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53-005-CO J30^

AND LOAN INSURANCE
PITAUZATION ACT (H.R. 27)

BRINGS

BSrORE THE

BANKING, FINANCE AND
?AN ATFAIRS

BPRBSENTATIVES

NDREDTH CONGRESS

ILR.27

Provision of additional FiNANaAL re- \

\ SOWINGS AND LOAN INSURANCE CORPO-

'<H^HY 21 UDd 22. 1987

09/92 53-005-00 JJO T ^|

FEDERAL SAVINGS AND LOAN INSURANCE
CORPORATION RECAPITALIZATION Aa (H.R. 27)

HEARINGS

BEFOEETME

COMMITTEE ON BANKING, FINANCB AND

UBBANATFAffiS

HOUSE OF REPRESENTATIVES

ONE-HUNDREDTH CONGRESS

H.R.27

A BILL TO FACILITATE THE PROVISION OF ADDFnONAL FINANOAL RE-

JANUASY 21 and 22, 19ST

Printed for the use of the Committee on Banking, Finance and Urhan AfTaiia

Serial No. 100-1

U^. OOVKBrnOENT PRINTINa OFFICE
WAfiHINOTON : 18B7
F«r wla bf Uk SupHiotaoihal sf Documutt. Ccavta^cnal a-a

HOUSE COMMITTEE ON BANKING. FINANCE AND URBAN AFFAIRS
FERNAND J. ST GERMAIN, Rhode bland. Chairman

HENRY B. GONZALEZ, TeiHH
FRANK ANNUNZIO, Illinois
WALTER E. FAUNTROY, Digtrict of

Columbia
STEPHEN L. NEAU North Carolina
CARROLL HUBBARD, Jr., Kentucky
JOHN J. LaFALCE, New York
MARY ROSE OAKAR, Ohio
BRUCE F. VENTO, Minnesota
DOUG BARNARD. Jr., Georgia
ROBERT GARaA, New York
CHARLES E. SCHUMEH, New York
BARNEY FRANK, Massachugette
BUDDY ROEMER, Louisiana
RICHARD H. LEHMAN. California
BRUCE A. MORRISON, Connecticut
MARCY KAPTUR, Ohio
BEN ERDREICH, Alabama
THOMAS R. CARPER. Delaware
ESTEBAN EDWARD TORRES, Colifornia
GERALD D. KLECZKA Wisconsin
BILL NELSON, Florida
PAUL E. KANJORSKl Pennsylvania
THOMAS J. MANTON. New York
ELIZABETH J. PATTERSON, South Carolin,
C, THOMAS McMILLEN, Maryland
JOSEPH P. KENNEDY D, MaHsachuaetta
FLOYD H, FLAKE, New York
KWEISI MFUME, Maryland
DAVID E. PRICE, North Carolimi

CHALMERS P. WYLIE. OTiio

STEWART B. McKINNEY, Connecticut

JIM LEACH. Iowa

NORMAN D. SHUMWAY, Califbmia

STAN PARBIS. Virginia

BILL McCOLLUM, Florida

GEORGE C. WORTLEY. New York

MARGE ROUKEMA, New Jeniey

DOUG BEREUTER. Nebraska

DAVID DREIER, California

JOHN HILER, Indiana

THOMAS J. RIDGE, Pennsylvania

STEVE BARTLETT, Texas

TOBY ROTH, Wisconsin

AL McCANDLESS. California

J. ALEX McMillan, North Carolina

H. JAMES SAXTON, New Jersey

PATRICK L. SWINDALL, Georgia

PATRICIA SAIKI. Hawaii

JIM BUNNING. Kentucky

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CONTENTS

Hearings held on:

January 21, 1987 ....
January 22, 1987....
T«rtofH.H.27

Wednesday, January 21, I9ST

Porta, Patrick A...

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Lett«ra of Invitation ...
Pooition Btatement

Upuuon on zero coupon bonds

St Germain, Hon. Femand J., response to questions of the Chairman from

Hon. Phil Gasteyer, Hon. John Rousselot and Hon. Patrick A. Porte

U.S. League of Savings Institutions, Report of the Task Porce on FSLIC Issues

THuaanAY, January 22, 1987

Gould, George D., Under Secretary for Pinance, Department of the Treasurr... 412

Gray, Ed, chairman, Federal Home Loan Bank Board 416

APPENDIX

Prepared statements:

Gould, George D 458

Gray, Ed 468

ADOmONAL MATERIAL SUBMITTED FOR THE RECORD

Department of the Treasury, statement on exit fees 623

Gould, George D., letten from Investment Bankers 508

Gray, Hon. Edwin J.:

Information regarding referred to cases and how oversight takes place 495

Letters (rf Invitetitm 525

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St Germain, Hon. Femand J., questions to Mr, Gray with response

Texas Savinga and Loan League, letter to Chairman St Ciermain dated Janu-
ary 9, 1986

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FEDERAL SAVINGS AND LOAN INSURANCE COR-
PORATION RECAPITALIZATION ACT OF 1987
(H.R. 27)

Wednesday, Januair 21, 1987

Housi OF Repesskntatives,
Committee on Banking, Finance and Urban Aftaibs,

WashiTigton, DC

The committee met, pursuant to call, at 10 a.m., in room 2128,
Raybum House Oflice Building, Hon. Femand J. St Germain
[chairman of the committee] presiding.

Present: Chairman St Germain, Representatives Gonzalez, Neal,
Hubbard, LaFalce, Vento, Barnard, Frank, Lehman, Kaptur, Erd-
reich, Caiper, Torres, Kleczka, Nelson, Patterson, McMillen, Ken-
nedy, Flake, Miume, Price, Wylie, McKinney, ^umway, Parris,
McCoUum, Wortley, Reukema, Dreier, Bartlett, Roth, McCandless,
McMillan, Saxton, Swindall, Saiki, and Banning.

The Chairman. The committee will come to order.

Before we fully begin this morning's hearing and our opening
statements, I would like to welcome our new Members, and intro-
duce our new Members. On the Democratic side we have six new
faces to brighten the committee and they are all down on the front
row.

From Spartanburg, SC— and we go by seniority as chosen by the
committee, the Democratic Steering and Policy Committee, so we
are not doing it alphaJsetindly, but rather by seniority as came out
of the Steering and Policy Committee. From Spartanbui^, SC, Eliz-
abeth J. Patterson. She has served on the City Cotmcil and in the
South Carolina l^islature before her election last fall. A number
of us have a fond memory of her late father, Olin Johnston, who
served with distinction in the United States Senate.

We welcome you, Ms. Patterson.

Next in seniority among the new Members is Tom McMiUen,
whose Fourth Maryland Congressional District lies just a few miles
from the Capitol. Anyone who has followed basketball in this area
or in the National Basketball Association has seen a lot of Tom
McMillen. But Tom has an equal number of trophies in the aca-
demic world, including a stint as a Rhodes Scholar.

Tom, we welcome you aboard as well.

Every now tind then someone comes along who truly fits the

cliche, "He needs no introduction." Certainly that applies to my

neighbor from Boston, Joe Kennedy. Not only is Joe Kennedy the

son of a former U.S. Senator and Attorney General, the nephew of

(1)

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a former President, and the nephew of a Bittii^c U.S. Senator, but
he lists among his constituents Thomas P. (Tip) O'Neill.

We welcome you as well, Joe.

We Increase our representation — well, we will have to wait for
him to arrive.

The committee will continue to have an important and strong
presence from Baltimore in Kweisi Mfume who takes the seat va-
cated by our long-term colleague, Parren Mitchell. Long prominent
in broadcasting in Baltimore, Mr. Mfume has been on the Btdti-
more City Council since 1979 and lends great strength to this com-
mittee's representation for its expertise on urban problems. We are
glad we still have Baltimore represented on the committee.

We welcome you as well, Mr. Mfume.

Our credentials in academia are enhfmced with the addition of
David H. Price, a political science professor from Duke University
in North Carolina. In between teaching the science of politics,
David Price found time to actually practice politics as chairman of
the Democratic Party in North Carolina and as staff director of the
Hunt Commission that revised the Democratic delegation selection
process in 1984.

We welcome you as well. Dr. Price.

Now I would like to tiun to our rankii^ Republican, Chalmers
Wylie, Euid eisk him to introduce Members on his side,

Mr. Wylie, Thank you very much, Mr. Chairman.

I have the pleasure of introducing four new Members: James
Saxton, a Republican from Bensenton, NJ. He has the seat which
was vacated by the late Representative Edward B. Forsyth, and he
served in the State Legislature for 8 years. He went to East Carls-
burg, PA, State College where he got his BA and has a Master's
degree from Temple University. I don't see Jim here right now.
Here he is. He made the second row. Good for you.

Pat Swindall is not here yet, I guess. I don't see him. But we will
introduce him anyhow. He has a BA from the University of Geor-
gia. He is a graduate &om Georgia Law School, is a lawyer by occu-
pation, and is from Dunwoody, GA. And we are glad to have Pat
Swindall, who is in his second term in Congress,

Pat Saiki — did I get that right, Pat— who is from Hawaii, and we
w;ant to welcome her. She is the mother of five children, and she
graduated from the University of Hawaii. She is a tesicher by occu-
pation, and this is her first term in Congress, and we are glad to
have Pat Saiki on the committee.

We also have Jim Bunning, who is a little bit like McMillen —
doesn't need much of an introduction — holds the seat once held by
Gene Snyder, who retired, Jim, as you know, is a former profes-
sionfil baseball player, once pitched a no-hitter for the Detroit
Tigers, suid we are glad to have Jim Bunning. He also has some
background in banking, so we know that he will make a significant
contribution as a graduate of Xavier University with a Bachelor of
Science degree.

Those are our four Members, Mr. Chairman. Thank you very
much.

[The opening statement of Chairman Femand J. St Germain fol-
lows:]

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with a iMwly tvplanlshad fund, tti* regulator* Kill b« In a
position to datanlna who liv*s and who diva aM>ng th* alck of eh*
■avtnga and loan Induitry. Tha bllliona In naw funds capraaant
anoraoua na« powar (or tha ragulatora. Bov vlaaly and fatrly thia
powar la axacclsad will hava traaandoua l>pact on tha industcy and tha
ultiaata coat to tha Fadaol Govamant and tha public In stabllliing
thaaa Institutlona.

BaCora Introducing H. R. 17, I addad a provlaion for ovaralght
ovar tha radacal Aaaat Dlapoaition Asaociatlon (PAMl which will b*
handling billions of dollaca In aaaata of fallsd aavlngs and loan
Insticueiona. Tha provlaion aaauraa that tha Genars I Accounting
Offica will hava ongoing apaclflc authority to ravlaw and audit tha
activttlaa of tKDk and to provida tha Congraaa with tlaaly data on tha

Today's haaringa ara part of an aftort by tha Ccsnalttsa to gat an
;ly atart in tha lOOth Congraaa. Naxt Tuesday, wa Kill opan

■rings on B.R. 18, tha Expsdltad Funds Availability Act a aajor

istuase initlaclva of thla CoioMlttaa. This sana conauMsr laglslatlon

■Bad tha Houae twica In tha laat Congrsss ones last January and

■In on Octobar 7. Hopafully, It can and will bs anactad thla yaar.

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Much of th« lapatus bahlnd this particular plan — tha Idaa at
ralalng lunda in tha privata narkat — coaas froa the Adnlniatratlon's
farvant hopa that It can avoid a major Inpact on the Federal budget as
It deals with tha Industry's nountlng problana.

Soua In tha Industry era promating alternatives to tha

Adnlniatratlon's plan scaled down versions that would place

ragulatora on a shorter string and require an earlier review of the
proeass. its have an obligation to listen to these alternatives.
flowavac, it la important that the insurance fund and the industry be
stsbllixad In a tlnsly fashion. And we shall make certain that this
Is accoBplished. There is limited time to experiment. Those who
support alternativaa have the burden of •stabllshlng the viability of

FSLIC recap Ita Illation I under any of these plans, will give the
Federal Hona Loan Bank Board and FSLIC great flexibility in dealing
with problem and failed aavinga and loana — lomething that the
■regulators Insist thay need to handle varied and conplex problems of

IE tha plan does become law, the Congress should be sure it
■alntalns tight and ongoing overaight to make certain that the word
doesn't become synonymous with arbitrary, capricious or

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m plan to ■)>*• both of thai* bllIa~R.R. 27 and a.R. IB— to
Barkup In tha Financial initlcutloni Subcoanltte* on fabruary 3 and
>arkup In tha full Coaaittaa on Fabruacy 10.

Tha Bousing subcomnlttaa will ba conducting haarlnga on ^Mcgancy
saalstsnca for tha hooialsBB on Fabruairy 4 Hlth a aarkup achadulsd on
FabruBCy 5.

I for tha hoaalaaa alao Kill ba brought up for nickup
In tba full Comalttaa on Fsbruary 10 along with tha FSLIC and
axpadltad funds laglslatlon.

Today ws will hear fro« Garald J. Lavy, Innadlata Past Chairman,
U.S. Leagua of savlnga Tnstltutionat David J. Sullivan. Jr.,
Traasurar, National Council of Savings Institutions and Patrick Forta,
PrasldenC, Association ot ThriEt Holding Coopanlaa.

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The Chairman. Thank you, Mr. Wylie.

This momiiig the committee asain takes up the administration's
plan to recapitalize the Federal Savings and Loan Insurance Corpo-
ration. This is one of the measures that the committee went into at
length in the 99th Congress.

The l^islation was reported by the committee on September 23,
1986, and passed hy the House on October 7, 1986. The bill died
when the Senate failed to act in a timely manner.

H.R. 27 is a recognitioQ of the serious drain on FSLIC as it at-
tempts to deal with pn^lems of the savings and loan industry that
has suffered from periods of high interest rates and inflation, as
well as mismanagement and excursions into risky ventures in
search of the fast buck.

The administration's propoeal would have the 12 Federsil Home
Loan Banks put up $3 oUhon as the capital for a new Financing
Corporation uiat, in turn, would seU bonds in the market and raise
an estimated $16 to $16 billion for FSLIC. This sum, combined with
existing reserves and ongoing assessments and investments of
FSUCt could provide a $25- to $30 billion pot to shore up the insur-
ance fund and to deal with the problems of the industry.

Much of the impetus behind this particular pliin— the idea of
raising funds in the private meirket — comes from the administra-
tion's fervent hope that it cfm avoid a m^or impact on the Federal
budget as it deab with the industry's mounting problems.

Some in the industry are promoting alternatives to the adminis-
tration's plan — scaled down versions that would place regulators on
a shorter string and require £in earlier review of the process. We
have an obli^^tion to listen to these alternatives.

However, it is important that the insurance fund and the indus-
try be stabUized in a timely fashion. And we shall make certain
that this is accomplished. There is limited time to experiment.
"Diose who support alternatives have the burden of establishing the
viability of their plans.

FSLIC recapitalization, under any of these plans, will give the
Federal Home Loan Bank Board and FSLIC great flexibility in
dealing with problem and failed savings and loans — something Uiat
the regulators insist they need to handle varied and complex prob-
lems of the industry.

If the plan does become law, the Congress should be sure it main-
tains tight and ongoing oversight to make certain that the word
"flexible" doesn't become synonymous with arbitrary, capricious or
wasteful.

With a newly replenished fund, the regulators will be in a posi-
tion to determine who lives and who dies among the sick of the
savings and loan industrv. The billions in new funds represent
enormous new power for tne regulators. How wisely and fairly this
power is exercised will have tremendous impact on the industry
and tiie ultimate cost to the Federal Government and the public in
stabiliidng these institutions.

Before introducing H.R. 27, 1 added a provision for oversight over
the Federal Asset Disposition Association (FADA) which will be
handling bilhons of doUeirs in assets of failed savings and loan in-
stitutions. The provision assures that the General Accotmting
Office will have ongoing specific authority to review and audit the

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activities of FADA and to provide the Coagren with timely data on
the agency.

Today's hearii^s are part of an effort by the committee to get an
early start in the 100th Congress. Next Tuesday, we will open hear-
ii^s on H.R. 28, the Expedited Funds Availability Act — a mcgor
consumer initiative of this committee. This same consumer l^isla-
tion pzissed the House twice in the last Coi^ress, once last January
and again on October 7. Hopefully, it can and will be enacted this
year.

We plan to move both of these bills— H.R. 27 and H.R. 28— to
mark-up in the Financial Institutions Subcommittee on Februetry 3
and mark-up in the Full Committee on February 10.

The Housii^ Subcommittee will be conducting hearings on emer-
gency assistance for the homeless on February 4 with a mark-up
scheduled on February 5.

The measure for the homeless also will be broi^ht up for mark-
up in the Full Committee on February 10 along with the FSLIC
and expedited funds legislation.

We will wait for the introductions of the witnesses. Mr. WyUe?

[The following was submitted for inclusion in the record at this
point: The text of H.R. 27.]

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H.R.27

To ficQitate the provincm of •ddhknal <™»nw»l mourcM to the Fsdenl Skvingi
tnd Lorn Iniuntnce Corporation.

m THE HOUSE OF REPRESENTATIVES

Jandabt S, IQBT
Hr. St OiBiuiif (for hinuetf ud Hr. Wylik) introduoed the foUowiag bill;
«4iMb wu reteiTcd to the Cominittee on BuJdng, Illnuice tnd Urbtn Attain

A BILL

To facilitate the provigion of additional financial resources to the
Federal Savings and Loan InBurance GorporatioQ.

1 Be it eiuicted by Ike Senate ajid House of Representa-

2 lives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the "Federal Savings and

5 Loan Insurance Corporation Recapitalization Act of 1987".

6 SBC 2. FINANCING CORPORATION ESTABLISHED.

7 The Federal Home Loan Bank Act (12 U.S.C. 1421 et

8 aeq.) is amended by inserdng after section 20 the following

9 new section:

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1 "SEC II. FINANCING CORPORATION.

2 "(a) Establishment. — Notwithstanding any other

3 provision of law, the Board shall charter a corporalioD to be

4 known aa the Financing Corporation.

5 "(b) Management of Financing Corporation. —

6 "(1) Directorate. — The Financing Corporation

7 shall be under the management of a directorate com-

8 posed of 3 members as follows:

9 "(A) The Director of the Office of Rnance of

10 the Federal Home Loan Banks (or the head of

11 any successor to such office).

12 "(B) 2 members selected by the Ctuunnan of

13 the Federal Home Loan Bank Board from among

14 Uie presidenta of the Federal Home Loan Banks.

15 "(2) Tbbms. — Each member appointed under

16 paragraph (1)(6) shall be appointed for a term of 1

17 year,

18 "(3) Vacancy. — If any member leaves the office

19 in which such member was serving when appointed to

20 the Directorate —

21 "(A) such member's service on the Director-

22 ate shall terminate on the date such member

23 leaves such office; and

24 "(B) the successor to the office of such

25 member shall serve the remainder of such mem-

26 ber'a term.

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1 "(4) Equal bepbebbntation op banks. — No

2 president of a Federal Home Loan Bank may be ap-

3 pointed to serve an additional term on the Directorate

4 until such time as the presidents of each of the other

5 Federal Home Loan Banks have served as many terms

6 on the Directorate as the president of such bank

7 (before the appointment of such president to such addi-

8 tional term).

9 "(5) Chaibpebson. — The Chairman of the Fed-

10 era] Home Loan Bank Board Hhall select the chairper-

11 son of the Directorate from among the 3 members of

12 the Directorate.

13 "(6) Staff.—

14 "(A) No PAID BMPL0YBB8. — The Financing

15 Corporation shall have no pud employees.

16 "(B) FowBBS. — The Directorate may, with

17 the approval of the Board, authorize the officers,

18 employees, or agents of the Federal Home Loan

19 Banks to act for and on behalf of the dancing

20 Corporation in such manner as may be necessary

21 to cany out the functions of the Financing Corpo-

22 ration.

23 "(7) ASHHOSTBATIVB BXPBMSB8.—

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1 "(A) In qenebal. — All administrative ex-

2 penses of the Financing Corporation shall be pud

3 by the Federal Home Loan Banks.

4 "(B) PeO SATA DI8TBIBUTION. — The

5 amount each Federal Home Loan Bank shall pay

6 shall be detennined by the Board by multiplying

7 the total administrative expenses for any period

8 by the percentage arrived at by dividing —

9 "(i) the aggregate amount the Board re-

10 quired such bank to invest in the Financing

11 ' Corporation (as of the time of such determi-

12 nation) under paragraphs (4) and (5) of sub-

13 section (d) (as computed without regard to

14 paragraph (3) or (6) of such subsection); by
16 "(ii) the aggregate amount the Board

16 required all Federal Home Loan Banks to

17 invest (as of the time of such determination)

18 under such paragraphs.

19 "(C) Admikistbative expenses de-

20 PINED. — For purposes of this paragraph, the term

21 'administrative expenses' does not include —

22 "(i) issuance coats {as such term is de-

23 fined in subsection (g)(5)(A));

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1 "GD'ftny interest on (and any redemp-

2 tion premium with respect to) any obli^tioii
8 of the fWncing CorporEUon; or

4 "(iii) custodian fees {as suoh term is de-

fined in subsection (gXSMB)).

6 "(8) ReouI/ATIOn by boabd.— The Directorate

7 shall be subject to such regulations, orders, and direc-

8 tions as the Board may prescribe.

9 "(9) No COHPBNSATION FBOH FINANCINO COB-

10 POBATiON. — Uembers of the Directorate shall receive

11 no pay, aUowances, or benefits from the Financing

12 Corporation by reason of their service on the

13 Directorate.

14 "(c) POWEBS OP FiNANCINO COBPOBATIOH. — The Fi-

15 nancing Corporation shall have only the following powers,

16 subject to the other provisions of this section and such regu-

17 lations, orders, and directions as the Board may prescribe:

18 "(1) To issue nonvoting capital stock to the Fed-

19 oral Home Loan Banks.

20 "(2) To invest in any security issued by the Fed-

21 eral Savings and Loan Insurance Corporation under

22 section 402(b) of the National Housing Act.

23 "(3) To issue debentures, bonds, or other obliga-

24 tions and to borrow, to give security for any amount

25 borrowed, and to pay interest on (and anv ledem^on

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X premium with respect to) &ny such obligation or

2 amount.

3 "(4) To impose assessments in accordance with

4 subsection (f).

5 "(5) To adopt, alter, and use a corporate seal.

6 "(6) To have Buccession until dissolved.

7 "(7) To enter into contracts.

8 "(8) To sue and be sued in its corporate capacity,

9 and to complain and defend in any action brought by

10 or against the Financing Corporation in any State or

11 Federal court of competent jurisdiction.

13 "(9) To exercise such incidental powers not incon-

13 siatent with the provisions of this section or section

14 402(b) of the National Housing Act as are necessary or

15 appropriate to cany out the provisions of this section.

16 "(d) Capitalization op Financino Cobpoea-

17 TION. —

18 "(1) PUBCHASE OF CAPITAL STOCK BY HOME

19 LOAN BANKS. —

20 "(A) In qeneeal. — Each Federal Home

21 Loan Bank shall invest in nonvoting capital stock

22 of the I^ancing Corporation at such times and in

23 such amounts as the Botud may prescribe under

24 this subsection.

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1 "(6) Fab talub; tbansferabilitt. —

2 Each Bhue of stock issued by the Financing Cor-

3 poration to a Federal Home Loan Bank shall

4 have par value in an amount determined by the
6 Board and shall be transferable only among the

6 Federal Home Loan Banks in the manner and to

7 the extent prescribed by the Board at not less

8 than par value.

9 "(2) Aqgeeoate dollab amount limitation

10 ON ALL INVB8THBNT8. — The aggregate amount of

11 funds invested by all Federal Home Loan Banks in

12 nonvoting capital stock of the Financing Corporation

13 shall not exceed $3,000,000,000.

14 "(3) Maximum xnvestbibnt amount limita-

15 TiON fob each houb loan bank. — The cumulative

16 amount of funds invested in nonvoting capital stock of

17 the financing Corporation by each Federal Home

18 Loan Bank shall not exceed the aggregate amount

19 of—

20 "(A) the sum of—

21 "(i) the reserves maintfuned by such

22 bank on December 31, 1985, purmant to the
2S requirement contained in the first 2 sen-
24 tences of section 16; and

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1 "Oi) the undivided proSts (u defined in

3 pwagrapb (7)) of such bank on such date;

3 and

4 "(B) the aum of —

5 "0) the amounts added to reserves after
. 6 December 81, 1985, pursuant to the require-

7 ment contained in the first 2 sentences of

8 section 16; and

9 "(ii) the undivided profits of such bank

10 accruing after such date.

11 "(4) PbO BATA DI8TEIBUT10N OP 18T

12 $1,000,000,000 INVESTED IN FINANCINO COBPOBA-

13 TiON BY HOME LOAN BANKS.— With respect to the

14 first $1,000,000,000 which the Board may require the

15 Federal Home Loan Banks to invest in capital stock of

16 the ■ Financing Corporation under this subsection, the

17 amount which each Home Loan Bank (or any succes-

18 Bor to such bank) shall invest shall be determined by

19 ^ Bou^ by applying to the total amount of sucb in-

20 vestment by all such banks the percentage appearing in

21 the following table for each such bank:

"Bmk pBTcentigg

Federal Home Loan Bmk of BoMod 1.8629

Federal Home Lowi Bmk of New Tok. „ 6.1006

Federal Home Lou Bmk of RUiborili 4.2102

Federd Home Lorn Beak irf AlUoU „ 14.4007

Federal Home Loin Bulk of CiDdmnti „ 8.36SS

Federal Home Loui Bulk of Indiuiapolii S.3MS

Federal Home Lou Bmk of Chicigo 8.SSS8

Federal Hmm Lou Bank of Dei Urine* 6J801

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Fedsnl Hcoh Lou Bank at Dallu S.S181

Federal Boom Lou Bulk id Topeki. S.2T0e

Federal Home Loan Bulk el Sui FnnMM 18.9644

Federal Home Lou Buk of SeUlle 6.148S

1 "(5) Pbo bata distbibution of amounts BE-

2 quibbd to be invested in excess of

3 11,000,000,000. — With respect to any amount in

4 excess of $1,000,000,000 which the Board may re-

5 quire the Federal Home Loan Banks to invest in cap-

6 itaJ stock of the Financing Corporation under this sub-

7 section, the amount which each Federal Home Loan

8 Bank (or any successor to such bank) shall invest shall

9 be determined by the Board by multiplying such excess

10 amount by the percentage arrived at by dividing —

11 "(A) the sum of the total assets (as of the

12 most recent December 31) held by all insured in-

13 stitutions which are members of such bank; by

14 "(B) the sum of the total assets (as of such

15 date) held by all insured institutions which are

16 members of any Federal Home Loan Bank.

17 "(6) Special pbovisions bblatino to uaxi-

18 mum amount limitations. —

19 "(A) In genebal. — If the amount any Fed-

20 eral Home Loan Bank is required to invest in

21 capital stock of the financing Corporation pursu-

22 ant to a determination by the Board under para-

23 graph (5) (or under subparagraph (B) oE this para-

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1 graph) exceeds the maximimi investment amount

2 applicable with respect to such bank under para-

3 graph (3) at the time of such detennination (here-

4 inafter in this paragraph referred to as the 'excess

5 amount') —

6 "(i) the Board shall require each re-

7 maining Federal Home Loan Bank to invest

8 (in addition to the amount determined under

9 paragraph (5) for such remaining bank and

10 subject td the maximum uivestment amount

11 applicable with respect to such remaining

12 bank under paragraph (3) at the time of such

13 detennination) in such capitsJ stock on behalf

14 of the bank in the amount determined under
19 subparagraph (B);

16 "(ii) the Board shall require the bank to

17 subsequently purchase the excess amount of

18 capital stock from the remaining banks in the

19 manner described m subparagraph (C); and

20 "(iii) the requirements contained in sub-

21 paragraphs (D) and (G) relating to the use of

22 net earnings avaUable for dividends shall

28 O'pply ^ such bank until the bank has pur-
24 chased all of the excess amount of capital

29 stock.

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1 "(B) Allocation of bxcbss amount

8 AMONG BBMAiNiNO BANK8.~Tbe (unount each

8 remaining Federal Home Loan Bank shall be re-
4 quired to invest under subpvagraph (AHi) is the
6 amount determined by the Botud by multiplying

6 the excess amount by the percentage arrived at

7 by dividing —

6 "(i) the amount of capital stock of the

9 Financing Corporation held by such remain-

10 ing bank at the time of such determinatjoo;

11 by

13 "(ii) the a^igregate amount of auch stock
IS held by all remaining banks at such time.

14 "(C) PuBCHASE PBOCEDUBE. — The bank on

15 whose behalf an investment in capital stock is

16 made under subpara^apb (A)fl) shall purchase,

17 annually and at the issuance price, from each re-

18 muning bank an amount of such stock determined

19 by the Board by multiplying the amount available

20 for such purchases (at the time of such determina-

21 tion) by the percentage determined under subpara-

22 graph (B) with respect to such remaming bank

23 until the aggregate amount of such capital stock
34 has been purchased by the bank.

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1 "(D) Limitation on dividends. — The

2 amount of dividends which may be paid for any

3 year by a bank on whose behalf an investment is

4 made under subpara^aph (A)Q) shall not exceed

5 an amount equal to 1/2 of the net earnings avail-

6 able for dividends of the bank for the year.

7 "(E) TSANBPBB TO ACCOUNT FOB PUB-

8 CHASE OF STOCK BEQUiBED. — Of the net eam-

9 ings available for dividends for any year of a bank
10 on whose behalf an investment is made under sub-

para^aph (A)0), such amount as is necessary to
make the purchases of stock required under sub-
18 paragraph (A)(ii) shall be placed in a reserve ac-

14 count (catablished in such maimer as the Board

16 shall prescribe by regulations) the balance in

16 which shall be available only for such purchases.

"(F) Net eabninqs available fob divi-
dends DEFINED. — For purposes of this para-
graph, the term 'net earnings available for divi-

20 dends' means the net earnings of a bank for any

21 period as computed after reducing the amount of

22 earnings for such period by the unount required

23 to be carried (for such period) to reserves main-

24 tained by such bank pursuant to the first two sen-
26 tences of section 16 of this Act.

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1 "(7) Undividbd profits defined.— For pur-

2 poses of paragr&ph (3), the term 'imdivided profits'

3 means retained earnings minus the sum of —

4 "(A) that portiw required to be added to re-

5 serves maintained pursuant to the first two sen-

6 tences of section 16 of this Act; and

7 "(B) the dollar amounts held by the respec-

8 tive Federal Home Loan Banks in special divi*

9 dend stabihzatiiui reserves on December 31,

10 19S5, as determined under the following table:

"Bulk Dollv (UDOUBt

Fsdenl Home Loin Buk o( BoMon IS.2 nnUion

Fedenl Hame Loan Bulk of New York 7.7 niilliiHi

Fsditn] HomB Loui Bajik of Pittaburgb 6,2 millioD

Feden] Home Loui Buk of AtluiU IS.S millioD

Federal Home Loan Bank of Cincinnati S.9 minion

Federal Home Loan Bank of Indiuupolii ST. 4 million

Federal Home Loan Bank of Chicago 6.0 millioii

Federal Home Loui Bank of Dea Hoinea 32.7 nunicn

Federal Home Loan Bank ol DaJlai „ 45.0 milliM

Federal Home Loan Bank of Topeka IS.T ndSiM

Federal Home Loan Bank of San Franeiaco. „ Sl.fl milini

Federal Home Loan Bank of Seattle 33.8 million

11 "(e) Obligations of the Financinq Cobpoba-

12 TION.—

13 "(1) Limitation on amount of outbtamdino

14 obligations. — The aggregate amount of obbgations

15 of the Financing Corporation which may be outstand-

16 ing at any time (as determined by the Board) shall not

17 exceed the greater of —

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1 "(A) 5 times the amount of the aonvoting

2 capital stock of the Financing Corporation which
S is outstanding at such time; or

4 "(B) the sum of the face amounts (the

5 amount of principal payable at maturity) of aecuri-

6 ties described in subsection (gK2) which are held

7 at such time in the segregated account established

8 pursuant to such subsection.

9 "(2) Net pbocbeds to be invested in cap-

10 ITAL OF FSLic. — Subject to such tenns and conditi<ms

11 as may be approved by the Board, the net proceeds of

12 any obligation issued by the F^ancing Corporation
IS sh^ be used to —

14 "(A) purchase capital certificates or capital

15 stock issued by the Federal Savings and Loan In-

16 surance Corporation under section 402(b)(lKA) of

17 the National Housmg Act; or

18 "(B) refund any previously issued obligation

19 the net proceeds of which were invested in the

20 manner described in subparagraph (A).

21 "(3) Limitation on tebm of obligations. —

22 No diligation of the Financing Corporation may be
33 issued which matures —

24 "(A) more than 30 years after the date of

25 issue; or

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1 "(B) after December 31, 2026.

2 "{4) Invbbtmbnt op united statbs funds in

3 OBLIOATIONS. — Obligations issued under this section

4 by the financing Corporation with the approval of the
6 Board shall be lawful investments, and may be accept-

6 ed as security, for all fiduciary, trust, and public funds

7 tlie investment or deposit of which shall be under the

8 authority or control of the United States or any officer

9 of the United Stales.

10 "(5) Mabkbt fob obligations. — All persons

11 having the power to invest in, sell, underwrite, pur-

12 chase for their own accounts, accept as security, or

13 otherwise deal in obligations of the Federal Home

14 Loan Banks shall also have the power to do so with
16 respect to obligations of the Unancing Corporation.

16 "(6) No PULL PAITH AND CBEDIT OP THE

17 UNITED STATES. — Obligfttions of the Financing Oorpo-

18 ration and the interest payable on such obligations

19 shall not be obligations of, or guaranteed as to princi-

20 pal or interest by, the Federal Home Lobji Banks, the

21 Umted States, or the Federal Savings and Loan Insur-

22 ance Corporation and the obligations shall so plainly
2S state.

24 "(7) Tax exempt status. —

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1 "(A) In oenbbal. — Except as provided in

2 subpara^aph (B), obligations of the Financing

3 Corporation shall be esempt from tax both as to

4 principal and interest to the same extent as any

5 obligation of a Federal Home Loan Bank is

6 exempt from tax under section 13.

7 "(B) Exception. — The Knancing Corpora^

8 tion, like the Federal Home Loan Banks, shall be

9 treated as an agency of the United States for pur-

10 poses of the first sentence of section 3124(b) of

11 title 31, United States Code (relating to detenni-

12 nation of tax status of interest on obligations).

18 "(8) Obliqations abb bxbmpt secubities. —

14 Notwithstanding paragraph (6), obligations of the I^-

15 nancing Corporation shall be deemed te be exempt se-

16 curities (within the meaning of laws administered by

17 the Securities and Exchange Commission) to the same
16 extent as securities which are direct obligations of the

19 United States or are guaranteed as to principal or in-

20 terest by the United SUtes.

21 "(f) ASBESBHENT AUTHOBITT OF THE FlNANCINQ
32 COBPOBATION. —

23 "(1) In genebal. — The financing Corporation

24 may, v/ith the approval of the Board, assess semiannu-
26 ally on each insured institution an assessment, except

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1 that the aggregate aroount awesBed under this para-

2 graph on any insured institution for any year may not
S exceed an amount equal to l/12th of 1 percent of the

4 aj^jegate amount of all accounts of insured members

5 of such insured institution for such year.

6 "(2) SUPPLBHBNTAL A8SB8SHBNT AUTHOB-

7 tZBD. — Upon the unanimous vote of the Directorate

8 thai additional funda are needed to pay the interest on

9 the obligations of the Financing Corporation because

10 no other funds are avulable, the financing Corporation

1 1 may, with the approval of the Board and in addition to

12 any assessment assessed imder paragraph (1), assess on
IS each insured institution an assessment, except that the

14 aggregate amount assessed under this paragraph on

15 any insured institution for any year may not exceed an

16 amount equal to l/8Ui of 1 percent of the aggregate

17 amount of all accounts of insured members of such in-

18 sured mstitution for such year.

19 "(3) Total amodmt op absbbbmbnts may not

20 KXOBBD DfTBBBBT AND FINANCINO COSTS. — The ag-

21 gregate amount of all assessments assessed under para-

22 graphs (1) and (2) for any year may not exceed —
33 "(A) the aggregate amount <A —

24 "(i) issuance costs (as such term is de-

36 fined in subsection (gK6XA)) incurred v

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1 respect to obligatioas issued during such

2 year;

8 "(ii) interest ptud on (and any redemp-

4 tion premium paid with respect to) obliga-

5 tions of the Financing Corporation during

6 such year; and

7 "(iii) custodian fees (as such term is de-

8 fined in subsection (gKSHB)) incurred during

9 Buch year; minus

10 "(B) the aggregate amount of any payments

1 1 under subsection (gX4) during such year.

12 "(4) Payment to financing cobpobation. —

13 All assessments assessed by the Financing Corporation

14 under paragraph (1) or (2) shall be paid to the Financ-

15 ing Corporation.

16 "(g) Ubb and Disposition of Assets of the Fi-

17 nancino Cobpobation Not Invested in FSLIC. —

18 "(1) In genebal. — Subject to such regulations,

19 restrictions, and limitations as may be prescribed by

20 the Board, assets of the Financing Corporation which

21 are not invested in capital certiflcates or capital stock

22 issued by Uie Feder^ Savings and Loan Insurance
2S Corporation under section 402(bKl)(A) of the National

24 Housing Act shall be invested iu —

25 "(A) direct obligations of the United States,

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27 \

1 "(B) obligatiom, putidpatioiis, or other in-

2 stnunenta of, or issued by, the Federal National

5 Mortgage Association or the Qovemment National
4 Mortgage AssooiatioD;

6 "(G) mortgages, obligations, or other securi-

6 ties for sale by, or which have been disposed of

7 by, the Federal Home Loan Mortgage Corpora-

8 tion under section 305 or 306 of the Federal

9 Home Loan Mortgage Corporation Act; or

10 "(D) any other security in which it is lawful

11 for fiduciary and trust funds to be invested under

12 the laws of any State.

13 "(2) Sbgbbgatbd account fob zeeo cotns)N

14 INBTBtntlENTS HELD TO ABSUBE PATHBNT OF FBIN-

15 ciPAL. — The Financing Corporation shall invest m,

16 and hold in a segregated account, noninterest bearing

17 instruments —

18 "(A) which are securities described in para-
18 graph (1); and

20 "(B) the total of the face amounts (the

21 amount of principal payable at maturity) of which

22 is approximately equal to the aggregate amount of
28 principal on the obligations of the I^ancing Cor-
34 poration,

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1 to assure the repayment of principal on obligations of

2 the I^ancing Corporation.

3 "(3) Dollar amount limitation on invbst-

4 ment in zbbo coupon instbument8 fob beobb-

5 GATED ACCOUNT. — The aggregate amount invested by

6 the Financing Corporation under paragraph (2) shall

7 not exceed $2,200,000,000 (as determined on the basis

8 of the pmvhase price).

