. Brigham,
Jr.

President and Director ,
Federated Savings Bank ,
Lockland , Ohio

John A. Dreyer

Director , Baltimore
Savings and Loan
Company , Cincinnati , Ohio

Richard D. Hoffman

Chairman of the Board ,
The City Loan & Savings
Company , Lima , Ohio

Vernon W. McDaniel

Assistant Treasurer and
Director, Anderson Ferry
Building and Loan
Company , Cincinnati , Ohio

John R. Perkins

President and Director ,
The Metropolitan Savings
Bank , Youngstown , Ohio

Eleanor J. Remke

President and Director ,
Madison Saving Bank ,
Cincinnati , Ohio

Joseph D. Rusnak

President and Director ,
Mentor Savings Bank ,
Mentor , Ohio

David J. Schiebel

Chairman of the Board ,
Home State Savings Bank ,
Cincinnati , Ohio

Harold R. Swope

President and Director ,
Independent Savings
Association , Euclid , Ohio

Charles F. Tilbury , Sr.

Executive Vice - President
and Director , The
Clermont Savings
Association , New
Richmond , Ohio

Jack R. Wingate

Executive Vice -President
and Director , Heritage
Savings Bank , Cincinnati ,
Ohio

Supervision of insured institutions :

1.

Do you impose on the institutions whose deposits
you insure , reserve , capital or other safety and

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76

soundness requirements designed to prevent the
likelihood of insolvency? If so , what basic
requirements do you impose ?

Yes .

2.

See Item II of the ODGF Rules .

Please respond separately for each state in which
you insured deposits : Ohio only

a.

Do you have authority , either by statute or
contract , to discontinue a financial
institution's membership in your deposit
insurance fund?
Yes--See :

b.

(1 )

Article IX , Section 6 ( a ) of the
ODGF Constitution ;

(2 )

Item IV ( A ) of the ODGF Rules provides
for at least two months of continued
insurance ;

(3)

Item VI of the ODGF Rules requires
Notice of Termination to be given to
depositors .

Under what set of conditions or circumstances
would you be authorized to discontinue
insurance?
By resolution of the Board of Trustees for
due cause . See Article IX , Section 6 ( a ) of
the ODGF Constitution .

C.

Since January 1 , 1980 , set forth the number
of institutions whose insurance you have
discontinued and the reasons for such
discontinuance .

None .

3.

Please respond separately for each state in which
you insure deposits : Ohio only
a.

Do you have authority to examine the books ,
records , loans and other financial
transactions of the institutions you
insure ? Is any such authority statutory or
by agreement ? Please describe and/or provide
a copy of your authority .
Yes . See Item VI ( F ) of the ODGF Rules . Also
see Article IX , Section 6 ( b ) of the ODGF
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77

Constitution and Item VI ( C ) of the ODGF Rules
concerning additional directors .

b.

How frequently do you examine the
institutions whose deposits you insure?
Please describe your examination policies and
procedures . How many examiners/auditors do
you have? What is your examination operating
budget?
Member institutions are examined as deemed
necessary by the Department of Supervision of
the ODGF . Policies and procedures vary with
the type of information desired .
Department of Supervision consists of three
persons capable of examining and auditing
with an unlimited budget .

c.

Whether or not you have independent
examination powers , do you have a right of
access to the examination reports of the
relevant financial institution supervisory
authority in your state ? If so , do you
receive their examination reports on a
regular basis ?
Yes , the ODGF receives copies of all
examination reports of its member
institutions as prepared by the Division of
Savings and Loan Associations , State of Ohio .

4.

Are the institutions you insure required to have
their books audited and their financial statements
certified by independent outside accountants?

No.

5.

If a financial problem is discovered or otherwise
becomes apparent in a member financial
institution , what authority do you have , short of
insurance termination , to force correction of the
problem and thereby forestall the necessity for
claims against the deposit insurance?
The ODGF has no direct authority to correct
problems ; however , the ODGF closely supervises
problems through the Department of Supervison
which works with the member institution to resolve
its problems . If the problem cannot be resolved
by the Department of Supervision , the ODGF works
with the Division of Savings and Loans , State of
Ohio , to seek to effect a merger with another
financially viable institution . The Advisory
Committee of the ODGF can make recommendations to

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78

the Board of Trustees with respect thereto .
IV.

Payment of Losses :

1.

Do you act as receiver/liquidator for failed
institutions you insure?
No. By agreement with member institutions , the
ODGF has replaced management and directors in the
past with ODGF employees and Trustees , corrected
problems and then effected a merger with a
financially viable association . The ODGF has
never been a receiver/ liquidator .

2.

If a financial institution whose deposits you
insure is closed due to insolvency , do depositors
receive their funds immediately or must they await
a liquidation process ?
The ODGF has never experienced a closing of a
financial institution due to insolvency .

3.

a.

If an institution whose deposits you insure
becomes insolvent , is liquidation and a
payout of insured deposits your only
alternative?
No. See Ohio Revise Code $ 1151.87 (H ) .
Pursuant to the ODGF Rules and general
authority , the ODGF can attempt to effect
mergers or provide other assistance .

b.

Do you have authority to arrange a purchaseand-assumption takeover (purchase of assets
and assumption of deposit liabilities ) of a
closed institution by another sound institution?
No, not without the complete , full knowledge
and approval of the Superintendent of the
Division of Savings and Loan Associations ,
State of Ohio , and the ODGF member institutions .

c.

Do you have authority to keep an insolvent
institution open and operating while seeking
a merger partner?
Yes , but the OGDF needs the approval of the
member institution and the Superintendent to
provide assistance .

4.

Please provide a listing showing , for each
insolvency covered by your fund from January 1,

-.7 -

79

1980 , to date :
The only situation to date is Home State Savings
Bank , Cincinnati , Ohio , which is now in the hands
of a state appointed conservator .

V.

Insured Fund Reserves :

1.

How much is your total usable insurance reserve ?
Provide calendar or fiscal year date for 1981 ,
1982 , 1983 , and 1984 .
Fiscal Year Ended June 30

1981 $ 50,182,978
1983 $ 88,354,862
2.

1982 $59,269,202
1984 $108,413,800

What is the present composition and market value ,
by type , of your insurance fund assets ( for
example : U.S. Treasury Securities , bank deposits ,
corporate bonds , mutual fund investments ,
state/local securities ) ?
At March 23 , 1985
U.S.
U.S.
U.S.
Cash
Bank

3.

Government Securities
Government Agency Bonds
Government Treasury Bills
and Federal Funds
Certificate of Deposits

$ 33,848,375
39,472,914
2,243,760
2,968,157
450,000

Do you invest any insurance fund assets in
deposits , notes , debentures , or other obligations
of the institutions you insure ? How much?
ODGF deposits are made in member institutions only
in the event of an assisted transaction . At
present , $ 6,955,311 is on deposit in a savings
account at City Loan & Savings Co. pursuant to a
contractual agreement arising out of an
acquisition of Central Savings Association , Blue
Ash, Ohio .

4.

In each of the past four calendar or fiscal years ,
what has been the average yield from interest ,
dividends , etc. , on your investment portfolio?
Fiscal Year Ended June 30

1981
1982
1983
1984

5.

9.98%
11.36%
11.30 %
11.32%

Please provide a copy of your latest annuai
report .

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80

(Amended Substitute Senate Bill Number 119)

AN ACT

To ensure the orderly reopening of building and loan
associations and to provide for the protection of
depositors, to terminate the authority for deposit
guaranty associations except for certain functions ,
to repeal sections 1151.80 , 1151.81 , 1151.82 ,
1151.83 , 1151.84 , 1151.85 , 1151.86 , 1151.87,
1151.88, 1151.89, 1151.90, 1151.91 , 1151.92, and
1151.99 of the Revised Code, and to declare an

emergency.

Be it enacted by the General Assembly ofthe State of Ohio:
SECTION 1. (A) No building and loan association the deposits of
which on the effective date ofthis act are insured by any deposit guaranty
association shall be open for business unless deposits in such association
are insured by the Federal Savings and Loan Insurance Corporation
(FSLIC) or the Federal Deposit Insurance Corporation (FDIC) , or unless the findings in division (B) , (C) , or (D) of this section have been
made.
(B) Notwithstanding division (A) of this section , a building and loan
association which has made an application for insurance to FSLIC or
FDIC that is substantially complete shall be permitted to open for business by the Superintendent of Building and Loan Associations if the
Superintendent finds, upon application by such association to the Superintendent, that such association probably should qualify for such insurance under the applicable standards of FSLIC or FDIC, as the case may
be. If such association is other than a permanent stock company, and, in
addition to an application for insurance to FSLIC or FDIC, it has submitted an application for reorganization under section 1151.61 of the Revised
Code, the Superintendent shall include and consider such application in
making his finding.
(C) Notwithstanding division (A) of this section, if a building and
loan association has made application to the Superintendent pursuant to
division (B) of this section and such application has been denied or not
been approved within fifteen days from the date such application was
submitted to the Superintendent , such building and loan association may
make application to the Director of Commerce . The Director shall hold a

81

hearing based upon rules promulgated by the Director within fifteen days
at which evidence may be presented . A building and loan association shall
be permitted to open unless the Director finds, based upon such factors as
the liquidity of the building and loan association as demonstrated by its
levels of cash, cash items and readily marketable securities , and the
ability of such association to immediately preserve or increase the liquidity in response to depositor demands and the net worth of such association, and that such opening is not in the best interests of the depositors of
such association or is detrimental to the interests of building and loan
associations generally. The procedures provided by this act are not subject to Chapter 119. of the Revised Code.
(D) Notwithstanding division (A) of this section, a building and loan
association may open if it demonstrates to the satisfaction of the Superintendent one ofthe following:
(1) It's deposits are guaranteed by a corporation, organization, or
other person, which corporation, organization , or person owns , directly
or indirectly, a majority of such association within 120 days of the effective date of this act , and which corporation, organization, or person meets
such financial and other qualifications as may be established by the
Superintendent;
(2) It is owned or controlled, directly or indirectly, by an institution
insured by FSLIC or FDIC and such institution guarantees its deposits,
or has entered into an agreement to be acquired by or be merged with
such institution, or enters into such an agreement within fifteen days of
the effective date of this act.
(3) The Superintendent determines that the interests ofthe depositors will not be jeopardized.
(E) In addition to the causes stated in section 1157.01 of the Revised Code, the Superintendent may order a building and loan association
to liquidate its business and property pursuant to section 1157.23 of the
Revised Code whenever either:
(1) The Superintendent has denied its application to open for business under division (B) of this section and there is no appeal from that
denial pending pursuant to division (C) of this section or an appeal has
been denied and the Superintendent determines that the interests ofthe
depositors will be jeopardized if the association is not liquidated ;
(2) After being permitted to open for business under division (B) or
(C) of this section, its application for deposit insurance has been denied or
the Superintendent finds that any other condition upon which opening
was permitted is not in existence and the Superintendent determines that
the interests of the depositors will be jeopardized if the association is not
liquidated;
(3) The association has not qualified to open for business 120 days
after the effective date of this act, and the Superintendent determines
that the interests of the depositors will be jeopardized ifthe association is
not liquidated .
(F) . During the period in which a building and loan association is not
open for business pursuant to division (A) of this section, such association
may set aside and make available in its discretion for withdrawal by all
depositors during any period of thirty consecutive days an aggregate
amount not exceeding the balance of such depositors' account or accounts,

82

but in no event more than an aggregate of seven hundred fifty dollars in
each thirty-day period; provided, however, that such association shall
keep an account of the withdrawals made and such withdrawals shall be
deemed to be credits against the withdrawing depositor's pro rata
dividend in the event such association is liquidated . Such association may
receive deposits, but the deposits received during such period are not
subject to any limitation as to payment or withdrawal, and such deposits
shall be segregated and shall not be used to liquidate any indebtedness of
such association existing on the effective date of this act or any subsequent indebtedness. Such deposits received while the association is not
open for business shall be kept on hand in cash, invested in the direct
obligations ofthe United States or the State of Ohio , or deposited with a
financial institution in Ohio designated by the Superintendent .
(G) Nothing in this section shall preclude the Superintendent from
exercising his powers and discharging his duties and responsibilities as
set forth in the Revised Code.
(H) The powers of the Superintendent under this act and Sub . S. B.
113 of the 116th General Assembly after December 31 , 1985 , shall be
limited to the fulfillment of commitments made under such acts, expressly or by reasonable implication, on or before that date and shall not
include the initiation of any additional proceedings not so required .
(I) There shall be no liability imposed on the part of, and no cause of
action of any nature arises against, the savings association guaranty fund
created pursuant to Sub. S. B. 113 of the 116th General Assembly, its
board of trustees, officers, agents, or employees , the superintendent of
savings and loan associations or his authorized representatives, for any
statements made in good faith by them in any reports or communications
concerning risks insured or to be insured by the association, or for any
administrative actions conducted in connection therewith.
SECTION 2. That sections 1151.80 , 1151.81 , 1151.82 , 1151.83 ,
1151.84, 1151.85 , 1151.86, 1151.87 , 1151.88 , 1151.89, 1151.90 , 1151.91 ,
1151.92, and 1151.99 of the Revised Code are hereby repealed effective
sixty days from the effective date of this act . Notwithstanding this section, a deposit guaranty association has all power and authority necessary
to accomplish complete winding up of its business, including, but not
limited to, the defense to judgment, with right of appeal as in other cases ,
of any claims asserted against any such deposit guaranty association , and
the prosecution to judgment, with right of appeal as in other cases , of
claims, whether arising by subrogation or otherwise, presently heid by,
or hereafter arising or accruing to, any such deposit guaranty association.
SECTION 3. Notwithstanding any other provision of the Revised
Code to the contrary, if any such building and loan association or building
and loan association or building and loan associations insured by a deposit
guaranty association elects to convert to a bank and if following such
conversion the institution should be eligible for FDIC insurance, upon
application the Superintendent of Banks shall forthwith issue an authorization for the applicant to commence business as a bank and thereafter
the institution shall be a bank.
SECTION 4. Notwithstanding any other provision of the Revised
Code to the contrary, if any such building and loan association or building
and loan associations insured by a deposit guaranty association , elects to

83

convert to a bank, the association or associations shall file an application
with the Superintendent of Banks. The Superintendent of Banks may,
without being subject to the publication, notice and hearing requirements
ofsection 1103.07 of the Revised Code, approve such application and may
condition such approval to provide for the orderly transition from the
business of a building and loan association to the business of the bank.
The Superintendent of Banks shall have full authority to enforce compliance with such conditions and to regulate the resulting bank pursuant
to Chapters 1101. to 1129. of the Revised Code. Upon receipt of evidence
satisfactory to the Superintendent of Banks that the resulting bank will
be insured by the Federal Deposit Insurance Corporation at the time it
commences business as a bank, the Superintendent shall issue a certificate of authority to commence business as a bank.
Notwithstanding any other provision of the Revised Code to the
contrary, if any building and loan association or building and loan associations insured by a deposit guaranty association elects to merge or consolidate with a bank or to transfer assets and liabilities to a bank, upon
receipt of evidence satisfactory to the Superintendent of Banks that the
resulting bank of such reorganization will be insured by the Federal
Deposit Insurance Corporation upon consummation of the reorganization, the Superintendent of Banks shall approve the merger, consolidation or transfer of assets and liabilities.
The Superintendent of Banks may waive, in whole or in part , fees
required by section 1125.16 of the Revised Code for any transaction made
pursuant to this section.
SECTION 5. A special prosecutor shall be appointed by the attorney
general as described in section 2939.10 ofthe Revised Code to investigate
and prosecute any criminal violations that may have been committed in
connection with any events and circumstances that caused any savings
and loan association to be placed in the possession of a conservator as of
March 15, 1985, and any criminal activity by any depositor, investor,
director, officer, or employee of any savings and loan association, any
unlawful activity in the operation of any savings, and loan association, or
any unlawful activity by any state officer or employee in connection with
the regulation, examination , inspection, or operation of any savings and
loan association or any deposit guaranty fund or any person with whom
an association had any contractual relationship.
SECTION 6. All assets , deposits or loans received by the deposit
guaranty fund for state chartered building and loan associations , as created by Sub. S. B. 113 ofthe 116th General Assembly less any deposits by
building and loan associations denied membership by the Federal Savings
and Loan Insurance Corporation are hereby pledged to indemnify the
corporation for any losses incurred by the corporation through defaults
through June 30, 1987 of formerly privately insured state chartered associations accepted for membership by the corporation. In addition, the
General Assembly shall appropriate $ 10,000,000 , not withstanding the
net amount provided by the deposit guaranty fund for these same purposes to the extent these funds are required .
SECTION 7. Within two working days of a privately insured state
chartered building and loan association receiving notification that it has
been denied insurance from the Federal Savings and Loan Insurance
Corporation, the deposit guaranty fund as created by Sub. S. B. 113 of

84

the 116th General Assembly, shall pay to the association any funds on
deposit by the association to the guaranty fund less any withdrawals by
the association and plus interest earned on the net balances by the association on deposit with the guaranty fund. Interest earned shall be calculated on the daily interest received by the guaranty fund as determined
by the funds' management.
SECTION 8. This act is hereby declared to be an emergency measure
necessary for the immediate preservation of the public peace, health, and
safety. The reason for such necessity lies in the fact that this action is
essential to the best possible conclusion to a serious problem affecting
public confidence in building and loan associations whose deposits are
insured by deposit guaranty associations. Therefore , this act shall go into
immediate effect.

Speaker

of the House of Representatives.

President

Passed

Approved

of the Senate.

19

19

Governor.

The section numbering of law of a general and permanent
nature is complete and in conformity with the Revised Code.

Director, Legislative Service Commission .

85

Filed in the office of the Secretary of State at Columbus ,
Ohio , on the
day of
A. D. 19

Secretary of State .

File No.

Effective Date

86

[DEPOSIT GUARANTY ASSOCIATIONS]

81151.80 Definitions.
As used in sections 1151.80 to 1151.92, inclusive, of the Revised Code:
(A) "Building and loan association" means a
corporation organized for the purpose of raising
money to be loaned to its members or to others;
and mcludes "savings association";

(B) "Deposit guaranty association" means an
association organized under the provisions of
sections 1151.81 to 1151.86, inclusive, of the
Revised Code;
(C) "Superintendent of building and loan associations means the superintendent of building
and loan associations in the state of Ohio created

87

1151.81

TITLE 11: BUILDING AND LOAN ASSOCIATIONS

by the provisions of section 121.04 of the Revised Code.
HISTORY: 126 ▼ 94, § 1. 28 10-11-55.
Cross-References to Related Sections
FiduciaryDeposit of funds, RC $ 2109.41
Investment by, RC § 2109.37
Investment of funds by trustees of police and firemen's disability and pension fund, RC 1742.11.
Investment
ofsurplus or reserve of state insurance
fund, RC4123.44.2.
Investments by domestic life insurance company,
RC 3907.14.
Investments by public employees retirement board,
RC 145.11.
Investments by state teachers retirement board, RC
$ 3307.15(FX1).
See RC $ 1107.18 which refers to RC 1151.80
to 1151.92.
CASE NOTES AND OAG
1. A deposit guaranty association organized under RC 1151.80 et seq is not empowered to guar:
anty the permanent stock of member building and
loan associations: 1956 OAG No.6299.
2. A deposit guaranty association organized under RC 1151.80 et seq is empowered to guaranty
withdrawable shares, stock deposit accounts or running stock of member building and loan associations: 1956 OAG No.6299.
3. A deposit guaranty association organized under RC 1151.80 et seq is empowered to guaranty
moneys on deposit with member building and loan
associations pursuant to the pertinent provisions of
RC 1151.19, whether evidenced by passbook o
certificate of deposit: 1956 OAG No.6299.
81151.81 Incorporation of mutual deposit guaranty association.
Any number of building and loan associations
incorporated pursuant to sections 1151.02, 1151.03 and 1151.04 of the Revised Code, not less
than twenty-five, may become incorporated under the general corporation laws of this state
as a mutual deposit guaranty association without capital stock subject to the limitations prescribed in sections 1151.80 to 1151.92, inclusive, of the Revised Code.
Articles of incorporation of a deposit guaranty
association shall be filed in the office of the
secretary of state. The secretary of state shall,
upon receipt of such articles,transmit a copy of
them to the superintendent of building and loans
and shall not record them until authorized to do
so by the superintendent.
HISTORY: 125 ▼ 94, § 1. 2E 10-11-55.

188

and substance and the examination shows that
such corporation, if formed, would be entitled
to commence the business of a deposit guaranty
association, the superintendent shall so certify
to the secretary of state.
The superintendent may refuse to make such
certification if upon examination he has reason
to believe the proposed corporation is to be
formed for any business other than assuring the
liquidity of member building and loan associa
tions and guarantying deposits therein, if he has
reason to believe that the character and general
fitness of the incorporators are not such as to
command the confidence of the general public
or if the best interests of the public will not be
promoted by its establishment.
HISTORY: 126 ▼ 94, § 1. ZA 10-11-55.
CASE NOTES AND OAG
1. The sole purpose of the legislature in making
possible a deposit guaranty corporation is to guaranty the liquidity of its member associations: Ohio
Deposit Guarantee Fund v. Dziamba, 60 00 428,
137 NE(2d) 905 (CP).
2. The refusal of the superintendent of building
and loan associations to certify the articles of incorporation of a deposit guaranty association because
of certain provisions or lack of provisions in a proposed constitution and by-laws constitutes an arbitrary and discriminatory act: Ohio Deposit Guarantee
Fund v. Dziamba, 60 OO 426, 137 NE(2d) 905 (CP).
§1151.83 Recording of articles of incorporation; certified copies.
Upon receipt of the certificate provided for in
section 1151.82 of the Revised Code, the secretary of state shall record the articles of incorporation of such deposit guaranty association
and furnish a certified copy thereof to the incorporators and to the superintendent of building and loan associations. All papers thereafter
filed in the office of the secretary of state relating
to such corporation shall be recorded as provided
by law and a certified copy forwarded to the
superintendent.
HISTORY: 126 ▼ 04 (95), § 1. ZE 10-11-55.

81151.84 Proposed amendments transmitted to superintendent.
When any proposed amendments to the articles of incorporation of a deposit guaranty as
sociation are filed in the office of the secretary
of state, the secretary of state shall transmit
copy thereof to the superintendent of building
$ 1151.82 Examination and certification and loan associations and shall not record such
by superintendent.
amendments until authorized to do so by the
Upon receipt from the secretary of state of a superintendent.
HISTORY: 125 ▼ 94 (95), § 1. KE 10-11-55.
copy of the articles of incorporation of a proposed deposit guaranty association the superin81151.85 Examination and certification
examat
once
shall
loans
and
of
tendent building
ine into all the facts connected with the forma- of amendments.
Upon receipt from the secretary of state of a
tion of such proposed corporation. In the event
such articles ofincorporation are correct in form copy of proposed amendments to the articles of

88

ticorporation of a deposit guaranty association
the superintendent of building and loan associations shall at once examine the proposed
amendments to determine their effect on the
operation of the deposit guaranty association.
In the event such proposed amendments are
correct in form and substance and the examination shows that if adopted they would not change
the character or principal business of the deposit
guaranty association, the superintendent shall so
certify to the secretary of state.
The superintendent may refuse to make such
certification if upon examination he has reason
to believe the proposed amendments would
change the character of the business of the
guaranty deposit association or the best interests
of the public will not be promoted by their
adoption.
HISTORY: 126 ▼ 94 (95), § 1. 28 10-11-55.

tion that is subject to inspection by the United States
or by this state.
(F) Issue its capital notes or debentures to
member building and loan associations provided the
holders of such capital notes or debentures shall not
be individually responsible as such holders for any
debts, contracts, or engagements of the deposit
guaranty association issuing such notes or deben1
tures;
:
(G) Borrow money;
(H) Exercise any corporate power or powers not
inconsistent with, and which may be necessary or
convenient to,the accomplishment of its purposes of
assuring liquidity of member building and loan
associations and guaranteeing deposits therein.
*HISTORY: 139 v S 426. Eff 12-9-82.

1151.86 Recording of amendments; certified copies.
Upon receipt of the certificate provided for in
section 1151.85 of the Revised Code, the secretary ofstate shall record the amendments to the
articles of incorporation and furnish a certified
copy thereof to the corporation and to the superintendent of building and loan associations.
HISTORY: 126 ▼ 94 (95), § 1. ZE 10-11-58.

Law Review
Developments in Ohio savings and loan law: 1980.
Ronald E. Alexander. 17 AkronLRev 357 (1981).
Regulating State Chartered Savings Associations: An Introduction to the Ohio Scheme. Ronald E. Alexander. 11
AkronLRev 399 (1978).
The Ohio deposit guarantee fund-the Ohio alternative
to FSLJC. Ronald Alexander, 15 AkronLRev 431 (1982).

§ 1151.87 Powers of associations.
Adeposit guaranty association incorporated in accordance with sections 1151.81 to 1151.86 of the
Revised Code, may:
(A) Assure the liquidity of member building and
loan associations;
(B) Guaranty moneys on deposit, but notthepermanent stock ofassociations;
(C) Loan money to a member building and loan
association for the purpose of assuring its liquidity
and deposits therein;
(D) Buy any assets owned by a member building
and loan association for the purpose of assuring its
liquidity and deposits therein;
(E) Invest any of its funds in:
(1) Bonds or interest bearing obligations of the
UnitedStates orfor which the faith and credit ofthe
United States are pledged for the payment of principal and interest;
(2) Bonds or interest bearingobligations of the
District of Columbia, of this state, of any county,
township, school district, or other political subdivision ofthis state, or of any municipal corporation in
this state;
(3)Farm loan bonds issued under the "Federal
Farm Loan Act," 39 Stat. 360, 12 U.S.C. 641
(1916), and amendments thereto;
(4)Notes, debentures , and bonds of the federal
home loan bank issued under the "Federal Home
Loan Bank Act," 47 Stat. 725, 12 U.S.C. 1421
(1932), and any amendments thereto;
(5) Bonds or other securities issued under the
"Home Owners Loan Act of 1933," 48 Stat. 128, 12
U.S.C. 1461, and any amendments thereto;
(6) Securities acceptable to the United States to
secure government deposits in national banks;
Certificates ofdeposit of any financial institu-

Ohio Administrative Code
Negotible order of withdrawal account. OBL: OAC
1301: 2-5-21

$ 1151.88 Filing of semiannual financial
reports.
Each deposit guaranty association shall on the
thirtieth day of June and the thirty-first day of
December of each year, or within forty days
thereafter, file with the superintendent of building and loan associations a report for the preceding half year, showing its financial condition
at the end thereof.
Such reports shall be in such form and contain such information as prescribed by the
superintendent.
HISTORY: 126 ▼ 94 (96), 8 1. EN 10-11-55.
$1151.89 Annual examination of building and loan associations.
At least once each year the superintendent of
building and loan associations shall make or cause
to be made an examination into the affairs of
each deposit guaranty association doing business
in this state. The expenses of such yearly examination shall be paid by the state.
HISTORY: -126 ▼ 94 (97), § 1. EA 10-11-55.
CASE NOTES AND OAG
1. The statute (RC 1151.89 et seq) gives the
absolute right of the superintendent to make investigations and examinations and inspections of any

89

§ 1151.90

TITLE 11: BUILDING AND LOAN ASSOCIATIONS

deposit guaranty company in the same manner as
he is empowered to supervise and control the operation of all member building associations. Any
abuse of authority, power or discretion on the part
of such guaranty association may be dealt with
as completely and adequately as with any member
building and loan association: Ohio Deposit Guar
antee Fund v. Dziamba, 60 00 428, 137 NE(2d)
905 (CP).

188

minister oaths to and examine the officers and
agents of such association as to its affairs.
HISTORY: 126 ▼ 94 (97), § 1. ZA 10-11-55.

§ 1151.92 Fees.
Each deposit guaranty association doing business
in this state shall pay to the superintendent of
building and loan associations , at the time offiling
$ 1151.90 Special examinations.
Whenever the superintendent of building and eachsemiannual report required by section 1151.88
loan associations deems it necessary he may make ofthe Revised Code,five dollars plus a sum equalto
or cause to be made a special examination of one one-hundred-sixtieth ofone per cent ofthe assets
any deposit guaranty association doing business ofsuch association as shown in such report. All such
in this state in addition to the regular examina- fees shall be paid into the state treasury tothe credit
tion provided for by section 1151.89 of the Re- of the division of building and loan associations
account.
vised Code. The expense of a special examina special
HISTORY: 136 S 447 (Ef 5-19-76); 137 ▼ S 221. EA
tion shall be paid by the association. Such 11-23-77.
expenses shall be collected by the superintendThe provisions of § 12 of SB 221 (137 v —) read as
ent and paid into the state treasury to the credit follows:
of the general revenue fund.
SECTION 12. Services rendered by the unclaimed funds
HISTORY: 126 ▼ 94 (97), § 1. E# 10-11-85.
section ofthe Department of Commerce shall include the
costs of making publications required by
§1151.91 Right to enter and conduct in- necessary169.
Chapter
of the Revised Code and of paying other
vestigations.
operating and administrative expenses. Adjustments tothe
The superintendent of building and loan as- Unclaimed Funds rotary fund appropriation shall be made
sociations or any examiner appointed by him to cover the actual expenses of this section. The amounts
shall have access to and may compel the pro- appropriate tothe Department ofCommerce in Am. Sub.
duction of all books, papers, securities, moneys, H.B. 191 ofthe 112th General Assembly for appropriation
and other property of a deposit guaranty asso- Item 800-613 Building and Loan Rotary shall be conciation under examination by him. He may ad-

90

Ohio Deposit Guarantee Fund

Constitution

IO DEPOSIT
ALL SAVINGS
GUARANTEED D
IN FULL UN
UARANT F
NTEE

OH

CONSTITUTION

OF

THE

OHIO DEPOSIT GUARANTEE FUND

ARTICLE I
NAME

The name of the corporation shall be :
" OHIO DEPOSIT GUARANTEE FUND . "

ARTICLE II
LOCATION

The principal office of the corporation shall
be located in Cincinnati , Hamilton County, Ohio .

ARTICLE III
PURPOSE

The purpose of the corporation shall be to use
the full extent of it powers , authority and resources
to provide for the liquidity of its members and to
guarantee the moneys on deposit in member associations ,
whether evidenced by passbook , or certificates of
deposit , withdrawable shares , stock deposit accounts ,
or running stock of member building and loan associations and savings associations , but not the permanent
stock , debentures or similar stock accounts .

ARTICLE IV
POWERS

The corporation shall have all of the powers
granted by Sections 1151.80 to 1151.92 inclusive of
the Ohio Revised Code to mutual deposit guarantee associations and as may be hereafter provided by law; and
shall have the powers granted by the general corporation laws of Ohio to non-profit corporations .

- 1 -

91

ARTICLE V
DEPOSITS

Each member shall maintain a deposit with the
corporation in such amount and under such terms and
conditions as shall be determined by the Board of
Trustees , not to exceed two percent (2 % ) of the
deposit liability of such member , which shall be uniformly applied to all members.

Such deposit shall be

evidenced by certificates of deposit of the corporation .

No additional deposit will be required except

on an affirmative vote of members having deposit liabilities aggregating more than sixty percent (60 % ) of
the total deposit liability of all members at a regular meeting or a special meeting called for the purpose .

All deposits and certificates issued therefor

shall be rounded off to the nearest Hundred Dollars .
Members may carry such certificates on their books as
assets and these may be considered as a liquid asset
by the member.

Members may not , without the consent

of the Board of Trustees , use such certificate or
certificates as collateral for loans .

Deposits of

members shall be adjusted semi-annually to conform to
changes in deposit liability , as shall be determined
by the Board of Trustees .
In addition to the above deposit , a new member
shall , upon admission , contribute to the accumulated
reserves of the corporation a sum equal to the accumulated reserves at the end of the calendar quarter
immediately preceding such admission multiplied by the
·- 2 -

50-923 0-85--4

92

ARTICLE V
DEPOSITS
(continued)

fraction whose numerator shall be the required
deposit of such new member and the denominator
shall be the aggregate of deposits of all members .

ARTICLE VI
MEMBERS

SECTION 1
Only companies organized under Sections
1151.02 , 1151.03 and 1151.04 of the Ohio Revised
Code may be members of the corporation .

On or

before the 31st day of July each year , each member ,
by action of its Board of Directors , shall appoint
one of its officers or directors to be its Representative , and one of its officers or directors to
be its Alternate Representative who shall serve in
the absence of the Representative , and shall thereafter notify the corporation of its appointment .
On October first of each year following such notification, each Representative and Alternate Representative shall be the Representative and Alternate Representative of the member appointing them until October
first of the following year or until their successors
are chosen and qualified .

At all meetings of members ,

the vote of each Representative or Alternate Representative shall be the vote of the member association
which appointed him.

- 3-

93

ARTICLE VI
MEMBERS
(continued)

SECTION 2.

Vacancies

Whenever a vacancy occurs in the office of
Representative or Alternate Representative of any
member, by reason of death , resignation or failure
to continue in office as an officer or director ,
such member , by action of its Board of Directors ,
shall appoint a successor to fill such vacancy for
the unexpired term and shall notify the corporation
of its appointment .

ARTICLE VII
MEETINGS AND
NOTICES

SECTION 1.

Annual Meeting of Members

The Annual Meeting of members shall be held
in October of each year , not earlier than the fifteenth (15th ) day thereof , for the purpose of
electing the Trustees and conducting such other
business as may properly come before the meeting .
The Board of Trustees shall designate the time and
the place of said meeting and the Secretary shall
notify the Representatives at least fourteen (14 )
days in advance of said meeting by mail .
notice shall contain the time , place and purpose of
the meeting .

Section 2.

Special Meetings of Members

Special meetings of members shall be held
whenever called by the Board of Trustees , the President , or by at least five ( 5 ) Representatives or

94

ARTICLE VII
MEETINGS AND
NOTICES
(continued)

twenty percent (20% ) of the Representatives , whichever , is larger, joined together for such purpose .
The President , or such group of Representatives ,
shall notify the Secretary of the purpose of the meeting in writing .

The Secretary shall notify all the

Representatives of the call , time , place and purpose
of said meeting , in writing , at least fourteen ( 14 )
days in advance of said meeting.

Section 3.

Notices

All notices for Annual or Special Meetings
shall be mailed to the address given by the member
in its notice of appointment or such other address
as the Representatives or Alternate Representatives
shall designate .

Section 4. Quorum
Fifteen ( 15 ) Representatives or twenty percent
(20%) of the Representatives , whichever is larger ,
shall constitute a quorum of members , and at each
meeting of members , whether Annual or Special , said
quorum may act by and through a majority of Representatives in attendance , and the act and deed of such
majority shall be binding and conclusive as the action
of all of the members in all respects .

- 5 -

95

ARTICLE VIII
BOARD OF
TRUSTEES

Section 1. Number of Trustees
The Board of Trustees shall consist of not
less than nine (9) nor more than fifteen ( 15 ) Trustees .

Only an officer or a director of a member

shall be eligible to serve as a Trustee .

The terms

of office of elected Trustees shall not be less than
one (1 ) year nor more than three (3 ) years .

Repre-

sentatives may increase or decrease the number of
Trustees , within the limits herein prescribed , at
any Annual or Special Meeting called for that purpose .

A decrease will not affect the term of a

Trustee then in office .
Trustees shall be elected by the Representatives at the Annual Meeting in such numbers and to
serve for such terms that an equal number of Trustees ,
as nearly as possible , will expire each year .
Elections shall be by ballot if more candidates are
nominated than number of Trustees to be elected .
Trustees shall be limited to two ( 2 ) consecutive terms
of office , but may be eligible to serve after one (1 )
full year's absence on the Board .
The Board of Trustees may make recommendations
to the membership as to the number of Trustees and may
nominate a duly qualified person as Trustee .
Any five ( 5 ) Representatives may also nominate
a Trustee by written nomination , provided such nomina-

- 6 -

96

ARTICLE VIII
BOARD OF
TRUSTEES
(continued)

tion is made in writing and addressed to the
Executive Vice-President and received by him at
least five ( 5) days prior to the Annual Meeting .

Section 2. Compensation
The Trustees shall serve without compensation as Trustees , but may be reimbursed for expenses as may be required from time to time in the
performance of their duties as Trustees .

Section 3. Termination of Office and Vacancies
The office of a Trustee shall be terminated
by reason of death , resignation , failure to continue
in office as an officer or director of a member or
failure to attend three (3 ) consecutive meetings .
Whenever such vacancy occurs , the remaining members
of the Board of Trustees shall appoint a successor
to fill such vacancy for the unexpired term.

Section 4. Meetings of Board of Trustees
The Board of Trustees shall meet at least
once every three ( 3 ) months , and may , from time to
time , by action of the Board of Trustees , establish
additional regular meetings of the Board of Trustees .
The President may call a special meeting of the Board
of Trustees at any time and the Executive VicePresident shall notify the members of the Board of

7.-

97

ARTICLE VIII
BOARD OF
TRUSTEES
(continued)

Trustees by notice , in writing , at least five (5 )
days prior to said meeting .

Section 5. Quorum
A majority of the Board of Trustees shall
constitute a quorum at any meeting of the Board of
Trustees .

At any meeting of said Board , at which

a quorum is present , said Board may act by and
through a majority of the Trustees in attendance
and the act and deed of such majority shall , in all
respects , be binding and conclusive as the action
of the whole Board .

ARTICLE IX
OFFICERS AND
COMMITTEES

Section 1 .
The officers of the corporation shall be
elected annually by the Board of Trustees at an
organizational meeting to be held following the
Annual Meeting of the corporation or at a regular
or special meeting of the Board , if necessary , and
shall consist of the following:

President , and a

Vice- President , all from its own number ; one or
more Vice-Presidents ; a Secretary and a Treasurer .
The Board shall elect an Executive Vice-President
who shall not be an officer or director of any
building and loan association , who shall administer
the policies of the Board .

The Board will appoint

98

ARTICLE IX
OFFICERS AND
COMMITTEES
(continued)

an attorney or attorneys and an auditor or firm
of auditors , who shall be certified public accountants .

The Executive Vice-President , attorney or

attorneys , and auditor or firm of auditors , will
all serve at the pleasure of the Board .

The Board

may employ such other persons as it deems necessary .
No full time employee may be a director or officer
of any building and loan association .

Officers so

elected shall take office immediately and shall
hold office for a term of one year or until their
successors are elected and qualified .

The office of

President shall not be held for more than two ( 2 )
consecutive terms by the same person .

Section 2 .
The President shall appoint an Executive Committee of five ( 5 ) , with the approval of the Board of
Trustees , all of whom shall be Trustees , who shall
act for the Trustees of the corporation in the interim
between the meetings of the Board of Trustees and have

1
such duties and powers as is delegated to them by the
Board of Trustees .

The President shall appoint an

Advisory Committee of seven (7 ) , with the approval of
the Board of Trustees , all of whom shall be officers or
directors of members , who shall have such duties and

- 9. 1

99

ARTICLE IX
OFFICERS AND
COMMITTEES
(continued)

authority as shall be delegated to them by the
Board of Trustees .

The Executive Vice- President

shall be the Executive Secretary of both committees
without vote .

Section 3.
The Board of Trustees shall have the power to
adopt , amend , repeal and enforce such By-Laws ,
resolutions , rules and regulations and orders as they
may deem necessary to enable them to properly manage
and control all the business , property and rights of
the corporation .

Section 4.
The officers shall have the powers and duties
as may be prescribed by the By-Laws .

Section 5.
The Board of Trustees may elect such other
officers and provide for such committees , either
temporary or permanent , as it deems necessary .

Section 6.
In addition to the powers granted heretofore ,
the Board of Trustees is charged with the following
specific responsibilities :

- 10 -

100

ARTICLE IX
OFFICERS AND
COMMITTEES
(continued)

(a) The Board of Trustees shall have the
sole right to admit additional members to membership in the corporation on such terms and conditions as the Board may prescribe , and for due
cause shall have the sole right to revoke membership in the corporation .

(b) The Board of Trustees may require
regular and special reports , statements and audits
of its members .

Section 7 .

Any rule and regulation or order may be
amended or repealed by a vote of the members at a
duly constituted meeting called for that purpose .

ARTICLE X
AMENDMENTS

The Charter and Constitution of the corporation may be altered , amended , repealed , or superseded either in whole or in part by the affirmative
action of a majority of the members , at any meeting
of members called for that purpose .

- 11 -

101

ARTICLE XI
DISSOLUTION

The corporation may be merged or dissolved
or otherwise terminate its existence , in accordance
with the General Corporation Act of Ohio , with the
provision that any action of the members to bring
about a dissolution or termination of the existence
of the corporation shall require the affirmative
vote of not less than eighty percent ( 80% ) of the
members .
Notwithstanding the provisions of Article X
of this Constitution , this Article XI may be amended
only by the affirmative vote of not less than eighty
percent (80 % ) of the members .

·- 12 -

102

Ohio Deposit Guarantee Fund

By- Laws
O DEPOSI
T
ALL SAVINGS
GUARANTEED D
IN FULL FUN
ARANTEE FU

OHI

BY - LAWS
OF

THE

OHIO DEPOSIT GUARANTEE FUND
SECTION I
DUTIES OF
OFFICERS

A. President

The President shall preside at all meetings
of the corporation , and of the Board , and shall have
such authority and perform the duties as they pertain to said office as may be required of him.
B. First Vice- President
The First Vice-President , who is a Trustee ,
shall perform the duties of the President in the
event of his absence .
C. Secretary
The Secretary shall keep a complete record
of all the proceedings of all meetings of members
and of the Board and shall perform the duties as
shall pertain to said office and such other duties
as may be required of him.
D. Treasurer
The Treasurer shall perform the duties
usually incident to the office of the Treasurer and
such other duties as may be required of him.
E. Executive Vice- President
The Executive Vice-President shall be a
salaried officer who shall devote his entire business
-- 1 -

103

SECTION I
DUTIES OF
OFFICERS
(continued)

time to the affairs of the corporation .

He shall

administer the policies of the Board , and , as such ,
he shall be the general receiving , disbursing , and
managing officer of the corporation under the Board
and the Executive Committee , and , with the assistance of such employees as the Board may provide ,
shall have the care and management of all the corporation's business , rights , and affairs for which
there is no other provision in the Constitution or
By-Laws of the corporation . In the performance of
his duties , he shall exercise such authority over
the subordinate officers and employees as shall be
necessary or appropriate .

He shall receive notice

of and attend all meetings of the members of the
corporation , of the Board , of the Executive Committee , and of the Advisory Committee , and may act , if
chosen , as secretary of any committee .

SECTION II
ATTORNEY

The Attorney shall represent the corporation
in all legal proceedings ; he shall draw all necessary
legal papers , give his advice and counsel whenever
requested , and render such other services as may be
required by the Board .

SECTION III
AUDITOR

The Auditor shall annually examine the books
and records of the corporation and render an opinion
of same and perform such other duties as are required
by the Board .

- 2 -

104

SECTION IV
COMMITTEES

A. Executive Committee
The President shall appoint the Chairman of
the Executive Committee who shall preside at all
meetings of the Committee .

The Executive Vice-

President shall be ex -officio the secretary of the
Committee without vote .

Members of the Committee

shall hold office until the next Annual Meeting
following their appointment and until their successors are appointed and qualified .

A majority of

members of the Committee shall constitute a quorum
for the transaction of business .
The Committee shall establish the policy
for investment of funds within the limitations
prescribed by Section 1151.87 of the Revised Code
and shall establish the policy regarding the sale
of investments or other assets , real or personal ,
of the corporation .

The Committee may borrow money

and secure loans so made by a pledge or mortgage of
any of the property , real or personal , of the corporation .
If, in the opinion of the President , or of
the Vice-President acting in the capacity of President , an emergency exists and it is impossible to
get a quorum to act at once , he may appoint one or
more members of the Board to act temporarily as a

- 3

105

SECTION IV
COMMITTEES
(continued)

member of the Executive Committee to provide a
quorum so that the Committee may function during

the emergency .

Minutes of meetings of the Execu-

tive Committee shall be submitted to the Board at

its next regular meeting .
B. Advisory Committee
The Committee shall , at its first meeting ,
organize by electing one of its members as its
Chairman who shall preside at all meetings of the
Committee .
The Executive Vice -President shall be exofficio a member of said Committee without the

power to vote .

The Advisory Committee may inquire

into the financial condition and management policies
of each member of the corporation and shall recommend
to any member actions or policies it considers necessary or advisable for such member to take to adopt in
order to place or preserve such member in a condition
to safeguard properly the interests of its depositors .
If its recommendations are not complied with within
a reasonable time to the complete satisfaction of the
Committee , it shall so report to the Board at its
next meeting , including in its report its recommendations with respect to the action to be taken by the
Board .

4

106

SECTION IV
COMMITTEES
(continued )

Said Committee shall have authority to counsel
with the Board of Directors of members .
All applications for membership in the corporation shall be submitted to the Advisory Committee for
its review and recommendation to the Board .

The Ad-

visory Committee shall meet at least quarterly and
special meetings may be called at any time by the
Executive Vice - President or the Chairman of the Commit-

tee .

Minutes of all meetings of the Advisory Committee

shall be submitted to the Board .

SECTION V
WAIVER

Members of the Board may waive notice of a
meeting required to be given by law or by the Constitution of the corporation , and, by attendance at a
meeting , shall be deemed to have waived such notice .

SECTION VI
AUTHORIZED
SIGNATURES

All certificates of deposit , notes , deeds , mortgages , contracts , and all instruments in writing not
herein specifically enumerated other than checks for
the disbursement of money , shall be signed by any two
(2 ) of the following officers :

President ; First Vice-

President ; Executive Vice- President ; Secretary or
Treasurer , or such officers as shall be designated by

- 5-

107

SECTION VI
AUTHORIZED
SIGNATURES
(continued)

the Board of Trustees to sign on behalf of the
corporation .

No officer shall sign in more than

one capacity .

SECTION VII
DEPOSITORIES
AND DISBURSEMENTS

All funds shall be under the control of
the Board of Trustees , who shall cause them to be
deposited in the name of the corporation with its
designated depository or depositories , and such
funds shall be withdrawn from such depository only
on check of such depository or depositories , to be
signed by such officer or officers as designated
by resolution of the Board .

SECTION VIII
INDEMNITY
BOND

All officers and employees of the corporation , before entering upon the discharge of their
duties , shall be covered by an individual ,

schedule

or blanket fidelity bond in favor of the corporation
in an amount required by , and with the terms and
surety approved by , the Board .

The Trustees , as such ,

shall not be required to give bond .

-- 6 -

108

SECTION IX
PARTICIPATION
BY TRUSTEES
IN MATTERS
BEFORE BOARD

Any member of the Board of Trustees who represents , as counsel , director or other officer , a member
of the Fund which has a matter before the Trustees ,
which may require action by the Trustees , may present
to the Trustees the case of the member which he represents , but such member of the Trustees shall not participate any further in the deliberation of the Trustees
or the action of the Trustees with respect to such
matter .

SECTION X
PARTICIPATION
BY ADVISORY
COMMITTEE
MEMBERS IN
MATTERS BEFORE
COMMITTEE

Any member of the Advisory Committee who represents , as counsel , director or other officer , a member
of the Fund which has a matter before the Committee
which may require a recommendation by the Committee ,
may present to the Committee the case of the member
which he represents , but such member of the Committee
shall not participate , any further , in the deliberation
of the Committee of the recommendation of the Committee
with respect to such matter .

--7-

109

SECTION XI
AMENDMENTS

These By-Laws may be altered , amended ,
repealed , or superseded either in whole or in part
by the affirmative action of a majority of members
of the Board at any meeting of the Board called for
that purpose .

A proposal to amend shall be filed

with the Executive Vice-President at least two (2 )
weeks prior to the meeting at which said amendment
is to be considered , and the Executive Vice-President
shall include said proposal with the notice of the
meeting.

Any amendment so adopted must be substantially

the same as proposed .

- 8 -

110

Ohio Deposit Guarantee Fund

Rules and Regulations
O DEPOS
IT
ALL SAVINGS
GUARANTEED
QUARAINNFULL FUND
TEE

OHI

INDEX TO

RULES AND
OF

REGULATIONS

THE

OHIO DEPOSIT GUARANTEE FUND
ITEM I.

APPLICATION FOR MEMBERSHIP

A. Eligible
B. Records and Files
C. Advertising Membership
ITEM II .

STANDARDS AND QUALIFICATIONS

A. Liquidity
B. Required Reserve
C. Real Estate Owned
D. Slow Loans
E. Taxes and Insurance
F. Shareholders ' Approval of Membership
G. Holding Companies
H. Test Appraisals
I. Deferred Charges & Income
J. Service Corporation Activities
ITEM III .

DEPOSITS AND PENALTIES
A. Deposits

B. Penalties
ITEM IV .

WITHDRAWAL FROM MEMBERSHIP

A. Notice
B. Amount Entitled To
C. Merger
D. Reorganization
E. Dissolution

111

ITEM V.

NOTICE OF TERMINATION OF MEMBERSHIP

ITEM VI .

POWERS DEFINED
A. Loans to Members
B. Purchase of Member's Assets .
C. Authority to Fill Vacancies on Board
D. Liquidation by Superintendent
E. Trustee's Authority to Require Amendments
F. Investigative Authority

ITEM VII .

INTEREST AND RETURN ON DEPOSITS

ITEM VIII .

INFORMATION AND STATISTICS OF MEMBERS

ITEM IX .

REQUIRED NOTIFICATION

ITEM X.

INCREASE IN INTEREST OR DIVIDENDS

ITEM XI .

ADVERTISING RATES OF RETURN

ITEM XII .

PROMOTIONAL OPERATIONS

ITEM XIII .

AMENDMENTS

112

RULES

AND

REGULATIONS

OF THE
OHIO DEPOSIT GUARANTEE FUND
ITEM I.

(A)

ELIGIBLE

APPLICATION
FOR
MEMBERSHIP

state which is not a member of the Fund may , upon

Any building and loan association of this

compliance with such conditions as may be prescribed
by the Board , become a member of the Fund .
(B)

RECORDS AND FILES
Applicants for membership in the Fund and mem-

bers of the Fund agree to authorize the Superintendent
to make available to the Fund the records and files in
his office as to the management and condition of each
member .

Said authorization shall be in the form agreed

upon by the Fund or the Superintendent .
(C)

ADVERTISING MEMBERSHIP
A member may advertise itself as a member of

the Fund and may use the symbol in its advertising as

long as it is a member .
to prescribe the form
may be advertised .

- 1 -

The Fund reserves the right
in which the guarantee of deposits

113

ITEM 11 .
STANDARDS
AND
QUALIFICATIONS

The following standards and qualifications
shall be required of all members of the Fund and
their maintenance shall be a condition of continuous
membership or admittance to membership in the Fund .
(A)

LIQUIDITY
Each member shall establish and maintain

unpledged liquid assets equivalent to 7% (or such
other percentage as determined by the Board of Trustees ) of its net deposit liability and borrowed money .
However , a member shall not be required to maintain
the required percentage on borrowed money that is
collateralized by a liquid asset as hereafter defined .

For purposes of this regulation , the following items shall be considered as liquid assets :

1 ) Cash .
2 ) U.S. Treasury Bonds , Notes or Bills .
3) Municipal obligations and federal funds ,
as prescribed in Section 1151.34 (B ) ,
Ohio Revised Code .
4) Investments in any of the following :
a) Stock in Federal Home Loan Bank .
b) Deposit in Ohio Deposit Guarantee

Fund .
c) Bank for Cooperatives Bonds .
d) Federal Land Bank Bonds .
e) Federal Intermediate Credit Bank .
f) Federal International Credit Banks
Consolidated Systemwide Bonds .

· la -

114

ITEM II

(A)

LIQUIDITY (continued )

STANDARDS
AND
QUALIFICATIONS

g ) Federal Home Loan Bank Bonds .
h ) Federal National Mortgage Association Bonds .

i ) Government National Mortgage Association
Bonds .
j ) Bankers acceptances of a bank insured by
Federal Deposit Insurance Corporation .

5)

Deposits in Federal Home Loan Bank
both demand and time .

6)

Deposits in Bank for Savings & Loan
Associations .

7)

Certificates of Deposit in any financial

institution subject to inspection by the
United States or by the State of Ohio .
8)

Any other type of investment similar to those
listed that may be approved from time to
time by the Board of Trustees .

That portion of any liquid asset that is pledged or used
as collateral for public deposits or used in reverse repo
transactions cannot , at the same time , be construed as a
liquid asset .
In the event that liquid assets are used as collateral for
borrowed money , public deposits , or reverse repo transactions , only the amount of the liquid assets equal to
the amount of the borrowed money , public deposit or
reverse repo transaction need be deducted from the book
value of the liquid assets in determining the 7 % liquidity
requirement .

However , in the event the lender , etc.

specifically requires liquid collateralization on a
greater basis than one for one , the additional amount
required shall also be deducted .
- 2 -

115

ITEM LI
STANDARDS
AND
QUALIFICATIONS

(A)

LIQUIDITY (continued )

Specifically excluded as liquid assets are all mortgage backed securities and revenue bonds .
If, for any consecutive seven (7 ) business
days , the liquid assets of the member remain less
than the fixed requirement and , during that period ,
the member makes loans , the member may be assessed
a fine of not more than $ 500.00 for each day when
loans were made .

The amount of the fine shall be

determined by the Board of Trustees , upon reviewing
the facts disclosed to them by the Supervisory
Section of the Fund .
At its discretion , the Board of Trustees may
waive any fine or penalty assessed .
# # #

· 2a -

116

ITÉM II .
STANDARDS
AND
QUALIFICATIONS
(continued)

(B )

LOSS RESERVE AND OTHER NET WORTH ACCOUNTS
Each member or applicant for membership shall

maintain or show reasonable ability to maintain , a
Loss Reserve and other net worth accounts in accordance with the requirements of the Ohio Revised Code
and the Superintendent , Division of Building and
Loan Associations , State of Ohio .

(C)

REAL ESTATE OWNED
No member or applicant for membership shall

hold real estate , acquired through mortgage foreclosure or deed in lieu thereof , the aggregate value
of which is in excess of three percent ( 3 % ) of its
total assets .

(D)

SLOW LOANS
No member or applicant for membership shall

permit the aggregate of its slow loans , as defined
by the Division of Building and Loan Associations ,
to exceed a sum equal to two percent (2 % ) of its
total assets .

(E)

TAXES AND INSURANCE
Each member or applicant for membership shall

maintain office records which show payment or nonpayment of taxes and insurance premiums upon all
property upon which the member or applicant holds

-3-

117

ITEM II .

a mortgage , and upon real estate owned .

STANDARDS
AND
QUALIFICACATIONS
(continued)

(F )

SHAREHOLDERS ' APPROVAL
Each member or applicant for membership shall

obtain the approval by its shareholders of its membership or application for. membership in the Fund ,
and shall , within sixty (60 ) days following its
admittance to membership , present to the Fund a
certified copy of minutes of the meeting at which
such approval was given .

(G)

HOLDING COMPANIES
Each member , the records of which disclose

that more than twenty percent ( 20 % ) of its voting
stock is owned by a person or corporation not organized under Chapter 1151 of the Ohio Revised Code ,
shall report this fact promptly to the Fund .

The

Fund, upon receipt of such notice , or within six (6)
months thereafter , may then declare the member to
be not eligible for continued membership in the Fund .
In such event , said member shall withdraw from the
Fund within two (2 ) months after the Fund has
declared it to be not eligible for continued membership .

Such member shall be entitled to withdraw from

the Fund , in the manner provided in these Rules and
Regulations .

4

118

ITEM II .
STANDARDS
AND
QUALIFICATIONS
(continued)

The Fund may reject any application made for
membership in the Fund , if it finds that more than
twenty percent ( 20 % ) of the voting stock of the
applicant is owned by a person or corporation not
organized under Chapter 1151 of the Ohio Revised

Code .
If , after the receipt of notice that more
than twenty percent (20 % ) of the voting stock of a
member or applicant for membership is owned by a
person or corporation not organized under Chapter
1151 of the Ohio Revised Code , and the Fund decides
to retain such member or admit such applicant for
membership , such member and the person or corporation owning in excess of twenty percent ( 20 % ) of the
voting stock may , at the discretion of the Board of
Trustees , be required to comply with the following
regulations :
1. No dividends may be declared or paid when
the aggregate of the subject member's statutory
reserves and undivided profits are less than five
percent ( 5 % ) of its withdrawable money .

-5-

119

ITEM II .
STANDARDS
AND
QUALIFICATIONS
(continued)

2. The Fund shall have the right to audit

or review the records of the person or corporation
owning in excess of twenty percent ( 20% ) of the
voting stock of a member and any other subsidiary
owned or controlled by such person or corporation
whenever the Fund considers such audit or review
necessary for its best interest .
3. A member whose voting stock is owned , as
stated above , shall have its stockholder or corporation , at its expense , submit copies of all reports
requested by the Fund which it considers necessary
for the protection of its interest .

Such reports

shall include , but not be limited to , copies of
annual audits performed by certified public accountants and copies of reports filed annually with the
Securities and Exchange Commission .
4. Transactions and dealings between a member
and any person owning more than twenty percent ( 20 % )
of the voting stock of such member , and any other
corporations , partnerships , trusts , or similar
organizations in which said person or his family has
an interest , is prohibited , without the prior approval
of the Fund .

6

120

ITEM II .
STANDARDS
AND
QUALIFICATIONS
(continued)

5. Transactions and dealings between a member
and its parent corporation , or any subsidiaries of
the parent corporation or major stockholder of the
parent or any of the subsidiaries , wherein the proceeds of any transaction or dealing made by such
member inure to the benefit of any of the above , is
strictly prohibited without the prior approval of
the Fund .

(H)

TEST APPRAISALS
Whenever a member is in violation of Sub-

sections (C ) or (D ) of this section and an examination made by the Division of Building and Loan Associations , or an audit conducted by the Fund's staff
discloses that the member company is or has been
engaged in unsound , unsafe or imprudent lending
practices , it shall be reported to the Board of Trustees .

Under such circumstances , the Board of Trus-

tees has the authority to cause test appraisals to
be made of the real estate owned by such member and
the real estate securing its loans , by an independent
appraiser selected by the Fund .

The cost of such

test appraisals will be borne equally by the member
and the Fund .
In the event the test appraisals indicate that
the member is or has been engaged in unsound , unsafe
or imprudent lending practices , the Board of Trustees
- 7 -

121

ITEM II .

may require the member to set up a Specific Reserve

STANDARDS
AND
QUALIFICATIONS
(continued)

in the amount by which the balance of the loan exceeds the appraised value of the real estate security
and also , to have all future real estate offered as
security for loans appraised by an independent appraiser selected by the Fund for such period as the
Board may determine .

(I)

DEFERRED CHARGES AND INCOME
Each member or applicant for membership shall

charge off premiums , on mortgage loans purchased when
paid, or may capitalize them.

If capitalized , a pro-

portionate amount of the premium shall be charged to
expense , at least semi -annually, over the remaining
term of the loans or over a period not exceeding the
average remaining term of the loans , or seven (7)
years , whichever is less .
Each member or applicant for membership shall
defer discounts on loans purchased over a period of
not less than seven ( 7 ) years ; the discount shall be
credited to income at least semi -annually .

Any

charge made by the purchaser in connection with the
purchase of a loan shall be deducted from the purchase price to determine the amount of the discount .

122

ITEM II .
STANDARDS
AND
QUALIFICATIONS
(continued)
(Rev. 2/80 )

(Rev. 4/25/84)

All charges for finder's fees , buying
commission , attorney's fees , and brokerage fees
in connection with the making or acquisition of
a mortgage loan or contract , shall be treated as
an expense in the accounting period in which
such charges are incurred .
Each member shall credit to an account
descriptive of deferred income any amounts charged
in connection with making a loan or contract (other
than average interest provided by the loan contract )
all amounts in excess of the greater of $ 50.00 ,
or four and one - half percent ( 4-1 % ) of the amount
of the loan , if the loan is for the purpose of
construction, or four percent ( 48 ) of the loan
or contract , if the loan is for any other purpose ,
plus $ 400.00 for either type of loan or contract
when members utilize employees of the institution
to perform appraisal , attorney or loan closing
functions . A proportionate amount of this deferred
income shall be credited to income , at least semiannually over a period of not less than seven ( 7 )
years . Amounts collected from the borrower and
paid out to third parties for necessary initial
charges in connection with the mortgage loan
or contract transaction are excluded from computing
deferred income .

- 9

123

ITEM II .
STANDARDS
AND
QUALIFICATIONS
(continued )

On loans sold, by participation or otherwise ,
capitalized premiums and/or deferred credits or discounts applicable to such loans as of the sale date
shall be added to or deducted from (as appropriate )
the book value , and the profit or loss thereon shall
be recognized as of that date .
On loans paid in full , the above may apply;
however , it is not mandatory , as it is on loans sold .

(J) .

SERVICE CORPORATION ACTIVITIES
A service corporation in which any member has

an interest or any subsidiary of a service corporation is prohibited from entering into any transaction
wherein a director , officer , employee of the member
or corporation , or person or corporation owning or
controlling 20% or more of the member's stock has a
direct or indirect interest without the prior written
approval of the Ohio Deposit Guarantee Fund .

· 10

50-923 0-85--5

124

ITEM II .

STANDARDS
AND
ALIFICATIONS
(continued )

(K)

BROKERED DEPOSITS AND JUMBO CERTIFICATES
OF DEPOSIT
Brokered Deposits are defined as funds

received , in which a third party intermediary,
acting as a broker, comes between the owner of

(Approved by
Board of
Trustees
9/26/84)

the money and the depository.

This broker repre-

sents either party for a fee --- or other consideration -- usually paid to the broker by the
depository.

A savings promotion by a member , in

which the employee receives a bonus for bringing
savings into the Association, is not considered
brokered savings , provided no one other than
the employee is involved in obtaining the savings
deposits...

Jumbo Certificates of Deposit are defined
as Certificates of Deposit in an amount of
$100,000 or more or a combination of amounts
exceeding $100,000 , which are controlled by the
same account holder , and which are specially
negotiated as to rate and/or duration .

With respect to the above , a member or
applicant for membership shall comply with the
following :

1)

Brokered Deposits and Jumbo Certificates , in the aggregate , shall not
exceed five percent (5% ) of a member's
current total deposit liability.
· 10a -

125

ITEM II .

However , Brokered Deposits and /or

STANDARDS
D
QUALIFICATIONS
(continued)

Jumbo Certificates may be accepted in
excess of the 5 % limit , if such excess
is invested in a liquid instrument that
matures within seven (7 ) days of the
maturity date of the Brokered Deposit
or Jumbo Certificate .

Mortgage loans , construction loans , and
other forms of loans will not be
considered as liquid investments .

2)

Any tie- in of Brokered Deposits or
Jumbo Certificates to the granting of
credit is prohibited .

3)

In the event the Board of Trustees determines that a member is a supervisory
problem, it may, by action taken at any
regular or special meeting , prohibit any
future acceptance of Brokered Deposits or
Jumbo Certificates by said member until
such time as the Board of Trustees , in
its opinion , no longer considers said
member to be a supervisory problem.

4)

A member shall have the right to submit to
the Board of Trustees a written request
for authorization to exceed the percentage
.- 10b -

126

Such request

ITEM II.

limitation in 1 ) above .

STANDARDS
A.
QUALIFICATIONS
(continued)

shall set forth the reasons for additional authorization, together with
supporting documentation.

The Board

of Trustees shall have the sole right
to approve or disappprove such request .

5)

Brokered Deposits and Jumbo Certificates ,
held as of May 31 , 1984 , that exceed the
percentage limit in 1 ) , may not be
renewed without the specific approval

of the Fund, except that Jumbo Certificates existing in member institutions as
of May 31 , 1984 , are " grandfathered " and
may be continuously renewed .

· 10c

127

ITEM III .
DEPOSITS
AND
PENALTIES

(A)

DEPOSITS
1. If additional deposits are voted , in

accordance with Article V of the Constitution , any
member not voting in favor of such call may resign
from membership by filing with the Fund , within
thirty ( 30) days after such a vote is taken , a
written notice of its intention to resign .

Such

resignation shall become effective upon compliance
with and in accordance with the provisions of the
Rules and Regulations .

The member so resigning

shall be entitled to receive from the Fund the same
:
portion of its assets , and in the same manner , as
it would be entitled to receive under Item IV ,
Section B, of these Rules and Regulations .
No member which has filed a notice with
the Fund of its intention to resign under this SubSection shall be required to make any additional
deposits , required by the Fund of its members pursuant to Article V of the Constitution , after receipt
by the Fund of such notice .
The assent of each member to the vote for
additional deposits shall be conclusively presumed
to have been given unless a member , within thirty ( 30 )
days after the vote thereon was taken , files a notice
with the Fund of its intention to resign .

-- 11 -

128

ITEM III .
DEPOSITS
AND
PENALTIES
(continued)

Any member, having given notice of its
intention to resign, may withdraw such notice by
written request , at any time before its effective
date .

Upon payment to the Fund of its full share of

the additional deposit required , such notice of intention to resign shall be void .
2. Upon admission to the Fund , the amount
required to be contributed to the accumulated reserves
and to the deposit of the Fund , required by Article
V of the Constitution , may be paid at once , or in
such manner as may be determined by the Board of
Trustees .
3. Deposits with the Fund , prescribed by
Article V of the Constitution , and the amount required
to be paid pursuant to Sub-Section 2 of this section ,
are prerequisite to membership .

4. "Deposit liability , " as used in this
section , means the deposit liability of a member as
of December 31st or June 30th, immediately preceding
the date of the action taken or required to be taken .
5. There shall be an adjustment of the deposit
requirements of members semi-annually , beginning
· January 1st and July 1st , based upon the increase or
the decrease of the deposit liability of each member .

- 12 -

129

ITEM III .

For each semi -annual period beginning January 1st ,

DEPOSITS
AND
PENALTIES
(continued )

of the member's deposit liability as reported on

the deposit of each member shall equal that portion

December 31st , immediately preceding and for each
semi -annual period beginning July 1st , the deposit
of each member shall equal that portion of the member's deposit liability as reported on June 30th
immediately preceding , as prescribed in percentage by
Article V of the Constitution .

If the required

deposit of a member is thus found to have increased
over the preceding semi -annual period , it may deposit
the difference due from time to time , provided the
entire difference shall be paid in full not later
than February 10th and August 10th of the period
for which the adjustment was made .

Refund due to

members on decrease shall be made by February 10th
and August 10th of the period for which the adjustment
is made , provided the Certificate of Deposit is presented for such change .

At the time of each semi-

annual adjustment of deposits , and after payments in
accordance with such adjustments have been made , the
Fund shall enter on each of the Certificates of Deposit
the amount then on deposit .

All deposits made with

the Fund pursuant to this Sub-Section shall be rounded
off to the nearest hundred dollars .

·- 13 --

130

ITEM III .
DEPOSITS
AND
PENALTIES
(continued)

(B)

PENALTIES
Each member accepts the obligation to make

all payments due pursuant to Sub- Section 5 of Section A of this Item , on or before the date due .
Failure to do so on the part of any member renders
such member subject to suspension or expulsion .
While under suspension , or after expulsion , for
failure to make deposits when due , the Fund recognizes no obligations to such member to exercise any
of the powers set forth in Item VI hereof , and such
member is not entitled to any of the benefits of
membership in the Fund , including display of the
symbol , other than those granted by Item IV , Section
B, with respect to withdrawal of assets .
Failure to make deposits on or before the
date due shall subject the member to a penalty .

The

penalty shall not exceed ten percent ( 10 % ) of the
amount due .

The Fund may institute an action at law

for the collection of the deposits or the penalty or

1
both .

· 14 -

131

ITEM IV .

(A)

WITHDRAWAL
FROM
MEMBERSHIP

time of giving notice of intention to withdraw or

NOTICE
Any member which is not , either at the

at the time of withdrawal , in default in any of
its obligations to the Fund , including calls made
before the date of withdrawal , or which has repaid
any advance or loan made to it by the Fund , and has
carried out the terms of any repurchase agreement
made with the Fund , may withdraw from membership
in the Fund upon giving to it twelve ( 12 ) months '
notice in writing , of its intention to withdraw.
The Fund may , upon a vote of two-thirds ( 2/3 ) of
its Board of Trustees , at a meeting called to consider such notice , or upon a vote of the members
whose deposit liabilities aggregate not less than
seventy-five percent (75 % ) of the total deposit
liabilities of all members (including those of the
withdrawing member) at a meeting of the members
called to consider such notice , permit such member
to withdraw at the end of two (2 ) months from the
date of giving such notice or at the end of such
period less than twelve ( 12 ) months from the date
of giving of such notice as may be approved by the
Board, if no meeting of the members is called to
consider such notice .

Upon the written request of

the withdrawing member, the meeting of the Board to
consider the notice as above provided shall be held

- 15 -

132

ITEM IV.

within five (5 ) weeks from the date such notice was

WI
RAWAL
FROM
MEMBERSHIP
(continued)

given.

If the Board , at such meeting , has fixed the

effective date of withdrawal at a date more than two
(2 ) months from the date the notice was given , then,
upon the written request of the withdrawing member ,
the meeting of members to consider such notice , as
above provided , shall be held within eight ( 8 )
weeks from the date

B)

(Approved
by Board of
Trustees
9/26/84)

such notice was given.

AMOUNT ENTITLED TO
Any member withdrawing from the Fund pursuant to

the provisions of Section A above shall be entitled
to withdraw from the Fund's assets only in the manner
hereinafter stated , its proportionate share of the
Fund's net assets on the date its withdrawal becomes
effective .

Such proportionate share shall be

calculated in the following manner:
1)

The amount of the deposit in the Fund by

the member, (representing the percentage
of the deposit liability of the member ) ;
plus ...

2)

the amount of the payment , if any, made
by the member upon admission to the
Fund, representing its proportionate
interest in the accumulated reserves of

the Fund (the equalization payment ) ;
plus or minus
-16-

133

ITEM IV.

3)

WITHDRAWAL
FF
MEMBERSHIP
(continued)

The member's proportionate interest in
the net earnings or losses of the Fund
between the date such member was admitted
to membership and the date of such member's
withdrawal , calculated as hereinafter
stated .

A member's proportionate interest in the earned
reserves or losses of the Fund will be calculated in

the following manner:
. For each six-month period , or fraction
thereof , (January to June , and July to
December) , of membership , the net earnings
or losses of the Fund less any dividends
paid to members shall be allocated to
each member based upon the ratio of each
member's deposit in the Fund to the total
deposits in the Fund of all members , based
upon the deposits required at the beginning
of each period .

2)

As of the withdrawal date , the withdrawing
member shall be charged with its propor-

~

tionate interest (based upon the ratio of
the withdrawing member's deposit in the
Fund to the total deposits in the Fund
of all members at that date ) in the

following manner :
-17-

134

ITEM IV.

a)

WITHDRAWAL
FR
MEMBERSHIP
(continued)

the amount , if any, by which the
market value of the Fund's assets

is less than their amortized cost
(book value);
b)

the amount of any reserve , as
determined by the Board of Trustees
but not recorded in the financial
statements of the Fund , to provide
for existing or potential losses
existing at the withdrawal date .

3)

If the total of the amounts calculated in
1 ) and 2 ) above shall be an increase in the
amount due to the withdrawing member, there
shall be deducted from such amount , twentyfive percent (25% ) of such amount to be
retained by the Fund .

The amount due to a withdrawing member shall
normally be paid in cash.

However , in the event that

the Board of Trustees , in its judgment , determines
that certain assets of the Fund are not readily marketable, then a percentage of such amount shall be paid by
the issuance of a certificate or certificates of
fractional participation.. Such certificate or certificates of fractional participation shall entitle the
holder thereof to its proportionate share of any proceeds
resulting from the liquidation of such remaining assets
as they are liquidated by the Fund.

-18-

Such certificates

135

ITEM IV.
WITHDRAWAL
ROM
MEMBERSHIP
(continued)

shall describe the assets to which it relates only
by symbols , and the Fund shall , after the issuance of
such certificate or certificates , designate such
assets on its records , by like symbols .

Such certi-

ficate or certificates shall not entitle the holder
thereof to any control over the manner , amounts ,
or time of liquidation of any of such assets .

The Fund shall not reveal any information
related to such remaining assets other than the
extent of liquidation of the assets to which such
certificate or certificates relate .

The Fund ,

in final settlement of such member's proportionate
share , either may pay to the withdrawing member,
in lieu of such certificate or certificates , such
sum in cash as may be agreed upon as the reasonable value thereof, or at any time after the
issuance of such certificate or certificates ,
may purchase the same for such sum in cash as may
be then agreed upon as the reasonable value thereof.

In the event that a withdrawing member's
proportionate interest in the earned reserves or
losses of the Fund was reduced by a reserve as
provided in 2 ) b) , the following shall apply.
If the ultimate aggregate loss incurred by the
Fund is less than the amount of the reserves
provided at the withdrawal date , then the withdrawing member shall be entitled to its propor-18a-

136

ITEM IV.

tionate share of any such amount ( less the 25 %

WITHDRAWAL
FI I
MEMBERSHIP
(continued )

to be retained by the Fund , if applicable ) .

In this

event , the determination of any amounts due to
withdrawn members , as well as the time and method
of payment , shall be made by the Board of Trustees ,
in their judgment , based upon a review of all the
facts and circumstances relating to the loss or
potential loss .

-18b-

137

ITEM IV .
WITHDRAWAL J
FROM
MEMBERSHIP
(continued)

(C)

MERGER
Any member, or members , proposing to merge

with any other association or associations , shall
immediately upon adoption of a plan of merger by
the Board of Directors of such member , or members ,
notify the Fund of such action and provide the Fund
with a detailed copy of the proposed merger .

Such

proposal ' shall include a proposed adjustment of its
deposit and premium payment with the Fund based upon
its deposit liabilities after such merger . The
Fund may approve such proposal with or without
modification or it may disapprove if the merged
association fails to meet the standards adopted by
the Fund .

A decision to approve with or without

modification or disapprove shall be made within
sixty ( 60 ) days after receipt of the copy of the
proposal .

Upon request of the member , the Board of

Trustees shall extend the sixty-day ( 60 ) period .
Upon the final disapproval by the Fund of such merger ,
the membership of such member , or members , shall
terminate upon the effective date of such merger .
Any such member , or members , thus terminating
membership shall be entitled to withdraw from the
Fund's assets , in the same manner provided in
Section B of this Item; its proportionate share of
the Fund's net assets on the effective date of such
merger .
· 19 -

138

REORGANIZATION

ITEM IV.

(D)

WITHDRAWAL
FROM
MEMBERSHIP
(continued)

to Section 1151.61 of the Ohio Revised Code shall

Any member proposing to reorganize pursuant

notify the Fund immediately upon adoption by its
Board of Directors of a plan of reorganization .

The

Fund may approve such plan with or without modification or it may disapprove , if the reorganized
association fails to meet the standards adopted by
the Fund .

A decision to approve with or without

modification or disapprove shall be made within
sixty (60) days after receipt of the copy of the
· proposal .

Upon request of the member , the Board of

Trustees shall extend the sixty-day (60 ) period .
Upon the final disapproval.by the Fund of such plan,
the membership of such member shall terminate upon
the adoption of the plan by the shareholders and
such member shall be entitled to withdraw from the
Fund's assets , in the same manner provided in Section
B of this Item, its proportionate share of the Fund's
net assets on the date of the adoption of such plan
by the shareholders .

20 -

139

ITEM IV.

(E)

WITHDRAWAL
FROM
MEMBERSHIP
(continued)

to dissolve with the Superintendent of Building

DISSOLUTION
Any member which has filed an application

and Loan Associations and received his consent in
writing to such dissolution , pursuant to Section
1151.45 of the Ohio Revised Code , shall be entitled
to withdraw from the Fund's assets , in the same
manner provided in Section B of this Item , its
proportionate share of the Fund's net assets on
the date such consent of the Superintendent is
given .

The Fund shall deduct from the proportionate

share of such member any obligation of such member
to the Fund and may require the fulfillment of any
repurchase agreement made with the Fund .

Such

member shall keep on deposit with the Fund such
percentage of its current deposit liabilities as is
required of members pursuant to Article V of the
Constitution , until such time as such member shall
have paid all of its depositors and the guarantee
by the Fund of the deposits of such member's
depositors shall have terminated .

- 21 -

140

ITEM V.
NOTICE OF
TERMINATION
OF
MEMBERSHIP

Any member , whose membership in the Fund
is terminated at any time , shall notify each of its
depositors of such termination of membership , and
shall set forth in the notice the date upon which
the Fund will cease to guarantee such deposits .

The Fund shall determine the date upon
which it will cease to guarantee such deposits and
the time and manner of giving and content of such
notice .
In no event shall the Fund permit the
withdrawal of any assets of the Fund by such member
until such member has delivered to the Fund proof
of the giving of such notice .

ITEM VI .
POWERS
DEFINED

For the purpose of guaranteeing the
deposits and assuring the liquidity of its members ,
the Fund shall have the following powers :

(A)

LOANS TO MEMBERS
The Fund may loan money to members with or

without security .

Such loans shall bear such rate

or rates of interest and be on such terms as the
Board of Trustees may determine .

·- 22 -

If and when bonds,

141

ITEM VI .

mortgages or mortgage notes secured by mortgages

POWERS
DEFINED
(continued)

on real estate shall be taken as security for any
such loan , the value of the bonds , mortgages or
mortgage notes and the title of the mortgagor may
be ascertained at such time and in such manner as
shall be satisfactory to the Board , and it shall
not be necessary to record the assignment of any
such bonds , mortgages , or mortgage notes to the
Fund .

(B)

PURCHASE OF MEMBER'S ASSETS
The Fund may buy any assets owned by any

member at the book value thereof , or at such other
value as the Board of Trustees may determine , notwithstanding that such value may exceed the market
value thereof , either with or without an agreement
providing for the repurchase of such assets , or any
of them, at such price or prices , and at such time
or times , and subject to such conditions , as are
determined by the Board .

(C)

AUTHORITY TO FILL VACANCIES ON BOARD
Whenever the Superintendent of the Division

of Building and Loan Associations shall notify the
Fund that any member has committed such an act or
acts or is in such condition that he might take
possession of the business of such member , pursuant

· 23 -

142

ITEM VI .

to law or when the Superintendent shall so request ,

POWERS
DEFINED
(continued)

the Fund may require the Board of Directors of such
member to appoint one or more persons , recommended
to it by the Board of Trustees , to attend all meetings of the Board of Directors and such committee
meetings as the Fund shall deem necessary and also
to fill any vacancy or vacancies on the Board of
Directors , to remain and retain such rights until
such conditions shall have been corrected to the
satisfaction of the Superintendent and/or the Fund .
Each building and loan association , upon becoming a
member , agrees , under the foregoing circumstances ,
to make such changes in its condition or in its
Constitution or By-Laws or in the membership of its
Board of Directors as may be required of it by the
Fund and to retain such changes in the Constitution
and By-Laws for the duration of its membership or
until authorized by the Fund to do otherwise .

- 24-

143

ITEM VI .

(D)

POWERS
DEFINED
(continued)

mine that a member is in such condition that he

LIQUIDATION BY SUPERINTENDENT
Whenever the Superintendent shall deter-

may be required to exercise any of his statutory
powers to restrict such member in the carrying on
of its business , or whenever he has , in fact ,
exercised any of such statutory powers , the Superintendent may notify the Fund .

The Fund shall there-

upon , or within a reasonable time , either restore
such member to a financial condition satisfactory
to the Superintendent , or it shall make available to
the Superintendent , as receiver or liquidating agent ,
such funds as may be necessary to pay each of the
depositors in such member the full amount of his
deposit as credited to his account on the books of
the member , and such funds shall be used only for
the purpose of paying the depositors of such member .
The Fund shall thereupon be subrogated to the rights
of such depositors against such member .
(E)

TRUSTEES ' AUTHORITY TO REQUIRE AMENDMENTS
The Board of Trustees may require the Constitu-

tion and By-Laws of members and of applicants for
membership to be amended for the sole purpose of
providing uniformity of the provisions affecting the
liability to their depositors and , consequently , the

- 25 -

144

ITEM VI .

liability and responsibility of the Fund to its

POWERS
DEFINED
(continued)

of each state examination which is made from time

members , and may require members to supply a copy

to time.

The Board may supply personnel to assist

the Superintendent of Building and Loan Associations
to make special examinations of its members .

(F )

INVESTIGATIVE AUTHORITY
The Fund's Supervisory staff, at the direction

of the Executive Vice- President of the Fund , may, at
any time , enter a member institution for the purpose
of conducting an investigation or audit .

The member

shall be required to furnish, upon request , all of
the company's books , records , securities , monies , and
other property, needed to complete the investigation
or audit .

26-

145

ITEM VII.
INTEREST
AND
RETURN OF
DEPOSITS

(A)

At the discretion of the Board of Trus-

tees , the Fund may pay interest when the deposit
liability ratio exceeds one and one-quarter percent
(1-1/4% ) and may return deposits to members , to the
extent of the excess , when the deposit liability
ratio exceeds two percent ( 2 % ) .

(B) The Fund shall pay interest or return
deposits to members when the deposit liability ratio
exceeds three percent (38) to the extent of such

excess .

(C) The interest paid to any member shall be
computed upon its deposits with the Fund , at the
immediate preceding adjustment date or in such other
manner as may be determined by the Board of Trustees .

(D) Any interest or return deposits may , at
the discretion of the Board of Trustees , be paid to
a member by applying such interest or return of
deposits to the reduction of any advance made to such
member by the Fund or any other liability of such
member to the Fund , including any amounts due to the
Fund as an adjustment of deposit requirements pursuant
to Item III , Section A, Sub-Section 5 , hereof.

1

·- 27

146

ITEM VII .

INTEREST
AND
RETURN OF
DEPOSITS
(continued)

ITEM VIII .
INFORMATION
AND
STATISTICS
OF MEMBERS

(E) Whenever the Fund returns deposits to
members pursuant to Sections A, B , or D of this
Item, the Fund shall enter on each of the certificates of deposit the amount then on deposit .

The Fund may require from its members information and statistics , in addition to information which
it may have received from the Superintendent , Division of Building and Loan Associations , or otherwise , with respect to their condition and investments ,
and upon consideration thereof may make such written
recommendations as , in the judgment of the Board of
Trustees , shall tend to place or preserve members in
condition to properly safeguard their depositors .
If a member to which such a recommendation has been
made refuses to comply therewith , within a reasonable
time , then the Board may , after hearing the member at
a meeting of the Board called for that purpose , and
upon the affirmative vote of three-fourths (3/4 ) of
the entire Board , expel or suspend such member from
membership in the Fund .

Such member shall thereupon

have , pursuant to Item IV (B) , the same rights with
reference to withdrawal of assets as a member which
has withdrawn from the Fund , except that the Fund may
set off against the member's proportionate share of
the assets any obligation of the member to the Fund ,
including advances , loans or repurchase agreements .
·- 28 -

147

ITEM IX.
REQUIRED
NOTIFICATION

Any member proposing to take any action for
which statutes require that application be filed
with or notice be given to the Superintendent of
Building and Loan Associations , shall , at the time
of filing such application or giving such notice ,
transmit a copy thereof to the Fund .

ITEM X.
INCREASE IN
INTEREST OR
DIVIDEND

Any member intending to increase its rates
of interest to be paid on deposits , or its dividend
rates to be paid its withdrawable shareholders ,
shall immediately notify the Executive Vice- President of the Fund of such increase ."

ITEM XI .
ADVERTISING
RATES OF
RETURNS

Every advertisement , announcement or solicitation relating to the interest or dividends paid
on savings accounts in member institutions shall be
governed by the following rules :
(a)

Annual rate of simple interest .

Interest

or dividend rates shall be stated in terms of annual
rates of simple interest or dividends .

OHIO DEPOSIT GUARANTEE FUND
1001 TRI STATE BLDG .
CINCINNATI , OHIO 45202
- 29-·

148

ITEM XI .
ADVERTISING
RATES OF
RETURN
(continued)

(b) Percentage yields based on one year .
Where a percentage yield achieved by compounding
interest or dividends during one year is advertised ,
the annual rate of simple interest shall be stated
with equal prominence , together with a reference to
the basis of compounding .

No member shall advertise

a percentage yield based on the effect of grace
periods permitted such members .
(c) Percentage yields based on periods in
excess of one year .

No advertisement shall include

any indication of a total percentage yield , com-`
pounded or simple , based on a period in excess of a
year , or an average annual percentage yield achieved
by compounding during a period in excess of a year .
(d) Time or amount requirements .

If an

advertised rate is payable only on savings accounts
that meet time or amount requirements , such requirements shall be clearly and conspicuously stated .
Where the time requirement for an advertised rate
is in excess of a year, the required number of years
for the rate shall be stated with equal prominence ,
together with an indication of any lower rate or
rates that will apply if the savings account is withdrawn at an earlier maturity .

9 30 -·

149

ITEM XI .
ADVERTISING
RATES OF
RETURN
(continued)

The term "profit " shall not

(e) Profit .

be used in referring to interest or dividends
paid on savings accounts .
(f) Accuracy of advertising .

No member

shall make any advertisement , announcement , or
solicitation, which is inaccurate or misleading
or which misrepresents its savings accounts
contract .
(g) Solicitation of savings accounts for
member institution.

Any person or organization

which solicits savings accounts for a member shall
be bound by the rules contained in this section
with respect to any advertisement , announcement ,
or solicitation.

No such person or organization

shall advertise a percent yield on any savings
account it solicits for a member institution which
is not authorized to be paid and advertised by
such member .
(h)

"Savings Accounts , " as aforementioned ,

are defined as all types of savings accounts ,
whether evidenced by passbooks or certificates .

·- 31 -

150

ITEM XII .
PROMOTIONAL
OPERATIONS

A member may use give -aways in connection
with a promotional campaign to increase savings
accounts .
The value of the give -away (any premium
whether in the form of merchandise , credit , or
cash ) shall be its cost to member institution
(excluding shipping and packaging costs , if applicable ) , and shall not exceed :
1. $ 10.00 for the opening of a new account ,
or for an addition to an existing account of less
than $ 1,000.00 .
2. $ 20.00 for the opening of a new account ,
or for an addition to an existing account of
$ 1,000.00 or more .

· 32 -

151

ITEM XIII .
AMENDMENTS

These Rules and Regulations may be altered ,
amended , · repealed , or superseded , either in whole
or in part , by the affirmative action of a majority
of members of the Board at any meeting of the Board .

. A proposal by the Board to amend shall be submitted
to the membership for review and comment thirty
(30 ) days prior to final adoption by the Board of
Trustees , except that , in any emergency , as determined by the Board of Trustees , temporary action ,
not to exceed ninety (90) days , may be taken to
alter , amend , repeal or supersede the above regulations pending final adoption .

-- 33 -

152

OHIO DEPOSIT GUARANTEE FUND
DEFINITIONS AS USED IN THE CONSTITUTION , BY- LAWS
AND RULES AND REGULATIONS
1.

"Fund" means the Ohio Deposit Guarantee Fund , a
corporation organized under the provisions of
Section 1151.80 to 1151.92 , inclusive , of the
Revised Code of Ohio.

2.

"Superintendent" means the Superintendent of the
Division of Building and Loan Associations ,
office created by Section 121.04 of the Revised
Code.

3.

" Building and loan association " means a corporation organized under Sections 1151.02 , 1151.03
and 1151.04 of the Revised Code , for the purpose
of raising money to be loaned to its members or to
others , and " building and loan association"
includes savings association .

4.

"Member" means a building and loan association
which has become a member of the Fund .

5.

