Full text of Statements and Speeches of L. William Seidman : Testimony on Status of the Resolution Trust Corporation, Before the Committee on Banking, Housing, and Urban Affairs ,United States Senate

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TESTIMONY OF

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.
January 31, 1990
Room 538
Dirksen Senate Office Building

Good morning, Mr. Chairman and members of the Committee. I am
pleased to appear before you today to discuss the financial
status and activities of the Resolution Trust Corporation (RTC),
as well as to comment on the Strategic Plan that was adopted by
the RTC Oversight Board (Oversight Board).
The RTC has existed less than six months, but already has
accomplished much. Our testimony will acquaint you with those
achievements. However, the greater part of our work lies ahead,
and we will discuss with you how we hope to complete that work.
The timely and efficient completion of our mandate depends on
many factors. We will examine those factors we believe to be of
particular importance, and how they may impact upon the RTC's
operations.
You have heard from the RTC Oversight Board concerning the
Strategic Plan. The RTC is moving forward quickly to implement
the policies and programs mandated by the Oversight Board under
the Plan.
I.

CURRENT FINANCIAL STATUS

The RTC's funding needs will depend on a variety of factors such
as future economic conditions, the future level of interest
rates, and future real estate prices, all of which cannot be
predicted with any degree of certainty. However, the critical
factor is to predict the number, size and financial condition of
the savings associations the RTC will eventually be called upon
to handle.
In a letter to Chairman Riegle written last June (See
Attachment 1.) , while the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) was being
debated, we addressed some of the same questions regarding the
RTC's funding needs that we are being asked to testify upon
today. At that time, we identified 428 savings associations
that we felt were most likely to come to the RTC. Based on
year-end 1988 financial data, and economic models used by the
FDIC, we estimated that the potential loss from these
institutions would be about $44 billion and that the $50 billion
was a reasonable estimate of loss. We noted, however, that
there was not much of a comfort margin.
As of January 16, 1990, the RTC had resolved 40 institutions and
had 293 institutions under conservatorship. Collectively, these
333 institutions reported $136 billion in gross assets and $148
billion in liabilities as of September 30, 1989.
(Note meet of
these institutions were the ones identified last June, although
many are significantly smaller now after being shrunk while in
conservatorship.) Our estimate of the present value cost of
resolving these institutions, based on FDIC loss experience, is
approximately $42 billion.




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If the case load does not grow more than another 100
institutions or another $40 billion in liabilities, the $50
billion funding provided by FIRREA would appear to be adequate.
Beyond those numbers, additional funding to absorb losses will
likely be needed. The RTC relies on the Office of Thrift
Supervision (OTS) to identify institutions it expects may
eventually come to the RTC. OTS has informed us that it is
working on its most current list of problem thrifts, which it
expects to give to the RTC in the next few weeks. A preliminary
estimate given to the RTC by OTS on January 18, indicates that
there are 225 to 295 institutions with $160 billion to $200
in assets above those already under RTC conservatorship
that may be categorized as "likely failures." The preliminary
estimate also identifies an additional 295 to 325 seriously
undercapitalized institutions with $185 billion to $205 billion
in assets that OTS expects to categorize as "distressed." Based
on FDIC's recent "backup" examinations of thrifts, we have found
no reason to question the reasonableness of the OTS estimates on
the number of troubled institutions. We have been told that OTS
expects to resolve the distressed institutions without
government assistance, but our examination process has not
proceeded to the point where we can confirm that independently.
In summary, the information as of January 16, 1990 may be
charted as follows:
Number

Assets
(Billions)

Low

High

Low

High

Likely to Fail

225

295

$160

$200

RTC (actual)

333
558

333
628

136
296

136
336

295

325

185

205

TOTALS
Distressed

NOTE: Asset figures for Likely to Fail category and Distressed
category are net assets. Asset figures for RTC (actual) category
are gross assets. OTS has not provided the RTC with gross asset
estimates.
Obviously the variance in the number of institutions and their
assets that may come to the RTC is wide and there is no way at
this time to provide a definitive forecast oi wnat it will be.
The estimated loss at institutions that recently have entered
the conservatorship program is less than the estimated loss of




-3the early entrants into the program (which was about 36 percent
of gross assets), so that the incremental loss of new
institutions is expected to be less than the average loss.
Losses in institutions recently taken over by the RTC are
estimated to be 20 percent of gross assets. We cannot at this
time estimate loss for future RTC restructuring activities as
this will be determined by the condition of the institutions
and market conditions at the time.
Under almost anv scenario, the $50 billion provided bv FIRREA
should, as far as funding loss is concerned, carry the RTC into
1991. The need for additional funding, if any, to absorb
losses can be addressed with much greater certainty at that
time. What cannot be delayed, however, is the need for working
capital.
Working Capital
As stated in the letter to Chairman Riegle, and many times
since then, the RTC needs considerably more than $50 billion in
the form of short term financing or working capital to most
efficiently handle resolutions. First, working capital is
necessary for resolutions in order to finance problem assets
pending their eventual sale. RTC's cash outlays take place
up-front at the time of resolution whereas its cash inflows
— whether from REFCORP or the sale of assets — will take
place over a number of years.
Second, working capital is necessary to replace high-cost funds
at the savings associations under RTC conservatorship. Very
high-cost funds (i.e., costing at least 125 basis points over
market) currently represent roughly 20 percent of the
liabilities of these associations. High-cost funds replacement
would yield a tangible savings to the thrifts under RTC
conservatorship, thereby reducing the ultimate cost of their
resolution. Such a program applied on a nationwide scale would
reduce the financing costs of all banks and thrifts, reducing
the RTC's eventual case load and resulting in improved
performance of the entire U.S. financial system.
Working capital for resolutions. Let us focus first on the
working capital necessary to finance resolutions. The cash
needed for a resolution is highly dependent on its structure.
We expect that most of the resolutions will be very cash
intensive "clean" thrift transactions, in which substantially
all the illiquid and distressed assets are retained by the RTC.
The RTC and the Oversight Board are now considering a
modification of the Strategic Plan that would allow more
liberal asset put-back structures. Under the modification
contemplated, it may be possible to transfer substantially more
assets, at least initially, to the acquirer. This would
require much less working capital up front and probably result
in more assets eventually being transferred to the acquirer.




-4More flexibility in put-backs also could speed up the
resolution process by shortening the due diligence period.
We estimate that for the 333 institutions resolved or under
conservatorship as of January 16, 1990, working capital needs
simply to fund resolutions should peak around $36 billion above
the funds provided by FIRREA to cover losses, with the actual
amount depending on the speed of resolutions and the rate of
disposition of less liquid assets. The working capital
estimate assumes that most resolutions will be "clean”
transactions where only liquid, nondistressed assets are
purchased by the acquirer. The estimate also assumes that
institutions in conservatorships have been significantly
downsized prior to resolution. Of course, the total amount of
working capital that ultimately will be needed will depend upon
the ultimate size of the case load. If the RTC's gross assets
were to reach $300 billion, working capital needs just to fund
resolutions could reach $70-$90 billion. Again, the actual
amount will depend on the timing of when institutions enter
conservatorship and the scheduling of resolutions.
Working capital for hiah-cost funds replacement. The second
major need for working capital is for replacement of high-cost
funds such as brokered insured deposits where the failed thrift
must pay very high interest rates. Replacing high-cost funds
affects the timing of the need for cash by the RTC. While
working capital to fund resolutions is likely to reach its peak
toward the end of the resolutions process, high-cost funds
replacement, in order to be effective, must' begin to take place
as soon as a thrift enters conservatorship. Thus, high-cost
funds replacement shifts the demand for such financing to the
present.
The potential savings to the taxpayer from high-cost funds
replacement is significant. We estimate that at the current
conservatorships alone there is $20 billion in funds maturing
over the next two quarters that cost at least 125 basis points
over prevailing market rates. Replacing these funds and
assuming an average savings of 150 basis points, the savings
would be about $300 million per year. When one considers all
other thrifts likely to come to the RTC, the savings from
reducing high-cost funding would be very substantial.
Moreover, even replacing just some high-cost funds should lower
substantially the interest rates on all brokered deposits not
only for existing or likely conservatorships but on all
depository institutions.
Replacement of high-cost funding would go a long way toward
stemming immediately the growth in losses of current
conservatorships as well as RTC-bound thrifts. We have
estimated roughly that conservatorships are experiencing
combined operating losses approaching $14 million per day.
These losses are caused by one or all of three factors: First,
by the amount and cost that their liabilities exceed the fair
value and yield in their assets (i.e., they are insolvent);