9 "(4) Exception fob payment op issuance

10 costs, intbbbst, and custodian pees. — Notwith-

11 standing the requirements of paragraph (1), the assets

12 of the Financing Corporation referred to in paragrfq)h

13 (1) which are not invested under paragraph (2) may be

14 used to pay —

15 "(A) issuance costs;

16 "(B) any interest on (and any redemption

17 premiiun with respect to) any obligation of the Fi-

18 nancing Corporation; and

19 "(0) custodian fees.

20 "(5) Dbfinitions. — For purposes of this subsec-

21 tion—

22 "(A) IssuANCB COSTS. — The term 'issuance
28 costs'—

34 "(i) means issuance fees and commis-

26 sions incurred by the Financing Corporation

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1 in connection with the issuance or servicing

2 of any obUg&tion of the Financing Corpora-
S tioo; and

4 "(ii) includes leg&l and accounting ex-

5 penses, trustee and fiscal and paying agent

6 charges, costs incurred in connection with

7 preparing and printing offering materials, and

8 advertising expenses, to the extent that any

9 Buch cost or expense ia incurred by the Fi-
nancing Corporation in connection with issu-
ing any obligation.

"(B) Custodian pees. — The term 'custodi-
an fee' means —

"(i) any fee incurred by the Financing
.6 Corporation in connection with the transfer

,6 of any security to, or the maintenance of any

.7 security in, the segregated account estab-

,8 Ushed under paragraph (2); and

"(ii) any other expense incurred by the

20 Penancing Corporation m connection with the

21 establishment or maintenance of such ac-

22 count.

23 "(h) Miscellaneous Pbovisions Relating to

24 FWANCmO COEPOKATION.—

67-flS4 O- 87 ~

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1 "(1) TbBATMBNT fob certain PUBP08EB.—

2 Except as provided in subsection (eK7XB), the Finsnc-

3 ing Corporation shall be treated as a Feder^ Home

4 Loan Bank for purposes of sections 13 and 23.

5 "(2) Sunset peovi8iok fob boerowino au-

6 THOBiTT. — No net new borrowing may be nude by

7 the Financing Corporation after December SI, 1996.

8 "(3) Fedebal ebsbbvb banks as dbposi-

9 TABIE8 AND FISCAL AGENTS. — The Federal Reserve

10 banks are authorized to act aa depositaries for or fiscal

1 1 agents or custodians of the Financing Corporation.

12 "(4) Appucabilitt of ceetain peovisions

13 relating to govbenment cobpobation. — No^

14 withstanding the fact that no government funds may be

15 invested in the financing Corporation, the Financing

16 Corporation shall be treated, for purposes of sections

17 9105, 9107, and 9108 of title 31, United States Code,

18 as a mixed-ownership Qovemment corporation which

19 has capital of the Government.

20 "(5) Quaeteelt ebpobts to conobbss. —

21 "(A) Bepobt bequibbd. — Before the end of

22 the 2-week period beginning on the first day of

23 each calendar quarter, the Financing Corporation
34 shall submit a detailed written report on tlie pre-
25 ceding calendar quarter to the Committee on

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1 Banking, Finance and Urban Affairs of the House

2 of Representatives and the Conunittee on Bank-
8 ing, Housing, and Urban Affairs of the Senate.

4 "(B) GONTENTa OF BEPOBT. — Each report

fi required under paragraph (1) shall contain a com-

6 plete description of —

7 "(i) all activities of the Iln&ncing Cor-

8 poration during the calendar quarter with re-

9 spect to which the report is made;

10 "(ii) the financial condition of the Fi-
ll nancing Corporation as of the end of such
13 calendar quarter;

13 "(iii) &U income of the Financing Corpo-

14 ration during such calendar quarter and the

15 source of such income; and

16 "()v) all expenditures made or expenses

17 paid by the Rnancing Corporation during
16 such calendar quarter, including administra-

19 tive expenses and any expense which —

20 "(D was mcurred in connection

21 with an activity of the Financmg Cor-

22 poration; and

23 "(Hi was pud by any other person

24 on behalf of or for the benefit of the
26 Financing Corporation.

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1 "(i) Fedeeal Savings and Loan Insubancb Oob-

2 POBATioK Industet Advisoey Committee. —

3 "(1) Establishment. — There is hereby eatab-

4 lished the Federal Savings and Loan Insurance Coipo-

5 ration Industry Advisory Committee (hereinafter m this

6 subsection referred to as the 'Committ«e').

7 "(2) Mbmbbbship. —

8 "(A) Appointment. — The Committee shall

9 consist of 13 members selected as follows:

"(i) 1 member appointed by the Chair-

1 man of the Board from among individuals

2 who are officers of insured institutions and

3 who are not members of the Board or em-
.4 ployees of the Board, the Federal Savings
15 and Loan bisurance Corporation, or the

6 Board of Directors of any Federal Home

7 Loan Bank,
"(ii) 1 member elected from each Feder-
al Home Loan Bank district (by the members
of the Board of Directors of each such bank
who were elected by the members of such
bank) from among individuals who are ofB-
cers of insured institutions.
"(B) Tebms. — Members shall be appointed

or elected for tenns of 1 year.

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1 "(C) Chaibpbbbon.— The member appom^

3 ed under subparagraph (AKi) shall be the chair-
8 person of the Conunittee.

4 "(D) Vagancibb. — Any vacancy on the
6 Committee shall be filled in the nuuiner in which

6 the original appointment was made.

7 "(£) Pat and expenses. — Members of the

8 Committee shall serve without pay but each

9 member of the Committee shall be reimbursed, in

10 such manner as the Board may prescribe by regu-

11 lation, by the Federal Home Loan Bank which

13 elected such member (and, in the case of the
18 member appointed by the Chairman of the Board,

14 by the Board) for expenses mcurred in connection
Ifi with attendance of such members at meetings of

16 the Committee.

17 "(F) Meetinos. — The Oonimittee shall meet

18 from time ta time at the call of the chairperson or
10 a majority of the members.

20 "(3) DuTiBB OF THE COHHITTEB. — The dutjes

21 of the Committee are as follows:

22 "(A) To review the reports and budgets pre-
3S pared pursuant to section 402(k) of the National
34 Housing Act and any other matter which the

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1 Boftrd may present for the Committee's consider-

2 adon.

3 "(B) To confer with the Board on the re-

4 ports, budgets, and other matters reviewed under

5 subparagraph (A).

6 "(C) To prepare written comments and rec-

7 ommendations for the Board and the Federal Sav-

8 ings and Loan Insurance Corporation with respect

9 the reports, budgets, and other matters reviewed

10 under subparagraph (A) (which shall be submitted

11 to the Board in a timely manner after each

12 meetmg).

13 "(4) Annual bepobt. —

14 "(A) Beqxjibbd. — Not later than January

15 15 of each year, the Committee shall submit a

16 report to the Committee on Banking, Finance and

17 Urban Affairs of the House of Representatives

18 and the Committee on Banking, Housing, and

19 Urban Aff^rs of the Senate.

20 "(B) Contents. — The report required under

21 subparagraph (A) shall describe the activities of

22 the Committee during the preceding year and the

23 reports and recommendations made by the Com-

24 mittee to the Board and the Federal Savings and

25 Loan Lisurance Corporation during such year.

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1 "(fi) RB0XJLAT10N8.— The Board shall prescribe

2 such regulations as the Board determineB to be appro-

3 priate to avoid conflicts of interest with respect to the

4 disclosure to and use by members of the Committee of

5 information reladnj^ to the Board, the FedenJ Savings

6 and Loan Insurance Corporation, the Federal Home

7 Loan Banks, and the Federal Asset Disposition

8 Association.

9 "(6) FbdBBAL ADVISOBT COMSnTTBE ACT DOBS

10 NOT APPLY. — The Federal Advisory Committee Act

11 shall not apply to the Committee.

12 "(7) Tbbhination. — The Committee shall termi-

13 nate when the Financing Corporation terminates under

14 subsection (j).

15 "(j) Tbemination of the Financinq Cobpoba-

16 TION. —

17 "(1) In qbnebal. — The Financing Corporation

18 shall be dissolved, as soon as practicable, after the ear-

19 lier of—

20 "(A) the date by which all stock purchased

21 by the Knancing Corporation in the Federal Sav-

22 mgs and Loan Insurance Corporation has been re-

23 tired; or

24 "(B) December 31, 2026.

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1 "(2) BOABD AUTHOBITY TO CONCLUDE THE AP-

2 PAIB8 OF FINANCING COEPOKATiON. — Elective on

3 the date of the dissolution of the Financing Corporation

4 under para^aph (1), the Board may exercise, on behalf

5 of the Financing Corporation, any power of the Fi-

6 nancing Corporation which the Board determines to be

7 necessary to settle and conclude the affairs of the Fi-

8 ntuicing Corporation.

9 "(k) Regulations. — The Board may prescribe such

10 regulations as may be necessary to cany out the provisions of

11 this section, including regulations defining terms used in this

12 section.

13 "0) Definitions. — For purposes of this section —

14 "(1) Insubed institution. — The term 'insured

15 institution' has the meaning given to such term by sec-

16 tion 401(a) of the National Housing Act.

17 "(2) Insubed membeb. — The term 'insured

18 member' has the meaning given to such term by sec-

19 tion 401(b) of the National Housmg Act.

20 "(3) Dibectoeate. — The term 'Directorate'

21 means the directorate established m the manner pro-

22 vided in subsection (bXD to manage the Financing

23 Corporation.".

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1 SBC 3. MIXED OWNERSHIP GOVERNMENT CORPORATION.

2 Section 9101(2) of title 31, United States Code, b

3 amended by adding at the end thereof the following new sub-

4 paragraph:

5 "(E) The Financing Corporation.".

6 SEC 4 RECAPITALIZATION OP F8UC

7 Section 402(b) of the National Housing Act (12 U.8.C.

8 17250>)) IB amended to read as follows:

9 "(b) Issuance and Salb op Capital Cbetificatbs

10 AND Stock to Financing Cokpobation. —

11 "(1) Authoeization to issxjb. —

12 "(A) In obnebal. — Notwithstanding an;

13 other provision of law, the Corporation may

14 issue —

15 "(i) nonredeemable capital certificates;

16 and

17 "(ii) redeemable nonvoting capital stock.

18 "(B) Rbquibbmbnt bblatino to amount

19 OF stock. — The aggregate amount of stock

20 issued by the Corporation under subparagraph

21 (A)(ii) shall be equal to the aggregate amount of

22 the investments made fay the Federal Home Loan

23 Banks in the capital stock of the f^iancing Cor-

24 poration under section 21 of the Federal Home

25 Loan Bank Act.

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1 "(C) Ceetipicatbs and stock may be

2 SOLD ONLY TO FINANCING COBPOBATION, — Cap-

3 ital certificates and stock issued under subpara-

4 graph (A) may be sold only to the Financing Cor-

5 poration in the maimer and to the extent provided

6 in section 21 of the Federal Home Loan Bank

7 Act and this subsection.

8 "(D) Pbocbbdb of sale abb pabt op

9 PRIMARY BESEBVE. — The proceeds of any sale of

10 capital certificates or stock under this subpara-

11 gr&pb shall be considered part of the primary re-

12 serve established by the Corporation pursuant to

13 section 404(a).

14 "(E) No DiviDBNDS. — The Corporation shall

15 pay no dividends on any capital certificates or

16 stock issued under this subpara^aph.

17 "(2) Equity bbtuen account. —

18 "(A) In oenbbal. — The Corporation shall

19 establish and maintain (until all capital certificates

20 and stock issued under subparagraph (A) have

21 been paid off and retired) an equity return ac-

22 count —

23 "(i) which shall consist only of amounts

24 contributed in accordance with the require-

25 ments of subparagraph (B);

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1 "(ii) which shall not be treated as re-

2 serves of the Corporation; and

S "{iii) the earnings accruing in which

4 shall be transferred in the manner provided

5 in subparagraph (D).

6 "(B) CONTBIBUTIONS TO ACCOUNT. —

7 "(i) No CONTRIBUTION IP BB8BEVB8-

8 TO-ACCOUNT8 BATIO IB LESS THAN O.S

9 PBBCBNT. — No contribution shall be made to

10 the equity reserve account established pursu-

11 ant to subparagraph (A) in any year in which

12 the reserves-to-accounts ratio is lesa than 0.5

13 percent.

14 "(ii) Annual contbibutions be-

15 QUIEBD. — Except as provided in clause (i),

16 the Corporation shall make contributions to

17 the equity reserve account CBtablished pursu-

18 ant to subparagraph (A) —

19 "(I) at the end of each year begin-

20 ning after 1996 through the Snal payoff

21 year (as defined in clause (vii); and

22 "(II) in amounts determined under

23 clauses (iii), (iv), (v), and (vi) of this sub-

24 paragraph.

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1 "(iii) Amount of pbimaey conteibu-

2 TiON. — The primaiy contribution to the

3 equity return account for any year (or which

4 a contribution ia required to be made ehall be

5 the amount determined by dividing —

6 "(I) the aggregate amount of cap-

7 ital stock issued by the Corporation and

8 purchased by the Financing Corporation

9 under paragraph (IKA); by

10 "{ID the number of years between

11 the first year beginning after 1996 in

12 which the reserves-to-accounts ratio is
18 equal to or greater than 0.5 percent and

14 the final payoff year (taking into ac-

15 count the first and last year described).

16 "(iv) Amount of additional con-

17 TEIBUTION ALLOWED IF BB8BBVB8-T0-AC-

18 COUNTS BATIO DOES NOT EXCEED 1.25

19 pbbcbnt, — In any yew in which the re-

20 serves-to-accounts ratio is equal to or greater

21 than 1 percent but less than 1.25 percent,

22 the Federal Home Loan Bank Board may re-

23 quire the Corporation to make an additional

24 contribution of an amount not to exceed

25 the amount determined by lUviding —

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1 "(I) the inveatment return amount

2 (as defined in clause (viii)) computed at
8 an annual compound rate not to exceed

4 6 percent; by

5 "(II) the numher of years between

6 the first year beginning after 1996 in

7 which the reserves-to-accomits ratio

8 was equal to or greater than 1 percent

9 and the final payoff year (taking into

10 account the first and last year

11 described).

12 "(v) Amount op additional con-

18 TBIBUTION allowed if BB8EBTE3-TO-AO-

14 COUNTS BATIO does NOT EXCEED 1.79

16 PEBCENT. — In any year in which the re-

16 serves-to-accountH ratio is equal to or greater

17 than 1.35 percent but less than 1.75 percent,

18 the Federal Home Loan Bank Board may re-
18 quire the Corporation to make an additional

20 contribution of an amount not to exceed the

21 amount determined by dividing —

22 "(D the investment return amount

23 computed at an annual compound rate

24 not to exceed 8 percent, minus the sum

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1 of any amounts contributed under clause

2 Tiv); by

3 "(ID the number of years between

4 die first year beginning after 1996 in
6 which the reserves-to-accounts ratio

6 was equal to or greater than 1.25 per-

7 cent and the final payoff year (taking

8 into account the first and last year

9 described).

10 "(vi) Amount of additional contbi-

11 BUTION ALLOWED IF EB8BBVE8-TO-AC-

12 COUNTS EATIO BXCBED8 1.7S PBECENT. —

13 In any year in which the reserves-to-ac-

14 counts ratio is equal to or greater than 1.75

15 percent, the Federal Home Loan Bank

16 Board may require the Corporation to make

17 an additional contribution of an amount not

18 to exceed the amount determined by divid-

19 ing—

20 "(I) the investment return amount

21 computed at an annual compound rate

22 not to exceed 10 percent, minus the

23 sum of any amounts contributed under

24 clause (iv) or (v); by

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1 "(n) the number of years between

2 the first year beginning after 1996 in

5 which the reservea-to-accoimta ratio
4 was equal to or greater than 1.75 per-
fi cent and the final payoff year (taking

6 into account the first and last year de-

7 scribed).

8 "(vii) Pinal payoff yeae defined. —
8 For purposes of this subparagraph, the term

10 'final payoff year' means the year of maturity

11 of the last maturing obligation of the Financ-

12 ing Corporation (which was issued under sec-
18 tion 21 of the Federal Home Loan Bank Act

14 and matures before January 1, 2027).

15 "(viii) Investment betubn

16 ahount. — For purposes of clauses (iv), (v),

17 and (vi), Uie term 'investment return amount'

18 means the amount which would be realized

19 on tiie aggregate amount invested by the Fi-

20 nancing Corporation in capital stock issued

21 by the Corporation under paragraph (1) over

22 the period of the investment if the return on
28 the investment is computed at the rate de-

24 scribed in subclause (I) of the respective

25 clauses.

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1 "(C) Investment of amounts in ac-

2 COUNT. — Amounts accumulating in the equity

3 return account may be invested in such manner as

4 the Corporation determines.

6 "(D) Tbansfeb of eabninos to pbimaby

6 BESEBVE. — Earnings accruing on any investment

7 (under subparagraph (C)) of amounts in the equity

8 return account shaJl be transferred to the primary

9 reserve account of the Corporation established

10 pursuant to section 404(a) as such earnings are

11 realized by the Corporation and shall not be treat-

12 ed as amounts in the account.

13 "(E) Retibehbnt of capital stock

14 UBiNQ BALANCE IN ACCOUNT. — Upon maturity of

15 all obligations of the Financing Corporation under

16 section 21 of the Federal Home Loan Bank Act,

17 the Corporation shall payoff and retire any capital

18 stock issued under paragraph (l)(A)(ii) using only

19 amounts accumulated in the equity return ac-

20 count.

21 "(F) RE8EBVE8-T0-ACC0UNT8 BATIO DE-

22 FINED. — For purposes of this paragraph, the term

23 'reserves-to-accounts ratio' means, with respect to

24 any year, the amount determined by dividing —

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1 "(i) Uie amount of reeerres of the Oor-

S poration (determined as of December 31 of

3 the preceding year); by

4 "(ii) the aggregate amount of all ac-

5 comits of all of its insured members (deter-

6 mined as of such date).

7 "(3) Financing coepoeation dbfinbd. — For

8 purposes of this subsection, the term 'Financing Gorpo-

9 ration' means the Financing Corporation established

10 under section 21 of the Federal Home Loan Bank Act.

11 "(4) No REDUCTION OE SUSPENSION OF INBUE-

12 ANCE PEEB«UH8 WHILE STOCK IS OUTSTANDINO. —

13 Notwithstanding any other provision of law, the provi-

14 sions of subsections (bK2), (dKl)(B), and (g) of section

15 404 shall not apply as long as any share of capital

16 stock issued under paragraph (IXAKii) is outstanding.".

17 SEC. 5. FSUC AUTHORITY TO CHAKGE PREMIUMS REDUCED

18 BY AMOUNT OF FINANCING CORPORATION

19 ASSESSMENTS.

20 Section 404 of the National Housing Act is amended by

21 redesignating subsections (d) through (i) as subsections (e)

22 through (j), respectively, and by mserting after subsection (c)

23 the following new subsection:

24 "(d) AuTHOEiTY TO Chaeqb Pbemiums Reduced by

25 Amount of Financing Cobpobation Assebsmbnts. —

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1 Notwithstanding any other provision of this section, the aom

2 of—

3 "(1) the amount of any premium required to be

4 paid by any insured institution under subsection (b)(1);

5 and

6 "(2) the amount of any premium authorized to be

7 assessed by the Corporation under subsection (c) with

8 respect to such institution,

9 for any period shall be reduced by the funount of any assess-

10 ment paid for such period by such insured institution to the

11 Financing Corporation pursuant to section 21(1) of the Feder-

12 al Home Loan Bank Act.".

13 SEC 6. MISCELLANEOUS PROVISIONS.

14 (a) Federal Home Loan Bank Dividenss. — Section

15 16 of the Federal Home Loan Bank Act (12 U.S.C. 1436) is

16 amended by adding at the end thereof the following new suh-

17 section:

18 "(c) Exception in Case of Losses in Connection

19 With Financino Coepobation Stock. —

20 "(1) In oenebal. — Notwithstanding Hubaection

21 (a) of this section, if —

22 "(A) a Federal Home Loan Bank incurs a

23 chargeoff or an expense in connection with such

24 bank's investment in the stock of the Financing

25 Corporation under section 21;

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1 "(B) the Board detennineH there is an ex-

2 traordinary need for the member institutions of

3 the bank to receive dividends; and

4 "(C) the bank has reduced all reserves (other

5 than the reserve account required by the first 2

6 sentences of subsection (a)) to zero,

7 the Board may authorize such bank to declare and pay

8 dividends out of undivided profits (as such term is de-

9 fined in section 21(d)(7)) or the reserve account re-

10 quired by the first 2 sentences of subsection (a).

11 "(2) ReQUIBBUENTS of section 21 NOT AP-

12 FBCTED. — Notwithstanding any payment of dividends

13 by any Federal Home Loan Bank pursuimt to an au-

14 tborization by the Board under paragraph (1), the ap-

15 plicable provisions of section 21 shall continue to apply

16 with respect to such bank, and to such bank's invest-

17 ment in the Financing Corporation, in the same

18 manner and to the same extent as if such payment had

19 not been made.".

20 (b) CONPOBMING Amendment. — Section 402(h) of the

21 National Housing Act (12 U.S.C. 1725(h)) is amended—

22 (1) by striking out "After the effective date" and

23 inserting in lieu thereof "(1) After the effective date";

24 and

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1 (2) by adding at the end thereof the following new

2 paragraph:

3 "(2) The first three sentences of paragraph (1) shall not

4 apply to stock issued by the Corporation to the financing

5 Corporation under subsection (bKlMA).".

6 (c) LiuiTATiON ON SPECIAL ASSESSMENT. — Section

7 404(c) of the National Housing Act (12 U.S.C. 1727(c)) is

8 amended —

9 (1) by striking out "(c) The Corporation" and in-

10 serting in lieu thereof "(cKD Special Assess-

11 MBNT. — Subject to paragraph (2), the Corporation";

12 and

13 (2) by adding at the end thereof the following new

14 paragraph:

15 "(2) Limitations on Amount op Assessment. —

16 The amount of any additional premium assessed by the Cor-

17 poration against any insured institution under paragraph (1)

18 in any of the following years shall not exceed the amount

19 Usted in connection with each such year in the following table

20 (unless the Federal Home Loan Board determines that severe

21 pressures on the Corporation exist which necessitate an infu-

22 sion of additional funds):

"For jtar. The amount of the additional pre-

mium may not exceed:

1087 Ka of 1 percent of the total unaunt of

the dccountB of the msured membon
of Buch uutilution

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"For 7«u: Tbt MWMnt of the

minin raaj not «xc««d:

IMS ~ Ml gf 1 pv«ent d the toul unmint of

Ida ueounU of the innuvd memlMn
ol nidi imtitutioa

1988. M* ol 1 paroaot at tba total ■mount of

■he leeousti of tba inturad msmbon
of nwh imtitutioD

1990 H4 al 1 perceot d tba tottl wnount of

Ihe aceouoti of tba iiwured mendicn

19S1 t4i gf 1 percent of the total aiiNiuiit of

the Kcousti of the iniured memben
iM fuch ioftitiitioii.

1 (d) Pbiobitt of Secubbd Intbbests. — Section 10 of

2 the Federal Home Loan Bank Act (12 U.S.C. 1430) is

3 amended by adding at the end thereof the following new

4 subsection:

5 "(e) Pbiobitt of Gbbtain Secubbd Intbbests. —

6 Notwithstanding any other provision of law, any security in-

7 terest granted to a Federal Home Loan Bank by any member

8 of any Federal Home Loan Bank or any affiliate of any such

9 member shall be entitled to priority over the claims and

10 rights of any party (including any receiver, conservaMr,

11 trustee, or similu' party having rights of a lien creditor) other

12 than the claims of secured parties that are secured by actual

13 perfected security interests that would be entitled to priority

14 under otherwise applicable law.".

15 (e) F8UC Rbpobt Ebquibembntb.— Section 402 of

16 the National Housing Act is amended by adding at the end

17 thereof the following new subsection:

18 "(k) Abpobts and Budgets Bequibed. —

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1 "(1) QUAETEELY BEPOBT8 AND BUDGETS. —

2 Before the end of the 2-week period beginning on the

3 first day of each calendar quarter, the Corporation

4 shall complete a detailed written report and budget de-

5 Bcribing and exphuning —

6 "(A) planned or anticipated activities and es-

7 timates of receipts and expenditures for such cal-

8 endar quarter; and

9 "(B) the activities, receipts, and expenditures

10 for the preceding calendar quarter.

11 "(2) Semiannual bepobt. — Before the end of

12 the 30-daj period beginning on the first day of each

13 semiannual period, the Corporation shall complete a

14 detailed written report and budget describing and ex-

15 plaining the activities, receipts, and expenditures for

16 the preceding semiannutU period.

17 "(3) Submission of semiannual bbpobt to

18 CONOBB88. — The Corporation shall submit a copy of

19 each semiamiual report required under paragraph (2) to

20 the Committee on Banldng, Finance and Urban Affairs
31 of the House of Kepresentatives and the Committee on

22 Banking, Housing, and Urban Affairs of the Senate.

23 "(4) ACTIVITIBS, ETC., OF FEDERAL ASSET DI8-

24 POSITION ASSOCIATION. — Activities, receipts, and ex-
35 penditures of the Federal Asset Disposition Association

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1 (or any successor thereto) shall be included in any

2 report or budget required under this subsection.

3 "(5) Definitions. — For purposes of this subsec-

4 tion —

5 "(A) AcTiviTiBS. — The term 'activities' in-

6 eludes any activity engaged in with respect to any

7 insured institution in financial difficulty.

8 "(B) Sbmiannoal pbbiod. — The term

9 'seniiannual period' means —

10 "(i) the period be^nmng on Januaiy 1

11 of any calendar year and ending June 30 of

12 such year; and

18 "(ii) the period beginning on July 1 of

14 any calendar year and ending December 31

15 of such year.".

16 (f) Sbcondabt Resbbve. — Section 404 of the Nation-

17 al Housing Act (12 U.S.G. 1727) is amended by atriking out

18 subsection (i) (as redesignated by section 5).

19 SEC. T. FEDERAL ASSET DISPOSITION ASSOCIATION.

20 (a) Status as MixbivOwnebship Govbbnubnt

21 COBPOBATION. —

22 (1) Ih gbnbeal.— Section 9101(2) of title 31,

23 United States Code (as amended by section 3) is

24 amended by adding at the end thereof the following

25 new subparagraph:

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1 "(I^ the Federal Asset Disposition Associa-

2 lion (as defined in section 7(d) of the Federal Sav-

3 ings and Loan Insurance Corporation Recapital-

4 ization Act of 1987).".

5 (2) Applicabilitt of cbetain provisions bb-

e LATINO TO GOVEENMENT COEPOEATION8. — Whether

7 or not government funds are invested in the Federal

8 Asset Disposition Association, such Association shall

9 be treated, for purposes of sections 9105, 9107, and

10 9108 of title 31, United States Code, as a mixed-own-

1 1 ership Government corporation which has capital of the

12 United States.

13 (3) Annual audit bequibbd. — Section

14 9105(a)(2) of title 31, United States Code, is amended

15 by inserting ", the Federal Asset Disposition Asaocia-

16 tion (as defined in section 7(d) of the Federal Savings

17 and Loan Insurance Corporation B«c&pitalization Act

18 of 1987)," after "Insurance Corporation".

19 (b) QlJAETEELT BePOBTB TO CONOEESS. —

20 (1) Rbpobt bbquibbd. — Before the end of the 2-

21 week period beginning on the first day of each calendar

22 quarter, the Federal Asset Disposition Association

23 shall complete a detailed written report on the preced-

24 ing calendar quarter to the Committee on Banking, E1>

25 nance anS Urban Affairs of the House of Kepresentar

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1 tivei and the Committee on Banking, Housing, and

2 Urban Affairs of the Senate.

3 (2) Contents of bepobt. — Each report re>

4 quired under paragraph (1) shall contain a complete de-

5 scription of —

6 (A) all activitiea of the Federal Asset Diapo-

7 aition Association during the calendar quarter for

8 which the report is made;

9 (B) the financial condition of the Association

10 as of the end of such calendar quarter;

11 (C) all income of the Association during such

12 calendar quarter and the source of such income;

13 (D) all expenditures made or expenses paid

14 by the Association during such calendar quarter,

15 including administrative expenses and any ex-

16 pense which —

17 (i) was incurred in connection with an

18 activity of the Association; and

19 (ii) was paid by any other person on

20 behalf of or for the beneBt of the ARxociation;

21 and

22 (E) the amount of capital of the Federal Sav-

23 ings and Loan Insurance Corporation which was

24 returned to such Corporation during such calendar

25 quarter.

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1 (c) Opbh Hebtino Requibbubht. — The Federal

2 Asset Disposition Association shall be treated as an agency

3 for purpoaeg of section 552b of title 5, Unit«d States Code.

4 (d) Federal Asset Disposition Association De-

5 PINBD. — For purposes of this section, the term "Federal

6 Asset Dbposition Association" means the savings and loan

7 association established by the Federal Savings and Loan In-

8 surance Corporation under section 406 of tlie National Hous-

9 ing Act to manage and hquidate nonperforming assets on
10 behalf of such Corporation in accordance with such section.

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Mr. Wtub. lliank you, Mr. Chairman.

I wish to compliment you for tihe early start on hearings on this
very important subject. It is unprecedented for us to have hearings
before ^e committee organizes, but I think it is warranted in view
of the urgency of the problem we now face, and I, too, would like to
welcome our panel of industry representatives this morning. It is a
very distinguished panel indeed, and it is critical that we hear
from them, since if any FSLIC recapitalization plan is going to
work, it must have the support of the industry itself.

Mr. Chairman, we are all aware of the situation confronting
FSUC. The Federal Home Loan Bank Board tells us that FSLIC's
primary reserve has fallen to lees tiian $2 billion and because of
insufScient funds, FSLIC has been forced to postpone resolution of
problem cases. The costs of warehousing problem thrifts has grown
to $6 million per day, a staggering amount that almost equals
FSLIC's entire income on an annualized basis.

As the GAO reported last fall, further delaying resolution of
problem cases will add substantially to the ultimate costs of Indus-
try and to the economy.

While there have been disagreements over specifics, I think that
all recognize the critical need to provide FSLIC with additional re-
sources; recapitalization will preserve public confidence in our Na-
tion's thrift institutions, and should help diminish the interest rate
premiums that a number of S&l£ currently have to pay to attract
and maintain deposits.

In short, while some have doubt about the ultimate effectiveness
of this particular proposal, whether it provides enough funds, I be-
lieve it represents a positive step forward find it should put us well
on ^e way to eliminating the drag the small minority of troubled
thrifts have had on the healthy mEyority, and I look forward to the
testimony this morning, and I can assure you, Mr. Chairman, that
you will once again have my full support in expeditiously moving
the recapitalizaUon bill.

The Chairman. Iliank you.

I will take this opportunity now to go back to the introductory
phase, and welcome our last new member. We increase our repre-
sentation from New York and the clergy in Floyd Flake from the
6th District in Queens. Floyd Flake is a minister who truly has
been an activist in promoting housing, senior citizen facilities and
small business efforts in Queens, a background and expertise that
we need on this committee.

We welcome you as well, Mr. Flake, to our panel.

Mr. Wtlie. Mr. Chairman, Mr. Pat Swindall from Georgia has
□ow arrived. I already gave you his credentials, but welcome to the
committee, Pat.

The Chairman. I recc^nize Mr. GonzEtlez for a unanimous con-
sent request.

Mr. Gonzalez. Thank you very much, Mr. Chairman.

I ask unanimous consent that at this point in the record, when
we enter into the testimonial portion, that we incorporate into the
record testimony sent by Mr. Mario G. Obledo, who is a former na-
tional president of the League of United Latin American Citizens
now in Sacramento, CA. Fmding himself unable to be present to

; VH_>t.f»^lV

render the testimony personally, he asked that I submit it for the
record, and ask unanimous consent that we do so.

The Chairman. If there be no objection, the testimony will be
placed in the record at the conclusion of the testimony of the wit-
nesses, the pEmel that is before us.

Is there objection? The Chair hears none.

The Chair might state it is unfortunate that the time element
was off, but we certainly would like to have had him in person, but
we do appreciate his metking an effort and going to the trouble of
preparing his testimony for us.

llie Chair recognizes Mr. Barnard.

Mr. Barnard. Thank you, Mr. Chairman.

Mr. Chairman, I first want to concur in your opening statement
this morning as well as to commend you for having these very
early hearings on this very, very important issue, the FSUC re-
capitalization bill.

However, I fear that we, from the advanced information, that we
may find ourselves involved in other controversial issues, which I
hope will not happen as far as this particular bill is concerned, and
I hope that we will stay clear of some of the Collateral issues which
have been indicated that might be in this particular consideration.

I fear that there is some trend developing to involve us in one (tf
the most controversial issues now facing the savings and loan in-
dustry, and this is a matter of direct investments.

I must confess I was somewhat surprised to see a mfyor piece on
this subject included in the packet of materials for this hearing
which I received, and that piece properly notes that in 1985 I sup-
ported a compromise amendment that related to direct invest-
ments.

Well, Mr. Chairman, a lot of water has flowed under the dam
since then. My subcommittee and House Government Operations
has continued to study whether direct investments are good or bad
for the savings and lo£m industry since then. It has been one of the
most hotly contested issues. Basically, are they in and of them-
selves dangerous? Correctly, I believe the Federal Home Loan Bank
itself has decided to hold hearings on this question.

It is my hope that the Bank Board will be able to resolve what
this committee should not delay in solving, and this is the proper
methodology for determining whether direct investments are good
or bad.

This has been the problem all along, that no one has come up
with the figures which makes the case one way or the other.

At the time my Government Operations Subcommittee endorsed
the rule, we did so with many qualifications, and obviously said the
matter needed further study, and that study is about ready to take
place.

Let us not get tied up in the many difficult byways of this issue
when we have to get on with this very important subject of recapi-
talization. Thank you very much.

The Chairman. Thank you.

The Chair recc^nizes Mr. Parris.

Mr. Pahhib. Thank you, Mr. Chairman.

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I want to add my words of oongratulations to you for holding this
hearing today, and welcome the wita o ea OG . Mr. Chairman, the pn^
lenu of FSLJC very much deserve our attention.

As some of you may recall, I have been somewhat outspoken on
the need for the committee to address the problems of FSLIC for
more than the last 3 years. I^ast year, the committee did take
action, applied what we call the FSLIC recap, what is now known
aBHJl.27.

However, the market forces in the delivery of financial services
in this Nation have simply overwhelmed the r^ulatory capacity of
government, and the situation changes almost daily in very pro-
found ways.

In the last several weeks, I have talked to a large number of
leaders in the thrift industry, and what I hear from these experts
is an increasing realization that the FSLIC recap plan similar to
that adopted in the last Congress could pose a serious threat to the
solvent tiirifts in this Nation.

I have read the estimates of the financial requirements for the
solution to this problem that are far beyond the $25 billion figure
that we have used, and may now exceed $40 billion.

The continuation of the progrtun of having our healty S&Lb bail
out the failing institutions could jeopardize the whole industry, and
create a crisis of considerable proportions with enormous and inter-
national implications and consequences.

An attempt to consider and even summarize the FSUC problem
and the chuiges taking place in the thrift industry Eilone even in
several hours of hearings is very much like trying to summarize
war and peace in 5 minutes.

Neverttieless, I have the sense that this committee may be on the
verge of reenacting legislation that is intended to save the thrift
industry, but may only buy time and ignore the real problems of
the chfuiging marketplace for the delivery of financial services in
this Nation.

I suggest to you that many others on this committee have a
number of reservations about whether or not this is the best or
even the complete solution to the problem. I would urge my col-
leagues, therefore, to proceed with caution, as some fundimiental
relinking about the future of the thrift industry is, in my view, in
order.

We should use these hearings as an opportunity to debate, dis-
cuss and to get some of these very complex qu^tions answered
rather than simply review and enact one of the several legislative
proposals that are before us.

I look forward to the opportunity of doing that in these hearings,
Mr. Chairman, and I thank you.

The Chaikuan. Does anyone else seek recognition at this point
in time?

Mr. Kleczka has an opening statement.

Mr. Ki^czKA. Iliank you, Mr. Chairman.

Mr. Chairman, if Congress approves a bailout of the Federal Sav-
ings and Loan Insurance Corporation, as seems likely, I would hope
that no one, in this room or elsewhere, is encouraged to believe
that our Federal deposit insurance problems have been resolved.

Real resolution of our depoeit insurance crisis must include a
merger of our Federal deposit insurance funds.

I am drafting l^islation which will do just that. We may not be
able to achieve a mei^er of deposit insurance funds in thia Con-
gress, but I am convinced that we should lay the groundwork.

To do otherwise would mean opting for a quick, short-term fix at
the expense of a long-term solution. Mr. Chairman, I would ask
unanimous consent that my complete statement be included as
part of the record.

The Chairman. Without objection, it is so ordered.

[The prepared statement of Mr. Kleczka can be found in the ap-
pendix.]

The Chairhan. The committee will now hear from Gerald J.
Levy, immediate past chairman of the U.S. League of Savings Insti-
tutions. He will be followed by Mr. David J. Sullivan, Jr., treasurer
of the National Council of Savii^s Institutions, and Patrick Forte,
president of the Association of Thrift Holding Companies.

Mr. Levy, we will put your entire statement in the record, and
you may proceed to summarize.

STATEMENT OF GERALD J. LEVY. IHMEDUTE PAST CHAIRHAN,
U.S. LEAGUE OF SAVINGS INSTITUTIONS, ACCOMPANIED BY W.
W. McALUSTER

Mr. Levy. Chairman St Germain and Members of the committee,
my name is Gerald J. Levy. I am president of Guarantee Savings of
AUlwaukee, and appear today on behalf of the U.S. League of Sav-
ings Institutions, where I am immediate past chairman, and have
chaired a special task force to address current issues confronting
the FSLIC.

I Eun accompanied by W. W. McAllister of San Antonio Savings
in Texas, who headed our subcommittee seeking constructive steps
to combat the special problems £iffecting our member institutions
operating in depressed economic areas.

Together wiUi our written statement, we have submitted the
fuud copy of our task force report. The report was adopted unani-
mously by our Board, which consists of directors from every State.
I believe our Board is as representative a group as it is possible to
convene of institutions ensured by the FSLIC, the audience most
directly affected l^ legislation to recapitalize the deposit insurance
fund.

We appreciate the priority thia committee places upon the cur-
rent financial problems of the FSLIC. The situation has changed
somewhat since the l^islative proposals of last year. Most notably,
it is clear that economic conditions vary significantly by State and
local community.

We found that the FSLIC caseload has become intertwined with
the deepening economic depressions in various States, which are
creating msoor difficulties for both savings institutions and com-
mercial banks.

You can see from the maps dispiayed befive you a considerable
similarity between States with economic problems, ccnnmercial
bank failures, and savii^ and loans with eaniings prx^lems.

The new situation requires a more flexible approach to the
FSUCs problems. The U.S. Lefigue proposes a two-pronged savings
institution self-help plan, self-help because it will restore the
health of the FSLIC and well-managed institutions operating in de-
preMed economies, without turning to the taxpayer, without en-
larging the Federal deficit or calling for Treasury funds or guaran-
tees.