"Depositor" means any person , firm or corporation
who has placed withdrawable funds in a member .

6.

"Deposit liability" means the aggregate of all
withdrawable funds credited to the accounts of all
depositors of a member .
(more)

153

DEFINITIONS (CONTINUED )

7.

"Certificate of deposit" means the capital note
which the Fund is authorized to issue to its members pursuant to Section 1151.87 , subsection (F ) ,
of the Revised Code .

8.

"Deposit" means the money which a members has
deposited with the Fund as a capital asset for
which the Fund has issued a certificate of
deposit.

… 9.

"Deposit ratio" means , expressed in percentage,
the deposit liability of a member divided into
the face value of the certificates of deposit
of a member.

10.

"Deposit liability ratio" means , expressed in
percentage , the aggregate deposit liability of
all members divided into the aggregate of all
cash and the value of marketable securities of
the Fund:

154

OHIO

DEPOSIT

GUARANTEE

FUND

1001 Tri-State Building

Cincinnati, Ohio 45202

DEPO
SIT
IO
ALL SAVINGS
EED
GUARANT
D
QUAR IN FULL FUN
ANTE
R
OH

STATEMENT OF CONDITION

June 30, 1984

155

TWENTY- EIGHTH ANNUAL REPORT

of the
OHIO DEPOSIT GUARANTEE FUND
A

mutual

deposit

guaranty

association

of state-

chartered savings and loan companies organized under
the laws of the State of Ohio .

Report For The Fiscal Year Ended
June 30, 1984

Submitted To The Members
October 18, 1984

50-923 0-85--6

156

OHIO DEPOSIT GUARANTEE FUND
BOARD OF TRUSTEES

THREE YEARS

Charles A. Brigham , Jr.
President and Director, Federated Savings Bank, Lockland
Eleanor J. Remke
President and Director, Madison Saving Bank, Cincinnati
John R. Perkins
President and Director, The Metropolitan Savings Bank,
Youngstown
Joseph D. Rusnak
President and Director, Mentor Savings Bank, Mentor
TWO YEARS

John A. Dreyer
Director, Baltimore Savings and Loan Company, Cincinnati
David J. Schiebel
Chairman of the Board, Home State Savings Bank, Cincinnati
Harold R. Swope
President and Director, Independent Savings Association , Euclid

ONE YEAR
Robert D. Maher
Secretary and Director , The Ottawa Home and Savings Association ,
Ottawa
Vernon W. McDaniel
Assistant Treasurer and Director, Anderson Ferry Building and
Loan Company, Cincinnati
Charles F. Tilbury, Sr.
Executive Vice- President and Director, The Clermont Savings
Association , New Richmond
Jack R. Wingate
Executive Vice-President and Director, Heritage Savings Bank,
Cincinnati

157

OFFICERS AND COMMITTEES
OFFICERS
President

Charles F. Tilbury, Sr.
Donald R. Hunsche

Executive Vice-President

Vernon W. McDaniel

Vice-President.

David J. Schiebel

Secretary
Treasurer

Joseph D. Rusnak

EXECUTIVE COMMITTEE

Joseph D. Rusnak

Vernon W. McDaniel
John R. Perkins

Charles F. Tilbury, Sr.

Jack R. Wingate

ADVISORY COMMITTEE
Wallace E. Evans
Executive Vice- President, American Savings Bank
Upper Sandusky
Richard D. Hoffmann
Chairman ofthe Board , The City Loan & Savings Company,
Lima

August Hoffman
Executive Vice- President , Midwest Savings Association ,
Silverton
Michael O. Roark
President, Scioto Savings Association , Columbus

Arthur W. Wendel , Jr.
Executive Vice- President, Seven Hills Savings Association ,
Cincinnati
Jerry D. Williams
Secretary, People's Building , Loan and Savings Company,
Lebanon
Robert M. Williams
President, Union Savings , Building and Loan Company ,
Loveland

158

ANNUAL REPORT OF THE PRESIDENT

Members of the Ohio Deposit Guarantee Fund :
Your Fund concluded a very successful twenty-eighth year of operation . The performance of your Fund is noteworthy in that new highs
have once again been achieved . These achievements include topping
$100 million in Assets and $ 10 million in Earnings . Also an achievement, during the fiscal year , is our losses , due to default prevention
activities , which were less than one quarter of a million dollars .
Your Fund had some other noteworthy achievements during the fiscal
year, which were related indirectly to its financial success :
1 ) The filing of a successful lawsuit against the Federal Reserve
Board, challenging the Board's redefinition of Regulation Y. If the
Fund had not been successful in winning this case, twelve of our members ,
with Assets aggregating $ 2,854,000,000 , would have been forced to terminate their membership in the Fund and apply for FSLIC or FDIC coverage .
2) NASSALS , on behalf of your Fund and the Superintendent , was
also successful in Washington , D. C. in lobbying amendments to Senate
and House Bills which would have given the federal government considerable control over state- chartered privately- insured savings and loans .
However, it is imperative that , in the future , constant vigilance be
exercised .
We owe a debt of gratitude to a number of enlightened United State
Senators , Congressmen and Congresswomen .
We also owe a debt of gratitude to the Division of Savings and Loan
Associations and its able Superintendent , C. Lawrence Huddleston ,
for having the State of Ohio join us in our suit against the Federal
Reserve Board , as well as their efforts in Washington , D.C. in protecting the dual system of chartering .
This fiscal year has seen the savings and loan industry in Ohio
emerging from the chaos of 1981 and 1982 with many additional powers .
These powers are designed to enhance the profitability of the industry
to enable it to better withstand the economic instability in which
it has been forced to operate . If used properly, these new powers
should increase profitability and enable all of us to better serve the
housing needs of Ohioans .
I would like to extend my gratitude to the Board of Trustees , members
of the various committees , management and staff for their cooperation .
The Ohio Deposit Guarantee Fund has enjoyed another very successful
year due to their dedication and unselfish service.
Sincerely,

Charles ILicy
Charles F. Tilbury
President

159

OHIO DEPOSIT GUARANTEE FUND
Consolidated Financial Statements of Membership
Adjusted to Reflect Current Membership Growth
(000 OMITTED )
ASSETS
Increase or
June 30, 1984
June 30, 1983
Decrease
Cash
$
67,607.
$
78,180.
$ 10,573.
U. S. Govt. Obligations
782,184.
216,936.
565,248.
514,068.
Other Investments
427,076.
(86,992.)
18,231.
73,808.
55,577.
Ohio Deposit Guarantee Fund
Federal Home Loan Bank Stock
2,474.
2,981.
(507.)
2,875,435.
2,545,573.
329,862.
First Mortgage Loans
Other Loans
707,028.
472,672.
234,356.
Real Estate Owned
21,486.
12,385.
9,101.
Office Bldg., Leasehold
2
38,46 .
8,624.
47,086.
Improvements & Equipment
37,337.
110,709.
73,372.
Other Assets
TOTAL ASSETS:
$5,125,466.
$777,521
$4,347,945.

Withdrawable Savings ⚫
Borrowed Money
Other Liabilities
Permanent Stock
General Reserves
Undivided Profits

; LIABILITIES AND NET WORTH
$4,103,030.
$3,373,350.
728,578.
717,116.
42,090.
81,020.
22,766.
20,664.
76,599.
77,145.
118,126.
112,927.

TOTAL LIABILITIES AND
NET WORTH:

$5,125,466.

$4,347,945.

14.11%

12.61%

5.19%

6.39%

includes $5,541,000 in
1983 insured by FSLIC.

Liquidity Ratio:
Net Worth to Savings Ratio:

$729,680.
11,462.
38,930.
2,102.
546.
(5,199.)

$777,521.

160

PEAT.
MARWICK

Peat. Marwick, Mitchell & Co.
Certified Public Accountants
580 WalnutStreet
memnati Ohio 45202

The Board of Trustees and Members
Ohio Deposit Guarantee Fund
Cincinnati , Ohio:
We have examined the statements of financial condition of the Ohio Deposit
Guarantee Fund as of June 30, 1984 and 1983 and the related statements of
operations, changes in deposits and reserve fund and changes in financial
position for the years then ended and the schedule of investments at
June 30, 1984. Our examinations were made in accordance with generally
accepted auditing standards and, accordingly, included such tests of the
accounting records and such other auditing procedures as we considered
necessary in the circumstances.
In our opinion , the aforementioned financial statements present fairly the
financial position of the Ohio Deposit Guarantee Fund at June 30, 1984 and
1983 and the results of its operations and the changes in its financial
position for the years then ended, in conformity with generally accepted
accounting principles applied on a consistent basis; and the schedule of
investments at June 30, 1984, in our opinion , presents fairly the
information set forth therein .

Pest
, Marwick,Mitchell + Co.

July 27, 1984

161

OHIO DEPOSIT GUARANTEE FUND
Statements of Financial Condition
June 30, 1984 and 1983

1984

ASSETS

Cash

1983

122,064

75,920

2,968,904

3,400,000

and $74,961,000 in 1983

99,580,636

74,088,089

Accrued interest receivable

3,112,322

1,884,169

Note receivable from member, net (note 3)

6,955,311

7,225,581

$

Time and overnight deposits
U. S. Government and agency obligations,
approximate market $96,387,000 in 1984

Equalization contributions due from
new members (note 2)

Prepaid insurance and other assets

6,700

362,900

13,989

11,821

$ 112,759,926

86,968,460

LIABILITIES, DEPOSITS AND RESERVE FUND
Allowance for estimated losses (note 3)

150,000

120,000

Accrued expenses and other liabilities

33,182

34,708

Members' deposits

74,778,500

57,952,000

Reserve fund

37,798,244

28,861,752

112,576,744

86,813,752

$ 112,759,926

86,968,460

Deposits and reserve fund (note 2):

Total deposits and reserve fund
Contingencies (note 4)

See accompanying notes to financial statements.

162

OHIO DEPOSIT GUARANTEE FUND

1
Statements of Operations
Years ended June 30, 1984 and 1983

1984

1983

10,116,338
409,310
765,115
11,953
11,302,716

6,938,012
521,806
913,648
12,202
8,385,668

Office operating expenses
Operating income

754,947
10,547,769

481,097
7,904,571

Other income (expense):
Provision for losses-member
associations (note 3)
Other, net
Other income (expense), net
Net income

(225,269)
34,976
(190,293)
10,357,476

(176,369)
6,072
(170,297)
7,734,274

Interest income:
U. S. Government and agency obligations
Time and overnight deposits
Notes receivable from members
Other

$

Total interest income

See accompanying notes to financial statements.

$

163

OHIO DEPOSIT GUARANTEE FUND
Statements of Changes in Deposits and Reserve Fund
Years ended June 30, 1984 and 1983

Members
Deposits
Balance at June 30, 1982
Net income for the year ended June 30, 1983
Increase in members' deposits (note 2)
Payments to withdrawing members
Balance at June 30, 1983
Net income for the year ended June 30, 1984
Increase in members' deposits, including
equalization contributions (note 2)
Payments to withdrawing members
Balance at June 30, 1984

See accompanying notes to financial statements.

$ 45,986,300
12,475,700
(510,000)
57,952,000
19,371,200
(2,544,700)
$ 74,778,500

Reserve
Fund
21,312,956
7,734,274

(185,478)
28,861,752
10,357,476
14,718
( 1,435,702)
37,798,244

164

OHIO DEPOSIT GUARANTEE FUND
Statements of Changes in Financial Position
Years ended June 30, 1984 and 1983

1984
Sources of funds:
Net income
Increase in accrued interest receivable
Funds provided from operations
Decrease in cash and time and overnight
Deposits
Decrease in notes receivable from members
Increase in members' deposits, including
equalization contributions
Other, net

Use of funds:
Increase in U. S. Government and agency
obligations
Payments to withdrawing members

See accompanying notes to financial statements.

$

10,357,476
(1,228,153)
9,129,323

1983
7,734,274
(710,810)
7,023,464

384,952
270,270

2,075,433
5,396,381

19,385,918
382,506
$ 29,552,969

12,475,700
606,546
27,577,524

25,572,567
3,980,402
$ 29,552,969

26,882,046
695,478
27,577,524

165

OHIO DEPOSIT GUARANTEE FUND
Notes to Financial Statements
June 30, 1984 and 1983

(1 ) Summary of Significant Accounting Policies
The Following items comprise the significant accounting policies
which the Ohio Deposit Guarantee Fund (Fund ) follows in preparing
and presenting its financial statements :
U. S. Government and agency obligations are recorded at amortized
cost. The obligations are not carried at the lower of cost or market
because they are generally held until maturity . Gains or losses on
the sale of securities are recognized upon realization and are
included in the statements of operations.
Where the Fund anticipates losses will be incurred in fulfilling its
guarantee of deposits in certain members, the Fund's policy is to
provide allowances for losses and for liquidation expenses by
charging operations for all anticipated losses in the period in which
the losses become evident and can be reasonably estimated . Such
allowances are recorded as asset valuation accounts where the
Fund acquires assets at costs in excess of appraised values and
where the Fund pledges certain assets to guarantee against losses
to other parties. The costs of these assets which , in management's
opinion, have no value are written down to a nominal value of $1 .
When losses and liquidation expenses are anticipated , but do not
relate to specific assets of the Fund , the allowances are shown as
liabilities. Income is credited for the reduction of estimated loss
provisions when losses realized in the period are less than the
allowances provided. In the opinion of management, adequate
provision has been made for all known or probable losses and
expenses of liquidation to be incurred.

(2) Description of the Fund
The Fund, a corporation exempt from Federal income taxes , was
incorporated under Ohio law as a mutual deposit guaranty association for the purpose of assuring the liquidity of and guaranteeing the
deposits of its members.

166

OHIO DEPOSIT GUARANTEE FUND
Notes to Financial Statements, Continued
Each member maintains on deposit with the Fund 2% of its savings
balances, adjusted semi-annually. Based on net growth in savings
deposits of members during the six months ended June 30, 1984, the
Fund expects to receive approximately $7,283,000 in additional
members ' deposits . Members joining since the inception of the Fund
are required to make an equalization contribution , which is credited
to the reserve fund , to establish their interest in the fund balance at
the date of entry on a par with other members. These deposits are
invested primarily in United States Government and agency obligations and serve as the central fund to fulfill the guarantee of the Ohio
Deposit Guarantee Fund.

(3) Provision for Losses
During the year ended June 30, 1983, the Fund , in its default prevention
activities, assisted the merger of a member institution into another
member institution by placing a deposit with the acquiring institution
at a below market interest rate and by agreeing to indemnify the
acquiring institution for losses on certain mortgage assets . The Fund
previously recorded a provision of $720,000 for estimated loss based
upon management's evaluation of this situation and the status of
negotiations at June 30, 1982. In the years ended June 30, 1983 and
1984, the Fund recorded additional provisions for estimated loss
based upon management's continuing evaluation of the provisions of
the assistance agreement.
The note receivable is due in annual installments of $ 250,000, with the
balance due in December, 1986. The balance at June 30, 1984 has
been reduced by approximately $425,000 ($600,000 at June 30, 1983) ,
representing the difference between imputed interest at the rate of
10.5% and the stated interest rate of 7.713% over the term of the note.

(4) Contingencies

The savings and loan industry in general (including many members of
the Fund) is experiencing unfavorable operating results and declining net worth as a result of high and volatile rates. This operating

167

OHIO DEPOSIT GUARANTEE FUND
Notes to Financial Statements, Continued

environment has affected savings and loans more severely than many
other sectors of the economy because of the mismatch between the
yield and maturities of their assets and liabilities.
Given the state of the economy and present condition of the industry, it
is possible that the Fund could sustain additional losses in subsequent accounting periods due to its default.prevention actions .
Because many of the causes for default are beyond management's
control, the amount of these losses cannot be determined . However,
the Fund believes that its resources are sufficient to absorb any such
losses over the foreseeable future.

168

Schedule

OHIO DEPOSIT GUARANTEE FUND
Investments

June 30, 1984

U. S. TREASURY BILLS
I
Maturity
7/05/84
7/12/84
7/19/84
7/26/84
8/02/84
8/09/84
8/16/84
8/23/84
8/30/84
9/06/84
9/13/84
9/20/84
9/27/84
10/04/84
10/11/84
10/18/84
11/01/84
11/23/84
11/29/84
12/06/84
12/13/84
12/20/84
12/27/84

Discount Equivalent
Rate Bond Yield
9.19%
9.80%
9.10
9.67
8.92
9.50
9.60
9.01
9.55
8.97
9.71
9.11
9.16
9.77
9.28
9.90
9.93
9.33
9.37
9.97
9.51
10.14
9.79
10.44
9.88
10.54
9.83
10.49
9.82
10.48
9.92
10.59
9.88
10.54
10.38
11.11
10.62
11.38
10.57
11.32
10.66
11.42
10.49
11.23
10.49
11.23

Par Value
$ 100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
$ 2,300,000

Amortized
Cost
99,877
99,686
99,522
99,362
99,155
98,940
98,755
98,569
98,387
98,156
97,960
97,770
97,548
97,320
97.116
96,932
96,490
95,794
95,613
95,416
95,181
94,959
94,770
2,243,278

Approximate
Market Value
99,877
99,686
99,522
99,362
99,155
98,940
98,755
98,569
98,387
98,156
97,960
97,770
97,548
97,320
97,116
96,932
96,490
95,794
95,613
95,416
95,181
94,959
94,770
2,243,278

U.S. TREASURY BONDS AND NOTES

Maturity
7/31/84
10/31/84
11/30/84
12/31/84
12/31/84
1/31/85
2/28/85

Interest Approx. yield
Rate To Maturity Par Value
13%%
11.78% $ 2,500,000
9%
1,500,000
9.52
9%
9.58
2,000,000
14
14.03
1,000,000
9%
9.48
1,500,000
9¼
9.67
1,000,000
9%
9.71
1,000,000

Amortized
Cost
2,514,062
1,501,339
2,002,589
999,887
1,499,297
996,916
999.300

Approximate
Market Value

2,504,687
1,492,969
1,988,125
1,011,875
1,484,531
986,250
985,625

169

Schedule, Continued
OHIO DEPOSIT GUARANTEE FUND
Investments
U. S. TREASURY BONDS AND NOTES, Continued

Maturity
5/15/85
6/30/85
7/31/85
8/15/85
11/15/85
11/30/85
2/15/86
2/28/86
3/31/86
3/31/86
4/30/86
8/15/86
9/30/86
12/31/86
2/15/87
2/15/87
3/31/87
5/15/87
5/15/87
5/15/87
6/30/87
12/31/87
3/31/88'
8/15/88
11/15/88

Par Value
9.85% $ 1,000,000
10.24
1,000,000
11.19
2,750,000
8.37
1,500,000
9.82
2,750,000
10.57
3,000,000
9.80
1,400,000
10.96
3,000,000
14.03
1,500,000
11.55
1,000,000
12.27
2,000,000
11.42
3,600,000
11.48
3,000,000
10.00
2,000,000
9.03
1,500,000
11.10
3,000,000
10.26
4,000,000
12.02
1,000,000
12.62
2,000,000
14.08
1,500,000
10.95
1,000,000
11.35
1,000,000
12.21
2,000,000
11.16
3,000,000
11.61
3,000,000

Amortized
Cost
1,005,250
996,719
2,731,309
1,498,268
2,747,852
2,997,124
1,401,854
2,995,312
1,499,496
999,130
1,983,437
3,596,892
3,045,912
2,000,000
1,499,028
2,982,880
3,998,792
998,932
1.995.270
1,497,967
989,219
997,252
1,986,875
2,933,234
3,009,407

$ 63,000,000

62,900,801

60,768,746

1,000,000
746,625
1,018,750
998,389
1,861,524
996,766
6,622,054

999,375
726,562
997,812
931,562
1,730,859
925,000
6,311,170

Interest Approx. Yield
To Maturity
Rate
10%%
10
10%
84
934
10/2
9%
10%
14
11/2
11 %
11 %
12¼
10
9
10%
10%
12
122
14
10½
11 %
12
10½
11 %

Approximate
Market Value
987,500
978,437
2,699,297
1,441,875
2,647,734
2,913,750
1,337,000
2,909,062
1,521,094
975,312
1,955,000
3,483,000
2,945,625
1,863,750
1,360,312
2,840,625
3,715,000
970,312
1.956.250
1,519,687
928,125
938,750
1,908,125
2,705,625
2,813,437

AGENCY BONDS
Federal Farm Credit Bank
3/04/85
1/20/86
9/02/86
12/01/86
1/20/87
10/20/88

11.95%
10.90
13.35
10.00
9.90
11.50

11.95% $
11.20
12.36
10.08
10.31
11.60
$

1,000,000
750,000
1,000,000
1,000,000
1,875,000
1,000,000
6,625,000

(Continued)

170

Schedule, Continued
OHIO DEPOSIT GUARANTEE FUND
Investments
U.S. TREASURY BONDS AND NOTES, Continued

Maturity

Interest Approx. Yield
To Maturity
Rate

Par Value

Amortized
Cost

Approximate
Market Value

Federal Home Loan Bank

1/25/85
7/25/85
8/26/85
9/25/85
12/26/85
2/25/86
4/25/86
8/25/86
11/25/86
2/25/87
3/25/87
6/25/87
7/27/87
11/25/87
10/25/88

13.55%
12.80
9.35
14.15
14.70
15.30
10.25
14.60
11.30
10.45
11.10
10.30
11.35
10.65
11.40

Total U.S. Government
and agency obligations

12.20% $ 2,500,000
13.34
2,000,000
9.35
1,000,000
14.15
3,000,000
14.70
1,500,000
15.30
2,000,000
10.13
2,750,000
14.60
1,000,000
12.30
1,000,000
10.22
1,000,000
10.25
1,875,000
11.13
2,000,000
3,500,000
11.72
10.51
1,700,000
11.53
1,000,000
27,825,000

2,527,155
1,989,955
1,000,000
3,000,000
1,500,000
2,000,000
2,755,402
1,000,000
983,333
1,006,211
1,913,672
1,967,946
3,469,648
1,704,836
996,345
27,814,503

2,521,094
2,004,375
964,062
3,045,937
1,533,750
2,061,250
2,612,500
1,021,250
958,125
933,125
1,774,219
1,841,250
3,308,594
1,562,937
921,562
27,064,030

$ 99,750,000

99,580,636

96,387,224

171

ROSTER OF MEMBERS
BELLAIRE
Buckeye Savings and Loan Company
BETHEL
Bethel Building and Loan Company
BLANCHESTER
Peoples Building and Loan Company
CINCINNATI
Addison Savings and Loan Company
American Savings and Loan Company
Anderson Ferry Building and Loan Company
Baltimore Savings and Loan Company
Century Savings Bank
Charter Oak Savings Association
Cherry Grove Savings and Loan Company
Columbia Savings and Loan Company
Delta Savings and Loan Association
East Side Building and Loan Company
First North West Savings and Loan Company
Heritage Savings Bank
Home State Savings Bank
Madison Savings Bank
Molitor Loan and Building Company
New Foundation Loan and Building Company
The Oakley Improved Building and Loan Company
Oakmont Savings and Loan Company
Seven Hills Savings Association
Sycamore Savings and Loan Company
The Tri-State Savings and Loan Company
West Northside Loan and Savings Company
Woodward Savings and Loan Company
COLDWATER
Home Building and Loan Company
COLUMBIANA
Home Savings & Loan Company
COLUMBUS
Scioto Savings Association
DAYTON
Home State Savings Bank of Dayton
DEGRAFF
People's Building and Loan Company
DOVER
Surety Savings and Loan Company
DRESDEN
Savings One Association
ELMWOOD PLACE
Inter-Valley Savings Association

172

EUCLID
Independent Savings Association
FRANKLIN
Miami Valley Building and Loan Association
GALION
Galion Building and Loan Company
GALLIPOLIS
Buckeye Building and Loan Company
Gallipolis Savings and Loan Company
GEAUGA
Geauga Savings Association
GREENFIELD
Home Building and Loan Company
HAMILTON
Permanent Savings and Loan Association
HILLSBORO
Anchor Savings Association
LEBANON
People's Building, Loan and Savings Company
LIMA
The City Loan and Savings Company
LOCKLAND
Federated Savings Bank
LONDON
Home Savings Bank
LOVELAND
Union Savings , Building and Loan Company
MAINEVILLE
Cardinal Savings Bank
MENTOR
Mentor Savings Bank
MIAMITOWN
Miami Savings and Loan Company
MONTGOMERY
Unity Loan and Building Company
MT. HEALTHY
Mt. Healthy Savings and Loan Company
MT. VERNON
The Citizens Building, Loan and Savings Association
NEW ALBANY
Investor Savings Bank
NEW PARIS
New Paris Loan and Building Company

173

NEW RICHMOND
The Clermont Savings Association
OTTAWA
The Ottawa Home and Savings Association
OXFORD
Oxford Savings Association
SABINA
Sabina Building and Loan Company
ST. BERNARD
Southern Ohio Savings Association
ST. MARY'S
The Community Savings and Loan Company
SILVERTON
Midwest Savings Association
SOMERVILLE
Somerville Building , Loan and Savings Association Co.
STEUBENVILLE
Jefferson Building and Savings Company

UPPER SANDUSKY
American Savings Bank
VERSAILLES
Versailles Savings and Loan Company
WEST UNION
Adams County Building and Loan Company
WHITEHALL
First State Savings and Loan Association
WILLIAMSBURG
Williamsburg Building and Loan Company
WOODSFIELD
Woodsfield Savings and Loan Company
YOUNGSTOWN
The Metropolitan Savings Bank

174
Mr. BARNARD. We will now hear from Mr. Tom Batties, chief
deputy superintendent and general counsel of the Ohio Division of
Savings and Loans.
Mr. Batties.
STATEMENT OF TOM BATTIES, CHIEF DEPUTY SUPERINTENDENT
AND GENERAL COUNSEL, OHIO DIVISION OF SAVINGS AND
LOANS
Mr. BATTIES. Thank you, Mr. Chairman. I am here at the invitation of Chairman Barnard . I am pleased to be here to have the opportunity to answer the questions of the committee regarding the
impact of the closing of Home State Savings Bank and what we are
doing in Ohio to resolve this problem.
Unfortunately, I learned late afternoon of yesterday that I would
be appearing before the committee to testify, so I do not have a
prepared text. However, I was in receipt of a letter approximately
March 22 or 23 by the chairman which listed a number of questions that would possibly be asked of me. And I have had an opportunity since yesterday afternoon to basically review those questions
and prepare some answers.
I think it is important at this time for me to fill the committee
in on my background and my relationship with the division . I
joined the division on April 23, 1984, as counsel to the superintendent and chief of supervision.
On January 19, 1985, Mr. Larry Huddleston, who had been the
superintendent, resigned on that day and I assumed the role as
acting superintendent. On March 8, 1985, I assumed the role or was
appointed to the role as superintendent of the division of savings
and loan, and on March 22 I resigned this position and Mr. Robert
McAllister was appointed the position of superintendent.
I guess in lieu of a prepared text, as I mention again, I have answered basically or reviewed the questions that were submitted to
me and would like to share my comments with you now, Mr. Chairman.
In question No. 1 through 2, there are various informational data
that was requested . I do have that information. I do not know
whether you want me to recite that information now.
Mr. BARNARD. If you could just furnish it and we will, without
objection, include it in the record, but if you will give us the bare
statistics that would be fine.
Mr. BATTIES. Do you want me to recite that now, sir?
Mr. BARNARD. No. Let us skip over that. We might need to come
back to it, butMr. BATTIES. OK. Fine. I think one of the most important things
is to note here in question 2A is how many Ohio federally insured
and nonfederally insured thrifts were on your problem list prior to
the insolvency of Home State? And I would like to answer that
question by stating that there was actually no problem or watch
list maintained by the Ohio Division of Savings and Loan. However, different types of lists were maintained for a variety of reasons.
Some of these lists were to more closely supervise institutions as a
result of their various violations of statutory laws. Other lists were
kept for supervisory concerns as a result of operating losses sus-

175
tained by the institutions. Other lists were kept because of the high
level of scheduled items incurred by an institution or delinquency
rates. Also by management weakness and/or underwriting practices or a lack of continuity of management and other areas such
as the amount or level of real estate owned by an institution and
other related problems.
Mr. BARNARD. Can you tell us whether or not Home State was on
that list?
Mr. BATTIES. Yes, sir.
Mr. BARNARD. It was on the list?
Mr. BATTIES. Yes, sir.
Mr. BARNARD. For any particular reason?
Mr. BATTIES . Yes, sir. It was on that list as a result of a low net
worth with respect to its asset size.
Mr. BARNARD. How long had it been on that list?
Mr. BATTIES. My personal knowledge of that list was created once
I had arrived at the division .
Mr. BARNARD . Which was-Mr. BATTIES . In April 1984.
Mr. BARNARD. April 1984?
Mr. BATTIES . Yes, sir.
Mr. BARNARD. But it was on the list since April 1984?
Mr. BATTIES. Yes, sir.
Mr. BARNARD. Thank you.
Mr. BATTIES. Question 3A asks to describe as completely as possible the results of the last two examinations of Home State Savings
Bank. "In your response, include specifically the supervisory rating
accorded Home State, any examination, criticism, or mention of
Home State's financial dealings with ESM Government Securities
and any other unsafe or unsound conditions or operations at the
association."
My answer to this is that I respectfully decline to answer on the
basis that to provide any of the requested information would require me to violate the provisions of section 1155.16 of the Ohio Revised Code, which states, in part, "The Superintendent of Building
and Loan Associations and its deputies, assistants, clerks and examiners shall keep secret the information obtained in an examination or by reason of their official position except in connection with
criminal proceedings or when it is necessary for them to take official action regarding the affairs of the Building and Loan Association and examine ."
I might add that a violation of this statute would result in a
fourth degree felony for anyone who violates this.
Mr. BARNARD. Does your department have any intention at this
time to file any criminal actions?
Mr. BATTIES . Sir, the Governor in recent legislation has appointed a special prosecutor to investigate wholly the transactions of
Home State Savings Bank as well as the operations of the division
prior to this situation. And we are working in cooperation with
them and have submitted all our records to the special prosecutor.
Mr. BARNARD. When do you think there will be a report from the
prosecutor?
Mr. BATTIES. Mr. Chairman, I believe that as expeditiously as
possible. I could not give a date certain at this time, but as a result

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of the public interest that I would believe that that would be done
as expeditiously as possible. Question 3B asks :
Whether or not related to the examination findings on what date did the Savings
and Loan Division first become aware of Home State's financial relationship with
ESM? Please describe the formal and informal supervisory actions, if any, taken by
your division with respect to Home State's financial dealings with ESM . In this connection, please provide copies of any supervisory letters or memorandums involving
Home State and ESM and describe all meetings with Home State and/or ESM employees.
My answer to this question is to the extent that I am required to
examine the records of the division, in order to answer this question, I have not done so because of section 1155.16 of the Ohio Revised Code. I have no personal knowledge of any action taken by
any former superintendent in connection with prior examinations .
To my personal knowledge, no actions not within the scope of section 1155.16 of the Ohio Revised Code were taken concerning Home
State's dealings with ESM since I was employed by the division in
April 1984.
Mr. BARNARD . Mr. Batties, is there any possibility that this information could be furnished to us privately?
Mr. BATTIES. I am sorry. Someone is coughing behind me.
Mr. BARNARD. Is there any possibility that we could get this information privately? You know, we could get it by subpoena.
Mr. BATTIES. I am well aware of that, sir. I would be more than
happy to discuss that with the attorney general on what information we could disclose, and I would work with full cooperation to
provide you with whatever we could under the law.
Mr. BARNARD. If you would look into that, because we think that
this information is very important to our ongoing study of this
problem.
Mr. BATTIES. Yes, sir. Question 4AAt what point did the Ohio Savings and Loan Division first make known to, one,
the Federal Home Loan Bank Board, and two, the Federal Reserve System the situation at Home State and its potential impact on Ohio Deposit Guarantee Fund?
My answer-I first learned of the potential problems at ESM and
the consequences of those problems for Home State from Mr. Don
Hunsche of the ODGF on Sunday, March 3, 1985. After stories concerning ESM appeared in the Cincinnati newspapers on Tuesday,
March 5, 1985 , I contacted the Federal Home Loan Bank at its Cincinnati office that same day to discuss the impact that this might
have on Home State, on the ODGF funds, and for verification of
the Cincinnati reports.
To the best of my recollection, my first discussions with the representatives of the Federal Reserve bank were on a Wednesday,
March 6, 1985. Those discussions were confined primarily to the
questions concerning the liquidity of Home State and the Federal
Reserve Board's ability to help Home State respond to depositors'
demands .
Question 4BWere copies of or information from your Division's examinations of Home State
made available to the Federal Home Loan Bank Board prior to the events of last
week? If so, when? Please enumerate.
Section 1155.16 of the Ohio Revised Code permits reports of examinations to be shared with representatives of the Federal Home

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Loan Bank Board . A copy of the 1983 report of examination of
Home State Savings Bank was provided to the Federal Home Loan
Bank Board at its request on or about March 13, 1985.
Question 5Describe your Division's dealings with the Federal Home Loan Bank Board and
the Federal Reserve System once it was determined that Home State would have to
be closed because of insolvency. Were these dealings satisfactory? If not, why not?
How could they have been improved?
First of all I would like to note that the division did not close
Home State Savings Bank. Home State Savings Bank officers
closed Home State effective Saturday, March 9, 1985. I appointed a
conservator on Sunday, March 10, and the conservator decided not
to reopen Home State in light of the depositor run which Home
State had experienced from the previous week and the illiquidity of
the institution.
The Federal Reserve Bank of Cleveland attempted to provide assistance to the division and to the conservator based upon past experiences including suggestions as to the solutions for Home State
and the use of the discount window.
The Federal Home Loan Bank Board's fifth district's office in
Cincinnati attempted to respond to inquiries and provide suggestions as to the Home State situation . I had no direct contact with
the Federal Home Loan Bank Board of Washington and therefore
am not in the position to comment on any dealings with them.
Obviously, in hindsight, I wish that it had been possible to find a
way to reopen Home State with Federal insurance and adequate liquidity on Monday, March 11, 1985, with the assistance of the Federal Reserve Board and the Federal Home Loan Bank Board. Unfortunately, it was not possible to do so. Both institutions have
been extremely helpful in assisting the State of Ohio with solutions
and potential solutions for Home State and the other ODGF-insured institutions since that time.
As to the question of how the system could have been improved-obviously time was a crucial factor for us. I would like to
suggest that there needs to be some sort of expedited process to get
to the decisionmakers at the Federal Reserve Board and also the
Federal Home Loan Bank Board. Procedures which lie outside of
the normal operating channels.
I also believe that there needs to be a greater cooperation among
financial institution regulators on both the State and Federal
levels, and that there possibly is a centralized crisis center or something established so that situations that occur that we have the opportunity to deal with them directly and immediately. And to operate in a more coordinated fashion.
Question 6On what date did your Division first notify the Ohio Deposit Guarantee Fund of;
one, the financial relationship between Home State and ESM, and two, your conclusion that Home State would have to be closed? Please elaborate.
My answer is that if your question goes to the losses actually suffered by Home State as a result of its dealing with ESM, I did not
notify the Ohio Deposit Guarantee Fund. Don Hunsche, the executive director of the ODGF, called me late on Sunday night, March
3, 1985, to advise me that there was a concern that substantial

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losses could be incurred by Home State as a result of an alleged
fraud at ESM. I have no personal knowledge concerning discussions
by prior superintendents with representatives of the Ohio Deposit
Guarantee Fund as to the relationship between Home State and
ESM other than those within the scope of section 1155.16 of the
Ohio Revised Code.
As to question B, as I indicated earlier, the division did not close
Home State Savings Bank. The officers of Home State made that
decision to close its doors on Saturday, March 9, 1985. The conservator and the superintendent since that time have explored a variety of alternatives which would permit the reopening of Home
State on a safe and sound basis, including the purchase of assets
and the assumption of liabilities as well as other alternatives. But
as of this date, no successful result has been concluded .
Question 7What specific lessons have been learned and what recommendations are you prepared to make to Congress regarding recent events in Ohio, including the relationship between Home State and out-of-State Government securities dealers and the
financial crisis that developed therefrom?
I respectfully suggest that is more appropriate for the Governor
of Ohio and the present superintendent to respond to this question
with specificity. Since March 4 my activities have been solely centered around finding solutions to the problems of Home State and
the other 71 savings and loan associations.
My concern at this point is directed primarily to needed changes
in Ohio law concerning the powers of the superintendent to regulate financial institutions and the creation of more effective powers
for the superintendent to utilize.
Obviously, I have not had time to focus upon Federal solutions or
alternatives in the midst of this crisis and therefore have only a
limited number of recommendations to offer at this time.
Once again, I would like to refer back to an answer to a previous
question that I think there needs to be some sort of centralized
crisis clearing house involving all the Federal financial institution
regulators. The second recommendation is that I think that the
Government securities area obviously needs to be highly regulated
by the Securities and Exchange Commission, and I would like to
defer any other recommendations until I have had a time to reflect
upon the events that have taken place in the last month or so.
I had some other comments that I would like to make right now,
Mr. Chairman, if I could .
I would like to applaud the efforts of the Federal Reserve Bank
which has been helpful from the very beginning throughout this
process not only in dealing with Home State but in dealing with
the other 71 institutions as runs occurred throughout the State.
They have provided examiners to ascertain the liquidity position
and open the discount window to the various institutions and I
think that they have been involved in an unrelentless effort in providing assistance.
think that with respect to the Federal Home Loan Bank Board,
once Chairman Gray made a decision to be of assistance in this
problem that the fifth district of the Federal Home Loan Bank
Board as well as Chairman Gray has acted in an expeditious

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manner in providing assistance in getting these institutions open
on a timely basis.
And I would like to take this opportunity to pay special attention
to the president of the Federal Reserve Bank of Cleveland and to
President Chuck Thiemann of the fifth district of the Federal
Home Loan Bank Board and of Mr. Larry Muldoon for their assistance throughout this crisis.
And that is the end of my testimony, Mr. Chairman .
Mr. BARNARD. Thank you very much.
Mr. Hunsche, what is your official status at this particular time?
I mean, the Ohio Insurance Fund is no longer a fact of life, is
that
Mr. HUNSCHE. It has been taken over by conservators, so I have
no status.
Mr. BARNARD. But are there any funds left in the deposit fund at
all?
Mr. HUNSCHE. Yes. There is about $87 million.
Mr. BARNARD. $87 million . What will happen to that?
Mr. HUNSCHE. That is a question only the conservator can
answer, since he has total power over it.
Mr. BARNARD. But there is a new fund that the State legislature
has appropriated . Is that true?
Mr. HUNSCHE. To the best of my knowledge, it has never got off
the ground .
Mr. BARNARD. I thought the Governor said that the State legislature had started a new fund with about $50 million or $60 million.
Mr. HUNSCHE. To the best of my knowledge, they have not placed
one penny in any new fund as yet.
Mr. BARNARD. Mr. Hunsche, you stated in your testimony on
page 6 that on March 6 the State of Ohio announced that it was
prepared to safeguard the interests of the depositors of Home State
and of all the depositors whose funds were guaranteed by the
ODGF and that the system in place provided adequate safeguards
for depositors at its State-chartered savings and loan associations.
What does that mean?
Mr. HUNSCHE. I was under the impression that the $50 million
that they were talking about was going to be put into the Ohio Deposit Guarantee Fund. And that we would then go to our members
for an additional 1 percent on top of that, which would have given
us approximately $220 million at which time we could have gone
into the newspaper and said that no matter what the loss is at
Home State, it can be covered.
Mr. BARNARD. Well, why was that not done?
Mr. HUNSCHE. That I have to defer to the State legislature and
the Governor. I do not know why it was not done.
Mr. BARNARD. Mr. Batties, can you answer that question? I
mean, I was under the impression this morning that there had
been an additional fund created for this purpose.
Mr. BATTIES. Mr. Chairman, there has been legislation providing
for a new fund, a new position guarantee fund. The moneys have
been appropriated for that fund and the attorneys of the State are
working on the mechanics in terms of opening up that fund . The
moneys have been appropriated andMr. BARNARD. But it is not operational?

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Mr. BATTIES. No. It is not operational at this time. It has been
incorporated if that answers your question. It has been incorporated, and the moneys have been appropriated for it.
Mr. BARNARD. But does that mean that the State of Ohio plans to
stand behind that new fund?
Mr. BATTIES. Mr. Chairman, they have appropriated $ 50 million
to inject on a loan basis to be repaid back over a period of a
number of years for the new fund.
Mr. BARNARD. What happens to the reserve in the present fund?
Mr. BATTIES. I can only speculate on that. And I might have to
defer to the Governor to provide that answer for you. I believe the
funds of the Ohio Deposit Guarantee Fund are frozen as they have
been basically placed on call by the result of the losses at Home
State.
Mr. BARNARD. Mr. Batties, it is obvious from the information
available to the subcommittee that beginning in 1980 the Ohio
Thrift Division and the Deposit Guarantee Fund had serious concerns about Home State's exposure with ESM. Why did the thrift
division not take more aggressive action to force an unwinding of
that relationship?
Mr. BATTIES. Mr. Chairman, I have to defer to the fact that I arrived at the division in 1984. It is my understanding as a result of
hearing testimony today and reading certain things in the papers
that there had been agreements made between the Ohio Division of
Savings and Loan and the Ohio Deposit Guarantee Fund with respect to Home State and its dealings with ESM and that there was
an agreement to unwind those transactions on a timely basis to be
completed I believe some time in 1985.
Mr. BARNARD. Can you answer that question , Mr. Hunsche?
Mr. HUNSCHE. Yes. In January, I believe, of 1984 or so.
Mr. BARNARD. What about 1983?
Mr. HUNSCHE. I believe it was 1984. The board had gone into an
agreement, a drafted agreement, whereby the-Mr. BARNARD. Now, this is a supervisory board, not the insurance fund?
Mr. HUNSCHE. No. This was Home State's board.
Mr. BARNARD. Home State's board and who?
Mr. HUNSCHE. Had entered into an agreement that it was going
to wind down the reverse repo transaction.
Mr. BARNARD. Was that agreement with the Ohio Thrift Division
or was it with the Deposit Guarantee Fund? Well, it must have
been with the Ohio Thrift Division, because you had no jurisdiction
evidently to supervise Home State, right?
Mr. HUNSCHE. Right. We have no cease-and -desist powers .
Mr. BARNARD. OK.
Mr. HUNSCHE. And that was being done, Mr. Chairman. In fact,
in July 1984, $400 million of the $670 million became Treasury bills
that were going to mature in May and June 1985. I think both the
division and the fund felt a sigh of relief knowing that 60 percent
of the transaction was going to be completed by May and June
1985.
Mr. BARNARD . Your testimony indicated that these transactions
would have actually matured on June 30, 1983. The question is if
they had matured, all these transactions, why did not Home State

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at that time—when they could have very appropriately disassociated themselves from ESM-did they not do that? And instead, it
looks like to me that they increased the fund from $200 million to
$700 million.
Mr. HUNSCHE. We were astonished at it. Why that was not done,
we do not really know.
Mr. BARNARD. Now, Mr. Batties, surely your acquaintances in
the department would give you some information about that, would
they not?
Mr. BATTIES. Please?
Mr. BARNARD. I mean, would not your experience in this division ,
would you not have some knowledge of why this was not done?
Mr. BATTIES. When I arrived at the division of savings and
loanMr. BARNARD. Now, when was that?
Mr. BATTIES. I arrived, Mr. Chairman, on April 23, 1984.
Mr. BARNARD. OK.
Mr. BATTIES. As counsel to the superintendent and chief of supervision-prior to that time, there had not been a separate division
or separate section within the division for supervisory matters. As
providing a dual role within the division as counsel to the superintendent and chief of supervision, I was stepping up my activities in
the supervisory area. During the course of my tenure there with
the division, the superintendent himself dealt with supervisory
matters as it related to Home State.
Mr. BARNARD. But would not the records that you have assumed
since taking on your new role, would they not give you the benefit
of this information?
Mr. BATTIES . Yes.
Mr. BARNARD. This has been over nearly a year ago and of
course this subject has been, you know-I know that this has been
a matter of concern with the State of Ohio.
Mr. BATTIES. Right. When I assumed the duties of acting superintendent on January 19, those records would have come under my
control. On that particular date, I was closing up an institution in
eastern Ohio and involved in various runs since that time on some
of the other institutions. To answer your question, once again I
would have to defer to 1155.16 in terms of providing that information for you, and would like to talk with my attorney general on
what information I could provide for you.
Mr. BARNARD. Mr. Batties , the subcommittee has been told informally that your department felt that their hands were tied because
the sale of securities in 1983 would have resulted in a $45 million
loss to Home State and would have caused its insolvency. Did the
department not ask Mr. Marvin Warner, the owner of Home State,
to infuse more capital at that time?
Mr. BATTIES. Mr. Chairman, I was not a member of the division
at that time and I have no personal knowledge as to whether or
not the superintendent or anyone asked Mr. Warner to infuse capital.
Mr. BARNARD. Mr. Batties, when we asked you and Mr. McAllister to testify, we expected that you were going to bring us information from the department which we could use in this hearing. And
obviously, you know, we are not getting that information . I mean,

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information which we have been able to get from other sources.
Surely we feel like you, as a representative of the Office of Ohio
Division of Savings and Loan, would have the availability of that
information. And you have given us nothing.
Mr. BATTIES. Mr. Chairman, I am not—
Mr. BARNARD . I respectfully appreciate the fact that you got a
new position and that you have only been in this position for
nearly a year. But a year, considering this transaction, is a long,
long, long time. I mean, because we have learned more than we
thought we would learn in the last 30 days. So I am just saying
that the information- we are not getting the information we need
to really find out what your department did, what you felt your responsibilities were, and whether you took just normal appropriate
action toward offsetting this calamity which developed between
Home State and ESM .
I guess the word is " stonewalling," but hopefully we need to get
this information.
Mr. BATTIES . Mr. Chairman, once again I defer to section 1155.16
and I would like to cooperate with you and provide that informationMr. BARNARD. That does not protect you from just telling us
what you know. We are not asking for the availability of information in examination forms . We are not asking for that. We respect
that.
Mr. BATTIES. Yes, sir.
Mr. BARNARD. But on the other hand, we feel that you, as a representative of this department, should tell us what we are trying to
find out. In fact, I guess let me clarify. We are trying to ask you
what you did. What was done? And that is all we are trying to find
out.
Mr. BATTIES. Right. Mr. Chairman , I understand that. And I am
trying to cooperate. The confusion is that many of the questions
that you are asking me are the information that I would have
would be as a result of my official position. AndMr. BARNARD. That is exactly why we have you here.
Mr. BATTIES. Right. And so thereforeMr. BARNARD. I mean, we like you , but we are here because of
the fact that you represent the Ohio Thrift Division.
Mr. BATTIES. Exactly. And as a result, I am constrained by the
section of the Ohio State Code and am personally liable for a
fourth-degree felony for exposing some of the information.
Mr. BARNARD. Do you think that the Ohio Thrift Division was
negligent in their handling of the connection between Home State
and ESM?
Mr. BATTIES . No, sir.
Mr. BARNARD. You do not? Why not?
Mr. BATTIES. Based upon the statutory restrictions that the superintendent had-this is my own opinion. You are asking me for
my opinion.
Mr. BARNARD. We are getting somewhere now.
Mr. BATTIES. Right. Based upon my personal opinion, I do not believe that the superintendent was negligent based upon the knowledge that I personally have and his restrictions under the statute
as provided by the Ohio Code.

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Mr. BARNARD. In your examination of Home State, in just your
normal routine examination and what you expect of sound, wellmanaged financial institutions, you found nothing amiss between
Home State and ESM?
Mr. BATTIES . There was concern within the division as to the
level of involvement of transactions with Home State and ESM
Government Securities . There was no statutory provision that
caused a violation of law with respect to those except for the discretion of the superintendent with respect to those transactions.
Mr. BARNARD. In other words, the fact that they had more securities pledged than their loan would require was a discretionary type
of decision?
Mr. BATTIES . There was no direct violation of law for their involvement with ESM .
Mr. BARNARD. But it was obvious that that was not very good
management.
Mr. BATTIES. Business practice.
Mr. BARNARD. The fact that there were obviously no receipts of
safekeeping from a third party with responsibility for these securities. How do you react to that?
Mr. BATTIES. Mr. Chairman, I have no personal knowledge that
there were no receipts provided Home State for its transaction
with ESM .
Mr. BARNARD. Let me quote from your October 1983 examination:
The failure to record in the corporate minutes the approvals for security transactions in the millions of dollars the various security brokerage firms used, having a
total of $390 million of open contracts in the futures market, and the repeated failure to properly prepare financial reports to the State of Ohio and to the Ohio Deposit Guarantee Fund, indicates a reluctance by management to document and report
its actions. It should also be mentioned in this report summary that many of the
areas of concern that are included in this examination report were also the subject
of comments in previous examination reports.
So here the examination report that your department conducted
brings forth the fact that there were real questions as to the management practice of Home State. So what did the department do
about that?
Mr. BATTIES. Mr. Chairman, as to my personal knowledge of
what the division did, my knowledge is scant. The proper person to
ask with respect to that would be the former superintendent . It is
my understanding in conversations recently and in testimony provided today as well as in the newspapers , is that there was an
agreement struck between the division and Home State, that they
were to unwind their transactions—they had matched their transactions is a term in the investment field, as Mr. Hunsche said, with
T-bills, which are of a sounder nature than possibly previous investment transactions and that they were to unwind these beginning in May and June 1985.
Mr. BARNARD. Mr. Batties, I hope you can answer this question.
That is, when the Home State conservator recently filed a law suit
against Marvin Warner and other officers of Home State, the new
thrift superintendent, Mr. McAllister, was quoted as saying that
"ugly acts by Mr. Warner and others caused the Home State collapse."

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Are you familiar with that statement?
Mr. BATTIES . Yes, sir.
Mr. BARNARD. What were those ugly acts?
Mr. BATTIES. I personally do not know what Mr. McAllister totally meant by those ugly acts by Mr. Warner. I can only give you my
personal opinion as to what they possibly could have been.
Mr. BARNARD. And what is your association with Mr. McAllister?
Mr. BATTIES. I am his employee. I work for Mr. McAllister. He is
superintendent of the division of savings and loan and I am chief
deputy superintendent.
Mr. BARNARD. And general counsel .
Mr. BATTIES. And chief counsel, yes, sir.
Mr. BARNARD. So you are speaking from some authority?
Mr. BATTIES . Yes, sir.
Mr. BARNARD . Good.
Mr. BATTIES. I would say that there is some concern. Mr. Warner's obvious involvement with Home State and his control position as being the sole shareholder of Home State, plus being possibly in a control position with American Savings of-I believe it is
Miami or Fort Lauderdale-and his obvious personal relationship
with Mr. Ewton of ESM, and that there might have been some collusive or alledged misconduct on the part of Mr. Warner with respect to Mr. Ewton and ESM.
Mr. BARNARD. Do you think some of that will be a part of the—
will some of this information or your feelings be relayed to the special prosecutor that has been selected?
Mr. BATTIES . Yes, sir.
Mr. BARNARD. Mr. Craig.
Mr. CRAIG. Thank you very much, Mr. Chairman.
Mr. Batties, you came to the division when?
Mr. BATTIES. April 23, 1984, Mr. Representative.
Mr. CRAIG. Who hired you?
Mr. BATTIES. Mr. Chairman, Mr. Craig, the superintendent at
that time, C. Lawrence Huddleston .
Mr. CRAIG. Is the superintendent's position of that division an
appointed position?
Mr. BATTIES. Mr. Chairman , Mr. Craig, yes, sir.
Mr. CRAIG. Who appoints that person?
Mr. BATTIES. Mr. Chairman and Mr. Representative , the Governor.
Mr. CRAIG. Why did that person resign?
Mr. BATTIES . Mr. Chairman and Mr. Representative, I do not
have any personal knowledge as to why he resigned, and possibly
the Governor might be the best person to answer that question for
you. Or Mr. Huddleston .
Mr. CRAIG. Your current boss is whom?
Mr. BATTIES. Robert McAllister, sir.
Mr. CRAIG. And he was appointed by the Governor also?
Mr. BATTIES . Mr. Chairman and Mr. Representative, yes, sir.
Mr. CRAIG. Thank you very much. I have some questions of Mr.
Hunsche.
I have before me, sir, the constitution of the Ohio Deposit Guarantee Fund. And on the face of that constitution is a-I assume-a
decal or a logo of the fund itself. It says "Ohio Deposit Guarantee

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Fund, all savings guaranteed in full. " And embossed on the face of
that is an outline of the State of Ohio . How is this decal used?
Mr. HUNSCHE. Just as it is presented there.
Mr. CRAIG. Could you come closer to the mike. I could not hear
you .
Mr. HUNSCHE. Just as it is presented . It is
Mr. CRAIG. And how is it presented to the public of Ohio? Does it
appear on the windows or doors of the-Mr. HUNSCHE. It appears on the doors and the windows of the
member companies .
Mr. CRAIG. Are there brochures available in eachMr. HUNSCHE. There are brochures available in each member institution
Mr. CRAIG. And what do they say?
Mr. HUNSCHE [continuing]. And Mr. CRAIG. Could you come closer to the mike, sir?
Mr. HUNSCHE. The topics first start out with "What is the Ohio
Deposit Guarantee Fund? How does the fund operate to protect depositors? Who owns and manages the fund?”
Mr. CRAIG. And what does it say about that?
Mr. HUNSCHE. It says "The Ohio Deposit Guarantee Fund is
owned entirely by its member associations which maintain a percentage of their savings deposits adjusted semiannually in the form
of cash deposits with the fund ."
Mr. CRAIG. Now could you tell me
Mr. HUNSCHE. There is no indication that it is owned by the
State or anything of that nature.
Mr. CRAIG. In other words, it is " depositor beware, do not look at
the decal that shows the State of Ohio. Read the brochure."
Mr. HUNSCHE. Right. They should read the brochure.
Mr. CRAIG. OK. Can you tell me who the current board of trustees of that Fund are? Who the board is?
Mr. HUNSCHE. Yes.
Mr. CRAIG. It is a board of trustees, I believe your constitution
calls it.
Mr. HUNSCHE. Yes. Charles A. Brigham. Do you want their affiliation as well?
Mr. CRAIG. Yes, please.
Mr. HUNSCHE. Who is also the president and director of Federated Savings Bank of Lockland. John A. Dreyer, director of Baltimore Savings & Loan Co. of Cincinnati. Richard D. Hoffmann,
chairman of the board, City Loan & Savings Co. , Lima. Vernon W.
McDaniel, assistant treasurer and director, Anderson Ferry Building & Loan Co. , Cincinnati. John R. Perkins, president and director
of the Metropolitan Savings Bank, Youngstown, OH. Eleanor J.
Remke, president and director of Madison Savings Bank, Cincinnati, OH. Joseph D. Rusnak, president and director of Mentor Savings Bank, Mentor. David J. Schiebel, chairman of the board,
Home State Savings Bank, Cincinnati. Harold R. Swope, president
and director, Independent Savings Bank, Euclid, OH. Charles F.
Tilbury, Sr., executive vice president and director of the Clermont
Savings Association, New Richmond, OH. Jack R. Wingate, executive vice president and director, Heritage Savings Bank, Cincinnati,
OH.

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Mr. CRAIG. This group, in its overall examination of Home State,
had made some determinations as to Home State's relationship
with ESM . In that determination , what authority does the guarantee fund have over a member institution? Can it only make recommendations?
Mr. HUNSCHE. To the best of my knowledge, it can only make
recommendations.
Mr. CRAIG. It cannot withdraw guarantee?
Mr. HUNSCHE. It can withdraw the guarantee of the member.
But then, you know, it is like taking an elephant gun to shoot a
flea.
Mr. CRAIG. So it has little to no authority over supervision of a
member bank's activity?
Mr. HUNSCHE. No. We can counsel, but we cannot compel . And
we have found over the years that normally we have been able to
counsel very effectively.
Mr. CRAIG. Were you able to counsel very effectively with Home
Savings?
Mr. HUNSCHE. Initially I would say we ran into a problem. Towards the end of the situation, when in July 1984, 60 percent of the
ESM transaction was put into Treasury bills that matured in May
and June 1985, we felt that we had done an excellent job because
they would have rolled out. And there would have only been about
$270 million left on some Ginnys that they had at that time. Our
position would have been at that time, depending on market, if
there were not an enormous loss in the Ginnys, that they roll out
of those as well. And that is what we would have tried to get them
to do.
Mr. CRAIG. Of the member institutions of the fund, where did
Home Savings rank in size and premium payment?
Mr. HUNSCHE. In size it ranked as first; in premium payment,
second .
Mr. CRAIG. So in other words, a substantial portion of the fund's
assets were derived from Home Savings?
Mr. HUNSCHE. I believe they amounted to approximately 15 percent of the fund.
Mr. CRAIG. Fifteen percent of the total. On January 4, all of the
directors of Home State, and I am quoting your testimony, "with
the exception of one, agreed to a program of unwinding from
ESM's relationship. " With a particular emphasis on overcollateralization, and a concentration of transactions with one thinly capitalized dealer, who was the one exception to that board decision? Do
you know?
Mr. HUNSCHE. Now, which date were you referring to, Mr. Craig?
Mr. CRAIG. I am referring to page 4, I believe , of your statement.
Last paragraph on the bottom of the page.
Mr. HUNSCHE. I believe that one was Nelson Schwab, the company's attorney.
Mr. CRAIG. We were informed otherwise. Do you know that to be
a fact?
Mr. HUNSCHE. I am not sure. There are two of these. One of
them-both of them have somebody missing. One of them was Stan
Brock and the other was the attorney.

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Mr. CRAIG. Do you know for a fact or is it a fact that Mr. Warner
did not sign the agreement and objected to that decision?
Mr. HUNSCHE. Oh, Mr. Warner, Jr.? I believe this is the one- oh,
five out of the seven. This is the one that Mr. Warner, Jr., and
Nelson Schwab did not sign .
Mr. CRAIG. Do you know their reason for not signing?
Mr. HUNSCHE. No, we do not . I believe they did not show as being
in attendance at the meeting.
Mr. CRAIG. What is your relationship to the State supervisor's
office in the collection of information and reports?
Mr. HUNSCHE. Over the years we have worked very effectively together. Anything that comes out of our office, a transmittal copy
goes to the division of savings and loans, and conversely, what
comes out of their office normally we get a copy of it.
Mr. CRAIG. Is it made available to the fund, to you, all of the supervisorial reports that the supervisor conducts of your member
group?
Mr. HUNSCHE . The examination reports?
Mr. CRAIG. The examinations.
Mr. HUNSCHE . Yes.
Mr. CRAIG. Are they adequate reports, do you feel?
Mr. HUNSCHE. Yes.
Mr. CRAIG. Do you base your entire decisions on those reports, or
do you do an investigative process yourself?
Mr. HUNSCHE. Sometimes we do. Other times, if we feel something should be expanded, our own people will go out and expand
on it.
Mr. CRAIG. You seem to demonstrate a vagueness in knowledge
as to the activities of the supervisor's office in your testimony or
the division, of at least a knowledgeable relationship through this
whole episode. How was the line of communication from the time it
became knowledgeable that Home State was in trouble?
Mr. HUNSCHE. Can you repeat that, please? I did not grasp what
you were saying.
Mr. CRAIG. You seem to, in your testimony, demonstrate, or at
least in the cross examination of the chairman, some lack of knowledge as to the activities of the supervisor's office or the division
and so I was curious as to what your relationship with them has
been through this whole episode.
Mr. HUNSCHE. That has only taken place since the conservator
was placed in Home State . Prior to that, we had a very workable
relationship. I think we almost lived together for a solid week in
trying to get this thing resolved . Once the conservator was appointed in Home State, we were taken out of the picture totally.
Mr. CRAIG. Do you believe that that is the proper process to go
through?
Mr. HUNSCHE. Personally, no.
Mr. CRAIG. Why not?
Mr. HUNSCHE. We felt that we could be helpful.
Mr. CRAIG. In what way?
Mr. HUNSCHE. Well, in one way we brought in a thrift consulting
firm out of New York early on to get a bid package together for
Home State. Sent them over to counsel's office for the department

50-923 0-85--7

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of commerce and they were turned away. Then I think that following Saturday we found out-Mr. CRAIG. Who was turned away from the department of commerce?
Mr. HUNSCHE. The people we brought in from New York, to prepare a bid package.
Mr. CRAIG. In other words, in an attempt to sell Home State?
Mr. HUNSCHE. Right.
Mr. CRAIG. What was the reason for turning them away?
Mr. HUNSCHE. That I do not really know.
Mr. CRAIG. You were not given a reason. Mr. Batties, could you
give us a reason?
Mr. BATTIES. Mr. Chairman, Mr. Representative, on the eve that
the conservator was appointed and subsequent days thereafter, the
conservator was trying to gain control of the Home State Savings
Bank situation- books , records. I had enlisted probably 20 to 22
State examiners to provide assistance in gaining control over the
institution at that time. We had already gone through some sales
activity with respect to Home State in the previous weekend .
To answer your question, it was just not in the best interests of
having the conservator gain control over the books and records of
Home State to have an additional party or parties clamoring
around the books and records at that time.
Mr. CRAIG. If I remember Mr. Hunsche's, either testimony or
cross examination, there was a concern though in the capability of
the fund to be able to present a valid image that Home State could
have been acquired, that the fund could properly have assisted, and
that the doors might have remained open in that transaction -or
in that period of time.
Mr. HUNSCHE. Well, it is just my personal opinion.
Mr. CRAIG. Well, as the administrator of the fund, your personal
opinion ought to have some value.
Mr. HUNSCHE. That had the loan been given to the fund, given to
the Ohio Deposit Guarantee Fund, and had we gone to our members for an additional 1 percent, which many of them were agreeable to, it would have increased our assets substantially. So that we
could have gone into the newspapers and then made the statement
that regardless of how large Home State's loss is, the Ohio Deposit
Guarantee Fund can cover it.
We had 30 years of credibility in the Hamilton County area. And
I think it would have worked.
Mr. CRAIG. But you were denied that opportunity?
Mr. HUNSCHE. A separate fund was set up.
Mr. CRAIG. All right. Mr. Chairman, thank you .
Mr. BARNARD. Mr. Spratt?
Mr. SPRATT. Thank you , Mr. Chairman.
It would be helpful to me, since we do not have balance sheets
before us or attached as any of the exhibits to any of your testimony, if you could just walk us, Mr. Hunsche, through the years and
examinations that passed from the time you first detected a problem at Home State in 1980, at which time your statement says
there were repurchase agreements of about $ 100 million and overconcentration with ESM, and an overcollateralization in nonuniform maturities.

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Could you first of all tell us what you mean by overcollateralization?
Mr. HUNSCHE. By overcollateralization is when the securities put
up with the broker/dealer exceed the amount of the loan against
their securities .
Mr. SPRATT. Do you know what the margin on those deals was?
The amount of excess collateralization? In rough percentage terms.
Mr. HUNSCHE. There were some of them as high as 25 to 30 percent, as I recall . One of our objectives was to get them down within
national ranges of 103 to 105 percent total collateralization.
Mr. SPRATT. Would that not strike an average examiner as an extraordinary situation?
Mr. HUNSCHE. Right. It did and, you know, the examiners did an
excellent job on this. The thing that we were told is that the excess
overcollateralization enabled them to borrow even at a cheaper
rate, initially.
Mr. SPRATT. Did the rate of borrowing-did the rate which they
were paying ESM validate that representation?
Mr. HUNSCHE . Yes .
Mr. SPRATT. It was a below-market rate of interest?
Mr. HUNSCHE. Compared to what you would borrow in other
areas. To the best of my knowledge.
Mr. SPRATT. And did the Ohio Savings and Loan Department and
the guarantee fund accept that explanation at that time?
Mr. HUNSCHE. Yes, I believe we did. However, we still felt that
there was too much of a concentration. Our main objective- we
had two objectives really-to get the collateralization down within
realistic percentages, and second, to reduce the amount of funds
that the company had with one securities dealer. In July 1984,
when we were advised that the $400 million of the $670 million
loan was covered by Treasury bills that matured in May and June
1985, we felt we had won the war. That over 60 percent of this
thing would have been washed out come May and June of this
year. And then all we would have had to contend with was the remaining $270 million based on their Ginny Mae loans that they
had out. And our theory was that if the loss was not substantial,
then we would urge them to get out of that as well .
Mr. SPRATT. In July 1984 , what did the Home State balance sheet
look like? What was on the asset side?
Mr. HUNSCHE. I do not have it with me.
Mr. SPRATT. Was there still an overcollateralization . Did these Tbills belong to Home State? Had they been transferred as collateralization for a loan from ESM?
Mr. HUNSCHE. I believe somehow back then, as I recall, they
were switched. They had some Treasury bonds due in 1988, and
somehow or another, they managed a switch out of the Treasury
bonds and into the Treasury bills, which would have matured then
on the year- what they done, their reverse repos were done basically for a year at a time. By switching out of the bonds and into
the Treasury bills, it gave us a definite maturity date , when 60 percent of the transaction would have just been paid off.
Mr. SPRATT. What was the net worth, the parent book net worth,
of ESM at this time? Excuse me-of Home State at this time?

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Mr. HUNSCHE. Probably somewhere in the vicinity of $13 to $15
million. I am not totally sure.
Mr. SPRATT. $ 13 to $ 14 million?
Mr. HUNSCHE. I really do not have those figures with me.
Mr. SPRATT. So many times its net worth was in effect being held
by a third party well beyond the jurisdiction of the State of Ohio in
Fort Lauderdale. What efforts did the Ohio State Savings and Loan
Division and the guarantee fund make to determine the validity,
the security, of this institution that was holding several times the
net worth of the largest institution that they insured?
Mr. HUNSCHE. We insisted on an audit report by Arthur Anderson. We also insisted on an audit report of ESM Government Securities and an attachment on that audit report showing where all of
their securities were supposed to be placed.
Mr. SPRATT. And so the audit report you-was the audit report of
ESM made by Arthur Anderson?
Mr. HUNSCHE. No. The audit report made on ESM was made by
Alexander Grant. But was accepted by Arthur Anderson who is the
C.P.A. firm that does the auditing of Home State. And it was accepted by us as well. We did not have any idea that it was an invalid audit report.
Mr. SPRATT. Who was the audit firm for ESM? I am sorry. I did
not hear your answer.
Mr. HUNSCHE. Alexander Grant.
Mr. SPRATT. Alexander Grant. What happened to them? Not
what is going to happen to them, but what happened to them in
their audit practice?
Mr. HUNSCHE. What happened to them? I think they would like
to find that out themselves. From what I have read, apparently
they had a partner who was taking kickbacks or something.
Mr. SPRATT. It was not a typographical error, was it?
Mr. HUNSCHE. I hope not.
Mr. SPRATT. I am sorry to ask you these elementary questions ,
and maybe if I had been following the press accounts closely
enough I would know this myself. I am just trying to put together a
picture of the situation. Were there custodial receipts? Were there
documents, safekeeping receipts, indicating these securities were in
the hands of a third party somewhere? The T-bills that are the subject of the reverse repo-were these certificates in these vaults?
Mr. HUNSCHE. I cannot answer that totally. At the one meeting I
attended where there was a gentleman up from ESM, the story we
were given is that the collateral is turned over to the communities
that put up the money. The physical collateral. It was always our
understanding that ESM was nothing more than a middleman . It
went to Toledo and various communities, got the money in, then
the institutions would pledge their governments, or Ginnys or
whatever it would be, and then those would then be taken and
pledged to the communities.
Mr. SPRATT. I see. What in fact happened? Do you know what in
fact happened to the securities?
Mr. HUNSCHE. Please?
Mr. SPRATT. Do you know what in fact happened to these securities?

191
Mr. HUNSCHE. You idea is as good as mine. I have been waiting
with baited breath to find out from Florida exactly what happened
to the securities. Now, we do know that something like $300 million in Ginnys apparently are still in Home State's name because
Home State is getting the interest on them.
Mr. SPRATT. Let me ask you a couple of questions about your insurance fund. One of the reasons for our holding this hearing is
that we also have oversight jurisdiction of the FSLIC and the FDIC
and there has recently been a proposal made for the reorganization
and consolidation of banking agencies. Basically it proposes that
the FDIC sort of back out of its examination process and only come
into dealing directly with its insured member banks at a time of
crisis.
It seems to me that you have been in something of that situation
yourself. Would you recommend that other insurance funds operate
in the same manner you have with only moral suasion at your disposal?
Mr. HUNSCHE. No. You would be better off to have as much
power as you can possibly get. But most of that emanates out of
the State law and it is awfully difficult for a private organization
to have it.
The ultimate weapon that we have naturally is the expulsion ,
but when you go through the expulsion, then you have the situation that was initially created by ESM, where you would have a
run on it. So-Mr. SPRATT. Were you hampered by the fact that you did not
have routine access to the books of Home State?
Mr. HUNSCHE. No. We always had routine access to the books of
Home State.
Mr. SPRATT. Oh, you did have access to the books.
Mr. HUNSCHE. That only stopped after the conservator was appointed.
Mr. SPRATT. I beg your pardon. OK. How have the member institutions of your deposit guarantee fund booked their 2-percent deposit?
Mr. HUNSCHE. They keep it on their books as an asset.
Mr. SPRATT. As an asset?
Mr. HUNSCHE. Yes. That is why it is imperative in the sale of
Home State to try and preserve that 2 percent so it does not have
to be wiped out against their net worth which will make less of
them qualified for Federal insurance.
Mr. SPRATT. I notice in the responses to interrogatories we put to
you that you indicated you had $2 million of reinsurance and a $1
million line of credit. In light of your exposure, do you think that is
adequate backup liquidity?
Mr. HUNSCHE. Definitely not, although after the Garn-St Germain Act, when the Federal Reserve was made available, it did
seem to be adequate.
Mr. SPRATT. You also guarantee deposits over $ 100,000 - all deposits, rather; 100-percent guaranteed . If it were not for that inclusive guarantee, would you still have the same insolvent situation?
Would you still have the same problem you have with Home State?
Mr. HUNSCHE. Yes.

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Mr. SPRATT. That does not make any difference in terms of exhausting your assets?
Mr. HUNSCHE. The guarantee in full really does not change the
portfolio all that much. I mean, you know, under the FSLIC and
FDIC, they have a number of ways that you can get up to- I forget
how much it is , a quarter of a million or better-guaranteed under
their insurance program .
Mr. SPRATT. Thank you.
Mr. BARNARD. Mr. Kolter?
Mr. KOLTER. Thank you, Mr. Chairman.
According to your statement, as early as 1980 and 1981 , there
was overconcentration with one dealer as you mentioned. And you
did have contact with the Home State Bank. Did you in fact also
have contact with say the Governor's office, the responsible members of the legislature, the superintendent of banking for the State,
and State people? Or were they not notified?
Mr. HUNSCHE. No.
Mr. KOLTER. The reason I ask this question, the Governor today
was interrogated as to why he did not move faster. And how could
he move faster if he was not notified by somebody?
Mr. HUNSCHE. The information contained in those reports would
have been strictly shared between the Ohio Division of Savings and
Loans and the Ohio Deposit Guarantee Fund. Now, I cannot speak
for Tom. I do not know if he reports to the Governor or not.
Mr. KOLTER. Do you feel if in fact you did notify responsible
people at that time at the State level that action could have been
taken to avert this crisis?
Mr. HUNSCHE. Back then it really was not all that much of a
crisis. A lot of them were matched. They might have been overcollateralized, but they were matched, and they were rolled off every
6 months. There are tremendous numbers of financial institutions
who use reverse repos as a borrowing type of instrument. I think
the situation involving Home State here was using it on a too large
a scale and with a too thinly capitalized dealer.
Mr. KOLTER. Mr. Batties, as regulator, if you would have contacted responsible people at the State level, do you feel this could be
averted? Or is this not your responsibility?
Mr. BATTIES. Mr. Chairman , Mr. Representative, no. I do not
think that it could have been averted. One thing, I do not think
that there is any way that the State in and of itself could have
averted the type of alleged fraud activity that took place at ESM. If
your question is to the level of involvement of Home State with
ESM, in terms of its level of activity, there was concerted effort
being taken at that time pursuant to the statutory authority to
have them unwind their situation, hopefully without a loss to the
institution that would possibly impair the Ohio Deposit Guarantee
Fund.
Mr. KOLTER. Thank you .
Mr.
Mr.
the
Mr.
Mr.

BARNARD. In other words, your authority is very limited?
BATTIES. Mr. Chairman, I might just go through some of
BARNARD. Do you have cease-and-desist powers?
BATTIES . Yes, sir.

193
Mr. BARNARD. So in other words, the Ohio Thrift Department
could-even as far back as 1977 or 1978, knowing of this involvement with ESM-they could have, at that time, taken regulatory
action?
Mr. BATTIES. The Ohio Division of Savings and Loan does possess
cease-and-desist powers .
Mr. BARNARD. And they could have taken action to remedy this
association if they thought it was unwise banking practices?
Mr. BATTIES. Mr. Chairman, if the superintendent at his discretion thought they were involved in unsafe and unsound practices,
he could have instituted a cease-and-desist order.
Mr. BARNARD. Who is the present superintendent?
Mr. BATTIES. Robert McAllister.
Mr. BARNARD. And who was the previous superintendent?
Mr. BATTIES. Myself, for a period of—
Mr. BARNARD. You were the acting superintendent.
Mr. BATTIES. Acting Superintendent.
Mr. BARNARD. But who was your predecessor?
Mr. BATTIES. C. Lawrence Huddleston .
Mr.
Mr.
Mr.
Mr.
man .
Mr.

BARNARD. How long had he been in that job?
BATTIES . Mr. Chairman, roughly 2 years or more.
BARNARD. And what is he doing today?
BATTIES. He is in the investment banking field, Mr. ChairBARNARD. Mr. Erdreich?

Mr. ERDREICH. Thank you, Mr. Chairman .
I am trying to get a separation between the sharks and the victims. And I think we are all victims here . I think the State of Ohio
is obviously a victim. The depositors who are more than inconvenienced and in jeopardy of losing their deposits are victims. But it
seems to me we are losing sight of the shark and I am shocked by
the memorandum, Mr. Chairman , that I looked at. A 1977 memo—
it talks about ESM and the principals and it says and I quote:
Everyone seems aware of their names and they are known as suede shoe typesslickers, high-pressure salesmen. The usual high-pressure bond salesmen. They are
known and feared because they once operated in Memphis and Little Rock as well
as Houston, TX, prior to coming to Fort Lauderdale, and are branded as the Memphis bond bandits.
I mean, it sounds like we are dealing with the Bonnie and Clyde
of the bond selling business, and this is 1977 when the Comptroller
of Currency is telling, at least in a memo that went to all national
bank presidents, about ESM. That ESM is a little problem, and is a
danger indeed, as this says, is feared by folks in the business. I am
just curious to hear that you folks in Ohio, and, yes, you saw that
this ESM situation was a problem, but I do not get the impression
that either of you, from each agency, had any sense that ESM was
some real danger, that you were aware of ESM being a real difficulty or a real financial problem.
Did you have any, Mr. Hunsche, of that?
Mr. HUNSCHE. No , sir. I wish that would have been shared with
us. I am sure we would have got them out of that ESM in 1977.
Mr. ERDREICH . Mr. Batties?

194
Mr. BATTIES. Mr. Chairman, Mr. Representative, we were not
aware and to my knowledge any other superintendent or myself
was aware that ESM, quote unquote, was a bad actor.
Mr. ERDREICH. It just amazes me, and I think, Mr. Chairman, the
further hearings today, what you are doing, is excellent because
the obvious lack of communication between all the agencies involved, whether it is at the Federal level or State level, contributed
to more victims piling up, and from what I am hearing I see what
Ohio had in the level of authority that you had, Mr. Hunsche, what
you all could do and where you moved in on the problems at Home
State, but looking overall, it just bothers me that an actor like this
and more than a bad actor, I would say, could be one of those
sharks out there and institutions have not really any sense of it
and the State agencies have very little sense of it. What sort of information beyond an audit, that you said you required, Mr.
Hunsche, I believe, received an audit on ESM? Anything beyond
that is information or disclosure about this particular entity and
what it was doing?
Mr. HUNSCHE. As far as ESM is concerned?
Mr. ERDREICH. Yes. As far as ESM?
Mr. HUNSCHE. I think they also required the ESM auditor to indicate where Home State's securities were located . Against which
transactions. And they used to compile a list of that every year as
well.
Mr. ERDREICH. But no further additional information about ESM
itself? And from the State's side-Mr. HUNSCHE. And the financial statements, you know, made it
look like it was making money tremendously. Very profitable corporation.
Mr. ERDREICH. The first that you had- that is, that the State had
information, your organization did, your agency, was prior to 1982
the involvement with ESM. Do you have any sense now of the size
of ESM , its operations?
Mr. HUNSCHE. Do I have any sense of the size?
Mr. ERDREICH. Have you any further information beyond an
audit report on ESM?
Mr. HUNSCHE. I have seen the 1984 audit report. Mr. Scheibel
had it. Apparently it was given to him on a Thursday and was
asked to be taken back on a Friday, but he kept it. I cannot quote
you from it, because I really do not have it. But he did have a physical audit report issued by Alexander Grant & Co. , for the year
1984 in his hand and he still has that.
Mr. ERDREICH . And the audit report, you and your agency were
satisfied with the audit report on the face of it, I take it?
Mr. HUNSCHE. Right.
Mr. ERDREICH. Thank you, Mr. Hunsche.
Mr. BARNARD. Mr. Batties, one of the strongest- well, excuse me.
Let me ask this to Mr. Hunsche . One of the strongest State private
insurance funds that we know about indicates that under their
system a reverse repurchase borrowing is a separate item on a
monthly report, which is flagged on a computer printout, and if it
appears like this situation between Home State and ESM , it results
in an automatic special inquiry. Now, I will ask both Mr. BattiesOhio does not have a system like that?

1

195
Mr. HUNSCHE. No, sir. We did not.
Mr. BARNARD. From your standpoint, the Ohio Insurance Fund
has no system like that. So you do not get these monthly reports?
Mr. HUNSCHE. Yes, sir. We get monthly reports . But I do not believe there is a definitive enough breakdown on that monthly
report to show any increase in collateral . Now, it would show an
increase in the borrowing, but it does not break down the collateral
as to what is truly available right now for liquidity and what is assigned to the other side of the reverse repo transaction.
Mr. BARNARD. Mr. Batties, what type of reports do you get from
these institutions? You do not get a monthly report, you get a quarterly report?
Mr. BATTIES. Mr. Chairman, we do receive a monthly report that
itemizes the assets and liabilities of the institution. In that monthly report, and I am not an examiner, but in my memory, my recollection of reviewing the reports, that it might take the examiner
just a few seconds to figure out that there is an item there that he
needs to inquire about, and then he would necessarily phone the
institution to determine exactly what that involved . So I believe it
is my understanding that that had been tracked on a continual
basis about their involvement, their assets and the liabilities . And
their relationship .
Mr. BARNARD. But nothing was done about it?
Mr. BATTIES. No, sir.
Mr. BARNARD . Mr. Kindness?
Mr. KINDNESS . Thank you , Mr. Chairman . I will be very quick
here.
Mr. Batties, does your division have any cease-and-desist powers
to in effect order a savings and loan to change their investment
pattern or to take particular actions in order to bring them into
compliance with sound practice?
Mr. BATTIES. Mr. Chairman, Mr. Representative, we had ceaseand-desist powers to in essence order an institution to cease and
desist the activity of which we felt was in violation of either law or
safe and sound business practices .
Mr. KINDNESS. Was that used?
Mr. BATTIES. With respect to Home State? No, sir.
Mr. KINDNESS. Is there a reason that is on the record why it was
not used?
Mr. BATTIES. I personally have no knowledge as to why it was not
used. I can only maybe offer an opinion, but I do not know specifically why it was not used by a previous superintendent.
Mr. KINDNESS. This was in a period of time when the superintendent himself was exercising the supervisory function although
your designated responsibility was supervisory as well as being
chief counsel; is that correct?
Mr. BATTIES. Mr. Chairman, Mr. Representative, that is correct.
Mr. KINDNESS . So Home State was a special case then aside from
your usual caseload, I take it .
Mr. BATTIES. Mr. Chairman, Mr. Representative , correct.
Mr. KINDNESS. And where is Mr. Huddleston now?
Mr. BATTIES. Mr. Chairman, Mr. Representative, he is still in Columbus, if that is your question, working in the investment banking field.

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Mr. KINDNESS . Mr. Hunsche, is it your understanding that the
Ohio Deposit Guarantee Fund is a corporation? Incorporated under
the laws of the State of Ohio?
Mr. HUNSCHE. Right.
Mr. KINDNESS . And it is a separate legal entity and might conceivably have a right to recover from the State of Ohio its losses
because of the interference with the ability of the ODGF to minimize or prevent loss of the funds that belonged to its members? Do
you have a right to sue as an association?
Mr. HUNSCHE. I would assume we would have a right to sue.
Mr. KINDNESS. And you have indicated to the committee that
there were actions taken by the State of Ohio which precluded
ODGF from pursuing actions it would normally pursue in a case
like Home State in trying to get another purchaser to acquire
Home State, and you were precluded from having information and
access to the books and records; is that correct?
Mr. HUNSCHE. That is correct.
Mr. KINDNESS . And as a result of that, has ODGF in your opinion
suffered any financial loss?
Mr. HUNSCHE. We do not know at this time. We do not know
what deal has been put together for Home State. All we have tried
to impress upon everybody concerned with it was the extreme importance of saving the 2 percent of the members' deposits.
Mr. KINDNESS. But the members ' deposits that were in the
ODGFMr. HUNSCHE. That are still in the ODGF .
Mr. KINDNESS [continuing]. Are under the control of a conservator appointed by the superintendent?
Mr. HUNSCHE. The superintendent.
Mr. KINDNESS. And as a result of that conservator's function, the
ODGF cannot function at all with respect to its own fund; is that
right?
Mr. HUNSCHE. Yes. You are right.
Mr. KINDNESS . And under what authority was the conservator
appointed?
Mr. HUNSCHE. Under a bill that was just passed about 2 weeks
ago. About 2 weeks ago, they amended the statutes and provided
for a conservator over guarantee-fund companies.
Mr. KINDNESS. That was the taking of property without compensation, was it not? Well, that asks for a conclusion. It sounds like a
taking of private property without compensation.
Mr. HUNSCHE. I am no lawyer, but I have heard those words used
before.
Mr. KINDNESS. Has there been a meeting of the board of trustees
of ODGF since the conservator was appointed?
Mr. HUNSCHE. There is no board of trustees. Now we are nothing
more than individuals.
Mr. KINDNESS . Did the legislation passed by the general assembly
revoke the charter, the corporation papers?
Mr. HUNSCHE. They revoked all the statutes under which we
were chartered. And then put us under a conservatorship.
Mr. KINDNESS . The articles of incorporation are still on file in
the secretary of state's office?
Mr. HUNSCHE . To the best of my knowledge.

197
Mr. KINDNESS. But it has been confiscated by the State. Is there
any action that you know of personally whereby the State of Ohio
has said "You no longer have these assets that belong to private
individuals or companies, savings and loans, that are members?"
Mr. HUNSCHE. I would say that that is a question that the conservator has to ask. You know, at this point in time he is the possessor of all the assets of the Ohio Deposit Guarantee Fund.
Mr. KINDNESS . Is the conservator appointed by a court or by the
supervisor?
Mr. HUNSCHE. He is appointed by the superintendent.
Mr. KINDNESS . Is there any court proceeding involved?
Mr. HUNSCHE. Not to the best of my knowledge.
Mr. KINDNESS . It sounds as though there ought to be.
Thank you, Mr. Chairman.
Mr. BARNARD. Ms. Oakar, do you and Mr. Luken have any brief
questions for this panel?
Ms. OAKAR. No, I think you have dealt with that thoroughly.
Mr. BARNARD. Gentlemen, we appreciate both of you being here
today, and offering the testimony.
Mr. Batties, it would be helpful to us if you could, while we have
the testimony, you know, the answers to your questions, it might
be helpful to us if you could go back and restructure some of those
answers now that you have been here today, and if you can fill in
some of the vacant aspects after conferring with Mr. McAllister or
whoever else you need to confer with . It would be very helpful to
us, because at this particular time we feel like we are somewhat
lacking as to the intricacies of your examination process.
We know that 148 examiners went into Ohio at the direction of
the Federal Reserve, and I guess the reason they did that, they had
to find out the stability of the institutions themselves because your
records probably did not-I am not saying that, but from what we
have learned this morning-that maybe the Ohio Thrift Division
was inadequate to give them information as to the strength of
these 71 institutions.
But if you can fill in the blanks , we would be very appreciative
and likewise, we would like to have the opportunity to ask for further information from the Ohio Department of Thrifts and Supervision.
And with that, we thank you very much for being with us today.
Mr. BATTIES. Mr. Chairman, thank you very much.
Mr. HUNSCHE. Thank you, Mr. Chairman.
Mr. BARNARD. Our next panel consists of the Honorable Edwin J.
Gray, Chairman of the Federal Home Loan Bank Board; the Honorable Preston Martin, Vice Chairman of the Federal Reserve
Board; Mrs. Karen N. Horn, president of the Cleveland Federal Reserve Bank; and the Honorable H. Joe Selby, Senior Deputy Controller of the Currency. Would you gentlemen please take your positions at the witness stand?
Gentlemen, we certainly appreciate your being with us today and
we also appreciate your patience. We are a little bit behind in
schedule, but because of the very importance of this subject in this
hearing and in this investigation, we certainly do not make any
apologies. We feel like all the time that we have used up to now

198
has been very valuably spent. We appreciate, however, your indulgence with us up to this point.
At this time I would just like to have the testimony of each of
you and then we will ask that you respond to questions from the
panel. We will begin with Mr. Gray and then Mr. Martin, Mrs.
Horn, and Mr. Selby. And the committee will be advised that from
this point on, because of the time, we will be imposing the 5-minute
rule, including the chairman, and hopefully we will have several
rounds of questioning. But we would like for everybody to have an
opportunity to offer questions .
So with that, Mr. Gray, we will hear from you, and thank you for
being with us today.
STATEMENT OF EDWIN J. GRAY, CHAIRMAN, FEDERAL HOME
LOAN BANK BOARD
Mr. GRAY. Thank you very much, Mr. Chairman, and distinguished members of the subcommittee.
I appear before you today in my capacity as Chairman of the
Federal Home Loan Bank Board and as Chief Executive Officer of
the Federal Savings and Loan Insurance Corporation .
We are here to discuss the nature of the response by the Federal
Home Loan Bank Board to the crisis in Ohio which was precipitated by the failure of Home State Savings Bank.
I am pleased to report today that the Federal Home Loan Bank
Board has conditionally approved applications for insurance of accounts by the FSLIC from 24 former member institutions of the
Ohio Deposit Guarantee Fund-applications which were processed
in an historically unprecedented period of time. In addition, two institutions have acquired FSLIC insurance of accounts through
merger into already insured institutions. We understand five other
institutions intend to apply for FDIC insurance.
As you know, Home State Savings Bank was closed on March 10
1985 , following a run on the institution by its depositors. The Home
State run spread quickly to other State-chartered institutions insured by the private but State-chartered Ohio Deposit Guarantee
Fund, threatening these institutions and the fund that insured
them . Faced with this crisis, Governor Celeste declared a bank holiday for the 71 privately insured Ohio thrifts on March 15. I mention these dates because I think they are of interest to you .
On Wednesday evening, March 13, representatives of the Federal
Home Loan Bank of Cincinnati examined State reports on Ohio
Fund members to make a preliminary estimate of their eligibility
for FSLIC insurance . On that same evening, at my request, Bank
Board General Counsel Norman Raiden explained the FSLIC's requirements for insurance of accounts at a meeting at the Federal
Reserve Board attended by several representatives of a number of
Ohio institutions and certain members of the Ohio congressional
delegation.
Mr. Raiden extended an invitation at that time to the Members
of Congress who were present to meet with me the following day in
my office to review the problem. At that time I took the initiative
to commit the FSLIC to expeditious processing of applications for
FSLIC insurance by members of the Ohio Deposit Guarantee Fund.