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5

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Second,^to the extent they must pay significantly higher rates
^beir funding than healthier competitors; and Third,
because they often have operating inefficiencies, to some
extent because cost savings generally lag downsizing programs.
RTC analysis indicates that at least two-thirds of the growth
m losses is attributable to the first factor, and thus
unavoidable. That is, the loss now being funded in the
institutions will have to be funded by the government after
resolution. However, approximately 20 percent of the avoidable
loss is due to the second factor and could be very rapidly
eliminated through high-cost funds replacement.
Finding a source or sources of working capital is not a
of tbe RTC' but comes under the purview of the
RTC Oversight Board. We are told by the Oversight Board that
they expect to be able to provide the RTC with working capital
m the next four to six weeks. These funds must be obtained
promptly if the resolution process and replacement of high-cost
funds are to proceed without interruption.
Current Sources and Uses of Funds
An outline of the R T C s actual cash inflows and outflows should
illustrate the urgency of this problem. As shown in Attach­
ment 2, by December 31, 1989 the RTC had received $24.5 billion
m capital contributions. Of this amount, $20 billion was
provided by Treasury appropriations or Federal Home Loan Bank
c°n^ lb^ lonsf and $4,5 billi°n was provided from the proceeds
o f e ^irst quarterly REFCORP financing. The R T C s cash
outlays totaled $20.2 billion, including $9.2 billion to
resolve 37 thrift institutions, and $9.2 billion in advances
for high-cost funds replacement at 156 institutions. Also
included i n t h e $20.2 billion total are 261 advances for
emergency liquidity which we were forced to make to meet
depositor demands at 85 conservatorships. The cash outlays for
this purpose totaled $1.8 billion.
As a result of these cash outlays, the RTC at the end of 1989
had only $4.3 billion in cash. All of that amount had been set
aside to cover the projected cost of resolving 12 institutions
which had to be held over to 1990 due to extended due diligence
requirements of the bidders. Through Friday; January 19, 1990
we bad received no additional funds, but had spent an
additional $1.3 billion. This left the RTC with a current net
cash position of only $2.9 billion.
The second quarterly financing cf REFCORP is about to provide
another nearly $5 billion in funds. We also have the potential
availability of an additional $5 billion from the Treasury line
of credit granted to the RTC by FIRREA. This line is intended
to be used only to satisfy the emergency liquidity needs of our
conservatorships.




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6

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RTC1s own operations are also a potential source of funds, but
the cash available in the immediate future from our
conservatorships and receiverships is quite limited.
Specifically, if we were to force all of the conservatorships
that have received advances from the RTC to repay whatever
advances they could by divesting all of their cash and
marketable securities, we would net less than $1 billion.
Similarly, the maximum dividends expected to be payable from
the RTC receiverships this quarter — through the liquidation
of their assets — is estimated not to exceed $1 billion.,
Until the working capital issue is resolved, the RTC has ceased
virtually all advances to replace the high-cost funds of the
conservatorships. As indicated earlier, this program has been
successful in reducing the funding cost of conservatorships
and, thus, limiting the growth of the loss that must be borne
by the RTC.
New Approaches
The magnitude of the problem dictates that we seek new and cost
efficient ways to handle the problem. As much of the earlier
discussion has indicated, a critical element in the cost
structure contemplated by FIRREA is the number of institutions
the RTC will be asked to handle. Minimizing the number of
institutions that will have to come to the RTC might be a way
to contain the problem.
The RTC staff has begun a study of ways of dealing with
institutions before they become wards of the Federal
government. In accordance with the Oversight Board directive,
we will be examining open-thrift solutions based on our
previous experience. Much research needs to be done on this.
There will be no costless solutions, but we are looking for new
ways to limit the cost of this problem.
II.

STRATEGIC PLAN

FIRREA requires the Oversight Board, in consultation with the
RTC, to develop a Strategic Plan for conducting the RTC's
functions and activities. FIRREA also establishes minimum
contents for the Plan.
The Plan developed by the Oversight Board's staff over the last
five months was done in consultation with the RTC and the staffs
of the Treasury Department, the Department of Housing and Urban
Development and the Federal Reserve Board. A draft of the Plan
was issued for public comment and many of the public's comments
were incorporated into the final plan.
The Strategic Plan represents a compromise resulting from trade
offs among many competing views. Our recent experience has led
us to request some changes in the Plan. Some of these changes




-7reguested of the Oversight Board pertain to the financing of
assets and asset put-backs. Overall, we believe it is a good
document that balances multiple, sometimes conflicting, concerns
and gives direction for managing the task ahead.
The mission of the RTC is to carry out a program to manage and
resolve institutions that come under its jurisdiction and to
dispose of any residual assets in a manner that:
•

maximizes return and minimizes loss;

•

minimizes the impact on local real estate and financial
markets ? and

•

maximizes the preservation of the availability and
of residential property for low-and
moderate-income individuals.

We think the Plan takes a clear position on what appears to be
conflicting objectives. Throughout the Plan the Oversight Board
makes it clear that it believes minimizing cost is the paramount
objective of the RTC.
The Plan provides a substantial amount of guidance to the RTC in
six major areas of operations: case resolution; asset
disposition; affordable housing; conflicts of interest and
ethical standards; external relations; and administration.
In
each of the six areas, the Plan includes a goal, one or more
objectives and various implementation procedures. The Plan
primarily relies on the RTC to develop numerous written
operating policies and procedures for each area in accordance
with established timeframes. We would like now to briefly
describe and offer some comments on each of the six main areas
covered by the Plan.
Case Resolution
With respect to case resolutions, the goal of the Plan is to:
"Manage and resolve institutions under the RTC's jurisdiction in
a timely and cost effective manner, while minimizing the
negative effects on local financial and real estate markets."
To meet this case resolution goal, the Plan sets six
objectives. These are:
(1) manage thrifts under the RTC's
jurisdiction conservatively; (2) prioritize resolutions based on
levels of deterioration; (3) select resolution methods on the
basis of cost; (4) develop procedures to keep all interested
potential purchasers fully informed of the case resolution
process and provide adequate time for the market to determine
the best (i.e., the least costly) method of resolution;
(5) maintain records sufficient to keep all interested parties
informed of the case resolution process; and (6) use the private
sector to manage and resolve institutions wherever practicable




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8

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and efficient. All of these are worthy objectives given the
task the RTC must manage. The RTC, and the FDIC before it, has
been performing its task consistent with the Plan's objectives
in this section.
Manage thrifts under RTC jurisdiction conservatively. The
objectives of the RTC when it places an institution into
conservatorship are to establish control and oversight while
promoting customer confidence; to evaluate the condition of the
institution to determine the most cost effective method of
resolution? and to operate the institution in a safe and sound
manner pending resolution.
To achieve these goals of conservatorship, we have a Managing
Agent and one or more Credit Specialists overseeing each
conservatorship. The role of the Managing Agent is to ensure
that management of the institution adheres to RTC policies and
procedures. The Credit Specialist's function is to assist the
Managing Agent with regard to RTC policies and procedures as
they relate specifically to asset management and disposition.
It is important to note that the asset disposition process
begins immediately upon conservatorship — appraisals are
brought up to date, conservative underwriting standards are
established for the purpose of marketing and selling real estate
owned, and RTC delegations of authority are made a part of the
operational structure of the institution.
Each Managing Agent is responsible for assessing the condition
and acquiring control of the institution, eliminating any
abusive or speculative practices, and investigating any evidence
f^^udulent practices. New management is brought in to ensure
conservative operation and preclude insider abuse, and a
business plan for each conservatorship is developed within 60
days of the date the institution is placed into the program. To
the extent possible, funding costs are reduced by replacing
high-cost funds using RTC advances. Funding demands and RTC
advances are contained by downsizing institutions. Downsizing
is accomplished by curtailing new lending activity and selling
assets where possible.
To address appropriately the unconscionable risk-taking, fraud
and insider abuse that were factors in many thrift insolvencies,
the RTC has established an Office of Investigations to identify
the individuals who caused thrift insolvencies through their
reckless mismanagement, fraud or criminal conduct, and to
recover the assets they misappropriated. The corps of RTC
investigators, which is expected to reach 300 by year-end, will
help determine whether and what sort of litigation should be
sgair.Sw insiders and others. The RTC will vigorously
assist the Department of Justice in prosecuting individuals who
benefited personally at the taxpayers' expense.
Starting with a seasoned core of investigators transferred from
FDIC's Division of Liquidation, we are building a highly
competent, well-educated investigator force from outside the




-9agency. We are requiring all of them to attend a rigorous
training program to enhance their investigative skills and their
understanding of complex financial transactions. We believe
using agency personnel and private sector contractors to gather
the facts before decisions are made to embark on costly
litigation will give us consistency and accountability in any
adverse actions we take against individuals.
Our objective is twofold: to return stolen thrift assets to the
American taxpayer, and to help send to jail those who operated
outside the law and in so doing benefited personally at the
taxpayers expense.
RTC Conservatorship Case load
August 9 September October November December January
262

