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TESTIMONY OF
WILLIAM TAYLOR
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
APPROPRIATIONS TO COVER THE GUARANTEES AND
OBLIGATIONS OF THE FORMER FEDERAL SAVINGS
AND LOAN INSURANCE CORPORATION
BEFORE THE
SUBCOMMITTEE ON VA, HUD AND INDEPENDENT AGENCIES
COMMITTEE ON APPROPRIATIONS
UNITED STATES SENATE
9:30 AM
APRIL 2, 1992
116 DIRKSEN SENATE OFFICE BUILDING
Madam Chair and members of the Subcommittee, I am pleased
to have the opportunity to address the fiscal year 1993
appropriation request of $6,772 billion to meet the continuing
obligations of the former Federal Savings and Loan Insurance
Corporation (FSLIC).
In addition, I will briefly highlight the
progress the Resolution Trust Corporation has made toward
realizing savings from expenditure of prior years'
appropriations.
I also will touch on aspects of the Federal
Deposit Insurance Corporation Improvement Act that are subject
to appropriation.
OVERVIEW
In order to manage the savings and loan crisis the
Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA), among many things, established the Resolution Trust
Corporation (RTC), the FSLIC Resolution Fund and the Savings
Association Insurance Fund (SAIF).
All assets and liabilities
of the former FSLIC were transferred to the FSLIC Resolution
Fund.
This includes all liabilities arising under the financial
assistance agreements and all FSLIC related litigation.
The
government's obligation for future savings association failures
was transferred to the RTC until September 30, 1993 and the RTC
must terminate its operations on or before December 31, 1996.
The SAIF was created to replace the FSLIC and will be the
receiver for savings associations that fail after September 30,
1993.
2
The FSLIC Resolution Fund was established to cover the net
liabilities of the old FSLIC.
The appropriations we request are
made solely to ensure that the obligations of the Federal
Government, obligations that are now several years old, are met
as they come due.
Operationally, the relationship of the FSLIC Resolution
Fund to the Federal Deposit Insurance Corporation is unusual and
complex.
Under the law, FDIC has responsibility for the fund
but the Resolution Trust Corporation has the authority for
renegotiating assistance agreements and notes that have come to
be known as the ”1988 deals."
All assistance agreements were entered into by the former
FSLIC under Section 406(f) of the National Housing Act and were
approved by the former Federal Home Loan Bank Board.
Assistance
transactions were done to facilitate the acquisition of failed
or failing thrifts.
The impetus for the Bank Board's use of
assisted transactions was the lack of liquidity in the FSLIC
insurance fund.
In sum, an assistance agreement is a contract between the
FSLIC Resolution Fund and an acquirer which specifies procedures
and actions the acquirer must take prior to incurring major
expenses or losses that are to be reimbursed by the FSLIC
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Resolution Fund.
Typically, these agreements would include
some, but not all, of the following provisions:
o
Payment in cash, or with a note, to cover all or a
negotiated amount of the negative net worth of the
failed institution(s);
o
Capital loss coverage which provides payment for the
difference between book value and net sales proceeds on
"covered assets."
The amount and nature of covered
assets is identified in each agreement;
o
Yield subsidies, which ensure a defined level of return
on covered assets;
o
Indemnifications to the acquirer for legal expenses in
connection with lawsuits against the failed institution
or other contingencies;
o
Loss—sharing arrangements in which the acquirer bears a
percentage of loss upon disposition of covered assets;
o
Gain-sharing arrangements, in which a percentage of
gain realized on the sale of covered assets above some
benchmark, are provided as an incentive to the acquirer
to obtain the maximum price for covered assets;
4
o
Tax benefit sharing provisions that arise from the
acquirers' use of preacquisition net operating losses
(NOLs) as well as other tax features of the agreements.
o
Buy out options under which the FDIC may elect to
purchase covered assets;
o
Warrants which entitle the FSLIC Resolution Fund to
share in any increase in value in the assisted thrift.
In some instances, this also may include sharing in
earnings;
o
Mark-to-market coverage which may reimburse the
acquirer for the difference between book and fair
market value of remaining covered assets when the
agreement terminates or for goodwill established for
assets that are not covered.
Under FIRREA, the physical assets acquired by FSLIC from
the closure of failed thrifts were assigned to the FDIC for
collection.
In addition, the FDIC was assigned responsibility
for the administration of 202 assistance agreements with
operating institutions.
The responsibility for administering
the agreements was subsequently assigned by the FDIC to the
Resolution Trust Corporation since it was the RTC that was
required by law to renegotiate many of these transactions.