199
Over the next 3 days, from Friday, March 15 through Sunday,
March 17, members of the staff of the Federal Home Loan Bank
Board had numerous conversations with Ohio officials to discuss related issues.
On Sunday evening, March 17, I and members of my staff met
with Federal Reserve Board Chairman Paul Volcker in his office to
discuss means of assisting Ohio institutions which the State had
closed . I told Chairman Volcker that I had pledged to expedite the
processing of applications for FSLIC insurance as quickly as possible. I further explained that because the Bank Board's examination
force is severely understaffed -by some 750 positions nationwide-I
simply did not have the examination staff required to complete
necessary examinations nearly as quickly as I would like . Chairman Volcker responded that evening with a pledge to provide as
many Federal Reserve examiners as needed to help the Bank
Board fulfill its commitment of rapid processing of insurance of accounts applications.
The following morning I dispatched the Director of the Bank
Board's Office of Examinations and Supervision to Cleveland to
meet with the staff of the Federal Reserve Bank there to coordinate the deployment of examiners.
Over Monday, March 18, and Tuesday, March 19, telephone calls
were made to all Ohio institutions insured by the Ohio Deposit
Guarantee Fund requesting them to advise the Federal Home Loan
Bank of Cincinnati as to whether they intended to seek FSLIC insurance. In addition, advance application packages were specially
mailed to all those institutions so they would be in hand on Tuesday. On Tuesday evening, March 19, examiners were deployed to
all those institutions which had indicated their intention to apply
for FSLIC insurance of accounts.
On Wednesday, March 20 , I met with Governor Celeste in my
office at his request. In that meeting I again reiterated my pledge
to mount an extraordinary effort to expedite processing of applications for FSLIC insurance by Ohio institutions . Following that
meeting I also dispatched the Bank Board's Director of the Office
of District Banks to Cincinnati to coordinate the applications process .
Indeed, the Bank Board deployed 71 of its own examiners and, in
addition, used some 140 Federal Reserve examiners for the sole
purpose of helping to expedite FSLIC insurance of accounts applications by Ohio Deposit Guarantee Fund members.
Examination of the applicant institutions was necessary because
the National Housing Act requires that the FSLIC "shall reject the
application of any applicant if it finds the capital of the applicant
is impaired or that its financial policies or management are
unsafe." Indeed, the act requires the FSLIC to quote " give full consideration to all factors in connection with the financial condition
of applicants ."
I had been advised by staff that a 10-day notice period was required by Bank Board regulations in order to approve applications.
The Bank Board's General Counsel explained this during his meeting with the members of the Ohio congressional delegation . Later,
after Chairman Volcker pledged examiner support, the staff advised me that the notice period could be waived under the circum-

200
stances. The Bank Board immediately waived the 10-day notice requirement in order to expedite the applications process.
Frankly, in light of this extraordinary and unprecedented effort
and the results it has so far achieved, I am not only pleased by the
dedicated work of our staff and the Federal Reserve examiners, but
I also cannot be apologetic to those who have chosen to find fault
with our effort.
There are several other matters, if time permits, which I would
like to address.
Considerable confusion has been generated by some as to the
contrasting roles of the Federal Reserve and the Federal Home
Loan Bank Board . Under Federal law-specifically the Monetary
Control Act of 1980-the Federal Reserve is given specific responsibilities as lender of last resort to depository institutions of any
kind. That act requires the Federal Reserve to provide " the same
discount and borrowing privileges as members banks" to any "depository institution in which transaction accounts or nonpersonal
time deposits are held."
This is why the Federal Reserve was directly involved in providing collateralized credit to member institutions of the Ohio Deposit
Guarantee Fund from the earliest beginnings of the Ohio thrift
crisis.
On the other hand, the Federal Home Loan Bank Board was not
involved in any way with the regulation , examination, supervision ,
or insuring of member institutions of the Ohio Deposit Guarantee
Fund. Our only legal responsibility in this matter was, and is, to
deal with applications for FSLIC insurance of accounts and to provide collateralized credit to Federal Home Loan Banks System
member institutions. There were 14 non-FSLIC-insured Ohio members of the Federal Home Loan Bank System at the outset of the
Ohio thrift crisis. None of them requested Federal Home Loan
Bank credit.
Those who have chosen to misconstrue the contrasting nature of
the legal responsibilities of the Federal Reserve compared to the
Federal Home Loan Bank Board, and have sought to leave the impression, false as it is, that the Bank Board moved slowly or had
any role to play other than to deal with applications for insurance
of accounts do a disservice to the men and women of the Federal
Home Loan Bank System who have acted well above and beyond
the call of duty in this matter. For my part, Mr. Chairman and
members of the subcommittee, I am very pleased with the Bank
Board's historically unprecedented and extremely swift response to
the Ohio thrift crisis.
As you know, the Bank Board has the clear duty under the law
to protect the safety and soundness of the Federal Savings and
Loan Insurance Corporation. Consistent with that solemn responsibility, the Bank Board has chosen as a matter of policy to act prudently and carefully to assess applications for insurance of accounts from uninsured depository institutions . This we have done,
and this we intend to continue to do , given the fact that it is the

201
full faith and credit of the United States which ultimately is called
upon to back insured accounts in FSLIC member institutions.
Thank you very much. I will be pleased at the proper time to
answer any questions the subcommittee may have.
[Mr. Gray's prepared statement follows :]

202

STATEMENT OF
EDWIN J. GRAY
CHAIRMAN OF THE
FEDERAL HOME LOAN BANK BOARD

Mr. Chairman and distinguished members of the Subcommittee .

I appear before you today in my capacity as Chairman of
the Federal Home Loan Bank Board ( " Bank Board " ) , and Chief
Executive Officer of the Federal Savings and Loan Insurance
Corporation ( " Corporation " or " FSLIC " ) .

You have asked me to

discuss the nature of the response by the Federal Home Loan
Bank Board to the crisis in Ohio precipitated by the failure of
Home State Savings Bank , and to share my thoughts concerning
what Congressional response might be appropriate to prevent
history from repeating itself .

Home State Savings Bank was closed on March 10 , 1985 ,
following a run on the institution by its depositors .

That run

resulted from a lack of depositor confidence in the institution
due to large losses Home State sustained as a result of the
collapse of E.S.M. Government Securities , Inc. , with which it
had a number of complex , and ultimately catastrophic , financial
arrangements .

The Home State run spread quickly to other

state-chartered institutions insured by the private Ohio
Deposit Guarantee Fund , threatening both these institutions and
the fund that insured them .

Faced with this crisis , Ohio

Governor Richard Celeste declared a " bank holiday " for these
seventy-one privately insured Ohio thrifts on March 15 , 1985 .

As early as 1982 , the Federal Home Loan Bank of Cincinnati
was aware of rumors of Home State's massive dealings with
E.S.M.

The Cincinnati Bank heard that Home State's September

1983 examination report disclosed substantial problems , but

203

staff at the Bank did not see a copy of that report until the
Ohio Division of Savings and Loan Associations made it
available to staff on March 8 , 1985 , after E.S.M.'s collapse .
Prior conversations with officials of the Ohio Division and the
Federal Reserve Bank of Cleveland during the week of March 4th
had confirmed the distinct possibility that E.S.M.'s collapse
had not only impaired Home State , but threatened to exhaust the
resources of the Ohio Deposit Guarantee Fund as well .

On Tuesday , March 5th , my office received a telephone
call from Chairman Volcker's office alerting us to reports that
American Savings and Loan Association , based in Miami , Florida ,
had suffered a major loss in the collapse of E.S.M.

On

Wednesday , March 6th , the Bank Board's general counsel received
a telephone call from the Securities and Exchange Commission
noting that public disclosure of the loss would probably be required .

At the request of the Federal Reserve Bank of Cleveland ,

the

Federal Home Loan Bank of Cincinnati sent three experienced
senior supervisory staff members to Cleveland over the weekend
of March 9th and 10th to assist the Federal Reserve in
assessing the financial condition of the state- chartered Ohio
thrifts that might need to borrow from the Federal Reserve
Bank's discount window.

204

Following this review , details of the potential loss
to Home State were discussed at a meeting on Sunday , March
10th, in Florida among officials of the Securities and Exchange
Commission , the Federal Reserve Bank of Cleveland , and the
Federal Home Loan Bank of Cincinnati , as well as other Federal
Home Loan Bank district officials .

At that time it was evident

that the Ohio Fund itself was threatened .

On March 12th ,

copies of certain information obtained at the March 10th
meeting were sent to the Washington office of the Federal Home
Loan Bank Board .

On Wednesday evening , March 13th , representatives of the
Federal Home Loan Bank of Cincinnati examined State reports on
Ohio Fund members to make a preliminary estimate of their
eligibility for FSLIC insurance .

That same evening the Bank

Board's general counsel explained the FSLIC's requirements for
insurance of accounts at a meeting at the Federal Reserve Board
attended by several representatives of a number of Ohio
institutions and members of Ohio's Congressional delegation .

The

next day , Thursday , March 14th , I met with four members from
Ohio's Congressional delegation to review the problem .

At that

time I took the initiative to commit expeditious processing on
our part of applications for FSLIC insurance by Ohio
institutions formerly insured by the Ohio Fund .

Over the next

three days , from Friday , March 15th , through Sunday , March

205

17th , officials of the Federal Home Loan Bank Board had
numerous telephone conversations with Ohio officials to discuss
related issues .

On Sunday , March 17th , my staff and I met with Chairman
Volcker to discuss means of assisting the Ohio institutions
which had been closed by the State .

I indicated that , while

the Bank Board would make every possible effort to expedite the
processing of FSLIC insurance applications , it did not have the
examination staff available to complete the necessary
examinations in as short a time as I would like .

Chairman

Volcker indicated that the Federal Reserve Board had over 100
examiners already in the Ohio institutions for the purpose of
reviewing the creditworthiness of those institutions .

He

pledged to me the use of these Federal Reserve examiners by our
staff to assist in expediting the examinations of Ohio
institutions applying for FSLIC insurance .

On Monday morning , March 18th , I dispatched the director
of the Bank Board's Office of Examinations and Supervision to
Cleveland to meet with the staff of the Federal Reserve Bank to
coordinate the deployment of examiners .

Over Monday , March

18th , and Tuesday , March 19th , telephone calls were made to all
Ohio institutions insured by the Ohio Deposit Guarantee Fund ,
requesting them to advise the Federal Home Loan Bank of
Cincinnati whether they intended to seek FSLIC insurance .

In

addition , advance application packages were specially mailed to

206

all those institutions so that they would be in hand on Tuesday .
On Tuesday evening , March 19th , examiners were deployed to all
those institutions which had indicated their intention to apply
for FSLIC insurance .

On Wednesday , March 20th , I met with Governor Celeste
in my office in Washington .

At that meeting , I reiterated my

prior commitment directly to the Governor to mount an
extraordinary effort to expedite processing of applications for
FSLIC insurance by Ohio institutions .

I assured Governor

Celeste in the strongest possible terms that nothing was more
important to me and to the Bank Board than rendering every
assistance possible to Ohio institutions seeking FSLIC
insurance .

Giving this assistance was our number- one priority .

To meet that commitment , I dispatched the director of
the Bank Board's Office of District Banks to Cincinnati to

coordinate the applications process .

I am pleased to report

that the staff has performed in an extraordinary manner and , as
of April 1 , 1985 , 60 Ohio institutions applied for FSLIC
insurance :

23 of these institutions have been conditionally

approved , 2 additional institutions have acquired FSLIC
insurance through merger into already insured institutions , and
5 institutions intend to apply for FDIC insurance .

207

The Ohio crisis shows clearly that persons who place money
in a depository institution ought to know the true nature of the
insurance backing that institution .

That is , disclosure should

be made to savers as to whether their deposits are backed by a
federal agency , a state agency , or a private company or association .

You have asked whether a standby rescue plan for state
or private deposit insurance funds should be put in place .

In

my opinion , the public would be better protected by requiring
federal insurance for all depository institutions .

This is so

simply because , as the events in Ohio have all too recently
reminded us , there appears to be no adequate substitute in the
minds of depositors for federal deposit insurance .

Nothing

gives depositors the same amount of confidence that FSLIC and
FDIC insurance do .

Universal federal deposit insurance is preferable to a
rescue plan for a number of reasons .

We are generally aware of

some financial statistics behind the state authorized private
deposit insurance funds , but we do not know the true financial
condition of the thrift institutions insured by these funds .
Privately insured thrift institutions are totally exempted from
all federal regulations , and , consequently , they are not
required to report their financial condition to federal
regulators nor to subject their books and operations to the
scrutiny of federal savings institution bank examiners .

In

208

short , these institutions have no connection with the Federal
Government , and the Federal Government in turn has no means of
assessing the financial viability of these institutions .

I should add that even a formal report on the
financial condition of these institutions might not prove
sufficient to assess their long- term economic viability .
Analyzing financial institutions depends not only on the
conditions reflected in pro forma financial statements , but
also on the quality of examination and supervision those
institutions receive .

On a straight accounting basis , Home

State Savings Bank appeared to be adequately capitalized .

On

the other hand , due to what may have been lax supervision , that
institution was allowed to take tremendous risk by borrowing
almost 50 percent of its funds through a single government
securities dealer

E.S.M.

Without our being able to

scrutinize the adequacy of the examination and supervision
process in states permitting private deposit insurance funds ,
we have no way at all of determining the soundness or financial
integrity of these funds , nor can we vouch for the accuracy of
the financial statistics provided by the affected institutions .

H.R. 1564 , which Congressman Leach introduced on March 19 ,
1985 , represents an approach for attempting to deal with
some of the problems that caused the Ohio crisis .

That bill

would require all privately insured depository institutions to
apply for federal insurance .

If they did not qualify , they

209

would receive interim insurance of individual accounts up to a
maximum of $ 10,000 per account .

Institutions insured on an

interim basis would have five years to become insurable .
Federally insurable institutions could elect to be insured by a
state- level program meeting standards set by federal
regulators .

This proposal is under study by the Bank Board .

Rather than prematurely commenting on this legislation at
this time , however , I think it might be more helpful if I were
to discuss what needs to be done to strengthen the FSLIC so
that the FSLIC's survival is assured .

I believe that there are

eight general goals whose achievement would significantly
strengthen the FSLIC Fund .

I must note , parenthetically , that the achievement of these
goals would not necessarily permit the forgiveness of the recent
special premium assessment imposed on institutions currently
insured by the FSLIC .

However , these goals are highly relevant

to the formulation of any federal legislation intended to avoid
a repetition of the Ohio crisis in another state at some future

date .

First , long- term capital adequacy of the FSLIC Fund should
be achieved to ensure public confidence in the Corporation's
ability to meet present and future obligations .

210

Second , capital should be infused from insured institutions
to the FSLIC to provide it with assets sufficient to resolve
problem cases in an expeditious manner .

Third , the FSLIC should be able to require additional
deposits or premium assessments from insured institutions in
order to replenish the reserves of the Corporation to the
extent they fall below acceptable levels .

Fourth , the additional capital infusion from insured
institutions to the FSLIC Fund should be structured so that it
primarily will be treated as a deposit , or investment in the
FSLIC , to be " expensed " when the deposit or investment is paid
out by the Corporation or depleted by losses incurred by the
Corporation .

Fifth, costs of the risk to the FSLIC should be allocated
fairly by requiring those institutions which choose to engage
in certain risky activities to bear a higher proportion of
FSLIC premiums than institutions not engaging in such activities .

Sixth , the FSLIC should be given explicit statutory
authority to limit , on a regulatory basis , losses from
excessive risk - taking by the industry .

211

Seventh , FSLIC insurance should be limited to those
institutions that are principally engaged in housing finance
and housing - related activities .

The FSLIC should not be

required to insure all the activities of other companies that
choose to designate themselves as savings institutions
institutions which choose to use the FSLIC seal to attract
funds and Federal Home Loan Bank credit to expedite investments
which are not reasonably related to economical home financing ,
including practices by arbitrageurs engaged in greenmail or
corporate takeover attempts .

Eighth , the FSLIC should have the authority to classify
accounts and to insure only those that are appropriate for
insurance by a federal agency , because deposits that are really
equity investments should not be federally insured .

Through its special insurance premium assessment and the
recent introduction of H.R. 1680 , the Bank Board has already
begun to move toward the goals I have outlined .

I continue to

believe strongly that the most important of these goals is the
amendment of the National Housing Act to create a " supplementary
premium" plan requiring those institutions which choose to
engage in

activities which go beyond those found suitable for

federal deposit insurance for thrifts by the Congress in the
Garn- St Germain Depository Institutions Act of 1982 to bear a
higher proportion of FSLIC assessments than those institutions

212

which do not choose to engage in such higher risk activities .
The Bank Board included this approach in H.R. 1680 , as well as
in legislation proposed to the Congress last year .

In Mississippi in 1976 and now in Ohio the FSLIC has
responded to a private insurance crisis by making extraordinary
efforts to expedite the examination of privately insured thrift
institutions and the processing of their applications for
insurance .

I believe that such efforts are in the public

interest .

However , they do impose very heavy strains on an

already over taxed examining and regulatory staff .

I have

repeatedly stressed that the Examinations staff and the FSLIC
are severely understaffed , and thus cannot adequately shoulder
the monumental burdens being placed on them .

Indeed , we have

been able to deal with the Ohio situation in an expeditious
manner only because of the virtually unlimited staffing
assistance provided to us by the Federal Reserve Board .

In my opinion , the Bank Board has moved swiftly and in an
historically unprecedented manner to expedite applications for
FSLIC insurance from institutions which were formerly members of
the Ohio Deposit Guarantee Fund .
this regard .

I am proud of our efforts in

I will be happy to try to answer any questions the

Subcommittee may have .

Thank you for your thoughtful attention .

213

1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation

Federal Home Loan Bank Board
OFFICE OF CONGRESSIONAL RELATIONS

July 25, 1985

RECEIVED

Mr. Peter S. Barash
Staff Director
Commerce, Consumer, and Monetary
Affairs Subcommittee
Committee on Government Operations
House of Representatives
Washington, D.C. 20515

AUG 2 1985
COMMERCE , CONSUMER AND
MONETARY AFFAIRS SUBCOMMITTEE

Dear Peter:
In response to your letter of July 17 , the Bank Board staff has reviewed
the confidential submission in question and finds that we have no
objection to any or all of this material being made part of the public
hearing record .
If I may be of further assistance please feel free to call me .
Sincerely,

‫حال‬
L. Arlen Withers
Director

214

APPENDIX

Question 1
Set forth , as comprehensively as possible and in chronological
order , the FHLBB's response to the collapse of Home State and its
impact on the Ohio Deposit Guarantee Fund and on Ohio's other
state - insured thrifts . In this regard , on what date and by whom was
the FHLBB first made aware of Home State's financial difficulties
( including its dealings with ESM ) and their likely impact on the Ohio
Deposit Guarantee Fund?
Answer
The Federal Home Loan Bank of Cincinnati was aware of rumors of
Home State's heavy dealings with ESM dating back to 1982. ( Attached
is a copy of Home State's December 1984 , December 1983 , December 1982
balance sheets from the Annual Reports of the Ohio Division of
Savings and Loan Associations . )
The Cincinnati Bank heard from
various sources that the September 1983 examination report disclosed
substantial problems , but it did not obtain a copy of that report
until March 8 , 1985 , after ESM's collapse surfaced . The report came
to the Bank from the Ohio Division subsequent to the run on Home
State starting on March 5 , 1985. Various conversations with Ohio
Division and Federal Reserve Bank of Cleveland officials during the
week of March 4 , 1985 , confirmed the distinct possibility that ESM's
collapse had not only impaired Home State but that it also could
easily exhaust the resources of the Ohio Deposit Guarantee Fund .
On Tuesday , March 5 , Chairman Gray's office received a telephone
call from Chairman Volcker's office alerting the Chairman that
American Savings and Loan Association , based in Miami , Florida , had
suffered a major loss in the collapse of ESM . On Wednesday , the Bank
Board's general counsel received a telephone call from the Securities
and Exchange Commission noting that public disclosure of the loss
probably would be required .
At the request of the Federal Reserve Bank of Cleveland , the
Federal Home Loan Bank of Cincinnati arranged to send three experienced senior supervisory staff members to Cleveland over the weekend
of March 9 and 10 to assist the Federal Reserve Bank in assessing
financial conditions and trends of Ohio Fund thrifts that might need
to borrow from the Federal Reserve Bank's discount window.
On Sunday , March 10the president and vice president of the
Federal Home Loan Bank of Cincinnati attended a meeting in Florida
with SEC , Federal Reserve Bank , and other Federal Home Loan Bank

215

district officials at which more details of ESM and the potential
loss to Home State were discussed , and where it become more evident
that the Ohio Fund itself was threatened . On March 12 copies of
certain information obtained at the March 10 meeting were sent to the
Bank Board .
On Wednesday evening , March 13 , representatives of the Federal
Home Loan Bank examined Ohio Division reports on members of the Ohio
Fund in order to make a preliminary estimate of their eligibility for
FSLIC insurance .
On Wednesday evening , March 13 , the Bank Board's general counsel
explained the FSLIC's requirements for insurance of accounts at a
meeting at the Federal Reserve Board attended by representatives of a
number of Ohio institutions and members from Ohio's Congressional
delegation . The next day , Thursday , March 14 , Chairman Gray met with
four members of Ohio's Congressional delegation and agreed to
expedite FSLIC action on applications for insurance by Ohio institutions formerly insured by the Ohio Fund . Over the next three days ,
from Friday , March 15 , through Sunday , March 17 , officials of the
Bank Board had numerous telephone conversations with Ohio officials .
On Sunday , March 17 , Chairman Gray and his staff met with
Chairman Volcker . At this meeting , Chairman Volcker agreed to
provide and Chairman Gray agreed to use Federal Reserve examiners to
assist in expediting the examinations of Ohio institutions applying
for FSLIC insurance .
On Monday morning , March 18 , the director of the Bank Board's
Office of Examinations and Supervision was dispatched to Cleveland to
meet with staff of the Federal Reserve Bank to coordinate the
deployment of examiners . Over Monday , March 18 , and Tuesday , March
19 , telephone calls were made to all 71 Ohio institutions requesting
them to indicate whether they intended to seek FSLIC insurance . In
addition , advance application packages were specially mailed to all
institutions so that they would be in hand on Tuesday . On Tuesday
evening , March 19 , examiners were deployed to all institutions
indicating their intention to apply for FSLIC insurance .
On Wednesday , March 20 , Chairman Gray met with Ohio Governor
Celeste . At that meeting , Chairman Gray confirmed his commitment to
mount an extraordinary effort to expedite processing of applications
for FSLIC insurance by Ohio institutions .
On Friday , March 22 , the director of the Bank Board's Office of
District Banks was dispatched to Cincinnati to coordinate the
applications process . As of April 1 , 1985 , 60 Ohio institutions have
applied for FSLIC insurance : 23 of these institutions have been

216

conditionally approved , 2 additional institutions have acquired FSLIC
insurance through merger into already insured institutions , and 5
institutions intend to apply for FDIC insurance .
1. b . Does the FHLBB/FSLIC have copies of the Ohio Division of
Savings and Loan's examination reports or other supervisory documents
regarding Home State? What do these documents indicate about Home
State's dealings with ESM from a safety and soundness point of view?
When were these examination reports made available to the Bank Board?
Answer
The Bank Board has a copy of the latest completed examination
report ( 10/15/83 ) for Home State Savings Bank . The examination
report , which was made available to the Federal Home Loan Bank of
Cincinnati on March 8 , 1985 , describes in detail the institution's
dealings with ESM . The examiner concluded that management's actions
placed the thrift " in a position of possible serious financial loss
that could create an extreme indemnification obligation on behalf of
the Ohio Deposit Guarantee Fund . " The potential loss exposure at
September 30 , 1983 , was estimated to be $158 million if the brokerage
firm failed for any reason to perform .
Question 2
2. a . Please describe fully the normal procedures followed and the
operating condition required of thrift institutions that seek FSLIC
insurance of their accounts . Please provide copies of relevant
regulations , statements of policy , or written guidelines applicable
to the standards for granting insurance coverage .
Answer
On December 15 , 1983 , the Bank Board adopted procedures and
criteria for evaluating applications for FSLIC insurance by depository institutions currently insured by the FDIC . The Bank Board's
procedures for uninsured associations applying for FSLIC insurance
have incorporated the same criteria mentioned above ( see attached
memo dated March 14 , 1985 ) . In the case of institutions formerly
insured by the Ohio Fund , the Bank Board is using the following
three -pronged test : ( 1 ) the institution must have net worth of at
least 5 percent of liabilities calculated on a regulatory basis and
excluding deferred loan losses ; ( 2 ) the results of a viability
analysis run for the institution over a five -year period using the
Bank Board standard market rate scenario must show that the institution does not fall below existing regulatory net worth requirements
over this period of time ; and ( 3 ) the institution must pass a
standard eligibility examination .

217

If an Ohio association passes this three - pronged test , it is
granted conditional approval subject to an ongoing minimum net worth
requirement of 5 percent of liabilities .
2. b . How many of Ohio's nonfederally insured thrifts have applied
to date for FSLIC admission ? How many do you expect to apply?
Answer
As of April 1 , 1985 , 60 Ohio institutions have applied for FSLIC
insurance : 23 of these institutions have been conditionally approved , 2 additional institutions have acquired FSLIC insurance
through merger into already insured institutions , and 5 institutions
intend to apply for FDIC insurance .
Has it been or will it be the Bank Board's policy to expedite
the application process or to modify in any way the substantive
operating condition or performance requirements necessary for
membership in FSLIC ? If so , how?
Answer
The Bank Board has committed to expedite the processing of Ohio
state -chartered institutions for FSLIC insurance . Through Monday ,
April 1 , 1985 , the Bank Board conditionally approved 25 applications
for FSLIC insurance ( including 2 mergers ) . To qualify for insurance ,
all Ohio state - chartered institutions must meet the requirements
described in the answer to question 2.a.
2. d . What is the average net worth ratio of federally insured
thrifts ( i ) in Ohio and ( ii ) nationwide?
Answer
The net worth ratio of FSLIC - insured thrifts in Ohio is identical
to the national ratio . The following shows regulatory net worth as a
percent of both assets and liabilities for all FSLIC - insured institutions in Ohio and nationwide for December 31 , 1984:

Regulatory Net Worth :
Amount (millions )
Percent of Net Assets
Percent of Liabilities

Ohio

U.S.

$1,843
3.87%
4.03%

$37,895
3.87%
4.03%

218

2. e . How many FSLIC insured thrifts in Ohio ( i ) are presently on
your problem list , ( ii ) could qualify for new admission to FSLIC
insurance at this time?
Answer
(i)
Ohio .

The Cincinnati Bank has 11 significant supervisory cases in

( ii ) Ninety - six of the 217 FSLIC - insured institutions in Ohio
have a net worth ratio to assets of 5 percent or more .
2. f . In what respects ( if any ) do the insurance approval standards
currently being applied to the Ohio thrifts differ from the standards
applied in the past to similarly situated applicants ( i.e. , nonfederally insured or uninsured applicants already in operation ) ?
Answer
The Bank Board has reviewed such applications on a case - by - case
basis . In all cases , however , the applicant was required to pass an
eligibility examination and , if approved , was required to maintain
net worth at regulatory levels . Recent cases have applied the
formula applicable to FDIC - insured applicants .
The most recent case of privately insured applicants similar to
the Ohio situation was the failure of the private insurance fund in
Mississippi in 1976. Institutions affected by that failure were
required to undergo a standard eligibility examination . Those
institutions that passed the eligibility examination were required to
maintain net worth and reserves at regulatory levels ( 5 percent at
that time ) .
At the time of the closing of Home State Savings Bank , several
insurance of accounts applications were pending from members of the
Ohio Deposit Guarantee Fund . The same criteria were being applied to
those applications as are now being applied to the other Ohio
applicants .

Question 3
Without identifying associations by name , please provide the
following information about the 10 similarly situated institutions
( i.e. , nonfederally insured or uninsured institutions that have been
open and in operation for a significant period of time before making
application for Federal insurance ) that have most recently applied
for and been granted FSLIC insurance : state in which located ; year
of application ; and ( as of date of insurance application ) ( i )

219

CORRECTED

regulatory capital ratio , ( ii ) ratios of scheduled items to capital
and to assets , and ( iii ) any other financial ratios and statistics
that are being assigned prime importance in evaluating the current.
application's of the Ohio applicants .

Answer
Applicant's Scheduled Scheduled
Application Approval Net Worth to Items to Items to Net Worth
Filed
Liabilities Net Worth Assets
Date
to Assets

State

Assets
(millions )

Conn .

11/4/82

9/29/83

6.10

24.40

1.4

5.70

2,100.4

Ind.

1/22/82

4/8/82

14.90

19.90

2.6

13.00

3.2

Mass .

9.40

17.00

0.5

7.00

39.2

7/28/83

4/30/84

Maine

3/17/78-

2/3/83

6.90

15.50

1.0

6.40

59.3

Ohio

6/13/82 :

4/6/83

12.90

58.70

6.4

10.90

65.1

N. C.

3/15/83

5/29/84

4.42

42.90

1.8

4.19

38.4

N. Y.

11/1/82

5/14/84

5.36

6.70

0.4

5.00

71.0

N. Y.

3/9/82

2/3/83

13.00

7.58

0.8

11.00

1,319.2

N. Y.

6/2/82

5/20/83

6.78

2.50

0.2

6.35

163.2

N. Y.
2/4/82
Question 4

11/24/82

6.85

20.85

1.3

6.41

1,209.8

To what extent have the Home Loan Bank Board and the Federal
Reserve System coordinated their responses to the Ohio situation?
Please provide specific information on the dates and the substance of
communications between the FHLBB and the Federal Reserve System .

Answer
The Bank Board and the Federal Reserve Board coordinated their
response to the Ohio situation soon after the problem came to light .
The FHLBank of Cincinnati furnished three supervisory agents to the
Federal Reserve Bank of Cleveland on March 9 to assist in evaluating
the credit of the uninsured institutions . There has been close
cooperation between these agencies since that time . Presently about
100 Federal Reserve examiners are assisting Bank Board examiners in
conducting eligibility examinations of uninsured Ohio institutions
that have applied for FSLIC insurance .

50-923 0-85--8

220

Question 5
5. a . It is the subcommittee's understanding that a number of
federally chartered and FSLIC - insured thrift institutions had
financial dealings with ESM Government Securities , Inc. , including
American Savings and Loan Association of Florida , Home Savings
Association of Florida , Baraboo Federal Savings and Loan , Sun Federal
Savings and Loan . Since 1980 , how many FSLIC - insured associations
had funds loaned to or invested with ESM? What is the total dollar
value of these funds? What is the current FHLBB/FSLIC estimate as to
the likely loss to FSLIC - insured institutions from these loans and/or
investments ? Could there be any FSLIC losses as a result ?.

Answer
As of December 31 , 1984 , we know of six FSLIC - insured institutions that had financial dealings totaling about $758.3 million with
ESM . Losses are estimated to be $66.8 million , including possible
FSLIC losses of $ 8.0 million . In addition , one institution borrowed
$8 million from ESM.
5. b . Please provide the dates of the two most recent FHLBB/FSLIC
examinations of each federally chartered or insured thrifts that
conducted business with ESM? Did any ofthe reports of these
examinations criticize or mention in any way the dealings between
these institutions and ESM? Please be specific . If so , were any
formal or informal supervisory actions taken against these institutions ? Please enumerate .

Answer
The following summary describes any comments concerning dealings
between the institutions and ESM for the two most recent examinations
and any supervisory action taken .
INSTITUTION A
5/21/82 Exam :
11/30/83 Exam:

No report comment .
No report comment .

INSTITUTION B
3/18/83 Exam :

No report comment .

9/14/84 Exam : The examiner noted that Ronnie Ewton , a director
of American , owned a controlling interest in ESM Group , Inc. , the
parent company of ESM Government Securities , Inc. The association

221

engaged in a number of securities transactions with ESM , the largest
being a $ 1 billion leveraged arbitrage transaction . Mr. Ewton
presented this transaction to the institution's board and participated in the approval process . A substantial portion of the funds
for this transaction were borrowed from various lenders . ESM was
responsible for obtaining the borrowings through third parties .
association had no control over who the borrowers were or of any
review of their financial strength . ESM refused to provide the
institution with information on the commissions involved .
The supervisory letter was written after the demise of ESM .
special examination was ordered to determine the extent of the
institution's involvement . The results of that examination have not
been received . The Board will conduct an investigation using its
powers under the National Housing Act .
INSTITUTION C

10/14/83 Exam :

No report comment .

10/15/84 Exam :

No report comment .

INSTITUTION D
7/8/83 Exam: Exam report criticized over - collateralization of
reverse repos . Supervisory agent requested corrective action .
Management agreed to take such action .

9/18/84 Exam : Exam report criticized over - collateralization of
reverse repos . Supervisory agent has not yet sent his supervisory
letter .
INSTITUTION E
11/21/81 Exam :

5/21/83 Exam :

No report comment .

No report comment .

INSTITUTION F
7/2/82 Exam:
8/16/84 Exam :

No report comment .
No report comment .

222

Question 6
Based on its experience to date with the Ohio crisis , does the
FHLBB have any recommendations to Congress regarding the need for
strengthening or modifying state/private deposit funds ? For example ,
is there a need to put in place a permanent " standby" rescue plan for
state/private deposit insurance funds that may experience extreme
difficulty? Any other recommendations?
Answer
Any legislation establishing some sort of " standby" rescue plan
for state -authorized private deposit insurance funds could significantly reduce the incentive for a state to responsibly regulate and
supervise its insured thrifts . The linkage of responsibility and
accountability is essential to the effectiveness of any supervisory
program. Even in the absence of any federal " standby " plan , the Ohio
events provide evidence that at least some Ohio authorities thought
that at the eleventh hour the federal umbrella would be extended to
shelter the state - authorized private fund's inadequacies .

223

CONFIDENTIAL

HOME STATE BANK
Since1840
Statement of Condition
December 31 , 1984

Assets
As we begin our 95th year, Home State's Statement ofCondition represents a financial institution with over 65% of its assets invested in cash,
U.S. Government securities, short term time
deposits and mortgages guaranteed byagencies of
the federal government.
As ofDecember 31 , 1984 total deposits were
$667,804,694, which is an increase of
$83,952,651, or 14.4% over the preceding year.
Total loans grew approximately $38,000,000 to
$670.358.560 and total assets reached
$1,448,621,505 asof December 31, 1984.
With 33 offices covering Cincinnati, Middletown, Dayton and Columbus and with Home
State Savings Bank offering increasing services to
our customers, we look forward in 1985 to continued progress and growth.
Sincerely.

Mortgage Loans
Government Insured
Privately Insured .
Other ...
Commercial and Consumer Loans..
Savings Account Loans ...
Real Estate Owned ....
Cash, Government Securities and
Other Investments....
Ohio Deposit Guarantee Fund
Investment in Real Estate
Rental Property-Depreciated .
Office Buiklings-Depreciated
Furniture and Equipment –Pepreciated
Investment In and Advances
to Subsidiaries
Other Assets...

$365,185,204
115,911,399
160,019,046
26,601,881
• 2.641,030
2,445,243
620,097,603
12,238,300
28,298,315
6.466.296
1.981,416
32,927,030
73.808,742
$1,448,621.505

President& Chestmenof the ProN

Directors
David J. Schiebel
Robert J. Weeder
Marvin
L. Warner,
Jr.
( Wrvian
Farm
Irangan Menhirby
Nelson Schwab, Jr.
Porters Crapbor Head & Restry
Stanton G. Brock
Predini. Aparan Management, the
Robert (Bob) Braun
TV 1.
Arthur C. Elliott
Amany

-Officers
David J. Schiebel
Prodrm & (herman of the Anand
Robert J. Weeder
Savare Vice Pendent & Tratow
Gerald L. Stephens
Severe Vue Prenderi
Richard J. Macke
Sem Ver Pendent
Charles D. Steinau
VarPrades
Barry
M. Ross
You
twarded
Ronald F. Boatman
VerIwata
Charles S. Stroup

Barry I. Randman
V...Instal

Liabilities and Capital
Deposits..
$ 67.0-9.09-1
Securities Sold Under Repurchase
Agreements ...
670,356.908
Debentures Payable
26.921.463Other Borrowed Money
12.064.083
Mortgage Escrow Deposits
Other Liabilities .....
50.012.013
Income Applicable to Future
Operations .....
506.180
Stock Statury Reserwes and
Undivickel Profits ...
19,745,0: 0
$1.448,621,505

224

CONFIDENTIAL

HERITAGE SAVINGS BANK
3316 GLENMORE AVENUE

HAMILTON COUNTY

CINCINNATI 45211

BRANCH OFFICES: 1
Telephone: 513-481-2481

Incorporated: 1883

PRESIDENT: WILLIAM T. SHEFFIELD
EXEC. VICE PRES: JACK R. WINGATE (MO)

SECRETARY:STANLEY C. MEININGER, JR.
ATTORNEY: WILLIAM T. SHEFFIELD

ASSETS
Conventional Mtg. Loans …………………………… .
Non Mortgage Loans..................
Cash.....
Investment Securities
Fixed Assets-Net
OtherAssets
Total..............

LIABILITIES AND CAPITAL
Withdrawable Savings.
$25,676.573
84,829
Other Liabilities .
Reserves ............
..930,395
Undivided Profits
1.217.237

$22,446,931
410,587
.394,412
.3.304,341
..848.627
.504,136
$27,909,034

Total..

$27,909,034

O.D.G.F.

12/31/88
HOME STATE SAVINGS BANK
2727 MADISON RD
CINCINNATI 45209

HAMILTON COUNTY
BRANCH OFFICES: 24
Incorporated: 1890

Telephone: 513-871-3400
PRESIDENT: BURTON M. BONGARD
EXEC. VICE PRES: DAVID J. SCHIEBEL (MO)

SECRETARY: DAVID J. SCHIEBEL
ATTORNEY: NELSON SCHWAB, JR.

ASSETS
Insured & Guaranteed Loans ...... $17,022,062
470,798,769
Conventional Mig. Loans..
Non Mortgage Loans.....……………………………………………….....12,282,689
Real Estate Owned.........................………………..……………. 2,751,137
Cash.....
8,863,216
Investment Securitios
596,226,323
Fixed Assets-Net
6,921,917
Other Assets ..............…………...
..26,818,513
Total.........
$1,141,684.626

LIABILITIES AND CAPITAL
Withdrawable Savings
$498,870,739
Borrowed Money
610,051,957
Other Liabilities.........
..16,691,757
1,185,000
Permanent Stock
Reserves
2,727.461
Undivided Profits .
12,157,712
Total

O.D.G.F.
68.

$1.141,684,626

225

CONFIDENTIAL

HERITAGE SAVINGS AND JUAN ASSOCIATION NE
3316 GLENMORE AVENUE
CINCINNATI 45211
HAMILTON
BRANCH OFFICEL
Telephone: 513-401-2481
PRESIDENT: WILLIAM T. SHEFFIELD
EXEC. VICE PRES: JACK R. WINGATE (RIO)

BECH RIV: JACK AL WINGATE
ATTOLET: WILLIAM T. SHEFFIEL

ASSETS
PABILITIES AND CAPITAL
$14.313.0
Conventional Mig. Loans
$20,015,783 Within i40 Sesings.
355,520 Other
Non Mortgage Loans..........
Real Estate Owned............................... 39,547 Ruser :
Cash .....
1,198,629
3,809,824 Undlyk! Profis .
Investment Securities ..
100,780
Fixed Assets- Not ............................
873,992
..600,601
Other Assets .............
To !
$28,60132
Totul...........
$26,596,122
O.D.G.F.

12/31/87

HOME STATE SAVINGS ABSOCIATION
2727 MADISON R
CINCINNATI 45209
HAMILTON COUNTY
BRANCH OFFICES: 21
Telephone: 513-871-3400
Incorporis : 139.
PRESIDENT: BURTON M. BONGARD
EXEC. VICE PRES: DAVID J. SCHIEBEL (MO)

SECRETARY: DAVID J. SCHIEBEL
ATTORNEY: NEI RON SCHWAR, J.

ASSETS
Insured & Guaranteed Loans . $17,837,319
Conventional Mtg. Loans.
277,299,699
Loans..............................3.424,792
Non Mortgage ...................
.................... 2,445,888
Real Estate Own
Cash.
4,011,315
Investment Securities
236,142,211
Fixed Assets-Ne:............................. 4,789,207.
OtherAssets
32,363,886
Tow ..................
#578,414,117

LIABILITIES AND CAPITAL
Withdraws !! Savings.
$485.182,079
Borrowed honey.
86,014,092
Other Liabilities......
10,877,874
Permanent Stock.
1,185,000
Reserver....
2,727,461
Undivided ofits ...... -------------------- 12,427,611

ODGF

Tetal......

.4678,414,117

226

CONFIDENTIAL
Federal
Home Loan
Memo
Bank
Board

FROM:

S. G. Frank Haas, II
Director

TO : Chairman Gray

OFFICE OF DISTRICT BANKS
INTER-OFFICE COMMUNICATION

DATE

March14.1985
: February 21, 1985

SUBJECT:

Ohio Deposit
Guarantee Fund

Attached is a copy of the procedures adopted by the Board on December 15,
1983 , for evaluating applications for FSLIC insurance by depository
institutions insured by FDIC. The Board does not have any procedures for
uninsured associations , but we have typically used the same criteria.
An application would have to pass each part of the " three-prong" test
before coming to the Board for final action . If an applicant failed a
part of the test, it would not go any further in the process .
The three-prong test is as follows:

1.

5% snapshot net worth.

2.

Viability analysis applicant required to meet regulatory net
worth requirements over a five year period using the Bank
Board's standard market rate scenario .

3.

Eligibility examination .

As explained in the June 29, 1984 memo, an exception would be granted on
the first prong of the test for associations with net worth of between 4%
and 5%, provided that their operating results reflected increasing net
worth over the prior two semi -annual periods.
Based on discussions with the Cincinnati Bank, it is estimated that 30
associations with assets of $1.4 billion would meet the first prong of
the three-prong test . (Of these 30 associations , the largest is a $ 914
million consumer loan company with 6% net worth. It has $515 million in
consumer loans and as such would not meet a thriftness test. ) Assuming
that there would be a 50% fallout rate between the next two stages , I
would estimate that no more than 15 associations would qualify for FSLIC
insurance if we applied the existing FDIC test.

227

Federal
Home Loan
Memo
Bank
Board

FROM :
ΤΟ

:

CONFIDENTIAL
OFFICE OF DISTRICT BANKS
INTER-OFFICE COMMUNICATION

S. G. Frank Haas , III , Director , ODB
David W. Glenn, Director, FSLIC
Eric I. Hemel , Director , OPER
All Bank Presidents

DATE :

January 12 , 1984

SUBJECT:

Procedures and Criteria
for Evaluating Applications
for FSLIC Insurance by
Depository Institutions
Insured by the FDIC

On Thursday, December 15 , 1983 , the Board formally adopted procedures
and criteria for evaluating applications for FSLIC Insurance by depository
institutions insured by the FDIC .
The Board considered a memorandum (copy attached ) from the Directors
of the Office of District Banks , Federal Savings and Loan Insurance
Corporation and the Office of Policy and Economic Research, recommending a " three-prong" test as part of the overall evaluation process .
The development and formal adoption of this procedure will provide
guidance to potential applicants as well as provide the applicant
with a realistic indication of whether it can expect favorable action
at each stage of the process .
The first step of the " three-prong" test would be to determine whether
the applicant had net worth to liabilities equal to or greater than 5%.
If the applicant met the first test , it would move to the second step
whereby the District Bank would conduct a viability analysis over a
5 year horizon, based upon data obtained from FDIC examination reports
and the Board's standard market rate scenario viability test . If the
applicant maintains its regulatory net worth (currently 3.0%) during
the entire simulation period , it would qualify for the eligibility
examination. Upon completion of the eligibility examination the
District Banks ' digest and recommendation would be prepared and forwarded
to Washington , D.C. for review and submission to the Board for action.
It is the opinion of the Board that the adopted procedure will be in
the best interest of both the applicant and Insurance Corporation . The
procedure will ensure that the corporation will not be exposed to unnecessary risk as well as provide potential applicants with formal procedures .
If there are any questions regarding the above procedures feel free
to give any one of us a call . Patrick G Berbakos of the Office of
District Banks ( 202-377-6712) is also available to answer any specific
operational questions.

S. G. Frank Haas , III
Director , ODB

David W. Glenn
Director, /FSLIC

Went
Enid .
Eric 1. Hemel
Director, OPER

228

Federal Home Loan Bank Board

MEMORANDUM FOR:

FROM:

SUBJECT:

CONFIDENTIAL
1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation

Federal Home Loan Bank Board
S. G. Frank Haas , III , Director , ODB
David W. Glenn , Director , FSLIC
Eric T. Hemel , Director , OPER
Proposed Procedures and Criteria for
Evaluating Applications for FSLIC Insurance
by Depository Institutions Insured by the FDIC

DATE :

ISSUE:
Establishment of appropriate criteria for evaluating applications for
FSLIC insurance submitted by other depository institutions currently
insured by the FDIC .
PREVIOUS AND CURRENT PROCEDURES
By law, the FSLIC must consider the safety and soundness of each applicant
when granting insurance of deposits . The exact criteria for judging
safety and soundness , however , is a matter over which the Board can
exercise wide discretion . Historically, the determination of an institution's safety and soundness was generally made in OES and ODB . However ,
in December 1982 the Board reviewed the existing approach for evaluating
applications and decided that the FSLIC should also have an integral role
in the evaluation of an applicant's viability according to a standard set
of criteria . Although no formal procedures were developed or issued by
the Board , there is general staff agreement that then Chairman Pratt
informally directed OPER and FSLIC to apply strict standards for the
initial FSLIC evaluation of applicants . This reflected a policy that
stressed the minimization of additional risk exposure to the Insurance
Corporation .
The standard which governed the initial evaluation of an applicant for
conversion to FSLIC insurance required that the institution demonstrate an
expected financial performance which would place it in the top 33% of all
thrift institutions already insured by the FSLIC. Upon receiving an
application for insurance of accounts , the FSLIC would analyze whether the
applicant would survive an interest rate scenario that would cause
two-thirds of the thrift industry insured by the FSLIC to be insolvent .
Only those institutions which remained viable under this scenario were
deemed eligible for FSLIC insurance of accounts . While this standard
minimized the risk of insuring new members , it was clearly not a realistic
scenario nor one which the insurance fund would be likely to survive .

1

229

Since January 1983 , 15 institutions have applied to convert to FSLIC
insurance . Of these applications , 5 were approved , 4 withdrawn , and 6 are
currently pending .
This past Spring , OPER and FSLIC were asked to reevaluate the criteria
under which applications are considered for FSLIC insurance . Since that
time, the Bank Board's core staff has met several times to discuss
possible alternatives to the two- thirds rule.

RECOMMENDATIONS
We recommend the adoption of a " three- prong " test as part of the overall
evaluation process for institutions currently insured by the FDIC. The
initial stage of this test would be the determination of whether the
applicant had net worth to assets or net worth to liabilities equal to or
greater than the FDIC's current reserve requirement of 5%.
If the applicant met the 5% reserve requirement , it would move to the
second stage of the test during which the District Banks would conduct a
viability analysis , over a 5 year horizon , based upon data obtained from
FDIC examination reports and the Board's standard market rate scenario
viability test . If the applicant meets its regulatory net worth requirements during the entire simulation period of the standard market rate
scenario , it would qualify for the eligibility examination .
An advantage of this system is that applicants would be " pre- screened " at
the District Bank level prior to the eligibility examination ; if an
applicant is unable to pass the first two stages of the "three- prong "
test , it would not qualify for FSLIC insurance and would not incur the
expense of the eligibility examination which can be very costly ( $ 304 per
day per examiner) . If the applicant passes all three stages of the test ,
the application would be forwarded to Washington D. C. for review and
submission to the Board for action ..
To ensure that the principal role of FSLIC - insured institutions continues
to be that of home finance , it was also recommended that applicants be
required to invest a substantial percentage of their assets in mortgage
and mortgage- related securities . However , the Office of General Counsel
recommended against trying to impose a housing commitment percentage
test .
In 1978 , the Bank Board attempted to impose a 60% housing commitment test
as part of the Committee on Banking , Finance and Urban Affairs , Financial
Institutions Regulatory Act ( H.R.13471 ) . The Act authorized Federal
charters for mutual savings banks . At that time , the Board wanted to
ensure that mutual savings banks investments reflected the fact that the
Federal Home Loan Bank System remained firmly committed to the housing
needs of the country. Although the Board urged the committee to statutorily require a percentage test , it was explicitly rejected by Congress .

230

CONCLUSION
It is the finding of FSLIC, OPER and ODB that the " three-prong" test is in
the best interest of both the applicant and the Insurance Corporation.
The procedure is strict enough to ensure that the insurance corporation
will not be exposed to unnecessary risk and it also gives the applicant a
realistic indication of whether it can expect approval at each stage of
the review process.
Adoption of formal insurance criteria will provide guidance to potential
applicants and should help to expedite the processing time.

Shtim
S. G. Frank Haas , III
Director , ODB

David W. Glenn
Director , FSLIC

‫السوله است‬
Eric 1. Heme
Director ,. OPER

Mr. BARNARD. Thank you, Mr. Gray.
We will now hear from Vice Chairman of the Federal Reserve
Board, Mr. Preston Martin.
STATEMENT OF PRESTON MARTIN, VICE CHAIRMAN, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. MARTIN. Thank you, Mr. Chairman. We appreciate the opportunity, President Horn and myself, to appear before the subcommittee and briefly to summarize the contribution of the Federal Reserve System to the amelioration of the Ohio privately insured thrift institution situation.
You have already been reminded that the Central Bank has the
authority under the Monetary Control Act of 1980 to lend under
normal circumstances to nonmember depository institutions, and
throughout the Ohio crisis, we have stood ready so to lend, and we
have extended credit during the course of events there.
The Federal Reserve has further, as has been indicated , played a
role in monitoring events in Ohio, in facilitating cooperative efforts, in counseling the various parties involved to resolve the situation, to reestablish public confidence and to promote the safety of
depositors ' funds.
In this capacity, as President Horn will detail with you, Federal
Reserve officials from the Cleveland Fed and from Washington
have held and have participated in numerous meetings with governmental supervisory officials from the State of Ohio, officials
from the Federal Home Loan Bank System, Federal Home Loan
Bank of Cincinnati, and other Federal regulatory agencies.
As the primary supervisor of bank holding companies, and in response to a request by Governor Celeste, the Federal Reserve, both
from the Board and through the efforts of officials of the several
Federal Reserve banks, have also been in contact with banking organizations , both from within and from without Ohio, to determine
their interest if any in acquiring or merging with ODGF institutions, including those which may be unable to qualify on their own

231
for Federal insurance or to reopen without additional external support.
To facilitate the Federal insurance requirement of the State government, we have expedited arrangements for review of applications by the Bank Board, as has been commented here, the FDIC ,
and within our own organization. And in this process, the Federal
Reserve will continue to make field examination personnel available to the Bank Board and to Ohio authorities to assist in examinations and to expedite the process of qualifying for Federal deposit insurance.
While a longer range solution with respect to all of the affected
thrifts remains to be worked out, we believe the Ohio events underscore the importance of full cooperation among appropriate Federal
and State supervisory authorities. And with regard to State banking authorities, the Federal Reserve is well into a new program to
work with those State officials and their staffs as they see fit to
increase their technical and examinational abilities.
One of your questions of us raised by the recent events in Ohio
relates to the role of private deposit insurance funds . Clearly deposit insurance is an important factor in maintaining public confidence in deposit institutions . I believe it is too early to make a definitive judgment about the role of sole- insurer private insurance
funds and even of possible State-sponsored funds in our financial
system . But you have asked for comments and we appreciate the
opportunity to do so.
There may be industry structures which could be adequately supported by private arrangements as sole insurers, structures involving large numbers of small institutions, a substantial reserve fund
not dependent upon deposits in a mutual basis by the insured institutions, and featuring adequately strong examination and auditing
procedures .
And I would add to that the desirability of geographic dispersion
of risk and the further desirability of an independent board, independent of representatives of the mutually insured institutions .
Such an industry structure of small institutions could consist,
say, of the smaller credit unions. Any such arrangements suffer
from a certain degree of confusion as to whether and to what
extent the resources of State government are behind the private
sole-insurer's reserves.
However, industry structures consisting in part or in whole of
sizable depository institutions, reserve funds dependent upon the
deposits of the members exclusively, and with an examination and
regulatory procedure, in part justified to its membership as less
rigorous than Federal procedures . These raise substantial questions
as to whether the public interest is served thereby. And thus the
Board supports the movement of several State legislatures away
from the presently constituted private insurance funds . Whatever
approaches may ultimately prove feasible, the events in Ohio do
serve to remind us of the potential consequences of the loss of
public confidence in individual depository institutions , and of the
celerity with which that loss can spread to other institutions.
In view of these concerns, the Federal Reserve System will continue to cooperate fully with the State and Federal authorities

232
seeking a longrun solution to thrift industry liquidity problems in
Ohio.
Thank you, Mr. Chairman.
Mr. BARNARD. Thank you, Mr. Vice Chairman.
[Mr. Martin's prepared statement follows:]

233

Statement by

Preston Martin

Vice Chairman , Board of Governors of the Federal Reserve System

I am pleased to appear before this Subcommittee to discuss the
Federal Reserve's contribution to efforts to ameliorate the problems of the
state-chartered, privately insured thrift institutions in Ohio. The situation in
Ohio was touched off by reported losses suffered by Home State Savings Bank
(Home State) as a result of transactions with E.S.M. Government Securities, Inc.
(ESM ), a broker-dealer in government securities, but also was related to more
systemic weaknesses in the supervision and insurance of some Ohio savings and
loan associations.

A detailed chronology of the Federal Reserve System's

response to events in Ohio is attached to the statement of President Karen Horn
of the Federal Reserve Bank of Cleveland.

As this Subcommittee is aware , reports of losses at E.S.M.
precipitated a run on Home State that led to its closing.

This development

subsequently contributed to more generalized deposit outflows at other ODGF
savings and loan associations and savings banks in Ohio, and a number of these
institutions experienced heavy depositor withdrawals. Faced with this situation ,
Governor Celeste of Ohio closed, on a temporary basis, all 70 of the remaining
ODGF thrift institutions. Subsequently, the State of Ohio adopted a plan that
allows certain institutions found to qualify for federal insurance to reopen on a
full service basis. Ohio authorities are pursuing other remedial steps, including
the potential merger of weak thrifts with stronger federally insured institutions,
designed to resolve the situation and promote the safety of depositor funds. At
the present time , all but one of the ODGF thrifts have reopened on either a full
or limited service basis; although a permanent solution involving the remaining
closed thrift, Home State, and those thrifts that cannot qualify for federal
insurance remains to be worked out.

The limited service reopenings permit

withdrawals of $750 per account per month. The Federal Reserve is lending to
the reopened thrift institutions where necessary.

234

In reviewing this situation, it is helpful at the outset to clarify the
Federal Reserve's specific regulatory responsibilities for various types of banking
institutions as well as its broader responsibilities as the nation's central bank.
The Federal Reserve has primary supervisory responsibility at the federal level
for state-chartered banks that are members of the Federal Reserve System and
for all bank holding companies.

Commercial banks that are members of the

Federal Reserve System are FDIC- insured, and commercial banks that are
subsidiaries of bank holding companies, regardless of membership status, must by
law be federally insured.

Of course, the Federal Reserve does not have

supervisory responsibility for thrift institutions, and the federal regulatory
agencies, including the Federal Reserve, generally do not have direct supervisory
or regulatory responsibility for state-chartered, nonfederally insured depository
institutions, such as the affected ODGF thrift institutions in Ohio. Normally,
such institutions are supervised and regulated by state authorities. It should also
be pointed out that the Federal Reserve is not an insuring agency and does not
have authority to make direct equity investments in depository institutions.
However, the Federal Reserve does have authority to lend through the discount
window and, in its role as the nation's central bank, has a fundamental
responsibility to foster the stability and orderly functioning of the nation's
banking and financial system .
Nonmember depository institutions, including the state-chartered
thrift institutions in Ohio, became generally eligible for discount window
borrowing in 1980 as a result of the enactment in that year of the Monetary
Control Act.

Under this legislation, the discount window facilities of the

Federal Reserve System were made available to all insured or uninsured
depository institutions, throughout the nation , which offer transaction accounts
or hold nonpersonal time accounts.

235

In its capacity as the central bank, the Federal Reserve may assist in
efforts to deal with financial disturbances in order to prevent them from
becoming generalized financial crises or causing systemic dislocations.

An

important policy tool to achieve these ends is the discount window through which
the Federal Reserve serves as the ultimate source of liquidity.
Throughout this difficult period in Ohio, the Federal Reserve Bank of
Cleveland has been prepared to lend and has loaned through the discount window
to the affected thrift institutions under terms and conditions established by law
for such borrowing. Indeed, on March 6, one day after the public disclosure of
possible Home State losses, Federal Reserve examiners were dispatched to
Cincinnati to meet with Home State officials, explain borrowing procedures, and
begin to review potential collateral.
chartered

In addition , the eligibility of state-

depository institutions, including thrifts, for discount window

assistance was stressed in a public statement by the Federal Reserve Bank of
Cleveland on March 10.

Prior to the temporary ODGF closings, the Federal

Reserve Bank of Cleveland provided discount window credit to certain affected
institutions, and as the institutions have reopened, they have been eligible for
liquidity assistance.

The availability of this discount window assistance to

reopened institutions was stated publicly by President Horn on March 15 and
reiterated by Chairman Volcker on March 20, 1985.
In carrying out its responsibilities as lender of last resort, Federal
Reserve System supervisory and examination personnel have worked closely with
the affected institutions to inform them of collateral and documentation
requirements and to assist them in understanding fully and meeting these
requirements. Discount window loans to affected institutions have been made at
the regular discount rate, currently 8 percent, and, as required by the Federal

236

Reserve Act, have been secured by adequate collateral . As is usually the case,
this collateral has consisted of government and agency securities, commercial
loans, one-to-four family residential mortgage loans, and other loans, and the
collateral has been evaluated within normal guidelines. The Federal Reserve
has, however, acted in a expeditious manner to facilitate the access of these
institutions to the discount window under normal terms and conditions.
In addition to these lender of last resort responsibilities, the Federal
Reserve has also played an important role in monitoring events in Ohio and in
facilitating cooperative efforts among the various parties involved to resolve the
situation, to reestablish public confidence and to promote the safety of
depositors' funds.

In this capacity, Federal Reserve officials have held or

participated in numerous meetings with governmental and supervisory officials
from the State of Ohio as well as with officials from the Federal Home Loan
Bank Board (FHLBB), the Federal Home Loan Bank of Cincinnati , and other
federal regulatory agencies.

In order to enhance our understanding of the

financial condition of the affected thrifts and to assist the State of Ohio and the
FHLBB, the Federal Reserve , within a few days of the temporary closings,
provided examiners to participate in on-site examinations and asset evaluations
of the ODGF institutions.

These examinations have helped to determine the

availability of collateral for facilitating access to

the discount window and,

equally important, they have played a critical role in the process of reopening
those institutions found to qualify for federal insurance.

The information

developed in our on-site visits and otherwise has been made available promptly
to other federal and state authorities. We hope these actions have supported and
complemented the steps taken by Governor Celeste , the Ohio legislature , and the
federal insurance agencies to reopen the affected thrift institutions.

237

As the primary supervisor of bank holding companies and in response
to a request by the State, the Federal Reserve has also been in contact with
banking organizations, from both within and outside of Ohio, to determine their
interest, if any, in acquiring or merging with ODGF institutions, including those
which may be unable to qualify for federal insurance or to reopen without
additional external support. The day after the temporary closings, Reserve Bank
officials telephoned the senior managements of bank holding companies
throughout the country to inform them of imminent State plans to hold meetings
to discuss the possible sale or acquisitions of certain thrift institutions.
As the Subcommittee is aware , the State of Ohio has adopted a plan
requiring federal insurance for essentially all savings and loans, building and loan
associations, and all savings banks in the state. The State has also implemented
arrangements to provide ODGF thrift institution depositors limited access to
their funds. Further, the Ohio legislature acted promptly to advance $ 50 million
in state funds to shore up the remaining ODGF institutions other than Home
State. To facilitate the federal insurance requirement, expedited arrangements
have been made for review of applications by the FHLBB, the FDIC, and the
Federal Reserve. In this process, the Federal Reserve will continue to make
field examination personnel available to the FHLBB and to Ohio authorities to
assist in examinations and to expedite the process of qualifying for federal
deposit insurance. We have been informed that as of March 29, 1985, the State
of Ohio had authorized 26 institutions to reopen on a full service basis. Included
in this number is a former thrift institution that has converted to commercial
bank status and has reopened with FDIC insurance after our Board acted on a
bank holding company application .

Also included in this figure is a thrift

institution acquired by a bank holding company in a transaction approved on an
expedited basis by the Federal Reserve Board.

238

It may take some time for the thrift situation to return to normal in
Ohio. A number of ODGF institutions have obtained federal deposit insurance.
Others will , apparently, need an injection of capital from present owners or new
investors, and still others may need to be acquired by stronger depository
institutions.

I assure you that the Federal Reserve will continue to provide

assistance through the discount window, the provision of examination personnel
to assist the FHLBB and State authorities, and the expeditious review and action
on applications for mergers or acquisitions that require our approval.
While a longer range solution with respect to all of the affected
thrifts remains to be worked out, the Ohio events underscore the importance of
full cooperation among appropriate federal and state supervisory authorities in
dealing with any strains or pressures involving depository institutions that could
have adverse systemic implications for the banking or financial system . Such
adverse developments must be met with timely and effective action to restore
confidence and maintain the stability of the financial system . In the case of the
thrifts in Ohio, I believe that , in general , the remedial procedures that have been
taken should significantly reduce any lasting impacts on financial markets.
One of the questions raised by the recent events in Ohio relates to
the role of private deposit insurance funds.

Clearly, deposit insurance is an

important factor in maintaining public confidence in depository institutions.
Indeed, as I have noted, commercial banks that are members of the Federal
Reserve System are FDIC-insured, and all commercial banks that are subsidiaries
of bank holding companies are required by law to be federally insured. I believe
that it is too early to make a definitive judgment about the role of sole insurer
private insurance funds and even state sponsored funds in our financial system .

239

There may be industry structures which could be adequately
supported by private arrangements as sole insurers, structures involving large
numbers of small institutions , a substantial reserve fund not dependent upon
deposits

by

the

insured

institutions,

and

featuring

adequately

strong

examinations and auditing procedures. Such a structure might consist of a large
number of smaller credit unions. Any such arrangements suffer from a certain
degree of confusion as to whether and to what extent the resources of state
government are behind the private sole insurers' reserves.

However, industry

structures consisting in part or in whole of sizable depository institutions,
reserve funds dependent upon the deposits of its members, and with an
examination and regulatory procedure in part justified to its membership as less
rigorous than federal procedures , raise substantial questions as to whether the
public interest is served thereby. The Board supports the movement of several
state legislatures away from private insurance funds. Whatever approaches may
ultimately prove feasible , the events in Ohio do serve to remind us of the
potential consequences of the loss of public confidence in individual depository
institutions and of the celerity with which that loss can spread to other
institutions.

In view of these concerns, the Federal Reserve System will

continue to cooperate fully with the State and federal authorities seeking a long
run solution to thrift institution liquidity problems in Ohio.

240
Mr. BARNARD. Ms. Horn, we are delighted to have you with us
today, and as president of the Federal Reserve Bank of Cleveland,
and we would like to hear from you at this time.
Ms. HORN. Thank you, Mr. Chairman . I would like to submit my
full statement for the record.
Mr. BARNARD . Without objection , your full statement will be included .
STATEMENT OF KAREN N. HORN, PRESIDENT, FEDERAL
RESERVE BANK OF CLEVELAND
Ms. HORN. I am pleased to appear before the Commerce, Consumer, and Monetary Affairs Subcommittee to discuss the Federal
Reserve's response to the recent problems experienced by thrifts insured by the Ohio Deposit Guarantee Fund.
This morning I will be reviewing for you the response of the Federal Reserve Bank of Cleveland . Attached to my statement is a
chronology that sets forth the Federal Reserve System's response
to the recent events in Ohio.
I would like to begin by stating that the role of the Federal Reserve Bank of Cleveland throughout this period has been to assist
the State of Ohio and other Federal regulators in fashioning a solution .
Our initial involvement was to ensure that we could act quickly
to provide liquidity assistance at the discount window and to make
currency shipments-first, to Home State and subsequently, to the
other institutions insured by the Ohio Deposit Guarantee Fund.
We have acted at the request of the State of Ohio, and throughout this period, the Federal Reserve Bank of Cleveland and the
Federal Home Loan Bank of Cincinnati have shared information
and staff in a cooperative effort to deal with the problems and to
fashion solutions . I would also like to recognize the substantial and
supportive role of the correspondent banks, the commercial banks,
in Cincinnati . I believe the Federal Reserve has been helpful , and
we will continue to assist the State of Ohio and other Federal regulators until the problem is solved.
The Federal Reserve Bank of Cleveland first became aware of
possible financial difficulties at Home State Savings Bank of Cincinnati on Monday, March 4, 1985, when an official of Home State
telephoned the Federal Reserve Bank of Cleveland to inquire about
procedures that Home State should follow if it needed to borrow at
the discount window.
Although the problems at Home State were triggered by unique
events growing out of its transactions with ESM, the severity of
public reaction made us concerned about possible deposit withdrawals at other ODGF-insured institutions . As I mentioned earlier, deposits at Home State were insured by the ODGF, a private fund
that also insured 70 other State-chartered thrift institutions in
Ohio. According to State officials , the insurance fund had assets of
about $ 130 million prior to the run on Home State . Uncertainty regarding other ODGF-insured institutions was increased by reports
on the use of ODGF funds to deal with Home State's heavy deposit
withdrawals.

241
Growing concern that other ODGF institutions might confront
problems on Monday, led us on Saturday, March 9, to develop a
plan to monitor and deal with deposit withdrawals at other ODGF
institutions, should they occur.
The plan had several dimensions. One, having a timely and effective mechanism for sensing unusually heavy deposit withdrawals.
Two, informing ODGF institutions of collateral and other requirements for borrowing at the discount window. And three, planning
and putting into place the logistics necessary to deliver currency,
evaluate collateral, and obtain documents for borrowing at the discount window.
The large number of ODGF institutions and the need for prompt
and effective action, if action were to be required-at this point we
were still in the contingency planning stage- made it imperative
that we be prepared to deal with the problem by Monday, March 11,
when the ŌDGF institutions opened. We were fortunate in being
able to draw upon the staff from other Federal Reserve banks to
assist us in contingency planning and logistics. The weekend planning effort concluded with meetings at 10 p.m. on Sunday, March
10, in both Cleveland and Cincinnati to brief Federal Reserve examiners on their role in the contingency plans. These plans called for
examiners to be strategically placed near ODGF institutions
throughout the State prepared to deliver borrowing documents
upon request.
Our weekend efforts had made it possible to monitor deposit outflows, to lend at the discount window, and to ship cash throughout
the weeks that followed to a large number of institutions, most of
which had not dealt at our discount window and which normally
received their currency from other sources.
Public confidence in ODGF institutions continued to decline . As
the financial institutions opened on Monday, March 11 , there was
evidence of loss of depositor confidence. At first this loss of confidence was largely confined to Cincinnati, where Home State is located. As the week progressed, the number of ODGF institutions
suffering heavy cash strains increased and the volume of withdrawals rose sharply. On Thursday, March 15, for example, the seven
most affected institutions in the Cincinnati area lost more than $60
million in deposits, almost triple the amount withdrawn on
Wednesday, the day before.
Several institutions had lost one-fifth of their deposits between
Monday morning and Thursday night, and there was clear evidence that the crisis was spreading to ODGF-insured institutions in
other cities as well. The more public confidence fell, the more serious the problem became. Federal Reserve examiners were sent
upon request to many institutions to begin reviewing their collateral as their deposit withdrawals increased and the potential for borrowing at the discount window increased . The Federal Reserve and
other commercial banks shipped currency to institutions that were
experiencing heavy withdrawals, but cash alone was not enough to
restore confidence . Without confidence, even the strongest financial
institution can be severely impacted.
Our active and visible role was to provide liquidity assistance to
ODGF institutions at the discount window. In performing this function, the Federal Reserve Bank of Cleveland has not modified its

242
normal eligibility requirements for discount window assistance .
The Monetary Control Act of 1980, which has already been referred
to, made the discount window of the Federal Reserve Bank available to any depository institution that holds transaction accounts
for nonpersonal time deposits . This so-called adjustment credit is
available on a short-term basis to assist borrowers in meeting temporary requirements for funds while they engage in an orderly adjustment in their asset and deposit liabilities. We set up field warehouses in most of the ODGF institutions where collateral was identified, evaluated, and earmarked for possible use in securing discount window borrowings.
That is our statutory and traditional role. The Federal Reserve
played another very important role during the ODGF Savings and
Loan problem. We served as a facilitator. During the early morning
hours of Friday, March 15, when the full dimensions of the problem became clear, Governor Celeste decided to close all ODGFmember institutions for a 3-day period. Following that decision, the
Governor requested that the Federal Reserve assist him in calling
a meeting of large Ohio banking and thrift institutions to discuss
the situation with them and propose a solution to the problem. The
State subsequently decided it would be useful to discuss the situation with out-of-State banks, and two meetings were held with outof-State institutions at the Federal Reserve Bank of Cleveland .
In the past 2 weeks , some elements of a solution have fallen into
place . Each ODGF institution was examined on a case-by-case basis
to determine its financial condition and the likelihood of its qualifying for Federal insurance .
The Ohio State Superintendent of Savings and Loan Associations
requested assistance from the Federal Reserve, the Federal Deposit
Insurance Corporation [ FDIC], and the Ohio Division of Banks in
conducting these examinations. The results of the preliminary examinations made it clear that a large number of these institutions
were well managed, in sound financial condition, and consequently
viable candidates for Federal insurance . Others, for a variety of
reasons, would have difficulty in qualifying for Federal Deposit Insurance. As of Tuesday, April 2, according to the State of Ohio, 28
of the former ODGF institutions have been reopened for the full
range of banking functions , most with Federal insurance.
Confidence in these institutions seems to be restored. And among
those fully opened, there has not been evidence of unusual withdrawals or need for assistance through either the credit facilities of
the Federal Home Loan Bank in Cincinnati or the Federal Reserve
discount window. The Federal Deposit Insurance applications of
some ODGF institutions are still being considered , and other ODGF
institutions have been informed of the changes and improvements
that will be necessary in order for them to be able to obtain Federal insurance .
Mr. BARNARD . Thank you very much.
[Ms. Horn's prepared statement follows:]

243

Statement by

Karen N. Horn
President , Federal Reserve Bank of Cleveland

I am pleased to appear before the Commerce , Consumer , and Monetary
Affairs Subcommittee to discuss the Federal Reserve's response to the
recent problems experienced by thrifts insured by the Ohio Deposit
Guarantee Fund .

This morning I will be reviewing for you the response of

the Federal Reserve Bank of Cleveland .

Attached to my statement is a

chronology that sets forth the Federal Reserve System's response to
recent events in Ohio.
I would like to begin by stating that the role of the Federal Reserve
Bank of Cleveland throughout this period has been to assist the State of
Ohio and other Federal regulators in fashioning a solution .

Our initial

involvement was to insure that we could act quickly to provide liquidity
assistance at the discount window and to make currency shipments 19 first

to Home State and subsequently to other institutions insured by the Ohio
Deposit Guarantee Fund ( ODGF ) .

We have acted at the request of the State

of Ohio, and throughout this period the Federal Reserve Bank of Cleveland
and the Federal Home Loan Bank ( FHLB) of Cincinnati have shared
information and staff in a cooperative effort to deal with the problems
and to fashion solutions .

I would also like to recognize the substantial

and supportive role of the correspondent banks in Cincinnati .

I believe

the Federal Reserve has been helpful , and we will continue to assist the
State of Ohio and other Federal regulators until the problem is solved .
The Federal Reserve Bank of Cleveland first became aware of possible
financial difficulties at Home State Savings Bank of Cincinnati , Ohio on
March 4 , 1985, when an official of Home State telephoned the Federal
Reserve Bank of Cleveland to inquire about the procedures Home State
should follow if it needed to borrow at the discount window .

The Federal

Reserve Bank of Cleveland did not have any financial information on Home

244

State .

It is a state- chartered savings and loan association , regulated

and examined by the Ohio Division of Savings and Loan Associations , and
prior to this time it had never borrowed at the discount window .
know that Home State's deposits were insured by the ODGF , but we did not
have access to any financial reports on Home State .

On March 5 , the

press reported that Home State might suffer a large loss in connection
with the failure of E.S.M. Government Securities , Inc. ( E.S.M. ) , a
Florida-based broker-dealer in government securities .

The Federal

Reserve began an effort to gather information on Home State's situation .
Discussions with the FHLB of Cincinnati confirmed that Home State was not
a member of the FHLB and that the FHLB also had little financial
information on Home State .
Reports from Cincinnati on Wednesday , March 6 , indicated a large
volume of depositor withdrawals at Home State .

On that same day , Federal

Reserve examiners entered Home State to examine available collateral in
the event that it became necessary for Home State to borrow at the
discount window.

Depositor withdrawals on Wednesday and Thursday were

funded with Home State's own liquidity and lending by the ODGF.
withdrawals on March 6 totaled $ 55 million .

On March 7 , a meeting was

held at the Cincinnati Branch of the Federal Reserve Bank of Cleveland
with representatives from the State of Ohio, ODGF , and Home State to
discuss liquidity assistance for Home State from the Federal Reserve Bank
of Cleveland.

Based on collateral judged to be acceptable by the Federal

Reserve Bank , credit was extended on Friday , March 8, and arrangements
were put in place to extend further credit .

Depositor withdrawals had

continued on March 7 and 8, reaching approximately $ 100 million for those
two days .

On Saturday , March 9 , Home State did not open for business .

245

Governor Celeste appointed a conservator for Home State and announced on
Sunday night , March 10 , that Home State would not reopen for business on

Monday.
Although the problems at Home State were triggered by unique events
growing out of its transactions with E.S.M. , the severity of the public
reaction made us concerned about possible deposit withdrawals at other
ODGF insured institutions .

As I mentioned earlier , deposits at Home

State were insured by the ODGF , a private fund that also insured 70 other
State-chartered thrift institutions in Ohio .

According to State

officials , the insurance fund had assets of about $ 130 million prior to
the run on Home State .

Uncertainty regarding other ODGF insured

institutions was increased by reports on the use of ODGF funds to deal
with Home State's heavy deposit withdrawals .

Financial information on

all ODGF insured institutions was made available to the Federal Reserve
Bank of Cleveland late Friday , March 8.

Federal Reserve examiners and

discount window staff reviewed and analyzed this information on Saturday
and Sunday , March 9 and 10 , with the assistance of senior examination
personnel from the FHLB of Cincinnati .
Growing concern that other ODGF institutions might confront problems
on Monday led us on Saturday , March 9 , to develop a plan to monitor and
deal with deposit withdrawals at other ODGF institutions , should they
occur.

The plan had several dimensions : 1 ) having a timely and effective

mechanism for sensing unusually heavy deposit withdrawals ; 2 ) informing
ODGF institutions of collateral and other requirements for borrowing at.
the discount window; and 3 ) planning and putting into place the logistics
necessary to deliver currency, evaluate collateral , and obtain documents
for borrowing at the discount window .

The large number of ODGF

246

institutions and the need for prompt and effective action , if action were
required , made it imperative that we be prepared to deal with the problem
by Monday , March 11 , when the ODGF institutions opened .

We were

fortunate in being able to draw upon staff from other Federal Reserve
Banks to assist in the contingency planning and logistics .

The weekend

planning effort concluded with meetings at 10:00 p.m. on Sunday ,
March 10 , in both Cleveland and Cincinnati to brief Federal Reserve
examiners on their role in the contingency plans .

These plans called for

examiners to be strategically placed near ODGF institutions throughout
the State prepared to deliver borrowing documents upon request .
Also , late Sunday evening , March 10 , following the Governor's
announcement that Home State would not reopen on Monday , the Cleveland
Federal Reserve Bank publicly

restated its discount window policy:

"State-chartered savings and loans and savings banks , like all depository
institutions , are eligible for liquidity assistance through the discount
window...under normal terms and conditions . "

Our weekend efforts had

made it possible to implement the policy , to monitor deposit flows , to
lend at the discount window , and to ship cash throughout the weeks that
followed to a large number of institutions , most of which had not dealt
with our discount window and which normally received their currency from
other sources .
Public confidence in ODGF institutions continued to decline .

As

financial institutions opened on Monday , March 11 , the evidence of the
loss in depositors ' confidence was almost immediate .

At first the loss

of confidence was largely confined to Cincinnati , where Home State is
located.

As the week progressed , the number of ODGF institutions

suffering heavy cash drains increased , and the volume of withdrawals rose

247

sharply.

On Thursday, March 14 , for example , the seven most affected

institutions in the Cincinnati area lost more than $60 million in
deposits -- almost triple the amount withdrawn on Wednesday.

Several

institutions had lost one-fifth of their deposits between Monday morning
and Thursday night , and there was clear evidence that the crisis was
spreading to ODGF insured institutions in other cities .
confidence fell , the more serious the problem became .

The more public
Federal Reserve

examiners were sent upon request to many institutions to begin reviewing
collateral as deposit withdrawals and the potential for borrowing at the
discount window increased .

The Federal Reserve and other commercial

banks shipped currency to institutions that were experiencing heavy
withdrawals , but cash alone was not enough to restore confidence ; without
confidence even the strongest financial institution can be severely
impacted .
Our active and visible role was to provide liquidity assistance to
ODGF institutions at the discount window .

In performing this function ,

the Federal Reserve Bank of Cleveland has not modified the normal
eligibility requirements for discount window assistance in any way .
Monetary Control Act of 1980 made the discount window of the Federal
Reserve Bank available to any depository institution that holds
transactions accounts or nonpersonal time deposits .

Regulation A of the

Board of Governors , which prescribes standards for the operation of the
discount window, provides for lending to eligible depository institutions
under two basic programs . One is the adjustment credit program; the other
supplies credit for seasonal and other limited purposes for more extended
periods .

Adjustment credit is available on a short- term basis to assist

248

borrowers in meeting temporary requirements for funds while an orderly
adjustment is being made in their assets and deposit liabilities.
All Federal Reserve advances must be secured to the satisfaction of
the Reserve Bank providing the credit .

Satisfactory collateral includes

securities of the U.S. government and of federal agencies , and , if of
acceptable quality , residential mortgage notes and other assets .
Although collateral is generally held in safekeeping at the Federal
Reserve Banks or acceptable third- party custodians , in this instance ,
field warehouses were set up in most ODGF institutions where collateral
was identified , evaluated , and earmarked for possible use in securing
discount window borrowings .
The Federal Reserve played another very important role during the
ODGF savings and loan problem -- we served as a facilitator .

During the

early morning hours of Friday , March 15 , when the full dimensions of the
problem became clear , Governor Celeste decided to close all ODGF member
institutions for a three-day period .

Following that decision , the

Governor requested that the Federal Reserve assist him in calling a
meeting of large Ohio banking and thrift institutions to discuss the
situation with them and propose a solution to the problem .

A meeting

with representatives of thirteen Ohio depository institutions
and S&Ls -- was convened that morning at the Federal Reserve Bank of
Cleveland .

At that meeting Governor Celeste explained his decision to

close the ODGF institutions and discussed a legislative proposal that
would require the ODGF institutions to obtain federal insurance before
reopening .

He also presented a proposal for dealing with the ODGF

institutions that would not qualify for federal insurance .

The State

subsequently decided it would be useful to discuss the situation with

249

out-of-state banks , and two meetings were held with out- of- state
institutions at the Federal Reserve Bank of Cleveland --one on Saturday ,
March 16 , at 9:00 p.m. and another on Sunday , March 17 , at 11:00 a.m.
In the past two weeks , some elements of a solution have fallen into
place .

Each ODGF institution was examined on a case-by- case basis to

determine its financial condition and the likelihood of its qualifying
for federal insurance .

The State Superintendent of Savings and Loan

Associations requested assistance from the Federal Reserve , the Federal
Deposit Insurance Corporation ( FDIC ) , and the Ohio Division of Banks in
conducting these examinations . This process began on Saturday , March 16 ,
with examiners provided by the Federal Reserve Bank of Cleveland and ,
eventually , by every other Federal Reserve Bank .
to each of the ODGF institutions .

Examiners were assigned

Virtually all examinations were

completed on Sunday , March 17 , enabling us to conduct a preliminary
review of the condition of each institution to supplement and update the
information obtained the previous Friday from the State .

The results of

the preliminary examinations made it clear that a large number of these
institutions were well -managed , in sound financial condition , and ,
consequently , viable candidates for federal deposit insurance .

Others ,

for a variety of reasons , would have difficulty qualifying for federal
deposit insurance .

The FHLB Board agreed to review on an expedited basis

the Federal Savings and Loan Insurance Corporation ( FSLIC ) insurance
applications of ODGF member institutions .

Under this arrangement , FSLIC

qualification examinations were expedited , using the resources of the
FHLB System and the Federal Reserve .

The Federal Reserve offered its

assistance to help complete the FSLIC examinations as rapidly as
possible.

We believed we could facilitate this process because our

250

examiners were already in place at the ODGF institutions and had gained
familiarity with these institutions through the just completed
examinations conducted on March 16 and 17.
As of Friday , March 29 , according to the State of Ohio , 26 of the
former ODGF institutions have been reopened for the full range of banking
functions , most with federal insurance .
seems to have been fully restored .

Confidence in these institutions

There has been no evidence of unusual

withdrawals or need for assistance through either the credit facilities
of the FHLB of Cincinnati or the Federal Reserve discount window .

The

federal deposit insurance applications of some ODGF institutions are
still being considered .

Other ODGF institutions have been informed of

the changes and improvements that will be necessary to enable them to
obtain federal insurance .
The State of Ohio is making intense efforts to develop an orderly
plan for those institutions that might not qualify for federal
insurance .

It is my understanding that a final outline of such a plan is

not yet complete .

A solution may have to involve the sale of some ODGF

institutions to other Ohio financial institutions and , perhaps , also to
out-of-state institutions .

The Federal Reserve Bank of Cleveland has not

participated in the discussions involving plans for any single
institution except those for which Federal Reserve regulatory approval
was required , such as the sale of Metropolitan Savings Bank of Youngstown
to FNB Corporation , a Pennsylvania bank holding company , and the
conversion of Scioto Savings Association into a state- chartered FDIC
insured commercial bank under the continuing ownership of its parent
company , Society Corporation , an Ohio bank holding company .

251

While this process is underway , the State has authorized the CDGF
institutions

not yet qualified to reopen for full business to open for

the limited purposes of giving each depositor access to a maximum of $750
per month and pledging assets to and borrowing from correspondent banks or
the Federal Reserve discount window to fund the limited deposit
withdrawals .

Complete confidence in the ODGF institutions has not been

restored , but the atmosphere is much calmer than it was two weeks ago .

50-923 0-85--9

252

CHRONOLOGY OF FEDERAL RESERVE RESPONSE TO OHIO S & L SITUATION
(* indicates events not part of the Federal Reserve response but which are
important to that day's chronology . )

Monday, March 4
* A receiver is appointed for ESM at the request of the S.E.C.
The Cleveland Reserve Bank's Loan and Discount Department receives what
appears to be a routine telephone call from Home State inquiring whether its
borrowing documents were in order .

Tuesday, March 5
Cleveland Reserve Bank makes initial inquiries about Home State to the Federal
Home Loan Bank of Cincinnati ( "FHLB Cincinnati ") and the Ohio Deposit
Guarantee Fund ( " ODGF" ) .
Home State's correspondent bank meets with Cincinnati branch of the Cleveland
Reserve Bank ( "Cincinnati branch " ) to discuss Home State situation.
Cincinnati branch
Home State .

makes

arrangements

for

emergency

cash

shipments

to

Wednesday, March 6
Cleveland Reserve Bank sends examination personnel to Home State and they
begin to review collateral .
Home State has estimated deposit outflows of $ 55 million .
Cincinnati
offices .

branch makes 39 special cash shipments to various Home State

Thursday , March 7
Meeting at Cincinnati branch is held with representatives of the State , ODGF ,
Home State , and the Cleveland Reserve Bank to discuss possible discount window
loan. Examiners continue reviewing collateral .
Governor Richard Celeste telephones President Karen Horn to discuss Home State
matter and to learn what assistance might be available from Federal Reserve .
Cincinnati branch makes 59 special cash shipments to various Home State
offices .
Home State has estimated deposit outflows of $45 million .

Friday, March 8
Home State's liquidity position declines throughout the day .
Cleveland
Reserve Bank monitors the situation with Home State's correspondent bank .
Frequent discussions are held by Federal Reserve officials in Cincinnati ,
Cleveland , and Washington regarding liquidity needs of Home State.
A Cleveland Reserve Bank official attends a meeting in Columbus called by the
Superintendent to discuss possible solutions to Home State situation .
-- 1 -

253

Friday, March 8 (Continued)
In late afternoon , Home State directors sign a note to borrow from the
Cleveland Reserve Bank . Collateral is segregated by examiners and shipped to
the Cincinnati branch . At 4:00 p.m. , a discount window loan is made to Home
State .
Cincinnati branch makes 76 separate cash shipments to various Home State
offices .
Home State has estimated deposit outflows of $54.2 million .
At the Cleveland Reserve Bank's request , the Superintendent agrees to provide
financial information for all ODGF institutions in anticipation of borrowing
requests from these institutions .
* In late evening , Home State management announces that Home State will be
closed on Saturday .
Saturday, March 9
Concerned about the potential spillover effects of the Home State closing ,
Cleveland Reserve Bank officials begin internal logistical planning for
possible cash deliveries and borrowing arrangements for other ODGF
institutions .
Cleveland Reserve Bank examination personnel begin analyzing the financial
data of all ODGF member institutions for possible borrowings at the discount
window . Three representatives from the FHLB Cincinnati assist in this process .
* A conservator , Arlo Smith , is appointed by Governor Celeste to direct the
affairs of Home State .
The Superintendent convenes a meeting at a Cleveland bank at 6:00 p.m. with
several large bank holding companies in Ohio to discuss the proposed sale of
Home State . Representatives from the Federal Reserve are in attendance as
observers .
Sunday, March 10
* Governor Celeste announces that Home State will not open on Monday .
Cleveland Reserve Bank issues a statement to the press indicating that
state-chartered savings and loans , like all depository institutions , are
eligible for liquidity assistance through the discount window under normal
terms and conditions .
At the Cleveland Reserve Bank , contingency planning continues and officials
from other Reserve Banks arrive to assist .
Monday, March 11
Cleveland Reserve Bank examiners are placed strategically throughout the state
and are prepared to deliver borrowing documents to any ODGF institution that
requests such information .
Cincinnati Branch officials discuss the Home State situation with local banks .
Estimated net deposit outflows of $6.0 million at ODGF institutions .