The first part involves a r^ulatory and supervisory approach to
extend capital forbearance, and to adopt generally eiccepted ac-
counting principles for problem loans of weU-managed institutions
operating in depressed areas.

We have explained our suggestions to Chairman Gray at the
Bank Board. Ebcperience demonstrates that time can heal wounds,
especially where tiie institutions involved hold assets consisting
primarily of loans secured by real estate.

The forbearance suggestions of our report are very important to
the health of the FSOC, but permit me to focus on our improve-
ments to the legislative plan developed by the Treasury. We sug-
gest two years of bond issuance of up to »5 million to provide up-
front resources of the FSLIC while the Treasury proposal asks for
$16 billion.

Repayment on the bonds under our self-help plan would come
first from the dedication of the statutory 20 percent net income set-
aside of the Federal Home Loan Bank System, rather than a $3 bil-
lion initial drain on the retained earnings of the system as recom-
mended by Treasury.

Adjustments would be made to treat home loan banks with FDIC
insured Members on an equitable basis. No one, the U.S. League or
the Treasury, can forecast with accuracy the needs of the FSLIC in
theyears ahead.

We have supported in large part r^ulatory steps such as broker
deposits, direct involvement and pha^d-in higher capital rules to
contain future problems. We applauded the chartering of FADA to
accomplish asset disposition in a business-like way and in the use
of the management consignment program.

The managerial strains on the FSLIC are considerable. Turnover
at the policy level, stafling deficiencies, and also hedging strat^es
at institutions with the consent of the Bank Board open the ques-
tion.

The U.S. League believes the prudent approach is to limit the ex-
traordinary up front bond issues to 2 years, at which point Con-
gress can review the project. By leaving in place the home loan
banks' retained eamii^, there is flexibility for future borrowing
at that point.

Our plan provides essentially the same resources to the FSLIC
over the next 2 years as the Treasury version. It provides signifi-
cantly more over the long-term, because the FSLIC would not be
burdened with paying interest on two or three times as much bor-
rowing.

We are pleased to see that H.R. 27 retains statutory language
giving some hope that the extra one-eighth of one percent FSLIC
special assessment can be phased out. Not only is the aipecisl aa-
seesment an extra competitive hao^cap. but togetheT «\& ^1^

prospect of debt service on $15 billion in bonds, it encourages
stronger institutions to migrate from the FSLIC to the FDIC.

H.R. 27 also contains important provisions correcting a problem
with the FSLIC secondary reserve. It also establishes an mdustiy
oversight group find assures periodic reports to this committee and
your coimtcrpart on the other side of the Capitol.

Our written testimony explains once again why plugging the
nonbank bank loophole is important to conserving uie resources of
the FSLIC, and asks your help with your colleagues on the tax-
writing committee for extending sunset dates on special code provi-
sions essential to attracting bidders for supervisory metiers.

Finally, you should be forewarned that testimony you will hear
tomorrow from the Treasury witness may attempt to ridicule our

Sood faith effort for a self-help plan sustainable by our industry.
I^e wish to reserve the right to Hie a point-by-point rebuttal of
such testimony.

I would now turn to the Treasuiy plan itself and the problems
that we have with it. We are concerned about the sheer dollar
volume

The CHAniHAN. Mr. Levy, I think maybe we ought to get unani-
mous consent for your request that you just made. The request is
that subsequent to Treeisury's testimony, if necessary, Mr. Levy, on
behalf of the U.S. League, would appreciate the opportunity to be
able to file a rebuttal statement.

Is there objection? The Chair hears none. The gentleman may
proceed.

Mr. Levy. Thank you.

Turning to our problem and our departure from the Tresisury
plan, our concern is with the sheer dollars involved in the plan, Slo
billion. We believe that this could lead to a too-rapid level of ex-
penditures, and we are deeply concerned about the mipact it would
nave on the depressed real estate meirkets that we referred to in
the charts.

The concern is that with that kind of cash on hand, it is ver^
conceivable that we could move towards almost a fire sale mentali-
ty in dealing with the real estate in that area.

I know that statements have been made about the concerns with
withholding and losses that have incurred to the FSLIC by hai^^ing
on.

I might point to the GAO report which came out in September
which pointed out that by holdim back from 1982 to 1986, the
FSIJC actually saved $4.7 billion by being the beneficiary of the
drop in interest rates and the improvement in the spread problem
cases that we saw.

We suggest that there should be a go-slow procedure in dumping
real estate in these depressed areas.

We are moving at the bottom of the market in areas like Texas,
Louisiana, and Oklahoma, and we are deeply concerned about the
process moving forward too quickly.

We are also concerned about the impact of the tax reform bill,
and the elimination of the tax-free reorganization that sunsets in
1988.

This is going to compel a much more rapid dispoeition of case
resolution, and we are concerned that with this in place, and with

the $15 billion actxes to the marketplace, it might compel a bond-
ing level that would just be one that the system could not handle,
so we ask for your assistance in getting an extension on tiie tax-
free reorganization for an additional 3 years. This miakes it possible
to put together the supervisory mergers.

What we have tried to address in our plan, and I think it is ap-
Kirent from it, is an attempt to keep all present members of the
FSUC on board.

I alluded to the fact that there are some members who Etre well
capitalized publicly held companies that would consider alternative
insurance, namely, the FDIC.

Our hope is to keep all of those people within the r^tem, be-
cause all of the plans, the plan filed by the Treasury and our plan,
really require the cooperation and involvement c^ all savings and
loans, and we certainly can't see the departure of the h^thy insti-
tutions moving across the FDIC and being able to fund out and
carry out either plan.

We are certainly pleased that the proposal on the table calls for
a phasedown of this special assessment. I think it is important to
note that if you look at the Treasury proposal for some |3 Mllion in
funding, the annual interest costs will nm about 1-1/2 times the
regular etssessment, so we believe that it is going to be very diffi-
cult, if not impossible, to ever phase out the special assessment, if
we move to a level of bonding at $15 billion, so that certainly in-
creases the pressure on those well capitalized public institutions
that we would like to keep from making an alternative decision.

There is some other uncertainty that I would like to put back on
the table, the uncertainly that we have generated by the instability
of the Board, the instebiUty of the FSLIC.

We are now in the second year of operating with a temporary di-
rector of the Federal Savii^^s and Loan Insurance Corporation.

We have been extraordinarily lucky over the past year to have
two temporary directors who have performed brillianUy. But to
have a problem of this size, and to be putting this amount of
money on the table, and not having a permanent director in place
is really of deep, deep concern to us.

Added to that, the instability of the Board and the potential
changeover, the need for filling permanent positions, all of these
things we think ctre creating uncertainty on the part of our Mem-
bers, and we think within the 2-year period that we propose fund-
ing, that these thii^ can be resolved, and we can satisfy our Mem-
bership and keep them on board euid keep them within the plan.

One last point, and that is the announcement that came out
from the Mayflov/er Group. We have supported continually the
closing of the non-bank bank loophole because it directly ties to the
size and solution of the problem, and we now have on tiie table the
support of the Treasury of this Mayflower Group plan which, in
effect, would eliminate, if carried through, any possibility of closing
that loophole.

That, again, creates uncertainty, because it raises a question in
our minds of what kind of resolution in terms of supervisory merg-
ers, of takeovers by the supervisors that could be accomplished
witiiout that loophole being closed, so we think it is ygrv important

; \^H_>t_f»^lV

to keep attention focused on that, because it is definitely part of
the overall cost and solution of this problem.

Thank you very much.

[The prepared statement of Mr. Levy can be found in the appen-
dix.]

llie Chairman. I will call upon Mr. McKinney to introduce our
next witness.

Mr. McKinney?

Mr. McKinney. Mr. Chairman, it gives me great pleasure to in-
troduce the next witness, David J. Sullivan, Jr.

I could probably tell you how far back we go, but that would em-
barrass both of us. I will simply put it this way: When we were
both appointed directors, he as a lawyer and myself eis a small
businessman in Mechanics emd Farmers Savii^ Bank in Bridge-
port, we were their token kids. Now he is no lon^r a lawyer, but
the chairman of the bank, and here to represent bis industry in the
halls of the 100th Congress in Washington, DC.

We got paid a great two crisp 20 dollar bills for our directors'

Earticipation and every loan of over $400,000 on real estate had to
e approved by the entire board, as I remember it, so that gives
you a guesstimate about how long ago it was, and we will leave it
at that.

It is very nice to have David here. He has been a good friend. He
has been a good help politically, and he has taken the Mechanics
and Fanners Bank and turned it into a sound growing, healthy in-
stitution with assets. Having started both of us when a savings
bank didn't advertise, didn't have carpet on the floor and, God help
you if you went on the radio; we are in a new world.

Thank you, Mr. Chairman.

The Chaihman. Where did you go wrong?

Mr. McKiNNBY. Well, that is a good question. I picked applica-
tions and no money. He picked bankii^ and money.

The Chairman. Mr. Sullivem, we will put your entire statement
in the record.

You may proceed to summarize.

STATEMENT OF DAVID J. SULUVAN, JR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MECHANICS AND FARMERS SAVINGS
BANK, FSB, BRIDGEPORT, CT

Mr. Sullivan. Thank you very much, Mr. Chairman and Mr.
McKinney.

Mr. Chairman and Members of the committee, i^ name is David
J. Sullivan, Jr., president and chief executive ofncer of the Me-
chanics and Farmers Savings Bank, FSB, Bridgeport, CT.

I am appefiring today in my capacity as treasurer of the National
Council of Savings Institutions, a trade association representing ap-
proximately 600 savings banks .^nd savings and loan associations
with total assets of $450 billion. Our Members include both FDIC
and FSLIC-insured institutions.

Our bank, the Mechanics and Farmers Savings Bank, is an
FDIC-insured institution and a member of the Federeil Home Loan
Bank of Boston, and under the provisions of the Gam-St Germain
Sill, we are a federally chartered savings bank r^ulated by the

Federal Home Loan Bank. I am currently privilwed to serve aa a
member of the board of directors of the Federal Home Loan Bank
of Boston.

We are very pleased to accept ^ur invitation to testify at today's
hearings, and we support your initiative in moviiu[ quickly to bring
the subject of FSLIC recapitalization before the Banking Commit-
tee.

I would like to begin by briefly reviewing the current state of the
industry in order to establish the economic and financial frame-
work against which our member institutions evaluate FSLIC re-
capitalization. Ninety-eight percent of the council members are op-
erating profitably; and for most of these institutions, their earnings
are at a record high.

The council's research department estimates that 1986 will be
another record profit year for FDIC-inaured savings banks. As a
result, capital margins have increased dramatically in the last
year, and we expect 1987 to indicate further positive results along
this trend line.

Average capital at FDIC-insured savings banks waa 7.3 percent
as measured by generally accepted accounting principles, and sav-
ings bank capital positions have recovered fully emd have now re-
turned to the historic levels that prevailed prior to the extreme fi-
nancial stress of the early 19808.

In fact, Mr. Chairman, as you know, in the Nori:heast and par-
ticularly in New England, return on average assets of 100 to 150
basis points is quite commonplace.

On the savings and loan side, the economic picture shows similar
earnings and capital improvement, as well as the traditional, more
positive deposit growth.

On the native side, there continue to be close to 400 FSLIC-in-
sured institutions which have not been able to take advantage of
the lower interest rate environment due primarily to problems re-
lating to asset quality.

These institutions Eire concentrated in those areas of the country
which have been hurt by the price decline in oil and l^ agriculture
al problems.

Notwithstanding these regionalized problems, we estimate that
1986 will be another year of strong profits for t^e m^ority of sav-
ings and loan associations and that the industry will continue
making ingior strides in rebuilding its net worth.

While FSLIC-insured institutions, in the aggr^ate, are thriving,
the conditions of the insurance itself is going firom bad to worse. I
don't need to elaborate on that.

The comments that you made, Mr. Chairman, and Mr. Wylie
made in the opening statements, clearly spell that out.

This being the case, the basic public policy question confinnting
the CongresB ia whether the shortfall in current FSLIC reserves
should be made up by the healthy s^ment of the industry or the
government itself.

The national council was the first to suggest a solution some-
where in between — namely, a private/pv^ic partnership that
would utilize the resources of the Federal Hot^e \JoaJi Banks as the
lever for generating new funds for PSxJC.

Unfortunately, this st^^cstion weis not favorably received by
either the FHL£B or the regional banks when it was initially made
in early 1985.

Responding to a congressional directive, the Treasury Depart-
ment began m 1986 to develop a borrowing program premised on a
capital contribution of up to $3 billion from the Federal Home
Loan Banks. These funds would be used to establish a fmancing
corporation which would support aB much as $15 bilUon of capital
market borrowings.

Under the terms of the plan, these borrowings would then pro-
vide equity funds to FSLIC for use in disposing of failed institu-
tions.

In response to objections by the Congressional Budget Office, the
original plan was modified in order to avoid any buc^tary impact
by empowering the financing corporation to assess FSLIC-insured
institutions to service its capital meu'ket debt, while FSLIC's assess-
ment would be correspondingly reduced.

In June 1986, our national council's task force studying this issue
recommended support for the Treasury/FHLBB plan with certain
changes, and both the Treasury and the Congress were generally
responsive to these suggestions when the bill was beii^ debated
last year.

On January 12, 1987, we convened our task force and after con-
siderable discussion and examination of a number of different op-
tions, it vraa agreed that the council should continue to support the
Treasury/FHLBB plan.

In fact, Mr. Chzdrman, we consider this question of recapitaliza-
tion of the Federal Savings and Loan Insurance Corporation so es-
sential that we are now prepared to support immediate enactment
of the FSLIC recapitalization measure regardless of whether our
recommendations are addressed now or deferred for subsequent
consideration.

We take this position because the indisputable fact is that in the
absence of any new infusion of new capital, FSLIC will be unable
to deal with its current, let edone future, case resolutions.

The anticipated cost of this effort is known to be at least $10 bil-
lion in 1987, with the eventual figure rising in fairly short order to
$25 billion. This is not an amount which can be met through cur-
rent and special assessments and earnings on reserves. Nor is it an
amount which can be handled in a business-as-usual method.

The clear message we would like to leave with the committee
today is that resolution costs have already been stretched out far
too long and in too many cases.

The real risk of inaction is that the hesdthy section of the thrift
industry which I have described will be irreparably injured by the
inability of the FSLIC to handle its current problems.

We estimate, for example, that the costs of generating deposits as
an FSLIC-insured thrift is approximately 50 basis points higher
than the cost of raising liabilities for a similarly situated FDIC-in-
sured bank. This disparity is largely the result of the perceived
weakness of the FSLIC fund in too many cases.

As a final comment on the new provision of H.R. 27 that would
subject tjie Federal Asset Disposition Association to GAO review, I
would state that the national council supports this change.

; \^H_>t_f»^lV

Although FADA has not taken title to any property under its
present business operations, public scrutiny of this type would ben-
efit all the parties concerned.

Mr. Chauman, the fact that the hearing is being held today on
the same bill, with your improvement, tli^t was passed last year,
your statement of Janueiry 6 on the floor in which you list the
recap bill as the first priority, the fact that this hearing was sched>
uled so early in the l^islative session, and with just this one sub-
ject, indicates to us that the committee is fully aware of how im-
portant FSLIC recapitalization is, and we support the committee in
that position.

Thank you very much.

The Chaishan. Thank you, Mr. Sullivan.

[The prepared statement of Mr. Sullivan can be found in the ap-
pendix.]

The Chairuan. Now we will hear from Mr. Patrick Forte, who is
President of the Association of Thrift Holding Companies.

STATEMENT OF PATRICK A. FORTE, PRESIDENT, ASSOCIATION
OF THRIFT HOLDING COMPANIES, WASHINGTON, DC

Mr. FOBTB. Thank you, Mr. Chairman and Members of the coro-
mittee.

Our Members are keenly aware of the need to improve the finan-
cial position of the FSLIC.

With an estimated primary reserve of $1.9 billion, the FSLIC

"nie Chairman. Mr. Forte, unfortunately your voice isn't carry-
ing through that mike. You are going to have to get real close to
the mike.

Mr. FoRTK. With an estimated primary reserve of $1.9 billion, the
FSLIC is confronted with potential payouts of possibly $25 billion.
This disparity threatens not only the thrift industry and the con-
sumers who rely on it, but the Nation's economic health.

We believe this problem must be dealt with as soon as possible.
A m^or recapitalization plan with wide support must be agreed on
so the thrift industry can r^;ain the public confidence it d^perate-
ly needs.

Delays in dealing with the problem will increase the ultimate
costs to the insurance fund and clearly present the possibility of a
taxpayer-assisted plan.

I want to emphasize to this committee that the problem we are
facing has not been caused by mismanagement witlun the thrift in-
dustry, in only a handful of well publicized cases has capital deple-
tion derived from management malfeeisance.

The primary drain on the FSLIC resources can be attributed to
the inability of the thrift industry to build or to raise capital be-
cause of corporate structure, dislocations in the economies of cer-
tain r^onal areas, inadequate management, and the lack of r^u-
latory foresight.

As to regalatOTy foresight, for example, in the last year, the
Bank Board has created havoc within the thrift industry by mgiufi-
cantly changing the rules for evaluating industry assets.

..Google

The combination of its new classification of assets rule and its R-
41c memorandum governing the appraisal of assets has severely
impaired thrift industry operations.

The clfissification of assets regulation allows Bank Board examin-
ers, functioning with virtually no objective Board guidance, to
write down assets at their own discretion.

The R-41c memorandum, moreover, will require immediate and
substantial writedowns, often producing values far below those that
would result from applying generally accepted accounting princi-
ples.

Put another way, by writing down industry net worth to a degree
not required by generally accepted accounting principles, the Board
has made even more urgent the need to pass a recapitalization bill.

Without a major effort to improve the means by which thrift in-
stitutions can be themselves capitalized, the ongoing cost of deposit
insurance will become an increasing burden on those thrifts which
are now well capitalized.

In other words, the strong thrifts will indirectly pay an increas-
ing subsidy to the weak thrifts, which will in turn weaiken thrift
earnings and hamper the building of capital through retained eam-
inm.

This is the principal reason Members of our association believe
the FSLIC recapitalization addresses only a smctll, albeit pressing,
aspect of the larger problem of undercapitalized thrift institutions.
R^cardless of the finemcial strength, the FSLIC alone cannot solve
the problem.

Further, it should be noted that in addition to the FSLIC, and
thrift depositors and taxpayers, there are a great number of indi-
vidual investors who have a great stake in this industry.

Over the past 4 years, investors have provided $14.2 billion to
thrifts.

During 1983, there was an investment of $3.5 bUlion; in 1984,
$800 million; in 1985, $2 billion; in 1986, $4.6 billion, a total of $10.9
billion of additional equity through stock purchases.

In addition, during the same period, investors have provided $2.3
billion in the form of subordinated debt, another form of capital.

Without this infusion of capital, the distress of the FSLIC and
the industry would have been further exacerbated. Therefore, the
interest of these public investors must also be considered by the
Congress in insuring the viability of the FSLIC.

On behalf of the Members of our association, I ask this commit-
tee to look beyond the immediate needs of the FSLIC and to consid-
er at the earliest opportunity measures that will set about improve-
ments to statutory and regulatory programs that will have the
effect of encouraging further private capitalization of the thrift in-
dustry.

Some of those concerns which we have, that have ramifications
that go beyond the affected holding companies, include, first, the
limitations now imposed on transactions with affiliates. This re-
striction effectively prohibits thrift holding companies from estab-
lishing fintmcing subsidiaries which make mortgage loans that are
to be sold to amliate thrifts. This and other affiliate transaction
rules applicable to thrifts must be modified to reflect present day
™«»Utie8.

; \^H_>t_f»^lV

Second, the elimin&tion or relaxation of debt-control reetricticau,
to encourage restrictions, to encourage additional capital flow into
the thrift industry, the restriction must be lifted on the amount of
non-diversified thrift holding the amount of debt, non-diversified
thrift holding companies and non-thrift affiliates can incur without
prior written approval of the Federal Home Loan Biuik Board.

Third, expansion of permissible thrift-related activities, including
cross-marketing of products or services. Thrift holding companies
are already si^ciently insulated from the insured subsidialry de-
posit institution to which the Savings and Loan Holding Company
Amendments of 1967 envisioned the holding company would serve
as a 80ur(» of strength.

With specific r^^rd to H.R. 27, we are in general agreement
with the major items in terms of the bill. We applaud the commit-
tee for working in this direction with the remtroduction of the
FSLIC recapitalization concept widely considered in the previous
Congress.

Industry support of the bill will be enhanced if language is in-
eluded which provides clear standards whereby the specif assess-
ment can be uscontinued without relying on uie disCTetion of the
Bank Board.

Our association also agrees with these elements of H.R. 27.

First, we believe the scale of the proposed recapitalization is ap-
propriate to the magnitude of the problem. Despite the price tag of
the solution, and the consequent indirect cost to our Members, we
agree that public confidence in the deposit insurance fund can best
be restored through a large injection of capital.

Second, H.R. 27 will draw on surplus funds of the District Feder-
al Home Loan Banks without creating risk contingencies that could
threaten their future stability. This is in contrast to a recent filter-
native proposal which could ultimately undermine the capital beise
of the whole thrift industry.

H.R. 27 provides a remedy for the FSLIC which does not impose
an inequitable burden on stockholderKiwned thrift institutions, as
would seem to be the effect of each alternative proposal we have
seen. We believe the future of the thrift industry will be dominated
by those institutions with capable management which can attract
new capital investment that will come from community investors
and from those who invest in publicly traded thrifts.

H.R. 27 will establish a substantial reservoir of financial strength
at the insurance level, which in turn allows thrift managers, de-
positors, and those who may wish to inject additional capital into
thrift institutions to rely on the fund as a source of stability. This
bill will achieve this stability without drawing on the American
taxpayer for a bailout.

To enhance the prospects for approving a plan to recapitalize the
FSLIC, we strongly believe that the recapitalization bill that goes
forwEird should not include other issues.

In the Chairman's letter requesting our testimony here today, he
noted that several Members have indicated an interest in propos-
ing amendments to H.R. 27 to deal with limitations on direct in-
vestment.

The Bank Board is, of course, in the midst of an ong<nng process
designed to evaluate its 2-year experience with th.B current direct

, \^n_>t_j»^iv

inveetment rule. It has received comment on that experience and is
conductii^ public hearingb later this month. Ilie Board, we be-
lieve, is carrying out precisely the rule-making function for which
independent regulatory agencies Eu*e designed.

The Board has committed to a schedule for developing a final
rule on direct investments by March 15. There can be little doubt
that some rule limiting direct investments will be adopted at that
time.

Both Chairman Gray and Board Member Henkel have indicated
support for a proposal to limit direct investments, thot^h they
diner as to the appropriate method.

Further, Board Member White simply has not stated his position
while reviewing the evidence.

The Board is carrying out its rule-making function in a responsi-
ble manner. It has opened its process to an unprecedented d^ree
of public participation. We believe that, through this process, uiey
can develop a rational and workable standard for r^ulating direct
investment fictivity and provide appropriate protection for the
FSUC fund.

There is no reason for Congress to preempt the Board's efforts.

If, Eifter the Board has taken final action, the Congress is not
pleased with the resulting rule, there will be ample opportunity to
legislate at that time.

Mr. Chairman, in conclusion, I wish to emphasize one more
point, and it is our belief that the most significant cause of thrift
industry problems today is not any particular kind of investment,
but rather the regional economic crises that are being experienced
in several parts of the country today.

While direct investments have contributed to thrift industry fail-
ures, so have mai^ other forms of investment, traditional and un-
traditional alike. "Hie truth of the matter is that any area of invest-
ment activity can be mismanaged, can be subjected to fraudulent
conduct, or can fall victim to a regional economic crisis.

The recapitalization problem is of such paramount importance
that its consideration by the Congress should not be diluted by dis-
cussion of other matters, and Congress' attention to this problem
should not be diverted to other issues which should be addressed
sepEU-ately.

Mr. Chairman, thank you. We appreciate your consideration of
our points of view.

[The prepaml statement of Mr. Forte can be found in the appen-
dixj

llie Chairman. Thank you, Mr. Forte.

Mr. Wylie has a brief statement to make.

Mr. Wyue. Thank you very much, Mr. Chairman.

As you know, the Republican Conference meets at II o'clock
today to approve ranking Members and committee assignments.
We are not really the jury yet, if you please. Your meeting was
called first and there wasn t emythiii^ I could do about the conflict.

Our Members need to go to tJiis importtmt meetii^. We do have
some questions and hopetully will return before the hearing is con-
cluded. If not, we would like to submit something for the record.

Mr. Frank. I thought we could vote on somethii^.

Mr. Wylie. You vote on us and approve us?

i by Google

The Chairman. Barney says we ought to vote on something,
since you are not the jury.

Thank you, Mr. Wylie.

Mr. Sullivan agrees with the addition of asking GAO to watch
over PADA. Does the U.S. League have any problem with that, Mr.
hevf

Mr. Levy. I don't think we have had a chance to really establish
a position. We are not opposed to public scrutiny of this fund.

The Chaibbian. Would you, for the record, submit a statement to
that effect?

Mr. Levy. Yes, we will.

^Tbe position statement to be furnished can be found in the ap-
pendix.]

The Chaibhan. Mr. Forte?

Mr. FoBTK. Yes, sir? The question?

The Chaibman. The question is with respect to FADA Emd the
GAO oversight of FADA that has been added to the bill. Do you
have any problem with that?

Mr. Forte. No, sir.

The Chaibman. Mr. Levy, in your statement and in your plan,
you refer to zero coupon bonds. I know for a fact that it has been
suggested to your task force that you obtain the services of some
security experts to give an opinion as to how marketable these zero
coupon bonds would be.

To the best of my knowledge, you haven't done that, have you?

Mr. Levy. No, we have not.

The Chairman. Are you going to do it?

Mr. Levy. Yes, we are.

The Chairhan. Will that be done expeditiously so we will have
the benefit of this for our deliberations?

Mr. Levy. Yes. We will bring that forward as quickly as possible.

The Chairman. We did auggest that a loi^ time ago.

[The opinion on zero coupon bonds referred to can be found in
the appendix.]

The Chairman. Now, Mr. Sullivan of the National Council of
Savings Institutions has suggested that the institutions be allowed
to leave FSLIC provided they have an exit penalty of 2 years of
regular premiums plus 2 years of special assessments.

On P^e 4 of your statement, Mr. Levy, you recc^nize the prob-
lem of FSLIC-insured institutions switching to IDIC.

Now, what is your position on the national council's proposal to
impose exit penalties in these situations or to construct a Berlin
Wall to prevent such switching?

I ask you, Mr. Levy, to comment, and then Mr. Sullivan, I ask
you also to tell us, and this will be the end of my questioning, how
you arrived at this 2 yeeirs of regulfu* premium plus 2 years of spe-
cial assessments, you know, where that came from?

Mr. Levy?

Mr. Levy. Specifically, we oppose the so^^alled Chinese Wall. We
think there should be the ability to depart if an institution so
chooses. We have generally si^ported the concept and development
of some reasonable exit fee. We have not gotten, specific on wtip*
that amount is.

We have heard it as the 2-year range and we have heard some
that have reached levels that we would consider almost the imposi-
tion of a Chinese wall. I don't think we would have difficulty with
the National Council's position of a 2-year imposition.

TTie Chairman. Mr. Sullivan, could you give us the justification
or the rationale behind your proposal?

Mr. Sullivan. Yes, Mr. ChEiirman. I believe that historically the
statute spoke of a 2-year penalty if, for instance, an institution
went from a federally insured status to a State-insured status such
as we had in Massachusetts or Maryland, and we simply use that
as a historical precedent, since we did not really have any other
basis to go on. It seemed to be a reasonable substitute for some of
the uncertainty that has been about now concerning the price of
moving from one fund to another.

The Chairman. But, Mr. Sullivan, things have changed. Every-
body agrees that action has to be taken; the situation is critical.
Yet, you are barkening back to days of yore rather than what I am
ai^dng, which is: What statistics — do you have statistics?

Mr. Sullivan. No, sir.

liie &IAIHMAN. You are going upon historic precedent. Unfortu-
nately, sometimes history is not precedence.

Mr. Sullwan. You are very correct, Mr. Cheiirman. We took that
as something that has a current statutory basis, and it seemed like
a reasonable compromise. But we are not wedded to that flgure.

The Chairman. Do you suppose that you m^ht use the expertise
of your counsel, and give us a little more than a historic precedent,
but some actual hard numbers to look at?

Mr. Sullivan. We will be happy to take up that question.

The Chairman. That would be helpful, and the U.S. League
m^ht want to do something like that, too.

Mr. Sullivan. Yes, we will,

The Chairman. Mr. Gonzalez.

Mr. Gonzalez. I want to thank the three witnesses for takii^
the time to appear before us on a very critical matter.

I would like to know if it would be possible or feasible to have
Mr. McAllister tell us a little bit about the very excruciating and
clear danger that exists in the Texas area, and particularly coining
from a man who represents the largest institution in our State of
Texas and happens to be headquartered in my district, in the 20th
Congressional District, of San Antonio.

We do have very singular, peculiar problems that need very spe-
cial attack or attention. And if Mr. McAllister could, it would be a
big favor.

The Chairman. Excuse me just a moment.

Mr. Gonzalez. We have to get permission.

The Chairman. Is there objection?

The Chair hears none.

Mr. McAllister is recognized.

Mr. McAllister. Texans are alwa^ willing to talk.

The basic problem we have experienced m the last year and a
half is an unprecedented thing in that it hais manifested itself in
unusually high levels of foreclosures. And Houston is in worse
straits than any m^or city in the country.

During 1986, actual foreclosures — not just postings — reached a
level of 24,000 homes in Houston. And in the month of January we
had that level at a 3,000-home level, which was even higher than it
had run in 1986.

We feel a major part of our plan is the forbearances we ask of
these institutions which, in turn, would pass through a tremendous
benefit to the citizens in these areas where our economies are im-
pacted by the decline in oil prices and other regional factors. Our
K' m requests a pattern similar to what the banking r^ulators
ve done for the national banks where they have dealt with the
problems in agriculture, and also the energy problems.

We think mis is a very importeint cost consideration, also, be-
cause it is our hope that these forbearances would leave a substan-
tial portion of tluB depressed real estate In hands that appeared
stronger, and perhaps let us weather it through until t^e economy
strengthens a bit. And then we address the problems in those insti-
tutions and liquidate those assets at a substantially reduced loss.
But that is a very important part of the U.S. League's Prcnram.

A surprise to those of us in Texas are the charts on the wall, and
there are 14 other States that are experiencing similar problems.

Mr. Gonzalez. Would you care to comment on the complaints
that I have had, from a very substantial number of savings and
]oaii and banldng sources in Texas, that the regulatory agencies
are in fact red-lining Texas at this time smd in this critical period,
in that it is prejudicial to helping the institutions rather than in-
sistence is made on really in effect liquidating rather than trying
to help? Is there any substance to that?

I have had numerous complaints from various portions of the
State.

Mr. McAllister. The m^or problem we have seen is the method
of evaluation of troubled assets. In our report, we request they do
use the GAAP process rather than the harsher evaluations implied
in the 41(c). The R-41(c) approach uses a very high discount figure,
and in a number of appraisals I have seen it has been a 12V^ to 14
percent level of discount.

In contrast, the NRP approach uses a discount that is the institu-
tion's cost of money.

The d^erenc^ in these two discount figures can make a tremen-
dous difference in the rect^nized loss an association takes in the
initial portion of the trouble loan.

The procedure that we recommend is identical to that procedure
used by the banking regulators, and we feel that our relators'
failure to eidopt these more lenient approaches to the initial eval-
uations is hurting our institutions.

Mr. Gonzalez. My time has expired.

The Chairman. Mr. Need.

Mr. Neal. Last week, I had occasion to talk to Ed Gray, and
there were a couple of institutions in my area working on a
merger, and one of them had asked me to contact him to speed up
tibe procedure. During the course of the conversation, we startra
talking about this approach, and he made the point that this whole
plan was contingent on a satisfactory exit fee.

He made the jwint that you are going to the ca{dtal marksta to
sell these instruments, and if investors see bow l^ money is BOin^

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to be repaid, and in fact if healthy institutions could leave the
system at will with no penalty or very small penalty, that investorB
won't be inclined to buy these instruments, and therefore the
whole plan would fail.

Would you agree? Please comment.

Mr. Levy. The question was raised by the Chairman about exit
fees, and there are two ways to look at this — actually, three. You
could build a wall and say nobody could leave. You can set a fee
Eind say you can't leave unless you pay a certain level of fee. We
tried to move to an entirely different approach and put together a
plan to sell to our Members, so that they would stay on board, look
at the plan and do an anEilysis of the costs, the kind of review proc-
ess that will take place and build a comfort level so they stay.

What we have done with our 2-year plan is essentially that. We
have run it past a few people in the industry that show the strong-
est tendencies to move on, and they are comfortable with the ap-
proach.

I underscore again that the Treasury plan brings on a level of
debt service that will require an oi^oing special assessment virtu-
ally forever. With that kind of analysis necessary, one starts equat-
ing what is the cost of staying versus leaving, and you get caught
up in the exit fee question.

We do keep our people on board, find we don't have them analyz-
ing exit fees.

Mr. Neal. No guarantee under your plan?

Mr. Levy. No guarantee that we can develop an exit fee that
somebody won't analyze and say, in the final analysis, it is still a
question; you are still better moving on. We are struggling trying
to reach an equitable conclusion.

Mr. Sullivan. The msirketplace, in my opinion, is very prsigmat-
ic, and in evaluating these securities they are going to look at the
sources of repayment. And, without some restraint on institutions
that want to leave, Mr. Gray's — Chairman Gray's position is well-
taken and one that has to be addressed. And that was part of our
position on the exit fee.

As the Chairman raised the question earlier, there is a case in
Florida — not yet docketed on the appellate level, and it has some
other wrinkles to it — but there they said the exit fee was totally
illegal. It had in part to do with the timing when the regulation
was issued or the position the FHLBB took.

The market will look, in evaluating these securities, at how the
instruments are going to be funded and repaid, without taking into
consideration what might happen down the road. They are going to
want to see what is there and what will be done to protect the
income stream.

Mr. Neal. What is your idea of a reasonable exit fee?

Mr. Sullivan. We had a 2-year proposal in our testimony, and at
the Chfurman's request we are gomg to research that further and
submit our recommendations specifically with statistical back-
ground on that question.

Mr. Neal. Mr. Gra^ was si^^esting a fee based on an assump-
tion that a thrift institution would be profitable and grow at 5 or 8
percent a year, and that a reasonable exit fee woind be what a

; \^H_>t_f»^lV

thrift would have paid in for 10 or 8 years under those asaump-
tions. That is a larger amount of money.

Mr. SuLUVAN. Substantially larger, yes, eir.

Mr. FoBTE. Mr. Neal, on the question of the exit fee, I don't
think from the viewpoint of an operator company a special assess-
ment is the only incentive to consider exiting the fund. There are
other considerations, very real considerations, of dealing with the
Bank Board on a business basis that gets into many other matters
of trying to run a public company, and it drifts into questions of
processing applications and the matter of running your business
that many companies are b^inning to consider in the range of as
important aa the exit fee, to lead them to think of leaving the fund.

As to an exit fee itself, we certainly understand there should be
an exit fee. Why have no idea at this time what that fee should be,
but it should be connected in some way — some consideration that
the operating company has received from the FSLIC.

The Chaibman. Mr. LaFalce.

The Chair is going to call upon Members according to their arriv-
al times, for a 5-10 minute period. That helps the new Members
participate in return for their timely appearance.

Mr. LaFalck. You are appearing on oehalf of the National Coun-
cil, and you heard the U.S. League espouse a position somewhat
different from the National Council, and l>y the administration,
and passed by at least the House Banking Committee in the last
Co ng ress.

What do you think of the relative merits of (a) the bill passed by
the last Conf^ress, or by the House Banking Committee in the last
Congress, which I believe the National Council signed off on (a) the
League's first preference; and (b) the League's second preference,
which would be some type of maimer?

Mr. Sullivan. In my closing remarks, I tried to state our posi-
tion, Euid that is, since the committee and the House did, in fact,
act upon this l^islation last year, and since this is the same bill
with only the improvement of the GAO supervision of FADA, we
think this pEuticulaT piece of l^islation could be acted upon almost
immediately. In addition the committee is familiar with it, as is the
full House and this is a situation involving the question of con-
sumer confidence that is so essential to our mdustnr. Thus the ad-
ministration plan is the most expeditious way to at least attempt to
b^cin to solve the problem. We do not think that it is the be-eul or
end-all; but it is an important beginning, so we support it in that
regard.

1 have not had time to go over the League's position completely
although I have heard my friend, Mr. Levy's testimony this morn-
ing. It is a new issue that m^ht have to require further hearings
that would involve much more time. I do think that the numbers
t^t are involved in the league plan are not enough to solve the
problem.

As far as the mei;ger of the funds is concerned, that is such an
involved question with so many ramifications that any attempt to
solve or even begin to solve the FSLIC problem by merging the
funds would require ^itensive hearings. It would require tremen-
dous debate, be highly controversial, and in the meantime the
problem would grow larger. Time is very important

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Mr. LaFalcg. One of your concerns is that the healthy thrifts
might leave the FSLJC and depart to the FDIC en masse. Is that
something that, number one, is speculative? If it is speculative,
what makes you believe it would be true? And if it is speculative,
could we deal with that legislatively by either making it more difG-
cult r^ulatorily, or prohibit it legislatively?

Mr. Levy. It is not speculative, because I have had conversations
with manf^ers of lar^e publicljf-held companies — and not ^just
large. But it is not an issue that just lies with the large publicly-
held companies. There are other well-capitalized institutions that
have made expressions to me of the sfmie kind.

One of the things that everybody has talked about is the broad
powers in the Thrift Holding Act.

Mr. LaFalce. Could it be dealt with by the FDIC, or isn't it
something that could be dealt with by legislative encumbremce?

Mr. Levy. Certainly, you can construct a Chinese Wall and say
everybody stays behind the Wall, and contain the problem in that
way.

Mr. LaFalce. Or establish a certain set of conditions which
would not enable a transfer simply to avoid the additional fees in-
cumbent upon membership in the FSLIC system?

Mr. Levy. Certainly.

We refer to a letter that has been circulated widely, reprinted in
the press, from Under Secretary Gould to Chftirman Volcker,
which says that as the program goes on, if it turns out that condi-
tions chuige in ways which threaten the viability of the plan, the
merger could be considered at that time.

We think the whole question of merger has been put in play and
is there. We are not in any way not talking about funding up. Our
plan calls for as much money on the table

Mr. LaFalce. Merger is a separate issue.

Mr. Levy. Totally.

Mr. LaFalce. The difficulty I have with the subject of merger is
not so much a conceptual one, although we would have to come to
grips with it, but simply a matter of timeliness. We never would be
able to bring about a merger of those two insurance funds in a
timely manner. It is too drastic a change to do in a timely fashion.
And it raises too meiny fundamental questions, such as what would
the future of a thrift as opposed to a bank be?

Would a merger of the two insurance funds — what would it
mean? Or is there some way to preserve their identity, et cetera?