5
We believe we have come a long way toward winding up the
obligations and liquidating the assets inherited from the
FSLIC.
When we acquired responsibility for these assistance
agreements in late 1989 there were 202 assistance agreements
outstanding with FSLIC notes totalling nearly $20 billion and
covered assets totalling about $58 billion.
remain 131 active assistance agreements.
Presently there
FSLIC notes have been
reduced to approximately $2.4 billion and covered assets to
about $14 billion as of December 31, 1991.
ASSETS IN LIQUIDATION
The FDIC also acquired from FSLIC roughly $14 billion in
assets resulting from failed savings and loans.
The volume of
FSLIC Resolution Fund assets held by the FDIC has been reduced
from $14 billion to about $8.9 billion as of December 31, 1991.
The additional funds generated by FDIC asset sales, combined
with assessment income from SAIF premiums, serve to reduce the
size of the annual appropriation.
However, SAIF premiums are no
longer available to the FSLIC Resolution Fund after 1992.
ASSISTANCE AGREEMENTS WITH OPERATING INSTITUTIONS
In prior year's testimony, the RTC outlined several steps
that could be taken in our efforts to lower the overall cost of
the assistance agreements:
(1) prepayment of FSLIC promissory
notes; (2) renegotiation of the largest agreements where
6
possible; (3) repurchase of covered assets and the placement of
these assets with other managers where cost effective; (4)
buyout of smaller agreements to save administrative costs; and
(5) further note prepayments and covered asset write-downs with
any remaining appropriated funds.
Through the appropriation of additional funds in both
fiscal years 1991 and 1992, the RTC implemented the cost-savings
plan.
We are pleased to report substantial progress.
During
fiscal year 1991 and through February 29 of fiscal year 1992 the
RTC, on behalf of the FSLIC Resolution Fund, took the following
cost-savings steps: 1) Prepaid notes aggregating $16.0 billion;
2) continued to prepay the New West/American Savings Bank
intercompany note at the earliest contractual opportunity; and
3) directed the write down of $4.2 billion in covered assets
through December 31, 1991.
In addition, the RTC made significant progress in
renegotiating the 96 separate assistance agreements for which
the FSLIC Resolution Fund had a continuing obligation.
Renegotiations have been completed on 43 agreements and another
19 agreements are in process.
There were 24 agreements that
expired according to their original terms and a final 10 remain
to be addressed.
Attached is a schedule which shows the outlays
expended in these activities through February 29, 1992 together
with estimates of the present value savings achieved to date.
7
These savings range from roughly $1.2 billion to the government
as a whole before tax benefits, to $2.4 billion, assuming full
use of tax benefits in the period generated.
The RTC also made substantial progress in its efforts to
restructure or dispose of about $1 . 1 billion of assistance
transaction related capital instruments owned by the FSLIC
Resolution Fund.
These instruments took a variety of forms
including preferred stock, subordinated debt, warrants and
income capital and/or net worth certificates.
Upon passage of
FIRREA, these instruments no longer could be counted as core
capital.
As of December 1991, approximately 93% of these
instruments have either been redeemed, restructured or written
off.
As a result, several large thrifts were able to have their
capital plans approved by the Office of Thrift Supervision.
This salvaged value for our investment and avoided potentially
more exposure by reducing the possibility of failure of the
institutions.
REMAINING FISCAL YEAR 1992 APPROPRIATION
For fiscal year 1992, the FSLIC Resolution Fund anticipates
gross cash inflows of about $19.0 billion.
This will consist of
fiscal year 1992 appropriations of $15.9 billion and the
collection proceeds from receivership assets, SAIF assessments
^ p n d miscellaneous receipts of approximately $1.8 billion, in
8
addition to a carryover of about $1.3 billion in obligated
appropriations from fiscal year 1991.
Payments required for contractual obligations from existing
agreements and administrative costs are estimated at about $4.8
billion.
During fiscal year 1992 we have expended, or have
committed to spend, about $6.0 billion to renegotiate notes and
agreements.
Thus, as of February 29, 1992, there remains
approximately $7.0 billion in discretionary funds available
through September 30, 1992 for continuing renegotiations,
modifications and restructuring of the 1988-89 FSLIC Assistance
Agreements.
This total does not include approximately $1.2
held in reserve for potential increases in contractual
obligations during the remainder of the fiscal year.
While it
is necessary to keep plans fluid as renegotiations continue, the
anticipated uses of funds are as follows:
o
$3.4 billion for renegotiations;
o
$2.5 billion for the termination of agreements
with institutions under RTC control;
o
$600 million (net) for New West intercompany note
prepayments; and
o
$500 million for further directed write-downs.
