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LIBRARY
OCT
TESTIMONY OF
FEDERAL DEPOSIT INSURANCE CORPORATION
L. WILLIAM SEIDMAN
CHAIRMAN
RESOLUTION TRUST CORPORATION
WASHINGTON, D.C.
ON
STATUS OF THE RESOLUTION TRUST CORPORATION
BEFORE THE
COMMITTEE ON BANKING HOUSING, AND
URBAN AFFAIRS
UNITED STATES SENATE
.10:00 A.M.
October 4, 1989
Room SD-538
Dirksen Senate Office Building
61989
SUMMARY STATEMENT
STATUS OF THE RESOLUTION TRUST CORPORATION
Introduction: Much has been accomplished since FIRREA was
enacted. However, much more remains to be done before the RTC
is fully staffed with all operating policies and procedures in
place. During this start-up period we have worked closely with
the Oversight Board to institute policies.
RTC Organization Structure and Staffing: The RTC's major
organizational components are the Asset and Real Estate
Management Division and the Resolutions and Operations
Division. Current Washington staff is approximately 100, with
an expected total of about 250. The four regional offices
established in Atlanta, Dallas, Denver and Kansas City each will
be relatively small, with approximately 100 employees exclusive
of accountants and attorneys. Consolidated field sites will be
established in each region primarily to administer RTC's asset
and real estate management function, and will have the bulk of
employees. There are currently about 800 field employees with
substantially more expected by year-end. The RTC expects to
employ outside contractors wherever practical. RTC staffing
will be minimized and will be mostly temporary employees. Even
then, RTC could employ anywhere between 5,000 and 10,000 people
by the end of 1990.
General Operating Policies: On the day FIRREA was enacted the
RTC adopted FDIC policies as interim operating policies, which
allowed the RTC to immediately begin its important tasks. The
Oversight Board also has adopted policies which are being
followed by the RTC.
Ethics and Conflicts of Interest: The RTC Board, at its
August 9 organizational meeting, extended the FDIC's "standards
of conduct" regulations to RTC independent contractors. On
September 26, the RTC Board adopted an interim statement of
principles of ethical conduct for independent contractors,
developed in coordination with the Oversight Board. We
anticipate publication in early November of proposed
regulations, and foresee having final regulations in place by
the February 5, 1990 statutory deadline.
Bribery: The RTC follows the FDIC in relying on three tiers of
action to guard against bribery of an RTC official. These three
tiers include the threat of criminal prosecution? internal RTC
controls, audits and investigations? and encouraging those
suspecting bribery to come forward.
Political Favoritism and Undue Political Influence: We expect
FDIC's culture of political independence to carry over to the
RTC by placing FDIC employees in key RTC positions and by hiring
through competitive government procedures. Working with the
Oversight Board, the RTC will establish specific written
policies and procedures that will draw on current FDIC policies.
2
RTC Operations and Resolutions; As of September 30, the FDIC
had placed 283 thrifts in the conservatorship program with gross
total assets of $112 billion and combined total liabilities of
$124 billion. Combined losses are estimated at about 31 percent
of gross assets, or $35 billion. As of September 30, the RTC
had made secured loans to 151 conservatorships of $8.1 billion
to replace high cost funding sources, for an estimated savings
of $118 million on an annualized basis. As of September 18,
only one of our institutions was among the top 35 highest rate
payers. The RTC also has used funds to provide emergency
liquidity to 41 conservatorships in the amount of $0.5 billion.
As of September 30, the RTC had resolved 24 institutions and
disbursed $1.8 billion to cover insured deposits. There
were twenty insured deposit transfers and four insured deposit
payoffs. We expect to resolve five large institutions before
the second week of October. These will be "clean”
purchase-and-assumption transactions in which only good quality
assets will be purchased by the acquirer. The cash outlay for
these should be approximately $8 billion.
Based on available financial data we estimate that another 300
thrifts may require failure resolution over the next three
years, for a resolution total of nearly 600, with combined
assets exceeding $300 billion. This will require the RTC to
dispose of assets of as much as $180 billion.
RTC Funding Entity: The RTC is exploring various alternatives
to provide working capital during the resolution process to
purchase problem assets from failed institutions and to carry
those assets until disposed of in an orderly manner. The amount
of any working capital raised would be limited by the FIRREA
debt limit and the value of the underlying assets.
Asset Management and Disposition: The biggest challenge facing
the RTC will be properly managing and disposing of the billions
of dollars of assets from the resolution of failed thrifts. The
legislation requires RTC to sell property in "distressed" areas
at 95 percent of market value or above. We have no present
plans to lower that threshold. In all geographic areas the RTC
will employ systematic and orderly marketing strategies and will
avoid techniques that dispose of assets at any price. We
therefore believe concerns about "dumping" should be eased
considerably. The RTC will depend heavily on the committee
process to make credit decisions. Adoption of Asset Management
and Disposition Plans will insure that asset negotiations and
strategies employed by contractors and in-house employees are
consistent with FIRREA and RTC policy. Meeting the year-end
real property asset inventory deadline is a real challenge. We
are presently analyzing our needs and plan to contract out this
function to the private sector soon.
3
Low Income Housing: The RTC is committed to maximizing the
availability of affordable housing for moderate and lower income
families. We are setting up communication channels with HUD and
other officials to help identify and qualify purchasers for the
program, and are exploring the best methods for assisting in
sales financing and utilization of secondary market agencies.
The RTC has created key supervisory and staff positions in each
field office to manage program compliance.
Private Sector Contracting: The RTC's goal is to maximize the
use of private contractors. Steps taken or in progress include
developing contracting policies and procedures? establishing a
senior executive position for coordination? providing
contracting management specialists in field offices? and
developing a computer data base on all qualified contractors.
Litigation and Legal Services: The RTC has inherited and is
monitoring some 35,000 lawsuits and has already reduced
expenditures on legal fees. Legal Division staffing will
include about 80 Washington and 1,100 field employees, of which
500 will be attorneys. Estimated RTC expenditures for outside
legal fees may reach $125 million for 1990. In-house attorneys
primarily will direct and control outside counsel.
Accounting and Auditing:
The RTC is subject to almost
unprecedented auditing and accountability. Oversight includes
policy guidance by the Oversight Board, RTC's own Inspector
General, FDIC's Inspector General, annual audits by the GAO, and
Congressional oversight.
Minorities and Women Outreach Program: We are working to
implement this important program as soon as possible. The
program will include a commitment to comply with both the spirit
and intent of FIRREA's mandate? providing and enhancing
opportunities for minority- and women-owned firms to contract
with RTC? identification of qualified firms? certification
that firms are actually minority- or women-owned? proper
qualifications? and execution and monitoring of the contracts.
Review of 1988 FSLIC Cases: Our review will cover 94 agreements
involving $110 billion in assets. This is an enormous task but
must be accomplished quickly. Most work will be contracted out
to private firms to speed completion and assure a credible and
impartial review. We believe there are ways of reducing costs
and will work with Treasury in exploring funding options.
Liquidation of FADA: Two approaches for liquidating FADA are
being considered. These are the sale of the FADA organization,
or, if that is not feasible, the dissolution of FADA and sale of
its assets. Existing asset management contracts (or guarantee
for future contracts) would not be for sale.
Good morning, Mr. Chairman and members of the Committee. It is
a pleasure to be here today for the first time representing the
Resolution Trust Corporation ("RTC") to apprise you of our
progress since the RTC came into existence on August 9, 1989.
Much has been accomplished in less than two months since the
Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") was signed into law. However, much more remains
to be done before the RTC has a full staff of employees and all
its operating policies and procedures in place. We and the
Congress anticipated that the task at hand would be difficult.
It is every bit as difficult as we contemplated. We have a
tremendous task ahead of us.
Today we will discuss the Committee's specific areas of interest
as stated in your letter of invitation. These include the
operating policies adopted to date by the RTC and the safeguards
we are implementing to protect against conflicts of interest,
political favoritism and bribery by employees and agents of the
RTC. In addition, we will provide a general overview of where
the RTC stands and where it is headed, particularly in
implementing many of the goals and specific mandates of FIRREA.
First, however, we would like to thank Secretary Brady and the
rest of the Oversight Board and staff for their hard work and
cooperation in getting this undertaking underway. During the
start-up period we have worked closely with the Oversight Board
to institute the policy statements discussed by Secretary
Brady. Although we have had a few differences of opinion with
the Oversight Board, these have been resolved. We look forward
to a fruitful and positive relationship with the Oversight Board
and staff as we jointly work to complete the start-up process
and begin the greater task that lies ahead.
As an introduction to the Resolution Trust Corporation, we would
like to outline the RTC's organizational and staffing structure
and what we foresee in these areas for the future.
2
RTC ORGANIZATION STRUCTURE AND STAFFING
Washington Office, Mr. David Cooke, my former Deputy at the
Federal Deposit Insurance Corporation ("FDICM), is the Executive
Director of the RTC. The RTC's major organizational components
are the Asset and Real Estate Management Division headed by
Lamar C. Kelly, Jr. and the Resolutions and Operations Division
headed by William H. Roelle. An Administrative Division and a
Funding Operations Division will support the two main
functions.
(See Attachment A for the organizational structure
of the RTC Washington office.)
Certain departments of the FDIC also provide significant support
services to RTC. These include areas such as corporate
communications, legislative affairs, legal services, accounting
and personnel management, as well as other areas.
The RTC currently has a Washington staff of approximately 100
employees, many of whom are on temporary details from either the
FDIC staff or the now defunct Federal Savings and Loan Insurance
Corporation ("FSLIC”). We anticipate that the RTC's Washington
Office ultimately will have approximately 250 employees.
Regional Offices. Four Regional Offices have been established
and four former FDIC Regional Directors have been appointed as
directors of those offices. The RTC's Regional Offices are
located in Atlanta, Dallas, Denver and Kansas City.
(See
Attachment B for the geographic areas covered by each Region.)
Each Regional Office will be relatively small, with anticipated
staffing — exclusive of accountants and attorneys — of
approximately 100 employees.
(See Attachment C for the
organizational chart of the Regional offices.)
Consolidated Field Sites. Consolidated sites will be
established to manage the disposition of real estate and other
assets owned by the RTC. These sites are where most of RTC's
personnel will be located. The number of employees is difficult
to determine with any degree of precision at this time. It will
depend upon the volume and type of assets, as well as our
ability to hire private contractors. The RTC expects to employ
outside contractors wherever practical in executing its mandate
under FIRREA. Even so, the consolidated field sites are likely
to employ several thousand people altogether.
At this early stage we have designed structures for three broad
size categories of sites. Smaller consolidated sites will
handle up to $7.5 billion in assets. A medium-sized site will
handle $7.5 to $15 billion in assets. Large sites, which we
anticipate will be few in number, will handle over $15 billion
in assets.
(See Attachment D for the list of consolidated
sites.)
3
Initially 730 employees were transferred from the FDIC to the
RTC's consolidated field sites. These employees were either
in the FDIC's Asset Liquidation Division or were serving as
Managing Agents in Conservatorships. Currently the RTC has
approximately 800 field employees, the majority of which are
involved in resolution and conservatorship operations.
We anticipate the number of people to be employed by the RTC
will be substantial. Wherever possible, staffing for RTC will
be minimized and most of the people employed will be hired as
temporary employees. Even with these constraints, however,
the RTC easily could employ between 5,000 and 10,000 people by
the end of 1990.