262

256

257

275

281

New conservatorships

11

7

10

18

10

31

Resolutions

11

13

9

0

4

5

End of month

262

256

257

275

281

307

Beginning of month

The conservatorship program began last February under the auspices of
the FDIC. By the time FIRREA was signed into law on August 9, and
the RTC began its work, there were 262 thrifts under conservatorship.
Since then 87 have been added, and 42 resolved, leaving 307
conservatorship thrifts as of today.
From the outset, downsizing institutions in the program has been a
high priority, and it continues to be stressed as a basic objective
of conservatorship. Efforts at downsizing have been successful,
especially in institutions that have been under conservatorship for a
number of months. Of the 243 institutions that were placed into the
conservatorship program during the first three quarters of 1989 and
that were still in the program at the end of the year, aggregate
assets declined by 23.2 percent through November 30, 1989.
At the same time, core funding saw a much smaller decline, while more
expensive or rate-sensitive funding fell sharply. These less stable
and relatively high-cost sources of funding were replaced to a
considerable degree with funds advanced by the RTC. High-cost funds
replacement is a strategy the RTC follows to contain operating costs
of conservatorship institutions, thus reducing the institutions'
operating losses and thereby the ultimate cost of resolution.
Essentially, the RTC has beer, able tc shrink the?» thrift? Ipjl
interest expenses while preserving franchise values to the extent
possible.




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Downsizing of Institutions Under RTC Jurisdiction, Distributed by the
Calendar Quarter They Entered the Conservatorship Program
(excludes conservatorships resolved during 1989; dollars in millions)
% change s j Lnce
As of quarter-end before
rship
conservatoi
As
of
11/30/89
entering
conservatorship
Number
of
Qtr. Thrifts Assets Core* Other** Assets Core* Other** Assets Core Other
$ 67,761 $51,805 $21,828 $50,434 $47,038 $11,360 - 25.6 -9.2 -48.0

89:1

148

89:2

47

23,401 16,945

89:3

48

11,259

89:4

38

20,150 14,903

1989

281

8,384

7,088 18,308 17,128

2,141 - 21.8 +1.1 -69.7

8,027

2,026 - 11.4 -4.3 -31.7

4,243 19,279 14,319

4,219 - 4.3 -3.9 - 0.6

2,966

9,971

$122,571 $92,037 $36,125 $97,993 $86,513 $19,747 - 20.1 -6.0 -45.3

* - Core deposits = all deposits with total balances below $100,000
** — Other funds sources = all deposits with total balances over $100,000 + FHLB
advances + reverse repurchase agreements; these figures do not include RTC
advances.
NOTE:

Assets reported net of reserves.

The 281 institutions under RTC conservatorship as of year-end 1989
had gross assets with a book value of $106.7 billion, based on their
financial reports of November 30, 1989. Losses already had been
taken on some assets as of this date, resulting in a lower book value
as of November 30 than when the assets first came under RTC
jurisdiction. The estimated fair market value of these assets, also
as of November 30, was $89.2 billion. The following table shows the
distribution of assets and the estimated declines in value based on a
mark to market.
in millions
Fair value

less
(%)

$ 36,740.6

$ 33,513.7

8.8

20,707.8

16,631.9

19.7

Total non-real-estate loans

6,466.4

5,405.7

16.4

Mortgage pool securities

9,204.5

b,509.2

/.5

Other investment securities

7,308.4

6,832.8

6.5

Repossessed assets and
other real estate owned

13,429.5

8,821.2

34.3

All other assets

12,798.9

9,497.1

25.6

106,656.0

89,211.8

16.4

Type of asset
Residential mortgage loans
Other real estate loans

total




ASSETS

Book value

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The estimated loss on these assets — the difference between book and
market values — was $17.4 billion as of November 30, 1989.
Additionally, the book liabilities of these 281 institutions exceeded
book assets by $13.8 billion. Thus, the estimated total loss on
these thrifts was $31.2 billion as of November 30.
To date, 42 cases involving conservatorship institutions have been
resolved. These institutions, in 17 different states, were handled
using a variety of resolution options, including 28 insured deposit
transfers, four insured deposit payoffs, and 10 purchase and
assumption transactions. For the 37 institutions completed prior to
December 31, 1989 the RTC had sold approximately $2.7 billion of the
assets of these thrifts to their acquiring institutions, and retained
assets with a book value of about $8.1 billion. The estimated
recovery on assets retained is $4.9 billion, resulting in an
estimated loss of $3.2 billion on assets in receivership. The five
transactions just recently completed are still in the process of
settlement between the RTC and the various acquirers.
Prioritize resolutions based on levels of deterioration. In
accordance with Oversight Board direction, the RTC has to develop a
prioritization schedule for case resolutions. The RTC's implementing
procedures for evaluating each institution and determining the
priority of case resolutions are attached as Attachment 3. These
guidelines and prioritization procedures attempt to comply with the
Oversight Board's objective to prioritize based on the rate of
deterioration both in absolute and in relative terms. The guidelines
leave room to schedule prioritizations on other than just
quantitative factors. For instance, the RT-C plans to resolve 16
minority-owned institutions now under its jurisdiction relatively
early on so as to preserve what chance there may be for them to be
restructured as viable enterprises, preferably owned by new minority
investors. These will be resolved under a program the RTC will adopt
in the near future.
The guidelines for making the prioritization determination focus on
four factors:
1.

Giving priority to institutions with relatively high rates of
deterioration;

2.

Minimizing the ongoing risk of exposure to the RTC;

3.

Maximizing the recovery of franchise values; and

4.

Ensuring the most efficient use of RTC resources and staff.

These factors, using eight quantitative measures in all, are combined
tc yield a single prioritization schedule. A prioritization schedule
is developed nationwide as well as for each of the RTC's four regions
to facilitate the resolution of institutions with less than $500
million in assets in those regions. A prioritization schedule is
also developed for the major transaction resolution process
headquartered in Washington, D.C. Each schedule divides the case




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load into four levels, or guartiles, of priority —
level of categorization considered practical.

the most precise

Each schedule is updated 30 days before the end of each calendar
quarter, to reflect additions to the RTC's conservatorship program,
changes in investor interest, and new data on institutions already ii
the conservatorship program.
This approach was used recently to identify those institutions to be
marketed by the RTC during the first quarter of 1990. The RTC will
continue to publicize the case resolution schedules in order to
generate maximum interest in the competitive bidding process.
Select resolution methods on the basis of cost. The RTC's written
guidelines for the "Cost Test” calculation required by Section 13(c)
of the Federal Deposit Insurance Act and the loss minimization
criteria in FIRREA are attached as Attachment 4. Case resolution
options are geared towards maximizing competition and minimizing
costs. The RTC offers a menu of bid options to open the competitive
bidding process, maximizing the private funds brought to the table.
This approach is designed to allow the market maximum flexibility anc
access in the bidding process, and minimize the RTC's costs.
It is especially important that bidders can select the amount of
assets they will acquire under current put provisions in that it
minimizes the time required for due diligence. This should promote
bidder interest and hasten resolutions, thus lowering RTC's cost.
The ability to offer cash to fill the asset short-falls reduces
costs, as the market discounts the use of government notes and
guarantees. Cash should lead to a better price. It also gives the
RTC more flexibility in the resolution process, again helping to
minimize cost.
The RTC offers five approaches in its current bidding format:
1.

Clean Thrift Option: Bidder acquires only cash and
investment-grade and mortgage-backed securities, performing
1-4 family residential mortgage loans, and performing
consumer loans, with a put for forged, stolen or fictitious
instruments.

2.

Modified Clean Thrift Option: Bidder acquires only cash and
securities, performing 1-4 family residential mortgage loans,
all consumer loans, and other performing loans (construction,
multifamily and commercial loans) with an expanded put,
including for forged, stolen or fictitious instruments.

3.

Modified Whole Thrift Option: Bidder acquires all assets of
the institution, except real estate owned and other specific
assets, with a put for forged, stolen or fictitious
instruments.




-134.

Whole Thrift Option: Bidder acquires all assets of the
institution with a put for forged, stolen or fictitious
instruments.

5.

Branch-by-Branch Clean Thrift Option: Bidder acquires only
fixed assets and limited other assets in certain cases. This
approach provides maximum access for smaller parties to the
bidding process.