- 2-

254

Tuesday, March 12
Conservator Smith repays loan from Cleveland Reserve Bank .
Activity at ODGF institutions remains relatively calm. Estimated net deposit
outflows for the day approximate $ 13.4 million at ODGF institutions . Borrowing
documents are delivered by Cleveland Reserve Bank examiners upon request .
Wednesday , March 13
Estimated net
institutions .

deposit

outflows

for

the day of $23.4

million

at ODGF

Officials from four ODGF institutions experiencing heavy deposit withdrawals
go to Washington , D.C. , to meet with members of Congress and officials of the
Federal Reserve and the FHLBB .
Several meetings are held at the Cincinnati
institutions to discuss borrowing documents .

Branch

Thursday, March 14
and cash

Major runs occur at six ODGF institutions
institutions accelerate .
Estimated net deposit outflows
approximate $63.9 million .

of all

open

ODGF

with

shipments

institutions

individual

to
for

these
day

Seven special cash shipments to five different ODGF institutions by the
Cleveland Reserve Bank .

Friday, March 15
At 7:30 a.m. in Cincinnati , Governor Celeste holds a press conference to
declare a three-day holiday for the ODGF institutions .
President Horn
indicates that the Cleveland Reserve Bank stands ready to supply liquidity
through the discount window under normal conditions when the institutions
reopen.
At 11:45 a.m. , a meeting at the Cleveland Reserve Bank is convened at the
request of the Governor with representatives of 13 Ohio financial
institutions . The Governor requests the institutions to join together to
develop a rescue package for those ODGF institutions that would not qualify
for federal insurance .
Fifteen special cash shipments are made to 12 institutions .
Saturday , March 16
At 9:00 a.m. , a second meeting is held at the Cleveland Reserve Bank with the
Ohio financial institutions .
The State also requests Federal Reserve assistance in discussing this
situation with out-of-state financial institutions .
Two meetings with
out-of-state institutions are then scheduled at the Cleveland Reserve
Bank--one on Saturday night at 9:00 p.m. and another for Sunday at 11:00 a.m.
Representatives from the State requested out-of-state banks to consider
acquiring some or all of those ODGF institutions that would not qualify for
federal insurance .

- 3-

255

Saturday, March 16 (Continued )
Examiners are present at every ODGF institution to review collateral .
Examiners from other Reserve Banks arrive to assist . The Superintendent of
Savings and Loan Associations requests the Federal Reserve , the FDIC , and the
Ohio Division of Banks to assist in learning the current financial condition
of all the ODGF institutions . Examinations are then commenced for this
purpose .
Fifteen special cash shipments are made to 11 ODGF institutions .
Sunday, March 17
A meeting is held at 11:00 a.m. at the Cleveland Reserve Bank with a second
group of eleven out-of-state bank holding companies . (This meeting is also
attended by some representatives from the previous meeting . )
Examinations conducted at the State's request are concluded at virtually all
ODGF institutions by examiners from the Federal Reserve . Summary results from
these examinations are compiled and reviewed .

Monday, March 18
* Governor Celeste signs an executive order requiring ODGF institutions to
remain closed for an additional 48 hours .
Examiners insure execution of borrowing documents and control of adequate
collateral for all ODGF institutions .
An evening meeting is held at the Cleveland Reserve Bank with officials from
the Federal Home Loan Bank System to discuss possible assistance by the
Federal Reserve with FSLIC qualification insurance examinations for ODGF
institutions .
Eight special cash shipments are made to 7 institutions .

Tuesday, March 19
A second meeting is held at the Cleveland Reserve Bank with officials from the
Federal Home Loan Bank System. The Federal Home Loan Bank Board officials
accept an offer from the Federal Reserve to assist in qualification
examinations .
Governor Celeste meets separately in Washington , D.C. , with Chairman Volcker
and Chairman Gray. Governor Celeste is assured of expedited processing by
FHLBB of FSLIC insurance applications .
As provided in the Cleveland Reserve Bank's check collection operating letter ,
the Bank sends notice and begins returning checks drawn on the closed ODGF
institutions with the stamp " not presentable at this time . "
FSLIC qualification examinations begin at ODGF institutions with the
assistance of Federal Reserve examiners already present at these institutions .
Two special cash shipments are made to 2 institutions .

Wednesday , March 20
* The State of Ohio legislature approves legislation requiring federal
insurance and permitting partial withdrawals ($750 per depositor each 30 day
period) for ODGF institutions .

256

Wednesday, March 20 (Continued)
The availability of discount window assistance to reopened ODGF institutions
was restated by Chairman Volcker .

Two special cash shipments are made to 2 institutions .
Thursday , March 21
The conversion of Scioto Savings Association into a commercial bank is
approved by the State of Ohio, the FDIC , and the Board of Governors of the
Federal Reserve System.
Friday, March 22
A task force is established in Columbus at the office of the Superintendent of
Savings and Loan Associations to coordinate communications between the
Superintendent , Cleveland Reserve Bank , and the FHLB-Cincinnati .
An application by F.N.B. Corporation in Hermitage , Pa., to acquire
Metropolitan Savings Bank in Youngstown , Ohio , is processed and approved on an
emergency basis by the Board of Governors of the Federal Reserve System.
Saturday , March 23
As ODGF institutions reopen for limited withdrawal purposes , cash demands are
placed on the Cleveland Federal Reserve Bank .
FSLIC qualification examinations continue .
In addition , Federal Reserve
examiners continue their presence in ODGF institutions to monitor cash
situations , and to secure collateral for borrowings where necessary. Staff
remains on duty at the Cleveland Reserve Bank to provide assistance and
discount window borrowings , answering questions regarding check collection and
manage the large numbers of examiners from outside the Fourth Federal Reserve
District .
Seven special cash shipments are made to 4 institutions .
Estimated net deposit outflows (aggregate ) · $5.4 million .
Sunday, March 24
FSLIC qualification examinations continue .

Monday, March 25
The Cleveland Reserve Bank issues notice that it is presenting checks to those
institutions that are fully open .
Six special cash shipments are made to 5 institutions .
Estimated net deposit outflows (aggregate) - $7.7 million .

Tuesday, March 26
Eighteen institutions are now open on a full-service basis . Liquidity and
cash situations in these institutions continue to be monitored by Federal
Reserve examiners in the field as well as the Cleveland Reserve Bank staff in
Cleveland , Cincinnati , and Columbus ..

- 5-

257

Tuesday, March 26 (Continued )
Five special cash shipments to 2 institutions .
Estimated net deposit outflows (aggregate ) - $3.9 million .

Wednesday, March 27
Six special cash shipments to 4 institutions .
Estimated net deposit outflows (aggregate ) - $ 2.9 million .

Thursday , March 28
One special cash shipment .
Estimated net deposit outflows ( aggregate ) - $4.4 million .

Friday , March 29
Twenty- six institutions are now open on a full- service basis .
FSLIC qualification examinations continue .
Three special cash shipments to 3 institutions .
Estimated net deposit outflows (aggregate ) - $2.8 million .
Saturday, March 30
Estimated net deposit outflows (aggregate ) - $1.3 million .
Mr. BARNARD. Mr. Selby, we will hear your testimony at this
time.
STATEMENT OF H. JOE SELBY, SENIOR DEPUTY COMPTROLLER
FOR BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF
THE CURRENCY
Mr. SELBY. Thank you, Mr. Chairman , for inviting me, and members of the committee.
On the shortness of the time that I knew I was coming up, I do
not have a prepared statement, but if it is appropriate I would ask
that my letter to you of March 29 be entered into the record .
Mr. BARNARD. Without objection .
Mr. SELBY. And I will summarize it very briefly.
You requested information from us concerning national bank involvement with ESM Government Securities of Ft. Lauderdale, FL.
National bank examiners first encountered ESM in late 1976
during the examination of the National Bank of South Florida in
Hialeah. Our examiners at that time reviewed the bank's new relationship established with ESM Government Securities and reviewed the securities transactions arising out of this relationship.
Our examiners determined that the type of securities trading
and the methods of financing provided by ESM were unsuitable for
a national bank primarily because they were clearly speculative
and the financing arrangement of the equivalent of margin financing.

258
We also concluded that the securities transactions may have
been executed at prices above the prevailing market price . We directed bank management to stop the securities trading activity
with ESM, to properly record and unwind outstanding repurchase
agreements and to sever their relationship at that time with ESM.
During the examination bank management did follow the examiners' recommendations. They completely unwound the trades and
reclaimed the money that had already been sent to ESM. As a
result, the bank suffered no loss on the transactions with ESM.
During this examination, it was also evident that there was some
massive self-dealing, numerous violation of bank laws as well as
possible criminal violations in concentrations of credit which appeared to us to propose a threat to the solvency of the bank.
On February 8, 1977, the bank's directors were served with a
notice of charges and a temporary cease-and-desist order. Due to
our imposed pressures and limitations particularly through the
cease-and-desist order, the controlling shareholder of the bank
sought purchasers for the bank and eventually sold it in August
1977.
The examination that we had conducted did result in a number
of criminal referrals made to the Department of Justice and Treasury, dealing with a substantial number of banking laws and I
might add particularly the Bank Secrecy Act, which did result in
some prosecution, but I think it was not a successful prosecution at
that time on the bank secrecy.
Information on the dealings between ESM and the bank were
first communicated by us to the Office of the State of Florida, that
State's securities regulator, in a February 16, 1977 , letter, and subsequently referred on April 27 , 1977, to the Miami office of the Securities and Exchange Commission.
During this same period of time, we became aware that Robert
Seneca and Ronnie Ewton, principals of ESM Government Securities, Inc., were interested in acquiring control of the bank holding
company in Florida called the American Bankshares, Inc. [ABI ] . I
believe at that time we had six national banks under ABI and
there were three State banks, also members of the holding company.
To our knowledge, Ewton and Seneca's involvement with ABI
had no connection to the situation encountered at the National
Bank of South Florida. However, because of our experiences with
ESM and their dealings with the National Bank of South Florida,
we did deem it appropriate to enter into voluntary written agreements with each of ABI's six national bank subsidiaries which
would preclude any business dealings directly or indirectly between
ABI's subsidiary national banks and ESM Securities, Inc. , its affiliates, its principals, any relative, whether by blood or by marriage
of the principals of ESM or any corporation, partnership, or other
type of enterprise controlled by these persons.
After Messrs . Ewton and Seneca acquired controlled of American
Bankshares, we resisted several attempts by these individuals to
subvert the voluntary agreements on the banks.
During 1978 , national bank subsidiaries of ABI were converted to
State-chartered banks . Eventually Mr. Seneca and Ewton sold their
interests in ABI, I believe , to Mr. Marvin Warner.

259
Prior to the conversion of the banks from national to State, we
informed the Florida State banking regulator of our outstanding
agreements and concerns. We also met with representatives of the
FDIC to provide them background information and assistance with
respect to the information . And it is my knowledge that since it
was a holding company, we also discussed our agreements with the
Federal Reserve.
Contemporaneous with this office's direct dealings with banks
doing business with or controlled by ESM and its principals, we
published a warning notice to all national banks which contained
descriptions of the types of transactions and financing arrangements being offered at that time by ESM as well as by other bond
dealers. That was contained in a banking circular dated July 26,
1977 .
In your March 22, 1985, letter, you requested information with
respect to how many national banks have had dealings with ESM
Securities from 1980 to date. At the time of ESM's demise, we have
knowledge only of one national bank that had moneys loaned via
repurchase agreements collateralized by U.S. Government securities and that bank suffered minimal losses of approximately
$250,000.
Mr. BARNARD . Was this account segregated?
Mr. SELBY. I do not know. Yes, it was.
Mr. BARNARD. Did you show any evidence of the securities?
Mr. SELBY. Yes. We have no other evidence of national banks
dealing with ESM during the period of your inquiry although I
must presume that some national banks did conduct business with
ESM during this period.
I must also presume absent any indication to the contrary that
no national banks suffered significant losses in connection with its
dealings with ESM. Certainly it had not been reported to us by our
examiners or by the banks.
Our examiners are well trained in these areas and are extremely
sensitive to the unsavory reputations of a number of security dealers doing business with depository institutions. And basically, since
1977, Mr. Chairman, we have intensified our training in the securities dealing practices and have given a great number of training
sessions to our examiners as well as other examiners and I am told
my staff member that in fact one of the lesson plans contains an
example using ESM as the type of example that we teach our examiners .
We are not aware at this time of any other examination criticisms or formal or informal enforcement actions taken against any
national bank because of their business dealing with ESM .
Because of the corporate structure of dealer firms trading U.S.
Government securities, we must presume each Government or Federal agency securities transaction entered into between a national
bank and a dealer involves an unregistered U.S. Government securities dealer. The full extent of those transactions in terms of
dollar value or number of transactions is unknown. But as I indicated previously, our supervisory reviews, which are attuned to
precisely the kind of transactions undertaken by ESM, disclose
very few irregularities . Those irregularities that are disclosed are
routinely communicated to the Securities and Exchange Commis-

260
sion, the National Association of Securities Dealers, and the appropriate State securities regulator.
It is my understanding that these referrals have been the basis
for a number of enforcement actions taken by the Securities and
Exchange Commission.
Thank you very much.
[Mr. Selby's prepared statement follows: ]

261

Comptroller ofthe Currency
Administrator of National Banks
Washington, D. C. 20219
March 29 , 1985

The Honorable Doug Barnard , Jr.
Chairman
Commerce , Consumer , and Monetary
Affairs Subcommittee
Committee on Government Operations
U. S. House of Representatives
Washington , D.C. 20515
Dear Mr. Chairman :
This is in response to your March 22 , 1985 letter requesting
information concerning national bank involvement with ESM
Government Securities , Inc. , of Fort Lauderdale , Florida ( ESM ) .
National Bank Examiners first encountered ESM in late 1976
during an examination of the National Bank of South Florida ,
Hialeah , Florida ( the Bank ) . Our examiners reviewed the Bank's
new relationship established with ESM and securities
transactions arising out of this relationship . The examiners
determined that the type of securities trading and the methods
of financing provided by ESM were unsuitable for a national
bank because the trades were clearly speculative and the
financing arrangement was the equivalent of margin financing .
We also concluded that the securities transactions may have
been executed at prices above the prevailing market price .
Bank management was directed to stop the securities trading
activity , to properly record and unwind outstanding repurchase
agreements and to sever the relationship with ESM . During the
examination , bank management followed the examiners '
recommendations , completely unwound the trades and reclaimed
the money already sent to ESM . The Bank suffered no loss on
the ESM transactions .
During this examination it also became evident that there was
massive self dealing , numerous violations of bank laws as well
as possible criminal violations , and concentrations of credit
which appeared to pose a threat to the solvency of the Bank .
On February 8 , 1977 the Bank's directors were served with a
Notice of Charges and Temporary Cease and Desist Order .
Bank was ordered to remove the self dealing transactions and to
halt further dealings with insiders . The directors were
informed that several senior officers of the Bank should be
removed . In the days following , the Bank received the

262

resignations of a number of senior officers and directors . Due
to our imposed pressures and limitations , the controlling
shareholder of the Bank sought purchasers for the Bank and
eventually sold the Bank in August , 1977. The examination
resulted in a number of criminal referrals made to the
Departments of Justice and Treasury dealing with a substantial
number of banking laws and the Bank Secrecy Act .
The specific securities transactions encountered in this
examination are detailed in the enclosed February 16 , 1977
memorandum authored by Mr. Lou Frank , who was then Deputy
Regional Administrator for National Banks in our Atlanta
regional office . Information on the dealings between ESM and
the Bank was first communicated to the Office of the
Comptroller of the State of Florida , that state's securities
regulator , in a February 16 , 1977 letter and subsequently.
referred on April 27 , 1977 ( see enclosures ) to the Miami office
of the Securities and Exchange Commission .
During this same period of time , we became aware that Robert
Seneca and Ronnie Ewton , principals of ESM Government
Securities , Inc. , were interested in acquiring control of a
bank holding company , American Bankshares , Inc. ( ABI ) .
knowledge , Ewton and Seneca's involvement with ABI had no
connection to the situation encountered in National Bank of
South Florida . However , because of our experiences with ESM in
their dealings with that bank , we deemed it appropriate to
enter into voluntary written agreements with each of ABI's six
national bank subsidiaries which would preclude any business
dealings , directly or indirectly , between ABI's subsidiary
national banks and ESM Securities , Inc. , its affiliates , its
principals , any relative , whether by blood or by marriage , of
the principals of ESM or any corporation , partnership or other
type of enterprise controlled by these persons . A copy of one
of these agreements , dated February 23 , 1977 , is enclosed .
After Messrs . Ewton and Seneca acquired control of American
Bankshares , we resisted attempts by these individuals to
subvert the voluntary agreements ( see attached correspondence
dated September 30 , 1977 ) . During 1978 , national bank
subsidiaries of ABI were converted to state chartered
institutions , and Messrs . Seneca and Ewton eventually sold
their interest in ABI to Mr. Marvin Warner . Prior to the
conversion , we informed the state banking regulator of the
outstanding Agreements . Subsequent to the conversion to state
charters , we met with representatives of the FDIC to provide
them with background and assistance with respect to this matter .
Contemporaneous with this office's direct dealings with banks
doing business with or controlled by ESM and its principals , we
published a warning notice to all national banks which
contained descriptions of the types of transactions and
financing arrangements being offered by ESM ( see the enclosed
Banking Circular No. 2 , Supplement No. 4 , dated July 26 , 1977 ) .

263

In your March 22 , 1985 letter you requested information , from
1980 to date , with respect to how many national banks have had
dealings with ESM securities , the total dollar value of these
dealings , and if any national bank suffered losses in
connection with ESM . At the time of ESM's demise , only one
national bank had monies loaned via repurchase agreements
collateralized by U. S. government securities . Bank South ;
Atlanta , Georgia , a relatively large regional bank , had
repurchase agreements of $38 million and suffered losses
approximating $ 250 thousand in liquidating these positions .
Two regional national banks have reported small gains and
losses in closing out forward contracts in GNMA securities
against ESM's Memphis , Tennessee , branch office .
We have no other records of national banks dealing with ESM
during the period of your inquiry although I must presume that
some national banks did conduct business with ESM during this
period . I must also presume , absent any indications to the
contrary, that no national bank suffered significant losses in
connection with its dealings with ESM . Our examiners are well
trained in these areas and are extremely sensitive to the
unsavory reputations of a number of securities dealers doing
business with depository institutions . It is my understanding
that examiner criticisms of bank dealings with ESM would be
brought to the attention of our Investment Securities
Division . No significant criticisms were brought to that
division's attention since the original 1977 transaction noted
in the National Bank of South Florida examination . We are not
aware of any other examination criticisms or formal or informal
enforcement actions taken against national banks because of
their business dealings with ESM .
Presently , and also during the period covered by your inquiry ,
our field examiners routinely review transactions between
national banks and unregistered government securities dealers .
Our examination reviews disclose that the vast majority of such
transactions are conducted in a manner which does not expose
national banks to losses . In each financial collapse of an
unregistered U. S. government securities dealer , apart from the
Drysdale Government Securities , Inc. situation , national banks
lost very little money because they followed the procedures
articulated in supervisory notices of the type previously
referred to ( see Banking Circular No. 2 ) and because they
exercised banking prudence .
Because of the corporate structure of dealer firms trading U.S.
government securities , we must presume each government or
federal agency securities transaction entered into between a
national bank and a dealer involves an unregistered U. s .
government securities dealer . The full extent of those .
transactions , in terms of dollar value or number of
transactions , is unknown . But , as I indicated previously , our
supervisory reviews , which are attuned to precisely the kinds

264

of transactions undertaken by ESM , disclose very few
irregularities . Those irregularities that are disclosed are
routinely communicated to the Securities and Exchange
Commission , the National Association of Securities Dealers , and .
the appropriate state securities regulator .
understanding that these referrals have been the basis for a
number of enforcement actions taken by the Securities and
Exchange Commission .
I hope this information is useful to the Subcommittee in its
investigation . Please let me know if you have further
questions in this area .

Sincerely ,

HrsSech
H. Joe Selby
Senior Deputy Comptroller
for Bank Supervision

265

Comptroller ofthe Currency
Administrator of National Banks
Sixth National Bank Region
Suite 2700, Peachtree Čain Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
404-221-4926

February 16 , 1977
PR

IU

Mr. Tim Rigsby
General Counsel
Office of the Comptroller
State of Florida
Tallahassee , Florida

TM

A

Dear Mr. Rigsby :
We are investigating a bond transaction involving E.S.M. Government Securities , Inc. This security transaction originated on
December 1 and 2 , 1976 .
We have previously been advised that E.S.M. Government Securities
Corporation was not authorized to engage in securities transactions
until December 23 , 1976.
If our information is correct , E.S.M. Securities Corporation was engaged in an unauthorized and prohibited transaction with one of the
banks that we regulate . Our Regional Counsel , H. Gary Pannell , informed me that you intend to investigate the matter and advise us
of the results of your investigation .

Very truly yours ,

Low Frank
Lou Frank
Deputy Regional Administrator .
of National Banks
Sixth National Bank Region
cc: Leomptroller - Attn : Mr. Dunham
Reading File
Priority File
American Bancshares Holding Co. File

LFrank : np

266

"E.S.M. Government Securities , Inc.
INVESTME::T BANKERS
SUITE 1710, ONE FINANCIAL PLAZA, FORT LAUDERDALE, FLORIDA 33394 (305) 764-2600
Corrected from SG1952 as to Price & Figures
SALE DATE
SETTLEMENT
REP.
D. Fromhoff
12/1 /767%
12/7/76

SOLDTO

CONFIRMATION
SUBJECTTO CORRECTION
NO.

SG

National Bank of South Florida
1001 E. 9th Street
Hialeah, Florida 33011'
Att : Henry Heitman, Chairman of Board

PAR AMOUNT
$500,000.00 .

PRINCIPAL

PRICE

DESCRIPTION OF SECURITIES

5 7/8

Treasury Notes :
Due 12/31/80
Dated 12/7/76 .
INTEREST PERIOD

INTEREST

99.902

TOTAL AMOUNT

$499,510.00

$499,510.00

DELIVER TO
Manufacturers Hanover Trust NY F/A National Bank of South Florida

WE CONFIRM SALE AS PRINCIPAL OF THE SECURITIES DESCRIBED ABOVE
WITH ACCRUED INTEREST TO BE ADDED.

WEAPPRECIATE YOUR
BY

200

267

E.& M. Government SecuriųE: Im .
INVESTMENT BANKERS
SUITE 1710, ONE FINANCIAL PLAZA, FORT LAUDERDALE, FLORIDA 33394 (305) 764-2600

SALE DATE
12/2/16

CUSTOMER FILE COPY
SUBJECTTO CORRECTION
SETTLEMENT
12/9/76

REP.
B. Trabeff

NO.
C

105

S

SOLDTO

‫ר‬
Parfemel bank of South Florids
1001 . " fireet
Melea , Merida 3211
L Att: Heary Hartmas, Chalınan of kard .

PAR AMOUNT
$1,000,000.00

DESCRIPTION OF SECURITIES
CENA. Fart. Cert.
iry 2/1/03
Date: 8/1/12

PRICE

4.:.5

3.

!
PRINCIPAL

INTEREST PERIOD

$600,000.00

INTEREST

$21,548.00

TOTAL AMOUNT

1,

DELIVER TO

THIS IS YOUR AUTHORIZATION TO ACCEPT DELIVERY OF THE ABOVE
BONDS, AND CHARGE OUR ACCOUNG

Authorized Signature

SIGN AND FORWARD TO BANK
ACCEPTING DELIVERY

268

April 27, 1977

PRISTAA A
Mr. Charles Harper
Securities and Exchange Commission
Dupont Plaza Center, Suite 1114
300 Biscayne Boulevard Way
Miami , Florida 33131
Dear Mr. Harper:
During the course of an examination of the National Bank of South Florida in
Hialeah, Florida, our examiners uncovered information indicating potential
violations of federal laws and regulations coming under the jurisdiction of
the Securities and Exchange Commission.
Enclosed herewith is a factual memorandum prepared by Deputy Regional Administrator Lou Frank detailing the transactions which indicate the subject bank
may have been defrauded by E.S.M. Government Securities , Inc. Because of the
firm's activities , it appears that substantial damage would have been perpetrated on the bank.
Subsequent to our axamination , the attorneys for the bank notified E.S.M.
Government Securities , Inc., to cancel the transaction. The securities firm
complied resulting in no ultimate loss to the bank. Notwithstanding the lack
of loss, it is clear from the facts in the attached memorandum that an intent
of fraud was perpetrated by the E.S.K. Government Securities, Inc. and, but
for the fact that we intervened, substantial loss could have occurred .

Very truly yours,

Donald L. Tarleton
Regional Administrator of National Banks
Sixth National Bank Region
Enclosures
CC:

Comptroller - Attn : Mr. Dunham
Loomptroller - Attn : Mr. Serino
Reading File
Priority File (National Bank of South Florida)
American Bancshares Holding Company File
RS :LF:np

269

MEMORANDOM

Comptroller oftheCurrency
Administrator of National Banks
Sixth National Bank Region
Suite 2700, Peachtree Cain Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
To Mr. Donald L. Tarleton

From Lou Frank
Date February 16 , 1977 g
Subject Your Request to Investigate Messrs . Ewton and Senaca
E.S.M. Government Securities , Inc. was chartered in the state of
Florida September 26 , 1975 and licensed to do business effective
December 23 , 1976. Records indicate a technical suspension with
reinstatement January 21, 1977 for some type of infraction . Reportedly, this bond broker operates out of One Financial Plaza ,
Fort Lauderdale , Florida . A parallel company , E.S.M. Securities ,
Inc. , apparently did business prior to the current corporate activities . "E " stands for Ronnie R. Ewton , 7421 S.W. 14th Street ,
Plantation , Florida ; " S" stands for Robert C. Senaca , 3999 Bayview Drive , Fort Lauderdale , Florida ; "M" stands for George G.
Mead , 2717 NE 35th Drive , Fort Lauderdale , Florida .
Only Ewton and Senaca have stated an interest in purchasing stock
in American Bancshares , Inc. Complete financial and biographical
forms have been furnished to these individuals ; however , because
Mr. Slobusky claims the sale transaction will be consummated by
Friday, we will have no time prior to their acquisition of the
stock to investigate their background . I have therefore made a
concerted effort to check their background without source documents .
No record exists with the Justice Department , State of Florida , the
SEC, FDIC , FRB or our office . Everyone seems aware of their names
and they are known as suede- shoe types , slickers , high pressure
salesmen , i.e. , the usual high pressure bond salesmen . They are
known and feared because they once operated in Memphis and Little
Rock , as well as Ilouston , Texas prior to coming to Fort Lauderdale
and are branded as "Memphis Bond Bandits " .
While no actual criminal wrongdoing in their past has been found ,
the relationship of E.S.M. Government Securities , Inc. , with the
National Bank of South Florida , Hialeah , Florida appears to be a
clear case of unsafe and unsound bond transactions . A high pressure
bond salesman from the company , Don Fromhoff, duped former Chairman
of the Board, Henry Heitman , into taking part in speculative

270

trading transactions . Mr. Heitman was lured by E.S.M. into various
flip- flop bond trades (1) with promises of profits of $ 150M per year,
(2) without use of bank funds , and (3) promises to complete the
trades before the settlement date .
Beginning with a " sucker transaction" (see Transaction "A" ) E.S.M.
allowed the bank to make a quick one- day profit of $ 1,583.75 . Greatly
impressed by the fast profit , possibly a "set up" transaction involving only $500M, Mr. Heitman apparently authorized two transactions
the following day, each for $ 1MM . E.S.M. "boxed" the bank on these
two transactions , artificially overstating the price of the GNMA PC
issue by about three points on the buy side , while buying br reporting to buy $ 1MM in FNMA's at the same time . The next day the FNMA's
were sold with a point profit . A one point spread was reported as a
profit of $10,000 to Mr. Heitman , who must at this point , have been
ecstatic about the bank's good fortune . (See Transaction " B" ) . The
one point profit is possible but since the securities were not delivered or settled for we may assume that the figures were "matched"
to provide a profit of $ 10M. The GNMA's were quoted by Soloman
Brothers on December 2 , 1976 at 89% to 91 with the 93 price paid
through E.S.M. appearing to be several points above the spread . With
each point representing $ 10M , it is easy to speculate that the two to
three points or $20M to $30M paid over the probable price of the
GNMA PC's security included the $ 10M profit they allowed him to take
on the FNMA's transaction . Another transaction begun December 3,
1976 ended December 7 , 1976 resulting in a small profit of $ 1,562.50 .
By the settlement date , Mr. Heitman faced a problem, although he must
have felt reasonably comfortable with his profits to date . He must
come up with $ 930,000 plus accrued interest of $21,343.06 or book a
$30M loss and report it to his board making his $13,146.25 profits
prior to this time look small . The net loss after eight days of
trading with E.S.M. would have been $ 16,853.75 . To make matters worse ,
the bank did not have the ready cash available to pay for the GNMA
participation certificates . Also , Mr. Heitman had been speculating
with these E.S.M. bond transactions without Board approval or their
knowledge ; a fact he did not want to report to them because of the
loss he would have to tell them about .
Mr. Heitman was apparently offered a repo deal which meant that he had
to in effect enter into a loan transaction with E.S.M. who in effect
lent the money to purchase the bond to the bank, a violation of 12
U.S.C. 82. E.S.M. apparently asked for a $30M " haircut" or made a
"margin" call on the bank in order to make their so - called loan secure . This occurred December 8 , 1976 and all of these transactions
should have been booked at this time . None were booked which resulted in a possible violation of 18 U.S.C. 656 and 1005 by former
Chairman of the Board Henry Heitman . Possibly a violation of 18 U.S.C.
1001 as well . E.S.M. might possibly be engaging in a conspiracy to
defraud the bank .

271

!" rad

Wran

J

The very sad part about the trap is that a very careful check of the
prices of the GNMA's on December 2 , 1976 showed they were quoted at
89 1/2-91 1/2 while on December 8 , 1976 they were roughly 91
If
he had not been " sandwiched" by E.S.M. and the transaction was clean ,
he could have gotten out about even because some brokers even indi -- uk ?
cated a one point profit . Instead E.S.M. shuffled him into a repo
transaction . Then the market really did drop to where the bonds are
now worth about 87 giving the bank a $60,000 loss if they sell or a
$60,000 depreciation in the issue if they take delivery on the February
18 , 1977 settlement date .
Several points should be made : the bank had no business engaging in
trading activities . They had neither the knowledge or experience but
probably the most disgusting fact about E.S.M. involvement is the fact
that they put the bank in a GNMA PC which is not a type of security
normally used in trading activities for the following reasons : (1 ) it
is thinly traded with very little volume , (2 ) prices are hard to determine , but probably the most serious reason why GNMA PC's are not
traded is that the spreads between bid and asked are usually too large
for traders to overcome in a short period of time . Of course , GNMA
PC's are U. S. guaranteed obligations and represent good long-term
bank investments . However , only a very inexperienced and unlearned
banker coerced by an unscrupulous and unethical bond broker would try
to trade such issues .
9
There has arisen the possibility that E.S.M. Government Securities ,
Inc. , was not licensed to do business until December 23 , 1976 and
yet the invoices indicate that they were doing business with the bank
on December 2 , 1976 prior to the date they would have been authorized .
Today , I am notifying in writing Mr. Tim Rigsby , General Counsel ,
Office of the Comptroller , State of Florida , Tallahassee , Florida ,
who has advised telephonically that he will investigate the matter .
Through Mr. Slobusky , I requested an explanation from Messrs . Ewton
and Senaca of how they could do business when they were not authorized . He reported that they claimed that they did business as E.S.M.
Securities , Inc. , prior to December 23 , 1976. The advices attached
clearly state E.S.M. Government Securities , Inc. , and cast serious
questions in regard to their personal integrity , not to mention their
moral and business ethics in these unsavory bond transactions . Their
actions contributed to Mr. Heitman's loss of his position and the possibility of a substantial loss if the bank should sell the GNMA PC's in
the near future .
I trust this material is sufficient to provide you with the grounds
necessary to protect the banking subsidiaries of American Bancshares ,
Inc. , from Mr. Ewton and Mr. Senaca .

cc: Comptroller - Attn: Mr. Dunian
Comptroller - Attn: Mr. Serino
Reading File
Priority File
LNBE Owen Carney

CC:

BC James Jones
iami Subregion
BC- 5

LFrank:

272

AGREEMENT BY AND BETWEEN THE
SECOND NATIONAL BANK OF NORTH MIAMI
NORTH MIAMI , FLORIDA
AND
THE OFFICE OF THE COMPTROLLER
OF THE CURRENCY

WHEREAS , The Second National Bank of North Miami , North
Miami , Florida (hereinafter the " BANK " ) , and the Comptroller
of the Currency (hereinafter the " COMPTROLLER" ) , wish to
protect the interests of the depositors , other customers ,
and shareholders of the BANK, and , toward that end , wish the
BANK to operate safely and soundly, and in accordance with
all applicable law;

NOW THEREFORE , IT IS HEREBY AGREED , between the BANK ,
through its duly elected and acting Board of Directors , and
the COMPTROLLER, through his duly authorized and acting
Representative , that commencing no later than the effective
date of this Agreement , or as shall otherwise specified
within the Articles of this Agreement , the BANK shall operate
in compliance with the Articles of this Agreement .

ARTICLE I
(1)

This Agreement shall be construed to be a "written

agreement entered into with the agency " , within the meaning
of the Financial Institutions Supervisory Act of 1966 , 12
U.S.C. $ 1818 ( b ) ( 1 ) .

ARTICLE II

(2)

As of and after the date of this AGREEMENT , the
knowingly
BANK shall not purchase , assume , or acquire in any manner,
directly or indirectly , in its own capacity or as a fiduciary
or nominee , or through its subsidiaries or affiliates , any
loan , loan participation , or any other obligation or asset
Knowingly
in any form whatsoever , FROM : nor shall the BANK extend ,
endorse , guarantee, or in any manner provide any extension
of credit whatsoever , TO cr FOR, any of the following :

273

(a)

E.S.M. Securities , Incorporated , Fort
Lauderdale , Florida ;

(b)

any affiliate , as that term is defined in the
Banking Act of 1933 [ 12 U.S.C. $ 221a (b) ) , of
E.S.. Securities , Incorporated , Fort Lauderdale,
Florida;

(c)

Robert Charles Seneca ;

(d)

Ronnie Restine Ewton;

(e)

George Gordon lead ;
Alan Richard Novick ;

(f)

(g)

any relative , whether by blood or by marriage ,
of the above named individuals , including ,
but not limited to , spouse , sons , daughters ,
sons-in-law, daughters- in-law, and parents ;

(h)

any corporation , partnership, joint endeavor,
or other enterprise or undertaking whatsoever, controlled by or operated substantially
in the interest of any of the above named
individuals ; where " control " shall be defined
as ownership, whether direct or indirect , of
ten percentum ( 10 % ) or more of the stock or
other evidence of capital or equity ownership
of any such organization; and where " substantial
interest" shall be defined as derivation , in
any manner whatsoever, of income amounting to
($13,000)
more than ten thousand dollars ($10,006,006)
per annum as a result of the operation of any

的
Brid

such organization .

ARTICLE III
(3)

As of and after the effective date of this Agreement ,

the Board of Directors of the BANK shall not pay any sum as
management fees or other charges whatsoever to its parent
holding company, American Bancshares , Incorporated , North
Miami , Florida , without the prior written approval of the

<.

274

Regional Administrator of National Banks for the Sixth
National Bank Region , Atlanta , Georgia (hereinafter the
"REGIONAL ADMINISTRATOR" ) .

It is expressly understood that

no contemplated payment of such management fees or charges
shall be approved by the REGIONAL ADMINISTRATOR , unless same
shall represent payment for services actually performed , or
for goods actually provided , in the calendar year for which
payment is sought .

ARTICLE IV

(4)

Within five ( 5) days of the effective date of this

Agreement , the Board of Directors of the BANK shall appoint
a committee to supervise the BANK's investment portfolio .
No person shall be appointed to that committee who shall not
have been a Director of the BANK on or before February 23,
1977, and no officer or director of the BANK's parent holding
company, American Bancshares , Incorporated , North Miami ,
Florida , shall be elligible to serve on the committee .
(5) The committee , acting for the Board of Directors
of the BANK, shall review any existing investment policy of
the BANK , and shall , within fifteen ( 15) days of the effective
date of this Agreement , adopt a written resolution incorporating
a written investment policy of a safe and sound nature , to
which the BANK shall strictly adhere . Such resolution shall
be submitted to the REGIONAL ADMINISTRATOR for approval ,
prior to adoption .

(6)

Said written investment policy shall include , but

not necessarily be limited to , the following :

(a)

a strict definition of the type or kind of
security to be purchased and held ;

(b)

limits upon the concentration of credit in
the investment portfolio;

(c)
(d)

a schedule of desired maturities ;
specification of the minimum quality of
security to be purchased and held .

275

ARTICLE V
whose employment or appointment as S.fin
(7) No officer of the BANK who shall be employed,
an officer shall Commence
appointed or otherwise retained after February 23 , 1977 ,
Band
shall be vested with any authority to :
(a)

loan money or otherwise extend the credit of
the BANK ;

(b)

authorize or otherwise approve or supervise
loans or other extensions of credit ;

(c) purchase or sell any security or other
instrument of investment on behalf of the

BANK ; or
(a)

authorize or otherwise approve or supervise
the purchase or sale of any security or other
instrument of investment on behalf of the

BANK ;
UNLESS the prior approval of the REGIONAL ADMINISTRATOR
shall have been first obtained .

When the BANK shali seek

such approval , a written request shall be submitted to the
PEGIONAL ADMINISTRATOR , which request shali particularly
name the officer , his rank, and the authority for which such
approval is sought , including a specification of any lending
limits and/or investment restrictions intended to be imposed
upon such officer ( s ) .

ARTICLE VI
(8)

It is expressly and clearly understood that if,

at any time , the COMPTROLLER , in his sole discretion , deems
it appropriate in fulfilling the responsibilities placed
upon the COMPTROLLER by the several laws of the United
States of America, to undertake any action affecting the
BANK, nothing in this Agreement shall in any way inhibit ,
estop , waive , bar or otherwise impede or prevent the COMPTROLLER
from so doing .

ARTICLE VII

(9)

The provisions of this Agreement shall continue

in full force and effect until , unless , or inasmuch as such

276

provisions shall be modified , suspended , excepted , waived or
terminated by mutual consent of the parties of this Agreement .

IN TESTIMONY WHEREOF , the undersigned , designated by
the Comptroller of the Currency as his representative , has
hereunto set his hand on behalf of the COMPTROLLER.

Danel&
l Kliter
Donald L. Tarleton
Regional Administrator of National Banks
Sixth National Bank Region
Atlanta , Georgia

-2-23-77
Date/

277

IN TESTIMONY WHEREOF , the undersigned , as the duly
elected and acting Board of Directors of the BANK , have
hereunto set their hands on behalf of the BANK.

Benak,
Then
Thomas C. Bennett

2/27/27

2-23·77
Date

limenthal
& Blumenghal

William H. Çatr'

2.23.77
Date

Anthony P Cassinelli

-23-72
2-2
Date

James D. Evans

Date

chilis
.
Halline
1ph D. Hollander

2-23-77
Date

David
Buge
Julian lineetDAVID BERGER

-73.7
Date

David M. Starke

Date

42-23-77
Date

Deze In PerfoN
Beth M. Thompson

Budwig M. Ungaro

Date

L. G. Whatley

Date

Page 6 of 6 pages

278

Comptroller ofthe Currency
Administrator of National Banks

Washington , D. C. 20219
September 30. 1977
Mr. Ronnie R. Ewton
Mr. Robert C. Seneca
c/o E.S.M. Securities , Inc.
One Financial Plaza , Suite 1710
Fort Lauderdale , Florida 33394
Dear Messrs . Ewton and Seneca :
I am writing this letter in response to your letter of September 19,
1977 , to Regional Administrator Donald Tarleton in our Atlanta
office . Shortly after receiving your letter Mr. Tarleton transmitted it and its attachments to our Washington office for an
appropriate response . I am advised that while your letter was
undergoing review in our Law Department Mr. Tarleton received a
telegram stating that you intended to pursue the matter with his
Washington superiors if he did not respond to your demand by a date
specified . I believe it appropriate , therefore , that I personally
respond to your letter of September 19 , since , as First Deputy
Comptroller for Operations , I am Mr. Tarleton's Washington superior.
In February of this year , information came to our attention which
we believe to be relevant to the performance of our statutorily
mandated duties and responsibilities . In one instance , the
information came to our attention in the course of a general
examination of a national bank . In another , it was derived
through confidential communications with another federal regulatory
agency . Our review ofthe information thus elicited was conducted
both in Washington as well as in Atlanta .
On the basis of our evaluation of the information confidentially
derived , we considered it appropriate to advise the boards of
directors of the six national bank subsidiaries of American
Bancshares , Inc. , of such of the information as we properly could .
At that time , we requested those banks to agree to certain
precautionary measures on a voluntary basis . The directors of
the six banks deemed it appropriate to enter into the voluntary
Agreements we proposed and with which we have reason to believe
you are familiar .
Please be advised that we approached the involved banks with the
opportunity to enter into voluntary agreements in the exercise
of our statutorily mandated responsibility to ensure their safe
and sound operation . The action taken by this Office in executing
its statutory responsibilities was fully considered and authorized
both by myself and the then Acting Comptroller of the Currency .

279

As we advised the subject national banks at the time the voluntary
agreements were executed , we neither intend nor anticipate that the
agreements will remain effective in perpetuity . In this regard ,
any national bank with whom we have an agreement is free at any
time to request the modification or termination of the agreement
should the board of directors believe it unduly burdensome or
otherwise inappropriate . You realize , of course , that such matters
are properly conducted between the parties to the agreement , and
not their affiliates .
Please be advised that we shall devote our most careful consideration
to any modification of an existing agreement which the involved
board of directors may propose .

Sincerely,

H. Joe Selby
First Deputy Comptroller
for Operations

280

Comptroller ofthe Currency
Administrator of National Banks
Washington, D. C. 20219
Banking Circular No. 2
Supplement No. 4
To :

Presidents of All National Banks

Subject :

Improper Securities Practices

July 26 , 1977

The unusually high proportions of liquid assets held by banks
in recent times have provided a tempting target for high- pressure
salesmen offering questionable securities transactions .
circular contains examples of transactions which our examiners
have found in increasing numbers in recent months . The list
is not all - inclusive , but merely representative of high risk
situations which have resulted in significant losses or illiquid
situations for the banks involved . The list includes offers of :

Municipal bonds having partial federal subsidies as
fully U. S. Government guaranteed issues .
Thinly traded federal agency and government guaranteed
issues at prices in excess of current market prices .
Informal repurchase arrangements as a price guarantee
mechanism used to promote the sale of thinly traded
securities or as a means of financing the dealer's
securities inventory .
Repurchase agreements which do not require proper evidence
of collateral securities or which do not specifically
identify the security held as collateral thus making it
possible for the dealer to obtain funds without adequate
collateral support and impossible for the bank to perfect
a collateral lien .
To purchase a bank's existing portfolio securities under
a reverse repurchase agreement ( securities purchased under
an agreement to resell ) if the banker is willing to
reinvest the cash proceeds in long term government or
municipal securities purchased from the dealer , thus transfering the more pronounced long term interest rate risk
from the dealer to the bank . If interest rates rise
during the term of the repurchase agreement , the longer
term securities or other holdings must be liquidated in
declining market to refund the maturing repurchase
i
agreement .
is

281

Reverse repurchase or securities borrowed agreements
with inadequate collateral . The dealer will price
collateral securities in excess of their current
market values , often pricing issues at par when they are
selling at a discount .
"When issued " , " forward placement " and " delayed delivery "
securities contracts to prospective purchasers with the
verbal assurance that a buyer would not have to accept
delivery of the securities . These types of commitments
require no investment on the part of a purchaser . In a
rising market the commitment can generally be sold at a
profit . However , in a declining market banks acquiring
such open contractual commitments have in several instances become liable for the purchase of considerable
amounts of securities at prices substantially in excess
of prevailing market value at settlement date .
To arrange reverse repurchase agreements to finance payment for securities delivered under the types of contractual commitments referred to above . This procedure
allows the dealer to convert an unsettled sale transaction
to a secured receivable due from a bank . The dealer will
require cash and delivery prices , plus a comfortable
collateral margin . This type of re- po financing generally
creates immediate liquidity problems for a bank by having
volatile short term source funds support long maturity
securities with significant market depreciation .
Stand - by or optional delivery forward placements or delayed
delivery contracts covering GNMAS with the option to
deliver being at the dealer's discretion . The dealer
pays the bank a stand - by fee for the privilege of delivering the securities at a fixed price and future date ; if
prices go up the option is not exercised , if prices go
down the securities are delivered at the original price .
In this manner the dealer can hedge the possibility of loss
by paying a modest fee . The most an investor can gain
is the amount of the fee , while simultaneously incurring
a substantial exposure to loss in a declining market .
To place the proceeds of a municipal advance refunding
issue , which the dealer had underwritten or served as the
issuer's financial advisor , on deposit with a bank if the
bank agrees to purchase the government securities to be
pledged against the escrowed deposit at prices in excess
of current market .

282

To guarantee a certain level of income if the banker
will grant the dealer blanket or discretionary authority
to execute trades on behalf of the bank . Transactions
executed under such agreements are seldom in the bank's
best interest .
Investment officers are advised that good professional practice
in connection with all securities transactions demands that
they fully educate themselves to the nature of the risk exposures
involved both in form of transactions and the underlying
securities . It is also fundamental that the financial standing
and professional qualifications of the persons or firms soliciting
business should be checked out carefully before commitments are
made . Transactions should be consistent with the bank's preplanned
investment strategy .
The following general investment guidelines are recommended for
all transactions :
Analyze the financial statements of securities firms
you do not customarily purchase securities from , prior
to transacting business with the firm .
Never give a blanket or discretionary investment authority
to exercise security transactions on your behalf to any
securities dealer .
Do not enter into a transaction the terms of which you
do not completely understand .

•

Do not purchase an option or security which you cannot
comfortably afford to pay for in full .

.

Do not advance payment for purchased or resale agreement
securities until you are certain the securities have been
delivered or until you have obtained proper evidence that
the securities exist .
Test prices of unusually attractive securities offerings
by obtaining substantiating quotes from a reputable local
or regional dealer .

JACHE
John G. Heimann
Comptroller of the Currency

283

Mr. BARNARD . Thank you , Mr. Selby.
Mr. Gray, in the procedure of bank examinations, does the Home
Loan Bank Board or the FSLIC, do they get the benefit of examinations of State-chartered institutions that are not insured by the
FSLIC, such as the 71 banks in Ohio?
Mr. GRAY. No.
Mr. BARNARD. You have no information from them whatsoever?
Mr. GRAY. No.
Mr. BARNARD. So on the occasion then of this situation, your
files, of course, were empty as far as financial statements of these
institutions?
Mr. GRAY. That is correct.
Mr. BARNARD. Mr.
Mr. GRAY. Pardon me. That is not correct with respect to those
11 institutions which are members of the Federal Home Loan Bank
of Cincinnati which were also members of the ODGF. There
are another three which have no insurance whatsoever which are
members of the Federal Home Loan BankMr. BARNARD. In other words, you had some that were members
of both? The FSLIC and the Ohio-Mr. GRAY. No. In this caseMr. BARNARD. No, I realize there were three that had no insurance whatsoever.
Mr. GRAY. Right. That is correct . And still have none.
Mr. BARNARD. And the laws of Ohio permit them to operate
without any insurance.
Mr. GRAY. Yes.
Mr. BARNARD. But you indicated there was another exception .
What was that exception?
Mr. GRAY. No; in this case, we do receive quarterly financial
statements from and State examination reports on members of the
Federal Home Loan Bank of Cincinnati.
Mr. BARNARD. But they are not federally insured?
Mr. GRAY. No; they are not federally insured . But they are members of the bankMr. BARNARD. They are Federal savings and loan associations
but are not federally insured?
Mr. GRAY. They are not Federal savings and loans. They are
members of the Federal Home Loan Bank of Cincinnati for credit
purposes only.
Mr. BARNARD. Oh, for credit purposes . OK.
Has the FSLIC been weakened at all because of these new memberships in the fund?
Mr. GRAY. No; I am pleased to say no.
Mr. BARNARD. Mr. Martin and Ms. Horn, were either of you consulted and counseled by the Governor as far as the bank holiday
was concerned?
Mr. MARTIN. Yes; I spoke to the Governor on one occasion and I
know that President Horn was consulted several times.
Mr. BARNARD. Did you concur in his decision that this was the
most expeditious decision to make in view of the circumstances?
Mr. MARTIN. Mr. Chairman, it is not our role to transgress in
this area. This is a State-regulated and chartered institution. We
provided the counsel from our experience. In my own case as

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former Chairman of the Federal Home Loan Bank Board in other
States and other situations we had no time attempted to make the
decision or to be compelling in the decision▬▬
Mr. BARNARD. Did you advise him of any precedent, as far as a
situation like this was concerned?
Ms. HORN. We discussed a number of alternatives over a number
of telephone calls, and as the Vice Chairman has indicated, we
never recommended a decision since that was not our role in this
situation. Among the alternatives that were discussed was a historical situation, and if my memory serves me right it was in the
State of Mississippi. That is the one historical situation I remember
entering the conversation .
Mr. BARNARD . Yes; I understand that there was a precedent for a
bank holiday in the State of Mississippi . I do not know how many
institutions were involved or how long it occurred, but that was the
purpose of my question: Had the Mississippi situation entered into
the decision of Governor Celeste?
Ms. HORN. It had entered into our discussions .
Mr. BARNARD. There was some indication today by some that the
Federal Reserve initially-I think we need to clarify this-say, on
the first or second day of the crisis, there was not as much interest
on the part of the Federal Reserve to get involved as it was after
the money market-after the value of the dollar did a somersault.
Would you like to address that? Was there any-did that have anything to do to speed up your concern?
Mr. MARTIN. No, sir, the concern arose as soon as there was information with regard to Home State, the implications of other
ODGF institutions was patent, and our interest was, let us say,
stimulated immediately that there was trading in the dollar, there
was trading in the dollar of $50 to $70 billion in foreign exchange
trading most days. And that traders may have alluded to Ohio to
justify some directional movement in the dollar is neither here nor
there.
Mr. BARNARD. My time has expired on this first round, but we
shall return .
Mr. Craig .
Mr. CRAIG. Thank you very much, Mr. Chairman. I appreciate
the testimony of all of the members of the panel.
Mr. Gray, in your experience with the Home Loan Bank Board
and the FSLIC, have you ever had a situation which you had to utilize a procedure because a member institution was having a run on
it?
Mr. GRAY. Not out of the ordinary. What we have done in one
particular case was to establish a limit of credit available at the
Federal Home Loan Bank for regulatory purposes. But that is the
only case I am aware of.
Mr. CRAIG. So you could not refer to a procedure or a plan of
action that you would utilize in the case of a member institution
getting into this kind of trouble?
Mr. GRAY. Well, we certainly would, as a collateral lender, desire
to provide credit for liquidity purposes to such an institution , to the
extent that collateral was available.
Mr. CRAIG. Have you ever closed one down?

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Mr. GRAY. That was experiencing a run? No; I do not believe so.
Fortunately.
Mr. CRAIG. In your ability to approve institutions coming into
the FSLIC, do you have carte blanche authority there?
Mr. GRAY. In our ability to what?
Mr. CRAIG. Do you do carte blanche approval?
Mr. GRAY. The Federal Home Loan Bank Board approves all applications for insurance of accounts.
Mr. CRAIG . Were you asked during this time to accept all members?
Mr. GRAY. Yes; I was. By a Member of the Congress.
Mr. CRAIG. And because of the Federal law that regulates you
and the procedure involved under that law, you did not have carte
blanche-you could not offer carte blanche authority or approval?
Mr. GRAY. As I noted in my opening statement, this would contravene both the spirit and the letter of the National Housing Act.
Mr. CRAIG. Mr. Selby, in the narrative you gave us of the episodes in Florida involving principals in ESM and also some of their
banking efforts and at a time when two principals , particularly offered to and a Mr. Warner purchased I believe it was American
Bancshares , which is a holding company with six nationals?
Mr. SELBY. That is correct.
Mr. CRAIG . And they were then converted to State banks?
Mr. SELBY. Correct.
Mr. CRAIG. In your opinion, why did that conversion take place
from Federal to State?
Mr. SELBY. I do not have any definitive answer.
Mr. CRAIG. In your opinion.
Mr. SELBY. My opinion- one reason generally is they did not
want to live under our agreements, possibly.
Mr. CRAIG . Your agreements differingMr. SELBY. That limited the national banks from dealing specifically with ESM and the principals and relatives and affiliates of
ESM. Now, that is only presumption on my part. I do not know
that.
Mr. CRAIG. In your Federal relationship or as the Comptroller of
the Currency and a regulator versus State regulation, where would
you say the level of scrutiny differs and the thoroughness of investigation?
Mr. SELBY. At the State level versus▬▬
Mr. CRAIG. The State versus Federal in this particular situation?
Mr. SELBY. I just cannot answer that. I know that we scrutinize
it and I also know that the other Federal agencies scrutinize it . I
cannot speak for the States . My guess is that certainly not in 1977.
I think now we have in place better mechanisms where not only
the Federal but the State authorities are privy to shared information, mainly through the Federal Financial Institutions Examination Counsel. We routinely now share this information and indeed
with the State authorities if they want the information .
Mr. CRAIG. In other words, what you are saying then, a move
from national to State could be a result of the ownership of a holding company not wanting to play by one set of rules, therefore
moving to play by another set?

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Mr. SELBY. Well, the holding company is the Federal Reserve ,
and obviouslyMr. CRAIG. I understand that.
Mr. SELBY [ continuing]. Has the authority under change of control. The banks converting to a State oftentimes their business plan
calls for them to convert. It is cheaper maybe. They have different
plans. In this particular instance, I do not know other than we put
the agreements on these banks to insulate them against
Mr. CRAIG . Down to and including any relative?
Mr. SELBY. That is correct. To insulate them and they attempted
to get out from under those agreements and we were unrelenting
and so I assume their business plan called for them to convert.
Mr. CRAIG. Thank you . My time is up.
Mr. BARNARD. Mr. Spratt?
Mr. SPRATT. Mr. Selby, it seems that the Comptroller's Office by
fortune and chance found out about ESM in time to alert your
member banks, national banks, and avert substantial losses on the
part of these national banks.
Mr. SELBY. Hopefully, by deliberate chance.
Mr. SPRATT. By deliberate chance?
Mr. SELBY. Through the offices of our examiners .
Mr. SPRATT. We will not pursue that. OK. In any event, you
found out about it.
Mr. SELBY. Yes.
Mr. SPRATT. Do you think that your office should continue to rely
upon chance discoveries of this kind, or fortunate deliberate opportunities of this kind , or should have a regular mechanism by which
these other ESM's presumably out there in the securities markets
are ferreted out and attention is relayed to your member institutions to be on the alert?
Mr. SELBY. Well, I think there should be a mechanism to perhaps
share information such as ESM when one agency finds it, which I
think we did, maybe not as well as we would do it now. But, yes,
there should be sharing of that information, and I think we do it,
quite frankly.
Mr. SPRATT. And with the StateMr. SELBY. With the States .
Mr. SPRATT. With the State funds?
Mr. SELBY. Yes.
Mr. SPRATT. In this particular case, however, no similar bulletin
or alert went out to the State funds?
Mr. SELBY. No.
Mr. SPRATT. Is it institutionalized now that an alert would go out
to State funds?
Mr. SELBY. Not to the State funds. It would go out through the
Federal mechanism to not only Federal institutions, that is, savings and loans and banks, through the FFIEC but it would alsowe would afford the States the opportunity to have that information and do the same things with the State institutions. So I would
assume whatever funds are there we would also be aware of. As a
matter of fact, we are working right now through the-Mr. SPRATT. Do you have a list , are there other memoranda like
the suede shoe memorandum about ESM that has gone out. Do you

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have a list of suspects, securities dealers with whom national banks
and others should not deal?
Mr. SELBY. I imagine that our staff could put together a list of
the ones that we are most suspicious of.
Mr. SPRATT. But is there such a list in circulation now?
Mr. SELBY. No, no.
Mr. SPRATT. If you do not advocate regulation or periodic audit,
do you not think that information should be compiled and made
available?
Mr. SELBY. Not if you go under the premise that our examiners
are trained sufficiently and understand the transactions sufficiently and go in and examine the banks and institutions sufficiently to
ensure that the banks are not transacting in speculative ventures
and are covering their position with collateral.
Mr. SPRATT. But there are other examiners. There are State regulatory examiners. There are Fed examiners . There are FDIC examiners. Why not share your information with them in a systematic way?
Mr. SELBY. Well, I think we do now, was my point.
Mr. SPRATT. I am pursuing that still. If there is no compilation,
how are you-you have got a body of information, a data bank of
suspect securities dealers, but it is not compiled and it is not being,
as I understand it, routinely sent out to other regulatory agencies
by way of bulletin or some similar form of contact.
Mr. SELBY. Well, it gets a little iffy, if you ask us to take a suspected bond dealer or securities dealer, and send out a mass mailing that says: " Don't trust this guy." I am not a lawyer, but I do
not think I would want to sign that myself.
Mr. SPRATT. Do not sign it. Just send it out under the name of—
you have got better immunity than the Ohio State Guarnatee Fund
which isMr. SELBY. I do not think my liability insurance covers me that
much.
Mr. SPRATT. I think you have got sovereign immunity possibly. I
understand, and there may be privileged communications withbut if that is true, if we have legal liable barriers, then maybe we
ought to consider some way to remove the barriers, mitigate the
barriers, in order to encourage to disseminate this needed information.
Mr. SELBY. I agree with your theory that we should share what
we find with other regulators as they examine their institutions
and supervise them. I agree with that.
Mr. SPRATT. Am I out of time?
Mr. BARNARD. No.
Mr. SPRATT. If I understand the testimony-I believe it is Mr.
Gray who implies that the examination performed by the Ohio Savings and Loan Division was quote " less rigorous than Federal procedures ," and in fact, the lessened rigor was held out as an inducement to membership in Ohio Guarantee. Your statement says
"that the Ohio Guarantee Fund justified itself to its membership
by offering less rigorous procedures than federally required . " Is
that your empirical observation having dealt with them and looked
back at what was happening in Ohio?

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Mr. GRAY. In all candor; yes. There are apparently other historic
reasons why institutions chose to be members: that is to say, they
were not held to the same constraints on interest that could be
paid on passbook accounts, and so forth . I reached this conclusion
on the basis of conversations with experienced staff that has been
around for some time. Certainly long before I came to the Bank
Board.
Mr. SPRATT. Out of time? Thank you, Mr. Chairman.
Mr. BARNARD. Thank you. Mr. Saxton.
Mr. SAXTON. Mr. Gray, this morning when Mr. Hunsche was testifying, I think he testified that the Ohio Deposit Guarantee Fund
had in its fund a percentage of about 2.9 percent of the gross holdings of its member banks. Does that sound right? I believe that is
the figure that he gave us this morning.
Mr. GRAY. I have to take his word for that.
Mr. SAXTON. And he contrasted that in the same light to about
one-half of 1 percent figure for the FSLIC .
Mr. GRAY. That would not be correct. I think the closest, the
most recent figure would be about 0.76 percent, as a ratio of FSLIC
reserves to deposits at our insured institutions.
Mr. SAXTON. In any event, 0.76 percent. Why is it that the FSLIC
is able to conduct its business with that kind of reserve while at 2.9
percent or almost 3 percent, the Ohio Deposit Guarantee Fund was
not?
Mr. GRAY. Well, obviously we would like to strengthen the reserves of the Federal Savings and Loan Insurance Corporation, as
you know, and one of the reasons why that ratio has developed as
it has is because of the frankly excessive growth in liabilities and
assets at our FSLIC-insured institutions over the last several years
under liability deregulation. We have taken actions now through
an additional special premium to increase the reserves of the fund.
But to answer you specifically, I think it is the full faith and credit
of the United States which at least implicitly stands behind both
the FSLIC and the FDIC.
Mr. SAXTON. Would you also say that in insurance language we
often talk about the spread of risk? And with the FSLIC there are
many more member banks, member institutions? Is that an important factor in contrasting the Ohio Deposit Guarantee Fund with
the FSLIC?
Mr. GRAY. Well, in all honesty I do not necessarily think that
that in itself would represent an advantage as such. Obviously, the
reserves of the fund depend on real dollars, real assets . I am not
suggesting this would happen but I suppose you could say that with
as many members as we have we could, particularly if the law
were changed, raise greater amounts of funds through special premiums. But essentially it is full faith and credit of the United
States itself which provides public confidence in our institutions.
Mr. SAXTON. The trustees in the Ohio Deposit Guarantee Fund
who administered it or who were the backbone organization of it
are appointed, were appointed, by member banks; is that correct?
Member thrift institutions?
Mr. GRAY. I gather that is correct. At least that is what the gentleman previously testified to.

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Mr. SAXTON. Is there any danger in having member institutions
actually represent themselves and control themselves? Is that a
built-in problem with private insurance funds?
Mr. GRAY. There is always the potential for conflict of interest,
although I say that generically, without any great knowledge of the
Ohio Deposit Guarantee Fund. And in our efforts to protect the
FSLIC, of course, we do have conflict-of-interest regulations which
are intended to deal with that problem.
Mr. SAXTON. I am not so concerned perhaps about actual conflict
of interest. I am just concerned about who watches the henhouse
better, someone who is completely disassociated with an organization or someone who has a rather close association with member
institutions.
Mr. GRAY. I think as a general proposition it would be better to
have independent governors for that kind of system .
Mr. SAXTON. Thank you, Mr. Chairman.
Mr. BARNARD. Mr. Kindness.
Mr. KINDNESs. Thank you , Mr. Chairman. I will not impose on
the time of the subcommittee further with regard to this panel.
Thank you.
Mr. BARNARD. Ms. Oakar.
Ms. OAKAR. Thank you , Mr. Chairman.
Ms. Horn, you testified that on March 9 you took action and
made some initiations with respect to the impending crisis in Ohio.
I want to congratulate you and the Fed on that. You did it under
the spirit of the law. But you took that initiation , and I think that
it did play a role, at least temporarily, in giving some element of
confidence to the situation . I just wanted to congratulate you on
that.
Mr. Gray, Mr. Craig asked a very important question which is
why I am so interested in potential conflicts of interest. I think
what the distinguished minority leader asked was has the Federal
Home Loan Bank Board acted or ever had a situation that was extraordinary in which they really took the bull by the horns and
acted. I think you answered, not to your knowledge. I am concerned about some of the transactions . For instance I look at the
situation with the Financial Corp. of America and its subsidiary in
California that had a run on it . I think that was fairly extraordinary. Their subsidiary had some real problems. What the Federal
Home Loan Bank Board did, and I realize they were federally insured, but you did extraordinary things . The institution was given
unlimited borrowing rights exceeding normal collateralization
Mr. GRAY. That is not correct.
MS. OAKAR. Well, how much of the borrowing——
Mr. GRAY. That is absolutely not correct.
Ms. OAKAR. How much has the Home Loan Bank Board lent this
institution since October?
Mr. GRAY. From October 31 , 1984, to March 31 , 1985, the Federal
Home Loan Bank of San Francisco advanced $5.6 billion to American Savings & Loan Association in California. During that same
period, American repaid $6.5 billion, for a reduction in its net outstanding advances from the San Francisco Bank of about $900 million. I would also note that in every instance, Congresswoman
Oakar, the only credit that has been provided to any of our institu-

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tions, including American, has been under the collateralization requirements that are imposed by the individual Federal Home Loan
Banks.
MS . OAKAR. Let me just say this. Mr. Chairman, it is my understanding that they have lent at least $4 billion which is no small
amount of money. By the way, that approximates the total assets
of all 72 institutions that were nonfederally insured, so that was a
pretty extraordinary undertaking . I point that out because there
have been extraordinary situations. And you may have been right
about it, but if I can pursue this. That is why I am concerned about
the rumors, and innuendos, concerning your actions or nonactions
related to the Ohio situation .
I asked you two questions before the full Banking Committee and
I asked you very specifically did you , prior to March 13 or any day
thereafter, get any advice on how to handle the situation from the
Secretary of Treasury or anybody from the White House. You answered that was not relevant. You would not answer it.
Then we have a situation whether it is accurate or not, in which
the Wall Street Journal publishes an article that says, indeed, Secretary Baker discussed this issue with you after having a meeting
in terms of how to decide what the Federal response should be.
They concluded that if the crisis developed it should remain a problem of the Democratic administration in Ohio.
The role that the Federal regulators should play, whether it is
the Federal Home Loan Bank Board or the Federal Reserve Board,
should be above politics . I do not understand why you would not
answer the questions during the Banking Committee hearing, but I
will give you another chance now.
Mr. GRAY. I have been waiting for your question which I am
happy to answer.
Ms. OAKAR. Good. I think you could have solved a lot of problems
on March 27 if you had answered my two questions.
Mr. GRAY. Well, let me just say, with all due respect to you as a
Member of the Congress of the United States, any innuendo, any
discussion of partisan politics, was raised by you and certainly not
by me. For example, and the record will show this, you referred to
the upcoming Governor's race in Ohio.
Ms. OAKAR. That is right.
Mr. GRAY. You referred to my failure to meet with members of
both sides of the aisle , Democrats as well as Republicans. Now, you
know full well that an invitation was extended to you and Congressman Luken and to others, to come to my officeMs. OAKAR. That is right.
Mr. GRAY [continuing]. To meet with me——
MS . OAKAR. And you know full well why I did not attend.
Mr. GRAY. Well , no, I do not.
Ms. OAKAR. Because you chose to meet with Congressman Wylie
privately after we had all agreed on an 11:30 meeting, you chose to
meet him for breakfast and my colleague from Ohio can verify
that.
Mr. LUKEN. If the gentlelady will yield .
Ms. OAKAR. I will be happy to yield.
Mr. LUKEN. That is exactly what happened . We have the floor.
We will ask you the questions.

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Mr. GRAY. Well, just a minute. She just made an observation and
I am going to answer it.
Mr. LUKEN. Are you running this, Mr. Chairman .
Mr. GRAY. Let me just say, Congresswoman Oakar, that the
meeting I had with Congressman Wylie had been set on my calendar 3 weeks before and it was to deal specifically with legislation
which was introduced by request by Congressman Wylie and by
Chairman St Germain of the House Banking Committee. That was
the purpose of that meeting .
MS. OAKAR. Let me yield to my colleague.
Mr. LUKEN. As the gentlelady has said, at extensive meetings on
March 13, with your counsel, we attempted to get a meeting with
you that night. Sixteen or more representatives of savings and
loans of Ohio were present pleading to meet with you . You were
unavailable we were told until 11:30 the following morning. That is
what we were told by your counsel seated here today. You were not
available until 11:30 . Mr. Wylie was there. At 9:30 the following
morning Mr. Wylie called me and said he had had breakfast with
you, had discussed these issues , and told me what your decisions
were. Those are the facts. I repeat, he called me at 9:30, said he
had breakfast with you. I was shocked. And he had discussed these
issues and he laid out what the decisions were which you later confirmed.
I yield back to the gentlelady.
Mr. GRAY. Well, I cannot speak for Congressman Wylie, but I did
tell him at breakfast, which began at 8 , that the Bank Board was
going to make a very strong effort to expedite applications as soon
and as quickly as possible .
Mr. BARNARD. Just a second. Let me advise that we owe Mr.
Luken time now. Ms. Oakar's time has expired.
Mr. GRAY. I did not answer, her question which I thinkMr. BARNARD. I mean I think they are participating together on
that.
Mr. LUKEN. I will proceed. Mr. Gray, we did meet with you on
March 13, and I will say right now that if you had taken action at
that time as we requested, that the closings of Friday, March 15,
would not have occurred. Now, I want to say exactly why I say
that. First of all, your statements are inconsistent with those of
Congressman Gradison and Congressman Wylie, as indicated in the
Wall Street Journal.
Mr. Wylie said that you did stall at that time. Mr. Gradison
states that you have reversed yourself since . Now, I want to ask
you -on March 13 did we ask you to waive the 10-day waiting
period? The 10-day notice period? And what was your answer?
Mr. GRAY. Counsel advised me, and you were there, that there
was a 10-day notice period which had to be observed.
Mr. LUKEN. And we pleaded with you to waive it and you said,
"no way," did you not?
Mr. GRAY. Well , I take the advice of my lawyer, who probably
knows more about these things than I do.
Mr. LUKEN. Did you take it a week later when you did waive it?
Mr. GRAY. Yes, I did.
Mr. LUKEN. Oh.
Mr. GRAY. On the advice of counsel.

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Mr. LUKEN. It is his fault. And at that we asked you to apply
extra help to get other examiners in, and did you not tell us that
you were stretched so thinMr. GRAY. That is right.
Mr. LUKEN. That you could not possibly get any more help.
Mr. GRAY. That is essentially correct.
Mr. LUKEN. And a week later you found all that help that you
have just been describing.
Mr. GRAY. Well, you know, on Sunday evening, as my testimony
indicates, I met with Chairman Volcker in his office and at that
time Chairman Volcker pledged to the Federal Home Loan Bank
Board as many examiners as we would need to bring about the expeditious processing of these applications .
Mr. LUKEN. You had Chairman Volcker's people with you on
March 13, and did you or did you not tell us that it was an Ohio
problem, quote "You are in the wrong city. You should be in Columbus"? Did you say that, Mr. Gray?
Mr. GRAY. I said I thought that individuals should be at the
State capital talking about this problem.
Mr. LUKEN. And when we pleaded on behalf of the depositors,
did you or did you not say that the depositors should have known
that they were not federally insured when they deposited in the
State institutions?
Mr. GRAY. You know, I do not recall that statement, but I
did Mr. LUKEN. Well, I will refresh your recollection . You did.
Mr. GRAY. WellMr. LUKEN. And when we talked about the savings and loans
and helping the depositors, you said "After all, the savings and
loans had the opportunity previously to join FSLIC and they had
refused it." You did not say that once. I bet you said that at least
six times in our brief meeting.
Mr. GRAY. That is a historical fact.
Mr. LUKEN. And then you would characterize that as cooperative, that you were going to extend yourself? Those reactions that
you were extending yourself for the depositors?
Mr. GRAY. You know, I said repeatedly, Congressman, that the
Federal Home Loan Bank Board and the FSLIC were committing
to do everything possible to expedite applications for insurance of
accounts as quickly as possible.
Mr. LUKEN. But you said you had no help. You had no legal authority. How were you going to expedite it if you did not have anybody to apply to processing the applications. And if you had to
follow the law, which you said could not allow you to expedite it.
And finally, I want to ask one more question.
When the representative of the S&L, his last question to you
was, "Give us 30 days. We will close for 30 days and can you examine these in 30 days," and you said you would not even consider it .
Is that not true?
Mr. GRAY. I said that with a very severe shortage of 750 examiners around the country that would not be possible, and that was in
specific response-Mr. LUKEN. But you have managed to do it in the last 2 weeks.

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Mr. GRAY. But let me finish what I am saying . That was in specific response to a suggestion that all of our examiners be deployed
summarily to the State of Ohio.
Mr. LUKEN. No. That was not the――
Mr. GRAY. Well, it certainly was.
Mr. LUKEN. The suggestion was-would you at leastMr. GRAY. Congressman Gradison made that suggestion.
Mr. LUKEN. It was not Congressman Gradison. It was the representative of the thrift, and he said that if we close for 30 days- he
said he recognized it that you were not going to help, so he said if
we close for 30 days will you at least examine them within that 30
days. And you said, "No way." You would not even consider it. And
now you are saying that you have already done it in less than 30
days.
Mr. GRAY. Well, now, I have tried to explain to you that on the
following Sunday evening, Chairman Volcker pledged the full support of the Federal Reserve and as a matter of fact, has provided
140 examiners - 140-to help the Bank Board in this process.
Ms. OAKAR. Chairman Volcker has been great. Will the gentleman yield? I just have to ask you the question .
Did Secretary Baker ever call you and tell you to stall and stonewall the Ohio crisis?
Mr. GRAY. I am glad I get a chance to answer your question .
Ms. OAKAR. Mr. Chairman, I think he should answer. Whatever
you want to do. You are investigating it, so maybe you can get it in
writing.
Mr. GRAY. I am glad I get a chance to answer that question . I
would like to do it briefly.
First of all, the Federal Home Loan Bank Board has traditionally, over many, many years, exchanged information with the Treasury, which is under the Chief Fiscal Officer of the United States ,
with other regulatory agencies, including the Federal Reserve. And
we have continued to do that . Particularly in extraordinary situations.
Now, I want to assure you that I have never taken instructions
from anyone, anyone, whether in the White House or Treasury or
anywhere else, nor has any other member of the Federal Home
Loan Bank Board because, in all honesty, we are an independent
agency.
Ms. OAKAR. But did you discuss the politics in Ohio?
Mr. GRAY. I absolutely never discussed any kind of politics in the
State of Ohio.
Ms. OAKAR. Well, it is referred to in the Wall Street Journal article.
Mr. GRAY. Well, that is pure unadulterated fiction. Because no
one ever called me to talk about politics in Ohio. The first time I
ever became aware of the plan alleged in the Wall Street Journal
was when I read it in the Wall Street Journal.
MS. OAKAR. I do not think the question has been answered specifically, but I will leave that to the committee to investigate.
Mr. BARNARD. Thank you very much .
Ms. Horn, how much did the Federal Reserve Bank lend out of
its discount window to these Ohio institutions?
Ms. HORN . Altogether――

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Mr. BARNARD. I am not asking you individually, but cumulatively?
Ms. HORN. Altogether, throughout this whole period, we have
lent in the range of $70 million .
Mr. BARNARD. $70 million.
Ms. HORN . That is a cumulative figure . Of course, it has been
paid back.
Mr. BARNARD. For the uninformed, all of that had to be secured .
Ms. HORN. Yes, it was secured .
Mr. BARNARD. And what maturities are you working on for those
loans?
Ms. HORN. They are relatively short-term loans.
Mr. BARNARD. Two weeks? Four weeks?
Ms. HORN. We do not have a designated maturity, but we have
overall guidelines limiting the frequency that an institution can
obtain adjustment credit. I cannot answer your question with a specific number of days, but we are talking about short periods of
time.
Mr. BARNARD. Do you think that in some of these more troubled
institutions that-even though you are secured-you will be a little
bit more liberal in renewing these discount notes?
Ms. HORN. There is no question about it . The guidelines are in
place so that we can use judgment in respect to them. As we
review the needs of the institutions, we will be adhering to the
guidelines-Mr. BARNARD. And you are not setting precedent here? This
precedent is already established?
Ms. HORN . I do not quite understand the question .
Mr. BARNARD. Is this the same practice that you use with other
member banks?
Ms. HORN . Absolutely.
Mr. BARNARD . Mr. Gray, did any of the 14 Ohio institutions involved, which were members of the Cincinnati Home Loan Bank,
apply formally or informally for credit?
Mr. GRAY. No, they did not.
Mr. BARNARD. Now, we want to get-well, one other question,
Mr. Gray. Because of this situation in Ohio, do you recommend a
more formal association with State savings and loan agencies or
even State private insurance funds, such as the exchange of examinations and so forth? Especially since you are subject to be called
on to either- no, you are not necessarily, but Mr. Martin is, the
Federal Reserve is subject to be called on as far as the discount
window is concerned . Of course, you are not eligible to loan to
these State-chartered institutions. Am I correct?
Mr. GRAY. That is correct
Mr. BARNARD . The Home Loan Bank BoardMr. GRAY [continuing]. As to Ohio institutions that were not
members of the Federal Home Loan Bank of Cincinnati.
Mr. BARNARD. Mr. Martin?
Mr. MARTIN. Mr. Chairman, I would assure you that the results
of the Ohio experience, since it is the most recent of its type, will
be communicated in our training sessions with the various officers ,
discount officers, and others within the whole Federal Reserve
System, and will be communicated to those State officials who are

295
working with our Federal Reserve bank presidents and officials in
the so-called training and orientation to improve both their and
our operations. This experience will not go on the shelf.
Mr. GRAY. Incidentally, Mr. Chairman, we do exchange information of a supervisory nature with other State savings institutions
regulatory agencies.
Mr. BARNARD. Including Ohio?
Mr. GRAY. With the State regulatory agencies.
Mr. BARNARD. Do they exchange information with you though?
That is the question. Now, I mean, are they furnishing you a copy
of their examinations?
Mr. GRAY. Well, we are really talking here about FSLIC-insured
institutions.
Mr. BARNARD. OK, yes. We need to, at this point in time, move
our discussion to some of the practices- policies and practice of supervisory agencies, especially as it is associated with ESM . And I
will ask all of you this. What procedures-Home Loan Bank Board,
Comptroller, and the Federal Reserve-are your examiners supposed to follow, during the examination process, to verify that an
institution which has entered into a repo agreement has actual possession of those securities?
Mr. GRAY. Well, in the case of the Federal Home Loan Bank
Board, repos and reverse repos are subject to two levels of review.
The first is the required annual audit by an accounting firm . Audit
procedures require verifications . The second level of review would
be during an actual examination of the institution . Examinations
procedures would require verification that the association's records
of the transaction were complete, adequately maintained, and they
would further require a review of such transactions to see if they
were in keeping with the Bank Board's regulations and guidelines .
Unusual positions or violations such as excess collateralization
which we have dealt with in guidelines which were issued on July
13, 1981 , would warrant comment and further investigation by our
supervisory personnel.
Mr. BARNARD. Mr. Martin?
Mr. MARTIN. Our examiners, according to a series of instructions,
written instructions, they have in these matters, check on the documentation, check on the credit worthiness of the institutions with
which the banker is dealing, check on the internal auditing procedures within that bank with regard to documentation, location of
collateral and so forth, and on and on. We have a rather elaborate
system of checking in it.
Mr. SELBY. Well, our examiners' handbook requires that our examiners verify that the banks have taken possession of the securities period.
Mr. BARNARD. In that event then, Mr. Gray, were these procedures followed in the September 1984 examination of the American
Savings and Loan?
Mr. GRAY. Yes, I believe they were.
Mr. BARNARD. Did you know that American's securities were
mixed in with everybody else's in ESM's account at Bradford
Trust?
Mr. GRAY. Yes, yes . Bradford Trust? Let me say, that I am a bit
hesitant, in all candor, to talk about it.

296

Mr. BARNARD. I beg your pardon?
Mr. GRAY. I am a bit reluctant in all candor to talk in this public
forum about an ongoing institution where confidence is important
and certainly we would be pleased to provide members of the subcommittee with this information privately. I really am reluctant to
get into great detail publicly because of the possible harm it could
cause to any individual institution.
Mr. BARNARD. I can understand that, Mr. Gray, and we certainly
do concur with you in that particular situation .
Mr. Gray, the subcommittee has information that on a number
of occasions between 1980 and 1985, the Federal Home Loan Bank
Board in its examination supervisory capacities came across unsafe
and unsound transactions involving ESM. For example, in 1980 and
1981 , the Bank Board participated in a joint examination of Unity
Savings Association of Chicago and the issuance of a cease-anddesist order involving Unity's $200 million transaction with ESM.
You have advised the subcommittee that in 1982, the Federal
Home Loan Bank of Cincinnati was aware of rumors of Home
State's dealings with ESM. And yet these rumors were not investigated. In 1983 and in 1984, immediately after ESM's principal
founder, Ronnie Ewton, was made a board member and put on the
executive committee of American Savings and Loan of Florida, an
FSLIC institution , American entered into a large and unsafe transaction with ESM .
You advised the subcommittee that the FSLIC insurance fund is
likely to sustain an $8 million loss because of the dealings of federally insured thrifts with ESM.
Could you provide us with more details as to that loss?
Mr. GRAY. I will be happy to provide information for the record.
[The information referred to follows: ]

297

1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
||||| Federal Savings and Loan Insurance Corporation

Federal Home Loan Bank Board
OFFICE OF EXAMINATIONS AND SUPERVISION

April 11 , 1985

RECEIVED
121985
Mr. Peter S. Barash
Staff Director
Commerce , Consumer , and Monetary Affairs
Subcommittee of the Committee on
Government Operations
Rayburn House Office Building , Room B-377
Washington, DC 20515

COMMERCE, CONSUMER AND
MONETARY AFFAIRS SUBCOMMITTEE

Dear Mr. Barash :
During the April 3 , 1985 hearing concerning Ohio privately insured savings
and loans, several matters were discussed regarding which we agreed to
provide you with additional information .
Our estimate of an $8 million dollar potential loss to the FSLIC was based
upon the situation of two institutions which are now in the hands of the
FSLIC. This estimate is based upon the assumption that liquidation will be
necessary in these two cases and represents a worst-case scenario. The
actual loss may be considerably less depending on numerous other factors.
I have enclosed for your information a copy of our memorandum R 6-2 which
discusses over-collateralization of reverse repurchase agreements and provides guidelines for appropriate collateralization levels . This memorandum
was referred to by Chairman Gray during the course of the hearing .
Finally, I am enclosing for your information a copy of a phone log from
the Federal Home Loan Bank of Cincinnati for the period from March 11
through April 4 , 1985. (This is a log of their on-going monitoring of
the situation . )
Please let me know if I can be of any further assistance .

Very truly yours,
Willi
am Shilling
William J. Schilling
Director

Enclosures
CC:

Chairman Gray

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Mr. BARNARD. Evidently, we have lost our records of that, Mr.
Chairman, but we will find them. Mr. Chairman, based on your supervisory knowledge of ESM's speculative and dangerous transactions with financial institutions, did youoppose in any way the
placing of Ronnie Ewton on the board and the executive committee
of American Savings and Loan?
Mr. GRAY. American Savings-Mr. BARNARD. Or to the Home Loan Bank Board?
Mr. GRAY. I do not believe we had anything to say about that in
particular. Counsel advises that this is a State-chartered institution.
Mr. BARNARD . Beg your pardon?
Mr. GRAY. Counsel advises that this is a State-chartered institution and, frankly, apparently we do not have jurisdiction-Mr. BARNARD. It was FSLIC-insured, though?
Mr. GRAY. Yes. It is FSLIC-insured .
Mr. BARNARD . But would not your authority run to that because
of that? Because of FSLIC's insurance, would you not have the jurisdiction to make a determination there?
Mr. GRAY. We can only remove a director if there are grounds
based on a violation of rules and regulations of the Federal Savings
and Loan Insurance Corporation.
Mr. BARNARD . In other words, there was no objection to Mr.
Ewton then being on the board of American Savings and Loan?
Mr. GRAY. Not on the basis of our discretionary authority, I
gather from counsel.
Mr. BARNARD. Given the large exposure of American Savings and
Loan and its ESM transaction and the involvement of Marvin
Warner in initiating those transactions, can you give us an explanation why the Home Loan Bank Board permitted the institution
to spend $26 million of its precious capital to buy back Mr. Warner's 50-percent ownership in American? Again, because of FSLIC.
Mr. GRAY. The principal supervisory agent of the Federal Home
Loan Bank of Atlanta approved this transaction in which American purchased the Warner stock from Shepard Broad. The purchase price was to be replaced either by the association reselling
the stock or by the sales of subordinated debt. The principal supervisory agent in this connection, urged by the State of Florida, as I
understand, felt that it would be in the best interests of the association for this transaction to take place.
Mr. BARNARD. Was that capital replaced? Did they sell the stock
subsequent to that?
Mr. GRAY. Well, it is in the process of being replaced. I think
they have a commitment to do so within 18 to 24 months.
Mr. BARNARD. Let me get back to the six FSLIC- insured institutions that had financial dealings with ESM. We ask whether the
latest two examinations of those institutions- if those examinations mentioned or criticized their dealings with ESM?
Mr. GRAY. As I recall - and you are talking about the six-there
were comments on several of them . On others apparently there
was not.
Mr. BARNARD. I think there was a mention of it on two of the
examinations but not the other four.
Mr. GRAY. That is right.