Thank you, Mr. Chairman.

The Chairman. The gentleman's remarks are well-taken. The
Chair agrees with him as to the fact that we couldn't do this in a
timely fashion.

Mr. Barnard?

Mr. Barnaro. Thank you, Mr. Chairman.

Mr. Lew, the U.S. League's proposal is in two phases. One is for-
bearance lor institutions in depressed areas. Has any request been
made of the Home Loan Bank Board for such a plan that the U.S.
League has proposed here this morning?

Mr. Levy. Yes, they had a meeting with Chairman Gray and pre-
sented the request for the kind of forbearance that we describe.
1^ forbearance that is being asked for is to parallel the announce-

,Vnt.,^.n^lV

ments by the bank rc^pilators, the Comptroller of the Currency,
and the FDIC, in oil, gas and agricultural areas.

Mr. Barnard. What has been the reaction of the Home Loan
Bulk Board?

Mr. Levy. I didn't attend the meeting, so I don't know.

Mr. Basnard. Was this the full Board?

Mr. Levy. No, just a discuBsion and a presentation of our plan,
which included both recapitalization and forbearance, and we think
they are very much tied together, because the aize of the problem
will be in direct proportion to the amount of forbearance granted.

There was a reference to our R41-C, and if you continue to apply
it and create the write-down on assets, we can, as Representative
Parris provided, we can balloon this thin^ up to 40 billion, and our
concern is providing forbearance at this time.

I was pleased to hear Mr. Sullivan talk about the savings banks
and how they have returned to health. Had we marked out whole
business to market in 1981 and 1982, we would have put those and
many savings and loems out of business, and we returned to health.

We want to give these institutions in these troubled areas a
chance to return.

Mr. Barnard. What is the feeling of the U.S. League as far as
the institutions that have been put into conservatorship? That is
not a part of your prc^am?

Mr. Levy. Not at all. We are providing the same number of dol-
lars that the Treasury plan would provide over the 2 yeetrs, and we
would hope they would move expeditiously to spend that money to
deal with the real problem cases.

So far, they have not exceeded a $3.5 to $4 billion annual case
resolution. The funds will Eillow them to move up to $6.6 to $6 bil-
Uon in a year. We are talking about well-managed institutions that
show no signs that cause these problems — excessive growth, mis-
management, fraud. We are not asking for forbearance for those
people, but there are well-managed institutions in these troubled
areas that are beine impacted by the economies in those areas.

And they are entitled to some forbearEmce.

Mr. Barnard. I a^ree. I think the two, the fund and the forbear-
ance, they go hand in hand. How much funds would your plan pro-
vide the first year?

Mr. Levy. We have done a comparison on a 2^ear betsis. On a Z-
year basis we would provide $8.9 billion against $9.6 billion.

Mr. Barnard. That is without assessing the institutions?

Mr. Levy. That is with assessing the institutions, and includes
the r^ular premiums, special assessments, and the borrowings.

Mr. Barnard. And the borrowings

Mr. Levy. Would not include earnings on investments.

Mr. Barnard. Would it be based upon the reserves of the various
home loan banks?

Mr. Levy. The repayment on the bonds would come from the
earnings of the Federal Home Loan Bsmk System, backed up by the
savings and loan business. If their earnings were not sufficient, we
would pick up the shortfall.

The uniqueness of what we are talking about here, the plem that
is being proposed, either of these plans, really involves an industry
bailing itself out, the healthy institutions paying for the sick. And

_n_>v>»^iv

let's not lose sight of the fact that the Federal home loan banks are
owned by the savinga and loans, so when that money goes forward,
it takes money out of another pocket; it is all ours.

Mr. Barnasd. There are 367 thrifts that are now in warehous-
ing. I guess I call that conservatorships. Is it your expectation that
if, whatever plan we adopt, Treasury or your plan, will these 367
automatically go on the block?

Mr, Levy. Well, I am not close enough to those 367. What I
would have to do first would be to analyze those 367 and determine
how many of those institutions are located in the green areas on
the map, and if it could be pointed out that they are on the list
because they have been forced to mark assets down to market
value, current value, and that in all other respects they have been
well-managed. If so, they don't belong on the list.

That is the list they have to attack.

Mr. Barnahd. You don't want to say all have been well-man-
aged?

Mr. Levy. Not at all. No.

Mr. Babnabd. Mr. Chairmfm, I would like to state that a GAO
study was made in September 1986, last fEdl, and I quote from page
4, where it says, our simulations predict that FSLIC may lose over
$1.4 billion from warehousing 367 thrifts from December 1985 to
December 1987, if interest rates do not change over this period.

Moreover, even modest increases in interest rates result in sub-
stantially higher costs to FSLIC, Only if interest rates fall do our
simulations predict there will be a continued pattern of current
savings, so FSLIC, and you will have this, results no other possibili-
ty of escalating asset problems, which can only increase warehous-
ing costs, I just add that eis another indication of the ui^ncy of
this committee and what we do.

The Chairman. Mr. Barnard's time has expired. I have to go on
to other Members.

Mr. Carper?

Mr. Carper. Thfuik you, Mr. Chairman, and thank you for your
testimony today. At l^st one of you has touched tai^entially on
closing the nonbank bank loophole. Would you elaborate on your
thoughts on that issue?

Mr. Sullivan. The National Council has historicEdly, since the
merger of the National Association of Mutual Savings Banks and
the National Savings and Loan League, taken the position that we
very strongly support deregulation of the financial industry. We
have taken the position that we simply do not want to make com-
ments about regulating other segments of the industry because we
are looking for as broEid and open a competitive market we can.
The problem we have is that we do not wtmt to see restrictions or
the elimination of the nonbank bank loophole side tied in with
some restrictions on our own industry. Therefore we have not
taken a formsd position on that question, other than to say we are
basically in favor of deregulation.

Mr. LkvY. We have been consistent throughout this past yeeu* on
that question. We think that they are definitely intertwined. You
must address the question of the nonbank bank along with the re-
capitalization.

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If entry rights are valueless, if entry into a State can be permit-
ted and has no value, which would be the case if the loophole is not
closed, the cost of resolving the FSLIC problem will be significantly
hi^er; so you have to look at it together.

It is clear, as we have seen in some of the cases involving savings
and loans and in some of the banks down in Texas, the desire for
entiy rights has reduced the overall cost to both the FSLIC and the
FDIC, so you do have to look at this in a combined way.

Mr. Forte. We support deregulation in the financial services in-
dustry to the extent, to any extent that is not a threat to safety
and soundness. We are not trying to inhibit any competitor in the
marketplace, so we think also that this issue should not properly
be attached to H.R. 27 in that it may inhibit its ptissage.

Mr. Carper. Mr. Sullivan, could you help refresh my memory as
to why initially two sepeu-ate insurance funds were created? Are
those reasons which are still valid, Mr. Sullivan?

Mr. SuLuvAN. My recollection is that in the period of the De-
pression and the Bank Holiday of 1933, Congress created the Feder-
al savings and loan industry as we know it today. A separate insur-
ance fund was created, because there was a distinct difference be-
tween the commercial bankit^ industry and the thrift industry in
those days.

The rec<^nition of the marketplace forces, going right through
the Gam-St Germain bill, have certainly modified those distinc-
tions to the point where they are nowhere near as great as they
were then. For example in Connecticut, in 1988, State-chartered
savings banks will have the same inherent banking powers, as do
commercial banks. In summary, my understanding is that the two
funds arose out of the separate nature of the businesses that were
conducted within the financial industry as a whole.

Mr. Levy. I Eigree with that, and you raise the additional ques-
tion as to now that we are here, where are we going?

One could look at the question of insurance and say it doesn't
follow function. In the Canadian system, they have a single deposit
insurance corporation that provides insurance, so there are alter-
natives, and I understand the complexities of raising that, and we
are not.

We are trying to provide enough money to get over the next 2
years, and have a chance to take a careful look while they can pro-
ceed with the resolution.

Mr. Forte. If I remember in the 19308, the establishment of the
original two funds, certainly followed the functional lines with
FSLIC addressing institutions supporting housing. Today, it would
appear that there is a very real possibility that a saving and loem
operating purely eilong traditional lines or investing in traditional
activities very possibly may not be profitable through a complete
economic cycle.

If that is the case, or that bei:^ the case, assuming that, many of
the more profitable institutions today are exercising portions of
their powers that they received through the Gam-St Germain Act.

That is not to say that there are not still specific advantages to
belonging to one system or the other. There certainly are, but
there certainly is a clear situation where Members of the FSLIC
are not limiting themselves to traditional activities.

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Mr. Cakpbr. Thank you.

The Chaibhan. Mr. Forte, you are an attorney. You are great in
not answering the question Mr. Carper asked you. He asked you,
what is the Council s position on closing the nonbank bank loop-
hole? He didn't say attached to this bill.

This will be my question. What does the Council feel, or what is
its opinion on cloeing out the nonbank bank loophole?

Mr. FoHTE. We don't have a position developed.

The Chairman. Not the Council, the holding compEinies — excuse
me.

Mr. Forte. That they wouldn't have a particular reason to advo-
cate closing the loophole.

The Chairbiian. Thank you.

Mr. Kleczka?

Mr. Kleczka. Thank you, Mr. ChEtirman.

Mr. Levy, is your migor objection to the bill before us the fact
that it overfunds the FSLIC problem, and can you indicate to this
committee that your 2-year plan will guarantee the long-term sol-
vency of the FSLIC fund?

Mr. Levy. Our concern is that it provides Etccess to a very signifi-
cant amount of money, which could be accelerated by reasons of
the tax reform bill, the elimination of the tax-free reorsfinization,
so you could find the Board pushed to a case resolution level, run*
ning up against a deadline of late 1988.

Our concern there is the same concern we have in our own busi-
ness: when there is too much money to be disposed of in too short a
time, mistakes are made. We are talking about putting up the
same amount of money, review the situation 2 years out, see what
happens with the economy in these areas, and we still have our op-
tions open, the retained earnings that would be available in the
bank system if it turns out the problem is not moving towards solu-
tion.

Mr. Kleczka. With your plan, the chances are that this Congress
and your association could be revisiting this problem in exactly 2
years with no resolution?

Mr. Levy. Yes, and in the letter I referred to, this is some notion
that could be the case even if the plan were passed. It is the uncer-
tainty we have out there in terms of what is going to happen— is
oil going to stay in the $16, $18 range?

There a]% questions we can't answer. So much has changed since
a yeeu* ago. The problem has grown not because of the action of the
institutions, but because the economic situation has changed in
these areas.

Mr. Kleczka. You also object to any type of exit assessments. Do
you think you member associations should have the will or the
power to exercise the exit fund any time they wemt, thus providii^
for a more serious problem than we have today?

Mr. Levy. The departure should be coupled with some form of
exit fee. We are not talking about the ability to depart without
meeting some obligation.

Mr. Kleczka. Where is the League with regard to the Sullivan
idon, the Chinese Wall?

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Mr. Levy. I wouldn't describe it as a Chinese Wall. The Chineee
Wall is either stating that savings Euid loans can only be insured by
the FSLIC, period, and can never leave, or structuring

Mr. Kleczka. Was it set up for Ss and I^ original!^

Mr. Levy. Yes.

Mr. Klbczka. There has been a lot of talk about mei^ng of the
funds, and one member indicated if in fact we merge the funds, we
would blur the distinction between commercial banks and thrifts,
and you stated that that blurring has already occurred, Mr. Sulli-
van.

If in ffict we are to look at the real world, this propoeal that I am
advancing would not further blur but recognize reality. Mr. Levy,
under what conditions would the League sup|K>rt a meived system,
only in lieu of this l^islation, or if in fact ttas bill woum pass, and
I suspect it will, would you at that point consider support of a
merged fund?

Mr. Levy. That option is on the table. It should be discussed. We
were not suggesting that, should we reeich the point where we for-
mally take on that kind of analysis, that departure is free. We
assume that we are going to get into an $8 or $9 billion expendi-
ture over the next 2 years, and during that period of time, if it
would come to it, there would be an EinalyBiB of what the additional
cost might be, and/or what kind of merger the funds might result.

The total size of the fund, if you put in a $16 billion fund and tell
us we are going to pay a special assessment forever, you might as
well keep tnem apart, if that is the ^an.

It is an ongoing, non-ending tapjjing of the resources of the
healthy institutions. We are trying to create a situation where the
institutions can have a better chance to define what the coat might
be and to have the problem relooked at.

I know we would all like to have this behind us, but considering
the size of the problem, what is wrong with putting the $9 billion
on the table and having another chance to look at it in 2 years?

The enormous change we have seen in the economy and the
nature of the institutions in the past 2 years will compel us to
come back and take a second look.

Mr. Kleczka. Maybe eifter we provide for the original recap we
can talk merger and get rid of that special assessment which you
contend will be forever more.

The Chairuan. Mr. Kennedy?

Mr, Kennedy. If you will forgive a little rookie up here, not un-
derstanding all of these issues up here, it seems that the mfyor
point of all of this is not whether or not we are going to bail out
FSLIC or what portion share the Federal Government or private
industry will pay, but rather, the portion of Mrs. McGillacuttie, who
initially took out that mortgage.

Mr. Levy indicates he feels the institutions could bail it out, and
Mr. Sullivan

The Chairman. Mr. Kennedy? I am having a problem hearing
you.

Mr. Kennedy. Can you hear me?

Mr. McAllister says 3,000 homeowners are going to have a very
tough month in January, if any of these provi^onfi are instituted hy
the Congress.

; \^H_>t_f»^lV

Do they in fact offer full protection for the Mrs. McGillacutties
in Houston and across this country?

Mr. Sullivan. I don't think that any of us claim, Mr. Kennedy,
that this proposal is going to provide that type of protection. It is a
start.

What we are also concerned about is protecting the depositors,
not only the people who own their houses, but the people wno have
entrusted us with their deposits. I can tell you from my own expe>
rience in Bridgeport, CT, we have three savings banks that are
right around the green, and we have people who survived the De-
pression who split their deposits among those three because they
are concerned about entrusting too much to any one of them.

Mr. Kennedy. My question is, maybe I should ask Mr. Levy, and
if you want to jxraip in that is fine.

I am interested in whether or not you can put in provisions in
eitJier bfiilout plan that would protect the homeowner who took out
that mortgage; in other words, the ones you don't want to buy.

Mr. Levy. I would be happy to ask Mr. McAllister come forward,
because the focus is so local, the 3,000 foreclosures were located in
Houston, one city.

Mr. Kennedy. We got a lot of charts with a lot more than Hous-
ton.

Mr. Lew. It involves more than just single-family residents.

Mr. McAllister. I could only give you a comparison to Midland,
where the FDIC took over the bank in that city. You have local
economies in very precarious health, and when you have these in-
stitutions taken over by the regulators, it puts that economy into
shock.

In Midland, you have a &-month period where many businesses
that defilt with that bank had new people, didn't understand their
business, didn't know which people were responsible borrowers, et
cetera.

When you attempt to grant some forbearance to them, it comes
through with keeping those borrowers' local feel for the situation.
It does have a constructive eiTect in these depressed economies, to
keep the financial infrastructure in place.

Mr. Kennedy. In either bailout case, it seems there should be
some bottom line protection with people who have invested or are
taking money out of these institutions rather than just the ones
that are deemed to be healthy by some accountant.

Ilie Chaikman. Before you leave, you cited 3,000 in Houston.

Mr. McAllister. I know for a fact the number for 1986 was ap-
proximately 24,000 foreclosures in Houston.

The Chairman. How many of those developments with live or six
hundred townhouses, condos, high-rises, et cetera, as opposed to in-
dividual homeowners?

Mr. McAllister. I don't have specific numbers.

The Chairbcan. These are not individual homeowners. A lot of
these ere developments that just didn't take off.

Mr. Gonzalez. Will you yield to me on that point? Bein^ that
the subcommittee has been entertaining the thought of ^ing to
Houston, but the figures we had for this last year, particular^,
were so acute, that they were exceeding the Pueblo, CO figures m
1983, when the steel mOls closed and they were getting 100 foreclo-

; \^H_>t_f»^lV

sures a month, and Houston was getting 300, and these were indi-
vidual homeowners, not developers or owners of large, extensive
multi-housii^.

The Chaiuian. I would be interested in getting those numbers
as to how many were individual homeowners, and speculative de-
velopers, in other words.

Mr. McAllister. Probably 50 to 60 percent are individual home-
owners. I don't have the specilic numbers.

The Chairman. Mr. Price?

Mr. Price. Do I understand you to say that the adoption of the
Treasury plan, given its iiinding levels, would effectively foreclose
the consideration later, the question of the merger of the funds?

Mr. Levy. What I said is that the level of the cost to the institu-
tions at that time would probably, if you had a passage of that plan
in some form. I thought Mr. Kleczka was heading toweuxls some
form of sizable exit fee, on top of that, the cost of that plan to the
individual institutions would be so great, it wouldn't matter how
you resolved it unless you were able to later — maybe it could lead
to an elimination or phase-out of the special assessment.

The cost of the plan is tremendous. The debt service alone will
run one and a half times the regular assessment of the PSLIC.

Mr. Price. You acknowledge that your own earlier plan was sub-
jected to severe criticism because of the level of resources that it
would provide. You now claim that you handled those criticisms,
and it was earlier mentioned it wouldn't handle immediate prob-
lems, and are you convinced that your revised plan takes account
of those earlier criticisms?

Mr. Levy. The problem with the earlier plan didn't have a body
portion, so it was not front-loaded with cash. The self-help program
puts $5 billion in the first 2 years, so we will virtually match the
proposals that come out of the administration on the nrst 2 years.

At one point, they talked about a $10 billion and a $15 billion
plan, but our numbers match up very well over the first 2 years,
liiey did not under the original proposal that we had on the table
last year when we didn't have a bonding feature attached to it.

The Chairman. Mr. Hubbard?

Mr. Hubbard. Thank you very much, Mr. Chairman.

We appreciate the three of you being with us today. First, Mr.
Levy, you favor a short-term recapitalization plan for FSLIC. If un-
successful, are you supporting, as the Wall Street Journal indicated
yesterday, a merger of the FSLIC into the larger Federal Deposit
Insurance Corporation?

Mr. Levy. No. The position we took is, we have a plan, our plan.
The alternative to our plem, we would propose sitting down Euid
t^^lVing about the subject of combining the funds. We would have to
explore it, and we agree, that would take time.

We would hope that that discussion would take place while the
$8 or $9 billion was on the table. We don't want the discussion to
take place and have everything frozen in time, smd not have the
fiinds available to the FSLIC.

We want the money there, and have this 2-year period set U|;k.
and we want the cash transferred over to them to get to these dxC
ferent cases.

_n.n.>»^iv

Mr. Hubbard. Isn't your position somewhat complicating the
problem for us in Ck>ngre6s as we try to pass legislation? Ira't it
somewhat complicating it?

Mr. Levy. I acknowledge that. Again, I guess I come hack to the
basic point, the uniqueness of this situation. We have talked
amongst ourselves. We never saw GM and Ford come forward to
provide the funds for Chrysler in 1980,

We are talking about putting our money on the table, and we are
willii^ to put up the money for 2 years and we still have the re-
sources of the bank system, $2.2 billion, which would be available
in 2 years if more is needed.

We are saying judgmentally, can we resolve this thing and
project forward based on the amount of information we have about
the economy and other things today? We suggest the subject will
have to be revisited.

Mr. Hubbard. If some form of recapitalization is not passed by
this Congress, is the next possible step the merger of tbe FSLIC
and FDIC insurance funds?

Mr. Levy. Any discussion of mergii^ the funds is going to be
very complex, and certainly not going to take place,overnight. We
support the injection of funds into the FSLIC.

Mr. Hubbard. Page 13 of your testimony, and I quote you r^ard-
ing the FSLIC, "In addition, there is tiie lingering question of
whether the agency, without attracting permanent expertise for its
top staff positions, can spend such enormous sums efficiently."

Would you expand on that?

Mr. Levy. Our concern, and we have expressed this for the past
year, we have gone over 1 year now with temporary directors at
the FSLIC, and I think we all understand when ^ou run an organi-
zation of that size and complexity, dealing with a problem the
scope of which is unprecedented, it is very difficult to carry on with
temporary management at the top.

They are not able to put chaise in and carry out their directives
the way a permanent director would do, and we think it is impera-
tive a permanent director be put in place.

It also gets tied in with the Bank Board and there has been a
great deal of uncertainty at the Bank Board over the past year. We
had a lot of departures in terms of permanent staff people, and we
have a number of key positions filled by people in an acting capetc-
ity, and that is part of our concern.

We want this to be on a monitored basis, and that is one of the
base reasons that we are proposing a 2-year plan.

Mr. Hubbard. Mr. Forte, you discuss the proposed rulemaking
process. You mention your opposition to amending H.R. 27 concem-
mg this issue of direct investments.

For the record, could you now or late in writing submit a repre-
sentative sampling of comments, both pro and con, about the direct
investment rule? It would be helpful to us to see this sampling of
views.

Mr. Forte. I believe we could provide copies of what we under-
stand to be all the comments on this rule, if that will be helpful, at
a later date?

[The material requested by Mr. Hubbard from Mr. Forte appears
on page 225.]

Mr. HuBBABD. One last question.

i by Google

The Chairman. Mr. Nelson has been waiting. Mr. Nelson.
Mr. Nelson. Mr. Chairman, I would yield a few minutes to the
gentleman from Kentucky.
Mr. Hubbard. Just one question, Mr. Sullivan, Richard Pratt is

auoted yesterday as saying savings find loans should worry that
iey will be locked into a long-term recapitalization to find out
later the PSUC still needs to be merged into the FDIC.

Is that a legitimate concern among the industry?

Mr. Sullivan. I assume it is. I would answer personally, Mr.
Hubbard, somehow there has to be some money raised to resolve
the FSLICs immediate problems, and even if there is a merger,
there has to be money somewhere to help resolve these problems.

We think that the plan that is eepoused in the current legisla-
tion pending before you at least makes a start on that without in-
volving taxpayer money. Then if the two funds have to be roeiged,
it can be worked out on a long-term basis, and perhaps without the
fire of the problem right now.

Mr. Hubbard. Thank you, Mr. Chairman.

The Chairman. Mr. Nelson?

Mr. Neuon. Thank you, Mr. Chairman.

I wanted to, by way of review, I had heard your comments, Mr.
Levy, about the possibility of the ^ort-tenn recapitalization, and
failing that, the question of the potential merger of FSLIC into the
FDIC, could — in the way of recapitulation, could I hear from Mr.
Sullivan and Mr. Forte?

Mr. SuLUVAN. At the National Council, our various committees,
have not gone into that question at any length. We have discussed
it as part of this overall question, but I would go back, respectfully,
to the answer I gave Mr. Hubbard. The problem that we are faced
with — and you and the Congress are faced with — is an immediate
one that at least requires a stert towards resolution. After that the
question of a merger of the two funds can be looked at without the
pressure of a crisis situation.

We Eire an FDIC-insured institution, and the rebate that was cus-
tomfiry in the past has been eliminated. So, in effect, it costs us
more. We are not assessed to the same d^ree as the savings and
loans are, but it still has become expensive. And I gather that the
FDIC itself has some concerns about some elements of its member-
ship.

So I am not tnin^ to duck the question, it is just so involved and
so complicated that it would take intensive study.

Mr. Forte. We, as an association, do not have a position devel-
oped at this time. And we do not at this time advocate a meiger of
the funds. But we are aware that this is a question that we are
going to have to address, and in that light we have chosen an in-
dustry chairman for this year from a holding company that holds
both— FSLIC and FDIC-insured. And we feel that the question will
need to be addressed. At leeist industry must have positions on this
question within the next year.

Mr. Levy. I would only say that David pointed out that the PDIC
premiums have increased, but in real dollars savings and loana pay
2% times as much for their FDIC coverage as does an FSLIC \ob^v
■ tution.

; \^H_>t_f»^lV

The second thing is, he is FDIC-insured, as are the great bulk of
the members of the National Council. Probably 70 percent— nope,
55 percent are FDIC-insured. It is perspective changes.

The Chairman. Maybe Mr. Rousselot might want to give lis the
exact number for the record rather than speculate.

Mr. Nei^on. I yield to the gentleman from North Carolina, who
has a question.

Mr. Neal. Mr. Sullivan, I am wonderit^ what your objection
would be to Mr. Levy's plan as a first step. It seems to me we have
the opportunity possibly of something that might not cost as much,
might not require as long an involvement. And this committee.
Congress, can always revisit any subject periodically.

What is the real problem with trying this?

Mr. Sullivan. Aa I hope I made it clear earlier, flrat of all, I
have great respect for Mr. Levy and lus intellectual ability. I just
have not had time to go through that plan, nor have we at the Na-
tional Council. It has been a rather recent creation. And I don't
disparage his plan at all.

I would go back to our initial position, that is not intended as
any criticism of his plan, but we support the administration plfm
as a direct response to what we see as an immediate problem that
requires immediate action. This plan is a well-thought-out plan,
and it does provide an immediate opportunity for the Congreas to
act on this question, and on this question alone.

Mr. Neal. Would you take the time to review this?

Mr. Sullivan. We certainly will.

The Chairman. Mr. Parris.

Mr. Parris. I regret that this conflict does not allow for my Re-
publiCEtn colleagues to be here. The exit fee is a totally new prob-
lem. It might be the reserve funds.

You believe that the thrift problems can be compartmentalized;
that the thrift industry is, in fact, capable of solving its own prob-
lems.

Is your $5 billion going to get the job done?

Mr. Levy. It is more than $5 billion.

Mr. Parris. I don't care what the number is.

Mr. Levy. You have to look at the problem in its entirety.

Mr. Beirnard referred to a GAO study that said, if we delay in
resolving this thing, we have a carrying cost and even greater
losses. It is said if the interest rates fell, dhe resolution costs would
also fall. You have to look at where they were when they wrote the
report, which was written in 1985, and they wrote that report irom
a perspective of 11 percent interest rates. They have already come
down 2 percent.

Mr. Parris. Five minutes goes by very quickly. I have some
things I would like to get on the record, if I might.

Isn't the fundamental problem one of what I call severability?
We got, in the second quarter, 453 institutions with $110 billion
wort^ of assets that lost $1.4 billion in that quarter alone — $470
million a month.

On a cash flow loss of 4.85 percent, when are we going to have
the point where it chokes the whole system? Can we mford the
delays?

; \^H_>t_f»^lV

Let me go on for just a moment here. The issue may very well
be, it seems to me, in the Dallas district — for instance, I have great
sympathy for Mr. McAllister. The Federal Home Loan Bank report
of January 9 shows that the cost of funds in the Dfillas region
down there — 8.35 percent. Mortgage yields in the Dallas district
dropped from June to September by .82 basie points.

How soon do we cross the point where they can no loiter contin-
ue to operate? Is the issue perhaps not how to minimize losses to
the Treasury? Self-help is great; it works. But are we here to recog-
nize the actuality of the requirement of the use of general govern-
ment funds to solve this problem?

We may be witnessing a race between the Farm Credit System
and the F^LIC to see who can get their hands in the Treasury first.
If that is true, we got a serious problem. And if we don't address it
in some effective way, we are going to really suffer the conse-
quences as a nation, and international implications, as I indicated
in my original statement.

The question is, it seems to me, have we come to the point where
we should consider abandoning the dual banking system? Should
we eliminate the distinctions between financial institutions and
provide services to the consumer? Have we come to that point? Are
we driven by the momentum of this problem?

And you submit — and this is a question, and I will stop talking —
you submit that if your 2.2 — if your plan doesn't work, we got the
|2.2 billion and we can go to the banks and get that money and
look at H.R. 27. But with the banks committing themselves under
^vemment junk bonds, is that $2.2 billion going to be there when
it is committed to a $5 billion cash flow over 20 years? What is
going to happen to Uiat asset?

Mr. Levy. I will take them in order. I would start with the $2.2
billion. Remember, the Federal Home Loan Bank System has over
9 percent capital, probably, between capital and collateral that it
holds; it is one of the safest institutions in the world.

I would say this. I don't think we are at the point where we have
to address the question, the duality question. Seventy-seven percent
of the associations are reporting at»olutely record earning, close
to 1-percent yield after the payment of assessments.

I would say that your argument, though, I support you totally,
and I think it compels staying within the framework of the 2-year
proposal, because I am not sure how we can project out the solu-
tion in some of these economically depressed areas.

I would say that the figures you show in terms of losses, a great
bulk of that is write-downs occurring. Again I have to keep coming
back to it, R41c, and if you look at the institutions, their operating
results aren't driving them down. They are being forced to mark
this eissets to market at the bottom of the cycle. We could have
done that in 1981 and 1982. We didn't.

The Chairman. Mr. Parris, your time has expired.

The Chair cannot allow an ongoing debate. You asked a very
lengthy question. Mr. Levy is attempting to fmswer it. If you want
to debate, you will have to wait for your next round of questioning.

Mr. Pabiub. Thank you, Mr. Chairman. I think I understand the
system.

The Chairman. Mr. Vento.

i by Google

Mr. Vento. Thank you, Mr. Chairman.

Mr. Levy, whose charts am I lookup at here?

Mr. Levy. The charts we prepared.

Mr. Vento. Do these charts reflect the number of institutions or
the dollar amount of the issue with r^ards to S&L or thrift prob-
lems?

Mr. Levy. The chart in green shows the 14 States where savings
and loans lost money on average, where the losses are occurring.

Mr. Vento. Are they the number of institutions or are they the
dollar loss?

Mr. Levy. It is the a^r^ate loss in those States.

Mr. Vento. The avereige institutions; so it is the number of insti-
tutions, not the magnitude?

Mr. Levy. No.

Mr. Vento. What the loss was?

I think, Mr. Chairman, that that ought to be noted, because I
think that you could have States like California, where there were
some very, very significant losses, but it is spread over a large
number of institutions, and so therefore it wouldn't be reflected on
that chart.

I think the same is probably true of the commercial bank fail-
ures; you are talking about the number of banks, are you not?

Mr. Levy. If you take dollar losses, you would remove two States,
Kansas and Nebraska. The other 12 would remain.

Mr. Vento. But it still meisks over where there may be serious
problems in Cftlifomia, is my point, Mr. Levy, and I hope your staff
imderstands that and the other Members of the committee. And
the yellow indicates the number of institutions in terms of bank
failures, is that correct?

Mr. Levy. The 12 States with most commercial bank failures.

Mr. Vento. So the number of banks, for instance, in Minnesota, I
note my home State is on there, and we have had some small
banks that have failed, but really, I think it is not s^ificEint given
the overall nature of dollars in the States, and of course, the other
chart, I don't believe there is any — I think the attempt here is to
show there is some correlation as to where S&Ls are having prob-
lems, and of course there is some.

There is also some lack in those charts. I guess it doesn't explain
everything and I guess you agree to that.

One of the questions that has come up repeatedly, of course, is
the question of direct investment, which I and other Members of
the committee have, and it is a legitimate concern. I guess fill of
you have stated that it was a legitimate concern. Some of you have
supported regulatory effort to limit direct investment, in non-sup-
portive legislative language in the recapitalization bill, as I under-
stand it.

There is no denial that some States authorize direct investments
and cause losses to the fund. I would like you to explain to me why,
if Congress is going to authorize some amount or some activity to
try and recapitalize the FSLIC, the insurance fund, to replace
losses, we should not authorize the Bank Board to limit activities
which result in losses to the fund, especially State-authorized ac-
tivities.

i by Google

In other words, we are in the position of providing^ the insurance,
but having very little to say over numy of the activities that are
authorized for State charter institutions.

Mr. Levy?

Mr. Levy. We certainly support limitations on direct invest-
ments. We have consistentlv supported that position. We have sup-
ported it most recently at tne hearings that were held at the Batu

I suppose we depart from you in su^eeting that it be dealt with
on an ongoing basis at the regulatory level, and we certainly hope
that they will address this at uie hearings that are goii% to be hdd
at the end of the month and continue on.

Mr. Vknto. I don't want to be argumentative, but the fact of the
matter is the regulatory level we are talking about three people,
two of whom — at lesist from what I can read, I have no inside infor-
mation — are not going to be there much longer and I think one or
two of the other people are not going to be there. That is a very
unstable, uncertam, unpredictable type of a regulatory agency to
be predicting where in the hell we are going to be with direct in-
vestment.

You said that this was my position. It is one of my concerns. I
don't know that it is my position.

At least at this point we have the luxury of beit^; able to form
an opinion once again on this issue. I m^ht say I came down
voting for this bill reluctantly earlier without it, but I am certain
at this point that maybe we can make some progress. That is not a
very predictable circumstance, is it?

Mr, Levy. No. If I could underscore, what we are saying is we
think that there has to be an ongoing limit on direct investment as
part of any recapitalization proposal. Our present position is that
we support an ongoing attention

Mr. Ventg. I assume the others at the table more or less agree
with what your statement is, because I see them voicing no protest.
Do you thuik there is any correlation between the direct invest-
ment problems and the problems that S&Ls or thriAs are experi-
encing?

Mr. Sullivan. Mr. Vento, I certainly would agree that there is
some correlation, but it is also a question of management. I think
that if direct investment is used carefully and prudently by reason-
able people running beuiks, that it is an important part of overall
profitability.

Our position initially at the National Council v/as that we were
against any r^ulation of direct reinvestment. At our most recent
meeting, in studying this question, we felt that the rule at the Fed-
eral Home Loan Bank Board ought to be extended for another 2
years, simply because we did not want this piirticular question of
recapitalization tied in with other controversial or difficult issues
that had to be faced.

Personally I feel that it is a matter that should be handled by
r^ulation rather than statutorily.

Mr. Vento. Mr. Chairman, I guess my time has expired.

The Chairman. Mr. Levy, I want to make an observation I
meant to make earlier. When you said General Motors and Ford
didn't bail out Chrysler, that is a terrible compaxigon. Youi testi-

, \^n_>t.f»^iv

mony was so great, and I was sorry to hear you come up with that
one, because I don't know who in the League came up with that
one, but it really doesn't fly, it really doesn't fly.

Mr. Dreier.

Mr. Dreieh. Thank you very much, Mr. Chairmfm.

I would like to congratulate you, Mr. Chairman, on b^^inning
this term with a very noncontroversial issue for the first hearing c?
the Banking Committee.

I would Uke to ask both Mr. Levy and Mr. Sullivan a question.
Looking at yesterday's WeiII Street Journal, you can see very clear-
ly that one oiganization is in support of the administration s plan.
The other is in opposition. One organization is looking at the poesi-
bility of a meiser of the two funds. I guess my question is simply,
why is it that the industry is bo tremendously divided?

Stewart McKinney so often talks here about the nec^sity for us
to bring about some kind of summit among all of those involved in
the delivery of flnancial services, and only then should we consider
legislation.

We are looking at one single industry here and seeing tremen-
dous division, and I wondered if either of you would offer me some
kind of explanation as to why that division exists.

Mr. Levy. I think I tried to point out earlier, we are not mirror
images of each other. Within the 3400 savings and loans, we have
members that are saving bankers, that are FDIC insured; but the
great, great majority of the members of the U.S. League of Savings
mstitutions are insured by the FSLIC. The m^ority of members of
the National Council are insured by the FDIC, and are alrea(^
over in that, bo I don't know that that is even an issue that they
have even gotten around to discussing. David here is also a
member.

I think we are both agreed that there is need for recapitalization.
Ours is a 2-year, take another look approach. There is support of
the long term, but we both propose putting money into the fund.

Mr. Sullivan. Mr. Dreier, I would take issue with what Mr.
Levy said in that while the majority, barely the meyority of the
members in the National Council are FDIC insured, many of the
very large members of our group, such as California Federal emd
Anchor Savings Bank, are in fact insured by the Federal Savings
and Loem Insurance Corporation.

Our task is divided equally and considers these questions very
carefully, but I think the answer to your question really is that
there are historical reasons for the differences.

In New England, for instance, we have had the benefit of State
legislatures which have allowed us to move from the traditional
mortgage and passbook business into checking accounts. We heid
checking accounts in Connecticut in 1973. We had instaUment lend-
ing powers in 1966. We have had commercial lending powers, some
of which were granted after the Chairman and Mr. Gam passed
their historic l^islation. So there has been a historic basis, I would
say, for that difference.

Mr. Dbsikb. There is no doubt about the fact that there is histor-
ic precedent. It is just that some of us hope to see a turn in that,
and vou can certamly understand that the division creates a real
problem for thoee of us who sit on this committee, and what I

,Vnt.,^.n^lV

would like to ask both of you now is. what do you foresee, what is
the scenario if we were to do nothing, which is what a division as
created up to this point?

Mr. SuujVAN. If we do nothine, haaed on everything that I have
read and that we have studied, there will come a point in the very
near future when the Federal Savings and Loan Insurance Compa-
ny will simply have negative net worth. We are then faced with a
real crisiB m consiuner confidence, because, if I may add, unlike
legislators who are aware of the distinction, it is my opinion, based
on some of our marketing study, that the average consumer does
not know the difference between FSLIC and FDIC to a great
degree. They know it is a bank and it is government insurance, and
tiiere have been instances where one institution gets into trouble,
then everyone gets concerned.

Mr. Drbibs. I am glad to know that institutions are aware of the
disparity, at least, even if the consumers aren't.

I would like to yield the remainder of my time to Mr. Parris.

Mr. Pabris. I thank my friend from Caluomia.

In response to your statement, Mr. Levy, the Home Loan Bank
Board News, from the Board itself, in January shows that the
FSLJC-insured firms, which is 77 percent of the firms, made $2.1
billion in the third quarter, and tme is essentially a level perform-
ance, but the unprontable firms, 23 percent, lost $2 billion, so it is
essentially a wash.

Three 'lourths of the industry is profitable. That is our problem.
It is well managed, capitalized adequately. It is doing great. One
quarter at least, maybe a third, is in deep trouble. That is the prob-
lem.

Mr. Levy. Mr. Parris, in response to that, what I am su^esting
is that the losses that are being reported by the other 23 percent
can't quantify it, but a significant £unount of those losses are re-
sulting from write-downs in real estate.

Mr. Pajirib. But an increasing amount of it is non-performii^
loans, including single-family homeowners in very depr^sed areas.

Mr. McAllister is in the center where the volcano is going to
blow up. The question is when.

Mr. Levy. If he were here, I think one of the things he would
point out is, if we had the same treatment on those troubled assets
that Etre afforded to commercial banks through FAS6 15, through
GAAP evaluation, you wouldn't have the extent of the writedowns.
The banks are allowed to carry them at a lesser discount. The fact
that the discounts are bo deep on the appraisals that are being
made under our R41c is driving that down.

Mr. Pasris. You have got the same problem with blue sky, with
Kood-will, in the 40-year period, and FDIC wUl approve it at 25.
You guys are living with 40, I Eun told. There are lots of thoee
kinds of distinctions.

The question is, should we meuntain that? Does that make any
sense?

Thank you, Mr. Chairmfm.

The Chairman. Mr. Gonzalez has a short statement.

Mr. Gonzalez. Thank you, Mr. Cheurman.