Under all of these options the bidder assumes all deposit
liabilities, and is required to pay the contractual interest rate on
those deposits for 14 days. Bidders have the option to purchase all
fixed assets (required in whole-thrift and branch-by-branch options).
If the RTC fails to receive a bid that meets the "cost test" during
the initial round of bidding, then an insured deposit transfer^option
is offered. This second bidding round might include a simple insured
deposit transfer, an insured deposit transfer that also includes the
purchase of certain assets, and an insured deposit transfer
transaction offered on a branch-by-branch basis.
We believe the broader the marketing, the more open the process, and
the more flexible the product, the better the price will be.
However, this approach does have some side effects.
The menu of options offered tends to be fairly standardized.
Negotiations with individual bidders for more complex or customized
transactions are precluded in the interest of open and competitive
bidding. While we offer a menu, which certainly will change as the
market dictates, customers cannot get customized orders. That may
discourage some potential bidders — particularly in an ever
.increasing buyer's market.
Another side effect is that some of the options, particularly the
whole thrift option, take a lot of time for bidders to evaluate.Depending on the condition of the records of the particular thrift,
even the so-called clean thrift option can take a lot of time. Smart
buyers shop carefully -- and slowly. The less time they get, the
less they are willing to buy. The more buyers, the slower the sale.
This is the primary reason that sales of 21 institutions started last
quarter rolled over until this quarter.
We are happy to report that,
of these, nine have been sold, and fivemore should be resolved
this
week, with the rest being sold over the next two to four weeks. This
would bring our total resolutions to 54, and we have announced the
process to start selling another 52 this quarter. Undoubtedly, a
number of these will roll over to next quarter. We are in
discussions with the Oversight Board on possible approaches to
expedite the sales process.
Develop procedures to keep all interested potential purchasers fully
informed of the case resolution process and provide adequate time for
the market to determine the best (i.e., least costly) method of
resolution. It is the RTC's policy to open the bidding process for
institutions under its conservatorship to all SAIF or BIF insured




-14depository institutions and corporations, partnerships or individuals
who have the potential for receiving approval from chartering=*
authorities for an assisted acquisition. Solicitations for bidders
on conservatorship thrifts are made to the greatest number of
potential purchasers possible, without regard to existing or
potential organizational structure (i.e., thrift or bank). In an
effort to attract the widest possible market, the RTC is committed tc
keep the marketplace of potential purchasers informed of its plans
wherever practical.
The RTC publicizes and communicates its case resolution plans,
procedures and results to potential purchasers through the use of
various techniques including RTC publications, advertising,
conferences, outreach programs, and the RTC reading room.
On November 27, 1989, the RTC published "A Buyer|s Guide: How to
Purchase a Savings Association from the RTC,” which was announced in
a press release. The Buyer's Guide is found at Attachment !5. This
pamphlet explains the RTC's marketing process for the institutions
that have come under RTC conservatorship. It is available free of
charge. To date, the RTC marketing department has mailed
approximately 3,000 copies. These mailings were in response to
written requests, general interest calls to the RTC, and calls
received on the RTC "hot line." Included with the "Guide" is the RTC
clearance package, which contains a financial statement form for all
private investors, a bidder fact sheet for financial institutions,
and a list of all institutions currently under RTC conservatorship,
which is updated weekly.
The RTC toll-free "hot line" also was established on November 27,
1989, and announced in a press release explaining its usage. To date
the RTC has responded to approximately 1,600 calls from individuals
expressing interest in purchasing a savings institution.
The RTC announces a case resolution schedule for each quarter,
listing each savings institution for which active marketing has beguri
or is planned, along with names and telephone numbers of RTC
officials to contact for more information. For each institution
listed in the case resolution schedule, a public information package
is available containing general information, financial statements and
branch location and deposit information. See Attachment 6 for a
sample information package.
The RTC also publishes the case resolution schedules and contact
names and numbers in the Federal Register and advertises in
appropriate newspapers, such as The Wall Street Journal. Samples of
these press releases and advertisements are attached as
Attachment 2- In addition to these announcements, the RTC schedules
marketing conferences to provide potential bidders more information
on upcoming resolutions.
Beginning in March 1990, the RTC plans to hold a series of one-day
seminars around the country to inform the public on RTC's
operations. Among the topics will be how to purchase a savings




-15association from the RTC. All potential purchasers who have
contacted the RTC about the case resolution process will receive
invitations to these seminars.
Independently, and in concert with RTC's Minority and Women's Affairs
Officer, the Washington and Regional Office case resolution staffs
will speak at various non-RTC programs around the country in an
effort to encourage the active participation in the bidding process
of all potential purchasers, including minorities and women.
The RTC maintains a data base which includes, to date, over 2,800
potential bidders who have expressed direct interest in purchasing ar
insolvent savings association and have completed the clearance
package. This list consists of bank holding companies, savings
associations, commercial banks, and corporate and private investors.
As outlined in our discussion of case resolution prioritization
above, the Strategic Plan calls for a quarterly update and
announcement of resolutions planned for the upcoming quarter.
Keep records sufficient to keep all interested parties informed of
the case resolution process. In the spring of 1990, the RTC will
open a reading room located at 801 17th Street, N.W., Washington,
D.C. It will house in one central location all documents of interest
to potential purchasers, the media, academicians and the general
public, and will be staffed by public information specialists. All
of the RTC's policies, procedures, guidelines and other sources of
public information, including purchase and assumption agreements
entered into since August 8, 1989, will be available for public
inspection. Copies of all documents will be made available to any
interested party for a nominal charge.
Use the private sector to manage and resolve institutions wherever
practicable and efficient. The following are areas in which the RTC
is now, or shortly will be, pursuing contracts with private sector
firms:
1.

Management of conservatorship institutions:
The RTC has retained individuals under personal services
contracts to handle Managing Agent responsibilities at a
number of large conservatorships. In addition, the RTC is
using significant numbers of individuals in
Liquidation-Graded positions with short-term employment
contracts. The RTC will continue to rely heavily on the
private sector in these areas.
Investment bankers, brokers and other professionals are under
contract to the RTC to assist in the ider.tifiuauio.*,
evaluation, pricing and sale of conservatorship assets.
Institutions under RTC jurisdiction continue to use the
services of private contractors where practical and
appropriate. In some areas, such as appraisal services, the
use of outside firms has increased significantly under the
RTC conservatorship program.




-

2.

16

-

Disposition of conservatorship institutions:
The RTC has used outside accounting firms in the Central
region for conducting Total Asset Purchase and Assumption
(TAPA) reviews. A Request for Proposal (RFP) is under
development for the purpose of expanding this into a national
program. The plan is to select a number of eligible^firms,
and then make specific work order requests of firms in that
qualified pool. The goal is to have firms conducting these
reviews by March.

3.

Review and analysis of the 1988 FSLIC deals:
A RFP soliciting bids from the private sector for work on
this project was issued December 8, 1989. It is expected
that contracts will be signed and work commenced in early
February.

4.

Additionally, the following are areas where the use of private
sector firms in the management and disposition of institutions by
the RTC is being explored:
Property management firms, for the management of properties
held by institutions under RTC conservatorship.
Investment banking services, especially in the negotiation of
resolution transactions for large conservatorship
institutions, asset securitization activities, cash
management, and portfolio management.

Status of the review of the 1988 FSLIC transactions. The RTC issued
a RFP, dated December 8, 1989, for the review and evaluation of the
assistance agreements transacted by the FSLIC between January 1, 1988
and August 8, 1989. A copy of the RFP is attached as Attachment 8.
Bids were due by January 23, 1990.
The RTC is hiring staff to coordinate the review process, to develop
the written report for the RTC Oversight Board and the Congress, and
to advise on and assist in the renegotiation of the terms of these
transactions where practicable.
The RTC has decided to use private sector contractors for much of the
work on this project. The project is highly specialized, complex,
and very labor intensive.
The RTC has limited resources to allocate to this especially
important project, without diminishing conservatorship operation and
resolution efforts. While the RTC will add staff to monitor this
^ its urgency virtually compelled the use of outside
contractors. The Strategic Plan calls for the completion of this
project with reports to the RTC Oversight Board and to the Congress
by August 31, 1990. There are 96 separate deals to review in the
course of this project. Covering all of them in the time frame and
detail required could not be accomplished in-house.