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Mr. BARNARD. Is there any reason why it would not have been
uniform ?
Mr. GRAY. Well, apparently the reason that there was no comment is because their position could have been de minimis or could
have been closed out in these instances.
Mr. BARNARD. As you can see all the members of the panel - we
are concerned about security dealers, and what it has done, especially as far as this particular situation in Ohio is concerned. And
frankly, I guess that is much of the reason why we are having
these unfortunate hearings today.
I guess it is unfortunate, likewise, that the Federal Reserve has
not anticipated this sort of event coming for a long time. And I
would just like to quote from some testimony given by Mr. Tony
Solomon, who was president of the New York Fed back in May
1982. When he testified before the Senate Banking Committee concerning the Drysdale collapse he said, and I quote,
[I]n
today's situation, with everybody traumatized by what has happened [ in the Drysdale situation ] and looking very carefully and reviewing their situation, I would say it was extremely unlikely that
there is another Drysdale around.
Now, Mr. Martin, in view of that, and we have had since Drysdale, Lombard-Wall, the Lion Capital, and now ESM . How manywhat is the attitude now of the Fed regarding these nonregistered
security dealers?
Mr. MARTIN. Mr. Chairman, as my colleague, the new President
of the Federal Reserve of New York, has this week testified before
another committee of the House of Representatives, we are aware
that the volume of trading in these markets is enormous, as I alluded to before. We are aware that there may be need for additional flows of information, additional analysis, even additional supervision. We are going to go ahead, as of May 1 , and initiate a reporting-voluntary admittedly-reporting process for the secondary
dealers in this market. We are gathering information and reviewing the situation given ESM and just the volume of trading there.
Mr. BARNARD. You would not agree then with the statement that
[your supervision of] the Government securities market is really
aimed at the maintenance of an orderly market for U.S. debt securities and not at the detection of fraudulent practices or protecting
investors?
Mr. MARTIN. Well, the market has of course a whole series of
purposes. As a market it is a way of financing our very, very large
deficit and the turnover of that deficit. In terms of our responsibility we have not been accorded the specifics in a complete way of
protecting depositors or holders of securities, although we make
every effort to maintain an orderly market and the sound group of
institutions, particularly the primary dealers, because they are the
big volume operators.
Mr. BARNARD . In other words, are you saying that if the normal
bank examination and supervisory procedures are carried out- so
far as banks are concerned and savings and loans-the institutions
do not need any more protection, from the standpoint of registering
all security dealers?
Mr. MARTIN. I think that every involved agency, State or Federal, can afford to sharpen its procedures in reviewing these kinds of

300
relationships, to see how adequate they are given today's markets.
But I am not here to advocate additional regulations.
Mr. BARNARD. Mr. Martin, in 1980, the Federal Reserve participated with the Treasury and the SEC in a study of fraudulent practices in the Government securities market. What steps has the Federal Reserve taken as a result of that study?
Mr. MARTIN. We have enhanced our examination procedures and
instructions to our examiners. We have stepped up our surveillance
of the primary dealers in New York through a kind of a suboffice
headed by Edward Ging of the Fed of New York, so that we get
more information more regularly, do more analyses, have more
people, person hours devoted to that process at the Fed in New
York.
Mr. BARNARD. Do you feel like that is a satisfactory solution to
the present problem?
Mr. MARTIN. I think, sir, that we-I am sorry to be repetitive. I
believe that our present review of those procedures will lead us to
an answer which we do not have at this moment. I would say it
warrants restudy and reappraisal which we are in the process of
doing.
Mr. BARNARD. Mr. Martin , I think that, in my own opinion, and I
will speak for myself personally, I think the Fed acted very responsibly in this situation. And I think that we probably set some
precedent in the involvement of the Fed in these State-chartered
institutions, which were also privately insured .
I think the question which everyone has on his mind now is
whether the Federal Reserve stands ready to act promptly to
supply liquidity to prevent the type of mass closings of even
healthy institutions which occurred in Ohio.
Mr. MARTIN. I can only say, Mr. Chairman, that we have learned
from this experience. We appreciate the various comments the
committee members and the chairman have made with regard to
our performance here. We have learned from it. And there is no
question of our commitment to you and to the public to act promptly. I think somebody, some official in the Bank of England 100 and
some years ago, said in these situations you lend, you lend boldly,
and you keep on lending.
Ms. HORN. And I would just add, if I might, Mr. Chairman, that
in the Ohio case we did not refuse a single request for liquidity.
Mr. BARNARD. It is interesting, Ms. Horn, though, that in view of
all the needs that were developed- in Ohio-was the Fed not surprised by the small amount of requests that they had?
Ms. HORN. Yes, I think that is a fair statement. In fact, we were
prepared for more than a week for the requests to come in. We
communicated with the institutions about their possible needs . The
requests were slow in starting up, as confidence deteriorated, the
situation became more severe.
Mr. BARNARD. Do you think this came about because of the wide
publicity that was given to the fact that the Fed was involved and
that the Home Loan Bank Board was doing all they could to bring
other institutions-do you think that that sort of stemmed the
need for this additional borrowing?
Ms. HORN. There is no question about it; these institutions run
on confidence, even more than they run on cash. And we tried to

301
make public statements occasionally, when it seemed appropriate,
to indicate the Federal Reserve's participation in the situation, and
we believe that added to the public confidence .
Mr. BARNARD . One last question I would like to ask of Mr. Selby.
In 1977, the Office of the Comptroller of the Currency had substantial supervisory experience involving ESM Government Securities
that painted the firm in a highly damaging light. I think you have
pretty well testified that your concerns ran so deep that some
criminal referrals were made involving the National Bank of South
Florida's dealings with ESM. Agreements were entered into with
six national banks in Florida prohibiting them from doing any
business with ESM. And you wrote the presidents of all national
banks warning against the types of securities transactions that
ESM regularly offered .
You did alert the SEC as to your concerns and you did provide
some information to the FDIC and the Florida comptroller.
You did not, I presume, communicate it at all with your State
counterparts. I think we are repeating testimony here but I want
to get it for the record. And there was no attempt to sit down and
coordinate with the other Federal banking agencies in a concerted
enforcement actions against ESM. Knowing what you know now,
do you not think that ESM could have been stopped or its tactics
exposed years ago, if Federal and State banking and securities
agencies had acted together?
Mr. SELBY. Well, I do not know that we could have stopped ESM .
I do not think that was our responsibility to say, to make a determination whether ESM was performing illegal transactions . Our
responsibilities were to see that the banks were operating in a safe
and sound manner. And to avoid having the banks, the national
banks particularly, participate in any kind of transactions that
might accrue loss to them. And I am not terribly sure I would
know how the Federal banking agencies could say to the world at
large that an ESM is not-you do not do business with an ESM.
We referred it to the SEC. And I think that was our obligation . I
do think in retrospect maybe that we could have, among the Federal agencies, and perhaps even the State agencies, done a better job
in talking about an ESM, and all we could do is to share our experiences with ESM. I do not think we could tell the Federal Reserve
or the FDIC or the Federal Home Loan Bank Board , "Here is a
firm that we suspect of doing illegal things ."
Mr. BARNARD . Well, you know, I understand that. And of course,
it is very obvious that everybody dealing with ESM did not have
losses.
Mr. SELBY. That is right.
Mr. BARNARD. It is very obvious that somewhere along the regulatory process there was some slippage here . Those who did not
have segregated accounts, and who did not have trust receipts, they
seem to be operating with some regularMr. SELBY. I think we could do a better job, and I think we are
doing a better job in disseminating information to the industry. We
all along have issued these banking circulars and assurances on
the securities transactions. The 1977 was not the only one. We
have done it all along, and as a matter of fact, right now I am
chairman of the task force on bank supervision under the FFIEC,

302
and the counsel has approved a drafting of a new circular that will
be sent out by all five agencies, talking about these very same
things . This was started back in the fall of last year .
Mr. BARNARD. That is the Federal-Mr. SELBY. The Federal Financial Institutions Examination
Council .
Mr. BARNARD. Mr. Gray is Chairman of that.
Mr. SELBY. Mr. Gray is now Chairman of it, that is correct.
Mr. GRAY. I am the Chairman, and we will be looking into this
very carefully and closely in the future.
Mr. BARNARD. Mr. Craig.
Mr. CRAIG. Two last questions. First of Mr. Martin and Ms. Horn .
Your activity and the method by which you approached the problem in Ohio and the ability that you could move in was entirely
within the law and you were responding to the law as it currently
is?
Mr. MARTIN. Yes, sir. We have alluded several times to the Monetary Control Act of 1980 and that is exactly what you all intended
us to do-Mr. CRAIG. That is correct.
Mr. MARTIN. For depository institutions .
Mr. CRAIG. And because of that law you were able to respond in
a timely and necessary fashion to the needs of those institutions?
Mr. MARTIN. Yes, sir.
Ms. HORN . That law, and our general approach of wanting to be
cooperative with everybody in trying to fashion a solution enabled
us to respond in a timely and necessary fashion.
Mr. CRAIG. Thank you.
Mr. Gray, I may make the mistake of quoting from the Wall
Street Journal in light of concern about its reporting today, I have
here a March 18 Wall Street Journal page with a listing of the activities on a day-by-day basis of the Ohio S&L crisis. I see that on
March 9-10, Home State closes. In your testimony, you say on
Wednesday evening, March 13, representatives of the Federal
Home Loan Bank of Cincinnati examined State reports on Ohio
Fund members to make a preliminary estimate of their eligibility
for FSLIC insurance.
Why did that Home Loan Bank move at that time?
Mr. GRAY. I think we wanted to move as quickly as we could and
we employed the information which we had at that early date to
try to get a fix on the situation to the extent we could.
I think much of the information we had at that time was relatively cursory. But we were at least trying to get a feel.
Mr. CRAIG. The Cincinnati board moved on your instruction?
Mr. GRAY. Yes.
Mr. CRAIG. That was how many working days from the time of
the public-announced closure of Home State?
Mr. GRAY. Two days.
Mr. CRAIG. Thank you very much. I have no further questions at
this time, Mr. Chairman ..
Mr. BARNARD. Mr. Kindness.
Mr. KINDNESS. Thank you , Mr. Chairman.
Just one quick question for Chairman Gray. There was some
questioning a little while ago which had to do with whom you had

303
breakfast with on what day, and that sort of thing. And regrettably
it is the sort of thing that happens around here once in a while,
and you were interrupted constantly. Is there anything else you
wanted to say on that subject?
Mr. GRAY. I certainly would.
Mr. KINDNESS . I regret that Representatives Oakar and Luken
could not stay, butMr. GRAY. Thank you very much . Well, I appreciate the opportunity.
I read with considerable interest the article in the Wall Street
Journal. Frankly, substantial portions of that article were inaccurate, misleading, distorted, and just plain wrong.
It is interesting to note that the author of the article made no
attempt at all to solicit my views or my account of our involvement
and the efforts which we made . I note that a substantial portion of
the article is given to the comments of at least two Members of
Congress who have had a disagreement with me over the way we
have handled this situation .
I want to point out again that I wanted to send the general counsel to the meeting at the Federal Reserve because I felt that he
could provide the kind of information that the Members of Congress and the members of the Ohio thrifts could use. And I felt that
at that time it was more appropriate for me to meet with Members
of the Congress as soon as possible. And in that evening meeting
we extended the invitation through the general counsel to meet in
my office the following morning at 11:30. There was no mention of
that in the article that Congresswoman Oakar chose not to come to
that meeting. And I regret of that. Mr. Luken did.
Another part of the article says that only after some resistance
did I let Democratic Representative Luken and one thrift executive
join a meeting with Republican Representatives from Ohio . The
fact is that Mr. Luken was invited and was obviously a part of the
group that came. We did not show any resistance to let him in at
all.
Mr. Gradison, one of your colleagues , a Representative from the
State of Ohio, told me yesterday that he was not completely quoted
in his remarks. In fact, he told me that when he was quoted as
saying, "I wonder, too, if political considerations were placed above
confidence in and the integrity of the financial system," as is written in the article, the Wall Street Journal left out another part of
his statement which clarified it substantially. What he furthermore
said was, "There is no indication that that happened."
There is also a suggestion that Mr. Volcker was urging me to expedite the insurance process. Well, you know, as I have already discussed before, I met with Chairman Volcker on the final evening of
the bank holiday. I have talked with him for more than 2 years
now and he has never called to question, or asked about, a course
of action taken by the Federal Home Loan Bank Board - ever!
And I have had some differences, as you may know, with the
Treasury from time to time on particular matters. They have been
expressed. We do share information with the Department of the
Treasury, because after all that is headed by the Chief Fiscal Officer of the United States, just as we share information with the
Chairman of the Federal Reserve Board and members of the Feder-

304
al Reserve Board because it is their responsibility to maintain the
integrity and financial stability of this country.
Such communications are a responsible course of action . And we
also exchange information with our fellow financial regulators in
all of the Federal financial regulatory agencies. That is also a prudent, long established practice.
So I thank you for the opportunity to make my comments, Congressman.
Mr. KINDNESS . Thank you . I am sorry it was necessary.
Mr. BARNARD. Gentlemen, we thank you, and, lady, very much
for being with us today. And you certainly have contributed tremendously to this.
I just want to say in closing, we all are concerned about maintaining the confidence in our financial institutions. And certainly I
do not have to preach to you about how much we are indebted to
you and your organizations in helping us maintain that confidence
in the public sector for our financial institutions .
And I sincerely hope that you will continue . We have had some
traumatic experiences in the last 4 or 5 years . We have had Penn
Square . We have had United American . We had Empire . No regulatory agency has been left out of this, possibly except for the Fed,
and you have been lucky.
But we need your continual vigilance in what you are doing in
order to help us maintain the confidence in our financial institutions.
Thank you very much.
Mr. GRAY. Thank you.
Mr. BARNARD. Our next panel consists of Charles C. Hogg II, who
is president of the Maryland Savings-Share Insurance Corp .; Ms.
Pamela A. Hathaway, executive vice president of the Pennsylvania
Savings Association Insurance Corp.; Donald R. Beason, president
of the Financial Institutions Assurance Corp. of North Carolina;
Leonard Lapidus, executive vice president, Mutual Savings Central
Fund of Massachusetts; and James L. Burns, Jr., executive vice
president of the Cooperative Central Bank of Massachusetts.
We will begin with Mr. Hogg and then go with Ms. Hathaway on
across the table and following that, we will have our questions . Mr.
Hogg.
STATEMENT OF CHARLES C. HOGG II , PRESIDENT, MARYLAND
SAVINGS-SHARE INSURANCE CORP.
Mr. HOGG. Mr. Chairman, members of the subcommittee , it is my
pleasure to be here and to address you on this very important issue
that is being discussed this morning.
I have submitted complete testimony and a very complete questionnaire. I would request that that be entered into the record .
Mr. BARNARD. Without objection , your entire testimony will be in
the record and you may summarize at your convenience.
Mr. HOGG. I will do that, sir.
My name is Charles Hogg. I am president and chief operating officer of the Maryland Savings-Share Insurance Corp. , referred to as
MSSIC.

305
MSSIC was created in 1962 by a special act of the Maryland General Assembly for the purpose of providing a viable form of deposit
insurance for State-chartered savings and loans.
Our purpose is, in addition to insuring accounts are to facilitate
the flexibility of our industry and to provide liquidity.
Currently MSSIC insures 102 State-chartered savings and loans,
all of whom have their principal offices in Maryland. These members have assets of about $8.9 billion and savings of $7.2 billion.
The figures I will give you for MSSIC are as of December 31 ,
1984. They were audited with an unqualified opinion by Touche
Ross & Co.
We had total assets at that period of $204 million . Our reserves
are $ 166.8 million . The components of the reserves, as we calculate
them , are the capital deposits from our members of about $ 144.3
million, retained earnings over the 23 years of operation of $17.5
million and a reserve for insurance losses of $5 million, therefore
totally $ 166.8 million.
In addition MSSIC maintains a central reserve fund, which has
as its primary purpose liquidity, of $80.8 million . We maintain,
with a group of five banks, a line of credit equal to $60 million .
The most important point in my testimony to you today will
cover the highly sophisticated regulatory and supervisory system
that we have in Maryland in dealing with the State-chartered,
MSSIC-insured industry.
This regulatory system includes a very complete monthly report
submitted to us by each member whose assets exceed $ 3 million .
The data on the reports gives us complete knowledge of compliance or noncompliance of members with our regulations. We have
a sophisticated data processing system into which the monthly reports are input against the programming of that data. Our highly
qualified staff then follows up on exceptions and trends and highlights that the computer output gives us.
An important aspect of our operation in Maryland is close coordination with the State through the division of savings and loan associations which is an agency of the department of licensing and regulation and the true State regulator of the industry.
This coordination includes both exchanging of exams and reports, and cross attendance at board meetings. By that I mean I
attend meetings of the board of commissioners. Mr. Brown, from
whom you will hear later, attends the MSSIC board meetings . We
hold joint supervisory conferences . My staff attends the exit interviews of the division . When they complete an examination of an institution, we get a copy of that examination and we get a copy of
the institution's reponse to the comments in the examination .
So, while there is total coordination of our effort, there is independent analysis. The coordination then has to do with dealing
with potential problem situations.
We believe that in the insurance company, that we are managing
risk through the monitoring of our institutions and through quick,
effective response to potential problems .
Both the State and MSSIC are active in our role in dealing with
our members, both in examination and in taking corrective action .
It has been said today here, many times, that the key to any depos-

306
it insurance system is confidence . We believe that, obviously. We
also think liquidity being strong is also important.
Liquidity in the MSSIC system at yearend was over 16 percent
among our members. In addition our members maintain lines of
credit with commercial banks . We have proven access, and this
topic has been talked about many times this morning, to the Federal Reserve Bank discount window.
MSSIC sources such as its central reserve fund and its own line
of credit are also important, so we think both cash and confidence
are important in dealing with these problems .
In summary, we know our industry, we respond quickly to problems . We know our jobs and we do them well.
At the appropriate time I would be delighted to answer your
questions. Thank you , sir.
[Mr. Hogg's prepared statement follows: ]

307

Testimony of Charles C. Hogg, II
before
Commerce, Consumer and Monetary Affairs Subcommittee
of the
Committee on Government Operations
April 3, 1984
I am pleased to appear before the Subcommittee to present my views on the
state/private deposit insurance systems and to discuss in particular the Maryland
Savings-Share Insurance Corporation (MSSIC).

My testimony will provide brief

background on MSSIC and respond to the four topics listed in Chairman Barnard's letter
of March 22, 1985.
MSSIC was created in 1962 by a special act of the Maryland General Assembly for
the purpose of providing a viable alternative for deposit insurance for state-chartered
savings and loan associations. In the early 1970's Maryland law was changed to require
deposit insurance for all savings and loans in the state, and MSSIC and the Federal
Savings and Loan Insurance Corporation (FSLIC) were the only providers authorized. The
Charter of MSSIC appears at Title 10, Financial Institutions Article, Annotated Code of
Maryland. The stated purposes of the Corporation are listed there as follows:
"(1) Promote the elasticity and flexibility of the resources of members ;
(2) Provide for the liquidity of members through a central reserve fund; and
(3) Insure the savings accounts of members."
The operations of MSSIC are directed by a Board of Directors comprised of three
members appointed by the Governor of Maryland and eight members elected from among
representatives of member associations .

The Board of Directors employs a staff of

financial professionals to implement Board policies. I am President and Chief Operating
Officer. In addition to the Board of Directors, we have a Membership Committee which
meets monthly to review the operations of the member associations and to determine the
eligibility of new associations for membership.
Our analysis of the operations and financial condition of member associations is an

308

active, not a passive, one. Each member whose assets exceed $3 million is required to
submit monthly a complete financial report which includes a balance sheet, income
statement and supplemental data. This information is entered into an IBM 34 computer
which is programmed to point out exceptions to all of our rules, regulations, guidelines
and policy statements.

In addition the computer provides reports on trend analysis,

margin analysis and any change beyond established parameters.

These reports are

reviewed by our financial analysts , and presented to the Membership Committee and
Board. Most importantly, our staff follows up on the reports by on-site visits to and
review of the operations of selected institutions high-lighted by the reports. These visits
and reviews may include checking on securities portfolios, loan files, operating expenses
and other specifics areas of interest, or they may entail a complete review of the
operations of the institution.
In addition to our major data processing efforts, our staff uses an IBM Personal
Computer to perform selected analysis on member associations as well as for internal
uses.
To supplement the analysis and review conducted by my staff, we have complete
access to the examinations and files of the Division of Savings and Loan Associations (the
Division), the state agency with regulatory responsibilities for the state chartered
industry. Members of my staff attend the Exit Interviews conducted by the state upon
completion of an examination of an institution , and we receive at the same time as the
institution a copy of the Examination Report, and subsequently, a copy of the institutions
response to comments in that examination .

Coordination between MSSIC and the

Division is further enhanced by the Director's attendance at MSSIC Board meetings,and
my attendance at meetings of the Board of Commissioners.

Our staffs and senior

officials meet frequently to coordinate our efforts in dealing with potential problem
associations and to insure that total, complete and free lines of communications exist .
Copies of correspondence between our offices and member institutions are regularly

289
Mr. SAXTON. Is there any danger in having member institutions
actually represent themselves and control themselves? Is that a
built-in problem with private insurance funds?
Mr. GRAY. There is always the potential for conflict of interest,
although I say that generically, without any great knowledge of the
Ohio Deposit Guarantee Fund. And in our efforts to protect the
FSLIC, of course, we do have conflict-of-interest regulations which
are intended to deal with that problem.
Mr. SAXTON. I am not so concerned perhaps about actual conflict
of interest. I am just concerned about who watches the henhouse
better, someone who is completely disassociated with an organization or someone who has a rather close association with member
institutions.
Mr. GRAY. I think as a general proposition it would be better to
have independent governors for that kind of system.
Mr. SAXTON. Thank you, Mr. Chairman.
Mr. BARNARD. Mr. Kindness .
Mr. KINDNESS . Thank you, Mr. Chairman. I will not impose on
the time of the subcommittee further with regard to this panel.
Thank you .
Mr. BARNARD. Ms. Oakar.
MS . OAKAR. Thank you , Mr. Chairman.
Ms. Horn, you testified that on March 9 you took action and
made some initiations with respect to the impending crisis in Ohio.
I want to congratulate you and the Fed on that. You did it under
the spirit of the law. But you took that initiation , and I think that
it did play a role, at least temporarily, in giving some element of
confidence to the situation . I just wanted to congratulate you on
that.
Mr. Gray, Mr. Craig asked a very important question which is
why I am so interested in potential conflicts of interest. I think
what the distinguished minority leader asked was has the Federal
Home Loan Bank Board acted or ever had a situation that was extraordinary in which they really took the bull by the horns and
acted. I think you answered, not to your knowledge. I am concerned about some of the transactions. For instance I look at the
situation with the Financial Corp. of America and its subsidiary in
California that had a run on it. I think that was fairly extraordinary. Their subsidiary had some real problems. What the Federal
Home Loan Bank Board did, and I realize they were federally insured, but you did extraordinary things. The institution was given
unlimited borrowing rights exceeding normal collateralizationMr. GRAY. That is not correct.
MS. OAKAR. Well, how much of the borrowing——
Mr. GRAY. That is absolutely not correct.
MS. OAKAR. How much has the Home Loan Bank Board lent this
institution since October?
Mr. GRAY. From October 31 , 1984, to March 31 , 1985, the Federal
Home Loan Bank of San Francisco advanced $5.6 billion to American Savings & Loan Association in California. During that same
period, American repaid $6.5 billion, for a reduction in its net outstanding advances from the San Francisco Bank of about $ 900 million . I would also note that in every instance, Congresswoman
Oakar, the only credit that has been provided to any of our institu-

290
tions , including American, has been under the collateralization requirements that are imposed by the individual Federal Home Loan
Banks.
Ms. OAKAR. Let me just say this. Mr. Chairman, it is my understanding that they have lent at least $4 billion which is no small
amount of money. By the way, that approximates the total assets
of all 72 institutions that were nonfederally insured, so that was a
pretty extraordinary undertaking. I point that out because there
have been extraordinary situations. And you may have been right
about it, but if I can pursue this. That is why I am concerned about
the rumors, and innuendos, concerning your actions or nonactions
related to the Ohio situation .
I asked you two questions before the full Banking Committee and
I asked you very specifically did you , prior to March 13 or any day
thereafter, get any advice on how to handle the situation from the
Secretary of Treasury or anybody from the White House. You answered that was not relevant. You would not answer it.
Then we have a situation whether it is accurate or not, in which
the Wall Street Journal publishes an article that says, indeed, Secretary Baker discussed this issue with you after having a meeting
in terms of how to decide what the Federal response should be.
They concluded that if the crisis developed it should remain a problem of the Democratic administration in Ohio.
The role that the Federal regulators should play, whether it is
the Federal Home Loan Bank Board or the Federal Reserve Board,
should be above politics. I do not understand why you would not
answer the questions during the Banking Committee hearing, but I
will give you another chance now.
Mr. GRAY. I have been waiting for your question which I am
happy to answer.
Ms. OAKAR. Good . I think you could have solved a lot of problems
on March 27 if you had answered my two questions .
Mr. GRAY. Well, let me just say, with all due respect to you as a
Member of the Congress of the United States, any innuendo, any
discussion of partisan politics, was raised by you and certainly not
by me. For example, and the record will show this, you referred to
the upcoming Governor's race in Ohio.
Ms. OAKAR. That is right.
Mr. GRAY. You referred to my failure to meet with members of
both sides of the aisle , Democrats as well as Republicans . Now, you
know full well that an invitation was extended to you and Congressman Luken and to others, to come to my officeMs. OAKAR. That is right.
Mr. GRAY [continuing]. To meet with me-—
Ms. OAKAR. And you know full well why I did not attend .
Mr. GRAY. Well, no, I do not.
Ms. OAKAR. Because you chose to meet with Congressman Wylie
privately after we had all agreed on an 11:30 meeting, you chose to
meet him for breakfast and my colleague from Ohio can verify
that.
Mr. LUKEN. If the gentlelady will yield.
Ms. OAKAR. I will be happy to yield.
Mr. LUKEN. That is exactly what happened . We have the floor.
We will ask you the questions .

291
Mr. GRAY. Well, just a minute. She just made an observation and
I am going to answer it.
Mr. LUKEN . Are you running this , Mr. Chairman .
Mr. GRAY. Let me just say, Congresswoman Oakar, that the
meeting I had with Congressman Wylie had been set on my calendar 3 weeks before and it was to deal specifically with legislation
which was introduced by request by Congressman Wylie and by
Chairman St Germain of the House Banking Committee. That was
the purpose of that meeting .
MS . OAKAR. Let me yield to my colleague .
Mr. LUKEN. As the gentlelady has said, at extensive meetings on
March 13, with your counsel, we attempted to get a meeting with
you that night. Sixteen or more representatives of savings and
loans of Ohio were present pleading to meet with you. You were
unavailable we were told until 11:30 the following morning. That is
what we were told by your counsel seated here today. You were not
available until 11:30 . Mr. Wylie was there. At 9:30 the following
morning Mr. Wylie called me and said he had had breakfast with
you , had discussed these issues, and told me what your decisions
were. Those are the facts. I repeat, he called me at 9:30, said he
had breakfast with you. I was shocked. And he had discussed these
issues and he laid out what the decisions were which you later confirmed.
I yield back to the gentlelady.
Mr. GRAY. Well, I cannot speak for Congressman Wylie, but I did
tell him at breakfast, which began at 8, that the Bank Board was
going to make a very strong effort to expedite applications as soon
and as quickly as possible.
Mr. BARNARD. Just a second . Let me advise that we owe Mr.
Luken time now. Ms. Oakar's time has expired.
Mr. GRAY. I did not answer, her question which I thinkMr. BARNARD. I mean I think they are participating together on
that.
Mr. LUKEN. I will proceed . Mr. Gray, we did meet with you on
March 13, and I will say right now that if you had taken action at
that time as we requested, that the closings of Friday, March 15,
would not have occurred . Now, I want to say exactly why I say
that. First of all, your statements are inconsistent with those of
Congressman Gradison and Congressman Wylie , as indicated in the
Wall Street Journal.
Mr. Wylie said that you did stall at that time. Mr. Gradison
states that you have reversed yourself since. Now, I want to ask
you-on March 13 did we ask you to waive the 10-day waiting
period? The 10-day notice period? And what was your answer?
Mr. GRAY. Counsel advised me, and you were there, that there
was a 10-day notice period which had to be observed .
Mr. LUKEN. And we pleaded with you to waive it and you said,
"no way," did you not?
Mr. GRAY. Well, I take the advice of my lawyer, who probably
knows more about these things than I do.
Mr. LUKEN. Did you take it a week later when you did waive it?
Mr. GRAY. Yes, I did.
Mr. LUKEN . Oh.
Mr. GRAY. On the advice of counsel .

292
Mr. LUKEN. It is his fault. And at that we asked you to apply
extra help to get other examiners in, and did you not tell us that
you were stretched so thin-

Mr. GRAY. That is right.
Mr. LUKEN. That you could not possibly get any more help.
Mr. GRAY. That is essentially correct.
Mr. LUKEN. And a week later you found all that help that you
have just been describing.
Mr. GRAY. Well, you know, on Sunday evening, as my testimony
indicates, I met with Chairman Volcker in his office and at that
time Chairman Volcker pledged to the Federal Home Loan Bank
Board as many examiners as we would need to bring about the expeditious processing of these applications.
Mr. LUKEN. You had Chairman Volcker's people with you on
March 13, and did you or did you not tell us that it was an Ohio
problem, quote "You are in the wrong city. You should be in Columbus"? Did you say that, Mr. Gray?
Mr. GRAY. I said I thought that individuals should be at the
State capital talking about this problem.
Mr. LUKEN. And when we pleaded on behalf of the depositors,
did you or did you not say that the depositors should have known
that they were not federally insured when they deposited in the
State institutions?
Mr. GRAY. You know, I do not recall that statement, but I
didMr. LUKEN. Well, I will refresh your recollection. You did.
Mr. GRAY. Well--Mr. LUKEN. And when we talked about the savings and loans
and helping the depositors, you said "After all, the savings and
loans had the opportunity previously to join FSLIC and they had
refused it." You did not say that once. I bet you said that at least
six times in our brief meeting.
Mr. GRAY. That is a historical fact.
Mr. LUKEN. And then you would characterize that as cooperative, that you were going to extend yourself? Those reactions that
you were extending yourself for the depositors?
Mr. GRAY. You know, I said repeatedly, Congressman, that the
Federal Home Loan Bank Board and the FSLIC were committing
to do everything possible to expedite applications for insurance of
accounts as quickly as possible.
Mr. LUKEN. But you said you had no help. You had no legal authority. How were you going to expedite it if you did not have anybody to apply to processing the applications. And if you had to
follow the law, which you said could not allow you to expedite it .
And finally, I want to ask one more question.
When the representative of the S&L, his last question to you
was, " Give us 30 days . We will close for 30 days and can you examine these in 30 days," and you said you would not even consider it.
Is that not true?
Mr. GRAY. I said that with a very severe shortage of 750 examiners around the country that would not be possible, and that was in
specific response-Mr. LUKEN. But you have managed to do it in the last 2 weeks.

293
Mr. GRAY. But let me finish what I am saying. That was in specific response to a suggestion that all of our examiners be deployed
summarily to the State of Ohio.
Mr. LUKEN. No. That was not theMr. GRAY. Well, it certainly was.
Mr. LUKEN. The suggestion was -would you at leastMr. GRAY. Congressman Gradison made that suggestion .
Mr. LUKEN . It was not Congressman Gradison. It was the representative of the thrift, and he said that if we close for 30 days- he
said he recognized it that you were not going to help, so he said if
we close for 30 days will you at least examine them within that 30
days. And you said, "No way." You would not even consider it . And
now you are saying that you have already done it in less than 30
days.
Mr. GRAY. Well , now, I have tried to explain to you that on the
following Sunday evening, Chairman Volcker pledged the full support of the Federal Reserve and as a matter of fact, has provided
140 examiners- 140-to help the Bank Board in this process .
Ms. OAKAR. Chairman Volcker has been great . Will the gentleman yield? I just have to ask you the question .
Did Secretary Baker ever call you and tell you to stall and stonewall the Ohio crisis?
Mr. GRAY. I am glad I get a chance to answer your question.
Ms. OAKAR. Mr. Chairman, I think he should answer. Whatever
you want to do. You are investigating it, so maybe you can get it in
writing.
Mr. GRAY. I am glad I get a chance to answer that question . I
would like to do it briefly.
First of all, the Federal Home Loan Bank Board has traditionally, over many, many years, exchanged information with the Treasury, which is under the Chief Fiscal Officer of the United States,
with other regulatory agencies, including the Federal Reserve. And
we have continued to do that. Particularly in extraordinary situations.
Now, I want to assure you that I have never taken instructions
from anyone, anyone, whether in the White House or Treasury or
anywhere else, nor has any other member of the Federal Home
Loan Bank Board because, in all honesty, we are an independent
agency.
MS. OAKAR. But did you discuss the politics in Ohio?
Mr. GRAY. I absolutely never discussed any kind of politics in the
State of Ohio.
Ms. OAKAR. Well, it is referred to in the Wall Street Journal article.
Mr. GRAY. Well, that is pure unadulterated fiction . Because no
one ever called me to talk about politics in Ohio. The first time I
ever became aware of the plan alleged in the Wall Street Journal
was when I read it in the Wall Street Journal .
Ms. OAKAR. I do not think the question has been answered specifically, but I will leave that to the committee to investigate.
Mr. BARNARD . Thank you very much.
Ms. Horn, how much did the Federal Reserve Bank lend out of
its discount window to these Ohio institutions?
Ms. HORN. Altogether--

294
Mr. BARNARD. I am not asking you individually, but cumulatively?
Ms. HORN. Altogether, throughout this whole period, we have
lent in the range of $70 million .
Mr. BARNARD. $70 million.
Ms. HORN . That is a cumulative figure. Of course, it has been
paid back.
Mr. BARNARD. For the uninformed, all of that had to be secured.
Ms. HORN. Yes, it was secured .
Mr. BARNARD. And what maturities are you working on for those
loans?
Ms. HORN . They are relatively short-term loans.
Mr. BARNARD . Two weeks? Four weeks?
Ms. HORN. We do not have a designated maturity, but we have
overall guidelines limiting the frequency that an institution can
obtain adjustment credit . I cannot answer your question with a specific number of days, but we are talking about short periods of
time.
Mr. BARNARD. Do you think that in some of these more troubled
institutions that-even though you are secured-you will be a little
bit more liberal in renewing these discount notes?
Ms. HORN. There is no question about it. The guidelines are in
place so that we can use judgment in respect to them. As we
review the needs of the institutions, we will be adhering to the
guidelines――
Mr. BARNARD. And you are not setting precedent here? This
precedent is already established?
Ms. HORN. I do not quite understand the question.
Mr. BARNARD. Is this the same practice that you use with other
member banks?
Ms. HORN. Absolutely.
Mr. BARNARD. Mr. Gray, did any of the 14 Ohio institutions involved, which were members of the Cincinnati Home Loan Bank,
apply formally or informally for credit?
Mr. GRAY. No, they did not.
Mr. BARNARD. Now, we want to get -well, one other question,
Mr. Gray. Because of this situation in Ohio, do you recommend a
more formal association with State savings and loan agencies or
even State private insurance funds, such as the exchange of examinations and so forth? Especially since you are subject to be called
on to either- no, you are not necessarily, but Mr. Martin is, the
Federal Reserve is subject to be called on as far as the discount
window is concerned . Of course, you are not eligible to loan to
these State-chartered institutions. Am I correct?
Mr. GRAY. That is correct-Mr. BARNARD. The Home Loan Bank BoardMr. GRAY [continuing]. As to Ohio institutions that were not
members of the Federal Home Loan Bank of Cincinnati.
Mr. BARNARD . Mr. Martin?
Mr. MARTIN. Mr. Chairman, I would assure you that the results
of the Ohio experience, since it is the most recent of its type, will
be communicated in our training sessions with the various officers ,
discount officers, and others within the whole Federal Reserve
System , and will be communicated to those State officials who are

295
working with our Federal Reserve bank presidents and officials in
the so-called training and orientation to improve both their and
our operations . This experience will not go on the shelf.
Mr. GRAY. Incidentally, Mr. Chairman, we do exchange information of a supervisory nature with other State savings institutions
regulatory agencies.
Mr. BARNARD. Including Ohio?
Mr. GRAY. With the State regulatory agencies .
Mr. BARNARD. Do they exchange information with you though?
That is the question. Now, I mean, are they furnishing you a copy
of their examinations?
Mr. GRAY. Well, we are really talking here about FSLIC-insured
institutions .
Mr. BARNARD. OK, yes. We need to, at this point in time, move
our discussion to some of the practices- policies and practice of supervisory agencies, especially as it is associated with ESM . And I
will ask all of you this. What procedures-Home Loan Bank Board,
Comptroller, and the Federal Reserve-are your examiners supposed to follow, during the examination process, to verify that an
institution which has entered into a repo agreement has actual possession of those securities?
Mr. GRAY. Well, in the case of the Federal Home Loan Bank
Board, repos and reverse repos are subject to two levels of review.
The first is the required annual audit by an accounting firm . Audit
procedures require verifications. The second level of review would
be during an actual examination of the institution . Examinations
procedures would require verification that the association's records
of the transaction were complete, adequately maintained, and they
would further require a review of such transactions to see if they
were in keeping with the Bank Board's regulations and guidelines .
Unusual positions or violations such as excess collateralization
which we have dealt with in guidelines which were issued on July
13, 1981 , would warrant comment and further investigation by our
supervisory personnel.
Mr. BARNARD. Mr. Martin?
Mr. MARTIN. Our examiners , according to a series of instructions,
written instructions, they have in these matters, check on the documentation, check on the credit worthiness of the institutions with
which the banker is dealing, check on the internal auditing procedures within that bank with regard to documentation , location of
collateral and so forth, and on and on. We have a rather elaborate
system of checking in it.
Mr. SELBY. Well, our examiners' handbook requires that our examiners verify that the banks have taken possession of the securities period.
Mr. BARNARD. In that event then, Mr. Gray, were these procedures followed in the September 1984 examination of the American
Savings and Loan?
Mr. GRAY. Yes, I believe they were.
Mr. BARNARD. Did you know that American's securities were
mixed in with everybody else's in ESM's account at Bradford
Trust?
Mr. GRAY. Yes, yes. Bradford Trust? Let me say, that I am a bit
hesitant, in all candor , to talk about it.

296
Mr. BARNARD. I beg your pardon?
Mr. GRAY. I am a bit reluctant in all candor to talk in this public
forum about an ongoing institution where confidence is important
and certainly we would be pleased to provide members of the subcommittee with this information privately. I really am reluctant to
get into great detail publicly because of the possible harm it could
cause to any individual institution .
Mr. BARNARD. I can understand that, Mr. Gray, and we certainly
do concur with you in that particular situation .
Mr. Gray, the subcommittee has information that on a number
of occasions between 1980 and 1985, the Federal Home Loan Bank
Board in its examination supervisory capacities came across unsafe
and unsound transactions involving ESM. For example, in 1980 and
1981, the Bank Board participated in a joint examination of Unity
Savings Association of Chicago and the issuance of a cease-anddesist order involving Unity's $200 million transaction with ESM .
You have advised the subcommittee that in 1982, the Federal
Home Loan Bank of Cincinnati was aware of rumors of Home
State's dealings with ESM. And yet these rumors were not investigated. In 1983 and in 1984, immediately after ESM's principal
founder, Ronnie Ewton, was made a board member and put on the
executive committee of American Savings and Loan of Florida, an
FSLIC institution , American entered into a large and unsafe transaction with ESM .
You advised the subcommittee that the FSLIC insurance fund is
likely to sustain an $8 million loss because of the dealings of federally insured thrifts with ESM.
Could you provide us with more details as to that loss?
Mr. GRAY. I will be happy to provide information for the record.
[The information referred to follows :]

297

1700 G Street, N.W.
Washington, D.C. 20552
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal Savings and Loan Insurance Corporation

Federal Home Loan Bank Board
OFFICE OF EXAMINATIONS AND SUPERVISION

April 11 , 1985
RECEIVED
121985
Mr. Peter S. Barash
Staff Director
Commerce , Consumer , and Monetary Affairs
Subcommittee of the Committee on
Government Operations
Rayburn House Office Building , Room B-377
Washington, DC 20515

COMMERCE, CONSUMER AND
MONETARY AFFAIRS SUBCOMMITTEE

Dear Mr. Barash :
During the April 3 , 1985 hearing concerning Ohio privately insured savings
and loans , several matters were discussed regarding which we agreed to
provide you with additional information .
Our estimate of an $8 million dollar potential loss to the FSLIC was based
upon the situation of two institutions which are now in the hands of the
FSLIC. This estimate is based upon the assumption that liquidation will be
necessary in these two cases and represents a worst-case scenario . The
actual loss may be considerably less depending on numerous other factors.
I have enclosed for your information a copy of our memorandum R 6-2 which
discusses over- collateralization of reverse repurchase agreements and provides guidelines for appropriate collateralization levels . This memorandum
was referred to by Chairman Gray during the course of the hearing .
Finally, I am enclosing for your information a copy of a phone log from
the Federal Home Loan Bank of Cincinnati for the period from March 11
through April 4 , 1985. (This is a log of their on-going monitoring of
the situation . )
Please let me know if I can be of any further assistance .

Very truly yours,
Willi
am Chilling
William J. Schilling
Director

Enclosures

CC: Chairman Gray

298
Mr. BARNARD. Evidently, we have lost our records of that, Mr.
Chairman, but we will find them. Mr. Chairman, based on your supervisory knowledge of ESM's speculative and dangerous transactions with financial institutions, did youoppose in any way the
placing of Ronnie Ewton on the board and the executive committee
of American Savings and Loan?
Mr. GRAY. American Savings▬▬
Mr. BARNARD. Or to the Home Loan Bank Board?
Mr. GRAY. I do not believe we had anything to say about that in
particular. Counsel advises that this is a State-chartered institution.
Mr. BARNARD . Beg your pardon?
Mr. GRAY. Counsel advises that this is a State-chartered institution and, frankly, apparently we do not have jurisdiction-Mr. BARNARD. It was FSLIC- insured , though?
Mr. GRAY. Yes. It is FSLIC- insured .
Mr. BARNARD. But would not your authority run to that because
of that? Because of FSLIC's insurance , would you not have the jurisdiction to make a determination there?
Mr. GRAY. We can only remove a director if there are grounds
based on a violation of rules and regulations of the Federal Savings
and Loan Insurance Corporation .
Mr. BARNARD. In other words, there was no objection to Mr.
Ewton then being on the board of American Savings and Loan?
Mr. GRAY. Not on the basis of our discretionary authority, I
gather from counsel .
Mr. BARNARD. Given the large exposure of American Savings and
Loan and its ESM transaction and the involvement of Marvin
Warner in initiating those transactions, can you give us an explanation why the Home Loan Bank Board permitted the institution
to spend $26 million of its precious capital to buy back Mr. Warner's 50-percent ownership in American? Again, because of FSLIC.
Mr. GRAY. The principal supervisory agent of the Federal Home
Loan Bank of Atlanta approved this transaction in which American purchased the Warner stock from Shepard Broad. The purchase price was to be replaced either by the association reselling
the stock or by the sales of subordinated debt. The principal supervisory agent in this connection, urged by the State of Florida, as I
understand, felt that it would be in the best interests of the association for this transaction to take place.
Mr. BARNARD . Was that capital replaced? Did they sell the stock
subsequent to that?
Mr. GRAY. Well, it is in the process of being replaced . I think
they have a commitment to do so within 18 to 24 months.
Mr. BARNARD. Let me get back to the six FSLIC-insured institutions that had financial dealings with ESM. We ask whether the
latest two examinations of those institutions- if those examinations mentioned or criticized their dealings with ESM?
Mr. GRAY. As I recall - and you are talking about the six-there
were comments on several of them. On others apparently there
was not.
Mr. BARNARD . I think there was a mention of it on two of the
examinations but not the other four.
Mr. GRAY. That is right.

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Mr. BARNARD. Is there any reason why it would not have been
uniform?
Mr. GRAY. Well, apparently the reason that there was no comment is because their position could have been de minimis or could
have been closed out in these instances.
Mr. BARNARD. As you can see-all the members of the panel -we
are concerned about security dealers, and what it has done, especially as far as this particular situation in Ohio is concerned. And
frankly, I guess that is much of the reason why we are having
these unfortunate hearings today.
I guess it is unfortunate, likewise, that the Federal Reserve has
not anticipated this sort of event coming for a long time. And I
would just like to quote from some testimony given by Mr. Tony
Solomon, who was president of the New York Fed back in May
1982. When he testified before the Senate Banking Committee con66
cerning the Drysdale collapse he said, and I quote,
[I]n
today's situation, with everybody traumatized by what has happened [in the Drysdale situation ] and looking very carefully and reviewing their situation, I would say
99 it was extremely unlikely that
there is another Drysdale around.
Now, Mr. Martin, in view of that, and we have had since Drysdale, Lombard-Wall, the Lion Capital, and now ESM. How manywhat is the attitude now of the Fed regarding these nonregistered
security dealers?
Mr. MARTIN. Mr. Chairman, as my colleague, the new President
of the Federal Reserve of New York, has this week testified before
another committee of the House of Representatives, we are aware
that the volume of trading in these markets is enormous, as I alluded to before. We are aware that there may be need for additional flows of information, additional analysis, even additional supervision . We are going to go ahead, as of May 1 , and initiate a reporting-voluntary admittedly-reporting process for the secondary
dealers in this market. We are gathering information and reviewing the situation given ESM and just the volume of trading there.
Mr. BARNARD. You would not agree then with the statement that
[your supervision of] the Government securities market is really
aimed at the maintenance of an orderly market for U.S. debt securities and not at the detection of fraudulent practices or protecting
investors?
Mr. MARTIN . Well, the market has of course a whole series of
purposes. As a market it is a way of financing our very, very large
deficit and the turnover of that deficit. In terms of our responsibility we have not been accorded the specifics in a complete way of
protecting depositors or holders of securities, although we make
every effort to maintain an orderly market and the sound group of
institutions, particularly the primary dealers, because they are the
big volume operators .
Mr. BARNARD. In other words , are you saying that if the normal
bank examination and supervisory procedures are carried out - so
far as banks are concerned and savings and loans-the institutions
do not need any more protection, from the standpoint of registering
all security dealers?
Mr. MARTIN. I think that every involved agency, State or Federal, can afford to sharpen its procedures in reviewing these kinds of

300
relationships , to see how adequate they are given today's markets.
But I am not here to advocate additional regulations.
Mr. BARNARD. Mr. Martin, in 1980, the Federal Reserve participated with the Treasury and the SEC in a study of fraudulent practices in the Government securities market. What steps has the Federal Reserve taken as a result of that study?
Mr. MARTIN. We have enhanced our examination procedures and
instructions to our examiners. We have stepped up our surveillance
of the primary dealers in New York through a kind of a suboffice
headed by Edward Ging of the Fed of New York, so that we get
more information more regularly, do more analyses, have more
people, person hours devoted to that process at the Fed in New
York.
Mr. BARNARD. Do you feel like that is a satisfactory solution to
the present problem?
Mr. MARTIN. I think, sir, that we-I am sorry to be repetitive. I
believe that our present review of those procedures will lead us to
an answer which we do not have at this moment. I would say it
warrants restudy and reappraisal which we are in the process of
doing.
Mr. BARNARD. Mr. Martin , I think that, in my own opinion, and I
will speak for myself personally, I think the Fed acted very responsibly in this situation . And I think that we probably set some
precedent in the involvement of the Fed in these State-chartered
institutions, which were also privately insured.
I think the question which everyone has on his mind now is
whether the Federal Reserve stands ready to act promptly to
supply liquidity to prevent the type of mass closings of even
healthy institutions which occurred in Ohio.
Mr. MARTIN. I can only say, Mr. Chairman , that we have learned
from this experience. We appreciate the various comments the
committee members and the chairman have made with regard to
our performance here. We have learned from it. And there is no
question of our commitment to you and to the public to act promptly. I think somebody, some official in the Bank of England 100 and
some years ago, said in these situations you lend, you lend boldly,
and you keep on lending.
Ms. HORN. And I would just add, if I might, Mr. Chairman , that
in the Ohio case we did not refuse a single request for liquidity.
Mr. BARNARD. It is interesting, Ms. Horn, though, that in view of
all the needs that were developed - in Ohio- was the Fed not surprised by the small amount of requests that they had?
Ms. HORN. Yes, I think that is a fair statement. In fact, we were
prepared for more than a week for the requests to come in. We
communicated with the institutions about their possible needs. The
requests were slow in starting up, as confidence deteriorated, the
situation became more severe.
Mr. BARNARD. Do you think this came about because of the wide
publicity that was given to the fact that the Fed was involved and
that the Home Loan Bank Board was doing all they could to bring
other institutions- do you think that that sort of stemmed the
need for this additional borrowing?
Ms. HORN. There is no question about it; these institutions run
on confidence, even more than they run on cash . And we tried to

301
make public statements occasionally, when it seemed appropriate,
to indicate the Federal Reserve's participation in the situation , and
we believe that added to the public confidence .
Mr. BARNARD. One last question I would like to ask of Mr. Selby.
In 1977, the Office of the Comptroller of the Currency had substantial supervisory experience involving ESM Government Securities
that painted the firm in a highly damaging light. I think you have
pretty well testified that your concerns ran so deep that some
criminal referrals were made involving the National Bank of South
Florida's dealings with ESM. Agreements were entered into with
six national banks in Florida prohibiting them from doing any
business with ESM. And you wrote the presidents of all national
banks warning against the types of securities transactions that
ESM regularly offered .
You did alert the SEC as to your concerns and you did provide
some information to the FDIC and the Florida comptroller.
You did not, I presume, communicate it at all with your State
counterparts . I think we are repeating testimony here but I want
to get it for the record. And there was no attempt to sit down and
coordinate with the other Federal banking agencies in a concerted
enforcement actions against ESM. Knowing what you know now,
do you not think that ESM could have been stopped or its tactics
exposed years ago, if Federal and State banking and securities
agencies had acted together?
Mr. SELBY. Well, I do not know that we could have stopped ESM .
I do not think that was our responsibility to say, to make a determination whether ESM was performing illegal transactions . Our
responsibilities were to see that the banks were operating in a safe
and sound manner. And to avoid having the banks, the national
banks particularly, participate in any kind of transactions that
might accrue loss to them. And I am not terribly sure I would
know how the Federal banking agencies could say to the world at
large that an ESM is not-you do not do business with an ESM .
We referred it to the SEC. And I think that was our obligation. I
do think in retrospect maybe that we could have, among the Federal agencies, and perhaps even the State agencies, done a better job
in talking about an ESM, and all we could do is to share our experiences with ESM. I do not think we could tell the Federal Reserve
or the FDIC or the Federal Home Loan Bank Board, "Here is a
firm that we suspect of doing illegal things."
Mr. BARNARD. Well, you know, I understand that. And of course,
it is very obvious that everybody dealing with ESM did not have
losses.
Mr. SELBY. That is right.
Mr. BARNARD. It is very obvious that somewhere along the regulatory process there was some slippage here. Those who did not
have segregated accounts, and who did not have trust receipts, they
-seem to be operating with some regular-Mr. SELBY. I think we could do a better job, and I think we are
doing a better job in disseminating information to the industry. We
all along have issued these banking circulars and assurances on
the securities transactions . The 1977 was not the only one. We
have done it all along, and as a matter of fact, right now I am
chairman of the task force on bank supervision under the FFIEC,

302
and the counsel has approved a drafting of a new circular that will
be sent out by all five agencies, talking about these very same
things. This was started back in the fall of last year.
Mr. BARNARD. That is the Federal-—
Mr. SELBY. The Federal Financial Institutions Examination
Council.
Mr. BARNARD. Mr. Gray is Chairman of that.
Mr. SELBY. Mr. Gray is now Chairman of it, that is correct.
Mr. GRAY. I am the Chairman, and we will be looking into this
very carefully and closely in the future.
Mr. BARNARD. Mr. Craig.
Mr. CRAIG. Two last questions. First of Mr. Martin and Ms. Horn .
Your activity and the method by which you approached the problem in Ohio and the ability that you could move in was entirely
within the law and you were responding to the law as it currently
is?
Mr. MARTIN. Yes, sir. We have alluded several times to the Monetary Control Act of 1980 and that is exactly what you all intended
us to do-Mr. CRAIG. That is correct.
Mr. MARTIN. For depository institutions.
Mr. CRAIG. And because of that law you were able to respond in
a timely and necessary fashion to the needs of those institutions?
Mr. MARTIN . Yes, sir.
Ms. HORN. That law, and our general approach of wanting to be
cooperative with everybody in trying to fashion a solution enabled
us to respond in a timely and necessary fashion.
Mr. CRAIG. Thank you.
Mr. Gray, I may make the mistake of quoting from the Wall
Street Journal in light of concern about its reporting today, I have
here a March 18 Wall Street Journal page with a listing of the activities on a day-by-day basis of the Ohio S&L crisis. I see that on
March 9-10, Home State closes. In your testimony, you say on
Wednesday evening, March 13, representatives of the Federal
Home Loan Bank of Cincinnati examined State reports on Ohio
Fund members to make a preliminary estimate of their eligibility
for FSLIC insurance.
Why did that Home Loan Bank move at that time?
Mr. GRAY. I think we wanted to move as quickly as we could and
we employed the information which we had at that early date to
try to get a fix on the situation to the extent we could.
I think much of the information we had at that time was relatively cursory. But we were at least trying to get a feel.
Mr. CRAIG . The Cincinnati board moved on your instruction?
Mr. GRAY. Yes.
Mr. CRAIG. That was how many working days from the time of
the public-announced closure of Home State?
Mr. GRAY. Two days.
Mr. CRAIG. Thank you very much. I have no further questions at
this time, Mr. Chairman.
Mr. BARNARD. Mr. Kindness .
Mr. KINDNESS. Thank you, Mr. Chairman.
Just one quick question for Chairman Gray. There was some
questioning a little while ago which had to do with whom you had

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breakfast with on what day, and that sort of thing. And regrettably
it is the sort of thing that happens around here once in a while ,
and you were interrupted constantly. Is there anything else you
wanted to say on that subject?
Mr. GRAY. I certainly would .
Mr. KINDNESS . I regret that Representatives Oakar and Luken
could not stay, but
Mr. GRAY. Thank you very much . Well, I appreciate the opportunity.
I read with considerable interest the article in the Wall Street
Journal. Frankly, substantial portions of that article were inaccurate, misleading, distorted, and just plain wrong.
It is interesting to note that the author of the article made no
attempt at all to solicit my views or my account of our involvement
and the efforts which we made. I note that a substantial portion of
the article is given to the comments of at least two Members of
Congress who have had a disagreement with me over the way we
have handled this situation .
I want to point out again that I wanted to send the general counsel to the meeting at the Federal Reserve because I felt that he
could provide the kind of information that the Members of Congress and the members of the Ohio thrifts could use. And I felt that
at that time it was more appropriate for me to meet with Members
of the Congress as soon as possible. And in that evening meeting
we extended the invitation through the general counsel to meet in
my office the following morning at 11:30. There was no mention of
that in the article that Congresswoman Oakar chose not to come to
that meeting. And I regret of that. Mr. Luken did.
Another part of the article says that only after some resistance
did I let Democratic Representative Luken and one thrift executive
join a meeting with Republican Representatives from Ohio. The
fact is that Mr. Luken was invited and was obviously a part of the
group that came . We did not show any resistance to let him in at
all .
Mr. Gradison, one of your colleagues, a Representative from the
State of Ohio, told me yesterday that he was not completely quoted
in his remarks. In fact, he told me that when he was quoted as
saying, "I wonder, too, if political considerations were placed above
confidence in and the integrity of the financial system," as is written in the article, the Wall Street Journal left out another part of
his statement which clarified it substantially. What he furthermore
said was, "There is no indication that that happened."
There is also a suggestion that Mr. Volcker was urging me to expedite the insurance process . Well, you know, as I have already discussed before, I met with Chairman Volcker on the final evening of
the bank holiday. I have talked with him for more than 2 years
now and he has never called to question , or asked about, a course
of action taken by the Federal Home Loan Bank Board- ever!
And I have had some differences, as you may know, with the
Treasury from time to time on particular matters. They have been
expressed. We do share information with the Department of the
Treasury, because after all that is headed by the Chief Fiscal Officer of the United States, just as we share information with the
Chairman of the Federal Reserve Board and members of the Feder-

304
al Reserve Board because it is their responsibility to maintain the
integrity and financial stability of this country.
Such communications are a responsible course of action . And we
also exchange information with our fellow financial regulators in
all of the Federal financial regulatory agencies. That is also a prudent, long established practice.
So I thank you for the opportunity to make my comments, Congressman.
Mr. KINDNESS . Thank you. I am sorry it was necessary.
Mr. BARNARD. Gentlemen, we thank you, and, lady, very much
for being with us today. And you certainly have contributed tremendously to this.
I just want to say in closing, we all are concerned about maintaining the confidence in our financial institutions. And certainly I
do not have to preach to you about how much we are indebted to
you and your organizations in helping us maintain that confidence
in the public sector for our financial institutions .
And I sincerely hope that you will continue. We have had some
traumatic experiences in the last 4 or 5 years. We have had Penn
Square . We have had United American. We had Empire. No regulatory agency has been left out of this, possibly except for the Fed,
and you have been lucky.
But we need your continual vigilance in what you are doing in
order to help us maintain the confidence in our financial institutions.
Thank you very much.
Mr. GRAY. Thank you.
Mr. BARNARD. Our next panel consists of Charles C. Hogg II, who
is president of the Maryland Savings-Share Insurance Corp .; Ms.
Pamela A. Hathaway, executive vice president of the Pennsylvania
Savings Association Insurance Corp .; Donald R. Beason, president
of the Financial Institutions Assurance Corp. of North Carolina;
Leonard Lapidus , executive vice president, Mutual Savings Central
Fund of Massachusetts; and James L. Burns, Jr., executive vice
president of the Cooperative Central Bank of Massachusetts .
We will begin with Mr. Hogg and then go with Ms. Hathaway on
across the table and following that, we will have our questions. Mr.
Hogg.
STATEMENT OF CHARLES C. HOGG II, PRESIDENT, MARYLAND
SAVINGS -SHARE INSURANCE CORP.
Mr. HOGG . Mr. Chairman, members of the subcommittee, it is my
pleasure to be here and to address you on this very important issue
that is being discussed this morning.
I have submitted complete testimony and a very complete questionnaire. I would request that that be entered into the record .
Mr. BARNARD . Without objection, your entire testimony will be in
the record and you may summarize at your convenience.
Mr. HOGG. I will do that, sir.
My name is Charles Hogg. I am president and chief operating officer of the Maryland Savings-Share Insurance Corp. , referred to as
MSSIC.

305
MSSIC was created in 1962 by a special act of the Maryland General Assembly for the purpose of providing a viable form of deposit
insurance for State-chartered savings and loans.
Our purpose is , in addition to insuring accounts are to facilitate
the flexibility of our industry and to provide liquidity.
Currently MSSIC insures 102 State-chartered savings and loans,
all of whom have their principal offices in Maryland . These members have assets of about $8.9 billion and savings of $7.2 billion .
The figures I will give you for MSSIC are as of December 31 ,
1984. They were audited with an unqualified opinion by Touche
Ross & Co.
We had total assets at that period of $204 million . Our reserves
are $ 166.8 million. The components of the reserves, as we calculate
them, are the capital deposits from our members of about $ 144.3
million, retained earnings over the 23 years of operation of $17.5
million and a reserve for insurance losses of $5 million, therefore
totally $166.8 million .
In addition MSSIC maintains a central reserve fund, which has
as its primary purpose liquidity, of $80.8 million. We maintain ,
with a group of five banks, a line of credit equal to $60 million .
The most important point in my testimony to you today will
cover the highly sophisticated regulatory and supervisory system
that we have in Maryland in dealing with the State-chartered ,
MSSIC-insured industry.
This regulatory system includes a very complete monthly report
submitted to us by each member whose assets exceed $3 million.
The data on the reports gives us complete knowledge of compliance or noncompliance of members with our regulations. We have
a sophisticated data processing system into which the monthly reports are input against the programming of that data. Our highly
qualified staff then follows up on exceptions and trends and highlights that the computer output gives us.
An important aspect of our operation in Maryland is close coordination with the State through the division of savings and loan associations which is an agency of the department of licensing and regulation and the true State regulator of the industry.
This coordination includes both exchanging of exams and reports, and cross attendance at board meetings. By that I mean I
attend meetings of the board of commissioners. Mr. Brown, from
whom you will hear later, attends the MSSIC board meetings . We
hold joint supervisory conferences . My staff attends the exit interviews of the division . When they complete an examination of an institution, we get a copy of that examination and we get a copy of
the institution's reponse to the comments in the examination .
So, while there is total coordination of our effort, there is independent analysis. The coordination then has to do with dealing
with potential problem situations .
We believe that in the insurance company, that we are managing
risk through the monitoring of our institutions and through quick,
effective response to potential problems.
Both the State and MSSIC are active in our role in dealing with
our members, both in examination and in taking corrective action.
It has been said today here, many times, that the key to any depos-

306
it insurance system is confidence . We believe that, obviously. We
also think liquidity being strong is also important.
Liquidity in the MSSIC system at yearend was over 16 percent
among our members. In addition our members maintain lines of
credit with commercial banks . We have proven access, and this
topic has been talked about many times this morning, to the Federal Reserve Bank discount window.
MSSIC sources such as its central reserve fund and its own line
of credit are also important, so we think both cash and confidence
are important in dealing with these problems.
In summary, we know our industry, we respond quickly to problems. We know our jobs and we do them well.
At the appropriate time I would be delighted to answer your
questions. Thank you, sir.
[Mr. Hogg's prepared statement follows: ]

307

Testimony of Charles C. Hogg, II
before
Commerce, Consumer and Monetary Affairs Subcommittee
of the
Committee on Government Operations
April 3, 1984
I am pleased to appear before the Subcommittee to present my views on the
state/private deposit insurance systems and to discuss in particular the Maryland
Savings-Share Insurance Corporation (MSSIC).

My testimony will provide brief

background on MSSIC and respond to the four topics listed in Chairman Barnard's letter
of March 22, 1985.
MSSIC was created in 1962 by a special act of the Maryland General Assembly for
the purpose of providing a viable alternative for deposit insurance for state-chartered
savings and loan associations. In the early 1970's Maryland law was changed to require
deposit insurance for all savings and loans in the state, and MSSIC and the Federal
Savings and Loan Insurance Corporation (FSLIC) were the only providers authorized . The
Charter of MSSIC appears at Title 10, Financial Institutions Article, Annotated Code of
Maryland. The stated purposes of the Corporation are listed there as follows:
"(1) Promote the elasticity and flexibility of the resources of members ;
(2) Provide for the liquidity of members through a central reserve fund ; and
(3) Insure the savings accounts of members."
The operations of MSSIC are directed by a Board of Directors comprised of three
members appointed by the Governor of Maryland and eight members elected from among
representatives of member associations.

The Board of Directors employs a staff of

financial professionals to implement Board policies . I am President and Chief Operating
Officer. In addition to the Board of Directors, we have a Membership Committee which
meets monthly to review the operations of the member associations and to determine the
eligibility of new associations for membership.
Our analysis of the operations and financial condition of member associations is an

308

active, not a passive, one . Each member whose assets exceed $3 million is required to
submit monthly a complete financial report which includes a balance sheet, income
statement and supplemental data. This information is entered into an IBM 34 computer
which is programmed to point out exceptions to all of our rules, regulations, guidelines
and policy statements.

In addition the computer provides reports on trend analysis,

margin analysis and any change beyond established parameters.

These reports are

reviewed by our financial analysts, and presented to the Membership Committee and
Board. Most importantly, our staff follows up on the reports by on-site visits to and
review of the operations of selected institutions high-lighted by the reports. These visits
and reviews may include checking on securities portfolios , loan files, operating expenses
and other specifics areas of interest, or they may entail a complete review of the
operations of the institution.
In addition to our major data processing efforts, our staff uses an IBM Personal
Computer to perform selected analysis on member associations as well as for internal
uses.
To supplement the analysis and review conducted by my staff, we have complete
access to the examinations and files of the Division of Savings and Loan Associations (the
Division), the state agency with regulatory responsibilities for the state chartered
industry. Members of my staff attend the Exit Interviews conducted by the state upon
completion of an examination of an institution, and we receive at the same time as the
institution a copy of the Examination Report, and subsequently, a copy of the institutions
response to comments in that examination .

Coordination between MSSIC and the

Division is further enhanced by the Director's attendance at MSSIC Board meetings,and
my attendance at meetings of the Board of Commissioners.

Our staffs and senior

officials meet frequently to coordinate our efforts in dealing with potential problem
associations and to insure that total, complete and free lines of communications exist .
Copies of correspondence between our offices and member institutions are regularly

309

exchanged.
Our coordination and cooperation with the Federal Home Loan Bank Board
(FHLBB) is naturally more limited, although we do attend seminars and meetings where
representatives of the FHLBB participate. In addition, I have recently held meetings
with the Director of the Insurance Section of the FSLIC on methods of planning for and
executing institution closings or other supervisory actions. We retain as a consultant the
firm of the former Director of Insurance of the FSLIC.

The financial data I will provide today is as of December 31 , 1984 to give a good
comparative basis, although our data processing capabilities allow us to provide monthly
data. We will be pleased to provide any data the committee wants.
At December 31 , 1984 the 101 members of MSSIC (now 102) had total assets of
$8.9 billion and total savings deposits of $7.2 billion . Included in the assets are mortgage
loans of $5.8 billion and Investments and Securities of $ 1.6 billion. Our largest member
had total assets of $1.6 billion and our smallest member had assets of $ 152,968.
At the same date, MSSIC had total asets of $204.8 million , which included highly
liquid investments, primarily U.S. Government or Agency securities of $ 132.2 million . In
addition, the Central Reserve Fund, used for liquidity, had assets of $80.8 million , also
invested in liquid securities. Our premium structure consists of a 2% Capital Deposit
maintained by member associations with MSSIC .

These deposits are adjusted semi-

annually as of June 30 and December 31 of each year. We calculate our reserves or net
worth to be $166.8 million . The components of this reserve position are Capital Deposits
($144.3 million), Retained Earnings ($ 17.5 million) and a Reserve for Insurance Losses
($5.0). All of the MSSIC figures are audited as of December 31 , 1984 and Touche Ross &
Co. has given an unqualified opinion on our financial statements .
At this point in my testimony , I would like to digress to introduce a topic that has
significant meaning to MSSIC and which could add over $ 15 million to our retained
earnings and reserve position.

310

This Subcommittee has asked us to make recommendations to Congress on
measures which could be taken to strengthen the private deposit insurance system. Mr.
Chairman, MSSIC is proud of its record. We feel depositors in members of MSSIC are
thoroughly protected by our continuing to operate as we have since we were established
in 1962.
There is one area, however, where a change in the law would allow MSSIC to
increase insurance reserves , which would add further protection to our members. As the
Committee is aware, the federal deposit insurance agencies, the FDIC and FSLIC and the
central liquidity facility of the National Credit Union Administration, are statutorily
exempt from federal income taxes. MSSIC is statutorily exempt from Maryland state
taxes.

MSSIC, however, is not exempt from federal taxes, although several state

organizations which perform functions similar to those of MSSIC are exempt from

federal taxes.
This disparity in treatment results from the fact that the section of the Internal
Revenue Code which provides the federal exemption for deposit insurers, section
501 (c)( 14)( B), applies only to organizations created before September 1 , 1957. MSSIC is
excluded by virtue of having been established in 1962.
There is no logical reason for this discrimation .

A federal tax exemption for

MSSIC would permit us to add approximately fifteen million dollars to our insurance
reserve fund, that figure representing taxes owed to the federal government, but not yet
paid to the government. If MSSIC were operating under a federal exemption, we would
be fifteen million dollars stronger, yet there would be no revenue loss to the federal
Treasury. More importantly, we would operate in the same federal tax position as the
federal deposit insurance agencies and those private insurers established before
September 1 , 1957.
A bill H.R. 6199, was introduced last Congress to eliminate entirely the cut-off
date in Section 501 (c)( 14)(B) of the Code.

We understand that a similar bill will be

311

reintroduced this session. We hope it will be enacted into law. In light of Congress'
concerns over the ability of federal and state deposit insurers to do their jobs well, all
deposit insurers should have the same federal tax treatment, particularly when they '
perform as well as MSSIC.
As we have pointed out, our exacting procedures for membership in MSSIC, and
the careful ongoing scrutiny that we make of our state's savings and loan industry, are a
depositor's best protection against loss. No depositor in Maryland has lost even a single
penny since MSSIC was organized in 1962, and we intend to continue this fine record. A
federal tax exemption would help us perform the job of assuring the maximum protection
available under law to depositors with members of MSSIC.
A proper and appropriate early-warning and regulatory/supervisory system such as
is in place in Maryland and at MSSIC should preclude the failure of one or more large
insured thrifts from occurrring suddenly or as a suprise to regulators and insurers.
Careful and constant monitoring must be used to detect potential problems before they
become serious, and enforcement and corrective action must be taken quickly and
effectively. Should a significant failure occur, however, several options are available to
the regulator and insurer.

These options, exercised early and decisively , include

voluntary merger, assisted merger or acquisition, conservatorship or receivership ,
assumption of management and control, sale of branches or other assets and controlled
liquidiation.

Obviously all sources of liquidity, including the Federal Reserve Bank

Discount Window, bank lines and other sources must be activated.

Communications

among all parties concerned must be open and effective.
Several lessons have been learned from the events in Ohio. These deal primarily
with communications , liquidity sources, and regulatory response. As a result of the Ohio
situation, we have reviewed our methods of communications with our members, and with
the executive and legislative branches of our State government.

We are capable of

disseminating quickly critical information to 102 savings and loans, and of getting from

312
these institutions, and their branches, fast and accurate information .
We have reviewed and are assured that those institutions who are eligible are
properly filed and prepared to utilize their access to the Federal Reserve Bank Discount
Window. We have instructed our members to reconfirm the terms and conditions of
borrowing under bank lines of credit. MSSIC's own liquidity position has been temporarily
increased
We have the systems in place to deal with an unfortunate event. All the parties
involved, including the Federal Reserve Bank, are prepared to do our jobs,quickly and
effectively.
It has been my pleasure to appear before you. I would be happy to answer any
questions. Thank you for your time and interest.
STATEMENT OF PAMELA A. HATHAWAY, EXECUTIVE VICE PRESIDENT, PENNSYLVANIA SAVINGS ASSOCIATION INSURANCE
CORP.
Ms. HATHAWAY. Thank you, Mr. Chairman .
Mr. Chairman and distinguished members of the subcommittee , I
am pleased to be able to appear before you today on behalf of the
Pennsylvania Savings Association Insurance Corp.
I am Pamela Hathaway and I am the executive vice president of
the corporation.
The Pennsylvania Savings Association Insurance Corp. was created by act 5 of 1979 of the general assembly of the Commonwealth
of Pennsylvania as a nonstock, nonprofit corporation and I
quote, "to promote the elasticity and flexibility of the resources of
member associations , to provide for the liquidity of such associations through a central reserve fund and to insure the savings accounts in such association ."
The general assembly created the corporation at the same time it
passed a law mandating insurance of accounts in Pennsylvania. At
that time there were 139 State-chartered, uninsured savings and
loan associations in that State. The majority of these institutions
were small, neighborhood , traditional building and loan associations , many of which had been serving the thrift and mortgage
needs in their local communities since before the turn of the century. The general assembly had attempted to pass legislation requiring Federal insurance of accounts but realized that the majority of
these associations would not qualify for Federal insurance because
of their small size and lack of full-time offices . The creation of the
PSAIC allowed the continued existence of these small, but otherwise viable and well-run neighborhood associations .
After commencing business in November 1979, the corporation
approved its first group of associations for insurance of accounts on
August 13 , 1980. Of 102 applications submitted to the corporation,
89 associations were approved for insurance of accounts . As of Jan-

313
uary 31 , 1985, the corporation insured accounts in 69 associations
ranging in asset size from $ 128,700 to $89 million.
That asset range is broken down as follows: We have 14 associations under $500,000 . Between $500,000 and $ 1 million- 16 associations; $ 1 to $ 3 million- 19 associations; $3 to $5 million - 10 associations; $5 to $10 million-7 associations; $ 10 to $15 million - 2 associations and over $15 million- 1 association.
The median asset size of all of our insured institutions is $2.2
million. Net worth at our insured institutions averages a strong 13
percent as a ratio to total deposits and our institutions maintain
average liquidity of approximately 15 percent.
Any building, savings or savings and loan association organized
under the laws of Pennsylvania may become a member of the corporation so long as its fiscal affairs, solvency, management and directorship have been certified as approved for insurance of accounts by the secretary of banking.
Act 5 also provides that the central insurance fund shall consist
of capital contributions by each member in an amount equal to not
less than 2 percent of total savings on deposit. Each member institution is presently assessed a membership or what we call a capital
deposit, of 2 percent of total savings liabilities. This deposit is adjusted at least semiannually for each institution but is adjusted on
a monthly basis for those institutions which experience net savings
activity greater than $ 100,000 per month.
The corporation also has the authority to assess additional capital deposits against member associations upon 75-percent membership approval of such action . As of January 31, 1985, capital deposits by members stood at $4,040,000 . This figure, when added to the
fund balance or our retained earnings, gives the corporation insurance reserves of $5.1 million which translates to a reserve-tomember savings ratio of 2.46 percent.
The board of directors of the corporation exercises the corporate
powers of PSAIC and the size and composition of the board is set
by law at 11 members, 3 of whom are appointed by the Governor
and 8 of whom are elected representatives of member institutions.
The corporation's monitoring system is geared to early detection
of problems and is carried out in very close cooperation with the
department of banking. Each of our insured institutions is required
to submit to the corporation, monthly financial data consisting of a
balance sheet, income statement and information regarding slow
loans, mortgage commitments, lines of credit and savings activity.
Our associations are also required to submit a complete copy of
their annual independent audit report to the corporation and the
department of banking provides the corporation with a copy of its
examination report and supervisory letter and all subsequent correspondence and information.
The corporation has the authority to assess penalties and fines
against member institutions for failure to comply with reporting
requirements. The corporation's staff reviews all financial reports
and information and prepares the data for review by the membership committee which meets on a regular bimonthly schedule to
discharge its duties of making recommendations to the board with
respect to the admission of new members, the withdrawal of members and the standing of members which continue in the corpora-

314
tion. Any action deemed necessary by the staff or committee is reviewed with the department of banking and carried out jointly.
The corporation does have the authority to examine the books
and records of member institutions at anytime and to terminate
the insurance of any member upon good cause shown. The corporation may issue cease-and-desist orders; appoint a "supervisor in
charge" at an institution; remove officers, directors and employees
for violations of the law or the bylaws and rules and regulations
and enter into written agreements with member institutions to
avert default and lend money to or purchase assets from institutions.
All member associations are required to abide by the regulations
of the Savings Association Code of Pennsylvania as well as our
bylaws and rules and regulations.
These regulations include but are not limited to a loans-to-one
borrower limit of 10 percent of total savings and maintenance of at
least 8 percent reserves and 10-percent total net worth as a ratio to
total savings. Borrowings are limited to 50 percent of total savings
deposits and although none of our institutions approaches this
limit, the corporation monitors any borrowed money at an institution very closely.
Our regulations require an institution to maintain at least 7-percent liquidity. As stated earlier, the majority of our members maintain liquidity well in excess of that requirement and the corporation can, from time to time, require that associations maintain additional liquidity in accordance with guidelines set by the board to
assure prudent management.
Although we have never had any payouts from the fund, our
bylaws do outline the procedures for such claims.
The corporation maintains a very close working relationship
with the savings association bureau of the department of banking.
A representative of the bureau attends all of our board and membership committee meetings and as noted previously, we regularly
receive all examination reports for our insured members and the
bureau keeps us informed of their actions in regard to our members at all times and, in fact, no supervisory action would be taken
by the bureau without first discussing the matter with the corporation.
If supervisory action is deemed to be necessary and appropriate,
we would act jointly with the bureau in that regard.
The department of banking and the corporation share the same
goal of maintenance of a strong, viable and well-run State-chartered, privately-insured system of savings institutions. It is in the
best interests of not only the department and the corporation but
also our savings institutions and their depositors to fully coordinate
our efforts to monitor and supervise our institutions .
In addition to those aspects of the relationship which I previously outlined, the secretary of banking must approve any amendments to the bylaws and rules and regulations of the corporation
prior to final adoption. The secretary of banking has the statutory
authority to examine the corporation's books and records and the
corporation is required by statute to provide the secretary with an
annual report of our activities and financial condition as examined
and certified to by an independent public accountant after the

315
close of each fiscal year. The secretary of banking also has statutory authority to require the corporation to discharge its obligation
to act for the protection of depositors of member institutions.
Thirteen of our institutions are also members of the Federal
Home Loan Bank System and although we do not have the same
extensive relationship with the Federal Home Loan Bank that we
do with the department of banking, we do receive copies of their
mailings to our members and we have always had ready access to
the officials at the Federal Home Loan Bank. We do not receive
any examination reports from the Federal Home Loan Bank Board
because the Board does not examine any of our institutions or exercise supervisory authority over them.
With regard to precautions which have been taken to prevent or
minimize dissipation of the assets of the insurance fund, the regulations which are in place to assure adequate liquidity and reserves
and limits on borrowing and lending at member institutions ensure
prudent management of our insured member associations.
We believe that closely monitoring and supervising our institutions in close cooperation with the department of banking to insure
and enforce such prudent management allows the corporation to
identify potential problems and act to solve them before they reach
the point where the assets of the fund could be jeopardized.
The corporation also can work with the department of banking
to arrange mergers, capital infusions and underwriting agreements, and as noted earlier, we do have supervisory powers to appoint a new manager, remove officers, directors and employees, issue
cease-and-desist orders and terminate insurance of accounts.
In addition, the corporation can make mandatory the purchase of
debentures, notes or other evidence of indebtedness in an amount
not to exceed 2 percent of a member's total assets and we can increase the 2-percent membership deposit upon the affirmative vote
of 75 percent of all members entitled to vote. We would also point
out that the number of insured institutions which are larger than
the fund are not in the majority as evidenced by the member asset
ranges provided earlier in this statement and our largest member
has filed a written agreement with the corporation and with the
department of banking to maintain capital and net worth levels in
excess of the 10-percent requirement.
Prior to the recent events in Ohio, the corporation was already
looking at various ways in which the fund could be strengthened.
Specific options being considered were establishing lines of credit,
reinsurance, assessing member associations a nonrefundable
annual fee in addition to the 2-percent capital deposit and establishment of a central reserve fund to provide for members' liquidity.
When we have more complete information available to us, other
than what has been reported in the news media regarding recent
events in Ohio, we will carefully review that data with a view
toward making any changes we might consider necessary to further improve and strengthen our fund.
As explained in this statement, we do maintain close coordination and cooperation with the department of banking which is the
principal thrift supervisory agency for our member associations.

50-923 0-85--11

316
After working so closely with the savings association bureau
since our inception, we would stress that State supervision of our
thrift institutions is first rate. We feel that the State examiners are
well qualified to supervise our institutions and the management of
the bureau has, as its foremost concern, the protection of member
associations and their depositors and the Pennsylvania Savings Association Insurance Corp.
The bureau staff's experience and knowledge of the savings industry, in general, and of our members, in particular, contributes
to a strong State-chartered , privately insured savings and loan
system in Pennsylvania. This system has served the citizens of
Pennsylvania well and should continue to do so in the future.
Mr. Chairman and distinguished members of the subcommittee, I
thank you for your attention and for the opportunity to make this
statement today.
[Ms. Hathaway's prepared statement follows:]

C

317

STATEMENT OF PAMELA A. HATHAWAY, EXECUTIVE VICE PRESIDENT
PENNSYLVANIA SAVINGS ASSOCIATION INSURANCE CORPORATION

Mr. Chairman and distinguished members of the Commerce , Consumer , and Monetary
Affairs Subcommittee of the House of Representatives Committee on Government
Operations , I am pleased to be able to appear before you today on behalf of the
Pennsylvania Savings Association Insurance Corporation .

The Pennsylvania Savings Association Insurance Corporation was created
by Act 1979-5 of the General Assembly of the Commonwealth of Pennsylvania as
a nonstock, nonprofit corporation " to promote the elasticity and flexibility
of the resources of member associations , to provide for the liquidity of such
associations through a central reserve fund and to insure the savings accounts
in such associations" .
The General Assembly created the Corporation at the same time it passed
a law mandating insurance of accounts in Pennsylvania. At that time there
were 139 state-chartered , uninsured savings and loan associations in the state .
The majority of these institutions were small , neighborhood , traditional building and loan associations, many of which had been serving the thrift and mortgage
needs in their local communities since before the turn of the century. The
General Assembly had attempted to pass legislation requiring federal insurance
of accounts but realized that the majority of these associations would not
qualify for federal insurance because of their small size and lack of fulltime
offices ; the creation of PSAIC allowed the continued existence of these small ,
but otherwise viable and well-run neighborhood associations .
After commencing business in November, 1979, the Corporation approved
its first group of associations for insurance of accounts on August 13 , 1980 ..
Of 102 applications submitted to the Corporation , 89 associations were approved
for insurance of accounts . As of January 31 , 1985 the Corporation insured
accounts in 69 associations ranging in ' asset size from $ 128,700 to $ 89,089,000.

318

That asset range is broken down as follows : under $500,000 - 14 associations ,
$500,000 to 1 million - 16 associations , 1 to 3 million - 19 associations ,
3 to 5 million - 10 associations , 5 to 10 million - 7 associations , 10 to 15
million - 2 associations and over 15 million - 1 association. The median asset
size of PSAIC-insured institutions is $2,280,500 .

Net worth at our insured

institutions averages a strong thirteen ( 13) percent as a ratio to total
deposits and our institutions maintain average liquidity of approximately 15%.
Any building, savings or savings and loan association organized under the laws
of Pennsylvania may become a member of the Corporation so long as its fiscal
affairs , solvency, management and directorship have been certified as approved
for insurance of accounts by the Secretary of Banking.
Act 1979-5 provides that the central insurance fund " shall consist of capital
contributions by each member in an amount equal to not less than 2% of total
savings on deposit" . Each member institution is presently assessed a membership
(capital) deposit of two (2 ) percent of total savings liabilities ; this capital
deposit is adjusted at least semi-annually for each institution but is adjusted
on a monthly basis for those institutions which experience net savings activity
of $100,000 or more monthly. The Corporation has the authority to assess additional
capital deposits against member associations upon 75 percent membership approval
of such action. As of January 31 , 1985 capital deposits by members stood at
$4,040,000; this figure when added to the fund balance gives the Corporation
insurance reserves of $5,120,000 which translates to a reserve-to-member savings
ratio of 2.46% based on total member savings liabilities of $208,502,800 .
The Board of Directors of the Corporation exercises the corporate powers
of PSAIC and the size and composition of the Board is set by law at eleven (11)
members , three (3) of whom are appointed by the Governor and eight (8) of whom
are elected representatives of member institutions . The bylaws require the Board
to meet at least once every two months.

319

The Corporation's monitoring system is geared to early detection of problems
and is carried out in close cooperation with the Department of Banking.

Each of

our insured institutions is required to submit to the Corporation monthly financial
data consisting of a balance sheet , income statement and information regarding
slow loans , mortgage commitments , lines of credit and savings activity .
Associations are also required to submit a complete copy of their annual independent audit report to the Corporation and the Department of Banking provides
PSAIC with a copy of its examination report and supervisory letter and all
subsequent correspondence and information. The Corporation has authority to
assess penalties and fines against member institutions for failure to comply
with reporting requirements . The Corporation's staff reviews all financial
reports and information and prepares the data for review by the Membership
Committee which meets on a regular bimonthly schedule to discharge its duty
of making recommendations to the Board with respect to the admission of new
members , the withdrawal of members and the standing of members which continue
in the Corporation . Any action deemed necessary by the staff or committee is
reviewed with the Department of Banking and carried out jointly.
The Corporation has the authority to examine the books and records of
member institutions at any time and to terminate the insurance of any member
upon good cause shown. The Corporation may issue cease-and-desist orders ;
appoint a " supervisor in charge" at an institution ; remove officers , directors
and employees for violations of the law or bylaws , rules and regulations and
enter into written agreements with member institutions to avert default and
lend money to or purchase assets from institutions .
All member associations are required to abide by the regulations of the
Savings Association Code of Pennsylvania as well as our bylaws , rules and

320

regulations . These regulations include but are not limited to a loans-to-one
borrower limit of 10% of total savings and maintenance of at least 8% reserves
and 10% total net worth as a ratio to total savings . Borrowings are limited to
50% of total savings deposits and although none of our institutions approaches
this limit , the Corporation monitors any borrowed money at an institution very
closely. Our regulations require an institution to maintain at least 7% liquidity; the majority of our members maintain liquidity well in excess of that
requirement and the Corporation can, from time to time , require that associations maintain additional liquidity in accordance with guidelines set by the
Board to assure prudent management .
Although we have never had any payouts from the fund , our bylaws outline
the procedures for such claims . These procedures are as follows :
(1) The Secretary of Banking declares an institution in default , takes
possession and values the assets pursuant to the Department of Banking Code .
(2) The Corporation calculates the net insurable loss in accordance with
its bylaws .
(3) The Corporation then pays such net insurable loss in cash to the
Secretary of Banking or to the owner of the account , or makes available a
transferred , unrestricted savings account in another PSAIC-insured institution.

The Corporation maintains a very close working relationship with the
Savings Association Bureau of the Department of Banking. A representative of
the Bureau attends all of our Board and Membership Committee meetings and as noted
previously, we regularly receive all examination reports for our insured members
and the Bureau keeps us informed of their actions in regard to our members at
all times .

In fact , no supervisory action would be taken by the Bureau without

321

first discussing the matter with PSAIC ; if supervisory action is deemed to be
necessary and appropriate we would act jointly with the Bureau in that regard.
The Department of Banking and the Corporation share the same goal of maintenance
of a strong, viable and well-run state-chartered , privately-insured system of
savings institutions .

It is in the best interests of not only the Department and

the Corporation but also the member savings institutions and their depositors to
fully coordinate our efforts to monitor and supervise our institutions .
In addition to those aspects of the relationship outlined above , the
Secretary of Banking must approve any amendments to the bylaws , rules and
regulations of the Corporation prior to final adoption . The Secretary of
Banking has statutory authority to examine the Corporation's books and records
and the Corporation is required by statute to provide the Secretary with an
annual report of our activities and financial condition as examined and certified
to by an independent public accountant after the close of each fiscal year.
The Secretary of Banking also has statutory authority to require the Corporation
to discharge its obligation to act for the protection of depositors of member
institutions .
Thirteen (13 ) of our insured institutions are also members of the Federal
Home Loan Bank system and although we do not have the same extensive relationship
with the FHLBB that we do with the Department of Banking, we do receive copies
of the general mailings which are sent out to FHLB member associations and we
have always had ready access to the FHLBB officials who work with our FHLB
system members . We do not receive examination reports from the Federal Home
Loan Bank Board because the Board does not examine any of our institutions or
exercise supervisory authority over them.

322

With regard to precautions which have been taken to prevent or minimize
dissipation of the assets of the insurance fund , the regulations which are in
place to assure adequate liquidity and reserves and limits on borrowing and
lending at member institutions ensure prudent management of our insured member
associations . We believe that closely monitoring and supervising our institutions in close cooperation with the Department of Banking to ensure and enforce
such prudent management allows the Corporation to identify potential problems
and act to solve them before they reach the point where the assets of the fund
could be jeopardized . The Corporation also can work with the Department of
Banking to arrange mergers , capital infusions and underwriting agreements ,
and as noted earlier, the Corporation has the supervisory powers to appoint
a new manager at an institution , remove officers , directors and employees ,
issue cease-and-desist orders and terminate insurance of accounts .

In addition,

the Corporation can make mandatory the purchase of debentures , notes or other
evidence of indebtedness in an amount not to exceed two (2) percent of a member's
total assets and can increase the 2% membership deposit upon the affirmative
vote of 75 percent of all members entitled to vote at a meeting called for that
purpose . We would also point out that the number of insured institutions which
are larger than the fund are not in the majority as evidenced by the member
asset ranges provided earlier in this statement and our largest member has filed
a written agreement with the Corporation and the Department of Banking to maintain
capital and net worth levels in excess of the ten (10) percent requirement.

Prior to recent events in Ohio , the Corporation was already looking at
various ways in which the funds could be strengthened .

Specific options being

considered were establishing lines of credit , reinsurance , assessing member

323

institutions a nonrefundable annual fee in addition to the two ( 2) percent
capital deposit and establishment of a central reserve fund to provide for
members ' liquidity. At a recent directors ' meeting , the PSAIC Board passed a
resolution to require all member associations which have not already done so
to establish a relationship with the Federal Reserve Bank to allow access to
the discount window and also voted to amend the PSAIC rule which requires an
affirmative vote of 75% of the membership to allow the Corporation to assess
a capital deposit in excess of two (2) percent of total savings . When we have
more complete information available to us other than what has been reported
in the news media regarding recent events in Ohio, we will carefully review that
data with a view toward making any changes we might consider necessary to further
improve and strengthen our fund .
As explained in this statement , we maintain close coordination and cooperation with the Department of Banking which is the principal thrift supervisory
agency for our member associations . After working so closely with the Savings
Association Bureau since our inception, we would stress that state supervision
of our thrift institutions is first-rate ; we feel that the state examiners are
well-qualified to supervise our institutions and the management of the Bureau
has as its foremost concern the protection of member associations and their
depositors and the Pennsylvania Savings Association Insurance Corporation . The
Bureau staff's experience and knowledge of the savings industry in general and
of our members in particular contributes to a strong state-chartered , privatelyinsured savings and loan system in Pennsylvania . This system has served the
citizens of Pennsylvania well and should continue to do so in the future .
Mr. Chairman and distinguished members of the Commerce , Consumer, and Monetary
Affairs Subcommittee of the House of Representatives Committee on Government
Operations , I thank you for your attention and for the opportunity to make this
statement before you today.

324

NAME OF DEPOSIT INSURANCE FUND Pennsylvania Savings Association Insurance
Corporation

1.
i.

General Information:

1.

Type(s) of Financial Institution(s)
whose deposits you insure:
Savings & loan associations

2.

In which state(s) do you insure: Pennsylvania

3.

A.

Cost of initial membership
in your fund, if any:
Non-refuxlable filing fee - $1,250.00

B.

Annual premium:

C.