The statement I have is really one of a supplicant reminding and
asking at the same time that we try to get some kind of a moral

commitment to housing as a primordial intention on the part of
the institutions that were set up initially for the very same pur-
poee, realize the imperative nature of the situation, but at the
same time, would like to get some kind of an intended purpose ful-
fillment to get into housing as much as it is possible.

The Chairman. Mr. Wylie.

Mr. W¥iJE. Thank you, Mr. Chairman.

I apologize for having to leave, but I did get confirmed as t^e
ranking minority Member, I am pleased to say, so it is now official.

The Chairman. Welcome aboard.

Mr. Wylie. Thank you very much.

I don't want to be repetitious with my questions, but I did want
to ask you, Mr. Levy, you stated your concern, that with a $15 bil-
lion infusion into FSLIC, the Bank Board might move too rapidly
in resolving some cases. I think I am stating that fairly.

You suggest a go-slow approach, citing a GAO report that 1^
holding off in 1981-1986, the FSUC actually saved $4.6 billion be-
cause of changes in interest rates.

Now, isn't the situation dramatically different today? Now we
are dealing with an asset problem, and not really an interest
spread problem. Does this surest a go-slow approach to you?

Mr. Levy. Mr. Barnard raised the question about the current
study from the GAO, which calls for not delaying because of losses
that could be taken, and I pointed out that their study was based
on interest rates being at 1 1 percent; they are now down to 9 per-
cent. But I don't think we are talking about going slow in that
sense. We are talking about putting roughly S9 billion on the table,
and allowing them to increase their level of c£ise resolution about
75 percent ^[mve what they have been able to achieve to date.

"The "going slow" that we talk about is only in the economically
depressed areas, and then only with institutions that can be judged
to be well managed.

Mr. Wylie. I see. Doesn't your plan severely burden the Home
Loan Banks? The 20 percent of earnings that would be dedicated to
paying the costs of borrowing $5 billion in 2 years is the statutoiy
requirement for legal reserves, and in effect under your plan for 20
years the Banks couldn't build reserves that they are required to
do under the laws of safety and soundness, is that right?

Mr. Levy. The answer to that is, under the Treeisury plan they
would be moving their retained earnings over in mass, upwards oT
$3 billion ultimately, 2.2 on hand now that would be moved out
under that proposal. Yes, we call for 20 percent, only 20 percent of
their earnings, whatever they earn. If they don't earn it, th^i we
make up the difference.

Again, I state that as the Federal Home Loan Banks would grow
over time, and that would be through the extension of additional
credit, institutions are required to purchcise stock at the time they
take down additional loans, and that stock is added to the capitu
bfise, and that is why we have such a highly capitalized bank
system.

Mr. Wylie. Just suppose your alternative is not adopted. Titrnte'
was a rumor which was reported in the Wall Street Journal that

a might not support H.R. 27, or would even actively oppoee it

, \^n_>t_j»^iv

Was that a fair report or a rumor, or what would be your positioa?
What would be the position of the Lea^e?

Mr. Levy. Our U.S. Lea^e Board of Directors, as we pointed
out — and we had people from all of the 50 States— look«l at a
fleiies, a priority list, and the first priority was to support the plan
that we put on the table. The second is to talk about some kind of
combination of the funds. Those were the two priorities we looked
at

I underscore totally Euid completely, we do not want to find our-
selves in a situation where no funding is done. We want funds to be
put into the FSLIC.

Mr. Wylib. Thank you, Mr. Levy.

Thank you, Mr. Chairman.

The Chairman. Mr. Roth.

Mr. Roth. Thank you, Mr. Chairman.

I want to also congratulate the Chairman for moving forward
with a good deal of speed. This is one of the first hearings that we
have eot in this new Congreas.

And, while I have the microphone, 1 offer my congratulations to
Mr. Wylie, who was reelected vice-chairman of this committee by
one of the highest votes in our conference. I think is an idea of the
regard in which he is held in our conference.

One of the gentlemen could answer this question. You recom-
mend that the Federal Home Loan Btmk Board require that gener-
ally accepted accounting principles be used for problem loans. Why
do we just use generally accepted accounting principles for these
loans? Why not use it for cases where it wouldn't be advantageous
to use it? I mean, what is the thinking behind it?

Mr. Levy. Let me field that. I have been waiting for that ques-
tion, and it is a very good question, Mr. Roth.

The bank system requires the application of regulatory account-
ing principles in the evaluation of real estate. That isn't something
that we asked for. That is something we were given. The essentifil
difference between that approach and the GAAP approach is that
you get much deeper discounting.

Earlier, Mr. McAllister pointeid out that in Texas their discount-
ing real estate is somewhere between 12V& and 14 percent; whereas,
if you use a GAAP approach or a net realizable value, they would
be discounting at the cost of funds in the overall institution, which
throughout the country is GVz to 7 percent. So it produces a much
sharper write-down and gets to what Mr. Parris is talking about:
these tremendous losses that are reported.

And banks are using the GAAP-type reporting on troubled
assets. We are saying, let us apply that rule for troubled assets.

You are raising a broader question, I think, in terms of why this
and why not GAAP in its entirety. I understand the issue com-
pletely. You know, we are both from Wisconsin. Wisconsin State-
chartered institutions have never been permitted to report on £my-
thing but GAAP. We were never a^orded the opportunity to go to
RAP accounting, I think, and I have been a spokesman within the
League pushing for the idea that we ultimately have to get back to
a GAAP reporting standard. I think that is understood.

lite question is, we have got to be able to do it. But 1 would
agree with you, personally. Not speaking for the League but M an

; \^H_>t_f»^lV

individual, I think eventually we have to come back to GAAP re-
portii^.

In this area, I think it is very important because the use of RAP
standards rather than the GAAP standards on asset evaluation is
producing the kind of write-down of assets and really exacerbating
the problems in some of these very economically depressed areas.

Mr. Roth. Thankyou very much.

Thank you, Mr. Chairman.

The Chairman. Is Lake Woebegon, WI actual or not?

Mr. Levy. That is Minnesota.

The Chairman. Is there a Lake Woebegon?

Mr. Vento. Absolutely. There are 15,000 lakes in Minnesota. I
am sure there is one up there.

The Chairman. Have you had any snow yet?

Mr. Vento. We have had a little bit.

The Chairman. All those in Lake Woebegon were frustrated in
havii^ the snow shovels up there.

Mr. Vento.

Mr. Vento. Thank you, Mr. Chairman.

That is in my district. You strike a real chord when you hit that,
Mr. Chairman. I am surprised that I hadn't shared that with you
before.

In looking at the issue of recapitalization, Mr. Levy, you put
forth a plan that relies on using the credit of the Federal Home
Loan Bank, the regional banks; is that correct? Your plan provides
for $2.5 billion worth of zero coupons from that source. That would
be a special assessment, then, that would go from the banks or
ftx>m the financial institutions to support that; is that correct?

Mr. Levy. Well, not quite. They would use a finance subsidiary
to issue the bonds. The bonds would be issued publicly. The repay-
ment of the bonds, the interest and principal repayment, would
come from 20 percent of t^e bank's earnings over the 20-year
period. And if the earnings of the bank system weren't high
enough to meet the service, then we have to pick up — we, the sav-
ings and loans, would pick up the difference.

The bank system's earnings in 1978 have increased at an average
of 14 percent a year, and this projection is done on

Mr. Vento. So that there would be no repayment, then, from the
FSLIC fund to the bemk. In other words, it would just come from
the earnings of that, which is pretty strong, I guess $8 billion

Mr. Levy. Exactly.

Mr. Vento. That had been rejected earlier, emd as a part of that
you have forbearance in other activities, I notice, but that falls far
short of the initial Treasuiy plan of from $10 billion to $15 billion.
/^d maybe you can just very quickly explain why that occurs that
way.

I notice you have some special assessment provisions in your
four-point plan. I did read it over. Forbearance — there is a four-
point plan, I am sorry. And another point that I guess I didn't
bring to the surface here yet.

Mr. Levy. On a 2-year basis, our plan, including r^ular assess-
ments, special assessments, borrowings, would produce $8.9 billimi.
The Treasury proposal would produce, actually produce, $9.9 bil-
But they would start to pay back.

Mr. Vento. Is that more than $2.5 billion that comes out of the
special zero coupon, the special agency created, or special asset cor-
poration created?

Mr. Levy. We are assu mi ng there would be $2.5 billion in bond-
ing each year.

Mr. Vento. Oh, fine.

Mr. Levy. For the first 2 years.

Mr. Vento. Let me get back to another point. You know, one of
the solutions here is the creation of the asset corporation in terms
of an early attempt in trying to deal with the management of
assets that were coming into control.

Can you comment? I have had concerns raised to me that the
management of these assets is less than optimal. I mean, that is to
say that they are being sold at far below what the value would be,
I guess to k^p things liquid. And the fact is that if we were able to
hdd them for a longer period of time, that there would likely be a
greater return for uiose assets that are being man£^ed. That is a
concern that I have had reused to me from various States, certainly
not from my own State at all, as a matter of fact.

Mr. Levy. In response to that, prior to the establishment of the
Federal Asset Disposition Association, I wouldn't care to comment
about whether we were maximizing in all cases. I would say this: I
hai^ien to be a director of the A^t Disposition Association, and
we meet regularly with that group. We review the pn^ress. And I
would say that we have brought tc^ether a highly professional
group.

I just had the opportunity on the flight out here to review an
asset that they had gotten involved with, and the very complex
workout is such that there isn't any question in my mind — they
have come up with a very creative way to maximize the return on
this asset. But we are doing it continually; a very hard-nosed ap-
proach.

These are professionals. In dealing with acquirers of real estate,
they know all the tricks of the game, and they are very tough nego-
tiators. And I would say that we — we, being all people involved
with maximizing the return of the FSLIC — should nave some satis-
faction that this system is in place.

They have about $1.8 billion under management. Including par-
ticipation loans, it is close to $3 billion. But we truly have a very
professional group out there. That is why I would like to see

Mr. Vento. Do you think there is enough of that and the need
for the FSUC on the dollar flow to assure that

Mr. hKvu. Absolutely. With each asset, a business plan is written
by FADA. They write a special business plfui based on their analy-
sis of the asset and of the marketplace. And that business plan
goes to the FSUC, which will review it and sign off or request
amendment. But they are out there maximizing the return.

We do not intend to be out there In some sort of tiresale mode or
try to Uquidate assets in the shortest periods of time. We are trying
to mfutimize the dollar return. And that, of course, isn't in the ad-
ministration's plan.

I think 2 years out you are going to start seeing some real'specif-
ic and hard results in terms of payback and flowbac^ of dolla*^

67-8SJ O ~ B7 - 4 Ll:,i^ ii, \^n_>t_n^iv

that are going to help the numbers that we are looking at today.
We can't project forward and do it. But we will be able to look at it
at that time.

Mr. Vento. Mr. Chairman, I guess my time has expired again.

The Chairman. Does anyone have any further questions?

If not, we congratulate the witnesses not only on their perform-
eince, their answers, but their stamina.

We will be submitting some additional questions in writing and
would ask you to reply to them as soon £is possible. As you know,
many of the Republican Members could not be here because of the
conflict that occurred, and I am sure some of them will have addi-
tional questions, as will I. And we will look forward to your an-
swering in writing those questions we have already agreed to have
you give and do in writing.

We look forward to the security expert giving us analysis of the
zero coupon bonds, Mr. Levy; find John Rousselot givii^ us num-
bers on Uie mix in the national thrifts, ABCD.

And, to my fellow New Englander, it weis good spending time
with you.

The committee will be in recess until tomorrow momii^ at 11
o'clock.

Mr. Sullivan. Thank you, Mr. Chairman.

[Whereupon, at 12:35 p.m., the committee adjourned, to recon-
vene at 11 a.m. the following day, Thursday, Jsmuary 22, 1987.]

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STATBHBNT OF

JAHUARV 21, 1987

Nr. CbainMn, If the Conqceaa appcovva s bailout of th«
P»dac«l Savinga and Loan Insurance Cotpocatlon, as saama
lllt«ly, I would tiop* that no one is sncoutagad to b«liava
that our fadeial dapoalt Inauranca problems hav« been
tasolvad,

ceaolution ot aur deposit Insurance crisis muat
aral deposit insurance Cunds^

The banks laay not like the idea. And the thrifts nay
like the Idea even leas. But it ia worth remembering that
the lending industry strongly opposed the creation of
deposit insurance by the Congress during the Hew Deal.
SoaMtiMas, it takes someone else to tell you what is good
Cor yout own industry.

The rSLIC bailout we consider today may work well in
the best of all possible worlds. But If interest rates rise

■ore sharply than the plan anticipates a leaner and

■eaner OPKC could contribute to this scenario — the funds
raised may not be enough to cover the increase in SbL
failures which would surely result. If healthy thrifts
leave the rSLIC in substantial numbers to avoid extra
assessments, the foundation of the bailout plan would be
shaken. And there are experts who question whether the 8%
annual Inctease In deposit growth the plan anticipates Is
realistic. If it is not leatiatlc, the numbers won't add up
quite so nicely.

There ate several reasons why Congress should consider
not simply a bailout of one deposit Inaurance fund but a
■etger of all the insurance funds.

First, marketplace changes. This Is the 1980s, not the
1930s. While banks, savings and loans and credit unions had
distinct, individual characteristics when their respective
Insurance funds were crested, times have changed. Savings
Institutions now engage In commercial lending and all
institutions compete for consumer business, inter-lndustcy
Mergers, the breakdown of geographic barriers and changes in
product lines reflect the change. One large, well-staffed
and flexible deposit Insurance fund could anticip ate changes
in the financial macketplace rather than simply respond to
changea as they occur.

..Google

-2-

Second, reduced Eiak exposuE*. For federal deposit
insurance , comnierclal bank risk Involves, in many Instances ,
such factors as loan losses and the level of bank and
nonbank competition. Savings institutions, on the other
hand, are extremely sensitive to changes in the interest
rate. The larger number and more varied type of
institutions insured by a consolidated fund would broaden
risk and limit exposure. Had the FDIC and FSLIC been merged
in 1984, the number of financial institutions deemed "too
large to fail" (institutions with assets which total 50t or
more of the reserves of their respective funds) would have
declined from B2 to 27i decreasing exposure and Increasing
stability in the deposit insurance system.

Third, coordinated regulatory policies. The General
Accounting Office points out that a merged fund would would
provide a single focus for evaluating the deposit insucance
risk to which the federal government is exposed.
Consolidation would also enable coordination of closure and
liquidation procedures as well as capital and accounting
requirements.

Finally, public confidence. Bailing out the FSLIC
will not Inspire public confidence in federal deposit
insurance. If anything, it encourages comparisons of the
"healthy fund" with the "sick fund." Public confidence in
financial institutions was shaken profoundly In Maryland and
Ohio when depositors began to differentiate between state
and federally Insured savings Institutions, Merger of
federal deposit insurance funds would preclude comparisons
of the FSLIC and the FDIC at the national level.

I am now drafting legislation which would merge the
federal deposit insurance funds. He may not be able to
achieve a fund merger in this Congress, but I am convinced
we should lay the groundriork. To do otherwise would mean
opting for a quick, short-term fix at the expense of a
long-term solution.

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m a.«. Luan or satimm laniTvrioM

shald j. i,Kvr

budri the

nTm (M lunuM, riHuci t uum aptaiu

V.l. BOOH or UPUSnTATtVII

mSHimoa, d.c.
Jaauatr 31. 1IB7

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KR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

Hy nana Is Gerald J. L«vy. I an Pc«sld«nt of Guaranty
Savings and Loan Aaaociation of Milwaukee, Wisconsin and appear
today to preaent the Tlaws of the U.S. League of Savings
Institutions*.

I am Innediate past chaicnan of tha league and serve as
chalcinsn Of its special task force on current issues
confronting the Fadatal Savlnga and Loan Inautance Corporation,
vhich provides federal deposit insurance coverage for
apptoxinately 3,000 of oui menber inatitutiona. I am
acconpaniad by Mr. H. M. HcAlliater, Jr., chief executive
officer of San Antonio Savinga in San Antonio, Texsa, and
chairman of out task force's aubcoamittee on reglonsl
problems. The coi^lete text of our report has been provided
with this statement.

Tha U.S. League of Savings Institutions serves tha more
than 3,400 member institutions which make up the tl-2
trillion savings association and savings bank buainessas.
U.S. League membership includes all types of institutions
— fadarai snd state-chartarad, stock and mutual. The
principal offlcata include: Joe C. Korria, Chairman,
Emporia, Kansas; Theo H. Pitt, Vice Chairman, Rocky Mount,
North Carolina; Hilliam B. O'Connall, President, Chicago,
Illinois; and Phil Gastayer, Executive Vice President and
Director of Washington Operations. U.S. League
headquarters are at 111 East Nacker Drive, Chicago,
Illinois 60601. Tha Washington office is located at 1709
Dew York Avenue U.K., Mashington, D.C. 20006. Telephone:
(202) 637-S900.

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H* appr«ciat« th« pciorlty this dlatinguldiad Conniitt««
placca upon tha cuccvnt financial problwu o( th« FSLIC. The
situation has ctaangod aon^what since th« first formal
lagislativa propoaals to provldo additional funding w«ra mado
aarlr laat yaar. Host notably. It la clear that econonic
conditions In our nation vary •Ignlflcantlr by state and local
coHBunities.

Laat r«at it was aasuaed that there Mas a United, one-time
bulge la the FSLIC's accuaulated caseload that had to be dealt
with on an extraordinarr basis over the next few years. But.
as our c«acti<rated Task Force on PSLIC Isaues reviewed the
altuation, we found that the FSLIC caseload has becoae
iatertwined with the deepening econoodc depressions in various
states wbtch are creating aajor difficulties for both savings
institutions and coeverclal banka. Hell-vanaged institutions
are being overwhelmed by local econonic conditlona which
rsaenble those of the 1930s. Credit-risk problena identified a
year ago are no longer confined to coonercial real eatate;
traditional aingle-faally hone loana ate now turning up in the
non-pertonalng categories in soae areas. (Maps and charta
(ppesting aaong the exhibits in our task force's report
deoonatrate the close correspondence between: states with
economic problena meaaured by unanployment, personel incone and
housing atacts; atatea experiencing coonercial bank failures In
19as and 1986; and atataa where FSLIC-insured savings
institutions lost money, an average, in the first half of ISBfi.)

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Thus, tha capital of many institutions Is baing tampocatily
erod«<J by opaisting losses fcom the lack o£ earnings on
non-parfOEming aasets. Thasa ptoblens ara baing conpoundad by
the use of regulatory accounting proviaions knomi as the
'classiCicatlon of asaata* regulation adopted by the Federal
Home Loan Bank Board in January, 1986. Hben conbinad with the
deprassad local aco^onlc environment, asset claasif ication
wrlta-dowos and strict adherence to a recent ly-promulg a tad
appraisal guideline naans that msny aound Institutions csn ba
forced into insolv«ncr>

The U.S. League balievac that the new situation requires a
new and mora tlailbla approach to the rSLIC*s problems. He
propose a two-pronged "Savlnga Inatltutions SelE-Help Plan'.

First, adopting a flexible regulatory and supervisory
policy approach already in place at the consiiarclal banking
agenclea, we have aaked the FKLBB to edopt a capital and
non-performing loan Corbaaranca policy for well -managed
institutions located in depressed economic areas.

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S«cand, <*• propoaa tat your consldaratlon ■ aodlfiad
l«glslatlT* plan lAich iMMiblM H.B. 27, as introduc^a by
Cbalnaan St OarBtln and Mpraaantatlv* lt]rlia on January 6. and
ai paaaad by th* Houa* en Octobai 7 naat th« and of tba laat
Congcasa. Our ■odlficatlona aaak to Baka th* atatutory progcan
■or* aaaagaabla and eiaxlbla, ancouiaga parlodic raviaw by tha
Congraaa aa cenditiona avolv*. and provlda a progtaa
suatalaabl* br tba antielpatad raaouieaa o( our Induatry In
coalng yaara.

mil- arnnr— la tlttt, "< *A.-l(Ht II 'f^*' *"^?' V'"- It

■111 tMtora tba tiaanclal baaltb of tha P8LIC and mll-Maagad
iBstitutlona oparatlng In dapraaaad acoaoalaa without turning
to tba tazpayar, anlatging tba fadatal daflcit. or calling for
Iraaaurr tunda or guacantaaa. It la accoHpliahad through tha
Intagratad ragulatory. auparvlaotr> long-tara eradlt and
dapoaltor protactlon ayataa conpriaad of tha FHLBB, tha rSLtC
and tba Fadaral Bom Lean Bank tyataa. Tha financial rasourcaa
coaa antlialy froa ragular and apaclal aasacaiaanta on
PSLIC-laaurad Institution and uaa of an aarnlnga aat-aaida of
tba Fadaral MMaa Lean Bank Systaa, which la otmad by our
Inatltutlena (and aoaa POtC-insurad savinga banks, for which
•llowanca baa baan aada). Daspita tha mlscharactariaatlona of
othara ~ including sona proMlnant govarnoMnt officlala who
ahould know battar — it la antiraly "aalf halp".

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FQaagMAMCE FOB IHSTITUTIOllS tM DEPBESSED ABgAS

As our Laaguft has taaticiod In th« paat, tb« U.S. Laagu«
haa bean concainad about *hlgh flyaia' and tha axpoiura thay
hava craatad foe tha PSLIC fund. Ma bava cacognlaad, as haa
th« niLBB, that rastoilng tha haalth of th« FSLIC alao involvas
inpoaing nacassaEy ragulatotj and suparviaory disciplin* — to
contain tha poaaibilitr of racutiant axposuta to loas through a
growing caaaload of institutlona In racalvarBhlp.

Ma hsTa baan ganatally auppottiva of tha FHUB'a aftorts to
lasttain acquisition of funds thteugb dapoilt bcokacs. to
taguira pcloi aupaivisoEy appioval whan diract invaataant (in
laal aststa, sacuritlas and sacvlca coiporatlana) axcaad 10% of
aaaata, and to aaibatk upon a six-raac ptogia* to bring
ragulatoiT capital to 6%. Ha ha<r« ttnceuiagad suparvliory
Inltiativas, including tha raplacaawnt of BanagMnants at high
flyarsi putting inatltutions undar a ManagaoMnt Conaignnant
Frograai with a^pactlsa borrowad from aoundly-managad companlaa,
mininising lonsas on assats acguirad through racalvarship by
asaigning tbaa to tha Fadaral Assat Olaposltion Association,

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MtablistHHBt of • ■•patat* Bank Board-laval OfCica of
tnCorcaamt, and dapl.Qir**nt oC «xaMinBtloii peiaonnal to th«
lagioaal banks h1mi« tb«r My aoEa closaly monitoi tha ptoblav
css«le*d aad spot potsntial tioublad Inatltutiona. Currently,
tiM Bask Board baa a special taak torca working on ■
[•oiganisation plan (or the mic, which >m coMwnd.

NhiU thn E««al>taiT and MoaflaMut initiatlTas Just
[•cited ara helpina. oui Task fotce tecogniied that taqional
•nd local econoMic eonditioaa are ciaating opecatlng pcoblaM
even for traditional FSLIC inatitutiona c o^itted to thrift and
luMM finance in their co^ninitlea. These patterna. aa noted,
are not limited to onr buaineaa. but arc being upnrlenced br
iiiMTiir-'r' banks operating in depressed econeMies. In April,
19a< the three federal ceanerelal banking tegulstora issued a
policy statsaent for wellHunaged banks located la areas
heavily dependent upen agricultural or enaigy-talated
•coaoales. They established > capital rorbsaranca progran,
celaxed lending restrictions bssed en paicantagea of capital,
•nd encouraged the use of genera lly-accap tad accounting
pciaciples (OAAP) lAich allow the carrying at low- or
non-paying loans without writedowns which deplete capital.
(The Conptroller's version of the policy atatenent is attached
to this testiMoy.)

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with thia modal, our U.S. Laagua'Task Fotce taconmanda that
the FHLBB taka tha following actions:

I- Dliect Its pilncipal suparvlaoty aganta to azatciaa
Cotbaaianca In Dandling wall-msnagad Instltutiona in tcoubla
dua to local aconomlc condltloni; in judging Mhecher an
institution is wall-managad, tha PSA should detamlna that
willful violations Of laws and ragulatlona. oxcasslva gcowth or
othat irraspOBSibla actions on th* part of MBnag««ant,
owaarship oi dltsctots. did not contrlbuta to an inatitution's
diatcass .

#- Probla* sssats should ba aecountad tot according to
ganacallr-aecaptad accounting piinclplas; this iavolTca tha
usa of valuation standards consiatant ititta GAAP in tk* catryin*
valua of assats, apptaiaal discounting consiatant with OAAP,
and avoiding duplication with othar 'schadulad itama'
raqulrananta (which would atill spplr to non-par faming
ona-to-four faailr hona loans).

Th«s« ragulatoiT and auparvisocy stops would craata a
'braathing apaet* banaficial not only to Inatitutiens, but to
tha PSLIC and to local acononiaa. As datallad in our full
raport tbara is ampla pcacadaat tot Congraaaional and
lagulstorr torbaaranc* initlstlvaa involving financial
intarmadlariaa. Tha anactaant of tha Nat Hotth Cartiflcsta
piogcam davalopad by thia diatinguishad panal in 1982 and tha
regulatory accounting provisions anactad laat yaat for the Farm

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Ccadlt Brmttm, h h«11 ■■ tb* conMCclal bank r*gulators'
poller stataaaat BwitloMd abova, baar ultiMts to piavloua
ptudaat EorbaaraBc* appcoacliaa.

Bxparianca daaanatrataa that tlaa can h«al wounds ~~
aspaciallr trtwr* tbo lutltutioaa involvad hold aaaota
coasistiav prUntilT ot leans sseutad by raal oatat* valuaa.
Fat aMaapla. in tk* l)ai-S2 potted, eut ■ awbar institutions in
tlw so-callod *tust bolt* cxpotlancod tbo Host pronouncad
difficultiaa — but tolotanco and tiaw havo pcovod to bo tho
boat couKS* oe aetien. Instltutloas in Mw Totk had an
afgioflsto tatvtn on assots ot -l.Sl potcoat In I9B1 and 1983,
and in Illinois, ot -1.0 percrat. By the tirst half of laat
foat, thtifts in Mm Totk had an sggtogato MA ot *1.1S and
thoa* in Illinois +1.13.

Ftoai tbo potapoctiva a aound erarall policy apptoach te
taatotlng tha haalth of tha FSLIC, ferbaaianca ia pattieulsily
iapettant for local acono*las in diattasaod ataas. It
Hall-«anagad intitutlona ata placad in tacalvatsbip
unnacassaiilr — and 1( thait aaaata sra liquidatod at
daptaaaod valuaa — aeononlc dlattaaa mHI ba aggiavatad.
Compatins financial institutions Nhich ata still in opatstlon
Mill find thalt pottfolle vsluas dogisdad and tha financial
InCtastcuctuta oC antica coaMunltlas will bo thiaatanad. Tha
Congiass snd tha fadatal tagulatota paist aaka aracy affott to
ninimisa such a aaquanca of avents.

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A Ftnromo proposal for the fslic

In conatcucting isgialativ* authority to rebuild tha FSLIC
r«saEv*8, a 'aalf h«lp' aolution mist recognlaa the aTailabla
resoutCM of tha thrift iadustry o7«r tb« longer tana aa wall
as tha sisa of tba rSLIC*s currant problanw and ttaa agancy's
capacity to daal with ttaa«.

Fton tha and of tiacal 19BS to tha and of fiscal 1986, tha
PSLlC's rasarvaa daclinad br *3.9 billion ~ fron S7.S billion
to (3.6 billion. Howarar, as Exhibit 6 in our full raport
shows, tha FSLIC hod cssh and govarmaant aacuritias on hand o£
(4.6 billion at tha and of Saptambar, 19B6. During fiscal
I98e. this figuca daclinad by fl.l billion, Bacausa tha FSLIC
had incona of C2.4 billion, this naana it axpandad $3.i billion
during tha yaar. During tha sana tina pariod, th« insucsnca
fund showad an oparating loss of $3.9 billion, but this was
mora than axplalnad by (3.9 billion in accounting loss
provisions.

To sddrass tha dstariorating situation, tha Traaaury
daralopad tha proposal essantlally sat forth ss H.R.27. Tha
diatinguishlng characteriatlc of thia approach ia tha borrowing
of (10 to (IS billion ovar tha nest aavaial yasrs (using a

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financing cocpocatloa aatiblishad tot thla purpos«} to auviMnt
pr^iiua •■■•■■■Mnts «^ PSLtC portfolio Invastaant IneoiM. In
iddition, to Sttcura thas* naaaiva bortowlnga, th« PHLBank
SyatM Mould contribute $3 billion ithlch iMuld ba uaad to
pucchaaa aaro-coupoo bonda to dafaaaa tha principal of tba
bonda. To aaaura d«bt aarvica, th« financing corporation ia
givoa a (irat call on futura dapoait iaauranca praaiiM floita.

nai^ara of tha Ceaalttoo will racall that thla co^laz
tuadlng ^lan attractad crittclsa froai tha Congraaaional Budgat
Oftiea, lAicb mlad laat Jnlr that tha borrowing* could not ba
Bcerad aa govaraaant racaipta tor budgat purpoaaa and, aa a
raault. apandlng tha ptocaada in raaolving PSLIC problaa caaaa
Muld add to tha todaral daflcit. Tacbntcal changaa lad to a
raconaidaration by CBO. wbich accaptad tba raviaod atructuia aa
a -cloaa call-.

As tha aavings inatltution bualnaaa azaainad tha
lagialatlTO propeaal of tha Traaaurr. it too bacaaa concarnad
about tha Mgnituda of tba daficlt spandlng through naaalTa
borrowioga. In -alapla tanaa. our aia t ara quaationad tha naad
to 'Hortgaga tkalr futura* br taking on tha dabt aarvica of SIO
to »U blllioB (lotatlona for up to 30 yaara. Thla wy ha»a
■oiN appaal to bond aalaaiaan. but It inpoaad a continuing
burdan on an induatty coaipatlng with othar financial aarvica
providaca Mbila comittad to • aolution fundad antiraly by lt>
own raaourcaa.

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Our Laagua •zplorsd vailoua alt«iiiatlv«s. One, known as
thtt 'pay as you go' plaot was cciticlzad foE not pioviding
sufficient laiouccaa in tba aarly yaara to bandl* tba noat
innadiata pcoblana. Sacond, it waa cbargad tbat if tb* FSLIC's
problama provad laigar than azpactad, thara waa no way in whicb
moca funda could ba ptovidad.

Tba Taak Fotca wbich I cbalc sought to accomnodata thasa
cilticiana whan wa met in Dacanbac and aarliar thia nonth bj
fualng aona alwaanta of ouc *pay as you go' thoughts with a
nodaat bondinf approach. Tba result, which I pcaaaat for rout
conaldaration. la > 'Savings Inatitutlon Salf-Halp Flan toi
Funding tba PSLIC.

Out approach contains four baaic staps:

1. A funding corporation would ba set up which would. If
needed, isaua zaro-coupon bonds which would ba repaid from tha
dedication (or that purpose of 20 percent of nat incona that
the Federal Ho«a I^an Bank Syataa currently aets aside in Its
so-callad lagal reserve (which is not available to pay
dlvldenda to thrift Institution atockholdera). The funding
corporation could raise up to t3.5 billion in borrowing in the
first year followlnf enactnant and another S2.5 billion In the
aecond year. (The FHLBank contributions to debt service on
this bonding would ba adjusted for non-PSLiC sharaholdacs.) If

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-12-

Bank Syitaa •arninq* tail ahoct oC out ptojactlona,
FSLIC-lnauraa Inatitutioaa ara piaparad to naka up tha
iittrntnuc*.

Hhila uplalnaa la graatai datall Id out full lapoit, tKa
eolloMiug tabl« gl<r«s tha total astaioal c«aouccaa available to
rSLIC undvc tbia ptoftaa Id coBpatlaon with tlw plan of M. 11.17
1 tqr tb« Tcaiauryi

U.S. Laagga
Savioga inata.
Saif-Ralp

• 1.9 Blllloa
•13. a Billion
tlO.O Billion
•31.7 Billion

n^.rA p™r«

Caab Flow

..QXMli

2 Taara
i Taara

ID Taara
20 Taata

•10 Billion

« a. 7 Billion
•It.a Billion
*1>.0 Billion
•29.7 Billion

«19 Billion

t *.6 Billion
•21.4 Billion
•21. S Billion
«2a.3 Billion

Our plan ptovidaa aaaantiillr tba aa«a raaourcaa to tha
PSLtC ovat tba nait two yaaca aa tba Tcaaauty'a vataion; It
provid** aigniCicaatlr Nota ovar tba long tatai bacauaa tba
PSLIC would not ba buidanad with pajring intaraat on two or
tbcaa tlaai aa nucb borrowing.

In MMltlon to thaia astarnal laaouicaa, tha FSLIC haa
Invaataant iacoaa loauBll^r and should soon san an additional
ioClOM of caab tiom tha diapoiltion work of tha Padaral Asaat
Diapoaition AaaociatioD.

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Mao, it Bhould tM rwBambarad that If tha FSLIC wera
actuallr to apand mora than $S billion par t«»' dispoiing of
pTOblam aaaata, thaia it ■ laai poiiibiiity tbat it would ba
ssaearbating it* own problana, thoaa of aurvlvinq tavingg
inatltutiaaa and of local aeonoMiat. In addition, tbara ia tha
lingarlng quaatioo wbaCbac tha agancy, nitlwut attiacting
pataanant aipattiaa for Its top staff peaitiona, can apand aucb
enocnoua suiu afflciaatlr>

Anotbar banafit of tbla appioach. in coavatisoa with tba
Traaaury'a aodal, is that it laavaa tba 11. a billion in
tatainad aatninga of tha PNLBank Srstsa iotact, ainc* It onlr
taps oniT tba futura iai:a«a attaaa alraadr aat asida uodar tba
ptavisiona of tha radacal Hobs i.oan Bank Act of 1>32. Tbla
faatucB not only r*dgcaa tha thraat to ongoing FMLBank Systan
fund TBlalng on Hall Straat, but it conaarvaa flazibilitT> If,
for Mbatavac taaaon, tba authotitr gtantad by out approach
ptovss inada^ata, Congcass could Tarltlt tba situation and
utilisa tha Syataa's tatainad aatnlags at a latai data. And,
savings institutions aca undarstaadably concarnad about tha
highar dabt aarvica butdan of tha Traasury vaiaion.

indaad, the Laagua considats it approprlata that Congress
csviaw thla sltustion peiiodically rather than laava It
poaaibla adminiatcatlvaly to burden tha induatty and ita Bank
Systna further with huga anounts of dsbt.

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2. Ha ar* pKaaad to ••• that H.s. 27 pcaaatvaa • piogcan
(or rallvriag FSLIC-iMUiad inatltutlona, ov»z timm, of tha
•ztra burtMi of tba ap«cial 1/a of 1% aaaaaaaaBt wbich haa baan
laviad alacc tha bvglnaiag of ISBS. Dndai botti oue plan and
H.s. 27. that apacial aaaaatiwnt would ba pkaaad out ovae als
raata. tt is vital that aaTinga inatltutlona aaa aona and to
tha Bpacial inauEanea aaaaaaiiant. An rSLlC-lnautad aavlnga
Inatitntloa with tha aaaa atruetura aa a eoapatltoi
mc-inaiiEad bank para at laaat two-and-ona-half tiaas as auch
for eoaipatabla fadaral account inauianca. with tha dabt
■atvica bUEdan of tha Tcaaaury/Bank Boatd plan, a pbaa«-out of
tha apaclal aaaasanant ia ebrloualr !•■> likaly.

In addition to tbla ina«iilt7> tha diapacity aacoucagaa
(ttongac aavlnga inatltutlona to aigrata fton F8LIC- to
FDlC-lDBucanca. Such a mlgiatlon than daplataa tha ovarall
taaourcaa o( tha rSLIC — a pattioulatlr treublaaona thought If
rSLtC iaautanca alao cartlaa with it tha obligation oC
continuing dabt aarrlca for saaalva bonding, aa undac tha
AdoiniatEatlon'a plan.

3. Anotbat balpCul proviaion, alraady eontalaad In H.B. 27
aa Sac. 6(0, rapaala unnacaaaaiy atstutoiy languaga in 19S2
concaining authotitr to tap into tha hiatoric sacondarr caierva
of tha PSLIC whan tha ptlnary taserva U dapletad. Tha
prasanca of tha languaga of asisting iaw has ralsad concerns
among caitaln accounting professionals that the more than S80C

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-15-

mllllon in Bacoiujary reseive balancas carried as assati on the
induatrr'i books should ba written oCt — a coiiaa ponding
reduction in induatiy nat wottb — which, of courae would
aggiavata the FSLIC's problaos thtough tba attoka of a pan.
With tha *aalf halp plan* lacon^andad by this tastinony in
placa, thara is no n»«d to prasarva tba statutory pbcaaa added
in 1983.

4. Piaallr- out task fotca baliavaa that any P8LIC funding
lagialatlon should includa, as does H.B. 27, an ovarsight
coMBittaa with laprasantativas fion FSLIC-lnsutad institutlona
to ■onitot and aaBia auggaations concarnlng agancy plans and
progtana (or spanding and easalosd taaolution. In addltioB>
tha FSLIC should b« r«4ulr«d to report parlodically to this
CoRMlttaa and Iti Sanata couataipsit on its utilisation of
funds {aa providad for in Saction < of K.R. 37).

»«T.tT»n T.»1TBTATICT tBBtIgg

A conprahaa'slva lagislativ* approach to ralleva FSLIC's
problaaa includ'as two additional topics — on* within tha
jurisdiction of your Comittaa and another where you could ba
of inraluabl* assistaaca.

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Tlw tirst la th* Emlllai topic ot settling thm uncaitalnty
In tba ■■Bk HoMlog Coapanr Act liiio«m •■ th« 'nonbank bank
loophttl*'. Tb« contlnuad opacatlon oC aad potential Cot
loo^ol* builu, opacating outside the legulatlon ot the boldlnv
ea^mnr lew with privileged activities' (leslbilltr and
geographical expansiea opportunities, ebvlonslT threatens the
Btabllltr ot esistlng depositery iBstltutieas and the payMats
■ystaa. Contianed esploltatlon of the loophole Is aa even
greater problem In the contest ot coasecvlog the resources ot
the rSLXC fund.

The Most cost effective war to resolve KLIC's problea
easaleed is to arrange supervisory a«rgers tor troubled
Institutions. It potential awcgar pertaeis ot troubled thrifts
caa eater new Mrkats or obtain a depository charter tbtougb
the loophole route, tbeie la little incentive to bid oa the
PSLIC's preblsa esses. Plugglag the loophole would bs ot
treanndevs assistance to the PfLIC and our Institutions which
stand raedr through our self-help plan to restore its raaarvaa
to full health.

Ma urge thle distinguished ConMlttee to revisit legislation
clarifying the datlnltlon of -bank- In the Bank Holding Cenpany
Act, thus plugging the loophole, at the aailiest possible
opportunity.