9
*
The $2.5 billion estimate of the amount necessary to
terminate the agreements with institutions under RTC control
will not be spent in the current fiscal year if renegotiation
savings can be achieved by accelerating obligations due at
privately-held institutions.
Any part of the 1992 appropriation
which cannot be appropriately obligated will lapse.
FISCAL YEAR 1993 APPROPRIATION
Appropriations for the FSLIC Resolution Fund, unlike most,
a*‘e not composed of specific line items subject to separate
analysis and funding decisions.
Rather, the request calls for a
single line item driven by economic estimates, and a pace of
doing business by, and with, holders of major assistance
agreements.
The required funding is the difference between
other FSLIC Resolution Fund funding sources, principally
collections from the sale of the Fund's assets, and the
obligations due for payment during the fiscal year.
The amount of appropriations requested in the President's
budget for 1993 represents the upper end of a range of
possibilities that depend on how events unfold in 1992.
If
particular obligations can be prepaid or renegotiated in 1992
they will not need funding in 1993.
Unfortunately, successful
renegotiations cannot be guaranteed and therefore funding must
^be
sufficient to provide for these obligations in 1993 should it
continue to be required.
10
For fiscal year 1993 we anticipate total cash needs of
between $5.2 billion and $7.0 billion including a rollover of
$500 million from the previous year.
The difference largely
represents funds for termination of agreements with institutions
controlled by the RTC if such agreements are not terminated in
1992.
The base need of $5.2 billion will provide for
contractual obligations of ongoing agreements and optional note
prepayments.
We project non-appropriated cash receipts of
approximately $1.0 billion from the liquidation of assets and
other sources in fiscal year 1993.
This results in a projected
shortfall ranging from $4.2 billion to $6.0 billion which will
require appropriated funds.
However, this estimate is highly
dependent on real estate values and the general state of the
economy.
The Administration's request for an appropriation of
$6,772 billion would provide adequate funds for the FSLIC
Resolution Fund under any scenario.
FUTURE FRF APPROPRIATIONS
We anticipate the process of renegotiating the ”1988 FSLIC
deals” should be completed in fiscal year 1992.
Although we
cannot say with certainly, presently it appears the FSLIC
Resolution Fund should be close to self-funding in fiscal year
1994.
This depends on factors that are not totally within our
control —
such as the strength of the economy and the market
value and liquidity of FSLIC Resolution Fund receivership
11
I
assets.
Nevertheless, any appropriations needed in fiscal year
1994 should be very modest in relation to past requests and the
request before you for fiscal year 1993.
NEW PROVISIONS OF THE FDTC IMPROVEMENT ACT
We will comment briefly on the FDIC's plans for
implementing two programs created by the House Banking Committee
and authorized by the Federal Deposit Insurance Corporation
Improvement Act of 1991.
appropriations.
Both programs are subject to
Neither of these programs —
as provided for in
section 241, FDIC Affordable Housing Program and section 231,
Bank Enterprise Act, were proposed by the FDIC.
However, we are
evaluating approaches to implementing these programs in
cooperation with the other agencies involved.
FDIC AFFORDABLE HOUSING
^ull implementation of an affordable housing program, as
envisioned by the statute, is subject to the availability of
appropriated funds.
The Act envisions a separate annual
appropriation of $30 million for "losses” under the affordable
housing program.
We expect that "losses" will be incurred
primarily from the sale of multifamily properties and low-cost
financing to be offered by the FDIC at its option, as provided
under the Act.
Substantial losses on the sale of single
family and condominium properties are not anticipated.
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On March 1, 1992, the FDIC implemented an affordable
housing program that complies with many of the provisions of
section 241.
The remaining provisions of the section 241 will
require an appropriation to fully implement —
provisions relating to multifamily properties.
particularly
Once funds are
appropriated, we anticipate little delay in implementing the
balance of the program.
The current estimated annual cost of
personnel, and related training, travel, supplies and overhead
is $10 million.
The program we are implementing involves a dedicated staff
to work closely with potential purchasers, national and state
agencies and local groups to find financing, advertise our
program, counsel buyers and qualify potential purchasers.
The program that became effective on March 1, 1992
includes:
1.
Restricting for 180 days, the purchase of eligible
single family and condominium housing to eligible
individuals under the Act (except for current tenants)•
2.
Notifying state clearinghouses of the availability of
single family properties as potential low-income
housing.
3.
Requiring a profit recapture on any resales within
twelve months.
4.
Notifying state clearinghouses of the availability of
multifamily properties as potential low-income housing.