Continuing equity contribution or
Two (2) per cent of savings membership deposit
membership deposit:

None

4.

Maximum coverage per account or per
depositor: $100,000 per account

5.

Do you insure brokered deposits:
brokered deposits

6.

Number of insured institutions,
by type:

Yes , however our institutions do not use

B.

$100 million to $500 million: None

Sixty-eight (68)

C.

$500 million to $1 billion: None

D.

Over $1 billion: None

M¡.

Under $100 million:

jå

A.

7.

Aggregate amount of deposits
insured, by type of institution: $208,502,800 (Jan. 31 , 1985)

8.

Your fund's total useable assets:

9.

Ratio of usable insurance fund
assets to deposits insured: 2.46%

$5,120,000 (Jan. 31 , 1985)

(Jan. 31 , 1985).

325

II.

Background:
1.

Are you a governmental or private agency and are you a creation of State
law? Please provide a text or description of your basic statutory authority.
We are a private agency created by State law (P.L. 17 , No. 5 - April 6 , 1979 )
as a nonstock, nonprofit corporation, the purpose of which is " to promote the
elasticity and flexibility of the resources of member associations , to provide
for the liquidity of such associations through a central reserve fund and to
insure the savings accounts in such associationsany,
. " with supervisory authority
2.
Please provide name of the state agency(ies), if
over your books, records, operations, etc. By statute , the Secretary of Banking
"may make such examinations and inspections of the corporation and require the
corporation to furnish him with such reports and records or copies thereof as
the Secretary of Banking may consider necessary or appropriate in the public
interest or to effectuate the purposes of this act . " In addition the Secretary
of Banking must approve any amendment to the bylaws , rules and regulations (attached
3.
If a situation arises where your insurance funds are inadequate to cover sheet ) .
deposit losses, do you have, by statute,
a.

access to the treasuries of the state(s) in which you operate; and/or

No.

authority to assess other insured institutions enough to cover the losses?
b.
The Corporation can make mandatory the purchase of debentures , notes or other
evidence of indebtedness , in an amount not to exceed two (2) percent of a member's
total assets . We also can increase the 2% membership deposit but only upon the
affirmative vote of 75 percent of all members entitled to vote at a meeting
called for that purpose . The Board is , however, presently considering (attached
Are you subject to state limitations as to the ratio of insurance fund assets sheet)
4.
to total deposits insured? Act 5-1979 provides that the " fund shall consist
of capital contributions by each member in an amount equal to not less than
2% of the total savings on deposit with each member."

5.

Do you have lines of credit already established by contract on which you
can draw at will? What is the aggregate dollar limit of established lines
of credit? With what institution or institutions have these credit lines been
established?
No.

326

II. Background :
2. (cont'd . )
of the Corporation prior to final adoption. We are also required
to make an annual report of our financial condition and activities
to the Secretary of Banking after the close of our fiscal year.

3. (cont'd . )
b. language to remove the need for approval of the membership to
increase the assessment .

327

6.

Do you reinsure your risks with any other insurance carriers? Please
provide details . No.

7.

Regarding your board of directors :

a. How is your board of directors selected? We have an eleven (11 ) member
Board of Directors - eight (8) are elected by the membership from the representatives of insured associations and three (3) are appointed by the Governor of
Pennsylvania upon the advice of the Secretary of Banking.
b. What rules govern the size and composition of the board? Section 4 of
Act 5-1979 and Article II , Section 2 of the Bylaws require that eight of the
directors be selected from among the insured institutions and three be appointed
by the Governor to comprise the required board membership of eleven.

c. Who are the present members of your board? (Please provide names
and principal affiliations . )
Edward J. Bartosiewicz - Metropolitan Savings & Loan Assn. , Secretary-Treasurer
Walter A. Benfield - Bally Building & Loan Assn. , President

Herbert J. Blair - Tioga-Franklin Savings Assn. , Secretary
Shirley C. Chiesa - Carnegie Savings , Building & Loan Assn. , President
J. Richard Eshleman - public director appointed by the Governor
John J. Kelly, Jr. - public director appointed by the Governor
Anthony V. Miscavige , Jr. , - Sobieski Building & Loan
." Assn. , Secretary
Edward B. Servov - public director appointed by the Governor
Gregory L. Walker - Huntingdon Savings & Loan Assn. , EVP
Fred J. Wiest - Union Savings & Loan Assn. , Solicitor
John M. Zdanowicz - Windthorst Warsaw Savings Assn. , Secretary

328

III. Supervision of insured institutions:
Do you impose on the institutions whose deposits you insure, reserve, capital
or other safety and soundness requirements designed to prevent the likelihood
of insolvency? If so, what basic requirements do you impose?
All institutions must abide by the provisions of the Savings Association Code of
Pennsylvania, as per reserve and capital requirements , as well as lending
limits , borrowing limits and investment authority. Our associations must maintain at least 8% reserves and 10% total net worth, loans to one borrower are
limited to 10% of total savings , associations are permitted to borrow only up
to 50% of total savings and we require associations to maintain at least 7%
liquidity at all times .
1.

2.

Please respond separately for each state in which you insure deposits:

Do you have authority, either by statute or contract, to discontinue a
financial institution's membership in your deposit insurance fund? Yes Our rules and regulations provide for termination of insurance and expulsion
from membership in the Corporation .
a.

Under what set of conditions or circumstances would you be authorized
to discontinue insurance? We may expel an association and terminate
its insurance if:
(1) The member is violating any provisions of the laws of the Commonwealth .
(2) The member is conducting unsafe or unsound practices in the conduct of
business .
(3) The member is in violation of any of the bylaws , rules and regulations
of the Corporation.
b.

C.

Since January 1 , 1980, set forth the number of institutions whose
insurance you have discontinued and the reasons for such discontinuance .
None ..

329

3.

Please respond separately for each state in which you insure deposits:

Do you have authority to examine the books, records, loans and other
financial transactions of the institutions you insure? Is any such
authority statutory or by agreement? Please describe and/or provide
a copy of your authority.
Yes - The rules and regulations provide that an association must " provide and
permit examination of any and all books , papers and records of the member as
may be requested by the Board of Directors of the Corporation. "
8.

b.

How frequently do you examine the institutions whose deposits you
insure? Please describe your examination policies and procedures. How
many examiners/auditors do you have. What is your examination
operating budget?
We presently employ no examiners or auditors .
The Department of Banking provides us with a complete copy of the examination
which they conduct once a year at each of our institutions . We also receive
monthly financial data from each of our insured members as well as a copy of
the annual audit report as conducted by an independent accountant . With regard
to any special examinations we might request, we can employ an outside auditor
for that purpose or request that the Department of Banking conduct a special
examination .

C.

Whether or not you have independent examination powers, do you have
a right of access to the examination reports of the relevant financial
institution supervisory authority in your state? If so, do you receive
their examination reports on a regular basis? Yes we have a right of
access to the examination reports and we do receive them on a regular basis.
In addition , we are a part of any subsequent correspondence or action in
regard to the examination .
4.
Are the institutions you insure required to have their books audited and their
financial statements certified by independent outside accountants?
Yes - at least annually at the close of their fiscal year .
5.

If a financial problem is discovered or otherwise becomes apparent in a
member financial institution, what authority do you have, short of insurance
termination, to force correction of the problem and thereby forestall the
necessity for claims against the deposit insurance? We have the authority
to issue cease-and-desist orders and temporary cease-and-desist orders which
are effective immediately upon service upon the institution. If such orders
are violated we have the authority to appoint a " Supervisor in Charge" of the
institution. We also have authority to remove from participation in the conduct
of business of the association any officer, director or employee who has violated
the law, rules and regulations or cease-and-desist order. We are authorized
to enter into written agreements with members for the purpose of averting an
event of default this can include lending money, purchasing assets , endorsing
or acting as surety on obligations of the member. In conjunction with the
Department of Banking we can also arrange mergers , require infusion of capital
or require other underwriting .

330

IV.

Payment of Losses:
1.
Do you act as receiver/liquidator for failed institutions you insure?
No. The Secretary of Banking would declare an association " in default" and
become receiver. After depositors are paid off, the Secretary would turn
over the assets of the failed institution to the Corporation for liquidation.
2.

If a financial institution whose deposits you insure is closed due to insolvency,
do depositors receive their funds immediately or must they await a liquidation
process? Depositors would receive their funds immediately upon determination of the net insurable loss .

3.

a.

If an institution whose deposits you insure becomes insolvent, is
liquidation and a payout of insured deposits your only alternative?
No.

Do you have authority to arrange a purchase-and-assumption takeover
(purchase of assets and assumption of deposit liabilities) of a closed
institution by another sound institution? Yes - we would work with
the Department of Banking to arrange such a takeover.

C.

Do you have authority to keep an insolvent institution open and operating
while seeking a merger partner? Yes as long as an institution
has not been declared " in default" and closed we can keep it operating while
we work with the Department to find a merger partner.

4.

Please provide a listing showing, for each insolvency covered by your fund
from January 1, 1980, to date:

a.

The name, location, and size of the institution;

b.

The total dollar cost of the insolvency to your fund;

C.

The dollar amount of insured deposits in the institution at time of closing;

d.

The dollar amount of uninsured deposits in the institution;

e.

The percentage recovery to date to depositors on uninsured deposits;

f.

The gross dollar amount of outstanding unpaid depositor claims; and

g.

The length of time between the closing of the institution and the
completion of all payouts or transfers of insured deposits.

No insolvencies covered , to date .

331

V. Insurance Fund Reserves:
1.

How
year
1981
1982
1983
1984

2.

What is the present composition and market value, by type, of your insurance
fund assets (for example: U.S. Treasury securities, bank deposits, corporate
bonds, mutual fund investments, state/local securities)?
As of February 28, 1985:
Bank Deposits - $2,596,531
U. S. Treasury Securities - $2,275,852
U. S. Agency Bonds - $125,000
Money Market Fund - $26,573

3.

Do you invest any insurance fund assets in deposits, notes, debentures, or
other obligations of the institutions you insure? How much?
No

4.

In each of the past four calendar or fiscal years, what has been the average
yield from interest, dividends, etc., on your investment portfolio?
1981- 13.71%
1982 - 14.30%
1983 · 13.23%
1984 · 12.20%

5.

Please provide a copy of your latest annual report.

much is your total usable insurance reserve? Provide calendar or fiscal
data for 1981 , 1982, 1983, and 1984.
- $2,094,634
- $2,386,713
$2,792,376
- $4,612,357

2

332
Mr. BARNARD. Thank you very much.
STATEMENT OF DONALD R. BEASON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FINANCIAL INSTITUTIONS ASSURANCE
CORP. OF NORTH CAROLINA

Mr. BEASON . Thank you, sir.
My name is Donald R. Beason and I am president and chief executive officer of the Financial Institutions Assurance Corp. of North
Carolina.
I have previously submitted testimony and information which I
would request be included in the record.
Mr. BARNARD. Without objection, it will so be. You may summarize, it's your decision.
Mr. BEASON. To quickly summarize, I want to emphasize a few
points and then I will be available for any questions that you may
have.
It is important to point out that we are strongly regulated and
supervised by State government. We fully cooperate with them and
the statutes give them authority over our operations including the
ability to remove officers and directors of the insurance company.
The majority of our board of directors is independent of the insured institutions and has no relationship with them at all .
Our company has clear authority to take any actions we deem
appropriate for the protection of the depositors . That action does
include the removal of officers and directors of insured institutions
and other areas that we would feel appropriate at any time.
We don't operate a fund, we run a risk management insurance
company. To do that, we have a financial analysis system which assists us in identifying risk and we have a trained professional staff
to help manage those risks once they are identified.
All the conversation today is about losses and risk and I think
risk in financial institutions and their regulators, by the way, can
be defined in five broad areas: Management, capital, liquidity,
credit risk, and interest rate risk.
We audit management which many people, including some on
the national level say is impossible to do, but it is absolutely necessary because management controls the other four areas of risk. We
perform operational audits and diagnostic reviews on our institutions to identify potential risks so that we have the time to work
with them before they become losses .
We also impose a risk-related cost factor on individual institutions. If the risk is more than we perceive to be normal, institutions are charged a higher cost for the insurance coverage.
We have, in the past, and will in the future, take whatever
action is appropriate under our contracts and our statutory authority to protect the depositors. That includes not closing an institution, but maintaining them as an ongoing entity should that need
ever occur.
I would also like to say that we have in the past, do today, and
will in the future support strong standards for private deposit insurance.

333
Thank you, sir, for the time to be here and I will answer questions when it is appropriate .
Mr. BARNARD. Thank you, Mr. Beason.
[The prepared statement of Mr. Beason follows: ]

334

Statement of Donald R. Beason
President , Financial Institutions Assurance Corporation
Before the
Commerce , Consumer , and Monetary Affairs Subcommittee
House Committee on Government Operations

April 3, 1985

Mr. Chairman and members of the Subcommittee , my name
is Donald R. Beason .

I am President of Financial Institutions

Assurance Corporation ( " FIAC " ) of Raleigh , North Carolina .
FIAC , established in 1967 as a mutual deposit guaranty
insurance association under North Carolina law, operates in
four states and insures the deposits of savings and loan
associations , credit unions , and industrial loan companies .
Under North Carolina law , FIAC is supervised and examined (on
an annual basis ) by the State Secretary of Commerce .
FIAC appreciates this opportunity to provide the
Subcommittee with information about its deposit insurance
program and related matters .

Pursuant to the Subcommittee's

request , this statement includes a discussion of the purposes ,
operations and financial resources of FIAC , the supervision of
its insured institutions , and its recommendations to maintain
the soundness of the deposit insurance system.

335

FIAC Deposit Insurance System

Through effective financial management and growth of
FIAC's capital and reserve accounts and close supervision of
its member institutions , FIAC has developed a strong deposit
insurance system over the past 17 years .

As such , it has

consistently met the following North Carolina statutory
standards governing its existence :

1.

Assure the liquidity of insured institutions ;

2.

Guarantee the withdrawable accounts , shares of
deposits of insured institutions ; and

3.

Serve as receiver , when appointed , of an insured
institution .
Since its organization in 1967 , FIAC has never

suffered a loss and none of its members has failed .

FIAC's

ratio of reserves to insured deposits ( 2.24% , including
reinsurance contracts , as of Dec. 31 , 1984 ) exceeds those of
the federal deposit insurance funds and the aggregate net worth
to savings ratio of its member institutions (6.7% as of
Dec. 31 , 1984 ) exceeds the regulatory requirements of state and
federal authorities .

FIAC insures individual accounts up to

$ 100,000 and IRA accounts up to $ 250,000 .
FIAC funds its operations and reserves by requiring
each member to place with it a non- interest bearing deposit
equal to 1.25 % of such member's savings accounts .

This is

supplemented by statutory authority to impose additional , riskrelated capital assessments and/or annual premiums .

For

336

example , FIAC may require an institution to increase its
capital deposit to 2 % of savings or pay an annual premium of up
to 1/12 of 1 % of savings .

These additional risk- related

premiums may be assessed when FIAC determines that an institution poses more than a " normal " risk to the system .

FIAC's

funding system assures the maintenance of a sufficient capital
base and provides flexibility to assess risk- based fees in
individual circumstances .

Although none of the federal funds

have such capital deposit and risk- related assessment authority, Congress enacted legislation last year as part of the
Deficit Reduction Act of 1984 to provide the National Credit
Union Share Insurance Fund with capital deposit maintenance
authority .

This year , the Federal Home Loan Bank Board has

proposed a FSLIC recapitalization plan which closely resembles
the Share Insurance Fund capital deposit program.
The operations and activities of FIAC are devoted to
the active and ongoing identification and management of risk
entailed in the operations of its member institutions .

To that

end , FIAC has developed an extensive financial analysis system
to monitor such risk and has retained staff with the requisite
skills , background and experience to implement this risk
management function .

This is in addition to state supervisory

examination and independent audit requirements applicable to
FIAC insured institutions .
Details of the numbers and asset range of FIAC
insured institutions are included in the preliminary material
made available to the Subcommittee on March 25 , 1985.

To

337

summarize those figures , FIAC insures 34 savings and loan
associations with total deposits of $ 2,071,789,000 ; 25 credit
unions with total deposits of $ 1,092,946,000 ; and 8 industrial
thrift and loans with total deposits of $ 382,945,000 .

The

majority of FIAC's 68 insured institutions have assets of less
than $ 100 million and only one institution has assets exceeding
$500 million .
Our Corporation employs a number of systems and
procedures to assure the safety and soundness of insured
thrifts .

A sophisticated , computer - based financial analysis

system tracks financial information on a monthly basis to
provide us with an historical perspective on our members '
performance and insight into the future direction of their
operations .

These financial reports are checked against the

institutions ' independent audits and state examinations for
accuracy .

This system also " flags " those items which we

believe represent danger signals so that we can identify and
act on potential problems before they become so acute as to
pose a risk of loss .

For example , under our system, a reverse

repurchase borrowing , which is a separate line item on our
monthly report from members , is " flagged " on a computer printout and the analyst primarily responsible for that institution
must obtain detailed information on such a transaction .

Copies

of some reports generated by this system were included in the
preliminary materials sent to the Subcommittee .
In addition to the information provided us by our
monthly reports , FIAC has a procedure under which periodic

338

visits are made to member institutions for the purpose of
obtaining information about developments or trends which do not
necessarily appear on the monthly reports .

Interviews with

management provide us with knowledge of new products or
services , changes in operating policies or strategic plans , and
give us a basis for assessing the degree of management risk of
a given institution .

FIAC believes that part of its role as a

risk manager includes taking positive steps to improve the
profitability of its insureds .

Diagnostic reviews and opera-

tional audits designed to pinpoint operating deficiencies and
make constructive suggestions are among these positive steps .
Through these processes , FIAC works to ensure that its members
continue to be financially sound .
Even the systems and procedures we have in place
could not be effective without qualified and capable staff to
perform the analysis and follow-up on identified problems .
FIAC has attracted qualified personnel from a number of disciplines to carry out this critical aspect of our operations .

In

addition , outside professional help is engaged , when needed, to
supplement the activities of staff .

Liquidity and Funding

With respect to FIAC's procedures for paying
potential claims , we are not constrained under any statutory
limitation trom using our funds to pay depositors upon
demand .

Accordingly , in the unlikely event of a liquidation of

339

a member institution , depositors would not have to wait for the
liquidation of an institution's assets before they could
receive their funds .

In that respect , our response to demands

for withdrawals would be similar to that of the FSLIC or
FDIC .

Of course , while we have effected a number of sales and

merger transactions in dealing with supervisory cases , no FIACinsured institution has been liquidated since FIAC's
organization in 1967 .
FIAC has assets which provide sufficient funding to
handle foreseeable problems .

Its assets of $49.8 million are

heavily liquid , with approximately $ 30.3 million invested in
U.S.

Treasury and Agency securities , $9.5 million in other

intermediate investments , and $ 9.4 million in interest bearing
cash accounts .

The average maturity of the investment port-

folio is less than one year .

FIAC's investment philosophy of

safety and liquidity has provided it with a steady income
stream and asset growth .
The combination of regulatory powers and financial
oversight minimize the risk that any of our institutions will
fail and cause FIAC to suffer a loss .

On the other hand , extra

attention is focused on any institution deemed to require
special supervisory attention .

Moreover , as any insurer would ,

we pay close attention to the larger FIAC insured institutions .

Even with the oversight and funding systems we have in

place , we have to consider the possibility that one of our
insureds could fail and we have adopted measures to further
protect our assets .

I

340

Such measures include our reinsurance policies (which
aggregate $ 27 million and for which we commit a substantial
portion of our annual budget ) and our authority to increase
member deposits from 1.25% to 2% of deposits .

However , based

on our experience , we are confident that FIAC can react to any
foreseeable problem in such a manner as to prevent any serious
dissipation of its own assets .
The fact that we have never suffered a loss does not
mean that we are inexperienced in finding solutions to problem
cases .

We have in the past exercised our broad powers to solve

these situations .

This has included the removal, for good

cause, of officers and directors from problem institutions and
arranging the merger or sale of troubled instituions .
With regard to liquidity needs of FIAC members , the
following are several of the available sources :

1.

Member institution liquidity , which FIAC constantly
monitors for adequacy .

(At December 31 , 1984 , FIAC

insured institutions had liquid assets equal to 30%
of withdrawable savings . )
2.

Member institution lines of credit .

FIAC- insured

institutions are required to maintain independent
lines of credit with reputable lenders .
December 31 , 1984 , these lines aggregated some $139
million .
3.

Federal Reserve discount window .

All FIAC members

have access to the Federal Reserve's discount window .
Such access , mandated by the Monetary Control Act of

341

1980 for all depository institutions which are
required to maintain non- interest bearing reserves at
the Federal Reserve Banks , is provided to all such
institutions on a fully secured basis .

As was stated

in the House Banking Committee's Report on the
Monetary Control Act legislation , such access to this
liquidity source " enhances the safety and soundness
of the banking system" .

House Report No. 263 , 96th

Cong . , 1st Sess . , p . 5 .

4.

FIAC's liquidity .

Our investment portfolio's average

maturity is presently less than one year and can be
converted to cash in a very short time .
5.

FIAC's lines of credit .

FIAC maintains a $ 75 million

line of credit with two large commercial banks .

This

facility is tested periodically to ensure that funds
can be mobilized within a matter of hours .
These funding procedures underscore FIAC's belief
that an institution should not be closed to the public unless
all other efforts have been expended .

To do otherwise would

not only create a possible lack of confidence in the financial
system, but more importantly it would destroy any remaining
franchise value of the closed institution.

It is public

confidence that maintains the franchise value which is so
important to a financial institution and is a valuable asset
for an insurer seeking a merger or sale solution to a supervisory problem .

342

Supervisory Responsibility

Under North Carolina law , FIAC's primary regulator is
the North Carolina Department of Commerce , which has broad
regulatory powers over FIAC's operation .

Those regulatory

powers extend from performing annual safety and soundness
examinations to removing any officer or Trustee of FIAC .
The state's annual examination evaluates the ability
of FIAC's systems and personnel to identify and act on insured
institution risk within FIAC's system .

This examination

program was developed by a former Federal Reserve System
official who is presently a staff advisor to the North Carolina
Department of Commerce assigned to the Savings and Loan
Division .
Besides the regulatory link between the Department of
Commerce and FIAC , there is a close working relationship
between the two entities regarding the insured institutions .
Because FIAC and the state regulator share responsibility to
the depositors of the insured institutions , we have developed a
system of communication that each party uses to keep the other
fully posted on current developments which affect those institutions .

For example , if a state examiner should become aware

of a problem, we are immediately notitied instead of waiting
until the final report is published .

Of course , all examina-

tion reports covering institutions insured by FIAC are made
available to us on a routine basis , just as the results of any

343

examination or study we conduct are shared with the state
regulator of the insured institution.
In addition , representatives from the state
regulator's office have a standing invitation to attend all of
the meetings of the underwriting committee of FIAC's board of
trustees .

This board committee , composed entirely of public

members, regularly meets to discuss the financial condition of
FIAC insured institutions and to make formal recommendations to
staff regarding supervisory matters .
Finally, the monthly report we use to monitor the
condition of members is the same one that our regulators use .
Any modifications to the reporting form are approved by both
parties before implementation .

We work with state regulators

to insure that safety and soundness is maintained through
teamwork between our offices rather than through duplication of
effort .
This unique combination of regulatory oversight and
communication has contributed greatly to FIAC's success in
acting quickly and effectively to solve problems before they
become crises .
While no formal link exists between our Corporation
and the Federal Home Loan Bank Board, we do maintain close
contact with that supervisory body to stay abreast of current
developments affecting federally chartered institutions .

We

have participated jointly in special investigations and have
shared information which might have an impact on our respective
insured institutions .

344

Overview of the Deposit Insurance System

FIAC believes that its capital deposit and riskrelated assessment funding powers provide it with innovative
tools necessary to maintain a strong and sound deposit
insurance system .

The events in Ohio during the past few weeks

have focused attention on both federal and state deposit
insurance systems , and FIAC believes that Congress should
consider the flexible and effective funding methods of FIAC and
other state funds in its current review of the federal funds .
The federal deposit insurance funds for banks (FDIC )
and thrift institutions ( FSLIC) require each institution to pay
the same annual assessment percentage .

Unlike FIAC , these

funds receive no capital deposits from insured institutions nor
are the funds authorized to impose risk- related assessments .
This has resulted in lower ratios of reserves to insured
deposits for the federal funds , premium subsidies for institutions with more portfolio risk , and greater potential exposure
on the U. S. Treasury .

FIAC's risk management funding and

oversight program is one example of an alternative to the
present federal system .

Besides considering ways in which to

strengthen that system, FIAC believes that the federal government should spread its potential liability to a larger financial base than the federal insurance funds .

Thus , state and

private insurers such as FIAC increase the alternatives , both
as to types of insurance systems and additional financial ·

345

resources, available to the existing federal deposit insurance

We believe that these alternatives should be

programs .

examined as part of a comprehensive review of all deposit
insurance .
Whether the underlying cause of the Ohio situation is
ultimately determined to be inadequate supervision of a thrift
institution , lack of a monitoring framework over government
securities dealers , premature closure of all institutions ,
inadequate cooperation with the Federal Reserve Bank to assure
liquidity , or some other reason , regulators and insurers must
redouble their efforts to provide a safe and sound financial
system.
On the state level , FIAC has been active in promoting
the development of standards for all deposit insurance funds
and is continuing its efforts to achieve that goal .

Examples

of such standards which FIAC supports include , but are not
limited to:
1.

A requirement that a majority of the insurer's board
of trustees be independent of the insured
institutions ;

2.

Enforcement powers for the insurer including cease
and desist orders and the power to remove officers
and directors ;

3.

An adequate system to gather data and analyze
financial condition of insureds on an ongoing and
timely basis;

346

4.

Procedures to ascertain that the insurer has
qualified and competent staff to carry out the risk

management function;
5.

Access to examination reports of insured
institutions ;

6.

A strong working relationship with the primary
regulator of its insured institutions and the Federal
Reserve ;

7.

Adequate external funding sources ;

8.

Risk related premium or assessment powers ; and

9.

Well developed contingency procedures .

I expect that state and private insurers will
continue to pursue such matters and assist one another in
developing standards and operations best suited for their
insured institutions .

Conclusion

The dual banking system has been an historical
bedrock of our financial system .

State and private deposit

insurance programs have become a more visible part of this dual
system.

FIAC believes that its operations add to the strengths

of the financial system and is an example of why private
deposit insurance works .
FIAC appreciates having been invited to participate
in this hearing in order to highlight the positive aspects of a
private deposit insurer .

347
STATEMENT OF LEONARD LAPIDUS, EXECUTIVE VICE
PRESIDENT, MUTUAL SAVINGS CENTRAL FUND
Mr. LAPIDUS. My name Leonard Lapidus . I am executive vice
president of the Mutual Savings Central Fund.
I have prepared written testimony and have answered the questions of the committee which have been submitted before this and
ask that it be put in the record.
Mr. BARNARD. Without objection, your entire testimony will be
included in the record.
Mr. LAPIDUS. The central fund was created by State law in 1932
as a liquidity facility and undertook deposit insurance services for
State-chartered savings banks in 1934 and actually began insuring
savings banks in the State of Massachusetts before the FDIC began
insuring savings banks elsewhere.
All State-chartered savings banks must be members of the fund
and by State law, all deposits must be insured in full . The central
fund is supervised and examined by the banking division of the
State.
We have 145 member banks. They have about $25 billion of deposits but they may also be insured by the FDIC and 49 of them
are. The FDIC has about half the deposit liability and the central
fund has the other half, so we insure roughly $ 12 billion of deposits. We have a fund of $400 million in assets available to meet our
insurance responsibility and that gives us a so-called coverage ratio
of 3.2 percent which is among the highest of any deposit insurer in
the country, including the Federal agencies.
The fund may also draw 1 percent of deposits of members which
would give us access to an additional $250 million of funds if that
became necessary.
We have a liquidity backup of $40 million of contractural lines
and we have a standby liquidity program with $40 million of lines
with two investment banks which are noncontractural.
As I have indicated , we have been in business over 50 years. No
depositor has ever lost money in those 50 years and no bank has
ever been closed to the inconvenience of depositors and borrowers.
I think our success is based upon three factors . We have a very
strong conservative industry and, in fact, even though we're called
thrifts, the condition of the State-chartered savings banks in Massachusetts bear hardly any resemblence to thrifts elsewhere in the
country.
The average capital ratio of our institutions is 7.5 percent. They
have a strong earnings base. During the hard times of 1980, 1981 ,
and 1982, we had to provide assistance to only one of our banks
and in the 50-year history, we have provided assistance only to
about a dozen banks.
The second reason is that we have had the resolute and conscientious supervision by the banking department. There is a long tradition of good banking regulation in Massachusetts.
Third, there is very close cooperation between the banking department and the central fund in monitoring banks and effecting
solutions of problems as they arise.
The surveillance techniques that the banking department and
the central fund use include examination reports which we receive

50-923 0-85--12

348
from the banking department on the basis of statutory authority.
The banks also provide us with quarterly financial reports that we
transform into what we call the performance measurement system,
a comprehensive detailed ratio analysis, and we get monthly reports on deposits, on delinquencies, and special reports and analysis as needed.
Many of these reports are required by regulations approved by
the banking commissioner and have the same force as the regulations of the banking commissioner.
The information is effective , not simply because it's information ,
but because of the readiness to act when the information indicates
that we have a problem.
The committee in its request of us asked what did we learn from
the Ohio situation. I think the record that we have shaped in Massachusetts indicates that what we are doing seems to make sense.
The only thing I would add is that we probably need more Federal
and State cooperation than we have had in the past. I think that
might be more formalized, as many speakers this morning, many
witnesses this morning indicated. In fact, in Massachusetts, there
has been a very good, close informal relationship but, perhaps some
of that has to be made more concrete.
Thank you very much.
[The prepared statement of Mr. Lapidus follows: ]

349

Testimony of Leonard Lapidus
Executive Vice President
Mutual Savings Central Fund
before
Commerce , Consumer and Monetary Affairs Subcommittee
of the
House Committee on Government Operations
April 3 , 1985

My name is Leonard Lapidus .

I am the Executive Vice

President of the Mutual Savings Central Fund , Inc. , which insures

Our

deposits in state - chartered savings banks in Massachusetts .
deposit insurance fund was established in 1934 , and actually
began operating before the FDIC .

The Central Fund is one of

three private deposit insurers in Massachusetts , the others being
deposit insurers for the state's cooperative banks and credit
unions .

The Central Fund insures the full amount of deposits in
Massachusetts savings banks .

All of the state's 145 savings

banks are required by law to be members of the Fund .

These banks

range in asset size from $ 9.4 million to $ 1.2 billion , although
most of them have less than $ 200 million in assets .

Members have

the option of joining the FDIC , in which case the Central Fund
insures only those amounts over $ 100,000 that are not covered by
FDIC insurance .

Forty-nine of our members , including 13 of the

state's 15 largest savings banks , are members of the FDIC .

The

Fund has $ 401 million in assets available to meet its insurance
obligations and insures approximately $ 12.3 billion of deposits .
Its coverage ratio is over 3.2 percent .

The Fund is backed only

350

by its own assets and does not have any statutory backing of the

State Treasury .

Members pay an annual insurance premium set by the
Central Fund Board with the approval of the Commissioner of
Banks .

The maximum premium is 1/16 of one percent of insured

deposits , and the premium is currently set at 1/24 of one percent .

The Board , with the Commissioner's approval , can levy

additional assessments up to a total of one percent of each
bank's deposits , or about $ 250 million .

The Fund also has

$40 million in contractual lines of credit with five different
commercial banks , and has another $ 40 million of non-contractual
lines of credit with two investment banks .

Regular surveillance of members is accomplished primarily through a system of monthly , quarterly, and semi - annual
reports that are required to be submitted to the Fund by regulations approved by the Commissioner of Banks .

The Central Fund

compiles the information received and develops a quarterly
performance measurement report on each member bank .

These

reports , which are also sent to each member bank , provide the
Central Fund with a great deal of information about its members
and are a very effective monitoring tool as well as an important
management tool for the member banks .

The Fund has also developed

a savings bank simulation model that enables it to project future
balance sheet and income data under different interest - rate and

351

operational scenarios , and we are in the process of developing an
interest-rate - gap-measurement report .

Officials of the Fund also

have regular meetings with State Banking Division staff .

Our

extensive reporting and monitoring system and cooperative efforts
with the Banking Division enable the Central Fund to maintain
close surveillance of its members and to detect problems before
they become unmanageable .

In over 50 years of operation , the Central Fund has
never had to liquidate a bank , and pay off depositors .

It has

been the policy of the Fund to solve problem bank situations by
providing direct assistance or by arranging a merger , and that is
how we envision solving any problems in the future .

In the event

of a liquidation , we would expect to pay off all depositors in
the bank immediately and to take over the bank's assets and
proceed to liquidate them in an orderly fashion .

I have already touched on the nature and extent of the
Central Fund's coordination and cooperation with the Massachusetts
Banking Division in discussing our monitoring efforts .

In

general , the Banking Division and the Central Fund work closely
and exchange information to assist each other in monitoring
savings bank performance .

At least quarterly , Central Fund and

Banking Division staff meet to discuss and compare notes on
general industry conditions and specific banks that may be
experiencing problems .

By law , the Central Fund receives a copy

352

of each member's examination report from the Commissioner , and
the Commissioner is also authorized by law to provide , in his
discretion , any information that may be useful when problems are
suspected .

Because the Central Fund was created by an act of the

legislature , its role is formally recognized in Massachusetts
This is an advantage because it assures coordination and
cooperation between the Fund and the Banking Division .

While no formal arrangements exist between the Central
Fund and the Federal Home Loan Bank System, on various occasions
Central Fund officials meet or exchange information with Home
Loan Bank and Bank Board officials .

Although the Bank Board has

no supervisory role with regard to our members , many of them are
members of the Federal Home Loan Bank of Boston , and in light of
the Ohio situation , we plan to explore the possibility of developing closer ties with the Home Loan Bank in the future .

The Subcommittee has posed the question of what special
precautions the Central Fund has taken to minimize the likelihood
of the occurrence of a problem like that which arose in Ohio .
The Central Fund's membership is much more evenly distributed
than was the case in Ohio .

Taken together , the sum of the two

largest non-FDIC banks aggregates only 10 percent of the Central
Fund's deposit liability , and if these two banks were to suffer
the same relative losses as Home State , the Central Fund could
handle the situation without any difficulty .

353

We are , of course , concerned about problems that may
arise at our larger banks , and greater attention is paid to these
banks than to smaller ones in our surveillance program .

We have

a very strong surveillance program based on regular reporting
requirements , detailed performance measurement reports generated
by the Fund , our simulation model , access to examination and
independent audit reports of each member , and a continuing
exchange of information with the Banking Division .

The Subcommittee has also sought our views as to the
lessons that have been learned from the recent events in Ohio ,
and any specific recommendations that we may have .

In this

connection , we offer the following thoughts :

1.

Deposit insurers must have the powers and authorities
necessary to meet their responsibilities .
on its face , but is not always the case .

This is obvious
The funds must

have the authority to get information to monitor on a
continuing basis the financial , condition of the banks that
they insure .

First , the insurer must have examination

authority or the authority to receive examination reports of
the bank regulatory agency .

It must also be able to get

standard and special financial reports appropriate to its
responsibilities .

Its authority may rest on law or regula-

tion or contract .

Second , when potential problems are

detected , the insurers must have the necessary powers to

354

occurs to make the necessary contacts and arrangements .
Development of contingency plans should be encouraged by the
Federal Reserve and Home Loan Bank Systems , and the necessary
documents , collateral arrangements , etc. put in place for
prompt access to the Federal liquidity facilities .

Despite

enactment of the Monetary Control Act of 1980 , there sometimes is a tendency on the part of the federal regulators to
view privately insured institutions and their insurers as
outside the system and to place legal or policy impediments
in the way that make it difficult to effect the necessary
coordination .

This must be recognized and every effort made

to encourage working relationships between federal
authorities and private deposit insurers , whether by statute ,
regulation or policy .

4.

Deposit insurance funds must be adequately capitalized .
What constitutes adequate capitalization is , of course ,
relative and depends on other factors such as the degree of
risk diversification .

Obviously , funds like the failed fund

in Nebraska , which was largely a sham, should not be permitted to operate .

A fund like the Ohio fund , whose capitaliza-

tion appeared credible on its face but which had structural
problems that ultimately caused its downfall , poses more
difficult problems .

Nevertheless , realistic standards can

and should be developed .

355

deal effectively with them before they become unmanageable .
The authorities should be broad to provide direct assistance
in many different ways ; to facilitate mergers and purchase
and assumption transactions ; to conserve and , if necessary ,
to liquidate .

This authority need not be independent of

state supervision -- for example , in Massachusetts , all
Central Fund actions with respect to troubled banks require
the approval of the Commissioner , but our close relationship
to the Banking Division and parallel interests have assured
the effective superintendence of our members .

2.

Coordination and cooperation between state supervisory
officials and the insurance funds is a must .

Private

deposit insurers are generally not agencies of the state
governments , and there can be barriers , whether legal or
political , to the sharing of information and cooperation in
the decision-making process .

Every effort should be made to

ensure that state agencies and private insurers act as
allies in monitoring the banks and developing solutions to
problems .

Recognition of the deposit insurer's role in

state statutes probably contributes to greater cooperation
between state supervisory authorities and private insurers .

3.

Deposit insurance funds must also have the cooperation of
federal banking authorities .

This cooperation must be

continuing; we cannot afford to wait until an emergency

356

5.

There is no substitute for strong financial institutions and
vigilant supervision .

Massachusetts savings banks have an

average capital - to -assets ratio of nearly 7.5 percent .
Their health and the effective supervision by the
Massachusetts Banking Division are significant factors that
contribute to the strength of the Central Fund .

Deposit

insurance is a valuable protection and contributes to the
public's confidence in the system, but the success of both
private and federal deposit insurers depends ultimately on
the strength of the institutions they insure .

Thank you for the opportunity to testify before the
Subcommittee .

I would be pleased to answer any questions .

STATEMENT OF JAMES L. BURNS, JR, EXECUTIVE VICE
PRESIDENT, THE CO-OPERATIVE CENTRAL BANK, BOSTON, MA
Mr. BURNS. Initially I would like to express to you our appreciation for the opportunity to address this committee relative to the
function and capability of the Co-operative Central Bank.
The Co-operative Central Bank is a source of liquidity and is the
deposit insurer for the 100 co-operative banks in the Commonwealth of Massachusetts. The Central Bank's reserve fund was
founded in 1932 to be utilized as a source of liquidity by our
member banks. As you well know, liquidity is normally the first
need to be satisfied in the event difficulty occurs within any banking system .
The reserve fund has been maintained and increased since its inception in 1932 and has continued to be utilized by our member
banks to meet their occasional liquidity needs.
The leaders of our industry recognized, at that time, the need for
the existence of a deposit insurance fund in addition to the liquidity fund. Our industry implemented the share insurance fund in
1934 at a time when no other deposit insurance funds existed in
the country. This fund is a prime example of the banking community, the banking department and our legislature acting in conjunction with one another in our Commonwealth .
As a result of these two funds, a very strong, confident, conservative and well-regulated industry evolved . Our depositors have never
lost any money nor ever had any difficulty in obtaining their funds
at any of our co-operative banks, even during the depths of the Depression. This service to our customers continues to exist.
At this time our industry consists of 100 co-operative banks with
total assets of $5.25 billion. There are 220 co-operative bank offices
throughout our Commonwealth. The principal activity within our

357
system for well over 100 years has been the granting of home mortgages. These mortgages comprise nearly 70 percent of our total
asset base. With the changes which have occurred in banking over
the past two decades, our member banks have provided additional
service to their depositors such as NOW accounts, auto loans, personal, student and home modernization loans, ATM's, Keough retirement accounts and IRA's, and so forth.
The net worth of our industry is about 7.3 percent of deposits. At
the Central Bank we have $ 170 million in fund reserves, should the
need arise. We also have over $60 million in lines of credit with
commercial banks in Boston, New York and Washington, DC. One
additional strength within our system is our size. The average size
of our member banks is approximately $ 50 million in assets . Only
12 are over $ 100 million and none have deposits in excess of $300
million.
The methods of obtaining moneys for our reserve fund and insurance fund differ somewhat. In our reserve liquidity fund, deposits
are adjusted annually as the result of the vote of the board of the
Central Bank. A dividend is paid on these moneys. Because of the
good earnings of the fund, that dividend has been at the rate of 12
percent for a number of years. It acts as a source of liquidity for
member banks, as well as an additional income stream.
The share insurance fund was initially funded by an original assessment in 1934 and special assessment in the mid-1940's . Each
year the banks are assessed-for many years that assessment has
been at a reduced rate of one-twenty-seventh of 1 percent of deposits and notes payable.
This assessment is determined by a vote of the board of the Central Bank and is subject to the approval of the commissioner of
banks.
By statute, the assessment could be increased to one-twelfth of 1
percent of deposits and notes payable. Once the coverage factor of
the share insurance fund alone, is 3 percent of deposits, no further
assessments would be made unless the coverage factor fell below 3
percent.
Each member bank, including the Central Bank, is subject each
year to regular recurring field examinations by the State banking
department and an audit by independent public accountants. All
examination reports and audits are required to be sent to the Central Bank for review. In addition, monthly reports are required by
law, with fines, if late, to be sent to the Central Bank. These reports include balance sheet items, income statement items, along
with delinquency reporting, commitments outstanding, liquidity,
and other selected important data. Our monitoring system would
recognize any significant change occurring in these figures. Immediate telephone inquiry and/or visitation by our staff, and possibly
banking department staff would soon occur.
In Massachusetts, the banking department has maintained a
very conservative philosophy in its supervision and regulation of
State-chartered banks. This supervisory approach has resulted in
one of the strongest banking communities in America.
The following capital guidelines have been established for a
number of years by the State banking department and we adhere
to them :

358
If any bank's capital ratio falls below 5 percent of assets, the bank is placed on a
supervisory concern list. When the ratio falls below 4 percent, the Board is directed
to formulate and implement immediately a course of action which should include,
but not be limited to, seeking a merger or raising additional capital. When the ratio
falls below 3 percent, the certification of the bank as unsafe and unsound would be
imminent.
In addition to these capital requirements , we also monitor variations in any of the classifications in our early warning system.
There have been instances where we have taken action with banks
of relatively high net worth when a deterioration trend has been
diagnosed in one of these other categories. This policy of early remedial action has been successful in preventing deterioration of
the bank's financials and for the maintenance of a very important
item, public confidence.
We have been able to assist some 15 banks over the recent past
utilizing our ability to restructure, merge, provide income streams
along with administrative assistance and financial assistance
purely from the income of the insurance fund. The principal of the
fund has not been used and through the 1930's and the difficult
period of high interest rates and deregulation in the early 1980's ,
the fund has continued to successfully grow each year.
It should be noted that since 1980, the Central Bank has furnished financial assistance to insured members to facilitate mergers, or to assist in asset restructure . None of these cases involved
insolvency but were cases of early detection and prompt remedial
action to maintain the banking system's safety and soundness.
I won't bother you with the amount of funds which have been
injected or loaned to our member banks. It's included in my testimony.
Ninety percent of the assisted cases are now in a repayment
mode.
In order to attain this enviable record, it is of the utmost necessity that the regulator and insurer work together. Since assuming
my responsibilities at the Central Bank some 12 years ago, I have
worked with four State banking commissioners in Massachusetts
and, am very proud to say, have worked well with each and every
one, enabling us to fulfill our duties as the watchdog and the insurer of our industry.
Forty-two of our member banks are also members of the Federal
Home Loan Bank System and, as such, have access to that discount
window. We in the Massachusetts thrift business have been very
reluctant in the past to borrow. However, the opportunity is still
there should we need it.
The average borrowing, in the recent past, for our over $ 5 billion
industry has averaged out to approximately $50 million. We work
in conjunction with the Federal Home Loan Bank of Boston insofar
as supplying monthly information to them relative to our 42
member banks who are also members of that system.
The examination, audit and reporting process, together with visitations by personnel of the Central Bank, enable us to keep a very
close scrutiny of our banks' performance, thus ensuring the safety
and soundness of our industry.

359
Our two largest institutions each represent only 6 percent of the
total assets of our industry. We monitor all our institutions on a
very thorough basis.
Our industry is a very stable one-community banks serving
community needs. They are not involved with brokered CD's or
out-of-State repurchase agreements .
Your letter of invitation to appear before this committee requested specifically that I make comment as to the lessons learned and
specific recommendations to the Congress regarding the events in
Ohio in terms of strengthening our system, State supervision and
improving the Federal response to the strains on our industry.
Situations such as that which occurred in Ohio would not be permitted to exist in our Commonwealth for a number of reasons.
Such a rapid increase in asset size over a short period of time
would immediately trigger an investigation . In addition, the resultant gross deterioration of net worth would violate ours and the
banking department's net worth requirements which I discussed
previously. Upon audit review, the holding of collateral by a nonregulated Government securities dealer would be detected and
would not be permitted to continue.
The situation in Ohio appears to me to have been a regulatory
problem which, when ignored and not acted upon, became an insurance problem.
Our banks' own strong liquidity positions, substantial lines of
credit, the membership in our own reserve/liquidity fund, the Monetary Control Act of 1980, which would allow their access to the
Federal Reserve discount window, the overall strength of our industry and what we consider to be a very strong Co-operative Central Bank-all of these would prevent anything so traumatic as the
Ohio situation from occurring in our Commonwealth .
We also have in Massachusetts a very conservative State legislature which has wisely placed limitations on the amount of borrowing and also the total amount of any one particular loan or investment to any one individual.
You can see that these checks and balances would prevent a situation similar to Ohio from occurring in our Commonwealth.
While the situation has been a major item in the media, by and
large depositor confidence has been maintained and through our
tracking process, it appears to us that we are still experiencing deposit in-flows.
I would like to stress to the committee, once again, that not even
during the traumatic experience of the 1930's and the early 1980's ,
not one co-operative bank has ever failed, not one depositor has
ever lost a dollar in our system, liquidity has always been maintained and all deposits have been insured in full .
Thank you very much.
[The prepared statement of Mr. Burns follows: ]

360

DANK

THE

L
TRA
CEN

EN

COP

TheCO- OPERATIVE CENTRAL BANK
225 FRANKLIN STREET BOSTON • MASSACHUSETTS 02110

INSURED
TUL

(617) 542-3093
JAMES
L BURNS,
EXECUTIVE
VICEJR.PRESIDENT
ANE TREASURE

MARCH 28 , 1985

TO MEMBERS OF THE COMMERCE , CONSUMER ,
AND MONETARY AFFAIRS SUBCOMMITTEE

GENTLEMEN :
INITIALLY I WOULD LIKE TO EXPRESS TO YOU OUR APPRECIATION FOR
THE OPPORTUNITY TO ADDRESS THIS COMMITTEE RELATIVE TO THE FUNCTION
AND CAPABILITY OF THE CO-OPERATIVE CENTRAL BANK .

THE CO-OPERATIVE

CENTRAL BANK IS A SOURCE OF LIQUIDITY AND IS THE DEPOSIT INSURER
FOR THE 100 CO- OPERATIVE BANKS IN THE COMMONWEALTH OF
MASSACHUSETTS .
THE CO- OPERATIVE CENTRAL BANK'S RESERVE FUND WAS FOUNDED IN
1932 TO BE UTILIZED AS A SOURCE OF LIQUIDITY BY OUR MEMBER BANKS .
AS YOU WELL KNOW , LIQUIDITY IS NORMALLY THE FIRST NEED TO BE
SATISFIED IN THE EVENT DIFFICULTY OCCURS WITHIN ANY BANKING
SYSTEM .

THE RESERVE FUND HAS BEEN MAINTAINED AND INCREASED SINCE

INCEPTION IN 1932 AND HAS CONTINUED TO BE UTILIZED BY OUR MEMBER
BANKS TO MEET THEIR OCCASIONAL LIQUIDITY NEEDS .
THE LEADERS OF OUR INDUSTRY RECOGNIZED AT THAT TIME THE NEED
FOR THE EXISTENCE OF A DEPOSIT INSURANCE FUND IN ADDITION TO THE
LIQUIDITY FUND .

OUR INDUSTRY IMPLEMENTED THE SHARE INSURANCE FUND

IN 1934 AT A TIME WHEN NO OTHER DEPOSIT INSURANCE FUNDS EXISTED IN
THE COUNTRY .

THIS FUND IS A PRIME EXAMPLE OF THE BANKING

COMMUNITY, THE BANKING DEPARTMENT AND THE LEGISLATURE ACTING IN
CONJUNCTION WITH ONE ANOTHER IN THE COMMONWEALTH OF MASSACHUSETTS .

361

AS A RESULT OF THESE TWO FUNDS , A VERY STRONG , CONFIDENT,
CONSERVATIVE AND WELL - REGULATED INDUSTRY EVOLVED .

OUR DEPOSITORS

HAVE NEVER LOST ANY MONEY NOR EVER HAD ANY DIFFICULTY IN OBTAINING
THEIR FUNDS AT ANY OF OUR CO- OPERATIVE BANKS , EVEN DURING THE
DEPTHS OF THE DEPRESSION .

THIS SERVICE TO OUR CUSTOMERS CONTINUES

TO EXIST .
AT THIS TIME OUR INDUSTRY CONSISTS OF 100 CO - OPERATIVE BANKS
WITH TOTAL ASSETS OF $ 5 1/4 BILLION .

THERE ARE 220 CO-OPERATIVE

BANK OFFICES THROUGHOUT THE COMMONWEALTH .

THE PRINCIPAL ACTIVITY

WITHIN OUR SYSTEM FOR WELL OVER 100 YEARS HAS BEEN THE GRANTING OF
HOME MORTGAGES .
ASSET BASE .

THESE MORTGAGES COMPRISE NEARLY 70% OF OUR TOTAL

WITH THE CHANGES WHICH HAVE OCCURRED IN BANKING OVER

THE PAST TWO DECADES , OUR MEMBER BANKS HAVE PROVIDED ADDITIONAL
SERVICE TO THEIR DEPOSITORS SUCH AS NOW ACCOUNTS , AUTO LOANS ,
PERSONAL , STUDENT AND HOME MODERNIZATION LOANS , ATM'S, KEOUGH AND
IRA RETIREMENT ACCOUNTS , ETC.
THE NET WORTH OF OUR INDUSTRY IS OVER 7.3% OF DEPOSITS .

AT

THE CO-OPERATIVE CENTRAL BANK WE HAVE $ 170 MILLION IN THE FUNDS '
RESERVES , SHOULD THE NEED ARISE .

WE ALSO HAVE OVER $60 MILLION IN

LINES OF CREDIT WITH BOSTON , NEW YORK AND WASHINGTON , D.C.
COMMERCIAL BANKS .
OUR SIZE .

ONE ADDITIONAL STRENGTH WITHIN OUR SYSTEM IS

THE AVERAGE SIZE OF OUR MEMBER BANKS IS APPROXIMATELY

$50 MILLION IN ASSETS .

ONLY TWELVE ARE OVER $ 100 MILLION AND NONE

HAVE DEPOSITS IN EXCESS OF $ 300 MILLION .

362

THE METHODS OF OBTAINING MONEYS FOR OUR RESERVE FUND AND
INSURANCE FUND DIFFER SOMEWHAT .

IN OUR RESERVE /LIQUIDITY FUND ,

DEPOSITS ARE ADJUSTED ANNUALLY AS THE RESULT OF A VOTE OF THE
BOARD OF THE CO - OPERATIVE CENTRAL BANK .
THESE MONEYS .

A DIVIDEND IS PAID ON

BECAUSE OF THE GOOD EARNINGS OF THE FUND , THAT

DIVIDEND HAS BEEN AT THE RATE OF 12% FOR THE PAST NUMBER OF YEARS .
IT ACTS AS A SOURCE OF LIQUIDITY FOR MEMBER BANKS , AS WELL AS AN
ADDITIONAL INCOME STREAM .
THE SHARE INSURANCE FUND WAS INITIALLY FUNDED BY AN ORIGINAL
ASSESSMENT IN 1934 AND A SPECIAL ASSESSMENT IN THE MID - 1940S .
EACH YEAR THE BANKS ARE ASSESSED -- FOR MANY YEARS THAT ASSESSMENT
HAS BEEN AT A REDUCED RATE OF 1/27TH OF 1% OF DEPOSITS AND NOTES
PAYABLE .

THIS ASSESSMENT IS DETERMINED BY A VOTE OF THE BOARD OF

THE CO-OPERATIVE CENTRAL BANK AND IS SUBJECT TO THE APPROVAL OF
THE COMMISSIONER OF BANKS .

BY STATUTE THE ASSESSMENT COULD BE

INCREASED TO 1 / 12TH OF 1 % OF DEPOSITS AND NOTES PAYABLE .

ONCE THE

COVERAGE FACTOR OF THE SHARE INSURANCE FUND ALONE IS 3% OF
DEPOSITS , NO FURTHER ASSESSMENTS WOULD BE MADE UNLESS THE COVERAGE
FACTOR FELL BELOW 3%.

1

EACH MEMBER BANK , INCLUDING THE CENTRAL BANK , IS SUBJECT EACH
YEAR TO REGULAR RECURRING FIELD EXAMINATIONS BY THE STATE BANKING
DEPARTMENT AND AN AUDIT BY INDEPENDENT PUBLIC ACCOUNTANTS .

ALL

EXAMINATION REPORTS AND AUDITS ARE REQUIRED TO BE SENT TO THE
CO-OPERATIVE CENTRAL BANK FOR REVIEW .

IN ADDITION , MONTHLY

REPORTS ARE REQUIRED BY LAW TO BE SENT TO THE CO - OPERATIVE CENTRAL
BANK .

THESE REPORTS INCLUDE BALANCE SHEET AND INCOME STATEMENT

363

ITEMS TOGETHER WITH DELINQUENCY REPORTING , COMMITMENTS
OUTSTANDING , LIQUIDITY DATA AND OTHER SELECTED IMPORTANT DATA .
OUR MONITORING SYSTEM WOULD RECOGNIZE ANY SIGNIFICANT CHANGE
OCCURRING IN THESE BANK FIGURES .

IMMEDIATE TELEPHONE INQUIRY

AND/OR VISITATION BY CENTRAL BANK STAFF , AND POSSIBLY BANKING
DEPARTMENT STAFF , WOULD OCCUR .
IN MASSACHUSETTS , THE BANKING DEPARTMENT HAS MAINTAINED A
VERY CONSERVATIVE PHILOSOPHY IN ITS SUPERVISION AND REGULATION OF
STATE CHARTERED BANKS .

THIS SUPERVISORY APPROACH HAS RESULTED IN

ONE OF THE STRONGEST BANKING COMMUNITIES IN AMERICA .

THE

FOLLOWING CAPITAL GUIDELINES , ESTABLISHED FOR A NUMBER OF YEARS BY
THE COMMISSIONER OF BANKS , SERVES AS A GOOD EXAMPLE OF A STRONG ,
CONSERVATIVE APPROACH :
" IF ANY BANK'S CAPITAL RATIO FALLS BELOW 5% OF ASSETS THE
BANK IS PLACED ON A SUPERVISORY CONCERN LIST , WHEN THE RATIO FALLS
BELOW 4% THE BOARD IS DIRECTED TO FORMULATE AND IMPLEMENT
IMMEDIATELY A COURSE OF ACTION WHICH SHOULD INCLUDE , BUT NOT BE
LIMITED TO , SEEKING A MERGER OR RAISE ADDITIONAL CAPITAL .

WHEN

THE RATIO FALLS BELOW 3% THE CERTIFICATION OF THE BANK AS UNSAFE
AND UNSOUND WOULD BE IMMINENT . "
IN ADDITION TO THESE CAPITAL REQUIREMENTS , WE ALSO MONITOR
VARIATIONS IN ANY OF THE CLASSIFICATIONS IN OUR EARLY WARNING
SYSTEM .

THERE HAVE BEEN INSTANCES WHERE WE HAVE TAKEN ACTION WITH

BANKS OF RELATIVELY HIGH NET WORTH WHEN A DETERIORATION TREND HAS
BEEN DIAGNOSED IN ONE OF THESE OTHER CATEGORIES .

THIS POLICY OF

EARLY REMEDIAL ACTION HAS BEEN SUCCESSFUL IN PREVENTING

364

DETERIORATION OF THE BANK'S FINANCIALS AND FOR THE MAINTENANCE OF
A VERY IMPORTANT ITEM -- PUBLIC CONFIDENCE .
WE HAVE BEEN ABLE TO ASSIST SOME FIFTEEN BANKS OVER THE
RECENT PAST UTILIZING OUR ABILITY TO RESTRUCTURE , MERGE , PROVIDE
INCOME STREAMS ALONG WITH ADMINISTRATIVE ASSISTANCE AND FINANCIAL
ASSISTANCE PURELY FROM THE INCOME FROM THE INSURANCE FUND .

THE

PRINCIPAL OF THE FUND HAS NOT BEEN USED , AND THROUGH THE 1930S AND
DIFFICULT PERIOD OF HIGH INTEREST RATES AND DEREGULATION IN THE
1980S , THE FUND HAS CONTINUED TO SUCCESSFULLY GROW EACH YEAR .
IT SHOULD BE NOTED THAT SINCE 1980 THE CO - OPERATIVE CENTRAL
BANK HAS FURNISHED FINANCIAL ASSISTANCE TO INSURED MEMBERS TO
FACILITATE MERGERS , OR TO ASSIST IN ASSET RESTRUCTURE .

NONE OF

THESE CASES INVOLVED INSOLVENCY BUT WERE CASES OF EARLY DETECTION
AND PROMPT REMEDIAL ACTION TO MAINTAIN BANKING SYSTEM SAFETY AND
SOUNDNESS .
(A) PERMANENT CAPITAL OF $ 1,950,000 WAS DISBURSED TO TWO
INSTITUTIONS ..
( B ) INTEREST BEARING LOANS OF $ 3,529,670 WERE ADVANCED TO
THREE INSTITUTIONS .

CURRENT OUTSTANDING BALANCE OF

$899,670 EXISTS .
( C ) CAPITAL CERTIFICATES OF $ 16,724,000 WERE ISSUED TO
FOUR INSTITUTIONS .

$ 13,819,700 REMAINS OUTSTANDING

PRESENTLY .
( D ) SECURITIES OF $ 10,065,000 WERE ACQUIRED FROM ONE
INSTITUTION AT BOOK VALUE .

$ 8,731,700 REMAINS

OUTSTANDING SUBJECT TO RESALE ON 4/21/87 .

365

IN ORDER TO ATTAIN THIS ENVIABLE RECORD IT IS OF THE UTMOST
NECESSITY THAT THE REGULATOR AND THE INSURER WORK TOGETHER .

SINCE

ASSUMING MY RESPONSIBILITIES AT THE CO - OPERATIVE CENTRAL BANK SOME
TWELVE YEARS AGO I HAVE WORKED WITH FOUR STATE BANKING
COMMISSIONERS IN MASSACHUSETTS AND , AM VERY PROUD TO SAY, HAVE
WORKED WELL WITH EACH AND EVERY ONE , ENABLING US TO FULFILL OUR
DUTIES AS THE WATCHDOG AND INSURER OF OUR INDUSTRY .
FORTY -TWO OF OUR MEMBER BANKS ARE ALSO MEMBERS OF THE FEDERAL
HOME LOAN BANK SYSTEM AND , AS SUCH , HAVE ACCESS TO THEIR DISCOUNT
WINDOW .

WE IN THE MASSACHUSETTS THRIFT BUSINESS HAVE BEEN VERY

RELUCTANT IN THE PAST TO BORROW .
STILL THERE SHOULD WE NEED IT .

HOWEVER , THE OPPORTUNITY IS
THE AVERAGE BORROWING IN THE

RECENT PAST FOR OUR OVER $ 5 BILLION INDUSTRY HAS BEEN
APPROXIMATELY $ 50 MILLION .

WE WORK IN CONJUNCTION WITH THE

FEDERAL HOME LOAN BANK OF BOSTON INSOFAR AS SUPPLYING MONTHLY
INFORMATION TO THE HOME LOAN BANK RELATIVE TO OUR 42 MEMBER BANKS
WHO ARE ALSO MEMBERS OF THAT SYSTEM .

THE EXAMINATION , AUDIT AND

REPORTING PROCESS , TOGETHER WITH VISITATIONS BY PERSONNEL OF THE
CENTRAL BANK , ENABLE US TO KEEP A VERY CLOSE SCRUTINY OF OUR
BANKS ' PERFORMANCE , THUS ENSURING THE SAFETY AND SOUNDNESS OF OUR
INDUSTRY .
OUR TWO LARGEST INSTITUTIONS EACH REPRESENT ONLY 6% OF THE
TOTAL ASSETS OF THE INDUSTRY .
A VERY THOROUGH BASIS .

WE MONITOR ALL OUR INSTITUTIONS ON

366

OUR INDUSTRY IS A STABLE ONE
COMMUNITY NEEDS .

COMMUNITY BANKS SERVING

THEY ARE NOT INVOLVED WITH BROKERED CD'S OR

OUT -OF -STATE REPURCHASE AGREEMENTS .
YOUR LETTER OF INVITATION TO APPEAR BEFORE THIS COMMITTEE
REQUESTED SPECIFICALLY THAT I MAKE COMMENT AS TO THE LESSONS
LEARNED AND SPECIFIC RECOMMENDATIONS TO THE CONGRESS REGARDING THE
EVENTS IN OHIO IN TERMS OF STRENGTHENING OUR SYSTEM , STATE
SUPERVISION AND IMPROVING THE FEDERAL RESPONSE TO STRAINS ON THE
THRIFT INDUSTRY .

SITUATIONS SUCH AS THAT WHICH OCCURRED IN OHIO

WOULD NOT BE PERMITTED TO EXIST IN THE COMMONWEALTH OF
MASSACHUSETTS FOR A NUMBER OF REASONS .

SUCH A RAPID INCREASE IN

ASSET SIZE OVER A SHORT PERIOD OF TIME WOULD IMMEDIATELY TRIGGER
AN INVESTIGATION .

IN ADDITION , THE RESULTANT GROSS DETERIORATION

OF NET WORTH WOULD VIOLATE OURS AND THE BANKING DEPARTMENT'S NET
WORTH REQUIREMENTS WHICH I DISCUSSED PREVIOUSLY .

UPON AUDIT

REVIEW , THE HOLDING OF COLLATERAL BY A NON - REGULATED GOVERNMENT
SECURITIES DEALER WOULD BE DETECTED AND WOULD NOT BE PERMITTED TO
CONTINUE .
THE SITUATION IN OHIO APPEARS TO ME TO HAVE BEEN A REGULATORY
PROBLEM AND WHEN IGNORED AND NOT ACTED UPON BECAME AN INSURANCE
PROBLEM .
OUR BANKS ' OWN STRONG LIQUIDITY POSITIONS , SUBSTANTIAL LINES
OF CREDIT , THE MEMBERSHIP IN OUR OWN RESERVE /LIQUIDITY FUND , THE
MONETARY CONTROL ACT OF 1980 WHICH WOULD ALLOW THEIR ACCESS TO THE
FEDERAL RESERVE DISCOUNT WINDOW , THE OVERALL STRENGTH OF OUR
INDUSTRY AND WHAT WE CONSIDER TO BE A VERY STRONG CO - OPERATIVE

367

CENTRAL BANK

ALL OF THESE WOULD PREVENT ANYTHING SO TRAUMATIC

AS THE OHIO SITUATION FROM OCCURRING WITHIN OUR COMMONWEALTH .

WE

ALSO HAVE IN MASSACHUSETTS A CONSERVATIVE STATE LEGISLATURE WHICH
HAS WISELY PLACED LIMITATIONS ON THE AMOUNT OF BORROWING AND ALSO
ON THE TOTAL AMOUNT OF ANY ONE PARTICULAR LOAN OR INVESTMENT TO
ANY ONE INDIVIDUAL .
YOU CAN SEE THAT THESE CHECKS AMD BALANCES WOULD PREVENT A
SITUATION SIMILAR TO OHIO FROM EVER OCCURRING IN MASSACHUSETTS .
WHILE THE SITUATION HAS BEEN A MAJOR ITEM IN THE MEDIA , BY
AND LARGE DEPOSITOR CONFIDENCE HAS BEEN MAINTAINED AND THROUGH OUR
TRACKING PROCESS IT APPEARS THAT WE ARE STILL EXPERIENCING DEPOSIT
IN-FLOWS .
I WOULD LIKE TO STRESS TO THE COMMITTEE ONCE AGAIN THAT EVEN
THROUGH THE TRAUMATIC EXPERIENCE OF THE ' 30S AND EARLY ' 80S NOT
ONE CO-OPERATIVE BANK HAS EVER FAILED , NOT ONE DEPOSITOR HAS EVER
LOST A DOLLAR IN OUR SYSTEM , LIQUIDITY HAS ALWAYS BEEN MAINTAINED
AND ALL DEPOSITS HAVE BEEN INSURED IN FULL .

RESPECTFULLY SUBMITTED ,

JAMES L. BURNS , JR .
EXECUTIVE VICE PRESIDENT

368
Mr. BARNARD. I thank all of you for very, very splendid testimony.
One of the thrusts of our hearing and investigation has been to
look into the adequacy of what we term the "State private insurance funds" and certainly all of you have brought testimony which
is, at this point in the hearing, a breath of fresh air as to what you
are doing to offset things that we have seen happen in Ohio.
And, I certainly want to commend you and say that it certainly
gives this member of the committee a lot more confidence in the
experience of funds such as you have.
Mr. Burns, I was intrigued by your statement that upon an audit
review, the holding of collateral by a nonregulated Government securities dealer would be detected and would not be permitted to
continue. I would just like to ask, briefly, all the members of the
panel : How would you have responded if you had been confronted
several months ago by a situation like Home State?
You have listened to the testimony this morning and I would be
interested to know what would you have done in a situation such
as this. We'll begin with Mr. Hogg.
Mr. HOGG. Mr. Chairman, in Maryland , we have had on the
books of MSSIC since 1976, a regulation which would prohibit a
borrowing position of that level . We limit all borrowing of our
member institutions to 15 percent of their savings, not anywhere
near the Ohio situation.
In addition, we have loan concentration limits which would limit
the involvement with one institution.
Mr. BARNARD. Ms. Hathaway .
Ms. HATHAWAY. Yes , Mr. Chairman.
I think we have basically the same setup in Pennsylvania in
that, as I stated in my testimony, we do have a law on the books of
Pennsylvania that no institution may borrow more than 50 percent
of its total savings. However, right now I know that at all of my
institutions, most do not have borrowings and of those that do, the
highest percentage is 3 percent.
Although we don't have a formal written guideline or written
policy on that issue, I think we would start to very closely look at
the borrowed money if it got to be 10 percent.
Mr. BARNARD. Both you and Mr. Hogg would have gotten this information, then, from the monthly reports furnished to you by your
membership?
Ms. HATHAWAY. That's correct, I would and I think Mr. Hogg
also would .
Mr. BARNARD. Mr. Beason .
Mr. BEASON. Yes, thank you, Mr. Chairman . Our regulations
and, I think, State regulation limits a concentration of borrowings
or lendings to 10 percent of assets or less than capital of some
figure.
The financial analysis system we have has a flag system that
kicks out items that are outside the norm and it just so happens
that reverse repurchase agreements are a flag within our system
and anytime those were to develop, it would be kicked out. Such a
concentration would be found within a 45-day period from the time
it took place.

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Mr. BARNARD. Do your examinations come only through sharing
of examination reports from the North Carolina State Department
of Banking or Savings and Loan?
Mr. BEASON. No, sir.
Mr. BARNARD. You do your own examinations?
Mr. BEASON. Not examination, no, sir. The State does an annual
examination as we would normally think of a bank examination .
We perform operational audits or diagnostic reviews, more of the
operational audit concept.
Our primary source of information is a monthly financial analysis system that is performed.
Mr. BARNARD. Mr. Lapidus?
Mr. LAPIDUS. The savings banks in Massachusetts are not limited
in the amount of borrowing they can do, but the level of borrowing
that was engaged in by Home State would have been considered to
be an unsafe and unsound practice, we would have picked that up
as, in fact, the Ohio Division of Savings and Loan picked it up. The
issue was once you get the information , what do you do with it? I
think that was where the difference would be. I think in Massachusetts something would have been done, something on the basis of
the way the banking department has handled its responsibilities in
the past .
Mr. BARNARD. Mr. Burns.
Mr. BURNS. Thank you . Our early warning system would have
detected this immediately. We are informed on a monthly basis
now as to the source of loans in terms of the loans.
Of our $50 million outstanding at the moment, 45 is on a
matched basis from the Federal Home Loan Bank, 3 from our own
liquidity fund, and 2 from the commercial banking system.
Anything above 10 percent would kick out a flag.
Mr. BARNARD. Mr. Beason, I believe that your insurance fund is
the only one that has directors outside of your membership . Am I
correct there?
Mr. BEASON. We have that. I don't know about the others.
Mr. BARNARD. Mr. Lapidus?
Mr. LAPIDUS. We have a board of 25 members, 21 are bankers
and 4 are outside directors.
Mr. BARNARD. Mr. Beason, yours is exclusively outside directors;
is that it?
Mr. BEASON. No, sir. The statute requires that a majority of the
nine-member board be outsiders and independent.
Mr. BARNARD. Outside and independent. How do you feel this
strengthens your fund or your organization?
Mr. BEASON. It gives us the quality of people who can look at
what we do on a subjective basis without any personal feelings or
motivations being involved.
Mr. BARNARD. How are they selected?
Mr. BEASON. They are nominated by a nominating committee
made up for public directors.
Mr. BARNARD. Not from any supervisory agency or political
entity?
Mr. BEASON. That's correct.
Mr. HOGG. Mr. Chairman, in Maryland, the Governor appoints
three members of our board of directors .

370
Mr. BARNARD. Which are outside of your membership?
Mr. HOGG. Yes, sir.
Mr. BARNARD. Pennsylvania?
Ms. HATHAWAY. Pennsylvania has the same set up, eight are
elected from the membership and three are appointed by the Governor as public interest directors.
Mr. BARNARD. Mr. Burns, what about your organization?
Mr. BURNS. Yes, sir. Soon our board will be made up of 15 elected
from the officers and directors of the industry and 4 public interest
directors nominated by nominating committee and elected by the
corporate membership.
Mr. BARNARD. Mr. Lapidus, in your statement today, I believe
you said there sometimes is a tendency on the part of the Federal
regulators to view privately insured institutions and their insurers
as outside of the system and that they put into place legal and
policy impediments that make it difficult to effect the necessary coordination. Would you care to elaborate on that?
Mr. LAPIDUS. I don't mean to point fingers unnecessarily. I think
it's a matter that the private insurance funds don't have a governmental nexus so there is a tendency to think of them as simply outsiders.
I think it is something that is remediable. I have the good fortune of having worked within the Federal regulatory system for a
large part of my career and have very good relationships with Federal supervisors .
I haven't had any problem making those connections on my own,
but I think in other States, it might be more difficult.
Mr. BARNARD. Mr. Beason, in your testimony, you said that we
have fought within the private deposit insurance industry to establish national standards and a certification body for deposit insurers. What type of certification body would you like to see established?
Mr. BEASON. I'm not sure I have the answer to that yet. We have
been working first, to try to set the parameters of what the standards ought to be. Obviously the first reaction would be an independent body, independent of us and independent of Government,
if you will, but I don't think that we are opposed to that body
having Government representation or being Government controlled
though .
Mr. BARNARD. In other words, you see a body made up of representatives from the FSLIC, the FDIC, the Federal Reserve, or who
are you talking about?
Mr. BEASON. Certainly not the FDIC or the FSLIC. I would have
full faith in that body being under the jurisdiction of the Federal
Reserve System.
Mr. BARNARD. From what membership would you obtain this certification group?
Mr. BEASON. Maybe it ought to be under the Federal Reserve
System and that body appoint the other members and they could
come from government or business and industry for that matter.
Mr. BARNARD. Why do you object to the FSLIC or FDIC?
Mr. BEASON. Well, quite frankly, I think the standards that we
have set are clear and stand on their own and I would personally
object to that situation.

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Mr. BARNARD. In other words, in your valuation, you've got a
better system than the Federal system?
Mr. BEASON. I was trying not to say that.
Mr. BARNARD. I think it's obvious you said that.
That's a very interesting approach. Do you foresee that in this
situation that there would be a mandatory membership or would it
be a voluntary membership, as far as the State insurance funds are
concerned?
Mr. BEASON. I think being from North Carolina, you have to recognize that I am a States Righter without any reservation. But, at
the same time, I think national public policy does come into play
and has to override some things. With the depositors in Ohio suffering as they have, regardless of whose responsibility it is or how
it developed .
Nebraska and California are having the same situation . That's
where we come down and think that something has to be done for
the national policy aspect of this and yes, I think that overrides
and is effective.
Mr. LAPIDUS. Mr. Chairman, may I comment on that question as
well?
Mr. BARNARD. Sure.
Mr. LAPIDUS. Mr. Beason and I and a number of people at the
table have spent sometime over the past year discussing regulatory
standards. As far as the State funds go, we're not making a circle
with the wagons, but if we are making a circle with the wagons, we
only want the good guys inside.
We have been injured by funds such as the Ohio fund and Nebraska fund which went under. What we want to do is distinguish
ourselves from the funds that are weak and, in fact, in discussing
these standards, all of us admitted, very clearly that if we have
real standards, appropriate standards, some people are going to be
left out and that's exactly what should happen.
Mr. BARNARD. You know, I was interested in-and I am going to
finish so I can let my colleagues finish this questioning-the percentage of reserves to total assets insured.
Mr. Hogg, did I understand you to say that your ratio is 16 percent?
Mr. HOGG. No, sir. That 16 percent was the liquidity level of our
member institutions .
Our reserves to savings insured at yearend was 2.31 percent.
Mr. BARNARD. Your's was 2.31 .
Mr. HOGG. Yes, sir.
Mr. BARNARD. What about Pennsylvania, Ms. Hathaway?
Ms. HATHAWAY. Pennsylvania's, at the end of January, were 2.46
percent .
Mr. BARNARD. Well, since we're on that subject▬▬
Mr. BEASON. Our reserves to savings, I think are 2.4 and the liquidity position of our institutions is over 30 percent. The net
worth position of the institutions is over 6 percent.
Mr. BARNARD . Mr. Lapidus?
Mr. LAPIDUS . Ours is 3.2 percent.
Mr. BURNS. Our coverage factor, including the reserve liquidity
fund, are about 3.6 percent. Liquidity is about 28 percent and the

372
net worth of the industry is about 7.2 percent of deposits and 6.8
percent of assets.
Mr. BARNARD. In Ohio, we have a situation which I might describe as a catastrophic loss. I mean, here's a $ 1.5 billion institution, the largest institution insured .
Is there some danger in any of these funds that an institution ,
the largest that you have, could cripple your fund?
Mr. BEASON. Mr. Chairman, that's always a possibility, but a $50
million total asset savings and loan association could suffer a $ 150
million loss if they engaged in the kind of concentration that you
have been talking about in Ohio.
Mr. BARNARD. Would anyone else like to respond to that?
Mr. LAPIDUS. Yes. Our largest institution-our largest fully insured institution is about $800 million in assets. If it suffered the
same relative loss as Home State had suffered , the loss would be
$120 million and we could easily cover that.
Our two largest institutions don't constitute more than 10 percent of our liabilities so we could cover that as well.
Mr. BARNARD. Mr. Burns?
Mr. BURNS. Our four largest institutions were among the 15 we
assisted in the early 1980's, primarily because they are located in
metropolitan areas and were losing money to the money market
funds. They are all about 5 percent in assets now and most are
paying us back.
Mr. BARNARD. Mr. Burns , are the institutions in your fund, do
they have access to the discount window?
Mr. BURNS. Under the Monetary Control Act of 1980, they would,
sir, and out of that 100, 42 would be members of the Federal Home
Loan Bank System and would have access to that window as well.
Mr. BARNARD. Were you encouraged this morning-I presume
you were here-by what you heard from the Federal Reserve as to
the so-called precedent it established here with Ohio? Are you encouraged by that? What is your general feeling about that?
Mr. HOGG. Well, we've known, sir, since 1980 the Monetary Control Act, that the Fed had the requirement to lend to our institutions. There has not been opportunity for the thrift industry to
really exercise that until the Ohio situation , but it did not surprise
us because the Fed is very good at what it does and it has been
authorized and required to do that since 1980.
Mr. BARNARD. You didn't learn anything new from that?
Mr. HOGG. No, but we were pleased with their response.
Ms. HATHAWAY. I would just add too that we in Pennsylvania
were pleased with the Fed's response . The Federal Reserve Bank of
Philadelphia was in immediate contact with me regarding whether
or not our members were experiencing any troubles and giving me
the information to disseminate to our members immediately that if
they did start to have liquidity problems, we had a certain set of
guidelines in place that they should follow and our institutions do
have the same access to the Federal Reserve . The one thing I
would stress, that I think I skipped over inadvertently in my testimony was that one of the lessons we did learn from the Ohio situation is that we are requiring our member institutions, at this point,
to establish a borrowing relationship with a Federal Reserve bank.
Some of them do not now have that.

373
Mr. BEASON. After the act of 1980, we immediately required all
of our institutions to file and maintain borrowing agreements with
the Fed. They have been in place since that time. We have had no
reason to believe that the Fed would act in any other way than to
honor this.
I might point out that we have read that the institutions in Ohio
did not have those borrowing agreements in place.
Mr. LAPIDUS. As Ms. Hathaway indicated, we are not only encouraged by the testimony this morning, but by the actions of the
Federal Reserve after the Ohio situation broke. The commissioner
of banks, Paul Bulman, who will be on the next panel, and I chatted about that. I got in touch with the Federal Reserve and they
indicated they were prepared to meet their responsibilities under
the Monetary Control Act. They subsequently sent in a group of examiners to take a look at our reports. We filled them full of information and Girl Scout cookies, which had just come in, and I think
they left happy on both counts.
Mr. BURNS. The Fed did its job and it did it very well. We appreciate that very much. We have been in daily contact with the
Boston Fed and as Len has said, we have had their examiners contact our office and they have been very cooperative. We appreciate
it.
Mr. BARNARD . Mr. Craig.
Mr. CRAIG. Thank you very much, Mr. Chairman. I appreciate
the extent and depth of your testimony this morning and the obvious confidence you do display and the ability of your individual
funds to handle crisis and the method by which you operate. That
is, as the chairman reflected, very gratifying to all of us.
A couple of questions and I would ask them somewhat generically so if you would all like to respond as you have to the chairman, I
would appreciate that.
Are your respective States allowed to, or have they, by law,
placed their full faith and credit behind your deposit insurance
funds?
Mr. HOGG. In Maryland specifically, no, sir. Our charter, which
is title 10 of the Financial Institutions Article of the Maryland
Code does not place the full faith and credit of Maryland.
Mr. CRAIG. Do you feel that is necessary?
Mr. HOGG. No, sir.
Ms. HATHAWAY. In Pennsylvania, our statute, the statute that
created the corporation, does state that the faith and credit of the
Commonwealth is not pledged in any way.
Mr. CRAIG. Is not?
Ms. HATHAWAY. Is not pledged and we do not feel that that is
necessary.
Mr. BEASON. The answer to the question is no, and it's one
reason we have a name that does not have the name of the State
within in.
Mr. LAPIDUS . The same is true of Massachusetts. I'll answer for
both Mr. Burns and me. Full faith and credit is not dedicated to
the fund.
Mr. CRAIG. You have, in large part, responded . Would either or
any of you like to respond in any additional way as to how you
might handle in your own States, based on your own experience, a

374
situation somewhat like the Home State situation in Ohio and how
you might deal with that if that were to occur? Mr. Burns.
Mr. BURNS. On a for-instance basis, if that reverse had gone to
$60 million, we would have staff at that particular institution finding out the terms, conditions, collateral, requirements, and so forth
and then would work with the banking department and get that
reversed.
Mr. LAPIDUS. I'll respond to that with the luxury of not having
faced the situation, and not having all the facts, so I can work out
a nice solution. First, I would draw a distinction between solvency
problems and liquidity problems.
And, Ohio is interesting because there were both of them, the
solvency problem was with the Home State Savings Bank and solvency problems are handled by insurers.
Liquidity problems are handled, partly out of one's own resources, partly out of lines that you might have with commercial
banks or investment banks or what have you.
From the Home Loan Bank, if you're a member, and ultimately
from the Federal Reserve which has the authority to lend to any
depository institution under the Monetary Control Act.
In order to keep Home State open, and perhaps also in order to
stop the runs that occurred, the insurance entity would have had
to have made up the loss. If the insurance company didn't have the
resources to make up the loss, then it has to come from someone
else and in the typical circumstance, there would have been some
additional assessment from members to make up the loss.
The difference between the resources of the Ohio Fund and, at
least, the indicated loss at the time, did not seem to be very great.
It would seem to me that there should have been a possibility of
assessing the membership and effectively making up the difference.
With respect to the liquidity problem, to the extent that there
weren't lines available or resources available within the institution, one would have hoped that the Federal Reserve could have
done the job as they appeared to be ready to do.
Now, there are gaps in this scenario of mine because I am not
familiar with all of the facts of the situation except what was testified to this morning.
Mr. CRAIG. Mr. Beason.
Mr. BEASON. Not to repeat what they have said, but maybe go
back to an earlier date, I understand from what I have heard and
read that the State and the fund had agreements from the institution to back out of these investments.
The first time they found a failure to follow those agreements, I
think we would have replaced officers and directors of that institution and caused a change of control which would have then effected
those changes .
Mr. CRAIG. Do you have cease-and-desist authority?
Mr. BEASON. We do not use the words, "cease-and-desist ." We.
have the authority to take any action we deem appropriate for the
protection of the depositors and then we have a list in our standards and procedures of what those include but not a limit, that
would include removing officers and directors if they do not take
the actions we request them to take .
Mr. CRAIG. Ms. Hathaway.

375
Ms. HATHAWAY. Yes. I think that in that regard, and I don't
want to echo what everyone else has said, but I think we, in Pennsylvania, do have requirements and regulations in place that would
prevent that same kind of scenario, in the first place, and we do
have the supervisory powers to issue cease-and-desist orders, replace management, remove officers and directors and certainly we
would be enforcing those kinds of things.
Mr. HOGG. I would just add, sir, that to be in this business, you
need regulations. You need an early warning system, but neither of
those works unless you enforce violations of your regulations and
bring about compliance through the cease-and-desist order, removal
power or whatever authority you need to correct the problem.
Mr. CRAIG. I appreciate those comments . One last question and
then I am going to have to run and vote.
Mr. Lapidus, the State and private funds like yours have been a
part of a dual banking system for quite some time. There are some
that are now arguing that all regulations should be done at the
Federal level, that there is no longer a need or an advantage to a
dual system of chartering regulation and insurance . What are your
views on this and the reasons for your position and, of course, if
any of you would like to comment on that question, we would be
more than happy to hear it.
Mr. LAPIDUS. Yes, I would like to comment on that.
I have served both as regulator in State systems and in the Federal system. I worked for the Federal Reserve for 13 years in New
York. I was in the New York State Banking Department for 2
years as first deputy superintendent and later as acting superintendent and was assistant to the chairman of the FDIC for a few
years and I headed the Central Liquidity Facility of the National
Credit Union Administration and was director of the National
Credit Union Share Insurance Fund. So, I have spent most of my
career in banking and bank regulations on both the State side and
the Federal side.
I think there is a significant underappreciation of the importance of the dual banking system despite the fact that we very
often salute it.
If you take a look at the kinds of initiatives that have developed
at the State level and the richness that it provided to the banking
industry, I think you have to recognize how important it is that it
not be destroyed in times of crisis through the overreaching at the
Federal level.
Just to tick off some of the important things, the NOW account
was developed in Massachusetts at a time when we did not have
Federal insurance, at the time that Federal insurance was not imposed upon Massachusetts banks, and it would not have otherwise
developed. The NOW account was the seed that led to the development of the financial reform on the national level.
Variable rate mortgages developed in the States long before it
was made possible for federally chartered institutions to offer
VRM's. Now, as you know, probably 70 percent of the mortgages
are issued in VRM form and everybody is pushing institutions to
match their asset and liability maturities by use of VRM's.
Financial reform of the Garn-St Germain type was first passed
in the State of Maine.

376
Competitive standards, of the kind that were developed in the
1960's, probably were developed in New York State before they
were developed here.
Those are only examples .
Mr. SPRATT. There will be a short recess while the members go to
the floor to vote.
[Recess taken . ]
Mr. BARNARD. We apologize for the process, but we will be underway like this now for the rest of the afternoon .
Were any of you notified by any Federal agency or otherwise as
to the situation at ESM in Florida?
Mr. HOGG. No, sir, we were not.
Ms. HATHAWAY. No, in Pennsylvania we weren't.
Mr. BEASON. Not to my knowledge by a Federal agency, but by
some means our people determined that what was happening there
was not an appropriate investment for our institutions to make
and we were able to put that word out ourselves sometime back.
Mr. BARNARD. You don't insure credit unions, do you?
Mr. BEASON. Yes, sir, I do.
Mr. BARNARD. You do?
Mr. BEASON. Yes, sir.
Mr. BARNARD. Did you get information from the National Credit
Union Administration?
Mr. BEASON. Not to my knowledge. We may have, but I don't
know that for a fact . Some of my supervisory people may have.
Mr. BARNARD. Mr. Lapidus?
Mr. LAPIDUS. No, we were not.
Mr. BARNARD. Mr. Burns?
Mr. BURNS. No, sir, we were not, but we conduct regular seminars for our people, instructions on how to safeguard the purchase
and sale of securities.
Mr. BARNARD. We want to thank all of you for your very valuable testimony today and it is encouraging that these organizations
which you represent are as strong as they are. I am sure it is of
confidence, as well, for the public and we appreciate your testimony. Thank you very much.
The next panel will represent the supervisors of the State savings and loan organizations.
I would like to ask at this time if Mr. Charles H. Brown would
take the witness stand, Mr. George C. King, Mr. Ben McEnteer,
and Mr. Paul E. Bulman.
Gentlemen, we appreciate very much your being here today and
helping us with this testimony as to the operation of your supervisory agencies and we would certainly entertain your testimony at
this time.
I would like to say that we would be more than pleased to include your entire statement in the record without objection and if
you care to summarize, it would certainly be up to your own decision .
And, we will begin with Mr. Brown.