-17Even without benefit of the contemplated review process, we believe
there are aspects of these transactions that can be modified to
produce savings. Yield maintenance and asset loss coverage in many
of the 1988 transactions appear to be excessively generous. They are
especially generous in the context of pre-FIRREA tax incentives.
Moveover, in many cases these agreements produce disincentives to the
timely disposition of assets. We would contemplate modifications
that would continue to adequately compensate the acquirer for
carrying the assets but that also would provide incentives for the
timely disposition of assets.
We also believe that long term note agreements can be either modified
or paid—off depending on cash availability and the overall impact of
all changes on the agreements.
Allowing acquiring institutions to reduce the rates of contract
deposits. It is RTC policy to allow acquirers of failed thrifts
through purchase and assumption transactions to lower interest rates
on time deposits two weeks subsequent to the purchase of the thrift.
Acquirers, however, are not allowed to lower the rate paid on
passbook accounts below their passbook rates, and depositors are
allowed to transfer their funds to another institution with no
prepayment penalty. This policy benefits the RTC (thus, the
taxpayer), since acquirers would pay less for institutions where they
have to cover deposits until they mature.
In the last few years, a number of thrifts grew very rapidly by
assuming brokered deposits and offering high interest rates. These
institutions used the deposit insurance guarantee to go beyond their
local area markets to fund their investments. When these investments
failed to pay off, the financial health of these institutions began
to deteriorate, and they were forced to raise additional funds to
provide liquidity. In the Texas region, this need for funds combined
with a depressed economy forced many of the distressed financial
institutions to aggressively compete for funds in both local and
national markets. As a result, interest rates in that part of the
country climbed far above the national average. By the time the RTC
took control, some of these institutions had as much as 80 percent of
their deposits in brokered CDs. Even institutions without a high
percentage of brokered funds were paying high interest rates since
they also were forced to compete for funds. Therefore, almost all of
the RTC institutions have very high deposit costs.
A significant portion of the assets in the failed thrifts consist of
delinquent loans and foreclosed real estate. These are not assets
that most acquirers wish to purchase. Therefore, the principal value
in the failed thrift is its deposit base. If an acquirer was not
allowed to adjust the interest rates for the newly acquired deposits,
it would calculate the cost of holding high—cost deposits to maturity
and deduct this amount from the premium it was willing to pay the
RTC. The RTC receives significantly higher bids when the acquirer is
allowed to adjust the interest rates for the newly acquired
deposits. While the exact amount of the potential savings to the RTC




-

18-

for this policy is unknown, the 472 institutions in conservatorship
or on the OTS watch list as of January 3, 1990 held approximately
$156 billion in time deposits. If one assumes that one-third of
these deposits are high-cost funds on which an acquirer could lower
rates by 100 basis points, and that the average maturity from the
time of acquisition of the high-cost deposits was six months, the
savings to the RTC would be $260 million.
The policy is also fair to the insured depositor. Since the RTC has
provided the new institution with the necessary cash and other assets
to pay all the insured depositors of the old institutions, the
depositors have immediate access to their deposits with no prepayment
penalties. Depositors are given two weeks notice of the change in
rates so that they can pursue other savings options should they so
choose. In the one case to date where depositors were not given
sufficient notice, the RTC moved quickly to correct the situation.
Projections as to the number and size of institutions that— are
expected to be placed within the RTC*s ~iurisdiction. ^ The RTC relies
on the Office of Thrift Supervision to identify institutions that it
expects to place under the RTC's conservatorship program. In late
October 1989, OTS provided the RTC with a list of 223 such
institutions, which we refer to as the "OTS Watch List." The assets
of these thrifts, as reported on their most recent quarterly
financial reports, totalled $165 billion. Since receiving that list,
the OTS has placed 59 institutions, with total assets of $41 billion,
under conservatorship; three institutions were deleted from the list,
while two were added. The number of institutions on the Watch List
today is down to 163, with assets of $124 b-illion.
In discussions with the OTS, the RTC has indicated its ability to
take roughly six institutions per week into the conservatorship
program. Thus, the RTC could be reasonably expected to handle nearly
300 additions to its conservatorship program over the balance of
1990, if needed.
Asset Disposition
The goal of asset disposition is;
"To dispose of real estate and
other assets in such a way as to maximize the net present value to
the RTC while also minimizing the effect of these transactions on
local real estate and financial markets."
To meet the asset disposition goal, the Plan sets four objectives.
These are: (1) maximize the net present value recovery to RTC by
establishing policies, procedures and guidelines on all phases of the
asset disposition process; (2) to the extent practicable and
efficient, place assets under private control for management and
disposition under a program that employs incentive agreements,
assures open competition and assures compliance with the ethics and
conflicts provisions of FIRREA; (3) minimize the impact on local real
estate and financial markets while marketing assets expeditiously to
informed market participants? and (4) fully document the asset
management and disposition process.




-19The policies, procedures, and guidelines required to be established
by January 15, 1990 have been submitted to the Oversight Board for
review and comment. These guidelines are procedural. They deal with
requirements to notify bidders on assets in a timely manner, the
prohibition against discriminatory practices, outreach efforts for
minorities and women, and recordkeeping requirements for the RTC's
semi-annual inventory of real property assets.
The major emphasis of the first objective is to require the RTC to
establish comprehensive performance standards and written guidelines
on overall asset disposition strategies. The standards and
guidelines are due March 30 and are well under way. The guidelines
will cover such topics as appropriate marketing techniques, advances,
allowable sales prices and appraisal requirements.
The RTC is studying the issues presented by the "distressed area"
provisions of FIRREA and like many of the other implementing
provisions of the Plan, its policies and procedures in this area will
be made public by March 30, 1990. By the end of March, the RTC will
develop guidelines on disposition prices in distressed and
non-distressed areas.
Lastly, while the RTC is complying with the reporting requirements oi
FIRREA and the Plan, the RTC will move forward with setting standards
and implementing a comprehensive management information system.
Disposition of assets. The asset disposition process starts
immediately upon placing an institution in conservatorship under RTC
jurisdiction. In addition to implementing prudent operating controls
over the institution, RTC personnel aggressively downsize the
institution through the sale of liquid assets such as securities,
mortgage-backed securities, junk bonds and other issues which are
readily marketable.
Procedures to implement the orderly sale of real estate owned assets
are given priority. To accomplish this, appraisals are ordered on
all properties held by the conservatorship. From this information
the RTC will establish appropriate listing prices, expose the
property to the widest appropriate market, and negotiate the highest
sales price for the acquired property. All real estate owned
property with marketable title is eligible for sale from the date
that the RTC is named conservator.
The RTC believes it is vitally important to have real estate
appraisals that are well prepared, reflect realistic market values
and lead to sound business decisions. Thus, we have developed
uniform instructions to appraisers that must be followed in preparing
appraisals for the RTC. Additionally, we are closely monitoring the
state certification of real estate appraisers as required by FIRREA
and are actively participating with other federal regulatory agencies
in the development of uniform appraisal standards. These standards,
which appraisers must comply with, will help provide greater
consistency and accuracy in the preparation of appraisals used in
federally-related transactions. Finally, as part of the RTC's




-

20-

Contractor Registration Program, references supplied by appraisers
will be verified by RTC staff. This is particularly important m
identifying appraisers who have caused substantial losses by
previously preparing faulty appraisals for savings associations.
The RTC continues to dispose of assets through the resolution
process. The sale of a conservatorship frequently includes the sale
of part or all of the association's asset portfolio. We will employ
private sector asset management contractors to work out problem loans
and actively market for sale all real estate and other owned assets
not sold to acquiring institutions.
Securitization and the bulk sale of assets will be an important tool
used to dispose of assets. Currently, the Southeast Region is
conducting a pilot program for securitization or sale on a whole loan
basis of $12 billion in performing mortgage loans held by
institutions currently in conservatorship. The concepts used in this
pilot project will evolve into a nationwide policy regarding the sale
of many different types of assets.
The bulk sale of loans and real estate owned assets will similarly be
a tool in the sale of assets once the estimated fair market value has
been established. The RTC will package and attempt to sell all types]
of loans, both performing and non-performing.
Due to the relatively high costs associated with servicing small
assets, these assets will be aggressively marketed for sale to the
private sector.
Assets, particularly those held by receiverships, will be contracted
for management by the private sector. Asset contracting firms will
provide a wide variety of services, and it is these firms which will
specialize in the collection of problem credits and the management
and sale of RTC owned properties.
i

In managing and disposing of assets, our strategy is to employ the
private sector in two stages:
(1) portfolio analysis; and (2)
asset management and disposition. The portfolio analysis stage will
include a detailed review of assets across receiverships. The goal
of this process is to structure portfolios of assets based upon
product type, geography and other considerations and to gather
sufficient information to facilitate a competitive bidding of the
asset management and disposition contracts for these portfolios. The
information will be collected and placed on computer diskettes to ai
in the analysis of the information by the asset managers who will be
requested to bid on these contracts.
Once the portfolio analysis is complete, the RTC will request
sector firm^ to submit bidr to manage and dispose of asset
portfolios. To facilitate a fair and competitive process, we will
provide each prospective bidder with the information gathered in the
portfolio analysis stage as discussed above. The evaluation of bias
and the awarding of contracts will be based on a review of each
bidder's technical and managerial capacity and cost proposal. The
winning bidder will be the one with the best overall proposal.