GENERAL OPERATING POLICIES
On the day FIRREA was signed into law, the RTC adopted FDIC
policies as interim operating policies.
(See Attachment E for
the text of these policies.) This allowed the RTC to begin
its important tasks immediately. The policies provide general
guidance in the areas of resolution transactions and asset
disposition and management. These policies will be followed
unless they conflict with policies adopted by the Oversight
Board or until superseded by more specific or permanent RTC
policies.
The Oversight Board also has adopted some policies which have
been supplied to the Committee and described by Secretary
Brady. Those policies are being followed by the RTC.
ETHICS AND CONFLICTS OF INTEREST
The Committee specifically requested information on the
procedures and safeguards the RTC has and will put in place to
protect against unethical conduct and conflicts of interest by
its members, officers, employees and contractors. This
process for establishing and implementing these procedures is
well under way. Final regulations will be in place by the
statutorily mandated deadline.
Within 180 days, FIRREA requires the RTC to (1) prescribe
regulations which would govern conflicts of interest, ethical
responsibilities and post-employment restrictions applicable
to members, officers and employees of the RTC that shall be no
less stringent than those applicable to officers and employees
of the FDIC and (2) prescribe regulations applicable to RTC
independent contractors which would govern conflicts of
interest, ethical responsibilities and the use of confidential
information, consistent with the goals and purposes of titles
18 and 41 of the United States Code.
4
As an interim measure, the RTC Board acted at its August 9
organizational meeting — the date of enactment of FIRREA —
to extend the FDIC's "standards of conduct” regulations to
independent contractors of the RTC, to the extent those
standards "reasonably apply” to the activities of independent
contractors. The Board included the "reasonably apply”
standard because the FDIC's regulations prohibit employees
from owning bank stock and obtaining extensions of credit
(other than through the use of a credit card) from assisted
banks or from acquirers of failed banks headquartered within
their respective regions of assignment. We do not believe it
reasonable or necessary to restrict bank stock ownership or
credit of an independent contractor who, for instance,
provides no more than lawn care services to the RTC.
This first action of the Board regarding ethical conduct
standards was merely instituting the "bare essentials.” Any
credit restrictions ultimately imposed on independent
contractors will depend upon the nature and extent of services
the contractor is performing for the RTC. We expect to
prohibit contractors from obtaining extensions of credit only
from persons or institutions with whom their duties may
require them to negotiate. We would not allow a contractor to
obtain a loan from an institution with which he or she is
negotiating the sale of an asset.
The RTC Board took further action on September 26 by adopting
an interim statement of principles of ethical conduct for
independent contractors.
(See Attachment F for a copy of the
statement.) The statement was developed in coordination with
a joint policy group on ethical standards established by the
RTC Oversight Board. While the principles set forth in the
statement are effective immediately, we invited public comment
before developing the proposed regulations which we plan to
publish in early November for a 60-day public comment period.
In general terms, the principles set forth in the interim
statement are designed to preclude contractors with the RTC
from:
o
Performing services for the RTC which could affect
their personal financial interests or the financial
interests of their spouses, minor children, or
persons or entities with whom they have business or
financial ties;
5
o
Profiting from both sides of a transaction by
performing services for the RTC in connection with a
particular matter and simultaneously representing
themselves or other parties to or before the RTC in
connection with that same matter or a substantially
related matter;
o
Using nonpublic information obtained while performing
services for the RTC to engage in private financial
transactions or to benefit members of their families
or persons or entities with whom they have business
or financial ties?
o
Using RTC property or the assets of institutions with
respect to which they are performing services for the
RTC for their personal use, or allowing the use of
such property or assets by members of their families
or persons or entities with whom they have business
or financial ties; and
o
Having the quality and integrity of their services to
the RTC clouded or impugned by their acceptance of
gifts favors, entertainment or other items of
monetary value from persons or entities whose
financial interests could be affected by the
performance or nonperformance of their duties and
responsibilities to the RTC under the terms of their
contracts.
It is not our intention at this time to prohibit independent
contractors who manage assets for the RTC in one part of the
country from purchasing RTC assets in other parts of the
country. We will require, however, that they establish and
enforce screening mechanisms satisfactory to the RTC. These
mechanisms must preclude the flow of nonpublic information
(e.g., the formulas and procedures by which the RTC
establishes reserve prices on assets) between independent
contractor employees who are performing services for the RTC
* and those who are attempting to purchase assets from the RTC.
Contractors have the right to be adequately and reasonably
compensated for any services they perform for the RTC. They
should not be allowed, however, to profit from both sides of a
transaction or otherwise conduct their activities in a manner
that discredits or causes a loss of confidence in the Federal
Government. Contractors who perform duties and
responsibilities ordinarily performed by Federal employees
should be expected to behave and to be held to similar
standards of conduct as Federal employees. Since the RTC is
charged with a public trust, it may expect that persons with
whom it contracts for services will provide those services not
only for adequate and reasonable compensation, but also for
the public benefit.
6
The RTC needs the experience and expertise of independent
contractors in performing its functions. Accordingly, it will
be necessary to strike a delicate balance between the
legitimate needs of the RTC for independent contractors and
the interests of the RTC, the Congress, and the American
public in protecting against unethical conduct and conflicts
of interest. We hope to achieve that balance in the final
regulations.
In summary, we are working in cooperation with the RTC
Oversight Board's ethics and conflicts of interest joint
policy group towards the publication in early November of
proposed regulations. We foresee no obstacles to having final
regulations in place by the February 5, 1990 statutory
deadline.
BRIBERY
The FDIC traditionally has relied upon three tiers of action
to guard against the possibility of any third party bribing an
FDIC official. The same courses of action will be followed by
the RTC.
The first tier is the threat of criminal prosecution and
incarceration for any FDIC official who may solicit or accept
an illegal bribe or gratuity. FDIC maintains a close
relationship with law enforcement authorities to deal with
such cases.
The second tier consists of internal FDIC controls, audits and
investigations. The FDIC Office of Inspector General conducts
a vigorous program of audit controls which are designed to
detect the presence of any potential bribery. Also, periodic
site visitations are conducted to ensure that financial and
management controls are effectively in place. These programs
supplement the standard operating procedure of checks,
balances and review in each office.
The third tier depends on those suspecting bribery to come
forward. If a debtor is approached for a bribe by an FDIC
official or if an FDIC official is approached to accept a
bribe, the unmasking of these acts will help establish a high
level of public intolerance for such activity and public
confidence that the offenders will be punished. The
importance of this third tier should not be minimized since
even the best systems to deter criminal activity are not fail
safe.
7
POLITICAL FAVORITISM AND UNDUE POLITICAL INFLUENCE
FIRREA requires that measures be taken to avoid political
favoritism and undue influence with respect to the activities
of the RTC. Working with the Oversight Board, the RTC plans
to develop specific written policies and procedures that will
draw upon current FDIC policies which also now govern RTC
activities. The written guidelines adopted specifically for
the RTC will delineate internal operating procedures and
methods for responding to both appropriate and inappropriate
inquiries.
The FDIC traditionally has conducted its operations
independent of undue political pressures. We have policies
that guard against such pressures. The policies allow us to
investigate and provide information with respect to an
inquiry, concern or complaint of those in political office.
They do not permit us to discuss the substance of pending
decisions with respect to specific actions nor alter or change
a decision, policy or procedure of the FDIC at the request of
any outside party.
The Mindependent” culture of the FDIC will carry over to the
RTC. That objective will be facilitated by placing FDIC
career employees in key RTC positions. By hiring through
competitive government procedures, hiring will be based on
merit not political connections.
RTC OPERATIONS AND RESOLUTIONS
The RTC is responsible for: the management and operation of
institutions in conservatorship? the resolution of closed
thrift institutions? and the management of funds — as those
funds are provided by the RTC Oversight Board — for
resolutions, liquidity and the replacement of high-cost
funds. Immediately following the enactment of FIRREA, the RTC
began the process of resolving the substantial inventory of
insolvent thrifts that had been placed in the conservatorship
program.
Conservatorship Program. A major component of the President's
plan was to place the worst institutions under government
control and reduce operating losses. As of September 30,
1989, 283 thrifts had been placed in the conservatorship
program. These institutions had gross combined total assets
of $112 billion and combined total liabilities of $124
billion. Based on limited asset reviews, we estimate that the
losses in these institutions total $35 billion, or about 31
percent of gross assets. (See Attachment G.)
8
Our reviews also show that the estimated loss rate, on
average, has declined for the more recent additions to the
conservatorship program. Those institutions placed in
conservatorship prior to March 31, 1989 have estimated losses
as a percent of gross assets of 36 percent as compared to 21
percent for those placed in the program after March 31, 1989.
High-Cost Funding. Savings and loans in the conservatorship
program are highly illiquid and prior to FIRREA were forced to
compete aggressively for funds in a rising interest rate
environment. As a result, despite aggressive liquidity
management by our conservators, rates on brokered deposits
increased by as much as 150 basis points in some sections of
the country.
The availability of low-cost funds has decreased significantly
the upward pressure conservatorship S&Ls were putting on
interest rates. As of September 30, with funding provided by
the Oversight Board, the RTC has made secured loans to 151
conservatorships in the amount of $8.1 billion. The loans
were made to replace high-cost sources of funding. These
high-cost funds were primarily Federal Home Loan Bank
advances, brokered deposits and secured borrowings. As a
result of this action, the savings to the RTC, and ultimately
to the taxpayers, is estimated to be $118 million on an
annualized basis.
The availability of this funding program has allowed
institutions in conservatorship to exit from the high-cost
funds market. When the program started, 25 of these
institutions were among the top 35 rate payers in the country
for 90 day CDs. As of September 18, one was in the top ten
and it is the only RTC institution in the top 35. This
reduction in interest rate market pressure should enable other
financial institutions to lower their rates.
Reports from the field indicate that this is a very successful
program. The managing agents can set rates that allow them to
be competitive with local healthy institutions and maintain
their core deposits. Previously forced to be market leaders
to obtain funds for day-to-day operations, they now can
control their rate structures and borrowings without being in
the broker markets, and they can rely on the RTC to provide
liquidity when needed. This has greatly simplified their
funding and allowed a return to rational pricing of deposits.
Moreover, these actions have produced a significant impact on
the cost of funds for all institutions that must compete for
money in the market. In particular, the cost of funds index
used by FSLIC in the Southwest Plan resolutions has been
reduced significantly.
9
Emergency Liquidity Advances. In addition to replacing
high-cost funds, the RTC also serves as "lender of last
resort" for S&Ls in conservatorship. As of September 30, the
RTC has provided $0.5 billion in emergency liquidity to 41
conservatorships that were unable to meet their daily
liquidity needs and continues to maintain a reserve of $0.9
billion for future emergencies.
Resolutions. As of September 30, the RTC had disbursed $1.8
billion to resolve 24 institutions. It is important to note
that the $1.8 billion outlay is not the measure of ultimate
cost to the RTC. The ultimate cost will be determined only
after deducting collections that are realized through the
liquidation of assets held by the RTC.
’p/enty of the 24 resolutions to date have been handled as
insured deposit transfers, whereby institutions pay a premium
to act as the RTC's paying agent for insured deposits. The
other four resolutions were handled as insured deposit
payoffs.
In addition to these transactions, the RTC has allocated $8
billion toward the resolution of five large institutions.