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Anothat lnpoitaiit'.l«gl>lativa issu* Involved with
recapitalising th* F8I>IC ariaca tiom aunsat dat«a inserted in
laat year's Tax Refon Act. Nhile we appreciate that aucli
legislation falls within tba^jutlsdiction of other
Congraaslonal COMMltteea, youk cosnlttae should appreciata the
inportanea of the tax coda provisloiis cited below to tba FSLtC
■nd Tou could be of great assiatanca In urging an axtanaion of
those da tea.

The EconoBlc Recovarr Tax Act of 1981 Included three
anargancy provlaloas In the Intaraal Xeranue Code to aaatat the
FSLIC. See. 997 awda assiatanca payaants froa the rSLIC
tax-exettpt; Sec. 3aa(a)(3){D)(ll) granted special tax-free

reorganisation tceatnent Eoc troubled thrifts which don't neat
a~ continuity of interest requlca«ent after laargar; and
Sec.3a2(b)(7) Buatelned cartalB net operating loss carryovers
fcoB a troubled thrift tor uae by its rescuer. All three of
these provisions make acquisitions of troubled thrifts noes
attractive to potential acqulraca. However, despite the
Administration 'It re c o i andation that they be continued for five
years, last year's Tax Reform Act tscmiaatea them on Jan. 1,
1989 — just two years distant.

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Th« dMlcman of tb« Fadcral HonM Loan Bank Board haa
MtlHtsd that th« savinga to the FSLIC In attracting biddara
for treublad thritta ia at laaat ttdca tha coat In rsvaniwa
Coragoiw Iron tlwa* ap*clal tax coda provlatona. Hot only
would ttialr tapaal dtaceutaaa anpacvlaorr Bargaca, but tbara la
a varr caal poaalbllltr that ~ aa tba Januatr l> ^9»9 data
approachaa — tha FSLIC will find Itaalt totcad to accapt laaa
favorabla tana, with araa graatac casta to Its rasarvas, to
accoapliah aupatvlsotT Bargars.

mm aaak tha good oCflcM ot thia dlatlngulsbad Cowlttaa is
achiaviag a further astanaion of thraa yaara In thaas thr«a
Bpacial tax coda provlslona of particular l^ortanca to tha
P8LIC. Fnrtharaoia, givan tha Mounting problaaa confronting
tha Fadaral Daposit Insucanca corporation, conaldantlon ahould
ba glvan to axtandlng tkalr eovaraga to aaalat in tba
caaolutlon of peoblaa caaas confronting that agancf.

I hava appraclatad thia oppertuattr to prsaant tbs vlawa of
tha a. 8. Laagua on thasa iaauaa oC ovarrlding lapertanc* to our
FdLlC-lnaucad aaabar inatttutiona. Na ara confidant that a
raaaonad and coordlnatad ragulatory and auparvlaory approach
can acconmodata tha cballanga of austalnlng our Inatitutions
davotad to thrift and hoaaownacship in tha various raglons of
our graat nation axparlanclng temporary acononic diatrass.

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Fucthatiwta, w« submit foe youi considaration a Tsalf-halp"
laglslativa plan to bolstac tha resarvaa at our Inauianca fund
in a war which will b« suatainabla br oue industry and tha
FHLBank Syatwi oiin*d by oui thrift buiinaaa. H« do not aaak
tb« appropiiatloa of tazpayar funds to solva tha FSLIC's
p rob lama .

Thank you for yout attention. I look forward to your
quaations.

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M^lMliMBMtealltaMiiiMtf tUa4a«0IIC«.tfUll«U
fom^aOofdmifiltnii. liu4M0IIC^(IMUu|

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Agnl D. HM / IUil«« tKi ttt^-i,!

Digit zed by Google

David J. Sullivan, Jr.

on bdwlf of the

NBtional Cciwicil of Savings Institutions

H.X. 27
nceRU. MVIHQS JMD LCHN INSUtUUICe OOBFCmilCH

H ACT or 19BT

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Hr. OalrMn and HHfaara of Ch* COBittM, mt titmm is David J.
Sullivan, Jt., Praiidtnt and Oilat BMCutlva Officer of the itocltanic* and
Fanara Savingi Bank, F.S.B., Bcidgaport, Oonnacticut. I aa appearing
today In ay capacity aa Treaaucei oC the Mttonal Council of Savinga
Institutional • trade association repreasntlng approsiaately 600 aavlnss
banks and aaviAga and Iohi associatima with total aaaata of $450 blllicn.
OuE Msfaeis tneludi both rDIC and nuc-insuced institutions.

Nacbanlca and rarMeta Savings Bank la an FDIC-lnsucad institution
and a aasfaer of the Pederal Bca« Lean Bank of Boaton. t cutrently aerve on
the Bostd of Ucectors of the Boaton nu.

Ml ara vety pleased to accept your invitation to testify at
todqr's hearlnga, and *• eunasnd your Initiative in novlng quiidtly to bring
Om *i<>ie<:t of F8LIC recapitalliatlcn before the Banking Cc^ttea.
saat or toe hcoshk

I DDuld like to begin ty briefly reviewing the currant atata of
til* industry in order to establish the econoaic and financial traeawork
against «iiicta ouc aaibar Inatltutiona evaluata rsuc rec^ltallsatlon.
Kina^-al^t percent of tha Council MairtMrs are operating proEltablyi and
for Bost of these institutions, their esmlngs are at a record high, ihls
Is qitlta contiary to the arronaoua iapceeslcn ccaatad ky tha over-
pUbUdied proUesM of the fslic and tha relaUvely Hsll nuriaer of
ttnprofl table insUtutlons that tha atata of tha thrift induatry ia ona of
declining eccncalc perforaance. In facti Hr. rTnlieaii. nothing could be
fncthei ttom the case.

Iba Cbmcil'a lesaacch J a ptlw a uL aatlMtas that 19W will be
anotbai record profit y«ar for mc-insurad aavlags fasnks. In fact, as of

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the third quartai of 1986, only ent riDC-insurad s«vings bank hod not
ntucnad to profitability.

RBflacting both tb* Cavorabl* Intamt cat* envlraoBent that I
have prevloualy Bentioned, at well as the portfolio lestiucturlng
accoMpllched ky Many Inatitutions, the suirpluB accounts of FDIC-insuced
savings banks rose at an annualized rate of 96 basis points on average
assets In the third quarter, as a result, capital Bacglns have increased
dtanatlcally In the last year, and we espsct 1987 to indicate further
positive results Blcng this trend line.

1986
1985
1984
1983
1982
1981
1980
1979
1976
1977
1976

* • Less than .005 percent.

Note: Data cefec to net changes in surplus, undivided profits,
icsarves ttom retained earnings and exclude debentures, coital
infusions frca FDIC, net north certificates and net stock issues.

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Avanga capital at ISIC-inauxad aavlnga faanka «»• 7.3 parcant ■■

■••■urad ty OafiaraUr Accaptad Accounttng Prlncpala {OkU| . Aa Indlcatad

hf tha foUotdng ctwct, aavlaga bank capital poaltieoa bnva raoovatad fully

and haw ooh ratiuaad to tha hlatoclc lavala that pcanllad prior to tha

axtiaaa fiimcial atcaaa of tha aacly 19e0a.

Mtlo oC OafMial laaarya Accowita

to Maata oC Savlngi boka

1975-19W

i9e6p

7.33%

x»r

S.92

19M

5.12

IMS

S.3fl

19tt

S.30

S.M

1980

fl.63

1979

7.0S

ivn

6.90

6.77

1976

6.71

1975

6.96

p - pcaliainary, baaad on Oetobat,

1986 data

On tha aavinga and loan alda, tha aconoalc pictura ahoM alailac
aamlnga and capital l^rcmaant, aa wall aa tha tradlticnal, aora poaltlva
dapoait growth than la tha caaa with aavlngs banka utildi ara pradoadnantly
loeatad In tha Hld-Atlantlc and Daw England tagiona of tha country. Cit tha
nagatlva alda, then eorttlnua to ba doaa to 400 nuc-inaurad Inatltutlona
lAicfa hava not baan abla to taka advantage of tba lower Intaraat rata
wiiiliiiMaiii due priaarlly to probleaa ralatlng to aaaat ^piality. Aa haa
baan tha caaa In cGNNrcial banking, Uwaa InatltutloM ara concantratad in
thoM araaa of tha country «tiid) have baan i^actad adv«raaly ky tha price
dadlna in oil and agricultural pnducts.

€7-684 O- 87 -

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Motwlthctanding these [eglomllMd problwa, we eiUoste that 1986
will b« ansthec year of atccng proflta for savinge and loan aBSodations
an] that Uw InbstEy will continua nklng Mjot itddaa In rebuilding Ita
net wocth. Retained aamlnga, as Indicated below, have declined aoaewhat
ftoai a year earllec, reflecting a conalderable wiitadom of foredoaed real
•statai [nrtlcularly anong those institutions In the so-called K

Batainad BaCTiin9s a

19BQP 0.21%

ISaS 0.27

1984 0.15

1983 0.27

1983 -0.64

1981 -0.13

1980 0.13

1979 0.67

1978 0.81

1977 0.77

1976 0.63

197S 0.47

p - prallainary
Juat recently, the FHUB Increaaed regulatory capital requlieBBnts
to 6 peccant for FSLIC-Insured institutions with a transition period geared
to average Industry earnings. Based on realistic interest rate predic-
tions, «« see no reason this target CKinot be aet ly aost institutions
before the and of this decade.

fSLIC mnPITMJZWICM

Wille PSUC-lnsuced Instltutlcns, in the aggregate, are thriving,
the ancvaly is that the health of the fslic is indiqutably going trcai bad

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to MTM. iMad en mUmIm Md* ty th* Oowiiwint Acomnting OCflc* «d
pclvab* Btudtca, non coidttod r«a«rv*a •[• !•■• than $2 billion •gkinit
toUl Inaund dqpMlU ((vcaKUng 91 trillion. Hmc tare (12 Mnttw)
naolution CMta an pca)«ctad to bt bi t w an $5-96 billlan, «d Mitidpatad
Incoaa tiea ragulai ••••■^■ata, ^paclal ■■■■■■Miili. and portfolio
matUigi an Mtlmtad to ba $2.5 hlllian Coz 1967. itia flnmcial pietuca
la ebvioualy Boia cowpla» than this, givan tha mlstaoca of ao.<allad

a «hlcii ara couitaa ai auau by both tha PSUC and tha
Anothac coi^lcatlan la tha axploalva growth of
a atiidi currantly itand at B(:praxiBBtaly 33
flM faott^ Ilia iB that thaaa n^acs ali^y do not add up to a
trtabla inauranc* altacnatlva wilaaa adbatantlal naw funda aca injactad
■ithin tha naxt aU to twalva aontba.

this balng tha caaa, thi baaic piillc policy quaatlen confcontlng
tba Cmgraaa ts «bathar tha ahortfall in currant FSUC raaarvaa ahould ba
aada ty Iqf tha haaltly aa9^t of tha induatry or the ijiii iiiiaaiil itaalf.
Good acgiHMita axlat on both sida* of thla quaatlon. Cartainly the
laduatiy at laiga baa banafittad over tha yaara f roM a aaiarata inaurance
fund. On the other hand, fotcing tha induatcy'a haolttqr airtaita to pey tha
llquldatiea coata of Its naakaat wii^ira la to aaal^) raaponsiblllty to
Inatitutlona foi i In iMlemai over «hlch they have no central .

tta Natlcnal Council Ma tha flrat to (uggast • aolution aoMwhara
In hat—an niawly. a [wivata/public partnacahip that would utiliia tha
naouroas of tha radaral Hcaa Loan Banka aa tha. lavar for generating ami

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funda for reuc. in taatlwxv twfora tlw Cengraai tNa yaar* ago, wa

outlined tlia following ^proach to FSLIC recapitalization!

Iha aoat obvious and most readily Implemented is
foe the FSLIC to borcow what It needs by establishing a
etandby line of credit vlth the Federal none Loan Banks.
The banks cuircently hold capital amountinQ to ovec SB
billion, niey may be better able tc carry the shOct
tern burden than ace the individual thrift institutions.
Me tecogntEB that the federal acme Loan Banks aie owned
hQT the thrifts ani that this idea V3uld still reflect a
cost to the industcy; but, this lay ba an aaaler iray to
bME the burden.-

unfocttmately, thia auggaation waa not favorably received ty
either the FHI£B or the cegicnal banks trtien we initially Bade It in early
19SS. Instead, energy waa expanded on designing the Hanageaant Conaignaant
ProgtaM and creating the raderal Aaset Di^ioeitian Association, niis ta
not to BuggeBt these prograna have not been of aone assistance in easing
FSUC'S probleBB, but neither are they a aubstitute for 'real naney"
■olutlofu.

Reqiondlng to a Congresslanal directive, the Treasury Departaent
began in 1966 to develop a borrowing prograa preBiaad en a capital
contribution of ufi to $3 billion frcn the Federal Bcae Loan Banks. These
fundi nould ba used to aatablish a Financing Corporation which oould
■iq:port as mch as $1S billion of capital aarket borrowinga. Under the
t*nM of the plan, these bocrowlngt nould then provide equity funda to
FKJC for ua* in dl^osing of failad institutions. In raaponse to

• Hrgs. on Federal Regulation of Direct Inveataenta ty Savings and
Loans and Banks; and Condition of the Federal Deposit Insurance Funds
before the Subc. on Ccaaarca, ConauMr and Monetary Affalra of the B. Ccm*.
on Gov. C^wratlons, February 25, 1985, p> 169<

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lirjactlcna by tl» cangrMSiOMl Bidgrt Dfflca, tha ailglnal plan ««■

■odltlwl In otdar to avoid mv budgetary li^act ty m^atmriitg tlM rlnanclng

OaipontlDa to ■«■•■• nLtC-lnaurad inatitutions to aarvloa ita capital

iBikat drtit, «hll« nuc'a aaaaaaBHtt would ba eorra^ondlngly raduead.

In Ana, 1986, tha Matienal CDuodl'a TMk ibcca studying thl*

laaua laccaHHidad atiCTart for tba Tnmmuy/WEua plan mdar tha follawing

ccndltiana.

t laolalatiea Aould pravida that tha 1/S of eoa p
idal aaaaa^ant ba inaaad out tn aqual Incraaanta

. . ua aith rttic rat«ntl< " " ■

■utfaMity to latiiai an a

ipraad out oni a ptrio
nlaod cnly aa naadad.

Heating proapactlve uaaa o£

tunda to daal with pcoUaa inatitutioM. Ihls budgat
aboold ba autaalttad tot tavla* to a apacial indnatiy
•dvlaory oi^ttaa co^oaad o( thilft Inatltution

a of IBB Btock.

raUB and F8UC ataft paraonnal ihould ba caaovad f roai tba
raatrlctlena i^ioaad ty tha OtClca of Paraonnal ifcn a g a
— ■- ■- — ■-- to attract and ratain hl^ quality

Botft tha Traaaiuy and tha Oongraaa *aia 9«Mnlly raaponalva to
tbaaa auggaatlona «han tha bill m* baiag lUaatad last yaar. MHCiAMnta
a ffcon f ad by both tba Bouaa and Sanata authoriaad a nviaw bOBEd to Maat

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guattady for the purpa«« of advlaing on budgetary plamiog and projective
expanUtura of the additional funds calsod. Languaga was also Included In
the bill providing foe a phase-out of the special assessoent. Finally, the
ci^tal contElbutiona of the Bostcn and New Yock district banks, vhece «ost
of the FDIC-insured thcltta are located, were ^iproprlately adjustad.

On January 12, 1987, w caconvened ouc Taak rocce and, after
considerable debate and exaBlnatlm of a nunbec of different options, it
««• agreed that the Council should continue to tuppoit the Treasury/reLBB
plan. In fact, Mr. OialriMn, because coadltiona at tha rsuc have
natetlally woraenad during the inteivening months, we ace nov pcepared to
support liBBdiate anactaent of a FSLIC recapltaliiation naasura ragacdlaBS
of whether our recoamendatlons are addressed now or deferred for subsequent
consideiatlcn.

Ne take this position because the indisputable fact Is that In the
absence of any new infusion of capital, FSLIC will be unable to deal with
ita current, let alone future, case resolutions. Ihe anticipated cost of
this sffort is knom to be at least $10 billion in 19ST, with the eventual
figure rising in {airly short order to $25 billion. Itiis Is not an saount
which can be set throu^ current and special assessaenta and eamingB on
reserves. Nor le It an aaount which can be handled In a buslness-as-ucual
■ethnd. Ibm clear ■essage we would like to leave with the riewll 1 1 > today
is that reaolutlcn costs have already be«i stretched out far too long and
in too aany cues.

ttM tMl risk of inaction is that the healtt^ section of the
thrift Industry <4)lch I have described will be irreparably injured ty Uw

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inability of the nuc to hsndl* Its cucimt ptoblMM. Ne sttlBAta, tor
•M^pl*, thkt th* coat* of ganarating daposlta aa on FSLIC-lnauied thiift
ia aivrcKiaataly 50 baaia points highac than tha coat of lalaing
llabllitiaa for a alailacly-aituated nic-lnmred bank. Thia dl^scity is
Ucgaly tha nault of tiw paecalvad waknass of the fSLIC fiaid.

Now, of coiua«, the Cengraa* haa Its owi priorities, as do the
regulatory agencies, the JtdKlnistration, and other Interest groups. Should
the nuc rac^iitalisation aa passed laat year and reintroduced this year
by ym and Mr. Nylla aa B.R. 27 be unable to pasa as an aaargancy BBaaure,
than, tiM petwitting, we muld likewise advocate so*w Modifications.
Plrst on our list HOuld be that scaa additional consideration given to the
question of how the Bank Board will adalnister this i^tiont Infusion of
■ore than $15 billion in cash. Ihe advisory board of Industry
representatives called for in the 1986 FSUC recopltallEation plan needs to
be strengthened considerably In tar^s of both its coaiposltion and its

Given the adidnlstratlve burdens already facing tt» fSLBS as the
cfaaiterlng agency of fadaral thrifts, regulator of SCL holding ca^wiies
«d operator of the Federal Soae Loan Mortgage Corporation, we suggest that
perhaps the tiae has coae to restructure the FSLIC aore along the lines of
the i n dep en dent nac. For exa«ple, operating control over the aonies
lalsad ty the Financing Corporation could be vested In a publi(Vt>rivmte
beard coagossi of diverse govenwnt officials. As FDIC, for exaaple, has
an employee of the Treasury, naaely the CcNptToller of the Currency,
serving on ita Board, and we suggest that a representative of the Federal

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Beeecve Board ai^t alio be a soucce of additional axpertlae fot thlB
taconatituted panal.

Anothac point uhldi received consldecable attention laat year
talatae to tb* ability of iMtltutlons to ccrvect £rca FSLIC to FDIC
Inauranca — the ao-called "Berlin Hall* issue. This issue first surfaced in
Hay, 1986, lAwn, at the cequast of the Congtess, the Treaaucy aulxnitted
language prohibiting FDIC-insured Institutions tioa DSBbershlp in the IHUB
■ysttM. nile aowntaent seemed to oveclook the previously discussed fact
that In the Now York and Boston Federal Scae Loan Bank districts,
FDIC-insured thrifts ccnstitute the wjorlty shareholders of the Pedecal
BoMe Loan Bank stock. Fortunately, this language mg eubssquantly delated
frca the FSUC racaf>ltallzatlon bill, and other ure onerous "Berlin (toll"
SMendKnts that surfaced during tJouee conaldecation wece likewise not
adopted.

IhB National Council renains strongly of the view that currant
FSLIC probleaa In no way justify the reversal of 50 years of statutory
authority tUch has peraitted FDIC-inaurad thrifts to becoaa maixti of the
IHUB) nor does it mrrant the laposltion of a prohibition oc tenpocacy
■ocatorivM on the ability of inatltutlona to nove frca FSLIC to FDIC and
vice varsa. on Deceiter 19, 1966, this Issue was the subject of a court
action in Florida, in vhich the District Court voided an 'interpretive
ruling" adopted by the FHLBB on October 7, 1966, stipulating that
tnatitutlciis Must obtain Board approval before leaving the fslic syEten.
lbs Court alio took this occasion to ccanent on the recent practice of the
Board to impoae 'exit penalties" equal to the present value of 10 years of
insurance prenims on those institutions converting to FDIC Insurance. 'Hie
Court teraed these exit praaliBS 'extortion.'

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in thft viaw of the concil, whldi particlpatod as aaiam cutla In
the noclda case, Ua dwr etata of the law on thii paint le that the
Board ia wltlMut atatutory authoii^ to laveraa Ita long standing policy of
peiMlttlng Institutions to ewltch frea nuc to FDIC Insurance without
paying lay axlt Cm Mhataoavat, Tba Mtlonal Bousing Act dMs Motion two
yaars of continued pcMdiaw (ten an institution tandnatas F8UC covatage,
but this provision has navai baan intaipratad to cover the raplsc—ent of
FSLIC insunmca with mC coverage.

We bava likewlBa bad a task focca of affactad institutions working
on this issue and, notwlthatandlng the Board's long-standing eihlnlstrative
policy that no axlt tee pertains whan an institution raMlns within the
fedaral deposit insurance systea, we ballev* that given the current strains
on the FSLIC fund, ecae reaaonable exit tee Is ^^propriata . At our Board
of Directors Mstlnj held on Decaaber 9, 1986, the National Council
approved the position that Institutions should ba alloaad to leave the
FSUC pcwlded they pay an exit penalty equal to two years of regular
pr^taa pins two years of facial sssas^ants. He further suggest that
the authorl^ to lifiss the tuo yaars praaiui should taralnata within flva
yaars as par the phaae-out period for the special asseesaant Included In
R.R. 27.

Adoption of this ccaprealsa would provide institutions In the
■aike^laoe with soae degree of certain^ both aa to the cost and the
tiling of action on i^|illcstlans involving FSUC to FDIC ctnverslons.
tspacially In those states <4)lch are part of regional pacts or otherwise

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pandt Intacatat* banking, mitgn activity la proc««dlng t^aca and Mny of
thase tianaactiona involve Intar-lnduatry acquialtiona. Mtlwut tha
riannrtannl wa ara auggaating, tha induatcy will ba ccntrontad itlth tha
delaya and coata of ccntlmed lagal appaala, and tha FRUB will ba dapdvad
of ary aait faaa aa waa the caaa with tuo aajor trBnaacticna eo^ilatad
within tha laat two atntha.**

Aa a final caa*ant on tha naw proviaion of B.X. 27 that would
aubjact the redscal Aaaat Dl^oaltlon Juaoctatlon to GM) caviaw, t would
Btata that the National CouKll aupporta thia changa. Although nOK haa
not taScen title to ai^ pcopecty witoc Its praaant bualnaaa opatationa,
pcUlc actutlry of thia ^pa would benefit all the parties ccncemed.
CmcuBiCM

tn doalng, I would Ilka to thank you again foe the ofportunity to
t«atify. Our basic Beaaaga is that the declining state of FSUC finances
conatitutaa a pcobla* of sajor pioportions requiring i^ndiate action. Me
ucga the COaalttaa In tha atrongaat poaalbla tans to aupport the Tceasuiy/
FHLBB plan and being this ssttai before the full House for expeditious
ecnaldaiatica. Na hope that Senate concuciranca will follow shortly
tharaaftac.

t would be very plaaaed to answer any quaetlons i^idi Coandttaa
■BriierB Bay have at this tiaa.

** Neatdiestac Financial cocporaticn acquired ty Marine Plldland Bank
of Haw mrk, and uiited rliat Federal Savlnga and Loan Aaaociatlon acquirad
by Bamatt Banka of riorida.

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VBCTIMOMT OP m
USOCIATIOM OF THUPT HOLDINO COHPAHIBS

B0O8I COMaXTIB OH BAMUNO, FIHJWCI, AMD URBMI AFPAXM

Mr. Owlxman and Maab*ra of tha CoaalttM:

Thank you for- •»ktng tti* Aaaooiation of Thrift Holding
O0iiiv«nl«s to provida 70U with our p«r«p*otlT« on H.R. 27.

Z HI Patrlok A. Port*. As pr«ald*nt of th* Association of
Thrift Holding Co^r«nl«», Z r«pr«s«nt an organisation solsly
dsvotad to ths oonosims of thrift holding cospanlss. Our
association. In fact. Is ths only orgsnizstlon rsprsssntlng
thrift holding oaapanlss. Our matt rscsnt count of thrift
holding ooapsniss indie atss thsrs sr* approxlmatsly 270 thrift*
holding oowpsnlss and togatbar thay hold sora than 280 insursd
thrift Bubsidlarlss In 44 statas Mhich, in turn, hold sors than
$380 billion in insurad daposlts.

Our ■■sfairs ars kaanly awara of ths nssd to Isprovs ths
financlsl position of ths F8LZC. With an aatisatsd prlsary
rssarva of $1.9 billion, FSblC is confrontsd with potantlal
payouts of possibly 825 billion. This disparity thraatans not
only ths thrift industry and tha consuawrs who rsiy on It, but
ths natlm's sconowle hsalth.

This problaa aust ba daalt with as soon as posslbla. A
■ajor rsoapitallsation plan with wids support sust bs agrssd oa
so ths thrift industry can rsgsln ths public eonfidwio* It
dsspsratsZy nssds.

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FSLIC funda have bmoem» virtually d«pl«t«d ov«r • period of
yaars. Norklng with dcngarously United T«««rv«a, harrlad
regulators have atrugglad to aalvaga troubled thrifts or
liquidate then with ■Inlnun Impact on local comnunlties. It Is a
altuatlon that cannot be expected to long continue. Delaya in
dealing with the problem will only inorease the ultimate coats to
the insurance fund and clearly present the possibility of a
taxpayer assisteil plan.

At the sane tine, I want to emphasize to this committee that
the problan we are facing has not been caused by mismanagement
within the thrift industry. In only a handful of well publicized
cases has capital depletion derived from management malfeasance.

The primary drain on FSLIC 's resources can be attributed to
the inability of the thrift Indyatry to build or to raise capital
because of corporate structure, dislocations in the economies of
certain regional areas. Inadequate management, and the lack of
reguletory foresight.

Aa to reguletory foresight, for esample, in the last yeer
the Bank Boerd has creeted havoc within the thrift industry by
significantly chenglng the rules for evaluating industry assets.
The oomblnatlon of its new classification of assets rule and its
R-41c memorandum governing the appraisal of assets has severely
Impaired thrift Industry operations. The elaasiflcation of
assets regulation allows Bank Board examiners, functioning with
virtually no objective Board guidance, to write down assets at
their Gwn discretion. The R-41c nemorandum, moreover, will

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r«qulr« 1—i11«t» and aubatantld wrltadoMiia, oftan produoi n g
valiMM fftr bslow ttwa« that would r«ault froa cpplyljia ganarcllY
•oo«pt«d ■ooountlnB prlnaipl**. Put anothwr way, by writing de«n
industry nat wortb to ■ dagra* not raqulrad by ganaraily accaptad
•ooountlng prlnelplaa, tha Board baa Mada avan aora uxgant tlta
oaad to paaa a raoapitallsation bill.

Without a Hjor affort to li^rov* tha Baana by «hlch thrift
Inatltutlooa oan ba thaaaalvaa oapltallaad, tha ongolns ooat of
dapoait Inauranoa will baoo«a an incraaalng burdan on thoaa
tbrlfta which ara now wall capitalixad. In othar worda, tha
strong thrlfta will Indlraotly pay an inoraaalng aubaldy to tha
waak thrifta, which will in turn waakan thrift aaminga and
haapar tha building of capital through ratatnad aamlnga.

Thla la tha principal raaaon wawbara of our aaaoolatlon
ballava rSLiC racapltalizatlon addraaaaa only a amall, albalt
praaalng, aapaet of tha largar problaa of uitdarcapitallzad thrift
Inatltutlooa. Ragardleaa of Ita financial atrangth, FSLIC alona
cannot aolva that problaa.

Purthar, it ahould ba natad that In addition to tha FSLIC,
thrift dapoaitora, and taxpayara, thara are a graat nuabar of
Individual invaatora who hava a graat ataka in thla induatry.
Ovar tha paat four yaara, investora hava provided 814.2 billion
to thrifta. That la, in tha prooaaa of convaraiona, during 1983,
thara waa an invaataant of $3.5 billion; 198i, S800 ailllon;
1985, 82 billion; and 1986, 84.6 billion — a total of 810.9
billion of additional aqulty through atock purcbaaaa. In

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addition, during th« ••■• parlod, lnv*atOxa hav* providad $2.3
billion In tha fora of aubordlnated debt — anbthar fon of
capital. Nlthout thla infusion of capital, tha dlstrasa of tha
FSLXC and tha Induatry would hava baan further ezacerbatad.
'Hiarefore, tha Intaraat of thaae public invaatora miat alao ba
considered by tha Congraas in Inauring tha viability of the
FSLIC.

On behalf of the nenbers of our association, I ask 'this
coonlttea to look bayond the Inmedlata needa of tha FSLIC and to
consldar at tha aarllast opportunity maaauraa that will sat about
inprbvananta to statutory and regulatory programs that will hava
' tha -affect of encouraging further private capitalization of the
thrift Industry.

As on organization of thrift holding companies, some of the
concams which we have that have ramifications that go beyond the
affected holding companiea include:

The limitations now imposed on transactions with
affiliates. One of the most significant of these is
tha prohibition on purchasaa of mortgagaa from
affiliates. This restriction effectively prohibits
thrift holding companies from establishing financing
subsidiaries which make mortgage loana that are to ba
sold to affiliate thrifts. Thla and othat' affiliate
transaction rules applicable to thrifts must be
modified to reflect present day realities.
Tha allninatlon or relaxation of debt-control

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raatrlQtlons. To •noourag* additional capital flow

Into tha thrift Induatr;, tba raatrlctlon mat ba

llftad on tha Mount of dabt non-dlvaraifiad thrift

holdlna oowpaniaa and non-thrift afflllataa can iaeur

without prior writtan approval of tha FHLBB.

Bzpanaion of parmiaalbla thrift-ralatad actlvitiaa,

Inoludlng eroaa-aarkatlng of product* or aarvicaa. Zf

Inaurad Inatitutiona conply with all tha raquiraoanta

daalgnad to protact tha Inaurance fvutd and othar public

policy Intaraata, It la unnaceaaary to lapoaa

additional reatxlctlona on tha activities of tha

coapanlaa that own thaaa inatitutiona. Thrift holding

coapaniaa ara alraady auffioiantly Insulatad froa tha

Inaurad aubaldlary dapoalt Inatitutlon to which tha

Savlnga t Loan Holding Coapan; AMandfflanta of 1967

anvlalonad tha holding conpany would aarva aa a aourca

of atrangth.

Othar iBprovaBanta can be nade in tha rulaa govaming thrift

holding companlea that would allow mora aatiafactory profits and

thereby encourage additional outside capital to come into the

Industry. The few reforea eantloned today would certainly

Isprove conditions leading to tha capitalization of the thrift

induatry.

With apeclfic regard to H.R. 27, wa are generally In
egxeeoent with the aajor tarma of tha bill. Tha affect of H.R.
27 should ba to restore confidence in tha Integrity of the FSLJC

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and in th* fund's ability to fulfill Its proolaa. Ma applaud the
coBBlttea for iforklng In thlH direction with tha ralntroductlon
of tha FSLIC raoapltallzatlon concapt wldsl; conaldsrad In the
previous Congress.

The bill offers an s'l^talnable objective with reellBtlo
mlleBtonea . A key elanant of H.R. 27 Is to phase out the special
esseeament by FSLIC ovef- a five-year period. The special
asBesament costs the Industry $1 billion annually, while doing
nothing to inprovs the actual capital base of the thrift
Induatry. A five-year phass out Is a compronlse our nembarshlp la
willing to accept.

Industry support of the bill will be enhanced if language la
Included which provides clear standard a whereby the special
assessment can be discontinued without relying on the discretion
of the Bank Board.

Our association also agreea with theae elements of H.R. 27:
We believe the ecale of the proposed recapitalisation
Is appropriate to the magnitude of the problem.
Despite the price tag of this solution, and the
consequent indirect cost to our members, we agree that
public confidence in the deposit insurance fund can
best be restored through a large injection of capital.
H.R. 27 will draw on surplus funds of the Diatrict
Federal Home Loen Banks without creating risk
contingencies that could threaten their future
stability. This is in contrast to a recant alternative

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propcMBl irtiloh oeuld ultlaatslT und*zaln* tha capital
baaa of tha whola thrift Induatxy.

a.R. 27 pravldaa a rawady for FSLZC which doaa not
lapoaa an Inaqultabla bur dan on ateekholdar-ownad
tHrlft institutlafw, aa vould aaaa to ba tha affaot of
aaoh altamatlva proposal «• hava aaan. Aa aaabwra of
tbla Mil— II I II are aware, batwaan 19B1 and 19B5, thrift
holding coavanlaa hava baan by tar tha aoat aaanlngful
aouroa of aaalstanc* to the fSLIC and to tha PRLBB to
raaolva Uia problaaa of troublad thrlfta. Na balleva
tha future of tha thrift Industry will ba dominated by
thoaa Inatltutlona with cap able aansgement which can
attract naw capital Invaatvant that will coma fro«
ooHBunlty Inveatora and fron thoae who inveat In
publicly traded thrlfta.

R.R. 27 will aatabllah a aubatantlal reaarvolr of

financial atrangth at tha Inauranca laval, lAilch In

turn allowa thrift aanagera, depositors, and those who

■ay wish to Inject additional capital Into thrift

Institutions to rely on the fund aa a source of

Stability. This bill will achieve this stability

without drawing on the Ansrlcan taxpayer for e bailout.

To enhance tha prospects for approving a plan to

recspltalizs tha FSLIC, we strongly believe that tha

recapitalization bill H)at goes forward should not Include other

Issuss. In tha Chairman's letter requesting our testlnony here

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today, tM notad that ■•varai nwibMra tiav* Indlcatad an intarast
In proposing amandnenta to H.R. 27 to daal with limitations oa
dlract Invaatnanta. Tha Bank Board la, of couraa. In tha aldat
of an ongoing, procaas daaignad to avaluata Its two yaar
exparlanca with tha currant dlract Invaatmant rula. it has
recalvad conmant on that axparlanoa and la conducting public
hearings latar this nonth. The Board ia carrying out praciaoiy
the rulaoaklng function for which indapandent rogulatory aganoias
are designed.

The Board has comnlttod to a achadula for davaloplng a final
rule on direct inveatmants by March 15 . Thara can ba little
doubt that soma rule limiting direct Invastments will ba adopted
at that tine. Both Chaiman Gray and Board Member Hantcal have
indioBted support for the proposal to limit direct investments,
though they differ as to tha appropriate method.

Tha Board la carrying out its rulemaking function in a
responsible manner. It has opened Its process to an
unprecedented degree of public participation. He believe that,
through this process, thay can develop a rational and workable
standard for regulating dlract invaatmant activity and provide
appropriate protection for tha FSLIC fund. There is no reason
for Congreee to pre-empt the Board's efforts. If, after the
Board has taken final action, the Congress is not pleased with
tha resulting rule, there will ba ample opportunity to legislate
at that tima.

With regard to our views on tha invastments themselves, let

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M alaplY MS tblB. H* bMl«v« thttt tba Moat ■ignlflowit aaua«
of thrift Industry problaaa to^Y 1* i^ot wty parttoular kind of
InraaLBwit but rathar tha raglonal aoonoaila oriaaa that ara balng
axpAx-lanoad In aavaral parta of tha country. Nhlla diraot
I nwta a u ta hava contributad to thrift Induatry falluraa, ao haya
■aiqr othar foxM* of liwaatBant, traditional and untradltlonal
allka. Tha truth of tha Battar la that any araa Of invaataant
activity o«n b* Hlaunagad. can ba ai^jaotad to fraudulant
oonduot, or oan fall vlotla to ■ raglonal aconcale erlala.

Tha raoapltallzatlon problaa la of auch paranount iBportanea
that Ita oonaldaratlon by tha Congraaa ahould not ba diluted by
dlacuaalon of othar aattara, and Congraaa' attantlan to thla
problaa ahould not ba dlvartad to aUiar Isauaa which ahould ba
addraaaad aaparataly.

Hr. QialzHan, I again want to thank you for Inviting tha
Aaaoclatlon of Thrift Holding Coaipanlaa to praaant Ita vlawa on
Utla vitally l^ortant lasua. Ma appraclata your oonaldaratlon
of our point* of vlaw. I will ba happy to anawar quaatlcna and
walooaa tha o pp o rt unity to praaant additional information for tha
raoord on bMalf of our aaaooiatlon.

Thank you.

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t^eoMO' GUaelo:

TO! BANKim, FIHAHCe, AKD URBJUI UT

coMonas or mc umitid states

HOUSE OP RBPHISBHTATIVBS
mSHIMOTOH, D.C. aOBTB

PBOH: HMIO 0. OBLEDO, ATTOMIEY KT LA

DATII JMMMItV 1ft, ISBT

Dua to tiM ahort notlc* gtv*n to mm at tha hoarlng on
tha ra<iuaBt by the FSLIC for raei^ltallsatlon of Ita financial
baae to carry on Ita (tutlaa, I am unabla to luk* • paraonal
Vpaaranca and thus I aubBlt thla brlaf itataaant tor tha

I o^oaa tha r«e vital liatlon raquaat witll FSUC fully
•iVloliw to tha CoMPlttaa and to tha Congraaa ttia »ianaBa«ent and
Qparatlna praatlcaa . which hava oauaad It to flla thla raquaat
to obtain capital.

Ttia CouBlttaa nuat auraly hava Infomatlon as to tha
nuMwr of aavlnga and loan Institutions Hhlch ara pi^aantly
balng conslderad for racalvorahlp , Hhlch ara in racaivar^ilp,
Hhlch hava baan liquidated, and irtilch are balng auad by FSLIC.
It would ba l^»rtant to hava the Chalrparaon and Chief
Executive Offloar of each of thoaa Institutions aa a wltnaaa
before thla Comlttaa to ralata tha actlona of the FSLic
regarding their BBvlnga end loan aaaoelatlona.

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I ixf Pr««idia Soringa
Mid Lorn Jtsaaelatlon, Portervill*, Caltfomia, Mho twv« bMfi
mad by VSLXC on varloua ground*. Sufflo* it to matr tiiat
Prwaidlo. In our ofilnlan, imM oparattng fairly vail tntll ttM
railaral regulators atartod axtMialva aonltorlng procedoraa - In
affact, oparatlng tba AssoclAUon. Iha racord raflacta that
onca OMlr InCcrference conmenced, tba Association atartad
axparlandng difficulties that hi e aat unsumountable. At that
point, tb* Fadaral Hc^ Loan Bank Board (mLBB) placad Prwddlo
in rocoivu-falp utdar PSLZC, Mtto than prooaadad to furtbar
dlaslpat* tba Aaaoctatlan aaaoto. Aftar ■■aaculatlng Praaldlo, -
FSUC liquldatad tha Association and noM aaaka

Thla ratbar mjuat altuatlon could tiava baan pravantad
had tba FHLB8 aaalatad Praaldlo through tba iaauanca of not
■orth -certificates, nargar or consolldatlan advlca, conaultatlen
on poaalbla aale of tba Aaaoclatlon, or In a graat varlaty of
other waya. Ma ballaira Praaldlo could have been aavad had It
not been for tba arbitrary and latreaaonabla actions of the
federal aganclaa. Ita loea vaa a loaa to the i ii^mllj . but it
alao placed In Jeopardy all those olth Hhoai the Aasociatlan had

Many of our financial Institutions In this comtry are
undergoing prablaaa. Yet, »m FHLBB focusaa ita raaourcas
against Ota aaaller Institutians , In this case, tba only

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Hispanic op«rai:«d, pradcoiliiantly Hlaponlc oxiied aavlngs and loan
association In California and th« SouthMcat.