-

21 -

Consistent with the RTC's goal of maximizing net present value, we
have provided appropriate incentives in the asset management
contracts to ensure that asset managers are rewarded for timely
dispositions.
Disposition activities will cover a wide variety of activities.
Auctions, bulk sales, and conventional property sales will be used to
dispose of real estate owned assets. Other miscellaneous assets will
be assigned to private sector contractors for collection or sale once
an appropriate valuation can be established.
Status and nature of the asset inventory. As mandated under FIRREA,
the RTC*s inventory of assets was completed by January 1, 1990 and
forwarded to Congress. Additionally, national nonprofit
organizations and the National Association of Governors have received
an affordable housing volume. We have made the four volumes of
inventory available to the general public for a small fee. We have
been gratified by the response to date, and have sold over 100,000
individual volumes. Copies also were sent free of charge to certain
libraries around the country.
The asset inventory consists of all real estate owned by the RTC as
of September 30, 1989. This includes approximately 30,100 pieces,
with a book value of approximately $15.8 billion. Our property
holdings are concentrated in the Southwest, as reflected below:
State

Residential

Total

Commercial

Land

Oklahoma
Texas
Arizona
New Mexico
Colorado
Louisiana

89
1,340
134
46
182
242

20
82
142
73
131
60

1,466
14,328
1,435
518
1,273
2.132

1,575
15,750
1,711
637
1,586
2.434

Subtotal

2,033

508

21,152

23,693

National Totals

2,516

794

26,813

30,123

81%

64%

79%

79%

$7.6

$15.8

Percent of
National Total
Book Value
(Billions)

$7.4

$0.8

All of these properties are for sale. In many cases, however, an
asking price has not been established due to the need for an
independent, updated appraisal. We have made the establishment of
asking prices a top priority.
One of our primary objectives is to be responsive to offers to
purchase assets from the RTC. Accordingly, we have implemented a
policy requiring a response to all offers within thirty days. This
policy exceeds the requirements of FIRREA in that a response is also




-

22

-

required when no final response to an offer can be given. For
example, when an account officer receives an offer to purchase
property where a valuation has not been established, the account
officer must tell the prospective purchaser, in writing, when a
listing price will be established. In short, RTC is a sales
organization and high quality service to the public is an absolute
requirement.
As we move forward, our plans are to enhance the information in the
inventory and make it more timely and accessible by employing several
mediums. For example, we will be providing the inventory on computer
diskettes or cdROMs. Moreover, we plan to provide a central database
which can be accessed through an 800 number by individuals with modem
equipped PCs.
Description and fair market value of assets held bv the RTC. The
estimated fair market value of all assets held in receivership by the
RTC as of December 31, 1989 was reported to be $4.7 billion with an
approximate book value of $7.9 billion. These assets include
securities, loans, fixed assets, real estate owned, and other assets.
Owned assets (real estate and miscellaneous personal property) total
$1.9 billion. Illiquid and distressed mortgages total $4.9 billion.
Loans, securities and other assets total $1.1 billion. The normal
collection process will involve foreclosure on a substantial number
of real estate parcels currently pledged as collateral for loans in
the mortgage category. The exact number of parcels to be foreclosed
is impossible to predict until financial capacity of the individual
mortgagors is determined. Obviously, we strongly prefer prudent
restructuring of loans over foreclosure.
Affordable Housing
The goal of the affordable housing provisions is: "To dispose of
eligible single and multi-family residential properties in a way that
maximizes the preservation of the availability and affordability of
residential real property for low- and moderate-income individuals."
The objectives of the affordable housing provisions section are
two-fold. They are:
(1) implement the statutory requirements of
FIRREA; and (2) fully document the program and its results.
While the implementation procedures are numerous, they can be
summarized as requiring the RTC to:
(1) implement a pilot program
for eligible properties as rapidly as possible? (2) consult with HUD,
other federal agencies and affected state housing agencies; and (3)
by March 30, 1990, implement an overall systematic affordable housing
program usi^^
federal ar.d state agencies
wherever practicable.
The RTC has developed interim guidelines to address the eligible
residential housing requirements of FIRREA. These guidelines have
been forwarded to the Oversight Board for review and approval prior




-23to beginning a demonstration program. A Program Director, Program
Coordinator, and staff in Regional offices are in place to implement
the affordable housing program..
The RTC, working with the National Governors Association, has
contacted state governors for support in confirming the designation
of housing finance agencies as clearinghouses and to identify other
housing agencies to support our efforts to ensure that qualified
purchasers benefit from the sale of affordable housing properties.
Governors and state housing finance agencies each received a copy of
the real estate owned inventory, Volume IV, Affordable Housing
Properties. The volume listing all residential properties is being
mailed to state housing agencies. We are making the full listing
available to give clearinghouses advance notice of all properties
currently owned that could fall within the scope of the program.
The procedures governing the involvement of state housing agencies
and national nonprofits were defined as a part of our interim
guidelines after extensive meetings with the organizations identifie
in the law and other parties who expressed an interest in serving as
clearinghouses. We recognize the support these organizations can
provide to the RTC in disseminating property information
expeditiously so that qualified purchasers have the benefit of
previewing and making an offer on eligible properties.
The RTC has consulted with HUD, other federal agencies, and secondar;
market entities to begin to identify and arrange for financing of
eligible property sales. HUD's office of Intergovernmental Relation:
is scheduling a series of meetings within the upcoming weeks for RTC
personnel to meet HUD staff with specific program responsibility. W<
have met with the Federal Housing Finance Board, both in Washington
and at the regional level, to solicit their cooperation in providing
financing from their affordable housing and community investment
funds. Contacts also have been established with national nonprofit
organizations that also will serve as clearinghouses and technical
assistance advisors.
The RTC plans to begin marketing properties under the interim
'guidelines no later than the end of the month. Our regional staff
informs us that as a result of the dissemination of the affordable
housing inventory there have been numerous expressions of interest by
potentially qualified buyers.
Approximately 700 properties will be offered pursuant to the interim
guidelines. The Oversight Board has encouraged the RTC to implement
this demonstration program and to analyze the results before offering
price discounts and concessionary financing. We expect to use the
demonstration effort to test our procedures for disseminating
property information through clearinghouses, to determine if
subsidies and financing are needed, and to document successful
examples of the involvement of nonprofit and state agencies in
purchasing properties to provide for assisted housing for low- and
moderate-income renters.




-24By far, however, the vast majority of affordable housing is held by
conservatorships. We have identified 10,000 properties (half of
which are in Texas) that appear to meet the affordable housing
criteria.
Surely, as new appraisals come in, the numbers will
increase.
We have heard concerns that we
may tryto sell all these
properties outside the low income housing program because FIRREA
specifically excludes conservatorships. That is not our intent. We
have issued instructions to conservatorships to not engage in any
aggressive programs to sell these properties, although they are
allowed to sell in the normal course of business. We anticipate that
the vast majority of these properties will pass to the RTC as thrifts
are sold.
Another concern we have heard expressed is that the RTC initially
will overvalue residential properties to allow them to escape the lov
income housing program. Again, that is not our intention, nor would
it be very practical. Once we determine a residential property
should qualify, we will place it in the program. In short, we will
comply fully with the intent of the law as directed by the Oversight
Board.
Finally, provision of asset management, brokerage and buyer
crualification services by public agencies and private sector firms is
being explored.
Ethical and Conflict of Interest Guidelines
The goal of the Conflicts of Interest and Ethical Standards section
is: "Adopt conflicts of interest and ethical standards for RTC
employees, officers, advisory board members, contractors, and
agents."
The Plan includes two objectives under this goal. They are:
(1)
develop regulations that - (a) govern conflicts of interest, ethical
responsibilities, and past employment restrictions for RTC employees,
(b) govern conflicts of interest for contractors, and (c) ensure that
RTC officers, employees, advisory board members, contractors and
agents meet appropriate standards? and (2) develop policies and
procedures for avoiding political favoritism and undue influence.
Conflict of interest and ethical standards. Subsequent to the
publication for public comment of the Oversight Board's Strategic
Plan, the Oversight Board and the RTC issued, for a 45-day comment
period, a joint notice of proposed rulemaking entitled Qualification
of. Ethical Standards of Conduct for, and Restrictions on the Use of
Confidential Information bv. Independent Contractors. The proposed
rule was drafted after consideration of the comments received on the
earlier interim statement of principles, which established minimum
standards of ethical conduct for independent contractors retained by
the RTC. The proposed rule further reflects specific concerns of the
Oversight Board. These concerns include the flexibility to meet the
statutory mandate of the RTC to engage the services of independent
contractors, as well as the protection and preservation of the
integrity of the procedures and processes we will follow in
performing our duties.