These five transactions will be structured as "clean"
purchase-and-assumption transactions in that the acquirer will
receive only good quality assets and cash from the RTC to
offset the assumption of deposits and other liabilities.
Originally we had planned to consummate these transactions by
the end of September. However, due to recent clarifications
in requirements for bidder eligibility and entrance and exit
fees, we felt that a short postponement would be fair in order
to ensure that no interested and eligible acquirers were
excluded from the bid process.
The bidders' meetings were completed yesterday. Bidder
interest in these five transactions is strong. We are highly
confident these transactions will be completed by next week.
We also briefly postponed five smaller insured deposit
transfers due to the clarification of bidder eligibility
requirements. These transactions will use up the balance of
the funds for resolutions.
In summary, the $20 billion has been allocated as follows:
Resolutions
Emergency liquidity
Replacement of high-cost funding
$10.1 billion
$1.4 billion
$8.5 billion
10
Bidding Procedures. Transactions consummated by the RTC to
date generally have been smaller institutions with deposits of
less than $500 million. These transactions were standardized
with bidders essentially bidding to become RTC's paying agent
for insured deposits. The RTC solicited names of prospective
bidders from the FDIC, Office of the Comptroller of the
Currency ("OCC"), Federal Reserve Board ("FRB") and Office of
Thrift Supervision ("OTS"). Generally, for these smaller
transactions, only financial institutions were solicited as
time frames were brief (generally 48 hours or less).
A press release dated September 27, 1989, outlined procedures
to be followed by the RTC in order to qualify interested
parties as acceptable bidders. As indicated in the release,
"...potential bidders must be deemed acceptable by the primary
federal regulator and holding company and state chartering
authorities if applicable." However, a bidder could be
disqualified by the RTC if it were unable to obtain an opinion
from the FDIC that the transaction "results in no undue risk
to the deposit insurance funds."
To implement the above procedures for the sale of the five
large thrifts, the RTC requested names of acceptable bidders
from the FDIC, OCC, FRB and OTS. As a result of the
solicitation, a number of additional prospective bidders were
contacted by overnight mail on September 28, 1989.
(See
Attachment H for copy of the mailing.)
PROJECTIONS
The 283 institutions in the conservatorship program represent
only a portion of the likely RTC caseload. The OTS is in the
process of completing a list of conservatorship-bound S&Ls.
We expect the official list shortly but, in the interim, are
projecting our workload based on available financial data. We
estimate that OTS may turn over another 300 thrifts to the
RTC. This would mean that, in total, the RTC may be required
to handle nearly 600 failures during the next three years with
combined assets exceeding $300 billion (book value). These
failures are widely disbursed geographically, with Texas
accounting for the heaviest concentration.
How these cases are resolved will determine the volume of
assets the RTC must manage. We estimate that only 40 to 45
percent of the assets will be sold to the acquirers of the
failed institutions. Thus, RTC may have to manage the sale of
as much as $180 billion in assets. The quality and
composition of these assets will determine the difficulty the
RTC will have disposing of them. While liquid assets can be
disposed of quickly and easily, distressed assets will require
significant marketing efforts. Keeping in mind the
11
questionable quality of a failing institution's financial
reports, we estimate that as much as $100 billion in
difficult, non-liquid assets may flow to the RTC.
We currently estimate about $16 billion would be in real
estate owned by thrifts (most of which is repossessed real
estate). This figure is likely to be low if, as is often the
case, real estate is the only source of repayment on
non-performing or poor-quality loans.
The projections discussed above raise questions about the
adequacy of the $50 billion in RTC funding. Possible RTC
losses are difficult to project because they are dependent
upon many factors such as the number of failed institutions
and their size, future interest rates, economic conditions and
demand for thrift assets, as well as institution-specific
factors such as ability to manage loans effectively. It is
possible that $50 billion will prove to be an insufficient
amount to deal with potential failures, but it is really much
too early to make a reliable new prediction of loss.
The Office of Thrift Supervision is in the best position to
identify which institutions are likely to be turned over to
the RTC and when. Even then, it is difficult to estimate
likely losses until the RTC has actually gone into these
institutions.
RTC FUNDING
Through the Treasury and the Resolution Funding Corporation,
the RTC will be provided with $50 billion to eliminate the
negative net worth in institutions that are currently
insolvent or will become insolvent within the next three
years. While $50 billion represents the current cost of
"filling the hole,” it does not represent the total cash or
working capital needs of the RTC. As mentioned earlier, the
RTC may have to acquire $100 billion in illiquid assets out of
failing S&Ls before they can be sold. The book value of these
assets will have to be paid by the RTC to acquirers of
insolvent S&Ls. Only after these assets are sold will the RTC
be able to replace a portion of those cash outlays.
In effect the RTC must buy, then collect, on these illiquid
assets. This ties up the RTC's cash very quickly. For
example, after the five transactions are concluded next week
we will have spent about $10 billion — 20 percent of the $50
billion — resolving institutions that account for only a
small portion of the S&Ls to be resolved. A sizable portion
of this $10 billion will be recovered, however, through
collections on the assets held by the RTC. The collection
process tends to be slow. Forced sales, dumping or overly
aggressive collection efforts will result in increased RTC
losses as well as severe disruption in already distressed
economies.
12
The RTC roust establish a working capital program or funding
entity to manage its working capital needs. This would ensure
that the RTC has enough cash for S&L resolutions without
triggering uneconomic asset disposition policies.
We want to make it clear that no working capital program will
enable the RTC to "fill a hole" deeper than the original $50
billion. If the resolution process reveals that $50 billion
is too low, additional funds will be required to make up the
difference. Working capital would simply allow the RTC to
quickly remove the unhealthy portion of the thrift industry
and allow time for the orderly disposition of assets.
We have had considerable discussion with officials from
Treasury, government agencies that issue securities and
investment banking firms about various working capital
alternatives. Any programs to raise working capital, of
course, would be limited by the debt limit imposed by FIRREA
and by the value of the underlying assets.
No final decisions have been made and we plan to confer with
Congress before initiating any major working capital
programs. No matter which approach we take, funding for RTC
will be very complicated. Our first step is to hire personnel
for RTC's funding operations. We expect to complete our
search efforts for an experienced Funding Director soon.
ASSET MANAGEMENT AND DISPOSITION
The long-term challenge facing the RTC will be properly
managing the billions of dollars of assets that come from the
resolution of failed thrifts and disposing of those assets in
a timely and efficient manner. This task includes maximizing
returns and assuring that low and moderate income individuals
and non-profit organizations are afforded the opportunity to
purchase eligible single- and multi-family housing. It also
requires procedures that maximize the use of private and
minority contractors.
Asset Disposition. A primary objective of the RTC is to
maximize the net present value of collections on assets it
controls while minimizing the impact of these transactions on
local real estate markets. FIRREA identified six states as
"distressed areas" which require adoption of special asset
disposition policies to protect the economies of these areas.
Other areas can be designated as "distressed" if warranted.
The legislation requires RTC to sell property in "distressed"
areas at 95 percent of market value or above. Selling
property below this threshold is permitted only to satisfy RTC
low income housing objectives or if the RTC's Board of
Directors approves lowering the threshold for appropriate
reasons. We have no present plans to lower that threshold.
13
We understand the concern expressed through the legislation
about the potential damage from "dumping” assets on a weakened
market. The RTC is fully prepared to meet the requirements in
the law to assure that market values are achieved for
properties sold and that the adverse economic impact of real
property sales is minimized. We do not "dump” property and
never have.
The Oversight Board is formulating policies to govern RTC with
respect to asset dispositions. Our policy, until a different
policy is developed, is to institute an orderly disposition of
assets at market values over time.
We do not believe that keeping property off the market — if
it can be sold at current appraised value -- would necessarily
have the effect of maintaining higher values in the market
place. In fact, holding properties off the market that can be
sold at today's values can be a destabilizing factor. The
cost of maintaining properties during a holding period must be
balanced against ultimate realization values to protect the
cost to the taxpayer.
In all geographic areas, including "distressed" areas, the RTC
will employ systematic and orderly marketing strategies basing
sale prices on current appraisals and other independent
sources of market information. These sources will include
brokers, market analysts and other Federal agencies. These
strategies will avoid techniques such as "absolute" property
auctions, which could be viewed as a mechanism to dispose of
assets at any price. FDIC's uniform appraisal instructions
are being revised to require consideration of sales with
typical term financing offered as opposed to a strict cash
sale basis.
Asset Disposition Decision Process. The asset disposition
decision-making process utilized by the RTC is based upon
Delegations of Authority approved by the RTC's Board of
Directors.
Credit decisions can cover a wide array of areas, but most
frequently consist of recommendations to sell real estate or
other assets at specified prices, make advances to protect
assets, or compromise and restructure loan agreements.
Recommendations for a particular action are originated by the
account officer or contractor managing the asset and presented
in a written credit case format to the individual or committee
authorized to approve the transaction.
The RTC will depend heavily upon the committee process to make
credit decisions. Major decisions will be made by credit
committees formed at the consolidated site and Regional
level. Cases involving complex legal issues and large-dollar
14 .assets generally will flow to RTC's Committee on Management
and Disposition of Assets — a senior level committee at RTC
headquarters in Washington, D.C. To allow for an orderly
workflow, various personnel with asset management expertise
throughout the organization also will have lesser levels of
individual delegated authority to approve routine
transactions.
An additional component of the RTC's asset management process
will include the preparation and approval of Asset Management
and Disposition Plans outlining strategies for disposition of
major assets acquired by the RTC. Adoption of Asset
Management and Disposition Plans will help insure that asset
negotiations and strategies employed by contractors and
in-house employees are consistent with the objectives of
FIRREA and RTC policy.
Real Property Asset Inventory. FIRREA requires the RTC to
publish, semiannually, an inventory of real property assets of
institutions subject to its jurisdiction. In particular, we
are required to clearly delineate those real property assets
that have "natural,” "cultural," "recreational," or
"scientific" values of special interest. The first such
inventory must be published before January 1, 1990.
Because of the large number of assets in the conservatorships
now under RTC control, meeting the year-end deadline is a real
challenge. We are presently analyzing our needs based on the
task at hand. We plan to contract out this function to the
private sector in the near future.
Low Income Housing. One of the primary missions of the RTC
under FIRREA is to maximize the preservation and availability
of affordable housing for moderate- and lower-income
families. To accomplish this objective the RTC will identify
eligible single-family and multi-family residential units and
provide non-profit organizations, public agencies and
lower-income families a right of first refusal to purchase
these properties.
For single-family dwellings, as eligible properties with clear
title are identified, written property listings will be
distributed to clearinghouses responsible for passing this
information on to eligible purchasers. Qualified purchasers
will have three months from the date of eligibility to make a
bona fide offer to purchase the property.
Qualified purchasers of multi-family residential units have 90
days after the RTC notifies clearinghouses (or until the RTC
determines the property is ready for sale, if earlier) to
provide notice of serious interest in purchasing the
property. Upon the RTC providing notice that the property is
15
ready for sale, any qualified purchaser who has expressed
serious interest has 45 days to make a bona fide offer to
purchase.
The RTC is in the process of setting up communication channels
with the Department of Housing and Urban Development^and other
officials to develop strategies to identify and qualify
purchasers for the program. We also are exploring the best
methods for assisting in sales financing and the utilization
of secondary market agencies to comply with the statutory
requirement of the program.