377
STATEMENT OF CHARLES H. BROWN, JR., DIRECTOR, DIVISION
OF SAVINGS AND LOAN ASSOCIATIONS, STATE OF MARYLAND
Mr. BROWN. Mr. Chairman, members of the committee, I am
Charlie Brown, director of the division of savings and loan associations for the State of Maryland.
I think, Mr. Hogg, from the Maryland Savings-Share Insurance
Corp., when he addressed you, stole some of my thunder. A lot of
my testimony he has already given you, but I will say that the division regulates 115 associations, 13 of which are insured by the Federal Savings and Loan Insurance Corporation and has assets of $1.6
billion.
We have 102 State-chartered associations insured by the Maryland Savings-Share Insurance Corp. with assets of $8.9 billion, so
we have a $10.5 billion industry on the State-chartered side.
Additionally in the State of Maryland, just for informational purposes, there are 44 federally-chartered associations with $9.5 billion
in assets so we have a $20 billion industry in the State of Maryland.
The assets of the 102 MSSIC-insured institutions range from $ 1.6
billion downward to our smallest association of $ 152,000 . We have
18 associations with assets in excess of $ 100 million and 58 associations with assets under $10 million.
We have many small neighborhood ethnic associations, many of
which are open to the public only 1 or 2 evenings a week.
Under Maryland law, the division is required to examine our associations at least once every 2 years. At the present time, examinations are made approximately every 14 to 15 months.
If need be, an association could be examined more frequently if
the division director considers it necessary. Additionally both the
division and the insurer, MSSIC, require that our institutions
submit a monthly operating report so that we can keep abreast of
the operations between examination periods .
Associations with assets of $5 million or more are required to
have an annual audit done by an independent C.P.A. That annual
audit goes to MSSIC, the insurer, and to the division.
The division works very closely with the insurer, MSSIC, in the
supervision of the State-chartered industry. MSSIC receives copies
of the examinations made by the division . MSSIC attends the exit
conference that we have with management after the examination
is completed.
Both agencies receive copies of the independent audit. Information is exchanged by the agencies so that we are kept fully aware
of the operations of each and every institution. If a supervisory
conference, with any institution, is necessary, both agencies are involved. Additionally the division director, myself, attends the
monthly meeting of the board of directors of the insurer and Mr.
Hogg, president of MSSIC, attends the meetings of the board of savings and loan association commissioners.
There is full cooperation between the two agencies in the supervision of our industry.
One of the questions that I was asked in that letter that was sent
me was, "Comment on the Ohio Deposit Insurance situation and
the adequacy of responses by State and Federal officials."

378
I would like to state that the regulator and the insurer in Maryland took steps to insure that our institutions were fully informed
of the situation, that our associations were prepared to meet unusual withdrawals resulting from publicity from the failure of
Home State and the Ohio fund.
Our insurer, MSSIC, was very liquid and was prepared to render
whatever assistance that might be needed by the membership.
On learning of this situation, Mr. Hogg and myself met with the
Governor's staff within a day or two. We met with the president of
the senate in Maryland, the speaker of the house to apprise them
what was going on and that it could have some effect on Maryland
associations. We met with the larger commercial banks in Maryland and the head of the Baltimore office of the Federal Reserve
Bank of Richmond.
We had full cooperation from the banks. The Federal Reserve
bank was outstanding. They moved fast to render whatever assistance they could give to us. A lot of our associations had already
given the necessary documentation to the Federal Reserve bank
years ago when the opportunity presented itself.
The Federal Reserve bank was there when they were needed .
The Federal Home Loan bank in Atlanta kept in touch with me
twice a day to see what was going on in Maryland, anticipating
that there might be a lot of applications for conversion .
As late as yesterday, I talked with them, yesterday afternoon .
I would just like to say that the Government agencies, both on
the Federal level and the State level reacted promptly for the protection of the industry and the public in the State of Maryland.
That's all I have to say, Mr. Chairman.
[Mr. Brown's prepared statement follows: ]

379

STATE OF MARYLAND

PAR

TME

NT

CEN
SI
& NG

MARYLA
ND

AB ON
LATI
E
R GU

HARRY HUGHES
GOVERNOR
SECRETARY

OF
FREDERICK L. DEWBERRY
SECRETARY

CHARLES H. BROWN, JR.
DIRECTOR

DEPARTMENT OF LICENSING AND REGULATION
DIVISION OF SAVINGS AND LOAN ASSOCIATIONS
THE BROKERAGE - SUITE 800
34 MARKET PLACE
BALTIMORE , MARYLAND 21202-4078
301 659-6330
WILLIAM S. LECOMPTE, JR.
DEPUTY DIRECTOR

March 29 , 1985

Representative Doug Barnard , Jr. , Chairman
Commerce , Consumer and Monetary Affairs Subcommittee
Rayburn House Office Building , Room B-377
Washington , D. C. 20515
Dear Representative Barnard :
In response to your letter of March 22 , 1985 , I would be pleased. to
appear at the subcommittee's hearings on the Ohio deposit insurance
situation which will be held on Wednesday , April 3 , 1985.

I am enclosing herewith the data requested in your letter and which
will be included in any testimony that I might give during the hearings .

Very truly yours ,

CharlesH.Nor
Charles H. Brown,
Director
CHB: kg
Enclosure

50-923 0-85--13

380

ON
REGUATLAI

HARRY HUGHES
GOVERNOR
SECRETARY
MARYLAND

NG

DEPARTMEN

NSI

E
LIC
NT OF

STATE OF MARYLAND

CHARLES H. BROWN, JR.
DIRECTOR

DEPARTMENT OF LICENSING AND REGULATION
DIVISION OF SAVINGS AND LOAN ASSOCIATIONS
THE BROKERAGE - SUITE 800
34 MARKET PLACE
BALTIMORE, MARYLAND 21202-4078
301659-6330

FREDERICK
L. DEWBERRY
SECRETARY

WILLIAM S. LECOMPTE, JR.
DEPUTY DIRECTOR

The Division of Savings and Loan Associations was created by the State
Legislature in 1961 for the purpose of regulating the State-chartered savings
and loan industry in Maryland . The insurer , more popularly referred to as
MSSIC , was created by the Maryland State Legislature in 1962 for the purpose
of insuring savings accounts of State-chartered savings and loan associations
which were not federally insured by the Federal Savings and Loan Insurance
Corporation (F.S.L.I.C. ) . The corporation , although created by the State
Legislature , is not a State agency nor is the insurance of savings accounts
backed or guaranteed by the State of Maryland . However , under Maryland Law
the Governor of the State of Maryland does appoint three public interest or
consumer members to the Board of Directors of the corporation . The remaining eight directors are elected by the membership consisting of the 101 institutions insured by it.
The Savings and Loan Division for the State of Maryland has a staff of
30 individuals of which 18 are field examiners , 2 examiner-supervisors and
a chief examiner . Additionally , there is the Director of the agency , Charles
H. Brown, and the Deputy Director , William S. LeCompte , plus clerical employees .
Since 1982 the Division has operated on the budgets as set forth below:
1982 Actual
$ 674,125
1983 Actual
708,387
1984 Actual
734,015
1985 Appropriated
960,785
1,020,604
1986 Proposed
The Division of Savings and Loan Associations , for the State of Maryland ,
regulates 114 State-chartered associations as follows :
Assets
December 31 , 1984
in Billions
13 State-chartered with insurance
of savings accounts by the Federal
Savings and Loan Insurance
Corporation (FSLIC)

$ 1.6

101 State-chartered with insurance of
savings accounts by the Maryland
Savings-Share Insurance Corporation
(MSSIC)
Total State-chartered industry

8.9
$10.5

381

The 13 associations insured by the FSLIC have assets ranging from $495
million downward to $ 21 million . The assets of the 101 MSSIC insured institutions range from $ 1.6 billion downward to our smallest association of
$152,968 . We have 18 associations with assets in excess of $ 100 million
and 58 associations with assets under $ 10 million . We have many small ,
neighborhood associations , some of which are open to the public only one or
two evenings per week.
Under Maryland law the Division is required to examine our associations
at least once every two years . At the present time examinations are made
approximately every 14 to 15 months . If need be an association could be
examined more frequently if the Division Director considers it necessary .
Additionally , both the Division and the insurer , MSSIC , require that our
institutions submit a monthly operating report so that we can keep abreast
of the operations between examination periods . Associations with assets of
$5 million or more are required to have an annual independent audit by a
Certified Public Accountant .
Presently , the Division has limited enforcement authority . However , as
a result of a 1984 Maryland legislative summer task force study of the savings
and loan industry , several bills were introduced in the State legislature this
year which will give the Division greater authority to regulate the industry.
These bills cover the following :
1. The authority to issue a Cease and Desist Order for any
violations of Maryland law or regulations of the Division .
2. Would allow the removal of any officer or director found
to be operating in an unsafe and unsound manner .
3. Clarification of the regulatory authority of the Board of
Savings and Loan Commissioners over State-chartered associations .
4. Requirement that an association must have available for the
public an annual financial statement .
The Division Director and the Board of Savings and Loan Association
Commissioners are satisfied that these new powers will give the Division the
authority to regulate the State- chartered industry . These bills are awaiting
passage in the Senate and the House and when passed and signed by the Governor
will become law effective July 1 , 1985.
By regulations of the Board of Commissioners , our institutions are
required to maintain a net worth of at least 3% of the savings deposits .
Additionally , the insurer , MSSIC , also has its own net worth requirements
which I am sure will be included in the presentation by Charles Hogg ,
President of MSSIC.

- 2 -

382

Presently we do
operating problems .
need to monitor more
associations in this

not have any associations that we feel have severe
There are always some associations which we feel we
closely than others and at this time we have three
category.

The Division works very closely with the insurer , MSSIC , in the supervision of the State-chartered industry . MSSIC receives copies of the examinations made by the Division . Both the Division and the insurer receive the
monthly operating report of each association . Both agencies receive copies
of the annual independent audit . Information is exchanged by the agencies so
that we are both kept fully aware of the operations of each and every institution. If a supervisory conference with any institution is necessary , both
agencies are involved . Additionally , the Division Director attends the
Board of Directors meetings of the insurer and Mr. Hogg , President of MSSIC ,
attends the meetings of the Board of Savings and Loan Commissioners . There
is full cooperation between the two agencies in the supervision of our
industry .
Maryland Law requires that any institution operating within the State
must have insurance of savings accounts by either the Maryland Savings -Share
Insurance Corporation or the Federal Savings and Loan Insurance Corporation .
Although the Division does not have the authority to terminate the insurance ,
the insurer , MSSIC , does have such authority . The termination of the insurance ,
however , would probably result in a supervisory merger of an institution with
a stronger association or the appointment of a conservator or a receiver for
liquidation purposes . In that respect , under Maryland law the Federal Savings
and Loan Insurance Corporation or the Maryland Savings - Share Insurance Corporation has an absolute right to be appointed conservator or receiver of a
savings and loan insured by it.
With regards to the Ohio situation it is felt the regulator and insurer
here in Maryland took steps to assure that our institutions were fully informed
of the situation and that our associations were prepared to meet unusual withdrawals resulting from publicity from the failure of the Home State Savings
and Loan Association and the Ohio Deposit Guaranty Fund . Our insurer , MSSIC ,
was very liquid and was prepared to render whatever assistance that might be
needed by the membership . It is felt other government agencies , in particular
the Federal Reserve Bank , moved promptly to render any needed assistance for
institutions which qualified . The Federal Home Loan Bank of Atlanta kept in
constant touch with the Division to determine whether Maryland was having any
savings losses which could result in a large number of applications for
federal insurance of savings accounts .
In conclusion I would say that all government agencies on both the state
and federal level reacted promptly for the protection of the industry and ,
more in particular , the public .
Charles1.
Submitted by Charles H. Brown , Director
- Division of Savings and Loan Associations ,
State of Maryland
March 29, 1985

- 3-

383
Mr. BARNARD. Thank you very much, Mr. Brown.
STATEMENT OF GEORGE C. KING, ADMINISTRATOR, SAVINGS
AND LOAN DIVISION, NORTH CAROLINA DEPARTMENT OF
COMMERCE
Mr. KING. I am happy to respond to your recent inquiry concerning the manner in which State/private insurance funds interact
with their supervisory agencies. The savings and loan division presently has a very competent 13-member professional staff that is responsible for supervising 81 State-chartered savings and loans representing a total of approximately $6.5 billion in assets.
Thirty-four of the 81 institutions have their deposits insured by
the Financial Institution Assurance Corp. [FIAC] and they have
about $2 billion in deposits. We have very broad supervisory and
enforcement powers provided in our State statutes. We examine all
institutions at least annually.
We monitor the associations based on monthly information submitted to us and, if adverse trends are detected, take appropriate
action to make necessary corrections. It is my opinion that present
powers vested in me by State statutes are adequate to address any
foreseeable adverse situations.
Our statutes and regulations do require that our State-chartered
associations maintain reserves and liquidity and minimum limits
are established for these purposes.
Minimum reserves are based on perceived risk of the association's assets . Liquidity investments are limited to cash and unpledged short-term securities with maturities of 5 years or less . Although the minimum liquidity requirement is 5 percent of net deposits, the average liquidity of all State-chartered shops is approximately 12 percent and the average liquidity of FIAC-insured associations is almost 20 percent.
I feel that the cooperation between the division and FIAC is most
satisfactory. All of our examination information is provided to the
fund on a timely basis. Because of the very close working relationship that exists between the division and the fund, any supervisory
actions taken are carefully coordinated.
We examine FIAC on an annual basis as well as maintain a continuing dialog throughout the course of the year. Accordingly, we
feel adequately qualified to address this area. Basically, we are
very pleased with the operation and approach utilized by FIAC in
keeping abreast of its insured institutions on an ongoing basis.
Moreover, we are of the opinion that necessary coordination and
full cooperation between FIAC and ourselves is fully in place at the
present time. We are entirely satisfied that FIAC is adequately carrying out its responsibilities in a competent manner and, cooperation with our division is more than satisfactory.
In regards to the recent situation in Ohio, the following remarks /observations are predicated entirely on media articles that
have been released to date. Accordingly, the following comments
are offered in that context. The most disturbing aspect of the Ohio
deposit insurance situation is that the State and the fund apparently did not have adequate plans in place for dealing with a major
crisis or default.

384
It also appears that the State had very little supervisor oversight
over the Ohio Deposit Guarantee Fund [ ODGF] and little direction
as to how the fund could or would respond to a major crisis. Significant questions surround this situation but apparently both the
State regulator of savings and loans and the ODGF were either not
aware or not capable of acting to correct serious deficiencies in the
financial condition of a large supervised institution . As a State regulator working in a State with State/private insurance fund, I
cannot understand how the situation in Ohio got to the position it
did without the State and the ODGF taking action to defuse the
problem.
I feel that our system in North Carolina is sound . We closely
monitor all State-chartered associations and endeavor to work
closely with our Federal and private insurance counterparts to see
that the deposit of funds in our institutions are safe.
Moreover, we supervise and annually examine the private insurance fund and monitor its operation . We communicate with FIAC
on a continuous ongoing basis as to the condition of our privatelyinsured institutions and I am fully confident that we have adequate contingency plans in place to deal with potential problems.
The lesson we have learned from the recent debacle in Ohio is
that situations and actions in other geographic locations over
which we have no input or control can have an effect on us in
North Carolina.
We would like to see strong, minimum standards be put into
place that would have to be met by any entity that wishes to provide deposit insurance for financial institutions. These standards
should include: (1) capable fund management; (2) minimum reserve
requirements; (3) strong monitoring capabilities; (4) adequate enforcement powers; (5) independent directorate; (6) qualified State
regulators; (7) liquidity capabilities, and (8) underwriting standards.
Mr. Chairman, at the appropriate time, I will be glad to respond
to any questions the committee may have.
Mr. SAXON. Mr. Chairman, the gentleman, when his microphone
was turned off, I heard him say, I believe the primary problem in
Ohio or the most important problem in Ohio is, and I couldn't understand where you went from there.
Mr. BARNARD. We heard a lot of words today. I didn't know if our
ears were playing out or not.
Mr. KING. I'm sorry, Mr. Chairman . I just thought that it was on.
What I had said, sir, was, "The most disturbing aspect of the Ohio
deposit situation is that the State and the fund, apparently did not
have adequate plans in place for dealing with a major crisis or default."
This is something that, from our standpoint, we do on an ongoing
basis to try to determine what a worse-case-type situation would be
and how we would deal with it, both from a safety and soundness
standpoint and from a liquidity situation.
[Mr. King's prepared statement follows :]

385

NOR

STATE9

TH CAROU

SEAL

198 CREAM
North Carolina Department of Commerce
430 North Salisbury Street Raleigh, North Carolina 27611
Howard H. Haworth, Secretary
James G...
March 29 , 1985
Martin, Governor

The Honorable Doug Barnard , Jr.
United States House of Representatives
Washington , D.C. 20515
Dear Mr. Barnard :
This is in response to your letter of March 22 , 1985 in which you request
specific information in anticipation of my appearance before your Subcommittee
on April 3 , 1985.
The response follows the same chronological order as outlined in your letter .
Also enclosed are exhibits which we concluded would provide additional
pertinent information to assist the Subcommittee in their deliberations .

la.

Professional Staff
Examination
Supervisory

Budget
Fiscal Year End 6-30

3355

1982
$580,000
1983 .
$523,000
1984
$616,000
1985
$780,000
(Projected)

1b.

Asset Size
(Millions of Dollars )
0-25
25-50 ..
50-100
100+

lc.

8
10
9
8

3
3
5
5

FIAC Insured
Number
Avg . Size

8
12
7
7

$16,540,811
$33,873,275
$65,576,672
$221,537,769

FSLIC Insured
Number
Avg. Size
13
11
11
12

$17,904,453
$38,294,918
$71,405,151
$202,848,806

Under the North Carolina General Statutes the Administrator may examine
savings and loan associations any time he " deems it prudent " . In actual
practice , every association is examined within twelve calendar months
from the date of the previous examination . Moreover , if any adverse
trend is discernible from our review of the required associations '
monthly monitoring reports , the examination process is accelerated to
determine what , if any , problems may be developing . This could include a
full scope examination or a modified examination specifically geared to
address the perceived problem area . Also , in instances of known problem
institutions , the examining cycle is shortened .

An Equal Opportunity /Affirmative Action Employer

386

The Administrator is vested with considerable power to maintain safety
and soundness in the institutions for which he is responsible . These
powers cover the whole range of supervisory prerogatives from the
issuance of cease and desist orders , civil and criminal sanctions and
removal of officers and directors . Enclosed under Exhibit 1 are the
applicable statutes that address the remedies that are available to the
Administrator to affect correction of unsafe and unsound practices or
procedures by an association and its officers and/or directors .
Since my employment with the Division in 1976 , in two instances it was
considered necessary to resort to a written supervisory agreement to
affect correction , while in five other situations it proved necessary to
arrange a supervisory acquisition action . The other remedial options
available to the Administrator have not proved necessary to utilize up to
the present time . We have found that moral suasion has been an effective
tool to correct most association problems . However, in direct response
to your question , we opine that the present powers vested in the
Administrator are adequate to address any foreseeable adverse situations .
Further, because of our close supervisory working relationship with the
Financial Institutions Assurance Corporation and FSLIC respectively ,
which obviously share our common goals of assuring the safety and
soundness of our supervised institutions , their additional powers such as
termination of deposit insurance further assists in assuring the ongoing
viability of our savings associations .
ld .

We impose both a General Reserve Requirement (adequacy of net
worth/capital ) and a Liquidity Requirement as provided under North
Carolina Administrative Code , Title 4, Chapter 16D.0701 , .0601 , and
.0602 , respectively. See Exhibit 2.
Under the General Reserve Requirements , varying percentages of net worth
are applied against an association's assets based on the perceived risk
inherent in a particular type/class of asset . Accordingly , investments
in the insurer's fund are considered riskless , while assets classified
loss are considered a 100% risk , with various other graduations between
these two extremes as indicated under Exhibit 3. This form was recently
upgraded to more adequately reflect the present composition of an
association's assets (under deregulation ) as well as the perceived risk
associated with such assets .
Basically the Liquidity Analysis ( See Exhibit 4) format is designed to
identify those assets that are considered reasonably liquid and that can
be sold (with minimal loss potential ) to augment possible liquidity
demands such as unexpected deposit withdrawals , etc. Assets that are
considered liquid include cash, deposits with other institutions and
unpledged securities with maturities of five years or less . The minimum
requirement is equal to 5% of the association's net deposits .

387

le .

We do not maintain a "problem" list , per se . However , we have adopted an
adaptation of the interagency rating system used by the Federal agencies
known as the CAMEL rating system. We are reluctant to disclose any
additional information because of the obvious sensitivities of the
situation.

2a.

All of our examination reports on FIAC insured institutions are provided
to the insurance fund in a timely manner ; usually within 30 days after
the close of the examination . In addition , copies of all correspondence
between the Savings and Loan Division and FIAC insured associations are
provided to the insuring corporation. Because we work closely with the
insurance fund, any supervisory actions taken by the Savings and Loan
Division involving FIAC insured associations are carefully coordinated
between the fund and the Division . All related information and documents
are also provided by us to the insurance fund .

2b.

North Carolina statute requires that all savings and loans have insurance
of accounts . The termination of this insurance , if the need for such
action should arise , would be initiated by FIAC . Specific authority for
taking this action is not vested in the Administrator of the Savings and
Loan Division nor in the Savings and Loan Commission . There has never
been an insurance of accounts termination in North Carolina . Because of
the close ongoing working relationship that exists between the Division
and FIAC, we cannot envision that an insurance of accounts termination
could occur without the full knowledge and concurrence of the Savings and
Loan Division.

3.

We examine FIAC on an annual basis as well as maintain a continuing
dialogue throughout the course of the year . Accordingly , we feel
adequately qualified to address this area . Basically , we are very
pleased with the operation and approach utilized by FIAC in keeping
abreast of its insured institutions on an ongoing basis . Moreover , we
are of the opinion that necessary coordination and full cooperation
between FIAC and ourselves is fully in place at the present time . In
summation, we are entirely satisfied that FIAC is adequately carrying out
its responsibilities in a competent manner and , cooperation with our
Division is more than satisfactory .

4.

The following remarks/observations are predicated entirely on media
articles that have been released to date . Accordingly , the following
comments are offered in that context . The most disturbing aspect of the
Ohio deposit insurance situation is that the state apparently did not
have adequate plans in place for dealing with a major crisis or default .
It also appears that the state had very little supervisory oversight over
the Ohio Deposit Guaranty Fund (ODGF) and little direction as to how the
fund could or would respond to a major crisis . Significant questions
surround this situation but apparently both the state regulator of
savings and loans and the ODGF were either not aware or not capable of
acting to correct serious deficiencies in the financial condition of a
large supervised institution . As a state regulator working in a state
with a state/private insurance fund , I cannot understand how the
situation in Ohio got to the position it did without the state and the
ODGF taking action to either prevent or defuse the problem.

388

I feel that our system in North Carolina is sound . We closely monitor
all state chartered associations and endeavor to work closely with our
federal and private insurance counterparts to see that the deposit funds
in our institutions are safe . Moreover , we supervise and annually
examine the private insurance fund and monitor its operation . We
communicate with FIAC on a continuous ongoing basis as to the condition
of our privately insured institutions and I am fully confident that we
have adequate contingency plans in place to deal with potential problems .
The lesson we have learned from the recent debacle in Ohio is that
situations and actions in other geographic locations over which we have
no input or control can have an effect on us in North Carolina . We would
recommend that strong, minimum standards be put into place that would
have to be met by any entity that wishes to provide deposit insurance for
financial institutions . These standards should include 1 ) capable fund
management , 2) minimum reserve requirements , 3) strong monitoring
capabilities , 4) adequate enforcement powers , 5) independent directorate ,
6) qualified state regulators , 7 ) liquidity capabilities and 8)
underwriting standards .

6.

We are forwarding to Mr. McSpadden a blank copy of our examination report
used in conjunction with examining a privately insured savings and loan
association as well as a blank copy of the examination report used in
connection with our annual examination of FIAC . The purpose in
forwarding these two examination reports is to provide the Subcommittee
with some indication of the overall scope and depth of the respective
examinations that we undertake in North Carolina . Each examiner is also
furnished a comprehensive manual of instructions to assist in the
examination of both federal and nonfederal savings and loan associations .

I trust the foregoing is fully responsive to your request .

Sincerely,

George C. King, Administrator
Savings and Loan Division

GCK/pr

389

§ 548-43

CH. 54B. SAVINGS AND LOAN ASSOCIATIONS

(3) Notice to file claims;
(4) Claims of members;
(5) Payments of claims and distribution;
and
(6) Final distribution and liquidation.
(b) Upon completion of liquidation, the liquidators shall file with the Administrator a
final report and accounting of the liquidation.
The approval ofthe report by the Administrator
shall operate as a complete and final discharge
of the liquidators, the board of directors, and
each member or stockholder in connection with
the liquidation of such association. Upon
approval ofthe report, the Administrator shall
issue a certificate of dissolution of the association and shall record same in the manner
required by this Chapter for the recording of
certificates of incorporation; and upon such
recording, the dissolution shall be effective.
(1981, c. 282, s. 3.)

a short form conversion, ifthe finding is made with
regardto a mutual association, or a merger or consolidation of the State association as to whichthe finding
was made, with any other State association" at the
end of the first sentence and added the second sentence. In subsection (b), the amendment substituted
"consolidations, conversions, and combination mergers and conversions" for "consolidations and
conversions."

§§ 54B-45 to 54B-51: Reserved for
future codification purposes.
ARTICLE 4.
Supervision and Regulation.

§ 54B-52. Administrator of
Savings and Loan
§ 54B-43. Stock dividends.
Division.
No dividend on stock shall be paid unless the
The Administrator of the Savings and Loan
association has the approval of the Administra- Division
of the State is hereby empowered and
tor. ( 1981 , c. 282, s. 3; 1983, c. 144, s. 7.)
directed to perform all the duties and exercise
Effect ofAmendments. The 1983 amendment, all the powers as to savings and loan associaeffective April 6, 1983, rewrote this section, which tions organized or operated under this Chapter,
formerly referred to stock ownership and dividends. unless herein otherwise provided. ( 1981 , c . 282 ,
s. 3.)
§ 54B-44. Supervisory mergers,
consolidations,
conversions, and
combination mergers
and conversions.
(a) Notwithstanding any other provision of
this Chapter, in order to protect the public,
including members, depositors and stockholders
of a State association, the Administrator, upon
making a finding that a State association is
unable to operate in a safe and sound manner,
may authorize or require a short form merger,
consolidation, conversion, or combination merger and conversion ofthe State association as to
which the finding is made. The resulting association may be a mutual association or a stock
association.
(b) The Administrator shall promulgate rules
and regulations to govern supervisory mergers,
consolidations, conversions, and combination
mergers and conversions authorized by this section. ( 1981 , c. 670, s. 2 ; 1981 (Reg. Sess. , 1982),
c. 1238, s. 11.)
Editor's Note. Session Laws 1981 , c. 670, s . 3,
provides: "This act is effective upon ratification but
shall not apply to any savings and loan association
chartered, but not yet operating, prior to said effective
date." The act was ratified June 24, 1981.
Effect of Amendments. - The 1981 (Reg. Sess. ,
1982) amendment, in subsection (a), substituted
"stockholders" for "shareholders" near the beginning
ofthe first sentence, substituted "authorize or require
a short form merger, consolidation, conversion, or
combination merger and conversion ofthe State association as to which the finding is made" for "authorize

§ 54B-53. Savings and Loan
Commission.
(a) The Savings and Loan Commission, which
has heretofore been created, shall continue to
exist and the seven members ofthe Savings and
Loan Commission who have heretofore been
appointed by the Governor shall continue to
serve their full terms and their successors shall
be appointed by the Governor as required by
this section. The Governor shall on July 1 , 1981,
appoint three persons to the Commission for
four-year terms. On July 1, 1983, he shall
appoint two persons to the Commission for
three-year terms, and two persons for four-year
terms. All appointments to the Commission
thereafter shall be for four-year terms. Any
vacancy on the Commission shall be filled by the
Governor for the unexpired term. A newly
appointed commissioner shall assume office at
the first regular or special meeting subsequent
to his appointment.
(b) The members of the Commission shall
elect one of their number to serve as chairman
of the Commission for such term as set forth in
rules adopted by the Commission. A
vice-chairman and other officers may be elected
as specified by the Commission.
(c) The term of a commissioner shall be four
years, or until his successor is appointed and
qualified.
(d) At least two members of the Commission
shall be persons who are currently serving as
managing officers of State associations. Four
members of the Commission shall be appointed
as representatives of the borrowing public and
shall not be employees of or directors of any

100

390

CH . 54B. SAVINGS AND LOAN ASSOCIATIONS
financial institution or have an interest in any
financial institution other than as a result of
being a depositor or borrower.
(e) Meetings of the Commission shall be held
regularly as provided in rules adopted by the
Commission but no less than once each calendar
quarter. Special meetings shall be held at any
time upon the call of the chairman, or upon the
call of any three commissioners. The Administrator shall call meetings when consideration
by the Commission is required by law for contemplated action of the Administrator. Members of the Commission shall be reimbursed as
prescribed by law for expenses incurred in the
performance of their duties under this section.
(f) The relationship between the Secretary of
Commerce and the Savings and Loan Commission shall be as defined for a Type II transfer
under Article [ Chapter] 143A of the General
Statutes.
(g) The Savings and Loan Commission is
hereby vested with full power and authority to
review, approve, disapprove, or modify any
action taken by the Administrator in the exercise ofall powers, duties and functions vested in
or exercised by the Administrator under the
savings and loan laws ofthis State. ( 1981 , c. 282,
s. 3.)
§ 54B-54. Deputy administrator of
Savings and Loan
Division.
(a) There shall be a deputy administrator of
the Savings and Loan Division who, in the event
of the absence, death. resignation, disability or
disqualification of the Administrator, or in case
the office of Administrator shall for any reason
become vacant, shall have and exercise all the
powers and duties vested by law in the Administrator.
(b) The deputy administrator is authorized
and empowered at any and all times to perform
such duties and exercise such powers of the
Administrator as the Administrator may direct.
(1981, c. 282, s. 3.)
54B-55. Power of Administrator
to promulgate rules and
regulations;
reproduction of
records.
(a) The Administrator shall have the right,
and is empowered , to promulgate rules, instructions and regulations as may be necessary to the
discharge of his duties and powers as to savings
and loan associations for the supervision and
regulation of said associations , and for the protection of the public investing in said savings
and loan associations.
(b) Without limiting the generality of the
foregoing paragraph, rules, instructions, and
regulations may be promulgated with respect to:
(1) Reserve requirements;

§ 548-55

(2) Stock ownership and dividends;
(3) Stock transfers;
(4) Incorporators, stockholders, directors,
officers and employees of an association;
(5) Bylaws;
(6) The Savings and Loan Commission;
(7) The structure of the office ofthe Administrator;
(8) The operation of associations;
(9) Withdrawable accounts. bonus plans,
and contracts for savings programs;
(10) Loans and loan expenses;
(11) Investments;
(12) Forms and definitions;
(13) Types of financial records to be maintained by associations;
(14) Retention periods of various financial
records;
( 15) Internal control procedures of associations;
(16) Conduct and management of associations:
(17) Chartering and branching;
(18) Liquidations;
( 19) Mergers:
(20) Conversions;
(21) Reports which may be required by the
Administrator;
(22) Conflicts of interest;
(23) Collection of State savings and loan
taxes;
(24) Service corporations; and
(25) Savings and loan holding companies.
(c) Repealed by Session Laws 1983, c. 144, s.
14, effective April 6, 1983.
(d) Any association may cause any or all
records by it to be recorded, copied or reproduced
by any photographic, photostatic or miniature
photographic process which correctly, accurately, permanently copies, reproduces or forms
a medium for copying or reproducing the
original record on a film or other durable material.
(e) Any such photographic. photostatic or
miniature photographic copy or reproduction
shall be deemed to be an original record in all
courts and administrative agencies for the
purpose of its admissibility in evidence. A facsimile, exemplification or certified copy of any
such photographic copy or reproduction shall,
for all purposes, be deemed a facsimile,
exemplification or certified copy ofthe original
record.
(f) The provisions of this section with reference to the retention and disposition of records
shall apply to any federal savings and loan association operating in North Carolina unless in
conflict with regulations prescribed by its supervisory authority. (1981, c. 282, s. 3; 1983, c. 144,
s. 14.)
Effect of Amendments. The 1983 amendment,
effective April 6, 1983, deleted subsection (c), which
read, "In order to supervise the continuing operation
ofstock associations, the Administrator shall promulgate rules to ensure the compliance by such associations."

101

391

§ 548-56

CH. 54B. SAVINGS AND LOAN ASSOCIATIONS

§ 54B-56. Examinations by
Administrator; report.
(a) If at any time the Administrator deems it
prudent, it shall be his duty to examine and
investigate everything relating to the business
of a State association or a savings and loan
holding company, and to appoint a suitable and
competent person to make such investigation,
who shall file with the Administrator a full
report of his finding in such case, including in
- his report any violation of law or any
unauthorized or unsafe practices of the association disclosed by his examination.
(b) The Administrator shall furnish a copy of
the report to the association examined and may,
upon request, furnish a copy ofor excerpts from
the report to the Federal Home Loan Bank
Board, a Federal Home Loan Bank, any mutual
deposit guaranty association organized and
operated under the provisions of Article 12 of
this Chapter, or the Federal Savings and Loan
Insurance Corporation or its successor.
(c) No association may willfully delay or
willfully obstruct an examination in any
fashion. Any person failing to comply with this
subsection shall be guilty of a misdemeanor.
(d) No person having in his possession or
control any books, accounts or papers of any
State association shall refuse to exhibit same to
the Administrator or his agents on demand , or
shall knowingly or willingly make any false
statement in regard to the same. Any person
failing to comply with this subsection shall be
guilty of a misdemeanor. ( 1981 , c. 282, s . 3. )

solely to defray expenses incurred by the office
ofthe Administrator in carrying out its supervisory and auditing functions.
(c) Notwithstanding any of the provisions of
subsections (a) and (b) of this section, whenever
the Administrator under the provisions of G.S.
54B-56 appoints a suitable and competent person, other than a person employed by the
Administrator's office, to make an examination
and investigation of the business ofa State association, all costs and expenses relative to such
examination and investigation shall be paid by
such association. (1981 , c. 282, s. 3; 1983, c. 144,
s. 15.)
Effect of Amendments. — The 1983 amendment,
effective April 6, 1983, inserted " savings and loan
holding company acquisition" in subdivision (a)( 2).

§ 54B-58. Prolonged audit,
examination or
revaluation; payment of
ccsts.
(a) If, in the opinion ofthe Administrator, an
examination conducted under the provisions of
G.S. 54B-57 fails to disclose the complete
financial condition of an association , he may in
order to ascertain its complete financial condition:
(1) Make an extended audit or examination
ofthe association or cause such an audit
or examination to be made by an independent auditor;
(2) Make an extended revaluation of any of
the assets or liabilities ofthe association
§ 54B-57. Supervision and
or cause an independent appraiser to
make such revaluation.
examination fees.
(b) The Administrator shall collect from the
(a) Every State association, including asso- association a reasonable sum for actual or necesciations in process of voluntary liquidation or sary expenses of such an audit, examination or
savings and loan holding company, shall pay revaluation. ( 1981 , c. 282, s. 3.)
into the office of the Administrator each July a
supervisory fee. Examination fees shall be paid $ 54B-59. Cease and desist orders .
promptly upon an association's receipt of the
examination billing. The Administrator, subject
(a) Ifany person or association is engaging in,
to the advice and consent of the Commission,
or has engaged in, any unsafe or unsound pracshall, on or before June 1 of each year:
tice or unfair and discriminatory practice in con(1 ) Determine and fix the scale of supervi- ducting the association's business, or of any
sory and examination fees to be assessed other law, rule, regulation, order or condition
and collected during the next fiscal year; imposed in writing by the Administrator, the
(2) Determine and fix the amount ofthe fee Administrator
issue a notice of charges to
and set the fee collection.schedule for such person or may
A notice of charges
the fees to be assessed to and collected shall specify theassociation.
acts alleged to sustain a cease
from applicants to defray the cost ofpro- and desist order, and state the time and place at
cessing their charter, branch, merger, which a hearing shall be held. A hearing before
conversion, location change, savings the Commission on the charges shall be held no
and loan holding company acquisition, earlier than seven days, and no later than 14
and name change applications and all days after issuance of the notice. The charged
fees associated with foreign associa- institution
is entitled to a further extension of
tions .
days upon filing a request with the
(b) All funds and revenue collected by the seven
Administrator. The Administrator may also
Division under the provisions of this section and issue a notice of charges if he has reasonable
the provisions of all other sections of this Chap- grounds to believe that any person or associater which authorize the collection of fees and tion is about to engage in any unsafe or unsound
other funds shall be deposited with the State business practice, or any violation of this ChapTreasurer of North Carolina and expended ter, or any other law, rule, regulation or order.
under the terms of the Executive Budget Act, If, by a preponderance of the evidence, it is
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CH. 54B. SAVINGS AND LOAN ASSOCIATIONS
shownthat any person or association is engaged
in, or has been engaged in, or is about to engage
in, any unsafe or unsound business practice, or
unfair and discriminatory practice or any violation ofthis Chapter, or any other law, rule, regulation, or order, a cease and desist order shall be
issued. The Commission may issue a temporary
cease and desist order to be effective for 14 days
and may be extended once for a period of 14
days.
(b) If any person or State association is
engaging in, has engaged in, or is about to
engage in any unsafe or unsound practice in
conducting the association's business, or any
violation of this Chapter or of any other law,
rules, regulation, order, or condition imposed in
writing by the Administrator, and the Administrator has determined that immediate
corrective action is required, the Administrator
may issue a temporary cease and desist order. A
temporary cease and desist order shall be effective immediately upon issuance for a period of
14 days, and may be extended once for a period
of 14 days. Such an order shall state its duration
on its face and the words. "Temporary Cease and
Desist Order. " A hearing before the Commission
shall be held within such time as such an order
remains effective, at which time a temporary
order may be dissolved or made permanent .
( 1981 , c. 282, s. 3.)
§ 54B-60. Administrator to have
right of access to books
and records of
association; right to
issue subpoenas,
administer oaths,
examine witnesses.

(a) The Administrator and his agents:
(1 ) Shall have free access to all books and
records of an association , or a service
corporation thereof, that relate to its
business, and the books and records kept
by an officer, agent or employee relating
to or upon which any record is kept;
(2 ) May subpoena witnesses and administer
oaths or affirmations in the examination of any director, officer, agent, or
employee of an association , or a service
corporation thereof or of any other person in relation to its affairs, transactions
and conditions;
(3) May require the production of records,
books, papers, contracts and other
documents; and
(4) May order that improper entries be
corrected on the books and records of an
association.
(b) The Administrator may issue subpoenas
duces tecum .
(c) If a person fails to comply with a subpoena
so issued or a party or witness refuses to testify
on any matters, a court of competent jurisdiction, on the application of the Administrator,
shall compel compliance by proceedings for contempt as in the case of disobedience of the

§ 548-62

requirements of a subpoena issued from such
court or a refusal to testify in such court. ( 1981 ,
c. 282, s. 3.)
§ 54B-61 . Test appraisals of
collateral for loans;
expense paid.
(a) The Administrator may direct the making
of test appraisals of real estate and other collateral securing loans made by associations doing
business in this State, employ competent
appraisers, or prescribe a list from which competent appraisers may be selected, for the
making of such appraisals by the Administrator, and do any and all other acts incident to the
making of such test appraisals.
(b) In lieu of causing such appraisals to be
made, the Administrator may accept an
appraisal caused to be made by a Federal Home
Loan Bank, the Federal Home Loan Bank Board
or by the Federal Savings and Loan Insurance
Corporation or any mutual deposit guaranty
association organized and operating under the
provisions of Article 12 of this Chapter.
(c) The expense and cost of test appraisals
made pursuant to this section shall be defrayed
by the association subjected to such test
appraisals, and each association doing business
in this State shall pay all reasonable costs and
expenses ofsuch test appraisals when it shall be
directed. ( 1981 , c. 282 , s. 3.)
§ 54B-62. Relationship of savings
and loan associations
with the Savings and
Loan Division.
(a) Except as provided by subsection (b) ofthis
section, a savings and loan association or any
director, officer. employee, or representative
thereof shall not grant or give to the Administrator or to any employee of the Administrator's office, or to their spouses, any loan or
gratuity, directly or indirectly.
(b) Neither the Administrator nor any person
on the staff of the Savings and Loan Division
shall:
( 1) Hold an office or position in any State
association or exercise any right to vote
on any State association matter by
reason ofbeing a member ofthe association;
(2) Be interested, directly or indirectly in
any savings and loan association organized under the laws of this State; or
(3) Undertake any indebtedness, as a
borrower directly or indirectly or
endorser, surety or guarantor, or sell or
otherwise dispose of any loan or investment to any savings and loan association organized under the laws of this
State.
(c) Notwithstanding subsection (b) ofthis section, the Administrator or any other person
employed in or by his office may be a withdrawable account holder and receive earnings
on such account .

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$ 548-63

CH. 54B. SAVINGS AND LOAN ASSOCIATIONS

(d) If the Administrator or other person has
any prohibited right or interest in a savings and
loan association, either directly or indirectly, at
the time ofhis appointment or employment, he
shall dispose of it within 60 days after the date
of his appointment, or employment. If the
Administrator or other such person is indebted
as borrower directly or indirectly, or is an
endorser, surety or guarantor on a note, at the
time ofhis appointment or employment, he may
continue in such capacity until such loan is paid
off. ( 1981 , c. 282, s. 3.)
§ 54B-63. Confidential
information.
(a) The following records or information ofthe
Commission, the Administrator or the agent(s)
of either shall be confidential and shall not be
disclosed:
(1) Information obtained or compiled in
preparation of or anticipation of, or
during an examination, audit or investigation of any association:
(2) Information reflecting the specific collateral given by a named borrower, the
specific amount of stock owned by a
named stockholder, or specific with
drawable accounts held by a named
member or customer;
(3) Information obtained, prepared or compiled during or as a result of an examination, audit or investigation of any
association by an agency of the United
States, ifthe records would be confidential under federal law or regulation:
(4) Information and reports submitted by
associations to federal regulatory
agencies, if the records or information
would be confidential under federal law
or regulation;
(5) Information and records regarding complaints from the public received by the
Division which concern associations
when the complaint would or could
result in an investigation, except to the
management of those associations;
(6) Any other letters, reports, memoranda,
recordings, charts or other documents or
records which would disclose any information ofwhich disclosure is prohibited
in this subsection.
(b) A court of competent jurisdiction may
order the disclosure of specific information.
(c) The information contained in an application shall be deemed to be public information.
Disclosure shall not extend to the financial
statement of the incorporators nor to any further information deemed by the Administrator
to be confidential.
(d) Nothing in this section shall prevent the
exchange ofinformation relating to associations
and the business thereof with the representatives of the agencies of this State, other
states, or ofthe United States, or with reserve or
insuring agencies for associations. The private
business and affairs ofan individual or company
shall not be disclosed by any person employed by

the Savings and Loan Division, any member of
the Commission, or by any person with whom
information is exchanged under the authority of
this subsection.
(e) Any official or employee violating this section shall be liable to any person injured by disclosure of such confidential information for all
damages sustained thereby. Penalties provided
shall not be exclusive of other penalties. (1981 ,
c. 282, s. 3.)

§ 54B-64. Civil penalties; State
associations.
(a) Except as otherwise provided in this
Article, any association which is found to have
violated any provision of this Article may be
ordered to forfeit and pay a civil penalty ofup to
twenty thousand dollars ($20.000). Any association which is found to have violated or failed to
comply with any cease and desist order issued
under the authority of this Article may be
ordered to forfeit or pay a civil penalty of up to
twenty thousand dollars ($20,000) for each day
that the violation or failure to comply continues.
(b) To enforce the provisions of this section,
the Administrator is authorized to assess such a
penalty and to appear in a court of competent
jurisdiction and to move the court to order
payment ofthe penalty. Prior to the assessment
of the penalty. a hearing shall be held by the
Administrator which shall comply with the provisions of Article 3 of Chapter 150A of the
General Statutes.
(c) Ifthe Administrator determines that, as a
result of a violation of any provision of this
Article, or of a failure to comply with any cease
and desist order issued under the authority of
this Article, a situation exists requiring immediate corrective action, the Administrator may
impose the civil penalty in this section on the
association without a prior hearing, and said
penalty shall be effective as of the date of notice
to the association. Imposition of such penalty
may be directly appealed to the Wake County
Superior Court.
(d) Nothing in this section shall prevent
anyone damaged by a State association from
bringing a separate cause of action in a court of
competent jurisdiction. ( 1981 , c. 282, s . 3.)

§ 54B-65. Civil penalties; directors,
officers and employees.
(a) Any person, whether a director, officer or
employee, who is found to have violated any provision of this Article, whether willfully or as a
result of gross negligence, gross incompetency,
or recklessness, may be ordered to forfeit and
pay a civil penalty of up to five thousand dollars
($5,000) per violation. Any person who is found
to have violated or failed to comply with any
cease and desist order issued under the authority of this Article, may be ordered to forfeit and
pay a civil penalty of up to five thousand dollars
($5,000) per violation for each day that the vio
lation or failure to comply continues.

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CH. 54B. SAVINGS AND LOAN ASSOCIATIONS
(b) To enforce the provisions of this section,
the Administrator is authorized to assess such a
penalty and to appear in a court of competent
jurisdiction and to move the court to order
payment ofthe penalty. Prior to the assessment
of the penalty, a hearing shall be held by the
Administrator which shall comply with the provisions of Article 3 of Chapter 150A of the
General Statutes.
(c) Whenever the Administrator shall determine that an emergency exists which requires
immediate corrective action, the Administrator,
either before or after instituting any other
action or proceeding authorized by this Article,
may request the Attorney General to institute a
civil action in a court of competent jurisdiction,
in the name ofthe State upon the relation ofthe
Administrator seeking injunctive relief to
restrain or enjoin the violation or threatened
violation of this Article and for such other and
further relief as the court may deem proper.
Instituting an action for injunctive relief shall
not relieve any party to such proceedings from
any civil or criminal penalty prescribed for violation of this Article.
(d) Nothing in this section shall prevent
anyone damaged by a director, officer or
employee of a State association from bringing a
separate cause of action in a court of competent
jurisdiction. (1981 , c. 282, s . 3.)

§ 54B-66. Criminal penalties.
(a) The provisions of this section shall in no
event extend to persons who are found to have
acted only with gross negligence, simple negligence, recklessness or incompetence.
(b) In addition to any of the other penalties or
remedies provided by this Article, the following
shall be deemed to be misdemeanors and shall
be punishable as provided in Chapter 14 of the
North Carolina General Statutes:
(1) The willful or knowing violation of the
provisions of this Article by any
employee ofthe Savings and Loan Division.
(2) The willful or knowing violation of a
cease and desist order which has become
final in that no further administrative
orjudicial appeal is available.
(c) In addition to any ofthe other penalties or
remedies provided by this Article, the willful
omission, making, or concurrence in making or
publishing a written report, exhibit, or entry in
a financial statement on the books of the association, which contains a material statement
known to be false shall be deemed to be a misdemeanor and shall be punishable as provided in
Chapter 14 ofthe North Carolina General Statutes . For purposes of this section, " material"
shall mean "so substantial and important as to
influence a reasonable and prudent businessman or investor."
(d) The Administrator is authorized to
enforce this section in a court of competentjurisdiction. (1981, c. 282, s. 3.)

§ 548-68

§ 54B-67. Primary jurisdiction.
Whenever an agency ofthe United States government shall defer to the Administrator, or
notify the Administrator of pending_action
against an association chartered bythis State or
fail to exercise its authority over any State- or
federally-chartered association doing business
in this State, the Administrator shall have the
authority to exercise jurisdiction over such association. (1981 , c. 282, s. 3.)
§ 54B-68. Supervisory control.
(a) Whenever the Administrator determines
that an association is conducting its business in
an unsafe or unsound manner or in any fashion
which threatens the financial integrity or sound
operation of the association, the Administrator
may serve a notice ofcharges on the association,
requiring it to show cause why it should not be
placed under supervisory control. Such notice of
charges shall specify the grounds for supervisory control, and set the time and place for a
hearing. A hearing before the Commission pursuant to such notice shall be held within 15 days
after issuance of the notice of charges, and shall
comply with the provisions of Article 3 of Chapter 150A of the General Statutes.
(b) If, after the hearing provided above, Commission determines that supervisory control of
the association is necessary to protect the association's members, customers, stockholders or
creditors, or the general public, the Administrator shall issue an order taking supervisory
control of the association . An appeal may be
filed in the Wake County Superior Court.
(c) If the order taking supervisory control
becomes final, the Administrator may appoint
an agent to supervise and monitor the operations of the association during the period of
supervisory control . During the period of supervisory control, the association shall act in accordance with such instructions and directions as
may be given by the Administrator directly or
through his supervisory agent and shall not act
or fail to act except when to do so would violate
an outstanding cease and desist order.
(d) Within 180 days of the date the order
taking supervisory control becomes final, the
Administrator shall issue an order approving a
plan for the termination of supervisory control.
The plan may provide for:
(1 ) The issuance by the association of capital stock;
(2) The appointment of one or more officers
and/or directors;
(3) The reorganization, merger, or consolidation of the association;
(4) The dissolution and liquidation of the
association.
The order approving the plan shall not take
effect for 30 days during which time period an
appeal may be filed in the Wake County Superior Court.
(e) The costs incident to this proceeding shall
be paid by the association, provided such costs
are found to be reasonable.

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§ 548-69

CH. 54B. SAVINGS AND LOAN ASSOCIATIONS

(f) For the purposes of this section, an order appointed to any position as a director, officer or
shall be deemed final if:
employee of that association, nor shall such a
(1) No appeal is filed within the specific director, officer or employee be eligible to be
elected to or retain a position as a director, offitime allowed for the appeal, or
(2) After all judicial appeals are exhausted. cer or employee of any other State association.
(1981, c. 282, s. 3.)
(1981, c. 282, s. 3.)
§ 54B-69. Removal of directors ,
officers and employees.
(a) If, in the Administrator's opinion, one or
more directors, officers or employees ofany association has participated in or consented to any
violation ofthis Chapter, or any other law, rule.
regulation or order, or any unsafe or unsound
business practice in the operation of any association; or any insider loan not specifically
authorized by or pursuant to this Chapter; or
any repeated violation of or failure to comply
with any association's bylaws, the Administrator may serve a written notice of charges upon
the director. officer or employee in question, and
the association, stating his intent to remove said
director, officer or employee. Such notice shall
specify the conduct and place for the hearing
before the Commission to be held. A hearing
shall be held no earlier than 15 days and no
later than 30 days after the notice of charges is
served, and it shall comply with the provisions
ofArticle 3 ofChapter 150A ofthe General Statutes. If, after the hearing, the Commission
determines that the charges asserted have been
proven by a preponderance of the evidence, the
Administrator may issue an order removing the
director. officer or employee in question . Such
an order shall be effective upon issuance and
may include the entire board of directors or all
of the officers of the association.
(b) Ifit is determined that any director, officer
or employee of any association has knowingly
participated in or consented to any violation of
this Chapter, or any other law, rule, regulation
or order, or engaged in any unsafe or unsound
business practice in the operation of any association, or any repeated violation of or failure to
comply with any association's bylaws, and that
as a result, a situation exists requiring immediate corrective action, the Administrator may
issue an order temporarily removing such person or persons pending a hearing. Such an order
shall state its duration on its face and the words,
"Temporary Order of Removal." and shall be
effective upon issuance, for a period of 15 days.
and may be extended once for a period of 15
days. A hearing must be held within 10 days of
the expiration of a temporary order, or any
extension thereof, at which time a temporary
order may be dissolved or converted to a permanent order.
(c) Any removal pursuant to subsections (a) or
(b) ofthis section shall be effective in all respects
as ifsuch removal had been made by the board
of directors, the members or the stockholders of
the association in question.
(d) Without the prior written approval of the
Administrator, no director, officer or employee
permanently removed pursuant to this section
shall be eligible to be elected, reelected or

§ 54B-70. Involuntary liquidation.
(a) The Administrator with prior approval of
the Commission may take custody ofthe books,
records and assets of every kind and character of
any association organized and operated under
the provisions of this Chapter for any of the
purposes hereinafter enumerated, if it reasonably appears from examinations or from reports
made to the Administrator that:
(1) The directors, officers, or liquidators
have neglected, failed or refused to take
such action which the Administrator
may deem necessary for the protection of
the association, or have impeded or
obstructed an examination; or
(2) The withdrawable capital ofthe association is impaired to the extent that the
realizable value of its assets is insufficient to pay in full its creditors and
holders of withdrawable accounts; or its
liquidity fund or general reserve
account is impaired; or
(3) The business of the association is being
conducted in a fraudulent, illegal or
unsafe manner, or that the association is
in an unsafe or unsound condition to
transact business; (any association
which, except as authorized in writing
by the Administrator, fails to make full
payment ofany withdrawal when due is
in an unsafe or unsound condition to
transact business, notwithstanding such
provisions of the certificate of
incorporation or such statutes or regulations with respect to payment of withdrawals in event an association does not
pay all withdrawals in full); or
(4) The officers, directors, or employees
have assumed duties or performed acts
in excess of those authorized by statute
or regulation or charter, or without supplying the required bond; or,
(5) The association has experienced a substantial dissipation of assets or earnings
due to any violation or violations of statute or regulation, or due to any unsafe or
unsound practice or practices; or
(6) The association is insolvent, or is in
imminent danger of insolvency or has
suspended its ordinary business
transactions due to insufficient funds; or
(7) The association is unable to continue
operations.
(b) Unless the Administrator finds that such
an emergency exists which may result in loss to
members, withdrawable account holders,
stockholders, or creditors, and which requires
that he take custody immediately, he shall first
give written notice to the directors and officers
specifying the conditions criticized and allowing
a reasonable time in which corrections may be

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CH. 54B. SAVINGS AND LOAN ASSOCIATIONS
made before a receiver shall be appointed as
outlined in subsection (d) below.
(c) The purposes for which the Administrator
may take custody of an association include
examination or further examination; conservation ofits assets; restoration ofimpaired capital;
the making of any reasonable or equitable
adjustment deemed necessary by the Administrator under any plan of reorganization.
(d) If the Administrator after taking custody
of an association, finds that one or more of the
reasons for having taken custody continue to
exist through the period of his custody, with
little or no likelihood of amelioration ofthe situation, then he shall appoint as receiver or
co-receiver any qualified person, firm or corporation for the purpose of liquidation of the association, which receiver shall furnish bond in
form, amount and with surety as the Administrator may require. The Administrator may
appoint the association's withdrawable account
insurance corporation or its nominee as the
receiver, and such insuring corporation shall be
permitted to serve without posting bond.
(e) In the event the Administrator appoints a
receiver for an association, he shall mail a
certified copy of the appointment order by
certified mail to the address ofthe association as
it shall appear on the records of the Division,
and to any previous receiver or other legal
custodian of the association, and to any court or
other authority to which such previous receiver
orother legal custodian is subject. Notice of such
appointment shall be published in a newspaper
of general circulation in the county where such
association has its principal office.
(f) Whenever a receiver for an association is
appointed pursuant to subsection (d) above the
association may within 30 days thereafter bring
an action in the Superior Court ofWake County,
for an order requiring the Administrator to
remove such receiver.
(g) The duly appointed and qualified receiver
shall take possession promptly ofthe association
for which he or it has been so appointed, in
accordance with the terms of such appointment,
by service of a certified copy of the Administrator's appointment order upon the association at
its principal office through the officer or
employee who is present and appears to be in
charge. Immediately upon taking possession of
the association, the receiver shall take possession and title to books, records and assets of
every description of such association. The
receiver, by operation of law and without any
conveyance or other instrument, act or deed.
shall succeed to all the rights, titles, powers and
privileges of the association, its members or
stockholders, holders ofwithdrawable accounts.
its officers and directors or any of them: and to
the titles to the books, records and assets of
every description of any previous receiver or
other legal custodian of such association. Such
members, stockholders, holders ofwithdrawable
accounts, officers or directors, or any of them ,
shall not thereafter, except as hereinafter
expressly provided, have or exercise any such
rights, powers or privileges or act in connection
with any assets or property of any nature ofthe

§ 548-70

association in receivership: Provided however,
that any officer, director, member, stockholder,
withdrawable account holder, or borrower of
such association shall have the right to communicate with the Administrator with respect
to such receivership. The Administrator, with
the approval of the Commission, may at any
time, direct the receiver to return the association to its previous or a newly constituted
management. The Administrator may provide
for a meeting or meetings of the members or
stockholders for any purpose, including, without
any limitation on the generality of the
foregoing, the election ofdirectors or an increase
in the number of directors, or both, or the election ofan entire newboard ofdirectors; and may
provide for a meeting or meetings of the
directors for any purpose including, without any
limitation on the generality ofthe foregoing, the
filling of vacancies on the board, the removal of
officers and the election of new officers, or for
any ofsuch purposes. Any such meeting ofmembers or stockholders, or of directors, shall be
supervised or conducted by a representative of
the Administrator.
(h) A duly appointed and qualified receiver
shall have power and authority to:
(1) Demand, sue for, collect, receive and
take into his possession all the goods
and chattels, rights and credits, moneys
and effects, lands and tenements, books,
papers. choses in action, bills, notes, and
property ofevery description ofthe association;
(2) Foreclose mortgages, deeds oftrust, and
other liens executed to the association to
the extent the association would have
had such right;
(3) Institute suits for the recovery of any
estate, property, damages, or demands
existing in favor of the association, and
he shall, upon his own application, be
-substituted as party plaintiff in the
place of the association in any suit or
proceeding pending at the time of his
appointment;
(4) Sell, convey, and assign all the property
rights and interest owned by the association:
(5) Appoint agents to serve at his pleasure;
(6) Examine and investigate papers and
persons, and pass on claims as provided
in the regulations as prescribed by the
Administrator;
(7) Make and carry out agreements with the
insuring corporation or with any other
financial institution for the payment or
assumption ofthe association liabilities,
in whole or in part, and to sell, convey,
transfer, pledge, or assign assets as
security or otherwise and to make guarantees in connection therewith; and
(8) Perform all other acts which might be
done by the employees, officers and
directors.
Such powers shall be continued in effect until
liquidation and dissolution or until return ofthe
association to its prior or newly constituted
management.

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397

§ 548-71

CH . 54B. SAVINGS AND LOAN ASSOCIATIONS

(i) A receiver may at any time during the
receivership and prior to final liquidation be
removed and a replacement appointed by the
. Administrator.
6) The Administrator may determine that
such liquidation proceedings should be
discontinued. He shall then remove the receiver
and restore all the rights, powers, and privileges
of its members and stockholders, customers,
employees, officers and directors, or restore such
rights, powers, and privileges to its members,
stockholders and customers, and grant such
rights, powers and privileges to a newly constituted management, all as of the time of such
restoration ofthe association to its management
unless another time for such restoration shall be
specified by the Administrator. The return ofan
association to its management or to a newly
constituted management from the possession of
a receiver shall, by operation of law and without
any conveyance or other instrument, act or
deed, vest in such association the title to all
property held by the receiver in his capacity as
receiver for such association.
(k) A receiver may also be appointed under
the authority of G.S. 1-502. No judge or court,
however, shall appoint a receiver for any State
association unless five days' advance notice of
the motion, petition or application for appointment ofa receiver shall have been given to such
association and to the Administrator.
(1) Following the appointment of a receiver,
the Administrator shall request the Attorney
General to institute an action in the name ofthe
Administrator in the superior court against the
association for the orderly liquidation and dissolution ofthe association, and for an injunction
to restrain the officers, directors and employees
from continuing the operation ofthe association.
(m) Claims against a State association in
receivership shall have the following order of
priority for payment:
(1) Costs, expenses and debts of the association incurred on or after the date of the
appointment of the receiver, including
compensation for the receiver;
(2) Claims of general creditors;
(3) Claims of holders of special purpose or
thrift accounts;
(4) Claims of holders of withdrawable
accounts;
(5) Claims of stockholders of a stock associa
tion;
(6) All remaining assets to members and
stockholders in an amount proportionate to their holdings as ofthe date of
the appointment of the receiver.
(n) All claims of each class described within
subsection (m) above shall be paid in full so long
as sufficient assets remain. Members ofthe class
for which the receiver cannot make payment in
full because assets will be depleted during
payment to such class shall be paid an amount
proportionate to their total claims.
(0) The Administrator shall have the authority to direct the payment of claims for which no
provision is herein made, and may direct the
payment of claims within a class . The Administrator shall have the authority to promulgate

rules and regulations governing the payment of
claims by an association in receivership.
(p) When all assets of the association have
been fully liquidated, and all claims and
expenses have been paid or settled, and the
receiver shall recommend a final distribution,
the dissolution ofthe association in receivership
shall be accomplished in the following manner:
(1) The receiver shall file with the Administrator a detailed report, in a form tobe
prescribed by the Administrator, of his
acts and proposed final distribution, and
dissolution.
(2) Upon the Administrator's approval of
the final report of the receiver, the
receiver shall provide such notice and
thereafter shall make such final distribution, in such manner as the Administrator may direct.
(3) When afinal distribution has been made
except as to any unclaimed funds, the
receiver shall deposit such unclaimed
funds with the Administrator and shall
deliver to the Administrator all books
and records of the dissolved association.
(4) Upon completion ofthe foregoing procedure, and upon the joint petition ofthe
Administrator and receiver to the superior court, the court may find that the
association should be dissolved, and
following such publication of notice of
dissolution as the court may direct, the
court may enter a decree offinal resolution and the association shall thereby be
dissolved.
(5) Upon final dissolution of the association
in receivership or at such time as the
receiver shall be otherwise relieved of
his duties, the Administrator shall
cause an audit to be conducted, during
which the receiver shall be available to
assist in such. The accounts of the
receiver shall then be ruled upon by the
Administrator and Commission and if
approved, the receiver shall thereupon
be given a final and complete discharge
and release. ( 1981 , c. 282, s. 3.)
§ 54B-71 . Judicial review.

Any person or State association against whom
a cease and desist order is issued or a fine is
imposed may have such order or fine reviewed
by a court of competent jurisdiction . Except as
otherwise provided, an appeal may be made only
within 30 days ofthe issuance ofthe order orthe
imposition of the fine, whichever is later. (1981 ,
c. 282, s. 3.)
§ 54B-72. Indemnity.
No person who is fined or penalized for a violation of any criminal provision of this Article
shall be reimbursed or indemnified in any
fashion by the association for such fine or penalty. (1981 , c. 282 , s. 3.)

108

398

Exhibit 2
COMMERCE - SAVINGS AND LOAN DIVISION

T04 : 16D .0600
25.16

SECTION .0600 - LIQUIDITY FUND

25.18
.0601 LIQUIDITY FUND REQUIREMENT
(a) Each association shall maintain a liquidity fund as 25.20
defined in G.S. 54B - 210 for the sole purpose of assuring the 25.21
liquidity of the association .
(b) The liquidity fund required by this Section shall be 25.22
deemed identical with and not supplementary to the liquidity fund
required to be maintained by associations insured by the Federal 25.24
Savings and Loan Insurance Corporation .
(c) Reserves required to be maintained pursuant to Title I of 25.25
the Depository Institutions Deregulation and Monetary Control Act
of 1980 and established pursuant to 12 C.F.R. 204 may be used to
25.27
satisfy the liquidity fund requirements of this Section.
(d) In addition to those investments set forth in G. S. 54B- 25.30
210 (a ) , a state association's liquidity fund may also include
securities which are hedged , subject to options, or 25.31
debt
redeemable , in the manner allowed to members of the Federal Hone
Loan Bank Board , by the board's regulations , as amended from time 25.32
to time ; the limitations regarding amounts of investments ,
investments in, or hedged by, a single source , and other similar 25.33
limitations set forth in the bank board's regulations , which 25.34
apply to members of the Federal Home Loan Bank Board , shall also
25.35
apply to state associations .
Statutory Authority G.S. 54B -55;
54 B- 210; 54B- 211 ;
Bff. August 31 , 1981 ;
Amended Eff . July 1 , 1983.

25.38
25.39
25.40
25.41

.0602 AMOUNT OF LIQUIDITY FUND
The liquidity fund shall be maintained in an amount equal to at
least the greater of:
percent
of
the net withdrawal value of the
(1) five
association's withdrawable accounts ; or
(2) two hundred fifty thousand dollars ($250,000) .

25.43
25.45
25.46
25.48
25.49
25.51

History Note :

History Note :

25.54
25.55
25.56

Statutory Authority G.S. 54B- 55;
54E- 210 ; 5& B- 211 ;
Eff. August 31 , 1981 .

NORTH CAROLINA ADMINISTRATIVE CODE

12/05/84

16-37

399

COMMERCE · SAVINGS AND LOAN DIVISION

SECTION .0700

T04 : 16D .0700

GENERAL RESERVE ACCOUNT

26.6

.0701 GENERAL RESERVE REQUIREMENTS
Ja) Each association shall establish and maintain a general
reserve account for the sole purpose of covering losses.
The
general reserve account shall be established and maintained
separately from any specific loss reserve accounts established
and maintained at the election of the association.
(b) Any state association which has insurance of withdrawable
accounts with the Federal Savings and Loan Insurance Corporation
and meets the statutory reserve
requirement of the Federal
Savings and Loan Insurance Corporation need not comply with the
general reserve requirement of this Rule.
level of the general reserve account shall be
(c) The
calculated at the end of each fiscal year using the percentages
set forth in Paragraph ( d ) of this Rule , and shall be based on
Bach
the amount of assets at the end of each fiscal year.
association shall make such transfers as may be necessary to
reach the calculated level no later than 90 days after the end of
the fiscal year .
(d) The level of the general reserve account which shall be
established and maintained against assets is fixed at the
following percentages :
(1 ) zero percent for the following "Group One" assets:
(A) Stock in the Federal Home Loan Bank of Atlanta ;
(B) PSLIC secondary reserve ;
(C) Deposits in the North Carolina Savings Guaranty
Corporation; and
(D) Unencumbered land and fixed assets used in course
of the association's business.
(2) two percent for the following " Group Two " assets :
(A) investments eligible for liquidity under G.S. 54B210, except stock in the Federal Home Loan Bank of
Atlanta and deposits in the North Carolina Savings
Guaranty Corporation ; and
(B) encumbered land and fixed assets used in course of
the association's business.
(3 ) three percent for the following " Group Three" assets:
JA) residential mortgage loans and mortgaged - backed
securities ;
(B) loans on withdrawable accounts ;
(C) premiums or discounts on mortgage loans to be
amortized ; and
(D) other assets not listed under this Paragraph (d ) .
(4) five percent for the following " Group Four" assets:
(A) commercial loans ;
NORTH CAROLINA ADMINISTRATIVE CODE

12/05/84

16-38

26.8
26.10
26.11
26.12
26.13
26.14
26.15
26.16
26.17
26.18
26.19
26.20
26.21
26.22
26.23

26.24
26.25

26.27
26.28
26.29
26.30
26.31
26.33
26.34
26.36
26.38
26.39
26.40
26.41
26.42
26.44
26.46
26.47
26.49
26.51
26.52
26.54
26.55
26.56

400

COMMERCE

SAVINGS AND LOAN DIVISION

T04 : 16D .0700

(B) secured consumer loans ;
(C) loans to facilitate ; and
(D) investment in service corporation.
(5) eight percent for the following " Group Five " assets:
(A) unsecured loans ;
(B) real estate owned ;
JC) standby, fixed-rate , Long terna commitments in
excess of six months at time of issuance ; and
(D) loans in bankruptcy.
je) Upon a review of an association's assets and for just
cause, the administrator may require an amount to be reserved in
addition to the amounts prescribed in Paragraph (d) of this Rule.
(E) For the purposes of meeting the required level of the
general reserve account, any account which is a part of the
association's net worth as defined in G.S. 54B-4 ( b) ( 38 ) shall be
considered a part of the association's general reserve account.
History Note:

.0702

Statutory Authority G.S. 54B- 216 ;
Eff. December 1 , 1981 ;
Amended Eff. November 1 , 1982 ; October 1 , 1982 .

REQUIREMENTS FOR NEWLY- CHARTERED STOCK ASSOCIATIONS

History Note:

Statutory Authority G.S. 54B- 216 ;
Eff. December 1 , 1981 ;
Repealed Eff. November 1 , 1982 .

26.57
27.1
27.2
27.3
27.4
27.5
27.7
27.8
27.10
27.12
27.13
27.14
27.15
27.16
27.17
27.18
27.21
27.22
27.23
27.25

27.28
27.29
27.30

401

Exhibit 3

GENERAL RESERVE REQUIREMENT (ADEQUACY OF NET WORTH/CAPITAL )
Description of Assets
GROUP I
Stock in FHLB-Atlanta
FSLIC Secondary Reserve
Deposits with FIAC
Unencumbered Land and Fixed Assets
Used in the Course of Assn. Business
Total Group I.
GROUP II
Investments Eligible for Liquidity
(Exclude FHLB-Atlanta Stock and
Deposits with FIAC )
Encumbered Land and Fixed Assets
Used in the Course of Assn . Business
Total Group II
GROUP III
Residential Mortgage Loans
and Mortgage Backed Securities
Loans in Withdrawable Accounts
Premiums/Discounts on Mortgage
Loans to be Amortized
Assets not Otherwise Listed
Total Group III
GROUP IV
Commercial Loans
Unsecured Loans
Consumer Loans
Loans to Facilitate
Investment in Service Corporation
Special Mention Assets
Total Group IV
GROUP V
Real Estate Owned
Assets Classified Substandard
Total Group V
GROUP VI
Assets Classified Doubtful
GROUP VII
Assets Classified Loss

Amount

Requirement

X

2% =

X

5% =

X 10% =

X 20% =
X 50% =
× 100% =

Reference 4 NCAC 16D.0701

|||

Total Assets
Total General Reserve Requirement
General Reserve on Exam Date
Excess (Deficiency)

402

Exhibit 4.

LIQUIDITY ANALYSIS
Cash on Hand
Bank Deposits (Checking Accounts )
Federal Funds and Overnight Deposits
Stock in Federal Home Loan Bank

Deposit with Financial Institutions
Assurance Corporation
U. S. Governments and Agency Obligations
Certificates of Deposit (Banks and S&Ls)
Bankers Acceptances

Corporate Debt/Commercial Paper
Repurchase Agreements
Debt Securities Hedged
Other Investments
Accrued Interest on Above
Less Total Amount Pledged

Actual Liquidity (A)

$

$

Total Savings

Less:
Share Loans
Pledged Collateral on Other Loans

Net Savings
Required Liquidity Ratio

x
Required Liquidity ( B )
Excess (Deficiency)
(A) Should Exceed (B)

Comments:

References:
NC General Statute 548-210- Components of Liquidity Fund
4 NCAC 16D.0601 - Liquidity Fund Requirement
4 NCAC 16D.0602 Amount of Liquidity Fund
Section 523.10 - Liquidity Definitions Bank System Regs

12

5%

403
Mr. BARNARD. Mr. McEnteer, before you begin, I would like to
ask, as Pennsylvania's secretary of banking, do you have the joint
supervisory control of banks and savings and loans?
Mr. McENTEER. Yes, sir.
Mr. BARNARD. You have both under your jurisdiction?
Mr. MCENTEER. Yes, sir.
Mr. BARNARD. Not divided in other words?
Mr. MCENTEER. Yes, sir.
Mr. BARNARD. What about credit unions?
Mr. MCENTEER . We have them also. State-chartered credit
unions also.
Mr. BARNARD. You have all three under your jurisdiction ?
Mr. McENTEER. And consumer credit companies also, and pawn
brokers too.
Mr. BARNARD. Well, now we're getting to the important aspects
now. [Laughter. ]
Mr. McENTEER. All State-chartered financial institutions that
comes under the purview of the department of banking.
Mr. BARNARD . The other 2 witnesses, you just have savings and
loans, correct?
Mr. BROWN. The State of Maryland's Savings and Loan Division
is a separate agency. Credit unions come under the bank commissioner's office which is a separate agency.
Mr. KING. Yes, sir, that's correct.
Mr. BARNARD. Mr. McEnteer, we will hear from you at this time.
STATEMENT OF BEN MCENTEER, SECRETARY, DEPARTMENT OF
BANKING, COMMONWEALTH OF PENNSYLVANIA
Mr. MCENTEER. Thank you, Mr. Chairman, distinguished members of the subcommittee.
I am Ben McEnteer, secretary of banking of the Pennsylvania
Department of Banking.
We have submitted detailed testimony, as requested by the committee and I appreciate the opportunity to highlight this testimony.
Mr. BARNARD. Without objection , your entire testimony will be
entered in the record.
Mr. MCENTEER. The Pennsylvania Savings Association Bureau is
the division within the department of banking charged with the examination and supervision of savings associations and directly responsible to the secretary of banking of Pennsylvania.
Under the Savings Association Code, the department of banking
is vested with the authority to annually or more frequently examine or investigate any State-chartered association . Along with the
power to investigate and examine is the power to issue orders to
discontinue any violation of law or any unsafe or unsound business
practice.
The department is authorized to take possession of an association, and either liquidate the association or appoint a deputy receiver for that purpose in the event the institution is in an unsafe
or unsound condition.
The savings association bureau presently supervises 104 Statechartered, federally insured savings associations with assets ranging from $4 million to $2.019 million and 68 State-chartered asso-

404
ciations insured by the Pennsylvania Savings Association Insurance Corp. with assets ranging from $ 125,000 to $82.9 million.
The largest association insured by PSAIC is $82.9 million. The remaining 67 associations have assets of between $ 125,000 and $ 13.5
million. These associations have been in business for a period of up
to a 117 years. The average net worth of these associations equals
13 percent of total savings on a GAAP accounting basis . I think
that is very important, that the average net worth of these associations amounts to 13 percent.
This has been an historical pattern for a considerable portion of
the Commonwealth's associations. Pennsylvania is the home of this
country's first building and loan association.
Associations insured by the Pennsylvania Savings Association Insurance Corp. are normally examined by the examing staff of the
bureau on an annual basis . The department has the authority to
examine and conduct investigations whenever it deems appropriate.
The department of banking may, by written order, direct an association to discontinue any violation of law or any unsafe or unsound business practice. Any director, officer, attorney, or employee of an association who, after the department orders it to cease
and desist from any violation of law or any unsafe and unsound
business practice, continues such violation or practice, may be removed from office. Based upon our experience, we are confident the
enforcement powers provided the department by law are sufficient
to monitor the safety and soundness of Pennsylvania's associations.
The Savings Association Code provides that whenever the general reserves of an association are not equal to at least 8 percent of
the savings accounts or whenever the net worth of the association
is not equal to at least 10 percent of the savings accounts, it shall
credit annually to its general reserves an amount equal to not less
than 5 percent of its net income before payment of interest on savings accounts.
The State's capital requirements then are significantly higher
than those required by the Federal Savings and Loan Insurance
Corporation. Even with the recently adopted FSLIC capital requirements imposing higher capital, the Pennsylvania State requirements are still higher.
After the Commonwealth amended its law in 1979 to require that
all State-chartered associations obtain account insurance, the department had the task of reviewing the financial status of every association applying for insurance from the Pennsylvania Savings Association Insurance Corp. If the financial status of an association
did not support a department certification for PSAIC insurance,
the department would first condition its certification upon the
pledging of accounts by officers or directors.
The second method of certification would be the traditional
method of arranging for a supervisory merger and the third
method is a relatively new procedure of recapitalizing an association by a supervisory conversion to stock form.
Based upon our continuous monitoring of both federally insured
and nonfederally-insured thrifts, we report that at the present time
we have no problem associations within the Pennsylvania State
system .

405
The statute establishing the Pennsylvania Savings Association
Insurance Corp. provides that the department of banking shall
monitor the operations of the PSAIC and require the corporation to
furnish reports or records as deemed necessary or appropriate in
the public interest.
Since the PSAIC has been in operation , the department has provided the PSAIC with copies of reports of examinations, supervisory letters and related correspondence between the bureau and the
insured members. Accordingly, our supervisory letters require that
the member associations provide copies of all their responses to the
savings association bureau for the PSAIC.
Since the inception of the PSAIC, a representative from the savings association bureau has attended all board of director's meetings, and membership committee meetings as well as annual meetings of the insurance corporation . This provides for continuous
dialog and a most effective joint supervisory program for all the
State-chartered associations insured by PSAIC.
It is appropriate, in our opinion, to emphasize that the safety of
a savings association primarily comes from (1) sound management;
(2) blue-chip home mortgage and investment portfolios; (3) strong
supervisory-enforced reserve position; (4) adequate liquidity for
meeting withdrawals; (5) the ability of the savings association to
secure funds in time of need from the Federal Home Loan Bank's
system, or the Federal Reserve Bank's discount window, or other
reliable sources; and (6) in addition, the insurance of savings accounts .
As the department's line of communication between itself and
the Pennsylvania Savings Association Insurance Corp. is operating
effectively, the department is not aware of any method that would
materially improve that relationship.
One important lesson to be learned from the Ohio situation is
that the well-being of any financial institution depends ultimately
on public confidence.
The privately-insured institutions in Pennsylvania have been in
business for a long time. They are strong, well managed, and well
regulated. These are the key features to insure that any type of financial institution remains fiscally sound.
Again, Mr. Chairman, I appreciate the opportunity to appear
before the subcommittee today and I will be pleased to take any
questions you may have. Thank you.
[ The prepared statement of Mr. McEnteer follows:]

406

TESTIMONY

BY
BEN MCENTEER
SECRETARY , DEPARTMENT OF BANKING
COMMONWEALTH OF PENNSYLVANIA

Mr. Chairman and Distinguished Members of the Subcommittee :

I am Ben

McEnteer , Secretary of Banking of the Pennsylvania Department of Banking .
I appreciate the opportunity to come before you today to review the
operation of the Pennsylvania Savings Association Insurance Corporation , (a
deposit insurance fund created by the Pennsylvania Legislature ) and to
discuss the manner in which the Corporation interacts with the Department
of Banking of the Commonwealth of Pennsylvania .
The Pennsylvania Savings Association Bureau is the division within the
Department of Banking charged with the examination and supervision
of savings associations (hereinafter associations ) and directly responsible
to the Secretary of Banking of Pennsylvania .

The department enforces and

administers all laws of the Commonwealth relating to any statechartered financial institutions .

The department exercises general

supervision over institutions in order to afford the greatest possible
safety to depositors , other creditors , and shareholders thereof .

It also

acts to insure the safe conduct of the business of such institutions ,
conserve their assets , maintain the public confidence in such institutions ,
and protect the public interest .
Under the Savings Association Code of 1967 and the Department of Banking
Code , the department is vested with the authority to annually or more
frequently examine or investigate any state -chartered association .

Along

with the power to investigate and examine is the power to issue orders to
discontinue any violation of law or any unsafe or unsound business
practice .

Under the Department of Banking Code , the Department is

authorized to take possession of an association , and either liquidate the
association or appoint a deputy receiver for that purpose in the event the

407

institution is in an unsafe or unsound condition .

In response to the request of this committee , as contained in the
communication of March 22 , 1985 , I submit the following :
The budget of the Pennsylvania Savings Association Bureau for
the fiscal year ended June 30 , 1983 was $ 1,008,000 ; for the year ended
June 30 , 1984 , $ 1,004,400 ; and for the current fiscal year , $ 1,033,000 .
The professional staff of the Bureau consists of 12 field examiners , 3
supervisory examiners , an assistant director and a director .
The Savings Association Bureau presently supervises 104 statechartered , federally - insured savings associations with assets ranging from
$4,000,000 to $ 2,219,000,000 ; and 68 state - chartered associations insured
by the Pennsylvania Savings Association Insurance Corporation with assets
ranging from $125,000 to $ 82,900,000 .

A further breakdown of the state-

chartered associations insured by the Pennsylvania Savings Association
Insurance Corporation shows that although the largest association is $82.9
million , the remaining 67 associations have assets of between $125,000 and
$13.5 million .
to 117 years .

These associations have been in business for a period of 28
The average net worth of these associations equals 13% of

total savings on a GAAP accounting basis .

This has been an historical

pattern for a considerable portion of the Commonwealth's associations .
Pennsylvania is the home of this country's first building and loan
association .

We further note that all savings and loan associations

domiciled in Pennsylvania are managed in a conservative manner .
Associations insured by the Pennsylvania Savings Association Insurance
Corporation are normally examined by the examining staff of the bureau on
an annual basis .

Under the Savings Association Code of 1967 and the

Department of Banking Code , the Department has the authority to examine or

-2-

408

conduct investigations whenever it deems appropriate .

Both Codes provide

that the Department of Banking may , by written order , direct an association
to discontinue any violation of law , or any unsafe or unsound business
practice .

Ancillary to these powers is the power to issue subpoenas , which

includes contempt penalties for failure to appear or to testify before a
Department proceeding .

Any director , officer , attorney or employee of an

association who after the Department orders to cease and desist from any
violation of law , or any unsafe and unsound business practice , continues
such violation or practice , may be removed from office .

There are criminal

penalties for directors , officers , employees and attorneys who engage in
insider transactions , fail to keep proper records , repledge collateral , or
submit required documents with false statements to the Department .

Based

upon our experience , we are confident the enforcement powers provided the
Department by law are sufficient to monitor the safety and soundness of
Pennsylvania's associations .
The Savings Association Code of 1967 provides that whenever the
general reserves of an association are not equal to at least 8% of the
savings accounts , or whenever the net worth of the association is not equal
to at least 10% of the savings accounts , it shall credit annually to its
general reserves an amount equal to not less than 5% of its net income
before payment of interest on savings accounts .

The Savings Association

Code requires adherence to various standards such as loan to value ratios ,
maximum loans to one borrower , maximum percentage of various types
investments to assets and a maximum limitation on borrowing .

These

provisions are designed to ensure the safety and soundness of our savings
associations and prevent the possibility of the insolvency of any
association .

-3-

409

The state capital requirements are significantly higher than those
required by the Federal Savings and Loan Insurance Corporation ( hereinafter
FSLIC) .

Even with the recently adopted FSLIC capital requirements imposing

higher capital requirements on the marginal deposits increase for rapidly
growing FSLIC insured associations , the state requirements are still
higher .
Even though capital requirements play an important role in preventing
insolvencies , the Department does not solely rely on them .

Ultimately ,

conservative , profitable good management is the best insurance against
insolvency .

From a regulatory standpoint , the Department attempts through

its examination procedures and the close relationship the Department has
with its chartered institutions , to identify problem associations at the
earliest possible moment .

When such an association is identified , the

Department generally requires one of the following approaches :
pledging of deposits by certain savings members ; supervisory mergers ; or a
supervisory conversion from a mutual to stock form .
After the Commonwealth amended its law in 1979 to require that all
state-chartered associations obtain account insurance , the Department had
the task of reviewing the financial status of every association applying
for insurance from the Pennsylvania Savings Association Insurance
Corporation ( PSAIC ) .

If the financial status of an association did not

support a Department certification for PSAIC insurance , the Department
would condition its certification upon the " pledging " of accounts by
officers or directors These pledged accounts not only increased the
association's net worth , but increased the pledgor officer's or director's
motivation to insure good management .

The Department continues to use this

method to increase net worth and has found it to be successful ,. especially
in the case of small or part-time associations .

-4-

410

The second method is the traditional method of arranging for a
supervisory merger .

With the advent of statewide branching in 1982 , the

Department may arrange the merger of any two associations located in the
Commonwealth .

Two reasons for the success of supervisory mergers are the

Department's knowledge of the savings and loan industry in the state and
its ability to foster mergers that are in the best interests of both
associations .
The third method is the relatively new procedure of recapitalizing an
association by a supervisory conversion to the stock form .

Using this

method , the Department determines , after a public hearing , that no public
purpose would be served by offering the stock to the current savings
members and authorizes a sale of the entire stock issue to a single person
or entity , or a control group . Stock conversions were first authorized in
Pennsylvania in 1982.

The statutory authorization for stock conversions in

Pennsylvania gives the Department more flexibility than the Federal Home
Loan Bank Board ( hereinafter FHLBB ) or the Federal Savings and Loan
Insurance Corporation ( FSLIC ) . Since 1982 , the Department has completed two
such transactions .

The first resulted in a stock association that grew

from $4,000,000 in deposits to over $ 80,000,000 in deposits .
association is now well capitalized , is well managed , and has increased the
net worth of PSAIC through its required deposit balances .
Based upon our continuous monitoring of both federally- insured and
nonfederally- insured thrifts , we report that at the present time we have no
problem associations within the Pennsylvania state system .
The statute establishing the Pennsylvania Savings Association
Insurance Corporation ( PSAIC ) provides that the Department of Banking ,
through the Savings Association Bureau , shall monitor the operations of the

-5-

411

PSAIC and require the corporation to furnish reports or records as deemed
necessary or appropriate in the public interest . The PSAIC must annually
submit a written report certified by an independent public accountant
relative to the conduct of its business , including financial statements .
The statute further provides that all applications for membership in the
PSAIC shall be referred to the Department of Banking , that the Department
examine the affairs of all such applicants , and that the Department provide
certification of such applicants as to the quality and soundness of the
applicant association's financial affairs , solvency , management and

directorship .

Since the PSAIC has been in operation , the Department , through the
Savings Association Bureau , has provided the PSAIC with copies of reports
of examinations , supervisory letters and related correspondence between the
Bureau and the insured members . Accordingly , our supervisory letters
require that the member associations provide copies of all their responses
to the Savings Association Bureau for the PSAIC .

In addition , as part of

our monitoring program , the PSAIC provides the Savings Association Bureau
with copies of its insured member associations ' monthly reports to the
Insurance Corporation for review by the Savings Association Bureau .
Since the inception of the PSAIC a representative from the Savings
Association Bureau has attended all Board of Directors ' meetings and
membership committee meetings , as well as annual meetings of the Insurance
Corporation .

This provides for continuous dialogue and a most effective

joint supervisory program for all the state -chartered associations insured
by PSAIC.

The sole power to terminate insurance of accounts for those

associations insured by PSAIC rests with the Insurance Corporation .
It is appropriate , in our opinion , to emphasize that the safety of a

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50-923 0-85--14

412

savings association primarily comes from ( 1 ) sound management , ( 2 )
blue -chip home mortgage and investment portfolios , ( 3 )

strong supervisory-

enforced reserve position , ( 4 ) adequate liquidity for meeting withdrawals ,
( 5 ) the ability of the savings association to secure funds in time of need
from the Federal Home Loan Bank's system , or the Federal Reserve Bank's
discount window , or other reliable sources , and ( 6 ) in addition , the
insurance of savings accounts .

Effective dual regulation depends on the mutual respect and
cooperation between the department and the Pennsylvania Savings Association
Insurance Corporation .

This , coupled with the appropriate remedial action ,

including the pledging of accounts , supervisory mergers and supervisory
stock conversions , has contributed to the public confidence Pennsylvanians
have in the Pennsylvania Savings Association Insurance Corporation's
insurance .
As the Department's line of communication between itself and the
Pennsylvania Savings Association Insurance Corporation is operating
effectively , the Department is not aware of any method that would
materially improve that relationship .
One important lesson to be learned from the Ohio situation is
that the well - being of any financial institution depends ultimately on
public confidence .
All financial institutions perform the same economic function as a
financial intermediary in the gathering of funds from the ultimate lenders
and distributing them to the ultimate borrowers .

The ultimate lenders

exchange their cash for deposit accounts or debt instruments of the
financial institution and the ultimate borrowers obtain cash from the
institutions and give the financial institution a note or a security

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413

evidencing their obligation to repay their debts .

All financial

institutions ' asset - liability management plans assume that all the ultimate
lenders will not ask the financial institution to honor withdrawal of
deposits at one time .

In fact , if this were not so , financial institutions

could not perform their economic function of efficiently allocating credit
in our ecomony .

Therefore , public confidence is paramount .

Furthermore ,

sound management and profitable operations with effective government
monitoring is the key to maintaining public confidence .
It seems premature to condemn a segment of the savings and loan
industry for the actions of one large state -insured institution .

None of

the PSAIC-insured institutions have invested in the type of repos or
reverse repos marketed by the

ESM government securities firm .

The privately insured institutions in Pennsylvania have been in
business for a long time .

They are strong , well -managed , and well -regulated .

These are the key features to ensure that any type of financial institution
remains fiscally sound .
Again , Mr. Chairman , I appreciate the opportunity to appear before the
subcommittee today , and I will be pleased to take any questions you may
have .