-25As with the development of any regulatory procedures, there were
comments from proponents and opponents of the standards of conduct ir.
the interim statement of principles and of the Oversight Board's
ethical concerns, as expressed in the Strategic Plan. Some comments
indicated that certain standards in the interim statement of
principles were overly stringent and would have a negative effect on
the overall success of the RTC. Others said that we were correct in
adopting stringent conflict of interest and ethical standards for
outside contractors and that the standards should be rigorously
enforced.
We anticipate a three-phased implementation of the independent
contractor ethics program. Phase one is the qualifying phase.
Contractors wishing to participate in contracting with the RTC must
first qualify according to standards for competence, experience,
fitness and integrity. They also must not be subject to any
mandatory bar to contracting. Phase two is triggered by a
solicitation for services. The solicitation will involve certain
certifications and representations by the qualified contractor. This
will include information and certifications about organizational and
personal conflicts of interest. Phase three, the award phase, will
include a contractual agreement stating that the contractor will
comply with all requirements of the RTC's independent contractor
regulations.
We are currently drafting final regulations reflecting the concerns
expressed by the public, in a manner consistent with the public trust
that has been placed upon the agency (See Attachment 9 for proposed
Regulation and Joint Notice of Proposed Rul-emaking.)
In addition to the proposed Regulations for Independent Contractors,
the RTC Board has issued proposed regulations for RTC employees,
prescribing ethical and other standards of conduct for RTC employees
no less stringent than those applicable to FDIC employees.
Measures to Avoid Political Favoritism and Undue Influence.
FIRREA requires the RTC to establish policies and procedures for
avoiding political favoritism and undue influence in the course of
its activities. -The Strategic Plan requires specific written
guidelines and procedures and draws upon current FDIC policies. The
Strategic Plan further requires that, prior to implementation of
permanent procedures, RTC employees must log all communications
between public officials (or their staffs) and RTC employees which
are intended to influence a case specific decision currently before
the RTC. These records must be made available for public
inspection.
To meet these requirements, we have developed a draft policy
statement and procedures for RTC employee interaction with public
officials.
(See Attachment 20 for a copy of the proposal.) These
procedures will allow RTC employees to respond to all appropriate
inquiries, requests or complaints made by or on behalf of public
officials. They will not allow responses that could result in a
personal or financial benefit otherwise unavailable through the




-26normal and efficient course of RTC operations. We believe these
policies are fair to all parties. However, because of the nature of
these provisions, we would appreciate any feedback that members of
the Committee wish to provide. We will gladly consider any comments
before finalizing these policies.
To meet the interim log-keeping requirements of the Strategic Plan,
we have given all employees notice that telephone logs must be
maintained. Such logs are now in use throughout the agency.
(See
Attachment 2JL for a copy of the explanatory memorandum and the log
sheet.) This requirement will be made permanent under the above
proposed procedures.
External Relations
The goal of the External Relations section is: Establish and
maintain open communications with the Congress, other government
offices, and the public to increase understanding of RTC policies ant
actions.
The objectives of this section are to:
(1) promote public
understanding of the RTC's policies and actions, and (2) consult wit
other government offices in developing guidelines and procedures.
As discussed earlier and detailed in Attachments 5, 6 and 7, the RTC
has developed a number of ways to keep the public informed of its
operations. In addition to existing publications, advertisements,
toll-free numbers, seminars and a reading room, the RTC soon will be
publishing guides on buying assets and contracting for asset
management, legal, and other services. Also, the RTC has increased
its efforts to insure the timely response to requests under the
Freedom of Information Act.
Administration
The goal of the Administration section is to: Assure that the RTC
has sufficient and effectively managed human and financial resources
to achieve the mission and goals of the agency.
The objectives of this section are:
(1) assure that resources are
effectively managed; (2) ensure fiscal responsibility; (3) respond in
a timely and efficient manner; and (4) cooperate with independent
auditors, the Inspector General and the Oversight Board.
In addressing objectives in this section of the Strategic Plan, items
related to RTC operations in which the Committee has expressed an
will be covered in some detail. In addition to discussing
the RTC1s progress in meeting the objectives stated in the Strategic
Plan, the proposed administrative expense budget, staffing plans, and
status of the integration of Federal Home Loan Bank Board (FHLBB) and
Federal Savings and Loan Insurance Corporation (FSLIC) staff into the
RTC and FDIC will be presented.




-27Operating budgets and plans. Our efforts to meet the objective of
effective resource management include the development and submittal
of operating and administrative expense budgets for each quarter
through calendar year 1990. Details of the most recent
administrative expense budget approved by the RTC Board are included
as Attachment 12.
Many variables affect the RTC's budgets including the number of S&Ls
under RTC control, type and pace of resolutions, availability of
qualified contractors, and recovery rate of various assets. Until
these variables can be better forecast, it is very difficult to
provide meaningful budget estimates for future periods. As a result,
the RTC Board has approved only a first quarter 1990 budget. We will
review financial performance mid-quarter and then consider budgets
for the remaining quarters of 1990.
In the first quarter*s budget, about $230 million was requested for
operating expenses. Of this amount, 70 percent is attributable to
outside legal and asset management fees, and 15 percent to salaries
and benefits. Early estimates suggest that the RTC's operating
budget for 1990 could approach $1.5 to $2.0 billion assuming an
annual resolution rate of about 200 institutions.
We anticipate
that 85 percent of this budget will be for outside services, which
reflects our goal of at least 80 to 90 percent of asset workload
being contracted out to the private sector.
Resource allocation and reprogramming. As part of the Strategic Plar
requirements and to assure that the RTC's resources are effectively
managed, we are in the process of developing and implementing
bottom-up budget procedures by which estimates of administrative
expenses can be formulated into budgeted amounts that reflect current
operating plans of the organization. These estimates, once approved,
will form the basis for ongoing monitoring of expenditures, variance
reporting, and reallocation of resources to most efficiently and
effectively meet corporation goals and objectives, much in the same
manner as is being done in the FDIC. The RTC provides significant
input to the FDIC Quarterly Corporation Status Report and, when
variables affecting the RTC budget stabilize, we will use performance
measures and expenditure data from this report to reassess and
reallocate resources as needed.
Staffing plans. Like the budget, RTC staffing is heavily dependent
upon many variables. A key variable is the ability to successfully
contract with the private sector for an unprecedented amount of
work. Included in the preparation of materials to justify our budget
requests are staffing plans for first quarter 1990, including
organizational charts and functional distribution of staff.
Attachment 13. provides this detailed information.
Currently, the RTC has almost 1,900 dedicated personnel, of which
over 600 are Managing Agents and their staffs in conservatorships.
Although between 15 percent and 20 percent of the current staff is
located in Washington, based on staffing projections this ratio
should decline to about 10 percent by the end of 1990.




-

28

-

Alt hough it is always a difficult process to merge professional
staffs from organizations with different missions and backgrounds,
the RTC continues to place former FSLIC, FHLBB, and FADA personnel in
RTC jobs. In fact, most of RTC current staffing comes from FSLIC and
FDIC. Six hundred and fifty people are from FDIC, largely from the
Division of Liquidation. Nearly 190 people from various FSLIC
operations were allocated to the RTC and RTC support units in the
FDIC. In addition, the RTC has hired about 20 persons from the FHLBB
and 80 from FADA.
Due to the non-permanent nature of the RTC, we are attempting
wherever possible to hire temporary professional and support
personnel. Over 60 percent of the field staff are non-career,
temporary employees hired under appointments of one to three years in
length. This ratio will increase as temporary employees continue to
account for most new hires.
Organizational structure. The RTC organizational structure is still
evolving, but we plan to be a decentralized corporation. Included in
Attachment .13 is the organizational chart for Washington as well as
charts for typical regional offices. The RTC will be divided into
four regions, and we expect to have a total of 14 consolidated
operational field offices (CFOs). Ten of the CFOs are ready to begin
operations now and we plan to sign leases by the end of the first
quarter 1990. We have initiated the staffing process and we will be
able to fully staff all sites after space has been acquired.
Regional offices will oversee all resolution and asset and
contracting operations. Consolidated field offices will focus on
asset and contract oversight, performing the majority of work in this
area.
Minority- and Women1s-Outreach Program. Included in the implementing
procedures of this section is the requirement that RTC develop and
present to the RTC Board a Minority- and Women's-Outreach Program in
accordance with the policies outlined in the discussion portion of
the Plan. An Interim Minority- and Women's-Outreach Program was
approved by the RTC Board on December 12, 1989. The Program involves
the identification, certification, promotion, and solicitation of
minority- and women-owned firms for participation in RTC contracting
activities. Staff will be dedicated by the RTC to the implementation
and overview of this Program (See Attachment 14 for a copy of the
Interim Program). In concert with RTC's Minority and Women's Affairs
Officer, RTC case resolution staffs will speak at various non-RTC
programs around the country in an effort to encourage the active
participation of minorities and women in the bidding process.
The RTC will amend its Interim Outreach Program in the near future to
incorporate the technical factor adjustments and price advantages
approved by the Oversight Board. These modifications to RTC's
Interim Outreach Program were sought by the RTC. Our Report on this
program required by FIRREA already has been forwarded to the Senate
leadership. The RTC is fully committed to including women and
minorities in our contracting program.