To make certain that the lower income housing programs are
properly carried out, the RTC has created key supervisory and
staff positions in each of its field offices to manage program
compliance. These managers will provide responsive execution
and communication between the field offices and the Washington
office, interact with the other agencies involved in the
program and provide direct management of sales activities at
the local level.
Private-Sector Contracting. FIRREA requires the RTC to
utilize private-sector resources — including asset management
firms, property management firms, leasing companies, brokerage
services, etc. — whenever practicable. We have concluded
that the use of private-sector resources, particularly in
managing and disposing of complex real estate assets, is both
practicable and efficient. Therefore, we have established a
goal to maximize the use of private contractors.
Several steps have been taken or are in process to achieve the
goals set forth above:
o
We are in the process of developing contracting
policies and procedures. Although not finalized, the
process will include a thorough
ethics/conflict-of-interest screening, a
qualification determination, competitive bidding,
negotiation, execution, and monitoring. The
Washington office will handle national contracts
while the regional offices will manage local
contracts under delegated authority.
o
Organizationally, we have established a senior
executive position in the Washington office to
establish contracting policies and procedures.
Similarly, we have provided for contracting
management specialists in both the regional offices
and consolidated field sites.
16
o
During the past several weeks, we have met or
communicated with hundreds of contractors to
discuss the types of services the RTC will need and
the policies and procedures under which contracting
will be implemented,
o
We plan to develop a computer data base on all
qualified contractors which can be used by RTC
field personnel to quickly identify potential
contractors by types of services performed and
geographical location.
LITIGATION AND LEGAL SERVICES
As a result of the conservatorships and receiverships set up
to date, the RTC has inherited approximately 35,000
matters in litigation.* The suits range from simple
collection and foreclosure actions to large complex commercial
litigation.
In order to hold down costs and avoid disruption in
conservatorships, the RTC has utilized, to the greatest extent
possible, the law firms retained by the thrifts prior to
conservatorship, provided there is no conflict of interest
with the RTC or the FDIC. Through the use of existing FDIC
regional legal operations, we have begun monitoring all of
these cases. The cases involving large dollar amounts
(usually $250,000 or more), high fee amounts ($5,000 or more
per month), or special issues, receive close supervision by
our in-house legal staff. Other cases are monitored on a
periodic basis by our Legal staff. All fee bills are reviewed
and are subject to approval by our legal personnel.
We already have begun to realize cost savings. Our initial
estimates indicate significantly reduced expenditures by these
thrifts on legal fees. Hard estimates are not yet available,
but it appears that these reductions may reach $50 million on
an annualized basis for existing caseloads. Through improved
monitoring, elimination of actions which are not cost
effective, and agressive movement of cases toward judgment or
settlement, it is anticipated that any poorly controlled
handling of litigation in these institutions will be brought
under control.
* In fact, with the assimilation of RTC's caseload and FSLIC
Resolution Fund matters, including the Southwest Plan cases,
the FDIC will be involved in approximately 60,000 legal cases
in addition to its caseload of approximately 13,000 that
existed on the day FIRREA was enacted.
17
^
Eventually the FDIC's Legal Division will provide full
in-house support to RTC in Washington and all the regional and
field offices. The Legal Division will supply some 80
employees in Washington and approximately 1,100 employees in
the field. Of these employees, approximately 500 will be
attorneys. Recruiting has begun at all levels and we
anticipate that by year-end some 200 attorneys will be in
place along with appropriate support staff. As the field
operations become fully staffed, the oversight of outside
counsel will become better controlled and additional savings
are anticipated.
Current estimates are that RTC expenditures for outside legal
fees and expenses may reach $125 million for 1990. The actual
expenditures, as well as the personnel estimates, will depend
on the rate at which we can move forward with in-house
staffing as well as the ultimate make-up of the caseload, the
number of thrifts handled by RTC and the extent of the assets
RTC has to liquidate.
The emphasis placed on outside contracting will apply to legal
services as well. In-house attorneys will conduct litigation
where practical and cost-effective. However, their primary
role will be to direct and control outside counsel in order to
provide the most effective and efficient blend of legal
services.
ACCOUNTING AND AUDITING
The RTC is subject to oversight, auditing and accountability
to an extent that probably is unprecedented in the history of
government. In addition to the audit policy guidance provided
by the Oversight Board, that Board also will be supported by
an internal analytical group assessing operations. In
addition, the RTC will have its own Inspector General
reporting jointly to the Oversight Board and the RTC Board of
Directors. Complementing the Inspector General will be the
FDIC's own Inspector General that will audit and investigate
as necessary the FDIC's provision of personnel and essential
services to the RTC.
The General Accounting Office will audit the RTC annually
either directly or through an accounting firm acting as its
agent. In addition, the GAO presumably will perform periodic
reviews and studies initiated by Members of Congress and/or
their Committees.
Finally, we anticipate the Congress will exercise strenuous
oversight of the RTC's operations — as already evidenced by
this hearing today and the creation of a special oversight
task force of the House Banking Committee. In fact, FIRREA
specifically mandates regularly scheduled appearances by the
18
RTC before this Committee. All in all, the readers and
•reviewers of audits will keep busy with the RTC.
MINORITIES AND WOMEN OUTREACH PROGRAM
FIRREA requires the RTC to establish an outreach program to
ensure that minorities and women are afforded an opportunity
to contract with the RTC on matters relating to asset
management, property management, legal services, etc.
We are working to implement this program as soon as possible.
A draft of RTC's program has been developed and is being
reviewed at this time. We anticipate the program will include
the following elements:
o
Policy Statement - a commitment to comply with the
spirit and intent of FIRREA's mandate
o
Goals and Objectives - to provide and enhance
opportunities for minority- and women-owned firms to
contract with RTC
o
Identification of qualified firms
o
Certification <■* to ensure that the firms are indeed
minority- or women-owned firms
o
Qualification - to ensure that the minority- or
women-owned firms have sufficient qualified staff and
other resources to render the services
o
Promotion - to communicate to minority- and
women-owned firms RTC's commitment to contract with
such firms
o
Execution and Monitoring
REVIEW OF 1988 FSLIC AGREEMENTS
The RTC is required under FIRREA to estimate the cost to the
Government of the 1988 FSLIC resolutions and, to the extent
possible, find methods of reducing those costs. The review
will cover 94 agreements involving $110 billion in assets. It
will increase efficiency if the review is accomplished as
promptly as possible. Our goal is to complete the review
within one year.
We are recommending that most of the work be contracted out to
private firms, which will coordinate closely with a small
group of in-house staff. The use of private-sector analysts
will help to ensure a credible and impartial review.
19
A preliminary look leads us to believe there may be ways of
reducing costs. Some agreements provide guaranteed spreads
and capital loss coverage on a large volume of problem
assets. In many cases it may be feasible to prepay FSLIC
notes or buy back or force the writedown of problem assets.
This would reduce the Treasury's carrying cost and could
improve collection incentives and performance. We hope to
work with Treasury in exploring funding options that are
consistent with the legislation.
LIQUIDATION OF FADA
FIRREA requires liquidation of the Federal Asset Disposition
Association ("FADA”) by the RTC within 180 days of enactment.
Two alternative approaches are being considered: (1) The sale
of the FADA organization or (2) the dissolution of FADA and
the taking of its resources by the FDIC.
We will first attempt to sell the FADA organization. This
approach would entail selling just the FADA structure. FADA's
name, charter, capital stock and liquid assets would not be
for sale. Furthermore, existing asset management contracts
(or any guarantee for future contracts) would not be for
sale. Any contingent liabilities resulting from FSLIC's
indemnities with the FADA, its Board of Directors and its
Officers would remain with the FSLIC Resolution Fund.
If we cannot sell FADA, the RTC will dissolve FADA and sell or
use its assets. Asset-management duties would be transferred
to the FDIC and FADA employees would be offered positions with
the FDIC at government pay scales. The next step would be to
sell, utilizing a competitive sale process, those of FADA's
furniture, fixtures and similar assets that are not needed by
the FSLIC resolution fund. This transition would occur during
November and December and the asset sales would be during
January.
CONCLUSION
In conclusion, we believe we have made a good start. We are
working under established FDIC policies while implementing,
with the Oversight Board, new policies to guide our future
work. We know that much remains to be done. The bulk of our
work lies ahead.
Attachment
RESOLUTION TRUST CORPORATION
WASHINGTON, D.C.
RTCMJM09
A
RESOLUTION TRUST CORPORATION
WASHINGTON, D.C.
ÜTCMMI* * /M /M
RESOLUTION TRUST CORPORATION
WASHINGTON, O.C.
rtcsumi«
irts m
RESOLUTION TRUST CORPORATION
WASHINGTON, D.C.
Attachment
Attachment
RESOLUTION TRUST CORPORATION
RTCSUM 02 «/2«/M
C
RESOLUTION TRUST CORPORATION
ATLANTA REGIONAL OFFICE
RTCM M OC
RESOLUTION TRUST CORPORATION
DALLAS REGIONAL OFFICE
RTCW M 10 •/**/•*
RESOLUTION TRUST CORPORATION
DENVER REGIONAL OFFICE
RTCSUM11 t/!*/•»
RESOLUTION TRUST CORPORATION
KANSAS CITY REGIONAL OFFICE
ftTCMMO* */>•/•«
Attachment
D
RTC Consolidated Sites
East Region
Bayou Consolidated Office - Baton Rouge, Louisiana
Northeast Consolidated Office - Philadelphia, Pennsylvania
Southeast Consolidated Office - Tampa, Florida
Mid-Atlantic Consolidated Office - Atlanta, Georgia
Central Region
Mid-Central Consolidated Office - Kansas City, Missouri
North Central Consolidated Office - Burnsville, Minnesota
Lake Central Consolidated Office - Schaumburg, Illinois
Southwest Region
Metroplex Consolidated Office - Dallas, Texas
Gulf Coast Consolidated Office - Houston, Texas
Southern Consolidated Office - San Antonio, Texas
West Region
Intermountain Consolidated Office - Denver, Colorado
Central Western Consolidated Office - Phoenix, Arizona
Coastal Consolidated Office - Costa Mesa, California
Attachment
RESOLUTION
BE IT RESOLVED that the attached document represents the
General Operating Policies hereby adopted by the Resolution
Trust Corporation on an interim basis.
These General
Policies summarize the major existing resolution
policies of the Federal Deposit Insurance Corporation.
The
adoption of these General Operating Policies is consistent
^*e actions taken by the Oversight Board in its meeting
today.
E
FDIC Resolution Policies
This document summarizes the major resolution policies
of the Federal Deposit Insurance Corporation.
The FDIC's primary goal is to resolve insolvent
institutions in a manner that minimizes the long-term cost
to the government.
FDIC will strive to ensure that
restructured institutions are adequately capitalized and
veil managed and do not impose unacceptable risks on the
deposit insurer.
Another major goal of the FDIC is to maximize the
recovery on failed institutions' assets while utilizing the
private sector as much as possible.
GENERAL OPERATING POLICIES
Treatment of Potential Acquirers
♦Potential bidders and the general public will be kept
fully informed regarding the ground rules of the resolution
process and the structure and parameters of completed
transactions.
♦In most cases, insolvent institutions will be resolved
subject to a competitive bidding process.