SMoauaa PSLIC has operated In such a loos* and careleaa
mannar, apandlng money in raaklaBB diaregsrd of tha taxpayer. It
la now In a position of "negative net Mortti," the very situation
they are responsible for trying to avert In the savings and loan
Industry. In essence, FSLIC has been eiqiendinB money to loae
money. This is unsound management , Morse than the management
cc»iplained about by the PHLBB in regards to the numerous savings
and loan aBBOciatlons placed in receivership.

We believe corrective legislation Is required to bring
order to the operating practices and procedures of the FHLBB and
PLSIC. Since this is a complex field of statutory and
regulatory provisions, it may be prudent to conduct legislativo
hearings to gather information on Mhat changes are needed. My
cooperation In this regard is certainly offered,

A final note - The Hispanic population of the lAilted
States, and particularly of the Southwest, la growing at a
tremendous pace. In Texas, we constitute at least 20% of the
population; likewise in California. Yet, In neither state do we
have a predMilnantly owned and operated Hispanic savings and
loan association. The fhlbb and FSLIC have an obligation to
assist this significant. Identifiable connuzilty to have such an
Institution.

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m eenelualon, it Is our dvcir* that tha
Faeapltallsatlon rwiuast by and for rsuc b* d«nl*d or, in tiM
alt«matlv«( that aetlan by tho CBwltt— bo postponod until a
full avldantlary haaring can bo conduetod on why tho raquaat
hicia tMoaasary and ahothar It la dlroctly rolated to tha
poaaibla ineaapatant aanagaaant of tha agancy,

Itaapectfully submlttad.

..Google

1 far the tl*co

U.S. HOUSE OF REPRESENTATIVES =7i^

rJMB^^jfWf

na, Om Osalna* rir— r» ynir ^fmaata at
ly 21, 1M7, In Xxm 2Ua Bwbum ana* OCfloa

BuUdlna to uaU4' on tt* paniaiom of H.H. IT, > oopy of lAlch la

«nel0Md.

at aJL. ZT, ■ CDCy of ittlet) Is mlae ■icli— d, tte only ilUfannoa flatii— i ti)*
bill nd tluc pand br tlw aaia* Ijat ymt la tta provljlai nUtlng u OlO

It Ib alKi 9iltB lUi^y Chn cba ■iJbjKX of dincC Iiiii—IimiI ■ w

— ndieocy linguagi i*£l*ctlna etw canildMribla a ono» m evar eba nean
pUnudQ aumuDdlng acelTltlaa of eba Mdanl Baa Loan aaM aoacd.
UMEBfoEB I ^ axtandlng Inrltacioia to vltnaaBiB *•■> will nOact aao
m cmcBEnlng thia it^jact ifid baliaw li

. . ■ oefica Building, WiililiijCiTii

D,C, 20S1S, 24 boura In advaoca of youc actiadulad WMranea. nur

■I ■! —Ill In lea anting vlLl Oa Ineludad In tba hairing ncecda and, if
dallnrad nhan ragiiaatad, da »L«L— Ht will ba ^da onilabla tu all
' .taa aaMan In ad va n a a at cba haarlng. TO pcovida oil oaadteaa
a iiltn auCfldant tl^ for ((iianianino, tba ocal |?i.a—im.lan oC your

t ba liHltad tu 10 m

^^i^rf

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as. House Of MP H ni NTATIVlS

It !• alMvdM iDwlr tj

A liillwi le Bd ba ^^ K iiMi f Bs tlM

&i wooiAan wlgi Ctt^W— lulM, pLnn dallirar 171 oiplM oC jque

\, tM itit—nt wlU b

saa i^«i^ in «i »w>j i oC tta hnrlrB. tt gconda ui co^cmb

s Dltli Kifflelant el^ tot a— tlcnlnB, tto oral j»— ■mtlen of your

e ba llalMd BO 10 BinitM.

:'Mf

D,j,ii.db,Google

U.S. HOUSE OF REPflESENTATtVES SSiS:ZPZS

Jmny 14, IMT

□f a.*. IT. ■ (XW oC oAldl ll

Mil aid ti»t pMMd by ti» ana* list yaar la Lbt pcevlalan nlMiiv ts ao

It Is alao 91IM Uk^y Uut cl» ■i«>ec of dlnet ii
EKlsKt ilm HMial B^ljira taam UidlcBtail in InMnat 1a pninunB
aind*£S7 Iwguig* raflacctng Cba oaiHldKibla eonsKn oiwr Cha neant
Di*llelty ■uRoinUiig nxlritlMm at da McIkbI Sbb i^an bhIe Bond.

■ •otcandino invltatloni bo wlen«a*« aho will ndact cnusliq
'~n thlM mjtajmat am bKllav* Lc to bi nymprlA^ for cba

■yten B3IH OCflta Building,

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^i^^S^ U.S. HOUSE OF RD>RESENTATTVES

JnMty U, IMT

mt. OwaU Uf

- ■ - OB, DX. 300M '

trnk yaa tat yaa OstlKiv « todv'* hMrlno « tht radNTd SwlJi^ aid Uin
Damni OoqecMloi (rsuT) ncapiUlliMlon pljn. In ocdu to ct^ilMa Hi* hMrlng
ncocd plaiB* pcortdB vrlttan muan Co tla follacliiQ ijMtlanat

I. On pag* 11 of youc uatlBcny, you staud chat rnt onl'i doaa Us rSLK; hiv*
MfMil I III Ml ■ml InocB*, but yai dxi pndlcMd chU Cha FSUC will 'aoon' cMlla* ui
'■dtftloal* InOai at cart Cna cha dlapoalclon wrk of tha Fadaol MMt Dlipaaltton
Maadattan (nnl . aw aoon will Uia rSLIC naliu this (nClov of CMh wd hOK lajch
eaah viU thla b*T Cn lAM (oucoaa oc calculatlona do you Baaa ctaaa pEadicclonaT

IE prolactioni. nUC-inaund inMltutiona ai

^ ■• aivlaln chia Mat«HnE. Raa ctit U.S. Lai

aumy of all FSUC-lnurad InatlOiClona en thia laauaT Flaaaa a^lJ

I wuld ^pcaclata your ocganliaclon'a ClMly napona* to thaaa
janmv 11, IMT, aa tha FuU CoHittaa plana to nirk ifi ctit FSLIC n
In a^ly faOniaiY.

Agalni thank you aM I lock (omaed to your nply.

ib,Google

U.S. HOUSE OF REPRESENTATIVES

Bla mtiaiMl OEUuit

TMi* yai toe lOur trntiaunf tt today'i hHclng ai Chi radanl Savlnoa Mt EA«n
Umatnaa Cocpontlcn {FSLIC} ivapltaliKfttlon plan, in oiidsr to collate tha haoring
neod plHH Ezovidi VEittan «>■■[■ to tha Calloiilng guHtlcai

1. Curlfig i±m h —rl ngi, cla ^jMtton troaa ■■ to tha nflbar oC Kational CouncLX
■nMc inatltutlos that an Inaund by tha rSLIC vaisua thooa lAlcA on Inaund Cy Clw
FaiJwnl Mpoalt mautanc* osrpecatiai (FDIC). Plsaa* provid* thli Infocnation and alio

2. Oi paga 11 oC vouc CaatlaDfiy. tba Mtiml OueII pccfioaaa livoaLng an axlt
(aa aqual to Cao yaan of nigular piinluga plua tao yaai* at 'facial aaaaaaanti*. M
ma llanwia Aiclnc tha laaring, Ibh did you datamtna that thla axlt (aa waa an
adaquata daMcrant to pnvant tlurtfta rm laavlng cha rSlIC Inaimnca tund7 Flaaaa
axplaln thla and other altecnatlvaa that nan ecnaidand to pnvant instltutloni (roa
■Hicdttng Crca PSUC co ntC Inaunnca.

I wuld acpneUW your oeginlution'a Cljialy cMiionaa to tlwa* i]ua«tiona Ey
Jniacy 11, IMT, a* Um Full O^ttaa plvia to aaik !« CM FSLIC ncipluliutlon plan
In aaily Mmiaiy.

AQaln, thank ^u* and I look fananl to ^ur caply.

ib,Google

U.S. HOUSE Of REPRESENTATIVES

(00 ITCb atr—t, N.H., Sult> SO)

. ... ... ,it talw'* )>*u;lng ai Cb* F*d*nl savings an] um

• CocparaUsn (nUCI raoplUlliaUon ^iMi. In ocdu to a^iaf tim raulng
nuim flmmm ^arlOm iirliitan H i— ra Co Oa tolittriaa quaatlOMi

1. on pagi t et your "*"t ycu lUtad chac induauy mvpoct at H.fi. 27 wuld
Ba antiancad ly Including aundudi iMraby tha apacUl aaMaaiiant eouU ba diaconciniad
HiUiDut nlylna en Ua Faitanl ft^ Uian Bank Board'a dUccaeian. Ben oouU Cha
■Mliatcliea vlan tiia dlacontinuanca o£ tha qiacial aaaaananc authccicy, aa you icfiaar
bD piiyja hara?

Z. M you km, tlia Iktlonal Council at Savljiga Intlcutlona, cha Fadaral naa [can
BHk Boaid anj Uw OapartMnt of Cha Traaiuy aljo atnxiily ainBct tha ana rSLIC
tacavlCalliMlon plan. i*i»Fa— lAa U.S. Laagua Ma nw aubalCCad an alUcnatlu*
ptepsaal. ttx doaa ctia JIaanElatlan of Thrift llaliUng Ct^ianlaa account Cor auOi a
dlvacganca o£ pinion within tha inluatEY zagafilliig tha FSLIC racapltaliaatlon plan?
Uao, pliiai jJMiiiL on tha U.S. Laagua'a napltalizaCion Diosaal aa outlinad in Hr.
t*V'a

k yen, and I took [oo«rl to your nply.

viAnMd J. St CaoMin

\ ChaloMin

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■ iM/taimara/Kummui a rm vn aii B

o-i-J

Tha Hoooiabi* r«ra*iia J. St

Sis:. .. ..^i.,, ™ ''^

rinanca aad Ortiui A£faiti
1119 siTbura Houl* OfCiea Building ^.^^._^

(laahiiigton, D.C. 30919 **««a«» ■ ftaeM *••*•

Daai Chaliwn St aaTvalo:

Tliank <rou for tbii opportunitr Eo alabocata (ucthat on t
U.S. I>aagua'a aalf-halp, iaduatCY-undanrrlttao progtaa for
raaolvtng tha ;rabI«Ma o( tha Fadaral Savinga and Loan
Inauranca Corporation. Following ara
quaatiOBS to ua of Jaauary 11, 19B7:

QuMBtloH tl. ! on Paga 13 of roul taatiaony, 70J itatad
that not onl7 doaa tha FSLIC hava annual invaatatant Incoaa,
but ;ou alao pradictad that tha FSLIC hIII 'sooa' taallza
•n 'additional- Inflow of caah Iron tha diapoaition work of
tha Fadaiil Aaaat Diapoaition Aaaoclation (faoa). How aoon
wtl tha FSLIC raallia this Inflow. of caab and bow nuch cash
will tbla ba7 On what sourcaa or calculations do you basa
thala pradietioua?

ftlHI"r' Tha job of' tha Fadaril Aiaat Diapoaition
Association (FXOA) la to nanaga and assist as poaslbla tha
FSLIC in Ita afforts to daal with tha problas aasata it
•cquicas. Although wa do not bava accass to pcaciaa data, wa
undaratand that fada is cucrantly aiuaging ovac ti.O billion In
aaaata. Fultbac, ifa ballava that tba itcuctuca ii tn placa to
pannit FMU to aanaga lougbly tS.D billion In asaats annually.

Givan tha pioblaM naCura of thasa aaaoti, It Is vacy
difficult to projact tha caah Elowa FADA will produce for tha
FSLIC. For azavla, ua odght aaaiuna tbat FADA will have about
tS.O billion under aanagenant by tha end of 198T. Tha aaaaC
raaolutioD rata for FADA alght range batwaan 10\ and ii\ of
aasata managad par year. Thla auggaats an annual cash flow to
FSLIC froB FADA of batwaan (900 aillion and tl.25 billion Cor
aacb year It managaa an avarag* of roughly (9.0 billion in

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Urn did not UB« such aBtliutca In our proposed plan for tiro
rcaaons: (l) so that the coaparison of our plan to that of
tiM TtMiniT would tM claar. and (2) Dua to th« uncartaintias
mceonading wharo tba aaaata will torn locatad, aarkat condltiona
and tba pcacis« nature of tb« aaaata lavoivad, anr aucb
katiaatM ara "ballpark* at boat.

Still, «■ ballava PMU will do a good job and provldo
Btflsificant bsaafita to tba F8LJC. Claaclr. tba rSLJC will
racal** addad caab flows at FADA opcrataa altbouflb tbair
pracla* alia and tlnlng la unknown.

ouaatlon «2 .: On pagaa 11 and 12 of your taatiaonri you
•zplain baalc alanaata of tba D.S. Laagua'a
raeapitalixation plan, including tba aatabliabiaant of tba
funding corporation, tba laauanca of saro-coupon bonda, tha
raising of up to IS billion dollars in two raars, and tba
r«paynant of tbaaa bonda and borrowlnga. You statad, *IC
tba bank STStan aamlnga fall short of our proj«ctlona,
rSLIC-iamrad Instltutiona ara praparad to owka up tba
dlffaranca.* Plaaaa axplaln tbia atataawot. Has tb* U.S.
I^agua conductad a aurray of all FSLIC-Inaur«d inatitutlons
on tbia iaaua? Plaaaa axplaln.

xnmtmr: Tha U.S. Laaguo baa not conductod b apaclfic
aurvay of ita naBbarahip on tba FBLIC lacapitalizatloa laaua.
This Is not tba aatbed In wbleb tba D.S. Laagua davalopa its
policy positions. Instaad it appoints study groups on various
issuas and aubNlts tbair racoanandations to tha govarning
bodioa of tb* U.S. Laagua.

nia U.S. I,aagua'a F8LIC funding plan waa unanlnoualr
approvad by a atudy group of nora than 40 rapraaantativa
tnduatry laadara and (again unanimously) by tba our Legialativa
Policy Conaalttaa and our Board of Diractors, which has
roprosantatlvaa from all so atataa. Furthamora many of tba
atata savlnga and loan laaguas, including thoss fron auch larga
atataa aucb as California, Florida and Raw York, hava andoraad
our proposal.

Tbus, wa can confldantly say that tbors is ovarwhalining
aupport for tha I,aagua's plan wltbln tba bualnass. Tba various
groups aantionad hava also oxpraaaod ataadfaat opposition to
tba plan proposod by tb« Traaaury Dapartoant and tha Fadaral
Honw Loan Bank Board aa contalnad in H.R. 27.

i by Google

Tb« TrMiurr'a vBraioii auttiorixes a $3 billion iav«stmant
br th« Fadaral Ham* Loan Bank Byatam in a Financing Corpocation
Nhich, in tutn, will uas tbia amount to purchase zero-coupon
bonds to defease principal on obligations of £ive timea that
amount (i.e., $15 billion) to be issued bj tbe Financing
Corporation which must mature within 30 years of issue (not
berond tbe rear 2026). All debt aervice aasoclatod with these
obligations must be borne br assessments an FSLlC-insured
institutions. ' Ho direction is provided in the proposed statute
on how quickly or in what increnents the $1S billion in bonds
is to be raised. When meaaured in present value terms, the
cost o£ special assessments and debt service under the
Adminiatration'a legislative requeat would be S15.5 billion for
the next 20 years; by contrast, this burden would be $9.6
billion under the League's proposal — promising a stronger
FSLIC fund at that point.

The League's funding proposal contemplates a different
contribution pattern from the FHLBank System, with a tap on
future earnings (if earned) over a longer period rather than'
the upfront diversion of $3 billion in System retained
eatninga. (Both approachea make adjustments for equitable
treatment of FDIC-insured institutions which belong to the
FHLBank System.) Relying on future earnings instead of
draining the FHLBank System's present retained earnings has the
additional benefit of preserving the creditworthiness of the
System for its day-to-day agency borrowing operationa.

As indicated by your question, the League's testimony
states thst if future Bsnk System earnings fall short of the
borrowings needed to bolster the PSLIC's reserves, FSLIC
institutions themaelvea would make up tbe difference. This
possibility is lllustrsted in grsster detail in Exhibit 8 of
the U.S. League's Task force on FSLIC issues provided to the
Comnittee, and attached hereto for your convenience. The
contributions of the FHLBank System and the ahortfall to be
made up by FSLlC-insured institutions are given under three
acenarios: when FHLBank earnings are 9.S\; when those
earnings do not grow at all; and whan those earnings are at
si. (For perspective, since 1978, System earnings have grown
an average of 14% annually.)

Sincerely,

Phil Gasteyer

i by Google

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S32.

IS. 00 BILL
BILL
0.004
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1993
1993
1994
199S
199t
1997
1MB
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3000

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3003
3004
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3000
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or coMTizmzom

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$379

I37S

$3<

$5*0

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$95

$949

1379

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$375

$131

$1,133

$275

$1SB

$3,344

$378

$300

$3,«3B

$27S

$349

$3,405

»378

$394

$4,399

337S

$349

$9, 19a

I37S

$409

. $<.139

$378

$47)

$7,199

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1544

$1,374

1379

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$9,490

$375

S70B

$11,199

1379

$•02

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$375

$904

$14,411

$375

$1,017

914,41]

$375

$1,140

$ii,iaa

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$5,500

$9,431

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13.00 tlLL.
S3a.44 KLL.
S.00%
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I.OOt

31,373

UIT

11,444

9373

9273

isat

ii.sia

939»

95*0

lUi

31,593

9303

937

9949

1990

11, t?!

S3U

943

91,399

1991

lt,7Sf

9334

991

91.933

1993

•1,143

9391

993

93,346

1993

•1,939

S3S9

•109

93,939

1994

13,033

93a7

9133

93.605

1999

•3,133

940<

9163

94.135

1999

•3.340

9437

■ 9197

•9.199

1997

•3,333

144a

9339

99,119

19»»

•3,4<9

9470

9373

97.193

1999

•3,393

(494

9339

99,174

3M0

•3,733

9919

9379

99,690

aooi

•a, 339

•944

9419

11.19a

3003

93,001

•973

9909

13,791

3001

13,193

•900

99T9

14,611

1004

•3.309

9910

9991

19,631

300S

13,473

•493

9793

la.iiO

3006

I3,949

•999

9935

31,373

3007

33,443

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99,093

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ont

covan

91.391

91,749

msnrt vusi

Of COHTUBOnoilt

93,949

91,999

ib,Google

RECEIVED p^^

JohME-Raumtal

RECE.IVE.P

^^^ ^^ FFB2 «fl7 ,

nmiy 30, 1967 '^CB i BB/ :

Ttw Bononbla Famand J. 5t GciMda '

OmXima

CD^ttM CO BKiklog, PlnBm nd Ucboa Affair* '

2129 Bqiium Boum Off ic* Building

Mshlngtsn, D. C. 20515

DMT Mr. Chaii^t

ma ia In n^oiaa to youi lattar of Januai; 21, 19B7, that
Indudad tM) tailaii-^ quastlona to tha taatlaotqr dallvtrad on babalf of
tha Hatlonal Cornell by Hr. David J. Sullivm, Jr.

First, with raspact to tha inauranca ttatu* oE tha aariaars of th«
Hational Council, ■ppratJjMtaly tNo-tbinU of our m^tMi inatltutlona aia
nac inaurad. Bowavar, of tha nproxlBataly $430 bUlKn in lnaurad
dapoaita bald ty iktlonal CoMidl Miters, $172.7 bUIlon, or 40.1 parent,
ara tcac loaurad, and 3257. 7 billlan, or 59.9 paccaot, raprasant dapoalts
inaniad by tha FSUC. Iba National CowkU's Taak Forca stuping PSUC
racapltallsatlGn mu llkaalsa avanly dlvldad batwaao lastltutlm that aca
FDIC lAsorad and thosa idiidi ara FSLIC inauiad. Ibat task forca ms
ebalrad by Hr. Osorga Ihitlnd, Vlca OialiBn and OD of Call&mla Fadaral
'.Savings and Loan Assodation, a $20 bUliia FSUC-inaurad Instltutloa.

With raqwct to tha quastion of axlt faas, this is a aattar to
Mtildt tba HatlOBal council has givan a graat deal of study, l^cn
"-mril'Vi^ with tha institutlona dlractly affactad (both acquirors and
•eqniraash «• hava propeaad a coapronlsa axit tf aqual to two yaars of
ragular praadUH aad'ttn yaars of snaelal aaaaasaaat, or rou^y flva yaars
of inauTBDCa praadiMS. Ha hwra arrlvad at this figura utilizing as a
■tartlag poliK currant law Wiidi, as a rasult of tha racant fadaral ecuct
rulisg in Florida*, la that tha nus lacks authority to l^inaa any axlt
Eaa «faan an institution conwarta fron fadaral to atata diartar as part of
Its ultinats ecnvarslcn to PDIC inauranca.

ItM two yaars axlt pcaaliji (Nntlonad in tha original Matioaal
Bousing Act of 1933 [12 D.S.C. 1730(dn Ma Intandad and has baan

onitad first Fadaral Savings and Loan Assoeiatlen. at al. v,
fadaral Bt^ Loan Banlt Board . Ho. Bi-Sa-av^lfi! HiddU Dlstcict
of Ploritk, Bacaabar 19, T9B«, acpaal dodiatad 84-3863 Uth CLt..
IM7.

UOl ;W*Mtt Amt N.W^ WMinglm. D.C ICCOSSOJO I (202} 8B7-3100

i by Google

imndin FSUC Insunnc* tot Mat* Umieaaeu or ncn-

, H* fa«l cue MWtifd "T'"'" lapraMRts ■
EvamiBbla ***^^^ grcuil bsfeNMn no vilt pnslWf iA<^ ^ib9 tte result In
th* ■bow ntaxmoA cu« u i«ll u tbi netat tnrwictlan Involving th*
mtgtt of iMctctettac raaacal scvingi ted Loan late mrlM iUdlaad iMk,
and tb* t«i yaart azlt tea balag •dvoatad by tho FRLM.

inqoicy.
plMMd t

/^ Und n

ib,Google

ASSOCIATION OF THRIFT HOLDING C©ltg»ANIES

WMUwdo, D.C. 20aOi

(309 awns _„ _

FEB 2 887

January 30, 1987 -^imm

Tha Honoxabla Famand J. St Garmain

CooMlttaa on Banking, Ptnanoa 6 Urban Affairs
2129 EUybum Houaa Offloa Building
Washington, D.C. 20S19

□••r Mr. St Garaaln:

Following tlM praasntatlon of tastloony by tha Aasoolatlon
of Thrift Holding Coapanlas at tha haarlnga on tha Fadaral
Savings and Loan insuranca Corporation ( PSLIC ) racapitaiizatlon
plan, you raquastad that tha Aaaoclatlon provlda urlttan anawars
to cartaln questions In ordar to complsta tha hsarlng racord. Ma
ara plaaasd to do so.

1. Your first quaation rafarrad to paga six of tha Aasocl stlon ' a
taatimony ( copy attachsd) , vhara It vaa statsd that industry
support of H.R. 27 would ba anhancad by Including standards
wharaby tha spaclal asaasSBant could bs discontlnusd ulthout
ralylng on tha Fadaral Hona Loan Bank Board's discration. 7aur
quary was: 'How vould tha oarkatplaca vlaw tha discontlnuanca of
tha spaclal asssasosnt authority, as you appaar to proposa hara?'

Tha Association of Thrift Holding Conpanlas amphaslzad in
its tastlaony that the spaclal aasaasmant should be phased out
over a period of no more than flva years, vlth Inclusion of
Isnguage in H.R. 27 which provldaa clear standards whereby the
special aasessment win ba discontinued without requiring any
action or exercise of discretion by tha Bank Board.

In our opinion, tha azlatence of clear standards In tha
legislation win dictate the marketplace reaction to
discontinuance of the special assessnant authority. If there is
certainty — if a nnchanisa is apallad out In tha act -- than the
view of the aarkatplaca toward equity or debt lasues of thrift
holding coapaniaa (and individual stock thrlfta) will ba
positive, bscause Invaatmant analysts will ba able tc take that
developaent Into account in developing their projections of
earnings. However, if tha happening of tha event must hinge on
rAgulatory fortuity, there will be uncertainty -- and that
discourages investment.

Tha key objective of H.R. 27 la to inprova the capital base
of the thrift industry. Attraction of capital is euch, nuch
easier if future events nay be predicted with some certainty.

i by Google

Vox th*t r«MOD, It 1« iaparatlv* that tiM tUOng e( tha
disooDtlmunoa of tha apaelal aaiaa— nt ba pradlotabla. That la
ealf poaalhla it thara ara daar atandarda in tha lagialation.

0bTioual7, pxaAietabla dlaaontinuanca o( tha apacial
aaaaa— nt la viawad favorably in tha induatry, baoauaa tha
•pacial aaaaaaMant la an a«panaa vfalch datraota froa aamlnga.
Howavar, in tha aazkat, ganaral induatiy approval doaa not
naeaaaarily eraata an inoantiva for thoaa tilth tha naeaaaary
eapital to Invaat in thrlfta. That inoantiva ia only oraatad if
tha tlalnfl of tha dlaoontinuanoa can ba praolaaly pradiotad, ao
that it oan ba inoorpoxatad In iimaaLaaitt atratagy.

2. Your iaoond quaatlon rafarrad to tha altamatlva propoaal for
rsLiC rooapitallaation aubiattad by tha U.S. Laagua, and aakad
how tha Aaaooiatlon of Thrift aoldlng Coapaniaa acoounta for aueh
a dlvargwMa of opinion within tha induatry ragardlng tha FSLIC
rooapltaliaation plan. you alae raquaatad coaaant on tha U.S.
Laagua ' a racapltallsatlon propoaal aa outllnad in Mr. Lavy ' a

Tha Aaaociation of Thrift Holding Qwpanlaa baliavaa that
thax* la a dlvargaiMa of opinion within tha industry ragardlng
tha axtant of FSLIC racapitaliiation bacause thara ara diffaring
■aiaaaaaiil ■ of tha aagnltuda of tha undarlying problaa. It la
coBplataly natural that the larga traditional aagnant of tha
Induatry Itaalf, aa rapraaantad by tha Laagua. nay hava a nora
hopaful vlaw of Ita aconoale elrcuaatancaa than thoaa with tha
parapactlva of invaatora or raguiatora.

Another raaaon why thara la dlvarganca of opinion within tha
induatry ia bacauaa dlffarant analyata think dlffarant factora
ara li^ortant in charsctarlilng tha problan. Fundaaantai to thla
ara ■aiihani laa avallabla to FSLIC to acqulra tha nonay to halp
troublad thrlfta. savaral unelaar factors ara: (1) If tha
Fadaral Hobm Loan Bank Systaa advancaa nonay which coma a froa
borrowings in tha public dabt aarkata. what lavsi of borrowing Is
Judicious, and what ara tha public policy sida affacts?; (2} If
FSLIC la guarantaalng such advancaa. what laval of rasarvas aust
It havaT

It is antlraly pradlctabla, furthamora. that a cooplicatad
problan will hava aavaral propoaad aolutlona. Thua, assuBlng
thara la agraaaant that FSLIC racapitallzatlon ia naceasary. that
laavas tha qusstlon of how meh racapitallzatlon ia nacasaary
now, and what la tha baat aachonisa to achlava It. Tha Laagua 'a
regional approach, including a forbaaranca progran, la ona
auggaatad aachanlaa, with political appaal bacauaa It
Incorporataa apaclsl attantion to raglonal problam araaa. Na
strongly support a progran Inoorporating a forbaaranca alanant.

ib,Google

BoiMvar, th* lazgu thraat to tb« Induatr; IB It* aUllty to
ralca arly«t« oaplt*i along with an adaquata fSLIC
racapltall satlon , and political appaal doaa not Itaalf era at*
naeaaaaxy capital. Thus, othar aagnanta of tha induatry suggast
a Bora hard-haadad, aeonoala aolutlon to tha racapltallzatlon

Thara la a vary raal dangax to ttia dlvarganca of opinion
ragardlng racapltatlzatlon of FSLIC, and that la that nothing
will ba dona. Fallura to act on raoapltallzatlon oould
praolpltata a orlals which could throw tha ant Ira financial
CMBunlty Into tuzaoll. Praaunably, avan tha Laagua agraas that
thla la an undaalrabia outcoaa.

Vary truly youra.

i by Google

UA LEASUE OF SAVINGS INSTITUTIONS
REPORT OF THE TASK FORCE ON FSLIC ISSUES

ib,Google

pp pg ir TASK poarf

ocraid J. Lwr

wIUUm >. O'Oanmll
n.fl. UMW or SKvnna
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ulllUa H. neigtiaU

Hutford, R aton LdM, n

Mrald 1. Qirl«t «nn n Jial* J. Jackaen

ram noauu. su. wsoc. eoM«MMM.nt uvnoa uw.

Mlt UM Cttr. Utah Mouiton. n

maoMLiTW mmu. bmk. p.i.i.

oary H. Drlna DonaU r. ■olqr

ib,Google

■MiU 1. :

lUtflHl L. TMltOn
OklABM, on

L. LlBton Iwi. Ill

nsaui MM HMiornMnk

MUimyTM im M T^ ■— ^.»TnTTm

nl. Braou. Jr.
■m mmu. 0*11
Mdwoi. V>

O^ HubK. m Olandala, o

lalpB S. Atlds. Jr. i)Mt9t ngalka. 3i-

MiM nDBtM. mvubs unci* pimui, atn

lluhtn«tan, DC Lenj Ultlt. WI

watt (■)■>■. IMK OP OEM. FB

Digit zed by Google

•war It niu. at

onniR INK ni nvn

Donald ■. Ibackaltocd
sntti uvnns bmk
colobua. m

VtlllMF. SlncUtt

Mahlngten. DC

Oiarlaa l. ftiuln

Oiailaa L. niliaann

HlillH J. Mhlllliig
JOHn, DM, mvu h t>

11^ lF>eUF STtfF

HMl rttv - «atf Uractoc

i by Google

169

TMCOf CMTFOTS

miaiu 0* m nuc task roici
rur&ci

tXSCVnVI SOMMAIT

ntiKAiANci roi mnrnmoHi m otrusno arias

A PUNDDIO PlOPOtAL VOI THB fXUC

or lUPltVBOtT POIBIAKANCt

UCIOIOUHD OH UCAPITALI7JlT10lf

B TiniB A COST TO TKI P3LIC H DILAYMO
ACTtOH IN THI FINAI. USOLtmON OF
PIOBUH CASBST

i by Google

ThU roport piopoMi > two-part pro(nn for awlnt the pncnim on tb* Padanl Sairtagt
lod Loan Innmacs Coipoiatlon. Whlla It addiaiMi tb* agsncy'i fnndini prablemi It aim
pUcai init aophaali on a lailai of InitUtlvei almad at tha ipaclal probUmi of
tawtltotiou loeaUd In acoDoniically daproMod araa*.

Call* far Dw ln)actltm o[ fmda Into Aa PSUC ham dominated the Usialatirs aiecda of
tha coDsreiiinul banUnt coDuntttaai for tha paat two jttn. Tat daiplU tba iiluq>
blmdrada of honn of dabata on (ba rablact. It U itUl not ponlble to daflne tba dlmeniloM
of tba pniblam wltb uiy d«|rea of pracWon. Tlw plltn Utrf tllllPlt Fll' ll MK M^Tft
millT tlWTfT ta <loll«r tanni what tba cmu of tha wohlanu ot tha PSUC wUl ba.

ComavDontl; ona of our goali wai to ha^ lat 19 a flastble profiam Ibat can ba adaptad
10 ouat whatarar fntora fbunclal demand* are plaead on tha F5LIC and tba (edMel

dapoalt Inaonnea lyitami In faneral. Tba proiram deralopad by tha Laafua lubatasUelly

But alae of |raal Impartance. it li becomlns clear that any proiram tor daiUni with
federal dapoilt iniuiance today miut racapilie the exiitenca of what mliht be' called
aieai ot raslonal dapreulon In (ba Uoilad State*. Tba*e nflow ba^ In tba enersy belt,
extend to the farm belt lod touch on itatei with economlei dependlni aa foieit product*.

Aa iome of the eidklbiu in thli report ibow, there 1* obriouty a patWn) here, and the
PSUC* problem* are heavily concentrated In tbete depieiiad area*. Ihii lapon li alto
intended to contribute to a breeder recotnition In Caa(nai and amons tba ptdOle
■•nerally of the need to take ipeclal meaiuret to eaae the treat economic itralm in Ibaie

Conaequently. rather than *lmply focuilnc on fundknsi our proinm recommend* ■ mnnbaT
of leinUIoiyi *tqiarTi*aiy and accoinillac inltlatlvei ■Imsd at deallac with tba tpaelal
problem* of Inititnticnu in thaie leilcnialy dapreiud locilltlei.

t^if [hi. r^ntort «^o JemoMtrate*. 'h- rnmm.rri.i tunHn. reeuUton ar llni^T ^rMai
'hit nnf of »PiTOach in JenreltB't ^f-^t" ■~l mrirnn A* will be lean, onr nropam
borrow* haaTUy from wtm' <% "imillTrTlnl '■TrWnri rTirl'^"P *" alraadT doina.

We believe (bat if wb can boy time (breu(h tbl* procram and preierve many well-
butitntlona now In trouble ilnvly becauie of local economic condition* bayond anyooi
control, the commnnitlea tbeie inttltutlon* lerva will be better for It and the buidan
the PSUC'* inmrance fimd will ba that much leu.

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IBSUHaABMUX

Haik hu «hBiCrf i^ th* flm f onaal iwtgwli U r»«M« ■<*Hlw«l mc (Mto IM tk»

FSUC WW* Btd* !■ Mity 1*U. Men BsuUy, tt kM baeoi

eoadiUdH la Km mUm vuy riirtftcwUy by luu ud •«« l

rMvlta IMM kv nwiUaai i»m1iiI|Ii| tha wvanl FSUC nfmdlai piofouU <dv<neW

!■ IHt u* M lo^w valid.

<Tk— aulr pUM tectodad oo* prafOMd br tha U.S. Lu«m Ib Hwch, IfMi ooa pi^oMd
« iminlwiull tb* MMM U«M bjr tto TmMWT Md th* Patent Eoaa Loaa Bank Beari.
and am atunatlwa *rar-Aa-r««^0«- pUa fwpt w d by Um U J. Laagoa Utar la If M.I

Odllaallf. It WW miiimiI that thar* t>aa a Umltad, ooa-tlaa bolga h tka FSLIC'i eaaa
load that had to ba daalt with on aa axtfaorttaaiT baala ovar tba naxt taw yaaia. Bat aa
tha U.S. Laa«aa'i raaetlvBtad Taak Pana aa PSUC iMaa* w rtawnd tha Maatlea taetat
tha PSUC aa IfM dnw to a olaaa. It faaod that tUt wu aot tha eaaa. iMtaad. It [oaod
that tha ilaapiiilm acoaoBic dapraMleaa ia Tailaai atataa an eiaatlB( Bu)at UtOenltlaa
naidal baaki la thaia aiaai. b laet. many atatai
ifiaatncton dlaaolra onlan tpaeUl ptovliioaa an

■ balai oranriialmad by local acono
wUch naanbia Ihiwa of the 1*M*. Iha MTahCr of tha dtoatioa to aophaaliad by tha
fact that pnfelaaw an no loocar conftnad to coomarclal real aatata preblam — laiia
namban of ' tradltlaaal ilatla-fanUy loan* an now twnlai iqi ta tlta noa-parfomlai
catagortaa la aaaM anaa.

Iba Taak Pana baHavM tU* now aUaatioa n^otna ■ oaw appraach to raiohrlBi tha
FSLIC'i proUam*. aad OMt onr twa-prooaad 'Savlagi InatltntloBi Salf-Halp Flan' li tha
kind of now appinaeh that dMOld ba takan.

dm fcittt of xran in an u tai A SSi ■ "•W PT°g«ffl

thu Mad of pcro la aa u tai Si J!S3i ■ "ff PT°ir«m

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>A1T 1 - POBBKA JAMCT lOI IimmmOM M D1PRM3BD ABIAS

Al daullad la tk* body at tUi npott ud la Appandla A, tbtn 1* anpl* pmeadaat for Ihl
'tMo-Uand* vpmach to ttw nioUtion tad nvwvlalon of laiingi fautltaUoas
neovua»alti In thii prognm. Ajmsbmi of nap* mre ulran to bur Um* aartr In thto
d«c«d« whoa th> m«|oiltT of Mvlnci fawtttnUoot mre nffoilnc lou«i baovia of
UTtngi'nta daraBuUlios tad Ush InUren raui> and in ItSt Concren toglilmJ
nsnUtoiy tcconDUng pro*UloM for tlia Fum Cndit Srium.

Of pwUenbr dtsiflcano*, la IIM th* t]u«a f*d*nl eoounucUI bank nwaUUrr •(
MBbarkad ^mhi > pnicnm af nyanrltoty fortMtnacM unnid «mU-nuuU|Bd c
bMki locatwl la uaM Uwt dapand haavUr on agitenltan i
Miconniad to Mork with tfooUsd OMrn botmntt. T)m ntoUton Mt«bllibad > c^lul
fotboir mc o pollcTi relazod Iradlni Undu, and aaeo oTM ** tte »*• af tb* pnvWoot «r
(■nanlly aceeptsd aecomitlat prinelplai that allow tham, In cattatn clreonttaaeMa to
coptlmia caiTTlni low paTinc or noo-paTini loam on thalr booki without havlai x» wiita
than down.

Llko tha foibunnca policy for commeicUI banki, tha U.S. Laaioa'* proiram alio offan
tU* kind af "breathliit ipaca' for WBll~nuna|ed uTiosi IntliluUim*, and wUl taa«
patantlal fntura burdsni oa tha PSLIC.

ada that tha Fedaral Home Loan Bank Board tab

wilM-down of tncoma prodoelna renoiiaiied one- to four-familr nropartiei
woaid pot ba mbtaet w t^m ajdtttonal 10 nercani c»t^m [emiirwpnent.