5.
Contacting other agencies to learn of potential
financing programs and specifics of their affordable
housing programs.
BANK ENTERPRISE ACT
Section 231 of the FDIC Improvement Act of 1991, termed the
"Bank Enterprise Act", is designed to encourage insured
depository institutions to provide deposit and loan services to
economically disadvantaged borrowers and communities through
reductions in FDIC insurance premiums.
The specific programs
authorized are: (1) reduced assessment rates for insured
depository institutions offering "lifeline" accounts; and, (2)
community enterprise assessment credits ("CEACs") towards
deposit insurance premiums for insured depository institutions
making loans and taking deposits in distressed communities.
The provisions of section 231 authorizing these programs do
not take effect until appropriations are provided.
Although the
data are not sufficient to permit a precise estimate of the
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costs of these programs, it may be worthwhile to illustrate how
the costs may vary depending on response by consumers and
depository institutions to these programs.
Approximately $2.6 trillion is held in domestic deposits at
FDIC-insured institutions, including both commercial banks and
thrift institutions.
For each one percent of deposits
attributed to lifeline accounts, the assessments amount to $60
million per year, based on the current deposit insurance premium
of 23 basis points.
With a 50 percent assessment credit, the
cost of each one percent deposit share amounts to $30 million
per year.
Consumer use of lifeline accounts will depend on how
the accounts are defined and whether the reduced assessment is
sufficient to make offering such accounts cost effective.
Community Enterprise Assessment Credits are generated from
increases in loans made to low and moderate income borrowers in
distressed communities.
Furthermore, institutions with branches
in distressed communities can earn credits for increases in any
deposits taken, and any loans or other investments made within
distressed communities by those branches.
The amount of this
credit varies depending on whether or not an institution meets
the criteria to qualify as a community development organization.
Without such qualification, the assessment credit is equal to 5
percent of the increase in loans made plus the increase in
deposits taken, except deposits that exceed the volume of loans
4
- 15 -
made are not counted.
The credit is 15 percent for institutions
that qualify as community development organizations.
The total
credit for an institution is subject to a cap of 20 percent of
total assessments or 50 percent of total assessments for a
qualified community development organization.
Deposit insurance assessment credits could be powerful
incentives in the early period of this program.
In addition to
the normal interest and fees charged, a bank could receive an
additional 5 to 15 percent of the loan in the form of an
assessment credit*
For example, a bank that qualified as a
community development organization would receive a $15,000
credit for each $100,000 increase in qualifying loans.
If the
bank also increased qualifying deposits by the same amount it
would receive an additional credit of another $15,000.
No
program in the past has provided similar incentives to
depository institutions and the impact could be substantial.
In
fact, the limits imposed on total assessment credits would
likely function as the binding constraint.
The FDIC is identifying needed regulatory and
administrative changes so that we are positioned to move quickly
should appropriations be made available for the Bank Enterprise
Act.
We believe that if appropriations were made by mid-year,
we would be positioned to have these programs fully implemented
for the first deposit insurance premium assessment period of
1993.
-
16
-
Madam Chair, this concludes my prepared statement,
be happy to respond to any questions that you may have.
I would
FY91 and YTD FY92 ACTIVITY
1988-89 FSLIC ASSISTANCE AGREEMENTS
SUMMARY OF CASH EXPENDED AND SAVINGS ACHIEVED
($MHUONS)
Report Date:
February 29, 1992
Present Value
Estimated Cost Savings
Action Taken______________ Cash CXrtlay______ Minimum*________ Maximum**
FSLIC Note Prepayments
InvestorKXmed
Government-Controlled
7,092.9
4,363.6
503.9
N/A
1,057.7
N/A
Covered Asset Write-downs
Investor-CXmed
Government-Controlled
3,985.8
249.4
218.8
N/A
400.9
N/A
3,148.5
0.0
172.0
N/A
609.0
N/A
458.6
2,372.6
20.3
N/A
29.3
N/A
1,680.9
259.6
N/A
333.3
N/A
Renegotiations
Investor-CXiied
Government-Controlled
Settlements
Investor-CXmed
Government-Controlled
Other Activities
Investor-CXmed
Government-Controlled
Totals
Investor-CXiied
Government-Controlled
0.0
16,366.7
6,985.5
1,174.5
N/A
2,430.2
N/A
* Minimum Cost Savings is the present value cost savings to .the Federal
Government as a whole, assuming no tax benefits utilized.
** Maximum Cost Savings is the present value cost savings to the Federal
Government as a whole, assuming full use of tax benefits in the period
generated.
@FedFRASER