♦Qualified bids by entities other than depository
institutions vill receive no more and no less favorable
treatment than bids by bank or acquirers,
♦Offers vill be accepted that do not include the
management of problem assets; acquirers vill be regarded as
one among many potential asset managers.
The FDIC vill
retain the flexibility to dispose of assets separately.
♦In general, transactions vill not include yield
maintenance arrangements that guarantee a built-in spread on
selected assets.
Capitalization of Restructured Institutions
♦Acquirers of restructured institutions vill be expected
to fully capitalize the institution at levels consistent
with those required for national banks.
♦Capitalization typically vill not be required for problem
assets retained by the FDIC and managed by the acquirer
under appropriate incentive arrangements.
♦Generally, the FDIC vill avoid taking ownership interests
in institutions resulting from assistance transactions.
forbearances
♦The FDIC will avoid granting any forbearances from
federal lavs or supervisory requirements; nor will it
authorize any powers or rights denied to federally chartered
institutions.
The FDIC may use Its powers to grant
forbearances from state lavs that interfere with the cost
effective end efficient resolution of insolvent
institutions.
TRANSACTIONS
Preference for Market-Determined Consolidations
♦The FDIC generally does not pursue administratively
imposed consolidations of geographically proximate
institutions.
♦Offering institutions in the same area for sale at the
same time is a market-based approach to consolidations can
be considered.
Solicitation of Bids
♦Wherever appropriate, potential acquirers will bid for
standardized "clean-institution" or '’whole-institution"
z
packages.
♦In some cases, especially for larger or more complex
institutions, a customized package will be designed and put
out for bid.
♦The FDIC will delegate the handling of many smaller
institutions to regional offices.
Asset Reviews
*In appropriate cases, the FDIC will attempt to provide
bidders with the results of asset reviews performed by a
third party.
The FDIC will retain the flexibility to pursue
approaches on a case-by-case basis.
Asset Puts
*Where acquirers retain assets of questionable quality,
the FDIC will generally provide some form of asset
protection, such as post-transaction markdowns or putbacks
for a limited time-period.
The FDIC will consider the
possibility of providing short-term protection against market
fluctuations on long-term, fixed-rate assets to facilitate
portfolio restructuring.
Transaction Structure
*In each case, FDIC will evaluate the feasibility of
successfully arranging a ••whole-institution« solution where
substantially all assets pass to the acquirer.
Whole
institution transactions will not be pursued where they
appear impractical due to lack of market interest, would
result in unreasonable delays in the resolution process, or
where the volume of problem assets is unduly large relative
to the acquirer's capital account or ability to manage.
Attachm ent
RESOLUTION TRUST CORPORATION
Interim Statement of
Principles of Ethical Conduct for Independent Contractors
to the Resolution Trust Corporation
AGENCY:
Resolution Trust Corporation (RTC).
ACTION:
Adoption of interim statement and request for comments.
SUMMARY:
The RTC hereby adopts an interim statement prescribing the
minimum standards of ethical conduct to which it expects persons or
entities with which it contracts for services to adhere and, since the
minimum standards are likely to be incorporated into any final
conflict-of-interest rules and regulations applicable to independent
contractors which the RTC promulgates, invites comments on the
appropriateness of these standards to the activities of independent
contractors.
DATE:
The standards set forth in the interim statement are
effective immediately.
Comments on the standards should be submitted
no later than October 31, 1989.
F
2
ADDRESS:
All c o n e n t s should be submitted to John M. Buckley, Jr.,
Executive Secretary, Resolution Trust Corporation, 550 - 17th Street,
N.W., Washington, D.C. 20429.
Comments may be hand-delivered to Room
6097 between 8:30 a.m. and 5:00 p.m. on business days.
Comments may
also be inspected in Room 6097 between 8:30 a.m. and 5:00 p.m. on
business days.
(Fax number:
(202) 347-2773 or 2775).
FOR FURTHER INFORMATION CONTACT:
Katherine A. Corigliano, Ethics
Program Manager, Federal Deposit Insurance Corporation, 550 - 17th
Street, N . V . , Washington, D.C. 20429, telephone (202) 898-7272.
SUPPLEMENTARY INFORMATION:
The RTC was established by section
2lA(b) of the Federal Home Loan Bank Act, as added by section 501 of
the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, and its purposes are (1) to manage and resolve all cases
involving depository institutions (a) the accounts of which were
previously insured by the Federal Savings and Loan Insurance
Corporation and (b) for which a conservator or receiver was or is
appointed during the period beginning on January 1, 1989 and ending on
August 9, 1992; and, in so doing, (2) to sell or otherwise dispose of
such institutions or the assets of such institutions with due
consideration to the objectives, among others, of maximizing the net
present value return from the sale or other disposition of such
institutions or assets, making efficient use cf funds provided by the
Federal Government (i.e., the American taxpayer) for the resolution of
cases, and minimizing any loss to the Federal Government in the
resolution of cases.
3
Section 2lA(b)(11)(A)(ii) of the Federal Home Loan Eank Act
directs the RTC, in carrying out its duties, to use the services of
private persons (including real estate and loan portfolio asset
management, property management, auction marketing, and brokerage
services) if such services are available in the private sector and the
RTC determines use of such services is practicable and efficient.
Section 2lA(p)(6) of the Federal Home Loan Bank Act prohibits
the RTC from engaging independent contractors to perform services on
its behalf, and contractors in turn may not retain subcontractors or
assign any of their employees to perform services on behalf of the
RTC, vho--
(1) do not meet the minimum standards of competence,
experience, integrity, and fitness to be established by the
RTC Oversight Board; and
(2) have (A) been convicted of a felony;
(B) been
removed from, or prohibited from participating in the affairs
of, any insured depository institution pursuant to any final
enforcement action by any Federal banking agency; (C)
demonstrated a pattern or practice of defalcation regarding
obligations to insured depository institutions; or (D) caused
a substantial loss to the Federal deposit insurance funds.
Other relevant provisions of the Federal Home Loan Bank Act
require persons seeking contracts with the RTC-
4
-- to include in their offers, in addition to such other
information as the RTC Oversight Board may prescribe by regulation, a
list and description of any instance during the preceding five years
in which the person or company under such person's control defaulted
on a material obligation to any insured depository institution; and
-- to agree that no person will be employed, directly or
indirectly, under any contract with the RTC unless a list and
description of any instance during the preceding five years in which
the person defaulted on a material obligation to any insured
depository institution, and such other information as the RTC
Oversight Board may prescribe by regulation, is submitted to the RTC
and the RTC does not disapprove of the direct or indirect employment
of such person.
Further, section 2lA(p)(3) of the Federal Home Loan Bank Act
requires the RTC, not later than 180 days from the date of enactment
of that section, to promulgate rules and regulations applicable to
independent contractors governing conflicts of interest, ethical
responsibilities, and the use of confidential information consistent
with the goals and purposes of titles 18 and 41 of the United States
C ode.
5
Recognizing that the important work of the RTC must commence
immediately and that the prior notice, public participation, and
delayed effective date provisions of the Administrative Procedure Act
will delay the promulgation of final rules and regulations for several
months, the Board of Directors (the "Board") of the RTC considers it
imperative that individuals or entities with whom the RTC contracts
for services understand immediately and acknowledge that the Board
will not tolerate or condone behavior or actions on their part or on
the part of their employees assigned to perform functions on behalf of
the RTC (hereinafter collectively referred to as "RTC contractors")
which evidence self-dealing or political or other favoritism.
Further, the Board expects RTC contractors to perform their duties and
responsibilities to the RTC with the highest degree of honesty and
integrity, so as to maintain public confidence in the RTC.
Actions on
the part of RTC contractors which result in or create the appearance
of a conflict of interest or which suggest political or other
favoritism may result in the termination of contracts.
In any case
where any such action indicates a possible violation of Federal
criminal conflict-of-interest or other applicable criminal statutes,
such as making false or fraudulent statements in a Government matter,
the matter will be referred immediately to the Department of Justice
for investigation and prosecution.
6
Pending the promulgation of final rules and regulations
implementing the provisions of section 2lA(p)(3) of the Federal Home
Loan Bank Act, RTC contractors are expected by the Board to conduct
their activities in an exemplary manner and to adhere, at a minimum,
to the following:
INTERIM STATEMENT OF PRINCIPLES OF ETHICAL CONDUCT FOR INDEPENDENT
CONTRACTORS TO THE RESOLUTION TRUST CORPORATION
1.
RTC contractors will NOT hold financial interests that
conflict with the conscientious performance of duty.
Before being
engaged by the RTC, contractors will be required, under appropriate
circumstances, to make disclosures relative to their employment and
financial interests and those of their spouses, their minor children,
and others with whom they may have business or financial ties.
The
information required to be disclosed in any given case shall be
limited to that which is reasonably necessary to allow the RTC to
determine that no conflicts or potential conflicts of interest exist
with respect to the services proposed to be performed for the RTC and
shall also include certifications to the effect that the contractor
meets minimum standards of competence, experience, integrity, and
fitness and is not otherwise ineligible to be engaged by the RTC.
7
2.
RTC contractors vill NOT participate in any matter in
which they, their spouses, their minor children, persons or
organizations with whoa they have business or financial ties, or
persons or organizations with whoa they are negotiating or have an
arrangement for future employment have a financial interest, unless
the Contractor Conflicts Committee, to be formed for the purpose of
reviewing such conflicts-of-interest issues, determines that the
relationship or financial interest is not so significant as to warrant
disqualification from participation in the matter.
3.
RTC contractors will protect and conserve RTC property
and will not use it or allow its use for other than authorized
activities.
They will not, for example, use or allow the use of
property or assets of a savings association in conservatorship or
receivership or of property otherwise held by the RTC (e.g.,
automobiles, furniture and equipment, or objets d'art) for their
personal use or for the use of other firm members, family members,
personal friends, or persons with whom they have business or financial
t ies.
4.
RTC contractors will NOT directly or indirectly acquire
or assist another person or organization in acquiring an interest in
any institution or the assets or property of any institution in
conservatorship or receivership with respect to which they are
rendering or have rendered services to the RTC.
8
5.
RTC contractors will NOT allow the unauthorized use of
non-public information obtained
as a result of rendering services to
the RTC and shall take all reasonable measures to avoid unintentional
or inadvertent disclosure of such information both within and outside
the contracting organization.
All information obtained by a
contractor as a result of rendering services to the RTC will be
treated as non-public information unless its disclosure is
specifically authorized in writing by the RTC or unless it becomes
part of the body of public information from a source other than the
contractor.
6.
RTC contractors will NOT engage in financial
transactions using non-public information from RTC or allow the
improper use of such information to further any private interest.
7.
During the term of their engagement, RTC contractors
will NOT offer to any RTC employee any gifts or other items of
monetary value (e.g., food, refreshments, and entertainment; "green"
fees; boating excursions; 'and tickets to theatrical, sporting, social,
or charitable events).
9
8.
During the term of their engagement, RTC contractors
will NOT solicit or accept for themselves or for others gifts or other
items of monetary value from any person or entity who, to the
knowledge of each contractor, is seeking official action from the RTC
in connection with the contract under which services are being
rendered to the RTC or has interests which may be substantially
affected by the performance or nonperformance of the contractors'
duties to the RTC.