-29Fiscal responsibility, responsive reporting, and cooperation with
auditors. The RTC intends to cooperate with the Oversight Board,
Congress, other Federal agencies, the General Accounting Office, and
the Inspector General. We will do our best to be timely and
efficient in all our activities. We will create systems and
implementing procedures to ensure fiscal responsibility and effective
management of the RTC's resources.
Utilization of the private sector. Draft guidelines have been
developed for utilization of the private sector as required by
FIRREA. We are committed to using the private sector extensively in
carrying out our mission. We have developed a three-phase process
for evaluating potential contractors which encompasses (1) ethical
standards, (2) technical competence and (3) competitive bidding
procedures.
We have sent to about 3,500 interested parties the RTC's contractor
application packages. The contractor's application package is found
at Attachment 15. These packages will guide the interested
individuals and firms through this three-phase process and
potentially qualify them for contracting opportunities with the RTC.
RTC offices in Washington, the Regions and the Consolidated Sites are
hiring employees to specifically ensure implementation of the RTC's
contracting guidelines.
III.

OVERSIGHT BOARD

There has been considerable criticism of the pace at which the RTC is
moving in the sale of institutions and assets during its first six
months. In our view, the pace has been satisfactory, although it
surely could have been swifter. We have just described many of the
accomplishments of the RTC since its creation in early August of last
year.
Part of this discussion has centered on the structure of the
RTC-Oversight Board and its effect on the pace of dealing with
insolvent savings associations. It is our view that the working
relations between the RTC and the Oversight Board have been good as a
result of outstanding efforts by Executive Director David C. Cooke
and Oversight Board President Dan Kearney.
It also is evident that we have an unusual structure. There are two
Boards involved each of whose duties are provided by law. This
necessarily makes doing business more time consuming than if we were
working in a more traditional structure. The structure, however,
provides more controls and policy checks than would be available in a
more traditional organization. Given the unusual, precedent-setting
job involved in cleaning up the thrift industry, such control and
such a unique structure may be appropriate.
How effectively it will operate is a question that should be examined
over time. It is too early to make a judgement at this point. We
raise it now only in answer to the ''too slow" comments. The system




-30in place ¿s slower and more bureaucratic than a more normal structure
with one board and one organization.
IV.

FDIC ISSUES

Status of Savings Association System and SAIF
The savings association system is entering a transitional period
which will determine the fate of the undercapitalized segment of the
industry. Events during this transitional period will determine the
size of the SAIF assessment base, that is, the deposits of
SAIF-insured institutions. The growth of this base has varied
dramatically over time. From mid-1978 to the end of 1982, deposits
at (presently) SAIF-insured institutions grew at an annual rate of
7.4 percent. This was followed by two years of rapid deposit growth
of 19.4 percent per year. From the end of 1984 through the first
quarter of 1988, deposits grew at a more normal 6.4 percent annual
rate. As of the third quarter of 1989, savings association deposits
were as they were in March, 1988. Deposit outflows, however, have
occurred in recent months.
The SAIF assessment base was $957 billion as of September 30, 1989,
down from $972 billion in December 1988 — but largely unchanged from
$957 billion in March, 1989 and $960 billion in June, 1989. While it
is too early to predict the long-term trend of the SAIF assessment
base, there are some reasons to expect that the base may decline in
the short run. The new capital standards imposed on thrifts by
FIRREA have forced many thrifts attempting "to conform to the new
standards to shrink in order to increase their capital ratio and
others to at least stop growing so they can remain in compliance with
the new standards.
This spring, the Office of Thrift Supervision will issue rules for
the interest rate risk component of the Risk Based Capital standard.
These regulations might increase the risk based capital required for
some thrifts and could thus cause additional institutions to curtail
their growth or force further downsizing if institutions are failing
their capital requirements. As thrifts adapt to the new regulatory
environment, the assessment base may begin to grow. However, that
does not seem likely in the short term.
In light of the uncertainties facing the industry during the next few
years, the FDIC has not felt that a "projection” of the SAIF
assessment base would be meaningful. The current condition of many
S&Ls may vary sharply from what is indicated by their public
financial statements and old examination reports. Future events are
even more uncertain. These include the behavior of interest rates,
the condition cf local real estate markets, and the condition of the
economy generally. All these factors will influence the ability of
the thrift industry to attract capital and hence to grow. We have
found this to be the case in some of the savings associations we have
examined so far.




-31FDIC Examination of Savings Associations
Since the enactment of FIRREA in August of last year and through
January 15, the FDIC has commenced or completed 363 examinations of
savings associations. The following schedule presents a regional
breakdown of those examinations:
Recrion
Atlanta
Boston
Chicago
Dallas
Kansas City
Memphis
New York
San Francisco
Total

Total
21
23
94
37
58
41
36
53
363

In most instances, our examinations have been conducted in
conjunction with an OTS examination or other presence at the
institution. This reflects our desire to avoid inappropriate
duplication with the OTS and to avoid placing an unnecessary burden
on the institutions. We anticipate that the pace of examinations
W1^ escalate. Currently, our pace is somewhat deliberate due to th(
types of institutions initially targeted for examination.
The primary criteria for selecting which thrifts should be examined
fi^*st has been the perceived degree to which they were believed to
present exposure to the Savings Association Insurance Fund. In
reviewing that risk perception, associations were selected because ol
low capital, asset problems, poor earnings, or because they otherwise
bore a risk to either the RTC or the Savings Association Insurance
Fund. Also of importance initially is whether an OTS examination of
the institution has been scheduled.
The asset quality of many of the institutions examined to date has
been lower than 'expected. In many cases this has been the result of
a marked degree of deterioration in real estate collateral values and
paying capacities over that previously noted.
In general, savings associations that engaged in lending or other
activities beyond residential real estate loans are more likely to be
experiencing asset-quality problems. In these institutions, reserves
for loan losses are generally inadequate and earnings are poor due to
low net interest margins and high fixed overhead expenses. Capital
is inadequate and a number of these savings associations are found to
be insolvent.
To the degree that we examined better-rated institutions, we found
many thrifts which are exactly as they were portrayed to be —
single-family residential lenders with few asset-quality problems but
with unbalanced rate sensitivity positions resulting in marginal
earning capacity.




-32Status of Guidelines and Regulations
FIRREA places certain responsibilities with the FDIC for matters that
can have a direct effect on the RTC's ability to resolve problem
thrift situations in a cost effective and non-disruptive manner. Of
Particular importance are the FDIC's responsibilities with respect tc
setting entrance and exit fees and developing guidelines covering
open-thrift assistance.
FIRREA mandates that both exit and entrance fees be levied in all
case where the insurance liability for deposits is converted from one
deposit insurance fund to the other. The FDIC is charged with the
sole responsibility to set the entrance and exit fees for BIF-to-SAIi
conversions; interim regulations have been issued to cover these
types of transactions.
Because of the relationship of insurance premiums paid by
SAIF—members and the funds that become available to service FICO
borrowings, FIRREA placed authority to set exit fees for SAIF-to-BIF
conversions jointly with Treasury and the FDIC. Understandably,
Treasury is more concerned with the servicing of FICO obligations,
whereas the FDIC's focus is on protecting the integrity of BIF and
in part by facilitating resolutions of insolvent thrifts.
While these are competing goals, Treasury and the FDIC have reached a
compromise, and new regulations in this regard will be issued
shortly.
Another area of importance is developing and publishing criteria the
FDIC will use in determining whether a request for open thrift
assistance should be recommended to the RTC. As indicated earlier,
it is important that a reasonable policy be developed and, when
appropriate, thrifts be rehabilitated without placing assets into
liquidation. The FDIC will be publishing proposed guidelines and,
where appropriate, regulations in the next few weeks.
Placement of Employees
By early February 1990 the FDIC anticipates that all of the personnel
reassignments involving former FSLIC and FHLBB employees will be
completed. To date, 400 of the affected employees (out of a total of
750) have been placed in jobs either at the FDIC or the RTC.
V.

LIQUIDATION OF FADA

FIRREA requires liquidation of the Federal Asset Disposition
Association (FADA) within 180 days of enactment (February 5, 1990).
The FDIC, as manager of the RTC, is responsible for carrying out this
liquidation. With the exception of a final distribution of funds,
FADA will be liquidated by February 5, 1990. At that point, only the
resolution of outstanding litigation claims will remain before final
distribution can be made to the FSLIC Resolution Fund as the sole
shareholder of FADA. Attachment ¿6 provides a detailed outline of
the steps taken to accomplish the goal of liquidating FADA.