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414

Official Advance Copy ofStatute Enacted at 1979 Session
No. 1979-5
AN ACT
HB 153
Establishing the Pennsylvania Savings Association Insurance Corporation and
providing for its powers and duties.
TABLE OF CONTENTS

Section 1.

Definitions.

Section 2 .
Section 3.
Section 4.

Pennsylvania Savings Association Insurance Corporation
Purposes and powers.
Board of directors.

Section 5 .
Section 6.

Qualifications for membership in corporation .
Exchange of information .

Section 7 .
Section 8.

Faith or credit of Commonwealth not pledged.
Bylaws, rules and regulations.

Section 9.

Corporation or member associations not subject to
insurance laws.

Section 10 .
Section 11 .

Liability of officer or director upon contracts.
Perpetual life of corporation.

Section 12.
Section 13 .
Section 14.

Exemption from taxation .
Application for membership .
Functions of Secretary of Banking.

Section 15 .
Section 16.
Section 17.

Filing certificate of commencement of business.
Termination of existence of corporation.
Effective date.

The General Assembly of the Commonwealth of Pennsylvania hereby
enacts as follows:
Section 1 .

Definitions.

The following words and phrases when used in this act shall have , unless
the context clearly indicates otherwise, the meanings given to them in this
section:
"Association ." Any building, savings or savings and loan association
organized under the laws of this Commonwealth and any Federal savings
and loan association incorporated pursuant to the Federal act of June 13 ,
1933 (48 Stat.128), known as the "Home Owners' Loan Act of 1933,"
which has its principal office in this Commonwealth and 75% of its total
assets invested in this Commonwealth .
"Corporation." The Pennsylvania Savings Association Insurance
Corporation.
"Directors" or "board of directors." The Board of Directors of the
Pennsylvania . Savings Association Insurance Corporation .
"Savings account." Any sum of money deposited with an association

in exchange for a promise to pay interest or earnings to or for the account
of the depositors.

415

2

Section 2. Pennsylvania Savings Association Insurance Corporation.
A nonstock, nonprofit corporation is hereby created , which shall be
known as the Pennsylvania Savings Association Insurance Corporation
and the members of which shall be certain eligible associations of this
Commonwealth as defined in section 1. Except as otherwise provided in
this act, the corporation possesses all the powers , privileges and immunities
which now are or hereafter may be conferred on corporations by the
General Corporation Law applicable
thereunder.
Section 3. Purposes and powers .

to

corporations

organized

(a) Purposes. -The purposes of the corporation are to promote the
elasticity and flexibility of the resources of member associations, to provide
for the liquidity of such associations through a central reserve fund and to
insure the savings accounts in such associations.
(b) Powers. In furtherance of these purposes the corporation has the
following powers :
(1)

To provide for the liquidity of member associations through the

creation of a central reserve fund for the purpose of making loans to
member associations. The central reserve fund shall not be subject to
payment of insurance claims against the corporation by member
associations or their account holders or otherwise.
(2) To insure the savings accounts in member associations through
the creation of a central insurance fund , which fund shall consist of
capital contributions by each member in an amount equal to not less
than 2% of the total savings on deposit with each member.
(3) To borrow money and otherwise incur indebtedness for any ofits
purposes; to issue its bond , debentures, notes or other evidences of
indebtedness, whether secured or unsecured , therefor; and to secure the
same by mortgage, pledge, deed of trust or other lien on its property,
rights and privileges of every kind and nature or any part thereof.
(4) To lend money to , and to guarantee, endorse or act as surety on
the bonds, notes, contracts or other obligations of or otherwise assist
financially, any member association; and to establish and regulate the
terms and conditions with respect to any such loans or financial
assistance and the charges for interest and service connected therewith .
(5) To purchase, receive, hold , lease or otherwise acquire and to sell,
convey, mortgage, lease, pledge or otherwise dispose of, upon such terms
and conditions as its board of directors may deem advisable, real and
personal property, together with such rights and privileges as may be
incidental and appurtenant thereto and the use thereof, including, but
not restricted to, any real or personal property acquired by the
corporation from time to time in the satisfaction ofdebts or enforcement
of obligations .
(6) To invest any of its funds, upon proper authorization thereof by
the board of directors, in any of the following:
(i) Cash or deposits in checking or savings accounts, or under
certificates of deposit in National or State banking institutions, to the

416

3

extent that such accounts are insured by the Federal Deposit
Insurance Corporation. This condition regarding Federal insurance
shall not apply to investments in certificates of deposit when such
condition would result in a lower interest rate than would otherwise be
available.
(ii) Savings accounts in associations to the extent that such
accounts are insured by the Federal Savings and Loan Insurance
Corporation.
(iii) Interest bearing bonds, notes, certificates of indebtedness,
bills or other obligations of the United States, any state or the District
of Columbia, or of any commission, instrumentality, agency,
authority or political subdivision of the United States, any state or the
District of Columbia , having legal authority to issue the same.
(iv) Interest bearing bonds, notes or other interest bearing
obligations of any corporation created or existing under the laws of
the United States, any state or the District of Columbia.
(v) Dividend paying stocks or shares having readily marketable
values of any corporation created or existing under the laws of the
United States or of any state. The board of directors may not invest
more than 10% of its total assets in such stocks , nor more than 3% of
its total assets in the stock of any one corporation .
(vi) Loans secured by first mortgages or deeds of trust on
otherwise unencumbered fee simple real estate or improved leasehold
property in this Commonwealth .
(vii) Ground rents in this Commonwealth.
(viii) Collateral loans secured by pledge
hereinabove named .

of any security

(ix) Direct loans to member associations under the terms and
conditions established therefor by the board of directors.
(7) To exercise all other corporate powers granted by general law to
corporations in this Commonwealth which are not inconsistent herewith
and which are necessary or appropriate to the purposes hereof.
(c) Accumulated earnings .-The earnings shall be accumulated by the
corporation and no part thereof shall be returned to member associations .
The provisions of this subsection shall not prohibit the payment of interest
by the corporation to member associations which have made deposits ,
loans or advances to the central reserve fund .
Section 4. Board of directors.
(a) Directors elected by member associations. -All of the corporate
powers of the corporation shall be exercised by a board of directors,
composed of 11 members who initially shall be appointed bythe Governor
within 60 days of the effective date of this act with the advice of the
Secretary of Banking, and who shall serve until the first annual meeting.
After a minimum of 25 associations have become members of the
corporation, the first annual meeting of the corporation shall be held , and
the member associations of the corporation shall elect eight directors , each
of whom shall be a registered voter of and shall reside in this

417

4

Commonwealth . Of the directors elected at the first annual meeting, three
shall be elected for terms of two years each, three shall be elected for terms
of three years each and two shall be elected for terms of four years each , and
thereafter all terms shall be for four years each.
(b) Directors appointed by Governor.- In addition to the eight
directors elected by the member associations as provided in subsection (a) ,
the Governor shall, with the advice of the Secretary of Banking, appoint
three directors of the corporation , one for a term of two years, one for a
term of three years and one for a term of four years. The terms shall
commence on the date of the first annual meeting of the corporation, and
thereafter all terms shall be for four years. Any director so appointed shall
be a registered voter of and shall reside in this Commonwealth .
(c) Vacancies. - If any vacancy occurs in the membership of any
director elected by the members of the corporation , through death,
resignation or otherwise, the remaining directors shall within 60 days elect
a person to fill the vacancy of the unexpired term. Any vacancy occurring
in the term of director appointed by the Governor shall be filled by the
Governor within 60 days, with the advice ofthe Secretary of Banking, for
the unexpired term. Upon the expiration of the term of any director, the
directorship shall remain vacant until his successor has been elected or
appointed and has qualified . In no case shall a director whose term has
expired continue to serve unless he is reelected or reappointed to a new
term and has qualified.
(d) Quorum. - Six members of the board of directors are a quorum at
any meeting thereof.
(e) Voting. ― In the election of directors and in voting on any other
matter legally to come before a meeting of the corporation , each member
association of the corporation has one vote, to be cast by a delegate
authorized to act by that association . A delegate may not vote on behalf of
more than one member association . A majority of the votes so cast shall
elect directors or determine any question put to a vote.
(f) Compensation.-The directors of the corporation may receive such
reasonable compensation from the funds of the corporation as may be
determined by the board of directors.
(g) Surety bonds of officers and employees. -The directors of the
corporation shall fix the amount of the surety bonds of the officers and
employees of the corporation conditioned upon the faithful performance
of their duties, as provided in the bylaws of the corporation .
Section 5. Qualifications for membership in corporation.
(a) General rule.( 1) The membership of the corporation consists of those
associations:
(i) the quality and soundness of whose financial affairs, solvency,
management and directorship have been certified to the corporation
in an expeditious manner, as approved for insurance of savings
accounts, by the Secretary of Banking; and

418

5

(ii) which have thereupon filed a formal application for
membership accepted by the board of directors, which acceptance
shall not be denied except for good cause shown regarding the quality
and soundness of their financial affairs, solvency, management or
directorship.
(2) The corporation may accept an applicant for membership
subject to the imposition of certain conditions concerning the quality
and soundness ofthe applicant's financial affairs, solvency, management
and directorship .
(3) Subject to the conditions set forth in paragraphs ( 1 ) and (2) ,
every association of this Commonwealth may become a member of the
corporation and may invest in and pay such assessments, premiums and
other charges as may be required for participation in the corporation .
Membership in the corporation is for the life ofthe corporation , subject
to the bylaws, rules and regulations of the corporation.
(b) Withdrawal. -Any member may withdraw from the corporation
upon written notice given one year in advance of the intended date of
withdrawal and upon complying with the bylaws, rules and regulations of
the corporation .
Section 6. Exchange of information.
The laws of this Commonwealth , including but not limited to the act of
May 15, 1933 (P.L.565 , No.111 ) , known as the "Department of Banking
Code," shall be construed and applied so as not to prevent an exchange of
information relating to associations and their business, between the
Secretary of Banking and representatives of the corporation. Any
document or information supplied to the corporation by the Secretary of
Banking shall be kept confidential unless the Secretary of Banking
specifically specifies otherwise, and violation of such confidentiality shall
subject the personnel of the corporation to the same sanctions to which the
Secretary of Banking would be subject under the " Department ofBanking
Code.'
Section 7. Faith or credit of Commonwealth not pledged .
Under no circumstances is the faith or credit of the Commonwealth of
Pennsylvania pledged herein.
Section 8. Bylaws, rules and regulations.
(a)

General rules and regulations. -Within 60 days of its appointment

and before the acceptance of the membership of any associations, the
board of directors shall promulgate, subject to the approval of the
Secretary of Banking, such bylaws, rules and regulations as may be
necessary and proper to carry out the provisions of this act and as are not
inconsistent with this act . Thereafter, the bylaws, rules and regulations so
adopted may be amended or revoked by the board of directors and will,
upon approval of the Secretary of Banking become effective upon their
adoption. The rules and regulations shall establish a limit on the amount of
insurance which may be provided for each separate savings account of an
association; and this limit shall be the amount of prevailing insurance

419

6

available from the Federal Savings and Loan Insurance Corporation or its
successor instrumentality from time to time.
:
(b) Internal rules and regulations.-The board of directors shall have
the power to adopt such bylaws, rules and regulations which may be
necessary for the internal operations of the corporation.
Section 9.
Corporation or member associations not subject to insurance
laws.
Neither the corporation , the member associations, nor those persons
owning savings accounts therein are subject to the provisions of any laws of
this Commonwealth concerning insurance by reason of participation
herein except that the provisions of section 641 , act of May 17 , 1921
(P.L.789, No.285) , known as "The Insurance Department Act of one
thousand nine hundred and twenty-one," shall continue to apply.
Section 10. Liability of officer or director upon contracts.
No officer or director of the corporation , whether appointed or elected ,
is personally liable upon any of its contracts legally entered into on behalf
of the corporation unless the same by its terms shall expressly obligate him
or them .
Section 11. Perpetual life of corporation.
The life of the corporation is perpetual.
Section 12. Exemption from taxation .
The corporation is exempt from all special and ordinary taxes and from
documentary stamp and transfer taxes imposed by this Commonwealth or
any political subdivision thereof.

Application for membership .
(a) Applications before organization of board . All applications from
associations for membership received by the corporation prior to
appointment and organization of the board ofdirectors shall be referred to
Section 13.

the Secretary of Banking. The Secretary of Banking shall examine the
affairs of all such applicants and as a result thereof if he finds the applicants
to meet the qualifications for membership in the corporation set forth
herein under section 5, he shall so certify them. The corporation shall not
extend the benefits to be accorded to member associations to any applicant
until:
(1 ) it has received the report and recommendation as provided
herein from the Secretary of Banking as to such applications so filed
prior to appointment and organization of the board ofdirectors and has
acted thereon in accordance with section 5 ; and
(2) it has accepted for membership a minimum of 25 associations
having savings accounts in the aggregate total of at least $25,000,000 .
(b) Applications after organization of board .-All applications from
associations for membership received by the corporation subsequent to
appointment and organization of the board of directors shall be made to
the corporation. The corporation shall then refer this preliminary
application to the Secretary of Banking within 30 days of receipt thereoffor
action in accordance with the requirements set forth herein under section 5 .

420

7

Section 14.

Functions of Secretary of Banking.

(a) Requiring corporation to discharge its obligation . - In the event of
the refusal ofthe corporation to commit its funds or otherwise to act forthe
protection ofdepositors of any member association ofthe corporation , the
Secretary of Banking may apply to the Commonwealth Court for an order
requiring the corporation to discharge its obligation under this act and for
such other relief as the court may deem appropriate to carry out the
purposes of this act.
(b) Examinations and inspections; reports. -The Secretary of
Banking may make such examinations and inspections of the corporation
and require the corporation to furnish him with such reports and records or
copies thereof as the Secretary of Banking may consider necessary or
appropriate in the public interest or to effectuate the purposes of this act.
As soon as practicable after the close of each fiscal year, the corporation
shall submit to the Secretary of Banking a written report relative to the
conduct of its business and the exercise of the other rights and powers
granted by this act, during such fiscal year. Such report shall include
`financial statements setting forth the financial position ofthe corporation
at the end of such fiscal year and the results of its operations, including the
source and application of its funds, for such fiscal year. The financial
statements so included shall be examined by an independent public
accountant, or firm of independent public accountants, selected by the
corporation and satisfactory to the Secretary of Banking, and shall be
accompanied by the report thereon of such accountant or firm.
Section 15.

Filing certificate of commencement of business .

After the first meeting of the board of directors , a certificate shall be filed
by the board of directors with the Department of State certifying that the
corporation has commenced business as provided in this act. Such
certificate shall be conclusive evidence that business was begun.
Section 16. Termination of existence of corporation .
If the corporation fails to insure savings accounts by January 1 , 1981 , its
existence terminates at that time without further action by the General
Assembly and the Governor, the provisions of this act then are null and
void and shall expire on January 1 , 1981 .
Section 17. Effective date.
This act shall take effect in 60 days.
APPROVED -The 6th day of April, A. D. 1979.
DICK THORNBURGH

421

Official Advance Copy
Act 1983-13

SESSION OF 1983

25

No. 1983-13

AN ACT

HB 575
Amending the act of April 6, 1979 (P.L.17 , No.5) , entitled "An act establishing
the Pennsylvania Savings Association Insurance Corporation and providing
for its powers and duties, " further providing for the regulation of the amount
of earnings paid on savings deposits by certain associations.
The General Assembly of the Commonwealth of Pennsylvania hereby
enacts as follows:

Section 1. Section 3(b) of the act of April 6, 1979 (P.L.17 , No.5) ,
referred to as the Pennsylvania Savings Association Insurance Corporation
Act, is amended by adding a paragraph to read:
Section 3. Purposes and powers .
(b) Powers . - In furtherance of these purposes the corporation has the
following powers :

(6.1) To approve any association insured by the corporation to pay
any earnings on savings accounts except when the Pennsylvania Department ofBankingfinds that such payment of earnings would be excessive in
light of the financial condition of the association or would constitute an
unsafe or unsound business practice.
***
Section 2.

Section 804 of the act of December 14, 1967 (P.L.746,

No.345) , known as the Savings Association Code of 1967 , is repealed insofar
as it is inconsistent with this act .
Section 3.

This act shall take effect immediately.

APPROVED- The 15th day of June , A. D. 1983 .
DICK THORNBURGH

422
Mr. BARNARD. Mr. Bulman, I would like to ask you, as I did Mr.
McEnteer. Under your jurisdiction, you have banks, savings and
loans and credit unions?
Mr. BULMAN. That's correct, Mr. Chairman.
In the division of banking in the Commonwealth of Massachusetts, we have loan companies, we have credit unions, we have cooperative banks, we have savings banks and we have commercial
banks .
Mr. BARNARD. Thank you very much .
STATEMENT OF PAUL E. BULMAN, COMMISSIONER OF BANKS ,
COMMONWEALTH OF MASSACHUSETTS
Mr. BULMAN. Mr. Chairman and members of the Commerce, Consumer, and Monetary Affairs Subcommittee.
My name is Paul Bulman and I presently serve as commissioner
of banks of the Commonwealth of Massachusetts.
Like most Americans, the citizens of Massachusetts have indicated concern about the recent events that have involved the privately-insured State S&L's in Ohio. This concern in Massachusetts did
not escalate into anything resembling the Ohio situation however.
The reaction can be more fully understood when one reviews a
number of interesting records held by the Commonwealth of Massachusetts.
First of all , our two private funds are the oldest continuously operated funds in the country. Founded in 1931 , they predate the
start of the Federal Deposit Insurance Corporation which came
into existence 2 years later. Today these two State funds hold $ 575
million in resources to insure nonfederally insured deposits of $ 15.3
billion in 245 savings and cooperative banks throughout the Commonwealth.
This means that our insurance funds presently provide 32 cents
coverage for every dollar on deposit. To the best of my knowledge,
no other deposit insurance fund, whether it be Federal or State,
can match that ratio. Our two funds have certainly provided a significant part of the public confidence in our thrift industry for the
past 54 years .
Whether they shall continue this role is not predictable at this
time. Within the past week, because of the press coverage of Ohio,
we have been advised that 41 privately insured savings banks have
asked the Boston office of the FDIC for Federal insurance applications. Reportedly six of our privately insured cooperative banks
have made similar requests for FSLIC insurance applications . Also,
within the past week, the banking committee of the State legislature held a public hearing on a bill that, if enacted into law, would
require our thrifts to obtain Federal insurance.
Although my comments thus far have focused upon the status of
the private insurance companies in Massachusetts, it should be
noted that I, as a State regulator, do not look upon them as the
primary source of public confidence in our thrift industries. Rather
the thrift banks themselves have historically demonstrated what
has been described as "good old Yankee conservatism."
Many of these institutions were founded over 150 years ago; and
the fact that they were able to survive through dozens of reces-

423
sions, depressions and other manifestations of economic upheaval
says a lot for their inherent soundness .
Today our 145 savings banks hold $27 billion of total resources
and $2 billion of surplus funds, which means that the surplus-toasset ratio stands at 7.4 percent. Our 100 cooperative banks currently hold $5 billion dollars of total resources and $354 million in
surplus, which works out to a surplus to asset ratio of 6.8 percent.
In contrast, the March 1985 Federal Reserve Bulletin indicates
that nationally the FSLIC-insured institutions hold a 3.9 percent
ratio and savings banks hold a 5.2 ratio.
When one looks at the current operating performance, the same
disparity continues with the Massachusetts savings banks and cooperative banks showing returns on average assets of 0.44 percent
and 0.72 percent, respectively, while nationwide savings banks and
FSLIC- insured institutions were reflecting 0.07 percent and 0.24
percent respectively.
While we obviously take some comfort from the traditionally
higher financial performance of our thrift industry, we recognize
the potential problem that could adversely impact the industry as
it attempts to restructure its balance sheets to survive in a more
competitive deregulated environment. Through annual examinations by a staff of experienced, well-trained field examiners, together with the close monitoring of quarterly call report data that has
been computerized to yield individual bank performance ratios in
comparison with peer group norms, we feel able to detect problems
at a very early stage.
To summarize, Massachusetts, during the past five decades has
relied upon a three-stage plan to maintain public confidence in its
banking system. First and foremost, the institutions themselves,
through years of conservative practices have held higher capital
positions and generally profitable operations.
Our second line of defense has rested upon the State's continuous
commitment to maintain a strong regulatory authority to monitor
and supervise the industry. And, finally, we have the best funded
insurance companies in the country, albeit private funds.
In compliance with your specific requirements for detailed information, I am submitting a list of detailed responses. I would also
like to thank the committee for your attention and affording Massachusetts the opportunity to testify here today.
[The prepared statement of Mr. Bulman follows :]

424

MR. CHAIRMAN AND MEMBERS OF THE COMMERCE, CONSUMER AND MONETARY AFFAIRS
SUBCOMMITTEE :
MY NAME IS PAUL E. BULMAN, AND I PRESENTLY SERVE AS COMMISSIONER OF
BANKS OF THE COMMONWEALTH OF MASSACHUSETTS .
LIKE MOST AMERICANS , THE CITIZENS OF MASSACHUSETTS HAVE INDICATED
SOME CONCERN ABOUT THE RECENT EVENTS THAT HAVE INVOLVED THE
PRIVATELY-INSURED STATES & LS IN OHIO . THIS CONCERN IN MASSACHUSETTS
DID NOT ESCALATE INTO ANYTHING RESEMBLING THE OHIO SITUATION. THE
REACTION CAN BE MORE FULLY UNDERSTOOD WHEN ONE REVIEWS A NUMBER OF
INTERESTING RECORDS HELD BY MASSACHUSETTS . FIRST OF ALL , OUR TWO PRIVATE
FUNDS ARE THE OLDEST CONTINUOUSLY OPERATED ONES IN THE COUNTRY. FOUNDED
IN 1931 , THEY PREDATE THE START OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION, WHICH CAME INTO EXISTENCE TWO YEARS LATER. TODAY, THESE
TWO FUNDS HOLD $575 MILLION TO INSURE NON-FEDERALLY INSURED DEPOSITS OF
$15.3 BILLION IN 245 SAVINGS AND CO-OPERATIVE BANKS . THIS MEANS THAT OUR
INSURANCE FUNDS PRESENTLY PROVIDE 3 1/2 CENTS COVERAGE FOR EVERY DOLLAR
ON DEPOSIT. TO THE BEST OF MY KNOWLEDGE NO OTHER DEPOSIT INSURANCE FUND ,
WHETHER IT BE FEDERAL, OR STATE, CAN MATCH THIS RATIO. OUR TWO FUNDS
HAVE CERTAINLY PROVIDED A SIGNIFICANT PART OF THE PUBLIC CONFIDENCE IN
OUR THRIFT INDUSTRY FOR FIFTY-FOUR YEARS. WHETHER THEY SHALL CONTINUE
THIS ROLE IS NOT PREDICTABLE AT THIS TIME. WITHIN THE PAST WEEK WE HAVE
BEEN ADVISED THAT FORTY-ONE PRIVATELY INSURED SAVINGS BANKS HAVE ASKED
THE BOSTON OFFICE OF THE FDIC FOR FEDERAL INSURANCE APPLICATIONS.
REPORTEDLY, SIX OF OUR PRIVATELY INSURED CO-OPERATIVE BANKS HAVE MADE
SIMILAR REQUESTS FOR FSLIC INSURANCE APPLICATIONS. ALSO, WITHIN THE PAST
WEEK, THE BANKING COMMITTEE OF THE STATE LEGISLATURE HELD A PUBLIC
HEARING ON A BILL THAT, IF ENACTED INTO LAW, WOULD REQUIRE OUR THRIFTS TO
OBTAIN FEDERAL INSURANCE .
ALTHOUGH MY COMMENTS THUS FAR HAVE FOCUSED UPON THE STATUS OF THE
PRIVATE INSURANCE COMPANIES IN MASSACHUSETTS , IT SHOULD BE NOTED THAT I,
AS THE STATE REGULATOR, DO NOT LOOK UPON THEM AS THE PRIMARY SOURCE OF
PUBLIC CONFIDENCE IN OUR THRIFT INDUSTRY. RATHER THE THRIFT BANKS
THEMSELVES HAVE HISTORICALLY DEMONSTRATED WHAT HAS BEEN DESCRIBED AS
"GOOD OLD YANKEE CONSERVATISM. " MANY OF THESE INSTITUTIONS WERE FOUNDED
OVER ONE-HUNDRED AND FIFTY YEARS AGO, AND THE FACT THAT THEY WERE ABLE TO
SURVIVE THROUGH DOZENS OF RECESSIONS, DEPRESSIONS AND OTHER
MANIFESTATIONS OF ECONOMIC UPHEAVAL SAYS A LOT FOR THEIR INHERENT
SOUNDNESS . TODAY, OUR ONE-HUNDRED AND FORTY FIVE SAVINGS BANKS HOLD $27
BILLION OF TOTAL RESOURCES AND $2 BILLION OF SURPLUS FUNDS, WHICH MEANS
THAT THE SURPLUS TO ASSET RATIO STANDS AT 7.4% . OUR 100 CO-OPERATIVE
BANKS CURRENTLY HOLD $5 BILLION OF TOTAL RESOURCES AND $354 MILLION IN
SURPLUS, WHICH WORKS OUT TO A SURPLUS TO ASSET RATIO 6.8% . IN CONTRAST,
THE MARCH 1985 FEDERAL RESERVE BULLETIN INDICATES THAT, NATIONALLY, THE
FSLIC-INSURED INSTITUTIONS HOLD A 3.9% RATIO AND SAVINGS BANKS HOLD A
5.2% RATIO.
WHEN ONE LOOKS AT CURRENT OPERATING PERFORMANCE, THE SAME
DISPARITY CONTINUES WITH THE MASSACHUSETTS SAVINGS AND CO-OPERATIVE
BANKS SHOWING RETURNS ON AVERAGE ASSETS OF .44% AND .72%, RESPECTIVELY,
WHILE NATIONWIDE, SAVINGS BANKS AND FSLIC-INSURED INSTITUTIONS WERE
REFLECTING .07% AND .24% , RESPECTIVELY.

425

NOW WHILE WE OBVIOUSLY TAKE SOME COMFORT FROM THE TRADITIONALLY
HIGHER FINANCIAL PERFORMANCE OF OUR THRIFT INDUSTRY, WE RECOGNIZE THE
PROBLEM POTENTIAL THAT COULD ADVERSELY IMPACT THE INDUSTRY AS IT
RESTRUCTURES ITS BALANCE SHEET TO SURVIVE IN A MORE COMPETITIVE
DEREGULATED ENVIRONMENT. THROUGH ANNUAL EXAMINATION BY A STAFF OF
EXPERIENCED , WELL-TRAINED FIELD EXAMINERS, TOGETHER WITH THE CLOSE
MONITORING OF QUARTERLY CALL REPORT DATA THAT HAS BEEN COMPUTERIZED TO
YIELD INDIVIDUAL BANK PERFORMANCE RATIOS IN COMPARISON WITH PEER GROUP
NORMS , WE FEEL ABLE TO DETECT PROBLEMS AT AN EARLY STAGE.
TO SUMMARIZE, MASSACHUSETTS , DURING THE PAST FIVE DECADES, HAS
RELIED UPON A THREE-STAGE PLAN TO MAINTAIN PUBLIC CONFIDENCE IN OUR
THRIFT BANKS . FIRST AND FOREMOST, THE INSTITUTIONS, THEMSELVES, THROUGH
YEARS OF CONSERVATIVE PRACTICES , HAVE HELD HIGHER CAPITAL POSITIONS AND
GENERALLY PROFITABLE OPERATIONS . OUR SECOND LINE OF DEFENSE HAS RESTED
UPON THE STATE'S CONTINUOUS COMMITMENT TO MAINTAIN A STRONG REGULATORY
AUTHORITY TO MONITOR AND SUPERVISE THE INDUSTRY. AND FINALLY, WE HAVE
THE BEST FUNDED INSURANCE COMPANIES IN THE NATION .
IN COMPLIANCE WITH YOUR SPECIFIC REQUIREMENTS FOR DETAILED
INFORMATION, I AM SUBMITTING A LIST OF DETAILED RESPONSES. THANK YOU FOR
YOUR ATTENTION AND AFFORDING ME THE OPPORTUNITY TO TESTIFY THIS MORNING.

426

1.
Please describe your agency's operations and enforcement powers ,
and the general condition of the thrifts in your state . In so doing,
please answer or furnish the following :
For each year, 1982 to date, the budget of the Massachusetts Office
la.
of Commissioner of Banks and the number of individuals employed in
professional level examination/supervisory capacities .
1982
1983
1984
1985

Annual Budget
$4,333,708
4,334,745
4,640,534
4,670,813

Examination/Supervisory Personnel
125
121
127
125

lb.
The number and asset range of ( i ) state-chartered and insured and
(ii ) state-chartered but federally insured, thrift institutions currently
supervised by your office .

(i ) State-chartered and insured
(ii )State-chartered, but
federally insured

Number
196
49

Asset Range
$2.3 to $743.1 million
$38.5 million to 1.2 billion

lc.
Describe briefly the frequency with which Massachusetts
institutions are examined and the civil and criminal powers available to
your agency to supervise these institutions ( i.e. , cease and desist
powers , suspensions or removal powers , civil fines , etc. ) Are you
satisfied with the sufficiency of these powers?
Massachusetts General Law presently requires a minimum of one examination
every two years for each financial institution . However, we have
historically examined almost all banks on an annual basis . My office is
fully empowered to issue cease and desist orders , remove officers , and
impose civil fines . I am satisfied with the sufficiency of these powers .
ld.
Do you impose on the institutions you supervise reserve , capital or
other safety and soundness requirements designed to prevent the
likelihood of insolvency? If so, what basic requirements do you impose?
In recent years we have generally required a 5% surplus/asset ratio for
our thrifts . If an institution falls below the 5% level, it is placed on
a "watch list " and monitored monthly. If the level falls below 4% we
begin to work actively with management to obtain corrective action . If
the capital level falls to 3%, we either replace management , merge the
institution into a stronger institution , or liquidate the assets .
In this connection, we are cognizant of the federal agencies
recent call for a 6% capital adequacy level. Because most of our thrifts
hold a mutual-ownership charter which limits their ability to increase

427

capital to earnings retention , only, we are unconvinced that this higher
level requirement could be realistically attained in a short time frame
for the vast majority of the industry. As long as our thrifts maintain
their traditional commitment to providing home financing and other
consumer services, we will be satisfied with our 5% requirement .
For those institutions that may be inclined to enter into
activities formerly reserved for commercial banks , we would expect them
to immediately raise their capital to the 6% level . This, of course,
could only be obtained by converting to a stock corporation.

le.
How many of Massachusetts's ( i ) federally insured and ( ii )
nonfederally insured thrifts are presently on you "problem" list?
As indicated in the response to question 1.d. , above, we have a "watch
list" of those banks that have recently displayed one or more financial
deficiencies or violations of law. Presently there are ten institutions
that have minor deficiencies such as technical violations of community
reinvestment or consumer protection laws , higher that average overhead
expenses, deficient lending policies , or slightly less than 5% capital.
We do not presently have any institutions that pose any high level of
concern .

2a.
Do you routinely and systematically make available to the insurance
fund administrators ( i ) examination reports and related documents
involving, and ( ii ) information about any supervisory actions taken
against, the state/private insured thrifts?
(i)
Both private insurers are furnished with examination reports , audit
reports and pertinent documents .
(ii ) Bank Supervision's management staff meets three to four times
annually with representatives of the insurance funds to discuss both
industry wide and on a bank-by-bank basis , any negative trends ,
deterioration of financial components , alleged improprieties , anticipated
management changes and other factors that may be material .

2b.
Do you have authority to order the termination of an association's
state/private deposit insurance? If so, under what set of conditions are
you authorized to do so; and set forth the number of such insurance
terminations from 1980 to date . If you do not have insurance termination
authority, does that authority reside elsewhere?
The Commissioner, personnally, does not have any authority to order the
termination of an association's state/private deposit insurance .
With regard to the Massachusetts Savings Banks insured by the
Mutual Savings Central Fund, Inc. , and Cooperative Banks insured by the
Cooperative Central Bank, termination of insurance coverage takes place
only upon the happening of certain events as set forth in Chapters 168
and 170 of the Massachusetts General Laws and as set forth in the
statutes governing their respective insurance funds .
Termination of coverage by the applicable insurance fund occurs
when there is a merger or consolidation between thrift institutions as to
the institution whose corporate existence is dissolved .

428

Termination of coverage by the state/private insurer occurs when a
state-chartered savings bank or cooperative bank is consolidated or
merged into a federally chartered institution .
Termination also occurs when a state-chartered savings bank or
cooperative bank converts to a federal charter.
Finally, when a state-chartered savings bank or cooperative bank
acquires federal insurance under the FDIC or FSLIC, then state insurance
terminates to the extent of the federal insurance coverage, but deposits
in both savings banks and cooperative banks in excess of those covered by
the federal insurance continue to be covered by their respective
state/private insurance funds .
Since 1980 , four savings banks have converted to federal charter,
two cooperative banks converted to federal charter, resulting in
termination of insurance by the Mutual Savings Central Fund, Inc. and the
Cooperative Central Fund .
Since 1980, three cooperative banks have merged into Massachusetts
savings banks with termination of insurance by the Cooperative Central
These banks are now insured by the Mutual Savings Central Fund.

3.
Please set forth your views on how Cooperative Central Bank might
operate more effectively to prevent or minimize losses to the fund; and
how your agency's coordination and cooperation with the operators of the
insurance fund could be improved.
As the regulator of the two private deposit insurance companies I have no
problem with their current operations. We have always maintained open
lines of communication with the operators of both funds and have always
received the full cooperation of the funds ' operators when dealing with
institutions of supervisory concern .

Please comment on the Ohio deposit insurance fund situation and the
4.
adequacy of responses by state and Federal officials ( including the
Federal Reserve, Home Loan Bank Board, and SEC officials ) . What specific
lessons have been learned and what recommendations are you prepared to
make to Congress regarding recent events in Ohio and their possible
repetition elsewhere?
I really can not comment on the problems in Ohio, because my only
information has come from recent articles in the media .

6.
Please feel free to provide any additional information or views .
which you believe are relevant to the issues being studied by the
subcommittee .
I have no additional comments to make at this time.

429
Mr. BARNARD. I thank all of you very much.
Is there any supervisory relationship at all between your office
and the insurance funds? I mean, you don't examine-do you examine their funds or audit them in any way or examine them in
anyway?
Mr. BROWN. In Maryland, Mr. Chairman, we do not supervise
the day-to-day operations of the insurance fund. However, under
Maryland law, any changes that they make in their regulations or
bylaws must be approved by the director of the division. Other
than that we have nothing to do with the day-to-day operations.
Mr. BARNARD. Mr. King?
Mr. KING. Mr. Chairman, in North Carolina, the secretary of
commerce who I serve at the pleasure of, has the statutory authority for that responsibility under State statute .
Mr. BARNARD. Does he automatically serve on the board?
Mr. KING. No, sir.
Mr. BARNARD. He doesn't serve on the private insurance board?
Mr. KING. No, sir. Now, about 2 years-2½ years ago, pretty
soon after that statute was changed delegating that authority to
the secretary of commerce or giving him that statutory responsibility, that responsibility was delegated to me as administrator of the
savings and loan division. So , in my particular case, I do directly
supervise the Financial Institution Assurance Corp. We examine
them every year. We have designed a special examination program.
Mr. BARNARD. Are they also independently audited?
Mr. KING. Yes, sir, they have an independent audit by one of the
big eight accounting firms.
Mr. BARNARD. Mr. McEnteer?
Mr. MCENTEER. We have the same thing in Pennsylvania, that
PSAIC is required to have a certified public accountant audit it annually and we review those reports. We also have a representative
of our savings association bureau at each meeting of the corporation and we look at their investments and what they are doing
with their money and follow it very closely and consult with the
manager of the association quite frequently. We keep close tabs on
it.
Mr. BARNARD. Mr. Bulman.
Mr. BULMAN. Mr. Chairman, we examine all three funds in Massachusetts, produce examination reports much like those produced
for all member banks and distribute those reports to the board of
directors of those funds.
Mr. BARNARD. Gentleman, the situation that happened at ESMdid any of you receive any notification from Federal agencies with
reference to that company?
Mr. BROWN. We did not in Maryland , Mr. Chairman.
Mr. KING. No, sir, not at all in North Carolina.
Mr. MCENTEER. No, sir, not to my knowledge. In Pennsylvania,
we didn't receive anything .
Mr. BULMAN. We did not in Massachusetts. But, in fairness, one
of the comptroller officers testified earlier that there was a memorandum produced, I believe, in 1977 and from memory, I can recall
seeing such a memorandum. I believe we obtained it from the Federal Deposit Insurance Corporation, which highlighted what they
referred to as Memphis bond dealers.

430
Mr. BARNARD. In your regular examination procedure, would the
situation that appeared in Home State- where they did not have a
segregated account- where evidently there was no trust receipt or
other evidence of ownership of these Government securities. Would
that have been discovered by your examiners?
Mr. BROWN. I think the examiners would pick that up and include it in their report.
Mr. BARNARD. Would they have criticized it?
Mr. BROWN. To the point of making a comment in the exam and
then it would be up to me to take some action .
Mr. BARNARD . Would the criticism have gone to the fact that
they didn't have trust receipts? Would it have gone to the fact that
they had, say, bought 35 to 40 percent more securities pledged than
borrowed?
Mr. BROWN. I think it would, Mr. Chairman, yes. I think the examiners would pick it up and would report it in detail to us.
Mr. BARNARD. Mr. King?
Mr. KING. Mr. Chairman, that would have been detected in our
examination process . It is a normal part of the written examination program. In addition to that, we had, and I can't remember
exactly the timeframe, 2 or 3 years ago now, three or four FSLICinsured institutions in the State, both State and federally chartered, that were burned in one of the earlier failures and as a
result of that, we learned some lessons and put in a little more
stringent procedures in our examination process and one of those,
in fact, was to definitely ascertain, during the examination process,
that collateral was delivered in these types of transactions.
Mr. BARNARD. Mr. McEnteer, in addition to that question , do you
have any knowledge of any Pennsylvania financial institutions that
were involved with ESM?
Mr. MCENTEER. We don't have any knowledge of any State-chartered financial institutions that were involved with ESM, especially
the savings associations. I am not sure about any national banks
that might have been involved . There are no State-chartered associations, to our knowledge, that were involved in any ESM transactions.
As far as the savings and loans, we would have discovered it, I
believe, because they are limited in their borrowing to 50 percent
of their deposits and if something like Ohio happened, it would
stick out like a sore thumb and also we confirm the securities, the
presence of the securities or their deposit with a correspondent
bank or something. When we go in on an examination, if they have
a repo_situation, we want to know that they have the securities.
Mr. BARNARD. Mr. Bulman?
Mr. BULMAN. Yes, sir. I don't think there is any question that
the total borrowings would have been recognized but more importantly I would hope that the examiners would have criticized the
margin requirements required for Government securities .
I believe the 25-percent margin requirement the committee
heard this morning in testimony, is far and beyond what the
normal margin requirement for Government securities is. My
memory would suggest that it's somewhere between 5 and 10 percent in Massachusetts.
Mr. BARNARD. Mr. Craig.

431
Mr. CRAIG. Thank you very much, Mr. Chairman and to all of
the panel, I appreciate your testimony and your observations of
this situation and your response and frank way to the chairman of
the committee. Mr. Chairman, I have no specific questions of these
gentlemen.
Mr. BARNARD. Mr. Spratt.
Mr. SPRATT. There was a suggestion made by Mr. Gray to the
effect that once institutions insured by funds such as those with
which you work in your own States, reached a certain level of size,
then at that threshhold, these institutions should be required to
obtain FSLIC coverage. Would you respond to that recommendation?
Mr. BROWN. I feel that there is room for both systems in this
country. We're not having any problems with our associations . We
know what's going on, the insurer knows that's going on and I
don't agree with Mr. Gray.
Mr. SPRATT. Well his point was, taking his cue from the Ohio situation where one institution failed because of its size, wiped out
the whole fund, that there came a point in risk when the FSLIC ,
with its much broader base and ultimately the Federal Government behind it, ought to be the insurer, but you don't think that's
necessary in light of the situation in Ohio?
Mr. BROWN. No, I do not, sir, no, sir.
Mr. KING. Based on what I basically read in the newspaper and
the little bit of additional knowledge that I picked up about the
Ohio situation, I don't think who was insuring the accounts had
anything to do with the problem. I think it was a combination of
some bad and probably fraudulent management decisions made by
the association in addition to the failure of the securities firm that
led to the downfall and lack of proper oversight and supervision by
the State regulator and the insurance fund and, you know, anytime
you have a break down in the system, you're going to have those
kinds of failures and the Federal system can have those same types
of problems also.
Mr. SPRATT. But the Federal system has the resources ultimately,
to cover the loss .
Mr. KING. No question about that . When you have received full
faith and credit of the U.S. Treasury behind the insurance funds
that prevents losing the public confidence, which was the basis for
the failure in Ohio. It makes a big difference.
Mr. SPRATT. Mr. McEnteer.
Mr. MCENTEER. I don't believe the size of the association has
anything to do with the failure or nonfailure. I think it is the management and the integrity of the management and the type of
assets and we have no thought in Pennsylvania of making an association apply for Federal insurance when it reaches a certain size,
although I will admit that most of ours are small. Our largest one,
because of this Ohio situation, has made arrangements for lines of
credit if anything_should happen there and the others, we have
worked with the Federal Reserve, they came in and looked over
our examination reports to determine that these associations are
sound and have good assets on which to borrow, so I think we're in
pretty good shape in Pennsylvania now for any emergency that
might arise.

T
1

432
Mr. BULMAN. I would just say that I think it is somewhat ironic
that we are here today talking about solvent State funds, advising
all their members to get FSLIC insurance. It seems to me in the
last couple of weeks, we were reading about the failures of FSLIC. I
don't know why we're all jumping into that system. There is an
awful lot being made of the full faith and credit of the U.S. Government. I know of lines of credit established at the Treasury. I
know of no law issued by this Congress that says the full faith and
credit of the U.S. Government is involved.
Mr. SPRATT. I agree. I understand that. But, implicitly, that back
up is available and the resources are larger than any of your individual pools.
Mr. BULMAN. I think the other issue that is important here,
whether we talk about State funds Federal funds, is that they are
all made up of industry premiums. The source of funds that we're
using today are premiums paid for insurance by the industry itself.
I don't know that we should get into the Treasury backing an industry. If an industry chooses to insure its own deposits, then that
industry should be willing to pay for it. I don't know that the citizens of the United States that don't avail themselves of these services should be taxed for that process.
The fundamentalist issue on States, as many of the State bankers in Massachusetts would tell you, is that they are going to maintain capital adequacy status in Massachusetts in their own banks
and they are able to do that through reaching their State legislature, through reaching their State regulator and through their own
central fund. They can maintain the safe and sound controls that
they are interested in. Massachusetts bankers cannot maintain
them in California and they are not willing to take their premium
dollars and underwrite a Federal system that has much different
standards.
The opposite of that, of course, is the federal system pools those
resources and protects all.
Mr. SPRATT. Do the examiners who work for you or work in your
State-regulated systems confer and consult with private auditors
outside auditors for the S&L's whom they regulate?
Mr. BULMAN. In Massachusetts , sir, on occasion, we will contact
an auditor. We have authority, through statute, to appoint our own
auditor. We can contract our own C.P.A. firm to examine an institution and the institution is billed for that examination .
Mr. MCENTEER. In Pennsylvania, our examiners don't actually
work with the auditors , but they confer with them on certain situations that arise . We have the availability to do that . They don't examine at the same time is what I am saying, but if something
comes up, they confer with them.
Mr. SPRATT. Well , we encountered the curiosity and the failure of
the UAB in Knoxville where both the private audit firm , the outside auditors and the FDIC were in the bank at the same time and
they apparently, from the facts we developed, weren't talking to
each other. Each was doing his own thing and it just struck me as
not a very wise allocation or use of resources in a period like that.
Mr. MCENTEER. We don't have any of that in Pennsylvania. I
hope we don't run into that. We get along very well with the private auditors.

433
Mr. KING. I might respond in our situation . We don't look at our
process, that we go through in supervising our S&L's, as an audit
function . We are examining the associations for compliance with
State statutes, but mainly for safety and soundness reasons.
We depend on the private auditors and all of our associations are
required to have independent audits. That information is very important to us as a part of that process. It's not something that we
ignore. We have a step in our examination process in which the
audit report is reviewed as a part of the examination. If we have
any questions then the contact is made directly with the independent auditor.
Mr. BROWN. In Maryland, part of the preexam analysis by the
examiner is going over the audit report that has been received,
probably between examinations and that report is taken with him
into the association for verification.
There are times when they do talk to the auditor and might
question something that is in the audit report, but we do look at it
and study it very seriously.
Mr. SPRATT. One more question, Mr. Chairman.
Mr. Beason indicated that the State of North Carolina, your
FIAC, in particular, has a fairly sophisticated monitoring system
where monthly data comes to the attention of the FIAC which is
watched carefully.
Do your various agencies monitor broker deposit levels, outside
investments and self-generated income among other items as indicia that trouble might be coming.
Mr. KING. Well, as you indicated, the monthly reports that we
get from the institutions is a very detailed report, in fact, almost to
the point of being cumbersome. We have expanded it over the last
2 or 3 years and it is a joint report, one that was developed by us
and FIAC together and all of those things would show up as separate items on that report.
Mr. SPRATT. Broker deposits, self-generated income, outside investments?
Mr. KING. Yes, sir, absolutely.
Mr. SPRATT. Have you found a correlation between these accounts, growth in these areas and shakiness of these institutions?
Mr. KING. I think the best way to respond to that is that we
haven't had that type of tremendous growth in any of our institutions. Most of our operations are fairly conservative. Those that are
more aggressive handle their growth in an orderly manner. We do
watch associations very closely that are growing more than normal
for that average size institution, but to date, we have experienced
no problems.
Mr. BROWN. We have some very tight regulations on loans to one
person that cannot exceed more than 10 percent of the assets of an
association. Any loans to an officer or a director must be approved
by the division director and then there must be appraisal reports.
It must be approved by two-thirds vote of the board of directors of
the association.
Mr. SPRATT. Who is the division director, is that a director?
Mr. BROWN. No, the director of the association, two-thirds of the
directors must approve a loan to another officer or director. At the
same time, that loan must be approved by the division director and

434
I must have all the data, appraisal, et cetera, to go along with it.
We do watch self-dealings and things of that nature very closely.
Mr. SPRATT. I was talking about self-generated income. I'm talking about construction loans where points and fees are taken which
are immediately booked as income before the project itself is completed and, in my opinion , the income is earned and realized .
Mr. BROWN. Right, I agree with that.
Mr. SPRATT. Rather than self-dealing.
Mr. BROWN. We do watch that.
Mr. KING. I would add for our associations in North Carolina,
they are required to follow generally accepted accounting principles [ GAAP]. We do have the RAAP accounting and the loan lost
deferrals and the appraised equity capital, but none of our privateinsured associations use it, so therefore they comply with generally
accepted accounting principles and the GAAP accounting principles are pretty stiff on that type of situation, as far as taking in
income before it is earned .
Mr. BULMAN. In Massachusetts, we have specific point regulations that allow an institution to take one point to recover underwriting expenses. If there are other points in the contract, then
they have to be tied into direct costs on the secondary market. If
there are points on commercial loans, then they are deferred and
they are accreted to income over the term of loan .
We do that so that when we're using our performance measurement system in looking at the income statement, and measuring it
to its previous month and industry norms, we're not looking at
high and low periods based on point income.
Mr. SPRATT. Mr. McEnteer. I'm sorry you didn't have a chance to
answer. Thank you Mr. Chairman.
Mr. BARNARD. Mr. Erdreich .
Mr. ERDREICH. Thank you , Mr. Chairman .
Just one question. I'm curious to what extent, if any, that your
State agencies receive any communications from the various Federal
financial regulatory agencies. I was shocked to see this letter of
1977 when the Comptroller of the Currency identified ESM as the
"Memphis Bond Bandits," and said they apparently were notorious
among some folks ' knowledge, but did you, or do your agencies
have any regular communication with these Federal regulatory
agencies?
It seems to me but for a 22-cent stamp and the mailout of the
banking circular that the Comptroller sent out in 1977, we may
have avoided some of the chaos in Ohio.
Mr. MCENTEER. In Pennsylvania, we work very closely with the
FDIC and the Federal Reserve and the FSLIC. In 1977, I was an
officer in a bank myself. It was a State-chartered bank and I didn't
remember getting any of that information on ESM . I do know that
there were some suede shoe guys from Memphis that used to come
up to the Pennsylvania Bankers ' Association convention , annual
convention and try to collar bankers at the doors of meetings and
finally the officials of the Pennsylvania Bankers' Association
barred them from coming to our convention and I guess they disappeared and took residence in Fort Lauderdale or some place.

435
But, I never saw any communication from any Federal or regulatory authority. Of course I wasn't in a position at that time and I
have only been in this department since 1979.
Mr. ERDREICH. Apparently, and this is just an example, but the
Comptroller of the Currency's circular that it sent out, went out
July 26, 1977, it went to presidents of all national banks and talked
about various and proper security practices. It was triggered by the
ESM investigation they did and the credit union folks came in very
effectively and apparently dealt with their own credit union entitites and others. I'm just trying to get some sense. I take it then
that your agencies are not on the mailing list for the Comptroller
of the Currency. I understand that you're not under them in any
way, but just to share information. If you got such a circular,
would it be helpful?
Mr. MCENTEER. I think we're on the mailing list more now since
the Federal Financial Institution Examination Council has been in
being and we have Conference of State Bank Supervisors as a representative on that and we get frequent bulletins from the Comptroller's Office. There's no question about it, the information that
is exchanged today is much better than it has been over the years
and it gets better all the time. I think we're all in business for the
same purpose. I don't believe we're trying to keep secrets from
anyone. We're trying to do a job for the banking industry and the
people and it takes cooperation and that's what we're coming to
right now.
Mr. ERDREICH. Yes, Mr. Bulman.
Mr. BULMAN. Sir, I think there are different levels of cooperation
amongst Federal agencies and State agencies. For example, I think
most of us share an awful lot of information with the FDIC because
they represent the Federal presence in State banks. Now, we have
very little dealings with the Comptroller of the Currency. We may
have some dealings with him as well as the Fed through holding
companies where you have a mixed group of State banks and national banks in a holding company environment. But, I think most
of us work more closely with the FDIC because they represent the
Federal presence in State banks.
Mr. BROWN. In Maryland the savings and loan division is an independent agency. We get nothing from the Comptroller of the
Currency. I can see where it might be advisable for me to be in
contact with the State bank commissioner and, if she does get anything along those lines, she would let me have it. The only thing
we get is data from the Federal Home Loan Banks and some of our
State-chartered associations are federally insured, but as far as
banks go, we get nothing.
Mr. ERDREICH . Mr. King.
Mr. KING. We are on the regular mailing list for the Federal
Home Loan Bank Board and the Federal Home Loan Bank of Atlanta and in addition to that, the Federal Reserve Board . We get
all their standard mailout information.
To the best of my knowledge, we receive nothing at all from the
Comptroller.
Mr. ERDREICH . Thank you , Mr. Chairman .
Mr. BARNARD . Mr. Kindness .

436
Mr. KINDNESS. Thank you, Mr. Chairman . Secretary McEnteer,
your testimony indicated that your department has the authority,
under law to , in effect, to take over control of an association and
appoint a deputy receiver for that purpose in the event that the
institution is an unsafe or unsound condition .
Would you have similar authority with respect to the private insurance corporation for deposits? That is, under the Pennsylvania
insurance setup, deposit insurance setup which is private, would
you have the authority without going into a court to take over control?
Mr. McENTEER. Yes. Under the banking code and the savings association code, the secretary of banking has that authority.
Mr. KINDNESS . And if that insurance corporation had the assets
or could readily obtain them by additional assessment of members
or whatever mechanism might be employed from State to State,
and others might want to respond to this, but if they had the assets
or could readily obtain them by assessment, would you consider it
prudent to take over direct control under your department?
Mr. MCENTEER. You're talking about direct control of an association?
Mr. KINDNESS . No. Of the insurance corporation .
Mr. MCENTEER. Well , I don't know of any reason we would take
direct control of the insurance association .
Mr. KINDNESS . That is unless there is something highly unusual
in the circumstances, you would allow the deposit insurance corporation to function and allow it to employ its assets to protect depositors, is that correct?
Mr. MCENTEER. Yes, I believe that's part of the establishment of
the insurance association. They can lend to a member association
and they haven't, as yet, set up a general fund for lending purposes, but if we stepped in and found an association that wasn't operating properly, it would probably be the last resort to go to the
insurance association .
We would look around for a merger to start with and maybe a
supervisory conversion to a stock company which we have done
twice and have somebody come in with capital and take it over and
that sort of thing.
Mr. KINDNESS. Mr. King, in your case, you have direct supervisory authority with regard to the associations and the insurance
function as well. Do you have sufficient sanctions available to you
that in the event of need, for example, a growing run on savings
and loans around the State, as occurred in Ohio, and lacking a
proper response from the deposit insurance corporation, could you
take over or appoint a receiver or conservator under existing law
and operate the deposit insurance corporation?
Mr. KING. Yes, sir, and I think probably the way we would approach that, in our situation, would be to replace management and
directors, if necessary, in order to facilitate that situation rather
than trying to place it in some type of receivership or conservator
appointment, this type of thing.
We do have the authority to remove management and directors
for cause .

437
Mr. KINDNESS . But if you had some default in your supervison of
the whole situation, would that be about the only reason that you
would attempt to take over the deposit insurance function?
Mr. KING. I think, like Mr. McEnteer, I can't imagine that situation happening. I suppose it could . It would have to-really the
only situation I could really even envision would be, you know,
some type of problem with the individual or individuals involved
with the insurance corporation itself.
Mr. KINDNESS . I just ask this because it appears that we're dealing with questions of principle and function here affecting a lot of
States, when the trouble seems to be something that is highly irregular, highly unusual and shouldn't reflect on your States one
iota, but it does reflect badly on my State of Ohio, but it seems to
boil down to problems with the supervisory and regulatory function
more than the insurance function , but we have a deposit insurance
fund that's not functioning. It's controlled now by a conservator in
the same hands, an employee of the division by the way, that conservator is . It's in the control of the same hands where the regulatory control has broken down. We got a tight little nest here that,
as I say, just is not typical of any other State's functioning, it
seems to me.
In the State of Maryland, Mr Brown, is there any control directly under your function that could be asserted over the deposit insurance fund?
Mr. BROWN. No. As I mentioned before, I have no jurisdiction
over the insurance fund in their day-to-day operation, however, I
don't know whether you were here when I made the comment
before. Any rule, regulation , changes, changes in the by laws must
be approved by the division director. Now, you're speaking of a default, probably, of the insurance corporation. There is nothing in
the code that would give me the authority to take over the insurance corporation . I would say there would have to be a court- appointed conservator or receiver to do what you are referring to.
Mr. KINDNESs . Or the Governor might go to the legislative
branch and get a special law passed and then take over――
Mr. BROWN. Could be.
Mr. KINDNESS [continuing]. The $81 million of assets or whatever
it might be that was left at the time.
Mr. BROWN. God forbid, let's hope that doesn't happen.
Mr. KINDNESS . Yes, let's hope it doesn't happen.
Mr. BROWN. But it is an interesting question .
Mr. KINDNESS . I suggest that it is not the kind of contingency
against which you would ordinarily expect to protect the functioning of your department or agency.
Mr. Chairman , I yield back .
Mr. BARNARD. Thank you very much. Gentlemen, we appreciate
very much your being here today, the testimony that you have offered and thank you very much.
Our next witnesses today are the Chairman of the Securities and
Exchange Commission, the Honorable John S.R. Shad and also Mr.
Thomas Tew, who is the trustee in bankruptcy for the ESM Government Securities.

438
We apologize that we have gone over somewhat, but you can understand the seriousness of the subject that we have before us
today and how it is understandable.
Because of that, I am going to ask Mr. Tew if he would permit us
to hear your testimony, Chairman Shad, and ask questions of you
so that you may depart and then we will work with Mr. Tew. I'm
sure he doesn't have any problems with that.
So , Mr. Chairman, at this time, we would like to have your testimony. I might say that your entire testimony, without objection,
will be included in the record and you have the opportunity to
summarize if you so see fit.
STATEMENT OF JOHN S.R. SHAD, CHAIRMAN, SECURITIES AND
COMMISSION,
EXCHANGE
ACCOMPANIED
BY
CHARLES
HARPER, ASSOCIATE REGIONAL ADMINISTRATOR, MIAMI
BRANCH OFFICE, AND DAN GOELZER, GENERAL COUNSEL
Mr. SHAD. Thank you very much, Chairman Barnard and members of the committee, I appreciate this opportunity to testify concerning the Government securities market. It is requested that the
written statement, as you have indicated, be included in the record.
With me today is also Charles Harper, the associate regional administrator in charge of the SEC's Miami Office .
The market in U.S. Government securities is by far the largest in
the world. In 1984, just the 36 primary Government bond dealers,
which report directly to the Federal Reserve Board, traded over
$1.5 trillion per month, as compared with the total stock trading
volume on all U.S. securities exchanges and over-the-counter markets of less than a $ 100 billion per month. In other words, the trading in the other stocks and bonds, over-the-counter and on the exchanges, amounts to less than 7 percent of the transactions handled by the 36 primary Government bond dealers, and there are
many others away from them that trade, but I would say that
those primary bond dealers do handle the bulk of the trading in
Government securities, the original offering.
The highly liquid, keenly competitive and efficient Government
securities market is critical to the effective execution of the Nation's monetary and fiscal policies.
The Securities Act of 1933 and the Securities Exchange Act of
1934 specifically exempt Government securities and broker-dealers
from regulation by the SEC, but the general antifraud provisions
apply to the offer, purchase and sale of all securities, including
Government. The Commission also has jurisdiction over those
broker-dealers registered with the SEC that deal in Government securities.
The Federal Reserve Board obtains daily reports on market activity and positions, monthly financial statements and annual reports from the 36 primary Government securities dealers and encourages secondary dealers to report the same information on a
monthly basis.
Also, many entities-and I know you're well aware of this from
the testimony you have just had from several-but let me repeat
briefly that there are many other entities that are engaged in the
Government securities market that are subject to the oversight of a

439
variety of Federal agencies. For example: The banks by the Federal
Reserve Board, the Comptroller of the Currency, and the FDIC; the
savings and loan associations and other thrift organizations by the
Federal Home Loan Bank Board; registered securities firms and
publicly owned corporations, other than banks and S&L's, by the
SEC; credit unions by the National Credit Union Administration
and pension funds by the Department of Labor, under ERISA. Various State agencies also regulate the activities of these entities as
well as insurance companies.
Now, I would like to briefly describe the Commission's response
to the very serious problems of the Government securities market
since 1977.
The 1977 failure of Winters Government Securities Corp. resulted in $4 million of losses to three dealer firms before insurance and
civil suit recoveries, if any. The Commission's injunctive and administrative actions alleged boiler-room sales tactics , excessive
markups and misrepresentations concerning the safety of transactions in Government National Mortgage Association securities
known as Ginnie Maes, as well as misrepresentations concerning
the financial condition of Winters Government Securities.
The defendants were enjoined from future securities law violations, barred from association with any broker-dealer, investment
company or advisor as supervisors, and Winters and Co.'s brokerdealer registration was revoked .
In 1982, Drysdale Government Securities, Inc., failed 3 months
after it commenced operations causing approximately $300 million
in losses to other dealers before insurance and civil suit recoveries,
if any. Most of the losses were born by the Chase Manhattan Bank.
The Commission alleged , among other things, that Drysdale borrrowed securities in increasing amounts and sold them in the cash
market to obtain the accrued interest. The Drysdale officers were
enjoined from future securities law violations and from aiding and
abetting broker-dealer recordkeeping violations and were barred
from association with any broker-dealer, investment company or
advisor, or any municipal securities dealer.
The Commission also assisted in criminal prosecutions. The Drysdale chairman was sentenced to 6-years imprisonment and ordered
to pay $ 10 million to certain institutions he had defrauded before,
actually before Drysdale Government Securities was set up before
1982.
The Drysdale head trader was sentenced to 3-years imprisonment
and the controller to 3 years probation.
Last week the Commission's injunctive action against an Arthur
Andersen & Co. partner, who had audited the Drysdale firm, was
dismissed on the grounds that his alleged misconduct had not occurred in connection with-those are the key words -the purchase
or sale of securities. The Commission will determine in the very
near future whether to appeal this dismissal .
Since the 1982 failure of Lombard-Wall , Inc., was apparently due
to normal economic forces rather than fraud, and neither the SEC
nor the Justice Department have brought actions against the firm
or its principals.

440
Reported losses of $20 million was sustained by the New York
State Dormitory Authority before insurance and civil suit recoveries , if any .
Since the Commission's investigation of the Lion Capital Group
is pending, I must limit my comments to publicly available information.
Lion went into bankruptcy in 1984. About 60 institutions , including 24 State of New York school districts have alleged that they
were induced to invest approximately $40 million in repurchase
agreements with Lion by promises of yields higher than those
available elsewhere, based on rate quotations provided by National
Money Market Securities, Inc. , a California money broker.
Lion's confirmations represented that the underlying securities
were held with Bradford Trust Co. In response to creditors' demands for such securities, Bradford has claimed that these securities were collateral for loans by Bradford to Lion. A settlement proposal has been taken under advisement by the courts.
Last week a New York State Grand Jury indicted certain Lion
officers for alleged fraud and grand larceny.
With reference to ESM Government Securities, in order not to
prejudice suits filed and investigations in progress by the SEC, my
comments must be limited to publicly available information.
Charles Harper of the Commission's Miami Office first learned of
apparent securities law violations by ESM at 8:30 a.m. on Monday,
March 4, from Thomas Tew, who I would add has done an outstanding job in all aspects of this situation .
At that time, Mr. Tew was retained by ESM; he had just been
retained, in fact, the previous Friday, on March 1. The information
that he provided indicated that ESM had incurred $250 to $300
million of unreported losses . That was Monday morning . By
Monday afternoon, Mr. Harper had obtained Commission authority
and a temporary restraining order from the U.S. District Court in
Miami against future securities law violations , a freeze of the defendant's assets and the appointment of Mr. Tew as receiver.
The Commission alleged that ESM's audited financial statements
failed to properly reflect the firms' true financial condition.
On Thursday, March 7, I called Paul Volcker, Chairman of the
Federal Reserve Board; Gerald Corrigan, president of the New
York Federal Reserve Bank; Edwin Gray, Chairman of the Federal
Home Loan Bank Board; as well as senior SEC staff members to
coordinate the effort of these organizations.
The next day, on Friday, March 8, the Commission issued a
formal order of investigation. Subpoenas were issued that afternoon, and the interrogation of witnesses began the next day, Saturday, March 9. Representatives of the SEC, the New York Federal
Reserve Bank, and the Federal Home Loan Bank Board met in
Miami on the next day, Sunday, March 10. That evening I was advised by Michael Wolensky, the senior member of the SEC's staff
on the scene, of the conclusions of the investigation to date which I
reported that evening, Sunday evening, to Paul Volcker.
Since I was leaving to catch a plane-I was in New York at the
time, and I was catching a plane back to Washington that night—I
asked Mr. Wolensky to brief Governor Celeste of Ohio. Mr. Wolensky reached an aide of Governor Celeste and did brief him .

441
The staff's intensive investigation continued, and on Friday,
March 15, the Commission authorized the staff to obtain a court
order granting access to the bank records of Jose Gomez of Alexander Grant & Co. , the partner in charge of ESM's annual audit since
at least 1980. The court immediately granted the application.
On Monday, March 18, the Commission granted the staff authority to file an injunctive action against Jose Gomez, alleging that he
lacked independence as the auditor of ESM because he had received at least $ 125,000 from ESM principals .
On March 20, the court entered an order freezing Mr. Gomez'
assets, restraining him from destroying or secreting relevant
records and requiring him to provide an accounting, by March 26.
He has asserted his fifth amendment privilege against self-incrimination.
As mentioned, this investigation is proceeding. Preliminarily, it
appears that approximately $200 million of the losses sustained by
the Home State Savings Bank of Cincinnati and the American Savings & Loan Association of Miami were due to the extension of substantially more than normal margin to ESM and the concentration
of their transactions with ESM .
Home State and American were apparently controlled by, or
under the control of Marvin L. Warner, at the time they engaged
in those transactions.
An additional $100 million of losses by municipalities and others
appear to have resulted from the lack of adequate collateralization
of their transactions with ESM .
On March 21 , the Commission indicated , at House hearings , that
it would review the regulatory structure of the Government securities market in consultation with the Federal Reserve Board and
the Treasury and report its conclusions to Congress within 90 days.
This effort is underway.
Senior members of the Commission staff and I have met with
Chairman Volcker of the Federal Reserve Board and Assistant Secretary Thomas Healy of the Treasury Department. The Commission also intends to publish a release shortly seeking comments on
the nature and extent of unregulated Government securities dealer
activities, alternative forms of regulation and oversight of Government securities dealers and markets and the extent to which those
who deal with Government securities dealers are modifying their
practices in response to the extensive publicity that has already occurred on ESM.
Possible regulatory initiatives range from encouraging or requiring those who deal with Government securities dealers to properly
collateralize such transactions. They range from that level to enacting rules and regulations under the supervision of a self-regulatory organization, or the direct aegis of one or more existing or
new Federal agencies.
Also because of the nature and frequency of transactions in Government securities, the vast majority are handled without incident
through low-cost high-speed electronic book entry systems.
Those who deal with Government bond dealers might be encouraged or required to use such facilities. It may also be necessary to
adapt such facilities to the unique needs of the repurchase agreement market.

442
It would be premature to speculate on these and other possibilities before the Commission, in consultation with the Federal Reserve Board and the Treasury, has obtained and analyzed the best
available facts. The Commission will attempt to weigh the costs
and benefits of the various alternatives and promptly submit its
conclusions to Congress. Thank you, Mr. Barnard.
[The prepared statement of Mr. Shad follows: ]

443

STATEMENT OF JOHN S.R. SHAD ,
CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION ,
TO THE SUBCOMMITTEE ON COMMERCE , CONSUMER AND
MONETARY AFFAIRS OF THE HOUSE
COMMITTEE ON GOVERNMENT OPERATIONS
Chairman Barnard and members of the Subcommittee :
I welcome this opportunity to testify concerning the
government securities market .

It is requested that this

statement be included in the record .
This testimony briefly describes the size and nature of
the government securities market ; the extent of the authority
of the Commission and the Federal Reserve Board ( " FRB " ) over
the government securities market ; problems involving government
securities dealers ; the Commission's recent enforcement actions
arising out of the failure of ESM Government Securities , Inc.
( " E.S.M. Government " ) ; and the Commission's review of the
government securities market that is in progress .
This testimony responds to many of the specific questions
raised in Chairman Barnard's letter of March 20 , 1985.

ΤΟ

the extent not addressed herein , specific answers are set
forth in the Appendix to this testimony .

I.

The Government Securities Markets
The market in United States government securities is by

far the largest in the world .

In 1984 , just the 36 primary

dealers , which report daily to the Federal Reserve Board ,
traded over $ 1.5 trillion per month , as compared with total

50-923 0-85--15

444

stock trading volume on all U.S exchanges and over- the- counter
markets of less that $ 100 billion per month ( i.e. , 7 % of the
government market ) .

The highly liquid , keenly competitive

and efficient government securities market is critical to the
effective execution of the nation's monetary and fiscal policies .

II .

The Commission's and the FRB's Regulatory Authority
The Commission's statutory authority over the government

securities markets is based primarily on the anti - fraud
provisions of the securities laws .

Section 3 ( a ) ( 2 ) of the

Securities Act of 1933 ( the " Securities Act " ) and 3 ( a ) ( 12 ) of
the Securities Exchange Act of 1934 ( " Exchange Act " ) exempt
government securities from registration .

Section 15 ( a ) ( 1 ) of

Exchange Act exempts from registration broker- dealers who
effect transactions exclusively in government securities .

As

a result , while the Commission has regulatory authority over
registered broker- dealers that engage in government securities
business , it does not have statutory authority to regularly
examine broker- dealers that restrict their business to government securities transactions .
However , the general anti- fraud provisions of the federal
securities laws ( Section 17 ( a ) of the Securities Act and Section
10 ( b ) of the Exchange Act and Rule 10b- 5 thereunder ) apply to
the offer , purchase , or sale of securities by any person .
Accordingly, the Commission may conduct investigations to

445

determine whether firms that deal exclusively in government
securities have violated the anti - fraud provisions in connection
with the offer , purchase , or sale of government securities .
The FRB monitors the activity and financial soundness
of the 36 primary dealers in government securities by obtaining daily reports of market activity and positions , monthly
financial statements , and annual reports .

The FRB supplements

these reports with telephone calls and on- site visits .

These

oversight activities depend largely on voluntary compliance
and moral suasion , as well as the ultimate threat of the FRB
ending a firm's primary dealer status .

The FRB has no statutory

investigation or enforcement authority over any government
securities dealers .

The FRB has encouraged secondary dealers

to report voluntarily the same information as is required of
primarily dealers , on a monthly rather than a daily basis .
As described below , the FRB also recently proposed voluntary
capital adequacy guidelines for government securities dealers
not subject to Federal regulation .
Also , those entities that engage in government securities
activities are subject to the direct regulatory oversight of
several federal agencies :

for the banks , the FRB , the Comptroller

of the Currency and the Federal Deposit Insurance Corporation ;
for the saving and loan associations and other thrift institutions ,
the Federal Home Loan Bank Board ; for the registered securities

446

firms , the SEC; for the credit unions , the National Credit
Union Association ; and for the pension funds , the Department
Various state agencies also regulate

of Labor , under ERISA.

the activities of the foregoing groups , as well as insurance
companies .
III . Government Securities Dealer Problems
The following government securities dealer failures have
occurred since 1977 :

Winters Government Securities Corporation

( 1977 ) , Drysdale Government Securities ( 1982 ) , Lombard -Wall , Inc.
( 1982 ) , Lion Capital ( 1984 ) , and ESM Government ( 1985 ) .
follows a review of each of these situations and the Commission's

responses .
Winters Government Securities
Winters Government Securities Corporation ( " WGSC " ) , an
unregistered government securities dealer , began business in
1973 and failed in 1977.

It was involved in the sale of

Government National Mortage Association ( " GNMA " ) mortgagebacked securities to banks , thrifts , and credit unions for
delayed delivery .

WGSC's activities were brought to the

Commission's attention by the State of Alabama , which had
received complaints from two savings and loan associations
that WGSC had executed unauthorized trades for their accounts .
unctive action
In August 1977 , the Commission filed an injun
against WGSC , Winters & Co. , a registered broker- dealer
affiliate of WGSC , and seven individuals who were affiliated
with WGSC as officers , directors , or salesmen .

447

In its action , the Commission alleged that the defendants
had engaged in fraudulent sales practices in connection with
the offer , purchase , and sale of GNMA securities for delayed
or forward delivery and payment .

The alleged fraudulent

practices at WGSG included the use of " boiler- room" sales
tactics , excessive mark- ups , and misrepresentations concerning
the safety of the investments and the financial condition of
WGSC.

The failure of the firm occurred when the market price

for these securities decreased and institutional customers of
the firm who had been subject to the practices discussed
above , disavowed trades that , if accepted , would have resulted
in losses to them .

As a result of WGSC's failure , three

originating dealers sustained $ 4 million in losses , before
insurance and civil suit recoveries , if any .
As a result of the Commission's injunctive action , all
of the defendants were enjoined from engaging in future
violations of the antifraud provisions of the federal securities laws .

The Commission also instituted administrative

proceedings against the individual defendants , in which they
were barred from associating with a registered broker- dealer ,
investment adviser , or investment company as supervisors .
The Commission also revoked the broker- dealer registration of
Winters & Co.

448

rysdale Government Securities , Inc.
Drysdale Government Securities , Inc. ( " DGSI " ) was a
government securities dealer , incorporated in 1981 , but
dormant until it took over activities formerly conducted by
its predecessor , Drysdale Securities Corp. ( " DSC " ) , _/ in
February 1982.

DGSI operated for approximately three months

before its collapse in May 1982 , causing approximately $ 300
million in losses to other dealers , before insurance and civil
suit recoveries , if any .

Most of the losses were borne by

the Chase Manhattan Bank .
The transactions involved in the Drysdale failure were
repurchase and reverse repurchase agreements concerning
government securities .

The DGSI failure was largely attribut-

able to an alleged ongoing fraud .

When DGSI began to function

in February 1982 , it assumed short positions in government
securities of over $ 2 billion , which included an unrealized
loss exceeding $ 190 million .

By commencing business , DGSI

represented that it stood ready and able to fulfill its
obligations under agreements to repurchase and to resell
securities and pay the interest which had accrued on the
underlying securities .

The Commission alleged that DGSI's

principals knew that the firm could meet those obligations

J

Drysdale Securities Corporation ( " DSC" ) was a registered
broker- dealer .

449

only so long as it could continue to borrow securities in
increasing amounts and sell them in the cash market to obtain
the accrued interest .
It was alleged that DGSI concealed this loss from other
dealers and potential creditors .

It was alleged that throughout

its three and one-half months of business life , DGSI essentially
engaged in a frantic and ultimately futile effort to meet the
undisclosed deficit , mainly by expanding its positions and
through speculative trading .
Drysdale collapsed in May 1982.

On July 27 , 1983 , the

Commission filed a complaint for injunctive relief against
DSC ,

officers of DSC and DGSI , and a partner of Arthur

Andersen & Co. , DGSI's accounting firm .

Without admitting or

denying the allegations , the officers of DSC and DGSI consented
to permanent injunctions from future violations of the
antifraud provisions of the federal securities laws , from
aiding and abetting violations of the Commission's brokerdealer recordkeeping requirements , and two of the officers
were ordered , for a period of two years after the entry of
their respective orders , to deliver a copy of the order to
any broker- dealer with whom they sought to open a brokerage

account .

The action against DSC was subsequently dismissed , after
DSC was dissolved . DGSI was not named in the Commission's
action because it effectively had ceased to exist by
July 27 , 1983 .

450

On March 29 , 1984 , the DGSI treasurer and head trader
pleaded guilty to an information filed in federal court .

The

information charged him with securities fraud , willful failure
to file tax returns and conspiracy to commit securities
fraud , mail fraud , wire fraud and broker-dealer recordkeeping
violations .

A guilty plea was also entered in the matter by

DGSI's former head cashier .
On July 6 , 1984 , the DSC chairman and chief executive officer
was sentenced by the United States District Court to eight years
imprisonment ( subsequently reduced to six years ) , based upon
his plea of guilty to securities fraud .

The court also

ordered him to pay $10 million in restitution for the benefit
(
of certain institutional clients whom he had defrauded during
a six-year period ending in 1982 , unrelated to the DGSI
fraud .

On the same day , he was sentenced by a New York State

Court to a term of 2-1 /3 to 7 years ( to run concurrent with
the federal sentence ) upon a guilty plea to grand larceny and
securities fraud .

That sentence was subsequently reduced to

a maximum of six years .
his DGSI activities .

The state charges were based upon

Without admitting or denying the charges ,

on December 28 , 1984 , he consented to a Commission Order
which barred him from association with any broker- dealer ,
investment adviser , municipal securities dealer , or investment
company .

Without admitting or denying the charges , the former

head cashier of DGSI also consented to a bar Order entered by
the Commission .

451

On March 15 , 1985 , the DGSI head trader was sentenced by
the United States District Court to three years imprisonment ,
to be followed by four years probation and , in each of those
four years , 200 hours of community service .

Based upon his

consent , the Commission also barred the former controller of
DGSI , who had been convicted in state proceedings of fraud
and larceny and sentenced to three years probation .
The Commission's injunctive action against the Arthur Andersen
partner was dismissed on March 25 , 1985 , based upon a ruling
by the United States District Court that the partner's alleged
misconduct had not occurred " in connection with " the purchase
or sale of securities .

The District Court based its holding

on the fact that alleged misrepresentations by the partner
and Andersen related to the capitalization of DGSI , not to
the value of the government securities underlying the repurchase agreement or the financial strength of the issuer of
the securities .

The Commission will , in the near future ,

determine whether to appeal this ruling .

Lombard-Wall , Inc.
Lombard-Wall was an unregistered government securities
dealer that failed on August 12 , 1982 , apparently due to normal
economic forces rather than financial fraud .
Commission's inquiry was limited .

Therefore , the

Lombard-Wall was not

affiliated with a broker-dealer registered with the Commission .

452

Losses were sustained primarily by one state governmental
body, the New York State Dormitory Authority .
actively investigated the firm .

State agencies

It immediately went into bank-

ruptcy .
These early assessments were not disproved , and the firm
emerged from reorganization in November 1983.

Total losses

reported in the matter were $ 20 million to the New York State
Dormitory Authority , before insurance and civil suit recoveries ,
if any.

Under these circumstances , the SEC staff did not

recommend a formal investigation nor the institution of
enforcement proceedings to the Commission .
Lion Capital Group , Inc.
The Commission's investigation of this matter is pending .
Accordingly , in order to avoid prejudice to the Commission's
investigation and any litigation that may result therefrom,
the discussion set forth below is based solely upon publicly
available information .
Lion Capital Group , Inc. ( " Lion " ) , a broker- dealer not
registered with the Commission , filed for protection under
Chapter 11 of the bankruptcy code on May 2 , 1984 , together
with four associated entities .

That filing raised issues

concerning approximately $ 40 million invested by about 60
institutions , 24 of which were State of New York School
Districts .

Those districts had allegedly invested their

453

funds in repurchase agreements with Lion after receiving rate
quotations through National Money Market Securities , Inc. ,
a California- based money broker .
The school districts were allegedly induced to invest
by a promise of yields higher than those otherwise available .
Lion generally had no direct contact with the school districts
other than to issue confirmations of transactions and to
receive funds from the school districts and return the funds
with the interest earned .

The confirmations represented that

securities underlying the repurchase agreements were held in
trust at Bradford Trust Co. ( " Bradford " ) , Lion's clearing
agent .

However , shortly after the initiation of the bankruptcy

proceedings , Bradford claimed that the government securities that
it held as a result of transactions with Lion were not held
in trust for the school districts but were collateral for a
loan from Bradford to Lion .
It appears that those customers that did not have
possession of collateral are involved in litigation with
Bradford , in which they alleged that Bradford's lien is
invalid .

A settlement offer is pending , and a hearing on the

offer was held on March 11 and 12 , 1985.

The Court has taken

the settlement offer under advisement .
On Monday , February 25 , 1985 , a New York State grand
jury indicted the chief operating officer of Lion Capital ,
its operations officer , and its chief financial officer ,

454

alleging , among other things , state law securities fraud and
grand larceny .
Initial reports of the amounts at risk as a result of the
Lion bankruptcy were approximately $ 28 million .

That amount

later turned out to be $ 40 million , before insurance and

civil suit recoveries , if any.
IV .

The E.S.M. Government Case .
The Commission's investigation of ESM is pending and

all discussion set forth below is based solely on publicly
available information .

E.S.M. Government is a broker- dealer ,

not registered with the Commission , that was engaged in the
government securities business .

It was able to do so , in

part , based upon its allegedly fraudulent financial statements .
The Commission first learned of apparent violations of
the federal securities laws by E.S.M. Government at approximately 8:30 A.M. on Monday , March 4 , 1985 , when the Commission's
staff received a telephone call from the Special Counsel to
E.S.M. Government .

The Special Counsel , who had been retained

by E.S.M. Government on Friday , March 1 , advised the staff
that a review of E.S.M. Government's records conducted over
the weekend indicated that the firm had allegedly incurred
approximately $ 250- $ 300 million of unreported losses .

The

Special Counsel reported that a substantial portion of those

455

alleged losses appeared to have been caused by large denomination government securities transactions and related interest
expenses .

Later on the morning of March 4th , the Special

Counsel met with the staff to provide further elaboration .
On the afternoon of March 4 , the SEC staff sought and
obtained authority from the Commission to file a civil action
in the U.S. District Court for the Southern District of
Florida against E.S.M. Government and three affiliates ,
E.S.M. Securities , Inc. ( a broker- dealer registered with the
Commission ) , E.S.M. Group , Inc. ( the holding company for
E.S.M. Government and E.S.M. Securities ) , and E.S.M. Financial
Group , Inc.

The complaint , filed later in the afternoon of

March 4 , requested a temporary restraining order against
future violations of the antifraud provisions of the federal
securities laws , a freeze of the defendants ' assets , and the
appointment of a receiver .

Without admitting or denying the

charges , the defendants consented to the entry of a final
judgment at the time the complaint was filed .

As part of the

judgment , the defendants ' assets were frozen and the Special
Counsel was appointed receiver .
In its complaint , the Commission alleged that ESM
Government had purchased and sold securities for over five
years when its audited financial statements failed to reflect

456

properly, as required by generally accepted accounting principles ,
the true financial condition of the firm.

The losses which

the firm had incurred had apparently been concealed by recording them on the financial statements of E.S.M. Government's
parent company , E.S.M. Group , which in turn reflected a
corresponding account receivable from E.S.M. Financial Group ,
a " shell " corporation which did not engage in any discernible
business .

Although it allegedly concealed the losses for

several years , E.S.M. Government ultimately became unable to
meet its obligations as they matured .

E.S.M. Government's

institutional customers have incurred losses which may exceed
$300 million , before insurance and civil suit recoveries ,

if any .
After filing the action against E.S.M. Government ,
Commission staff commenced an independent investigation of
the matter .
On Friday , March 15 , the Commission authorized the staff
to file in the District Court an application for an order
permitting access , without the delay that would otherwise be
required by compliance with the Right to Financial Privacy
Act of 1978 , to bank records of Jose Gomez , the managing
partner of the South Florida offices of Alexander Grant &
Company .

Alexander Grant had examined and issued a report on

E.S.M. Government's financial statements annually since at

457

least 1980 , and Gomez had been the partner in charge of those
audits .

The Court granted the Commission's application on

the day it was filed .
On Friday , March 15 , Chairman Shad contacted Chairman
Paul Volcker of the FRB , Gerald Corrigan , President of the New
York Federal Reserve Bank , Edward Gray , Chairman of the
Federal Home Loan Bank Board , and senior staff members , to
coordinate the efforts of these organizations .
gation continued over the week- end .

The investi-

Representatives of these

organizations met in Miami on Sunday , March 17th .
On Monday, March 18 , after reviewing the bank records
obtained pursuant to court order , the staff sought and obtained
Commission authority to file an injunctive action against Gomez .
In that action , which was filed on Wednesday , March 20 , the
Commission alleged that Gomez had violated antifraud provisions
of the Exchange Act , and sought a temporary and permanent
injunction against future violations , as well as other
equitable relief .

The Commission alleged that Gomez lacked

independence as the auditor for E.S.M. Government because he
received at least $ 125,000 from principals of E.S.M. Government
in the form of wire transfers into his personal bank account .
On March 20 , the Court entered a temporary restraining
order against future alleged violations by Gomez , freezing
Gomez ' assets , restraining Gomez from destroying or secreting
relevant records , and requiring Gomez to provide an accounting

458

by March 26 , 1985 , of all payments received from E.S.M.
Government or related entities or principals .

Gomez has

subsequently asserted his Fifth Amendment privilege with
respect to the accounting .

The Court also scheduled a hearing.

on the Commission's application for a preliminary injunction
for March 28 , 1985 , which has been put over to April 9 , 1985 .
The Commission's staff is continuing its investigation
to ascertain whether other persons and entities have engaged
in violations of the federal securities laws .

In addition ,

the staff is continuing to assist the receiver in his efforts
to locate and preserve E.S.M. Government's assets .

The

Commission's staff has also cooperated with other agencies in
this matter , including banking agencies having jurisdiction
over the financial institutions affected by the insolvency of
E.S.M. Government .
Preliminarily, it appears that three of the principal
factors that contributed to the losses sustained by those who
dealt with ESM have been the lack of adequate collateralization
of their transactions ; the extension of more than normal margin
to ESM by two savings and loan associations ; and the concentration
by these two savings and loan associations of their transactions
with ESM .

These two savings and loans apparently were under

common control at the time the transactions were made .

It also

should be noted that a number of the parties involved in ESM
had relationships with other government securities firms who

E.

459

had failed .

Nicholas Wallace , an ESM principal , was previously

associated with both WGSC and Hibbard O'Connor & Weeks .
Ronnie Ewton and George Mead , also principals of ESM , were
previously associated with Hibbard O'Connor & Weeks .

In

addition , Bradford Trust was the clearing agent for both Lion
Capital and ESM .
v.

Government Securities Regulation
Beginning in March of 1984 , representatives of the Federal

Reserve Bank of New York consulted with the SEC staff on certain
actions designed to improve the functioning of the government
securities markets .

In particular , the New York Federal Reserve

Bank has taken steps to strengthen its market surveillance unit
and curtailed certain repurchase agreements practices that had
contributed to previously incurred losses .

The Bank also proposed

for comment standards for a voluntary capital adequacy program
that would apply to government securities dealers not subject to
Federal supervisory oversight . _ /
The proposed capital guidelines include a liquid capital- torisk ratio applicable to otherwise unregulated government securities dealers that is broadly similar to the Commission net capital
rule for registered broker- dealers , but is designed to address
the specific risks of government bond dealers .

These guidelines

would measure both the credit and market risk associated with a
government securities dealer's position and set a level designed

Federal Reserve Bank of New York , Capital Adequacy Guidelines
for U.S. Government Securities Dealers , Request for Comments
(February 7 , 1985 ) .

460

to ensure that the dealer has sufficient liquid capital to absorb
losses incurred on those risk positions .

Primary government

securities dealers are already required to submit reports used to
test their capital adequacy in a manner broadly consisted with
this proposal .

The guidelines would also encourage certification

by an independent auditing firm of compliance by unregulated
dealers .

Primary dealers in government securities and banks

subject to Federal Reserve Board supervision would not be permitted
to deal with a non-complying government securities dealer .
Moreover , the Federal Reserve Bank would look for certification
letters as an element of sound banking practices in examining
member banks ' clearing and lending activities for government
securities accounts , and would encourage other bank supervisiors
to do so .
On March 21 , 1985 , the Commission indicated at hearings
held by the Telecommunications , Consumer Protection and Finance
Subcommittee of the House Committee on Energy and Commerce that
it would review the regulatory structure of the government
securities markets , and would consult with the Federal Reserve

Board and the Treasury.

It also said that it would report to

Congress its views regarding cost- effective modifications of the
current regulatory scheme , taking into account the critical
importance of this market to U.S. monetary and fiscal policies .
This work has begun .

Chairman Shad and senior members of

the Commission staff have met with Paul Volcker of the Federal
Reserve Board and Thomas Healy, Assistant Secretary of the
Treasury , and members of their staff .

461

The Commission also intends to publish a release shortly ,
seeking comments , among other things , on the extent of unregulated
government securities dealer activities , alternative forms of
oversight of the government securities markets ; and the marketplace's reaction to the extensive ESM publicity and the extent
to which those who deal with government bond dealers have
modified their practices in response to such publicity .

By

this means , the Commission will obtain the benefit of the views
of the securities industry , federal regulators , and others
concerning the relative merits of the present and future form
of regulation of the government securities markets .

The

Commission will incorporate the insights provided by these
commentators in its report to Congress .
There are many alternatives and possibilities that range
from encouraging or requiring customers of government s