They will not, for example, solicit or accept
gifts or other items of monetary value from--
(a) directors, trustees, officers, or employees of, or
suppliers of goods and services to, any savings
association in conservatorship or receivership with
respect to which they are rendering services to the
RTC;
(b) debtors to or creditors of any savings association
in conservatorship or receivership with respect to
which they, are rendering services to the RTC;
(c) potential acquirers of failing or failed savings
associations or of the assets of such associations with
respect to which they are rendering services to the
RTC;
(d) persons or entities, and their representatives, in
litigation with the RTC in connection with matters
with respect to which they are rendering services to
the RTC;
(e) contractors or subcontractors to, or persons or
entities seeking contracts with, the RTC.
9.
RTC contractors will make no unauthorized commitments
or promises of any kind purporting to bind the RTC.
10.
RTC contractors will act impartially and not give
preferential treatment to any private organization or individual in
the performance of their duties and responsibilities under their terms
of their contracts.
Firms or individuals with an interest in obtaining an
RTC contract or who are negotiating the terms of an RTC contract will
NOT make an offer of employment to any RTC employee who is personally
and substantially involved in the negotiation of the contract.
11
12.
RTC contractors will endeavor to avoid any actions
which could create the appearance that they are violating the ethical
principles and standards stated herein or any laws related thereto and
will agree to monitor compliance with such standards and laws by any
subcontractors they retain or any of their employees they assign to
perform services on behalf of the RTC.
13.
RTC contractors will NOT subcontract with anyone who
would not otherwise be eligible to contract with the RTC directly.
14.
RTC contractors will certify that they are in
compliance with these principles.
Other Considerations for RTC Contractors
Persons or entities seeking contractual relationships with the
RTC are reminded that, pursuant to section 21A(p)(l)(B) of the Federal
Home Loan Bank Act, ". . : [a]ny individual who, pursuant to a
contract or any other agreement, acts for or on behalf of the [RTC]
shall be deemed to be a public official for the purposes of section
201 of title 18, United States Code."
That statute imposes criminal
sanctions against public officials (and, consequently, against
contractors to the RTC) who accept bribes in connection with the
performance of their official duties.
Attachment
G
RTC CONTROLLED S&L’S
ASSET & LOSS PROFILE
AS OF SEPTEMBER 25,1989
(IN MILLIONS)
NO.
ms
IBAMA
KONA
KANSAS
JlFORNIA
[ORADO
pRIDA
DR3IA
ÎNOIS
JJS A S
JUISANA
[
JSISSIPPI
ISOÜRI
EBRASKA
W M EXIC O
JN N E S S E E
EXAS
WER S T A T E S
•r
5
5
12
22 _
12
14
6
19
14
28
6
6
5
5
5
83
36
•ORIGINAL
G RO SS
ASSETS
1,520
10,504
8,807
22,216
2.610
5,379
1,495
3,112
4,348
3.159
1,070
2,272
1303
1,676
517
35.794
21,196
••CURRENT
GROSS
a ssets
/
t
1,255
10,200
3,335
19,081
2.432,
4,922 *
1,381
2,854
4,184
3,095
1,048
2,097
1,418
1,601
486
32,166
20,099
$ CHANGE
GROSS
ASSETS
(265)
(303)
(472)
(3,135)
(178)
(457)
(114)
(258)
(164)
(64)
(22)
(175)
(86)
(75)
(31)
(3,608)
(1,098)
% CHANGE CURRENT
TOTAL
GROSS
LO SS
ASSETS
229
-17.42%
2,552
-2.89%
1,625
-12.40%
2.822
-14.11%
656
-6.83%
1,277
-8.50%
242
-7.61%
547
-8.29%
1,326
-3.77%
1,350
-2.04%
246
-2.06%
540
-7.72%
380
-5.69%
075
-4.46%
103
-5.97%
16,345
-10.08%
3,079
-5.18%
CURRENT
TOTAL LOSS/
GROSS ASSETS 18.28%
25.02%
48.71%
14.79%
35.20%
25.94%
17.51%
19.17%
31.74%
43.62%
23.50%
25.77%
26.77%
60.93%
21.12%
50.78%
15.32%
283
122,179
111,673
(10,506)
-8.60%
34,496
30.89%
pNSERVATORSHIP
C1-B9TO 3-31-89
JD1-89TO 6-30-89
PTER 6-30-89
177
57
49
83,352
26.794
12,032
74,930
24,775
11,968
(8,422)
(2,019)
(65)
-10.10%
-7.53%
-0.54%
26,738
5,317
2,440
35.68%
21.46%
20.39%
jjTALS
283
122,170
111,673
(10,506)
-8.60%
34,496
30.89%
79
67
87
50
22,630
21,086
-36,656
41,807
21.075
19,502
33,026
38.069
(1,555)
(1,5B4)
(3,629)
(3,73B)
-6.87%
-7.51%
-9.90%
-8.94%
4,316
5,921
16,584
7,674
20.46%
30.35%
50.22%
20.16%
283
122,179
111,673
(10,506)
-8.60%
34,496
30.89%
600 M ILLION
> 600 M ILLION
232
28,963
93.216
26,951
84,722
(2,012)
(8,494)
-6.95%
-9.11%
11,318
23,178
42.00%
rCTALS
283
122,179
111,673
(10,506)
-8.60%
34,496
30.89%
ITCREGIONS
ASTERN
pNTRAL
SOUTHWEST
We s t e r n
TOTALS
fesETSITE
INCLUDES *63 ACTIVE AND SO RESOLVED CASES
ORIQINAL GROSS ASSETS BASED O N M ONTH IMMEDIATELY PRIOR TO CONSERVATOR6HIP
URRENT GROSS ASSETS BASED ON MOST RECEN T FINANCIAL REPORTS AVAILABLE
Attachment
H
Resolution Trust Corporation
September 28, 1989
Dear Prospective Bidder:
During the week of September 10, 1989, the RTC notified you [certain
parties] that it was beginning the resolution process for ten large
savings associations. Included among the group of early resolutions
were the following five savings associations:
o
o
o
o
Freedom Savings and Loan Association, Tampa, Florida
Hill Financial Savings Association, Red Hill, Pennsylvania
Pacific Savings Bank, Costa Mesa, California
Peoples Heritage Savings, A Federal Savings and Loan
Association, Salina, Kansas
o University Federal Savings Association, Houston, Texas
The RTC's expedited case resolution process for these five
institutions included the goal of consummation of transactions for as
many of the five as possible over the September 30 weekend. The RTC
Board of Directors on September 27, adopted capital requirements for
newly formed state chartered nonmember banks and thrifts created as a
result of RTC transactions, postponed the acceptance of bids due that
day and reopened marketing to qualified bidders on the above five
savings associations.
In addition to reopening marketing, the RTC Board of Directors
directed its staff to notify all prospective bidders of the new
policies as outlined in the enclosed press release. As indicated,
the capital requirements for each financial institution interested in
bidding on RTC's savings institutions are the domain of the primary
Federal and State regulatory authorities. Each prospective bidder
* should discuss its capital plans with its respective primary Federal
and State regulator and the FDIC if the transactions contemplate
newly chartered thrifts or state nonmember banks requiring deposit
insurance.
550 17th Street, NWi Washington, DC 20429
If you or your institution wish to pursue an assisted acquisition of
any of the five institutions named herein, complete one copy of the
enclosed Confidentiality Agreement for each institution you wish to
pursue. Unless previously sent, please return it/them to the "Express
Mail” address or by using the facsimile (FAX) numbers given below.
If faxed, Confidentiality Agreements with original signatures should
be mailed subsequently to the regular mail address, also below. In
any case, we ask your assistance by completing the enclosed "Investor
Interest Form” and returning it by FAX to the RTC.
On Tuesday, October 3, the RTC will meet with all prospective bidders
who have returned completed Confidentiality Agreements in the past,
or as a result of this communication. The meeting is scheduled to
begin at 11:00 AM and will be held in the Amphitheater (Basement
Level) of the RTC Building located at 801 17th Street, NW. Packages
containing information about the institutions and draft assistance
agreements will be provided to all parties returning Confidentiality
Agreements whom are deemed pre-qualified. In the case of individuals,
investor groups, non-depository institutions or corporations RTC will
make a preliminary judgement on qualifications subject to subsequent
concurrence by the chartering and insurance authorities.
If you have any questions, please contact J. Richard Earle at (202)
416-4316.
Sincerely,
Sherwin R. Koopmans
Deputy Director, Resolutions
Enclosures
"Express Mail or Courier”
Resolution Trust Corporation
.
‘Attention: RTC Marketing List
J. Richard Earle
801 17th Street, NW (4th Floor)
Washington, D.C. 20006
FAX Numbers:
"Regular Mail”
Resolution Trust Corporation
Attention: RTC Marketing List
J. Richard Earle
550 17th Street, NW
Washington, D.C. 20429
202-898-1850
202-898-1851
202-898-1852
INVESTOR INTEREST FORM
Name of Bidder:_____________________________________ __ ___________
Contact Person:__________________________________ _________________
Telephone Number : _______________________ _______________________ —
We are interested/remain interested in pursuing an assisted
acquisition of (please check all that apply):
________ Freedom Savings and Loan Association
________ Hill Financial Savings Association
________ Pacific Savings Bank
________ Peoples Heritage Savings, A Federal Savings and Loan
Association
________ University Federal Savings Association
We wish to perform due diligence/additional due diligence at:
________ Freedom Savings and Loan Association
________ Hill Financial Savings Association
________ Pacific Savings Bank
________ Peoples Heritage Savings, A Federal Savings and Loan
Association
________ University Federal Savings Association
We are not interested in any of the five institutions (please
check _______ )
Please return by FAX by October 2 to 202—898—1850, 202—898—1851, or
202-898-1852.
CONFIDENTIALITY AGREEMENT
Agreement of Potential Acquiror
The undersigned hereby acknowledges that it desires to receive an
information package and may conduct due diligence review of
_________ _______________________, (Name of Insured Institution)
(City)
(State)
(the "Insured Institution"), in order to evaluate a possible
acquisition of the Insured Institution by the undersigned in its
own right and not as an agent, representative or broker for or on
behalf of an undisclosed party or parties.
Upon receipt of any financial or operational information
regarding the above referenced institution, the undersigned *
hereby acknowledges and agrees to be bound by the restrictions
set forth herein:
1.
On-Premises Review and Reproduction of Documents.
All documents and other items made available to the undersigned
by the Insured Institution, the Resolution Trust Corporation
("RTC") as conservator of the Insured Institution or the Federal
Deposit Insurance Corporation (the "FDIC") as managing agent for
the conservator, other than those in the information package, may
only be reviewed by the undersigned on the Insured Institution's
premises.
No reproductions of such documents, other than
handwritten summaries or notes and self-generated computer
records, may be made by the undersigned.
2.
Information Package
The RTC or FDIC may provide an information package containing
operational or financial information about the insured
institution.
The undersigned agrees that such information
package is the property of RTC and is not to be used for any
purpose other than to assist the undersigned in the proposal
process.
The information package may be disseminated to
employees, organizations, and other persons associated with the
undersigned engaged to assist the undersigned in the proposal
process.
However, prior to dissemination the undersigned agrees
and affirmatively covenants to make the provisions of this
agreement known to any person, organization and employee and to
obtain from such the commitment to maintain the confidentiality
of the information package in accordance with the terms of this
agreement•
3.
Briefing and Disclosure Requirement.
At any time after 30 days have passed since the completion of any
review and on request of the FDIC or RTC, the undersigned will
make available to FDIC or RTC at a reasonable time and in a
reasonable manner the persons who conducted any review for the
purpose of briefing FDIC or RTC, which briefing may include
discussion and disclosure of any data, charts, graphs, summaries,
memoranda or conclusions drawn from or based upon the documents
made available to the undersigned (any information of any kind
provided by the undersigned, whether orally or in writing, is
herein called the "Undersigned's Information").
Such briefing
will be used by FDIC or RTC for internal informational purposes
only.
The undersigned shall not in any event be required to
disclose or make available opinions, privileged communications,
or information relating to the internal bidding policies,
guidelines or decisions of the undersigned.
4.
Destruction of Documents and Information.
The undersigned further hereby acknowledges and agrees that all
the documents and information provided to the undersigned
including the information package, all memoranda, notes, computer
records and other writings prepared by the undersigned based on
the information in these documents and copies made of any of the
foregoing will be destroyed by the undersigned if it is
determined that no proposal is to be made by the undersigned, or
if any proposal submitted by the undersigned is not accepted with
respect to the Insured Institution.
On request of the FDIC or
RTC, such destruction shall be certified in writing to the FDIC
or RTC by an authorized officer of the undersigned.
5.
Restriction on Use of Documents and Information/Exceptions.
The undersigned also hereby acknowledges and agrees that the
documents and information referred to herein made available and
any other material related to this potential acquisition provided
by the Insured Institution, RTC or the FDIC to the undersigned,
are to be used in its decision to make a bid and for no other
purposes, that the information contained therein will be kept
confidential and disclosed only to the partners, directors,
officers, agents, advisors and employees of the undersigned who
are working on, or consulted in connection with, the proposed
acquisition, that all such persons to whom such information is
disclosed shall be advised of the restrictions contained herein,
and that it shall undertake all necessary steps to ensure that
these restrictions are followed.
apply to information
Such restrictions shall not
which (i) is already in the undersigned’s
possession, provided that such information is not known by the
undersigned to be subject to another confidentiality agreement
with or other obligation of secrecy to the FDIC, RTC or another
party, or (ii) is or becomes generally available to the public
other than as a result of: a disclosure by the undersigned or its
partners, directors, officers, employees, shareholders, co
investors, agents, representatives or advisors, or (iii) becomes
available to the undersigned on a non-confidential basis from a
source other than the FDIC or RTC, provided that such source is
not known by the undersigned to be bound by a confidentiality
agreement with or other obligation of secrecy to the FDIC, RTC or
another party.
If, in the opinion of the undersigned’s counsel,
any disclosure otherwise prohibited by this paragraph is required
by law or court order, the undersigned shall, prior to any such
disclosure, advise and consult with the FDIC and RTC and their
counsel concerning the reasons for, and nature of, the proposed
disclosures.
6.
No Warranties or Representations.
The undersigned hereby acknowledges and agrees that the FDIC and
RTC make no representations or warranties, express, implied or
otherwise, as to the accuracy or completeness of any documents
made available to the undersigned whether such documents have
been prepared by the FDIC, RTC or the Insured Institution or any
other party.
The undersigned further hereby acknowledges and agrees that it
shall not rely nor allow or advise any other party to rely
through the undersigned, upon the work product, memoranda,
statements, opinions, representations, factual or historical
summaries or disclosures of any kind of any employee, accountant,
officer, attorney, agent, representative or advisor, made known
to it by the FDIC or RTC, whether through discussions with any
such person or through review of any FDIC, RTC or Insured
Institution’s files, pleadings or documents, whether supplied by
the FDIC, RTC or another party.
7.
Disclosure of Affiliations»
The undersigned agrees that should it submit a proposal to
acquire the Insured Institution, the undersigned will disclose
all affiliations which the undersigned, an affiliate, subsidiary,
employee or agent of the undersigned has, or in the past five
years had, with the Insured Institution.
For the purposes of
this paragraph, affiliation shall include, but not necessarily be
limited to situations where the undersigned:
a)
Holds or held an equity interest in the Insured
Institution?
b)
Has or had an indebtedness, line of credit or loan
commitment, including letters of credit?
c)
Is or was employed or acted as agent, broker or advisor
to the Insured Institution or any other similar
arrangement.
The undersigned agrees to.submit such information, in writing, as
part of its proposal to acquire the Insured Institution.
Federal Deposit Insurance Corporation
Jo in t News Release
Resolution Trust Corporation_____________
FOR IMMEDIATE RELEASE
PR-188-89 (9-27-89)
CAPITAL REQUIREMENTS ADOPTED FOR FAILED THRIFT RESOLUTIONS
The Boards c f Directors o f the Federil Deposit Insurance Corporation (FDIC)
end the Resolution Trust Corporation (RTC) today adopted a p o licy defining the
procedures that w ill be used to q u a lify financial In stitu tio n s Interested In bidding
on RTC's savings In stitu tio n s.
In addition, the FDIC adopted capital requirements
fo r newly-formed state-chartered nonmember banks and t h r if t s created as a result
c f RTC t r a n s a c t i o n s .
At
th e
of
b id s
1n
b id d in g
same
on f i v e
to
tim e ,
the
RTC
In s titu tio n s
e va lu a te
th is
announced t h a t
to d a y 's
has been delayed to
d e a d lin e
p e rm it e l l
new ly adopted p o l i c y .
fo r
submission
p a rtie s
In te re s te d
The RTC plans
to meet w ith
I n t e r e s t e d b id d e rs on O c tober 3 .
The p o l i c y f o l l o w s :
In o r d e r t o q u a l i f y as an acceptable bid d er f o r a f a i l e d t h r i f t I n s t i t u t i o n ,
p o te n tia l
,n d
b id d e rs
must
be
deemed
h o ld in g company and s t a t e
th e RTC w i l l
acceptable
by
the
p rim a ry
c h a r te r in g a u t h o r i t i e s I f
federal
a p p lic a b le .
re g u la to r,
In a d d i t i o n ,
o b ta in the o p in io n o f the FDIC t h a t the u lt i m a t e tr a n s e c tio n re s u lts
I n no undue r i s k t o the d e p o s it 'I n s u r a n c e fu n d s .
The
F D IC
a p p lic a tio n s
re s u ltin g
ris k -b a s e d
w ill
r e q u ir e
f o r d e p o s it
from
RTC
4 -1/2 *
ta n g ib le
g u id e lin e s .
e a e 1ta l-to -a s se ts
ra tio
fo r
new
In s u ra n c e by s ta te -e h a r te r e d nonmember banks and t h r i f t s
t r a n s a c t i o n s . . C a p ita l
th a n 1 - 1 / 2 * from T i e r 2 .
a
It
1n
these
cases
would In c lud e a t l e a s t 3 * T i e r
would
be d e fin e d
1 c a p ita l
Loan lo s s reserves would be e x c lu d e d .
by
and no more
In adopting th is p o licy , tha FD1C Board emphasised that the p o licy 1* designed
to expedite the t h r if t resolution process and does not affe ct long-term ca p ita l
standards.
D irecto rs Robert l .
Clarke and M. Danny Mall s p e c ific a lly Indicated
that th e ir votes approving the p o licy were Intended to permit the RTC to go forward
with case resolutions but did not Indicate endorsement of the s p e c ific ra tio set
forth In the p o lic y fo r In stitu tio n s under th e ir supervision.
(The fiv e
savings In stitu tio n s fo r which the RTC has delayed the deadline
of submission o f bids are:
Freedom Savings t Loan Association, Tampa, F lo rid a ;
H ill Fin an cial Savings A ssociation, Red H i l l , Pennsylvania; P a c ific Savings Bank,
Costa
Mesa.
C a lifo rn ia ;
Peoples
Heritage
Savings,
A Federal
Savings
I
Loan
A sso ciatio n . S e lin a . Kansas; and U niversity Federal Savings A ssociation, Houston,
Texas.)
I I I
r a d e r a i R e g iste r / V o i. S I N o . 63 / T u e s d a y . M a rch 21, 1989 / Rule» and R egulation s
significant economic impact on a
substantia] number of small business
entities, in this case small state
nonmember banks, in accord with the
spirit and purposes o f the Regulatory
Flexibility A ct (5 U .S .C . CC1 etseq .)
W hile all insured banks will presumably
be required to make some revisions to
their reporting procedures to permit
supervisory monitoring of risk-based
capital ratios, the FD IC , in conjunction
with the other Federal banking agencies,
intends to adopt, after an opportunity
for public comment, reporting
procedures designed to minimize the
burden on small institutions.
The risk-based capital framework set
forth in this statement o f policy is
designed primarily to take accout of
those practices, such as the increased
use o f off-balance sheet activities and
the decline in the holdings o f low-risk,
liquid assets, which have been engaged
in primarily by certain larger banking
organizations. Moreover, rather than
requiring all banks to raise additional
capital, the statement o f policy is
directed at institutions whose capital
positions are less than fully adequate in
relation to their risk profiles.
li s t o f Subjects in 12 C F R Part 325
Bank deposit insurance. Banks,
banking. Capital adequacy, State
nonmember banks.
Accordingly. 12 C F R Part 325 is
amended as follows:
P A R T » 5 —C A P IT A L M A IN T EN A N CE
1. The authority citation for Part 325
continues to read as follows:
Authority: 12 U.S.C 1815(a). 1818(b). 1816.
1818(a). 1815(b). 1619(Tenth). 1828(c). 1828(d).
1828(i). 3907. 3909.
2. A new Appendix A is added to read
a s follows:
Appendix A to Part 325— Statement o f
Policy on Risk-Based Capital
Capital adequacy is one of the critical
factors that the FDIC is required to analyze
when taking action on various types of
applications and when conducting
supervisory activities related to the safety
and soundness of individual banka and the
banking system. In view of this, the FDICs
Board of Directors has adopted Part 325 of its
regulations, which sets forth (1) minimum
standards of capital adequacy for insured
state nonmember banks and (2) standards for
determining when an insured bank is in an
unsafe or unsound condition by reason of the
•mount of its capital.
This capital maintenance regulation was
designed to establish, in conjunction with
other Federal bank regulatory agencies,
uniform capital standards for all federallyregulated banking organizations, regardless
of size. The uniform capital standards were
baaed on ratios of capital to total assets.
11509
While those leverage ratios have served es a
financial and operating risks. In addition to
useful too! for assessing capital adequacy,
evaluating capital ratios, an overall
the FD1C believes there is a need for a capital assessment of capital adequacy must take
measure that is more explicitly and
account of each of these other factors,
systematically sensitive to the nsk profiles of
including, in particular, the level and severity
individual banks. As a result, the FDIC's
of problem and adversely classified assets.
Board of Directors has adopted this
For this reason, the Final supervisory
Statement of Policy on Risk-Based Capital to
judgment on a bank's capital adequacy may
supplement the Part 325 regulation. This
differ significantly from the conclusions that
statement of policy does not replace or
might be drawn soley from the absolute level
eliminate the existing Part 325 capitul-to-tutal
of the bank's risk-based capital ratio.
assets leverage ratios. Once the risk-based
In light of these other considerations,
capita! framework is implemented, the FDIC
banks generally are expected to operate
will consider whether the Part 325 definitions
above the minimum risk-based capital ratio.
of capital for leverage purposes and the
Banks contemplating significant expansion
minimum leverage ratios should be amended.
plans, as well as those institutions with high
The framework aet forth in this statement
of policy consists of (1) a definition o f copital or inordinate levels of risk, should hold
capital commensurate with the level and
for risk-baaed capital purposes. (2) a system
for calculating risk-weighted assets by
nature of the risks to which they are exposed.
assigning assets and off-balance sheet items
1. Definition of Capital for the Risk-Baaed
to broad risk categories, and (3) a schedule,
•Capital Ratio
which includes transitional arrangements
during a phase-in period, for achieving a
A bank's qualifying total capital base
minimum supervisory ratio of capital to risk
consists of two types of capital elements:
weighted assets. A bank's risk-based capital
"core capital elements" (Tier 1) and
ratio is calculated by dividing its qualifying
"supplementary capital elements" (Tier 2). To
total capital base (the numerator of the ratio) qualify as an element of Tier 1 or Tier 2
by its risk-weighted assets (the
capital, a capita] instrument should not
denominator).1Table I outlines the definition contain or be subject to any conditions,
of capital and provides a general explanation covenants, terms, restrictions, or provisions
of how the risk-based capital ratio is
that are inconsistent with safe and sound
calculated. Table 11summarizes the risk
banking practices.
weights and risk categories, and Table III
sets forth the credit conversation factors for
A . The Components o f Qualifying Copital
off-balance sheet items. Additional
(are Table J)
explanations of the capital definitions, the
1. Core copital elements (Tier 1/ consists
risk-weighted asset calculations, and the
of;
minimum risk-based capital ratio guideline*
—Common stockholders' equity capital
are provided in Sections 1. II and 111of this
(includes common stock and any related
statement of policy.
This statement of policy applies to all
surplus, undivided profits, disclosed capital
FDIC-insured state-chartered bonks
reserves that represent a segregation of
(excluding insured branches of foreign bank*)
undivided profits, and foreign currency
that are not members of the Federal Reserve
translation adjustments; less net unrealized
System, hereafter referred to as “state
losses on marketable equity securities):
nonmember banka." regardless of size, and to —Noncumulative perpetual preferred stock.3
all circumstances in which the FDIC is
including any related surplus; and
required to evaluate the capital of a banking
—Minority interests in the equity capital
organization. Therefore, the risk-based
accounts of consolidated subsidiaries.
capital framework set forth in this statement
At least 50 percent of the qualifying total
of policy will be used in the examination and capital base should consist of Tier 1 capital.
supervisory process as well as in the analysis Core (Tier 1) capital is defined as the sum of
of applications that the FDIC is required to
core capital elements * minus all intangible
net upon.
assets other than mortgage servicing rights.4
The risk-based capital ratio focuses
Although nonvoting common stock
noncumulative perpetual preferred stock, and
principally on broad categories of credit risk:
however..the ratio does not take account of
* Preferred slock issues where the dividend is
many other factors that can affect a bank's
reset periodically based, in whole or in pari, upon
financial condition. These factors include
the bank's current credit standing, including but not
overall interest rate risk exposure: liquidity,
limited to. auction rate, money market or
funding and market risks; the quality and
remarkt-ieble preferred stock, are assigned to Tier 2
level of earnings; investment or lonn portfolio capital, regardless of whether the dividends are
concentrations; the quality of loans end
cumulative or noncumulative
investments; the effectiveness of loan and
•In addition to the core capital elements.Tier t
may also include certain supplementary capital
investment policies; and management's
elements during the transition period subject to
overall ability to monitor and control
* Period-end amounts, rather than average
balances, normally will be used when calculating
riak-based capital ratio*. However, on a caae-bycase basis, ratios bssed oc average balances may
also be required if supervisory nuncems render it
appropriate.
certain limitations set forth in Section 111 of this
statement of policy.
4 An exception is allowed for intangible assets
that are explicitly approved by the FDIC as part of
the bank’s regulatory capital on a specific case
basis. These intangible* will be included in capital
for risk-based capital purposes under the terms and
conditions that are specifically approved by tha
FDIC
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Fed era l R egister / v o 1. &4. rvo. pj / lu e s a a y , M a rcn z i , i* « y / Kuies a n a Keguiattons
minority interests in the equity capital
accounts of consolidated subsidiaries are
normally included in Tier 1 capital, voting
common stockholders' equity generally will
be expected to be the dominant form of Tier 1
capital- Thus, banks should avoid undue
reliance on nonvoting equity, preferred stock
and minority interests.
Although minority interests in consolidated
subsidiaries are generally included in
regulatory capital, exceptions to this general
rule will be made if the minority interests fail
to provide meaningful capital support to the
consolidated bank. Such a situation could
arise if the minority interests are entitled to a
preferred claim on essentially low risk assets
of the subsidiary. Similarly, although
intangible assets in the form of mortgage
servicing rights are generally recognized for
risk-based capital purposes, the deduction of
part or all of the mortgage servicing rights
may be required if the carrying amounts of
these rights are excessive in relation to their
market value or the level of the bank's capital
accounts.
2. Supplementary capital elements (Tier 2)
consist of.
—Allowances for loan and lease losses, up
to a maximum of 1.25 percent of riskweighted assets;
—Cumulative perpetual preferred stock,
long-term preferred stock (original maturity
of at least 20 years} and any related surplus:
—Perpetual preferred stock (and any
related surplus) where the dividend is reset
periodically based, in whole or part on the
bank's current credit standing, regardless of
whether the dividends are cumulative or
noncumulative;
—Hybrid capital instruments, including
mandatory convertible debt securities; and
—Term subordinated debt and
intermediate-term preferred stock (original
average maturity of five years or more) and
any related surplus.
The definition of supplementary capital
does not include revaluation reserves or
hidden reserves that represent unrealized
appreciation on assets such as bank premises
and equity securities. Although such reserves
will not be explicitly recognized when
calculating a bank's risk-based capital ratio,
those reserves may be taken into account as
additional factors when assessing a bank's
overall capital adequacy.
The maximum amount of Tier 2 capital that
msy be recognized for risk-based capita)
purposes is limited to 100 percent of Tier 1
capital (after any deductions for disallowed
intangibles). In addition, the combined
amount of term subordinated debt and
intermediate-term preferred stock that may
be treated as part of Tier 2 capital for riskbased capital purposes is limited to SO
percent of Tier 1 capital. Amounts in excess
of these limits may be issued but are not
included in the calculation of the risk-based
capital ratio.
(a) Allowance for loan and lease losses.
Allowances for loan and lease losses are
reserves that have been established through a
charge against earnings to absorb future
losses on loans or lease financing
receivables. Allowances for loan and lease
losses exclude “allocated transfer risk
reserves." • and reserves created against
identified losses.
This risk-based capital framework provides
a phasedown during the transition period of
the extent to which the allowance for loan
and lease losses may be included in an
institution's capital base. By year-end 1990.
the allowance for loan and lease losses, as an
element of supplementary capital, may
constitute no more than 1.5 percent of risk
weighted assets and. by year-end 1992. no
more than 1.25 percent of risk-weighted
assets.*
(b) Preferred stock. Perpetual preferred
stock is defined as preferred stock that does
not have a maturity date, that cannot be
redeemed at the option of the holder, and that
has no other provisions that will require
future redemption of the issue. Long-term
preferred stock includes limited-life preferred
stock with an original maturity of 20 years or
more, provided that the stock cannot be
redeemed at the option of the holder prior to
maturity, except with the prior approval of
the FDIC.
Cumulative perpetual preferred stock and
long-term preferred stock qualify for
inclusion in supplementary capital provided
that the instruments can absorb losses while
the issuer operates as s going concern (a
fundamental characteristic of equity capital)
and provided the issuer has the option to
defer payment of dividends on these
instruments. Given these conditions, and the
perpetual or long-term nature of the
intruments, there is no limit on the amount of
these preferred stock instruments that may be
included with Tier 2 capital.
Noncumulative perpetual preferred stock
where the dividend is reset periodically
based, in whole or in part on the bank's
current credit standing, including auction
rate, money market, or remarketable
preferred stock, are also assigned to Tier 2
capital without limit provided the above
conditions are met
(c) Hybrid capital instruments. Hybrid
capital instruments include instruments that
have certain characteristics of both debt and
equity. In order to be included as
supplementary capital elements, these
instruments should meet the following
criteria:
(1) The instrument should be unsecured,
subordinated to the claims of depositors and
general creditors, and fully paid-up.
(2) The instrument should not be
redeemable at the option of the holder prior
to maturity, except with the prior approval of
* Allocated transfer risk reserves are reserves
that have been established in accordance with
Section 905(a) of the International Lending
Supervision Act of 1953 against certain assets
whose value has been found by the US. supervisory'
authorities to have been significantly impaired by
protracted transfer risk problems.
* The amount of the allowance for loan and lease
losses that may be included as a supplementary
capital element is based on a percentage of gross
risk-weighted assets. A bank may deduct reserves
for loan and lease losses that are in excess of the
amount permitted to be included in capital, as «veil
as allocated transfer risk reserves, from gross riskweighted assets when computing the denominator
o f the risk-based capital ratio.
the FDIC This requirement implies that
holders of such instruments may not
accelerate the payment of principal except in
the event of bankruptcy, insolvency, or
reorganization.
(3) The instrument should be available to
participate in losses while the issuer is
operating as a going concern. (Term
subordinated debt would not meet this
requirement.) To satisfy this requirement, the
instrument should convert to common or
perpetual preferred stock in the event that the
sura of the undivided profits and capita)
surplus accounts of the issuer results in a
negative balance.
(4) The instrument should provide the
option for the issuer to defer principal and
interest payments it (a) the issuer does not
report a profit in the preceding annual period,
defined as combined profits (i.e., net income)
for the most recent four quarters, and (b) the
issuer eliminates cash dividends on its
common and preferred stock.
Mandatory convertible debt securities that
meet the criteria set forth in 12 CFR 325.2(e)
will qualify as hybrid capital instruments.
There is no limit on the amount of hybrid
capital instruments that may be included
within Tier 2 capital.
(d) Term subordinated debt and
intermediate-term preferred stock. The
aggregate amount of term subordinated debt
(excluding mandatory convertible debt
securities) and intermediate-term preferred
stock (including any related surplus) that may
be treated as Tier 2 capital for risk-based
capitaJ purposes is limited to 50 percent of
Tier 1 capital. Term subordinated debt and
intermediate-term preferred stock should
have an original average maturity of at least
five years to qualify as supplementary capital
and should not be redeemable at the option
of the holder prior to maturity, except with
the prior approval of the FDIC. To qualify as
supplementary capital, term subordinated
debt instruments issued by state nonmember
banks should meet the criteria for
subordinated debt set forth in 12 CFR 325.2(j).
except that the minimum original maturity
requirement is five years for risk-based
capital purposes.
Discount of limited-life supplementary
capital instruments. As a limited-life capital
instrument approaches maturity, the
instrument begins to take on charcteristics of
a short-term obligation and becomes less like
a component of capital. Therefore, for riskbased capital purposes, the outstanding
amount of term subordinated debt and
limited-life preferred stock eligible for
inclusion in capital will be adjusted
downward, or discounted, as the instruments
approach maturity. Each limited-life capital
instrument will be discounted by reducing the
outstanding amount of the capital instrument
eligible for inclusion as supplementary
capital by a fifth of the original amount (less
redemptions) each year during the
instrument's last five years before maturity.
Such instruments, therefore, will have no
capital value when they have a remaining
maturity of less than a year.
@FedFRASER