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TUa ftOct wm lima k«to fMWUll t)w oMd (m tha FlUC to uka onr tha mmu «r mtsr
a( tkaw laatitDtiaDi ud dl^ou a( tham at iaallnii.illy low, *tlra-ula' lavali, wUeh
woold ba taavlUhU bacaaaa thaaa tanltnUaM an coocanUaud ta ratlooi ilratdr mlrad
Id •caooaale «i|riiilii. fa tdn tfek wndd tacthar d«c«« local taal aauu valoaa.
aiBUnMilin iiBtliM far cinmiUm kaKsd dapoatiMr I wUtWl Paa aod makbi tha
dapnaata WDiia.

Tha poUcT auUBaM (lacaamaadatlaa •!) ti of puUeabr ImfOftiaita. la aMiUoa U
tomattir aitleaUttai a FOUcy of (oitaitiBca, It ihaaM diract rSAi u eseralt with *tata
u*lM* iMUtaU ea ecwailirtinwri la traatlai fattainnei ud lUoir FSAi to lawar eaplul
mvriranaat* for ipaeUlc laMltatioaa. A (UtMMat of tUi. Uad woold maka It daar
t hr ang b o u t tha PHLB Syitam that ralai aod rafnUtlaa* daalcnad ta enrt muooad practical
arc BM appUad ao tadUcdmlnatalT that tbor iranBa tha pnblmM of waU-manaiad
iaatltBtioai In traofala mualT baeanaa af saa«ral •eaawmle elienoutaacas barood thair

accaptad accoaUtB( princlplai to tha traatmant

louii *rr.ardine to natmnant of Ktnanclal Standafdi IS (IPAS IS) )Mt aa oo mm a rai al
baaka do. Alao, it wuuU altar tha Bank Soard'i appiaital ibMoIIbw «Uch raqnln miai
waU-taa taa t tt nt laaa ta racognlaa axeaialvalT l*fB« loai M «• pmUam aatota aad to Incor
aaadlati an"!' >> ha*lo( prapaitlai taappralMd. (Soa Appoadtai B f or a dlaooMloB «t
■ Ill III! itMthoda.)

Tha Ihlid part of rha nconoaDdatlon wrald aUodaata a pmUam that ailaai (Aaa, la

Iii| riak oa a loan portfolio, cartain noa-tradltloail trpoi of loam an Mbtact both

to tha lehadnlad Itami approach aad to tha clasilflcatlaa of aaaata ijatmm. Tld* eaa
raaak la a MoaUa Mt' ta an lattitBtkn wtMia It awat bath add to lu naami If tha aaaat
to clawtflad aa dooMfat aad tocxvaaa ita aat worth U tha loaa aln bacomaa a a c had a lad
lum — aad of eoaraa thara la a haavy coeeaatratloa of problam loaa* bi aeaoOHleallp

Diiltti difa ptadlettsaa, tha raaUty about tha ftaaaclal coadltlcB of tha PSUC la laat

■Itm. Ahho^ lalim ban rauntad that tha t^ woaU ba down to 11 bUUon to

raaaareaa bp tha aad of lfl<> oa SoptambaT SO, IfSt, tha t%mey bad caih aad l or or awant

WawrthalMi. aJdHlooal r*M«rt«i •bimU ba pcortdad to tha asaacy, and Ian yaar tha U.I.

PSUC aa 0^ davolopad by iha U.S. Traaiury a^ tha Padaral Koma Loan Baak Board.
~ a dlffaraaca in Iha iwo planr wai a modait ooa af tlinln|> with tha (Oada bolat
>d DB a pap-ai-Ton-to baala In tha U.S. Laagna'i altaraatira.

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Th* IrMMKy/Bank Baud pnpoul tMoU ban mqnind bonowbtt tlO w II* bUUoD ^v
(not', borianlns tba twrtaiw wUb baas .iBUmt paTmnU (or op to U Toan or mora.
Tho eoDconi ta th* uvini* iMtttotlon tanlDoii mi that thaia OBOtmoni 'front-oad*
bonofriBgi w iill ld MDttMi lU IWara. (Eor a dlienaalan of tba baeksmuDd of F3LIC

Tba U.S. Laagna bai ra-aacandnad iu po«Hl«B i»lth Ifca goal of daraloptai a lol
PtUC't fndtai naad* tlut will bo aeeapuUa lo all paitloi. TtM (aaolt la a
(to 'pay-*«-yoo-|«' vpioaeh with a modati boadlni ■ppioaeb.

Tha SaTlniti IniUnUim Salt-Hate Promm lor f-nrillll "Vt PSUC. Tlili Hmdlai otopoaal to
aECOMMBNDATIOM H=

Tha Qam-St. Gemubi act bKtodad lanfoaia in Sacllon lit poimitllBi tba lacondaiy
laaarra to ba naad oa tba ume batit ■■ tha pilauuy raiam. VtwrwinoMij, tba wcondary
laiarra wai to be uppad aOij to cDvai FSUC louai and wai to ba uwd ontr to tba aztant
oUtar fnadi wera murallabla — ranilctloiu flowlnt from Ibe fact that tha fosdi In tba
aacondajy raiam lapraaant prapild Inanriaca piemliuna that wera taitaodad to ba

,. WhUa tlM l>ta cbaaie* wera joatlflad ondai extmna condUJoni t

eilittni, tbete to no aaad for ttoir contimiatlon In tba contaxt of tba artdltlnnal (n
balac pnn>ld«d to tba F3LIC by tba (nndhii proinin.

gactlm atKaKaMDIflll at tb a tf« coda bawnd

b daallna with tbe caaaload of tba tSUC on tba ichadnla eonunoo to both tha
Tnanry/Baok Board and tba U.S. Laagna Tanloni of an FSUC raeapltaliialloB pUai It l«
InvoitaM te leeepdia tha naMtttty of ntalnlna two proTtokan. anaetad In 1911 at part
of the tax coda cba^M at llMt tlne> wfaldi radnca bard dollar FSUC ontlayi In problem

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Jam to BMt m MttUl iwn

o U.UH in Dll, ««.t7« In !«<«, SOfi la IffO, t3.5SM
to 1»1, 1«.«7H IB Df) u« OW OMntfUT.

If —dad. « faadte* coi>w«l« r' r* >" "■ "I" ■«" >« "firriirt ;? tint

■M^^a ia att fraq di. Tbay hooU b* rap*ld tron tb* 3CM of Mt teMOM tbt
P«d«nl Room Lou Suk Sinrtam cnnvnUr wU add* In Om 'laiiJ rM«m',
MUck It Mt amiUUa to pay dMdaiMU to a

•ophulaad tkat orar tha paM two yaan tha Bitleo'i
• thaa tl billlm In ipaelal FSLIC maitmaim o*ar lad
Bacaaaa of ih* ipadal pnmlom, ■ aavtaci

nUCa]

i baak. And In addition to tha tawrdubla traatmant, tha
:onra|ln| lUnniar MTinii lutltutloBi to mlfrata Iran tha
B to that of tha Fodatal Dapoalt Ininraaca Coryontlon.

'■ caah naonrca* tall balow aana apaelRad laral, tha fwidiaf coiporatloB
lup 1 wonU biva antbotity to raUa op to fl.t bUUon In aaio-emran
liiaiiiwlim Id tha program'! ftnt yaar and aaothar ti.S bUllon in tha Mcood yaar (9aa
llWiilrila t far dotalli). If tha Bank Syitam'i aani&ai da ikot fraw qnicklT anoufh, It la

jniiltila tha lOW of not M iia nri^n not ha mf tldant to ratlra tha principal and accroad

hcnraat an tha bandi. In that eaaa, tha diffaranca would ba mada op hj aaiaannaDU on

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Tha fhM*d-do«n wBiBJMl Minmint 1* MtliMUd W ftowUM dM F3UC with u ■Jantawl
t4-t bUUoa ««tMMB HIT aad ll«2. (ThU uramM Uut ths batfanW tfvoaito eaaOaam to
■tow at ttelr Mtlmaud lilt nta of I poicanl par yue.i ConUiMd with tbo FSUC'i
niuUr p w m lu n Incoma, tUi would piarida llu F5LIC with ■ t«t>l cuh (tow of 120
billion ovar the Daxt 10 jaui.

CMMqaantlTi tba Imhutiy'i SalT-Hatp PUa w«aU Hn tha F3UC Tlitwitr tha latM
fvodlni, If oranti lo warrant, ai that provldod by tho Tnaiury/Baak Boaid Flu, a* ihown
In tha foUawfan Ublo:

»■> FBnimil AMD TMA3UBT/BAWI BOA»D FLAM

1 Yaan t S.I Blllloit

5 Tean IIS.S Bflllon

10 Taui 130.0 Billion

10 Yaan I3S.7 Billion

li flow an ihown In tha tabla on tha foUnwlai pa(a and in

OT«r the oaxt two yaan. the Laifoa altanutlva will fiovida flOD "■i"*"" mora to tha
FSUC than the TreMuiy/Bank Board plan If tlO billion wan boirowad la tha lattar. Btoi
if flS Ullioa ware bonowad inatoad of tlO bUllon. iha Leaina'a plan woold prorlda onlr
ITOO million laia <i*0T tha naxt two yam.

Orer tha lonf haul, Iha FSUC fam much battor in tha Leafoa't pnpotat tinea It li not
bordaned with tha hea*T dabt lanlea of tha Admlnlitntlon plan. Only >Aan ooa looki at
a tlva-yaar tlma-hailion doai tha FSUC fara battar In tha Tnamr/Banfc Boaid plan.

Howarar, tha LoacH'a pocitlMl it Oat. bacanaa of tha oncaitalntr u to tha lisa of tha
pnUaBii a piosram thonld bo put In placa to eorer tha naxt tT>o yaan nthar than having
a nva- or 4s-Taar pngnm which bnidont tha irttam with haavy iataiaat paymaalt into
tha next cantnry.

Aftar two yean. It tha titnatlon ramatnt ciitleil, tha Coograta thovld ban tha
iHiliiiiliiillj to railitt tha qoattlon and, tinea Iha Salf-Kalp piDcram doat not touch tha
cnmnt ratalnod aandnga of tha Fadaral Homa Loan Bank Syatoro, Ihaio la ammgh
(lolbllitr to ba abla to prevlda mon naovreai at that Una U Contraat «o dlfscta.

Tha advaaUiM o[ tha U.S. Lmwm'i nmr aalf-halp pragiam laclndo tha followlns:

*. It will prartda iha FSUC with ts.9 bllllan ovar tha nan two yun. With lu othai
naoweaa, tU* will ctn tha FSUC an hiflow of fondt over tha naxt two yaan of tlO
bUUoD or mon, or an avaraia of tS blllioo a yaar. TUt It tl.S bilUsa mon la
Bvandltnnt than the racort taval of tlacat list.

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"iftes

»»»«■«■« »lf.l«-ll» WMp«...

ggiP ^ aa g "

SMB.

8rt

mjT y I BMB J

TOXU.

TOTAL

*!>.■ t.

(!•■• I.
tit.) !■

tuai.

tlt.OB.

t«.*B.

noST

rokas out » > xptriu oDU(4Uob at tk* FSUC la OH tabta for tka uks of
net Ulmet Is iha iima. Uodsr Uh Lm|h'i wtf h»l> fOn Ik* laak SjrMaa
(«ai i»i1»ii tb* Imliiiil mt* <k« tBUran.

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IB ntetter than it ■ con ts Um PSUC Ib daliTlna ictloa In Ihi
. B«t u IsUUcd la AivaB^z D. tb* Bulk Boutf h** iniaf •nyt
9 lu eoatnl do not coatintw to tncniM ililn to tlw dapotU.

TbH* tnotod* npltctnc tatatfOaaU and boudi of dlnelBn, oi pnttlaf bBtttatlaB b Iha
t rniMlinmint Fnfliun. CoiulnlT tU rupoulbU Mvlnii InnlMtlaai. ilnidr

In [act UM npld aa ■fprotck to Iki dlQotltlOB at praUom u

bbuUt thoH aliaidr la dsap aeiwBile tiDobla, Iha aaaata mmld han to ba dl
fin-aala pilcai. la ttnu tkla unnld (mlur aroda local nal aatato valoM lanon
problama far all fbuaclal InatttudoBa la tha araa and *—^"i Iha dapraaaloD mna.

Hw ritoatiOB It micli Uta that aattf la tUi dacada. Aceortlnc t

Itaalf a

aacmltlM tba FSUC had on hand at tha at

Iha F5UC maU BBir ba totallT out bI m

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f. ■o.Mf.MTi ran narmmn^ m M»..«.n .■■..

tffceti of Um tfOMM i that taan roektd th* Aawlcaa fHitwiil lyi f m onr tbs pMt 10
yun epntlii to b> f«lt. Pint cmm hUtoiletl wrtnaM lo lafUtlaa and la tk* Isnl aad
■ ..... _ 1^1^ ^j ^U fln,,,!,! lartitntlaM — aad

•r, far

■nat Idwut on nnawelal
Mfwats aat daddadly ^aqaal

Oa ttaa Qoa haad. tb* amuuiuj at a wbola kas ntarad tha fllth raar of a nlattraly Italia
fMOvwy fiom ttw wvvn recMdon o( Itai, oat of Um looiMt racovarlot on noort.
ar at laatt • pasao In tba recorarr cooU occsr at any Unw. Um acoooDr
li aad MtM af U» moat wdow ptoUanu now avfaar n*oI*«d. btlatloa
hat baan bnoght dadar coatraL btarait rata* bava tnbtldad aad ta«m Ukaty ta loaab)
low for tha liiiiiiaillila tntnta, and loma lagloai, notiUir t]w Morthaatt. ara UuItIbc.

Slmllarty, by moit maaiorat tba (avlnii laitltotlou bualoau ai ■ >Aolo li paifoimlai
battar thaa STor. Bamiaia, Intarait rata ipraada, landlof nluma lad othar ladlcaton am
T aboTC Ustoilc Ufbi at tha raat ouloilty of tn>titaUo«B. A bnttaaM that Mma Man
' « hat a raw yaan ago would fadt away or ba abaoibad lata aMia loaaral ^tpeaa
Qpai of ttaaadal laatitatloaa, nch at conunarclal baoki, baa tnnad itaaU aioond. Aloat
with pndDclai thata sratttrtai rtiolu, moat MVini* taitllntloat ha*a mada liuiutaalva
pniraia ta radudai thalr aspoian to Ow latorott rata rltk that camad Ihani racb
prablaaia aaily la tha dacado.

» Ki baid that

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•Mid ovwnanlr o( oU 1^ lU aad thi imoIuk fkU la pilcM of aU towU fwUi biv*
1 tlM boontai oil 4ad (m prodnelag tuut — ud !•«■ pro^araw cmI dapaodcnt
V — lata Manomle wuUUad*. 0«*r*eM compatltlon In tba piDdnctlon of "'■"■- '■,
r, *t«al ud otter mataiUl* Iwt* bit thon indnniloi bud. XxblUt 1 ilioin tin IS
ths fnttait oconomle luidililpi u nManirad br

•a tna nliM on mllttt ■ downtun. A* B:AiUt 8 ihowi, tm itatai, T«aM lad
OkUhoaUi •ecovM for mon than ooa-foonh of tht comnwrcUl banki elocad by
ngnUton In tba pan two yaan. Anothar 40 pareant of tlie oloilnp In tboia two run
ocenrad In tba 10 nataa that eooatltota tba lOdwaatam farm bab. Ai U dwwn In (k*
map In bAtUt 4, anargr- and atclcnltara-domlnatad itatai In albar parta of tba cotmtiy
alio haTO laria nomban of cloilnii.

It It aa<r to aae ^Atf the commareial bankinc tntnatiy'i fata In ■ flran raflan doaatr
parallala that of tba aconomj aa a whola. Bank eradlt "hh'^titt' t« bo tho Ufoblood of
tmall and madhtm antarprlaa* neh m oaiir tami ud anarir prodocon. If ■ iialn faimac
la nnabta to raearar tba production eottt baciuta of low food prlcoi, tba bank from wUch
ba bo T TOwad for laed, fartillsar and a^nipiiMiit loMa Wo. Tba baireil that waa collaural
ll'likalr to be wutb far laia than tba loan balanca.

But If baaki ara the fint to nitfar, tba nast wa«o ot trooblo raiolf* landan Hho bold
BMnlsaiot. A* fam operationi loor. paoplo la tha larviea and manntactadni bodnanN
tlwt nvport asilcvltun loaa tbelr loba. otbar paru af tba raflaa't acononqr anffor. aad
evanttiallp tbe quality of mortiaie dofat and loani for otbar bootahald pnipoui dacUna*
alone with bnalnaaa debt.

Tba Impact of •eanooilc dlitraai on aavlnc* lutltatlona li srapblcally poitnyad In tha
napa la ExUbtt S, which hi(hll(ht lUtai whars taTtnti InttltuUona, oa the a*«n««i bad
poor opanUni raaolu In tlM flnt half of lilt. Ihaia mapi ovarii doioly tba pw Tkw a
oaai ibowtna teoaral acanomlc itnit and coanaarclal bank Wflcnltiaa la nrloot (tatM>

r criteria ara mad to daftna anaa where (tnaacial InatlUitiona ara bavlai
dlfflcnltlaa bacanaa of local acoaoailc profalami. it la dear there 1* at laaat aome oaoaal
nlationaUp. In araaa hna*il7 dapeadeat on certain cnrrentt; depraaiad indDatrlaa.
financial InitltMlou ara aiparltmclnc far mora tnrable than tboie located elaewhera or

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capital ituidaidi.
r, iB Ifat Cooanu iMldaMt

ir Ik* tad«nl iiiiiBiiiiiilil buk nggUton adopud
• fNpval ol piiMT lt Bcy fBibiiwc> u iwlit "baric tlly loiwdi waD-mnatad baata to
waifhar tUa uaaatUowl p«tlad* at atnutmlit harttUp to p«fU •! tba cmbut demtaatad
br *ka agilGdtara a«d tlBbar, aaatcr predneUsa wid nWnt te dwW a. (A daaotlpUoa of
tba coBBMrdal baak RfaUtar*' fotbaaraac* ^>a aad at otlMr ralsvaat (otbMmaea
■edab la gtrw In Appaodiz A to tUi rapon).

In aa lavlamastlai itataoMnt, tha ComiiUtillar of llu Comncy daeUtad tkat tha
prasram'i alamanu Inclndad ancooratiag baak* te wort with troablad ic'lcoltnnl and oil
aad lai bormfart. aiubUatalnf ■ capital foibaaraaca pollc)r> nUxiBS 't*^'"! llmlta. and
anmnraatnt *tba oaa of laBaraUr aceaptad aeeotnttnt prfoclpla* *Alch may parotit loan
watu c t u riagi wlllMnu lati mrotnlllon *

It rarmally acteowladfad tkat 'capital ibmild ba oaad dwlat
loan Ipiiai aad that capital taplanlihaiaat takaa tlma.* It
d that tha dec ureold not taka admlalatntlva aetton to anfarca b
a wbM* tha bank la ao asrtealtnral oi ~

' "" ~ n o[ tha acmomy. Affactad banln «

1 panriutosi la eanain clramnaacai, to contlane cairrlnc ilow paylnc c

Tha actloo* n
■bfaatUni ipac
laaartplfW.

At tba MaM ttaa, thaaa lU^ Moold altoviata or poaaihty allodaau loma potantlal htma
bofdaaa aa tha FSLIC. That* la eliallaD(e anonch In -■'"'"'""i tha fonda naadad W pay
far tha — ■ "ilri or doalai of laatltntloaa which aro aliaady inaolvant. A (mdinc piDpoaal
for that pM poaa la praaaatad latar la thla roport. It doai not maka unaa u add to that
bofdaa aoaaiUy maaacad laatltntloaa wUch ai« tamporarlly naabla to maintain tha
tagnlalaiy ataadaidt of (ood baalth bacanaa af caflaaal or othar taetora bayood thalr

la proaraliatlai tha comswrdal bank fnboaianoa inia*. nioUtary ofDcUli attnad In
Itaa that allowlac anra frarkoot tlma far iHtitiUloQi affaetad by dnratmn* la tlM farm
aad aaam aactoti of Iha acfloDmy inrald pay off for awynoa bacawa thaaa piablama ara
tooporary. Olvaa aniiatft tlma, tbwa ofneiali naaoaad, tba aaiata than parfarmtaf
poorly woold racovar thalr ralua it iobm point adthln afawyaan. mmat of f thoaa laaM
and taracloaing on tha tarman and oU and ■■• prodacan now ccmld convanaly raanlt tn
vait and mawcaiiary looai for tho banka rad thalr Loturaaea a|mcy aa well ■* for
. tUlN

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UoraoTU'. tte conmueUl bute nUmt*A ta Om fadanl Minkun' foAaariDca foUer
tTplcally hold u caliiural fer theli loaai tha fwDMn' huoarti or oU lad (u yradvesd or
aqnipmnit nMd by Uta bomwliii flnni. Thaia cpnWKkUUai eta (IsctnaM wldalT in vahw.
daptndlng on matlMi cnadttioai. world maikau and othei f icUn dlf ncvll to pndlet.

On tha otlMT hand, loaa ponfoUoa of MTtaif * Imtitutloiu tra lifietlir Mcnnd bj land and
boutai. U nal Mtata maikau nun down, the valua of tho loan collatanl can dnp off —
In lomB caiBi, nbaUntlalty. Bnt lonw maAetable vihw will aIw*Ti nmala. Aad, iliian
tima, tha valua wlU Ukalr iwlng back to or bayond Ita fordar laraL

If than ii 1 public policy JnatiflcaUnii tar rtratehiat out to aaran 7b«ii tha tlma avallabla
to pmdantly manaiad eommarcUl baaki to woik through iMt-plAgnad portfoUoa of farm
aDd~oll tad ■■( toana. It atanda to reaaon that tha caaa for aztaadlni a tlaM-bvrlBi option
to relldaitlal mortcaia laadait ii all tb* mora eonipolUni.

A> aotad pravionily, In 14 ttataa, ttw aavlnca InaUtntlona poatad lonaa, on tha avaraia, ia
tha tint half of IfM. Tha auat cUaalflcatlon rafolation makaa Umm dlfflcvltlai avan
mora laraia. Tha combination of tUi refnlation and a dapraaaad local aconomr maana
that tha ratnlatora can, in affact. foica almoat any tnatitotlon loeatad In an ana
underlolBc aconomlc difncnltlaa Into inaolvancy.

OtM bai to quaitlon whither plactaii otheiwiie loundly and conaarratlTaly nm tnatltntiaM
In tbli iltnatlon li in the lon(-t«nn Intereit of anyone. Including tha FSUC Inanranca rnal
— particularly mtwn tha Inaurance fimd la limitad In the ameimt of pioblem caaei It can
handle In any (Ivan time.

Theraforoi m wall ■■ denlopini a fimding itratefy for the FSUd tha U.S. Laagtu li
racommandlng meaanrei to allow biatltationi la troobied icoaomie uaaa the opportmlty
to work throng thair problenu. Thii pUn ii Urs«r than hut ■ fbiaaclal aotnUoa for the
PSLIC. It comblaai FSLIC timdliif sMiiurai wltb a work-out proiram to praaerre aa
many hoaeatly run Initltutloni la troubled lacUoni at the coontry aa poaalbla.

SpacifiuUy the I.«bciu recoi

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.. .., ._. _ D r»no«aal tram

Tiiitntliw W A* tNvtn mlaaU Padwat Rem* Lou Buki tinea nth daUiat<d
kaidUia or tb* irabUa eao ba mseh moia aftacUva thaa m eaatrallaad lyitam [nmi

. , n li that It ■revU allow toma laawaj for naaacUl dlf nenlttai
« onuM* naaM*n*at'> conuol lAUa ■"-'■"*-*-i Um ngnUtM'* abllitr is
Mc* tt* can^ttlwi of an tutltatloa. Tba ConrUoUar at tha CnnncT alto polBtad ovt
tUa advaaut* lo Ita foilNaiasoa prasranu

'...tba policy letalM ulatini flnaaclal praMntatlon iDd
craatM na laeoMtotoMlat with lananllr aocaptad
acciMBttit pttodplaa. Tba OCC ballaraa that
matnumlni tba taUfrtty ot ttaaocUl aUtamanU ia vital
to aiwrtm co n fMa nc a In lb* banktas i^itaaL' [Padanl
laclatar, VoL SI, Ho. 7a, p. ISW?)

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ta tha 4cco»wHin w*« ^f man Imi

today — tha in imiiIiii for pnblam

icconntlBl pRwadara* mU for far mora clconMa tiaatowat tkan dooa QAAP. '■^^■^i

BUST aai[lasi InattnMon miaaian taava lUtad Ibal, bi Ihe accoontliii ipbara. thay a

It of all poadbla woiUi.

i^Pfi..»^ .^..^jy^ yrrr""" ■- ■

Uadar CAAFi a loan lecalvabla It eantad at tha loiur of coit or 1)
or 1) a cairylsi vatoa datanniiiad la accerdaoea with tba provUlona of SPAS 15 ralaUat to
tmnblad dabt raitractaAif *ihora tba proportr la orlflDal obUfor ramalna tB plaea. Tha
dUfaranca batwaea Uuia GAAP ralnatlon mathoda aad that raqolrad mdar rntnUtniT
accomtliii practical ara ootllnod In datall la AppaodlK B.

Tba valtdnc as Iha bad* of not naliaabla valua randta la the liwllliiUin diaconatlas
totuia net cuh flowi fram the talet ud aat i«*einiai aMocUtad wttb tba property at tba
inttltatiaii'i co«t of money. Since the iMtitaUon'i coit of fadi will almoct atwayi ba
le«nr thaa tha dlacoimt rata uaad by an appnlaar la appraialai a pi n pert j oa tha baala of
R41ci tha tuat'i nt|nlatary canylnf value will ba ndnead to a level below the canytit

Ai tha detailed azaovla oa pa|ai 34 and IS tn Appeadla B dearly ahowa. tha net el
mer tba term of the loaa of each of Iha accooatlnc laathodi la the aaaa. Whi
allmtliatad la the method* allowed under CAAP li tha opf roat hit to lacoiaa aad aat m
which occiu* nader reinbtory accontias n^nireiaeati. Uader GAAP, the toai la ip
OMre evenly and tha butltntloo'i booki raHact anet ourylnt vatoaa In a ma
coaalitefit wlUi the pnctlce at eoaunerelal baakt and other baataen arganlsatloaa.

The example alio >hawi bow Um coatinuatlon of refnlatoty aaaat valuation tecbnlqnei
alfolflcaatty exieefbata the ihoit term deterloratloa of the FSUC by overttatl9( Ii
when preUemi are lecotnKed. Later, when the aaaat la told and tha dobt repaid, par
too laU for the taatltatlso tavolvad, tha PSUC urtll racoid a lala which will belate

Tha tUid part of (he recommaadatlon aalt* that tha Sank Board eooflna lu nae of tha
■ebedaled turn eivroecb ta ttavle famtty an* two- to loar-family ra iU e n tla l mortcaiet
ttBce It It aitfeih o w for applieatlaa to taaau tabject to the ar--~ -.—.«--..—

t rainlatloB In lanaary IfSt. the Bank

1 tte adoptltMi of tha rIaatlflrattfTB of a

tawtltttjaa waa raqalrad to lacraaaa Iti aot worth by 10 parcaat of aocb Itaan.

ib,Google

It (kUr cUfinrf u b* 1 vuUkto (I

t ud SO pnuoU tor > do«M«t clurifluttM. Am uMt i

Hfertaadu# will b« truWd ftU, u ■eh«dal»i Itaai bav* bxa traud in tb* puti
nh o( 30 rncMt of tba n ' - -■

Tb* frabUm ulMi *)bm tb* c U «m c*ttow of mmU mnUUaa and • ieb*<ul*J 1MB

Ma*' W f aD Id tb* dogbUol catatoiT ud ths b

"• bM «a«U itUl b* hid«ad to ba ■ icbadatod Itni nqaWM «

M tbat could b* tTQidod thmiill tffnUTI n

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PIQFOSAL POK THl PSUC

0««r tba lut Tur nd morai then bare b*a din pndletlaui about tha nnaaeUI
coDdiUon of tb* PSUC. ComnwaUton ban lUHattad that tba fimd unold ba down to tt
bUIloD In wable monrcaa br Qw and of IIS*. Tha raalltr ii Ian iiim. Tma. r aaai r ai
daellMd br fS.f bUUoa, tiom tT.S blllloa at thi and of flical 19U M (9.« bUIian at tha
and of flacal Ifat. Howorai, ai BddUt I itaow)! iha PSUC had cMh and lovatamant
aaciBitlai on band of $A.t bUlloa at Uw and of Sapuabar, IW. Onrtac fUcal Itlt. tU*
Onra daeUiiad br tl.l bilUon. Baeuua tba PSUC bad tnoomo of tl-4 bUllon, ttaii inaan*
- d tB.S billion dnrtni tha flacal yew.

Haaathalaia, (Iven tha fioblama factng tha PSUC, tba U.S. Lea(Qa eencadai tbat
additional raiovrcai aboald ba prorldad for tha fund. Lait pear, tha Laagna davelopad a
plan to proTlda the PSUC «rtth tha tinida to handle lu pioblanu. TUi plan woold maka
tha nsM raaoorca* ■Tallabl* to tha PSUC for problam niolntlon orer tba next aliht
yean ai prorided In eke racipitaliiatioB propoiBl davalopad br the U.S. Tfeanur aod tba
Pedenl Home I-oan Bank Boud. Iba main difference In tba tm plana trai ooe of tlraioc.

The ma|or benefit of the Laasoa'a pnpoaal wai that It wenld ellmlnale the need to boiraw
tha tlO to %\S billion anvialonad in tha Treaiunr/Bank Boaid propoaal. TbeM bonoartaa*
would biVB bnidanad tha bndnau wiU> base Inureit paTnwnu for 4 ta 30 or net* yean,
bi the U.S. Leasne'i altamatlTe. the (oadi naadad wotdd be coUectad on a pay-aa-yoa-to
baali wtaUa itlll allowtng tha PSUC to raaolva caaaa to far (reater vohnna than it haa tn
tbepaat.

Iba boRowIni approach of tba AdmlnlatTatlon propoaal waa of concern to othaia taaaidai
tba MViaii tniUtntion bvalneu. The Congrenbinal Bndiat Ofnca placed a mator
roadblock in tba pnpoaal'i way when. It raled Uat Inly Ihat tha bo r r o w in ii could not ba
aeored aa rece^u by tha loreininent for budiet pnipoiei and, at a remit, apendlni the
proceadi In ranMaf caaei wonld add tc the federal bad|el deficit.

Tectanlcal cbaniea to the piupoul lendtad to a chansa of poaitloo by tha CIO. However.
the CBO labeled ita acceptance of Um rariaad plan aa 'taehnleal* and a 'eloia call', the
Cbalraan of the Home Buddni CommlttBa eaUad tha plan 'all imofca and mlmna*.

In tplla of tha CBO'i mtnctant chance of haart. tho plan waa by Iti natnre ooe of defldt
■peiiillni Pederal bodiat daflclu have been a cancer on the AnMllEaa eeooomy tor tha
laat decade. The ptaUoaophy baa been coe of ipend now and pay later. Slmilariy, the
Traanoy/Bank Board plan called tor puihlnt the eoit of coirent eaae reeototl on lata the

Over the laat ureral yean, tha U.S. Leagoe'i hl^ait political oblectire bee been to
paiMade tba Contieai and tho AdmtmatratloB to let the fadval bud(at dandt under
contioL It ibould bo no ntpriae that tba Leacoa taela uncomfortable about tha
hocToertnga to tba Admtolatntlon propoaal, and would advance a 'pay-aa-you-so' approach

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• MO mala eilllclimi o( th* Laafua't pay-u-Too-go ■pftoMb. Pint, ciitlci
ehM(*d thK tba fnpaul did not pnrida •ooa^ naonrcM to th* PIUC in tb» Mriy jraui
to budla lu mort ImmadUu praUamL ft vu uwcud that ti woold b« bom Mpoft
la tb* long no aot to piovkt* tta PSUC with has* anonou ol (oodt w fnot •!

dult with In u •Qodltlou fuhioa. TU* eoMMtion 1* dMlt with
d that If tho PSUC'i

id lu potttlo* U

MO U than It any way to mold Ita yrfor pnpoMl with that of tho Trunuy/BaBk Boatd to
donlop ■ Mlntlan (oi ttw fandlnt Modi of cha PSUC that »U pafUw wvald acMpt-

Tho molt U a hutnc at llM *pa)r-M-TDn-|o' ■ppfoaeh wltb a modeit bondlni ipproaeh.
To accuntaty nflact wha 1* footln( thi bUl In tUi pUoi u ladood In tha otlwr pUni. Mt
ba«o callod tUi the ■Savlnii ^Rltatloo SoU-Kelp Plan (or Pnodtng the PSUC

: ftU nfttt«UlBr|BH« ftt
lag flB«rJ Plan. Thli pienam

■Tftfin fn"* to m candlUon

Tba G«n-St. Ouniata act taclndod laainacB tn Sactlu 13t pamltttnc tha laeondaiy
loioffo to ba mod on tha lama badi at Uie pilmuy naarra. PnvlonilT> tha Mcondaiy
loioffo wai to ba tappad onty to eovar PSUC louai and *rai to bo naod only to Iha extant
other fundi wate onaTallable — nttflctioDt flowtng (ram tha fact that cha ftmdi In tha

TlaHLJMUiByflM in i>na<a w bBtejaanaM un-uaa!

-anitena to earn their teTMtaient la th<
" ' > lt*2 chaatai were InitUlad a
for ihilr coatlnuitlon In cha c
baina pnvtdad to the PSUC by ihe fvndlac pratiam.

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anUwaf linuarfl. IW.

la daallns with tha caieload of tha FSLIC an tha tchadnla common to both Ou
TraaiuiT/Bank B«u>d and tha U.S. Laasua venloni of «i FSLIC racapluliaatlon plan, It li
Important to racoiniia tha oacautty of ratalnlnc two prorUloiUi anactad in IVll aa pan
of tha tax coda cbasiai at that ttma. which radoee hai4 dollar FSLIC ontlara In pndilem

That* tax coda prorlalon* an Sactlon S9T and Saction 3iB(aXSXD)(lU. Tha flnt aztandi
tas-(raa itatua to FSLIC dollan a^andad to naolTs a problain cu« aiMrthe aecond
rannita an acqalrar of a problam caaa to oaa tba ihalter of tha nat operatinf toaa
eanyfofwaidi of tha acfoind Imtitntloa. In tha raceatly adoptod n*itlon* of ttaa tax
EOda> thaia two provlalaaa irara aztandad vntU Jannuy 1, 1V8V, hot It U ««a*"'i^ | T it
MWand tham for at laaat a taitliT thraa wan, aa arirtnallT racommanded W tha Traamtr

Mttandth m fnrt^ thraa tam.t ■ ailriM t otMnaided hr fli T ■HITT'''- U

tha FSUC can b« mad to maX'Mm '""■t fa caia raaohitioni.

Tha Taak Forca racommandt tha foIlowln( thraa part pn>|ram for hmdlni tba PSLICi

The bnilnai* weald cotttlima. If naadad. ta my tha apaeUl teanranc

ffti ttort iCTtod at the t>.rt«.xn. xi l)g5. on the toUowin« abf-Taar Bhata-doani lehadnla!

1987 ioo.oim

1988 U.88%

1989 tt.«7«

199S ft Tharsaftar O.OON

TUa woold prarlda tha FSLIC with tha tollawtni fondi from the ipacUI
(aaanmlni that tha boalnaaa' dapaalti contlnnad to itoh at thati' aatimatad 1981
percent par year):

1M7
19M
I)H

1)90

1991

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• of thalt total UMti. Oa tlu otlMr h*»d. *

1 br b«ak raiaUtoty •Mbofitia. thM« k
J da facto laa a nneo of 100 panaat of Ua W Httw of th* lu|Mt m
:• too bl| to ka allowad to f aU.

Tlnwi Um tTpleal tasl

H Innitatloa f acaa tm InaqBltlM in daroalt in

rata li at laait ti

The pnUam with nch a lyi
li that It aBeoaraiai itranii
■TMaa to that of tha FDIC a

. in addition to tha obrloBi on* of toaqmuUa traataiant,
aitnci IntitUloat to adcrats fnim (ha FlUC-lararaaoa
■ tka7 can, at luat, *•« an and to tha facial aiiiwmant.

TUi la OM of tba tacton that moat tnnblad tha U.S. Laa^ua about tha boollni wioach
In tha TnaaaiT/Xank Boafd fiUn. Canyini coat* of tba debt mold ba lo U|h and
"-— — - inch a taiia ano«at of tha tneoma from tha VSLIC't rafnlar pramhim that It
aaaaad llkatr than woold oot ba an aad to tha apaelal aaia n na nt In
tMora. TUa woold aac0Br«>a ttnag tBatituttoaa to laava tba tyatam. i
FILIC'i dlftlcnlUaa and pmbably toavlat It with luafnctant raaonreaa t

67-BB4 0- 87 -

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Tb* hnidlni catpontLoa would htm

balmr miim v«clflc 1*t*1, to rail* v to tl-S W

tte pro(nm and uoihar |3.S billlso in tha u

Appoadlx B owtUnai In daUll )ww luch ■
tb>t if tliB Bank Sritam'i euniati do not irow quickly oooiiilii It li potilbla that tha 10
iwrcant of lut Incanu dedication mltht not b« itifflciant to rotira tha principal and
accmad Intaiut on the booda. Ja that caaa, the dlffMsBce woold ba made op bp
aaaattmenta on tha bnalaaat tor tha ihortf all. In any year in which tha bnalnaaa had to pay
* voclal mannwipt. any raqnlnd payment to tha timdlni coiporatloo to make op a Rank
Syilem dafidoney in lOTrlelnt tho debt woutd rapraiant a (Int call on the facial
aaaaaamaat — In othai wotda, tb* payment to tha timdlna carparatlon and ttaa Qadal
atseiaaunt wovM naver exceed one-el«ht at one parcent of dapwlta, tba itetnttny limit
on tha ipedal aaaaiamant.

JMPt!

mth the uvtac* tnatitntieo boaiDau bains- pot«ntially aakad to coatiibnta faoia amomti of
raiouTcei to the F3UC> the Bank Boaid ihonld be accountable For their nae by Uie
inmrance fond. Thafefore, an oreraiahl l-ftrmnlUTT wfth tepr»»«mmfa» [n»m ^^^T
buiinan would ba mtntoraUy fltyi'fUr'lf , 'llf «*lfT pffirf would be raanired to report

tffitllLll ba mtntcrallT a Ubllth , th Bank Bo e antred renon

' ' ' " M eoreoratlon would be tqMirffT ir flimal Cgimenlonal wtntliff ■

a taring! tnatltationa lelf-bolp piosram are achematically

BBSQUBCES POt T HB tSUC UKPgR THB INDUSTgY SBLF-tCLF PaOGEAM

The [ollowlns table glTei tlie total anemal reionicai available to tha FSUC orar
dUfeient tlmefranMa [or the lavinti lutitutioo taU-halp program u coopand to the
Treamiry/Bank Board propoial wliere it mi conten^latad raiting tlO Wlllan to tlS billion
in bomminf* over • (our- to [iva-yetr period;

Ca«b Flow SeU-Halv

a Taaia I B.V BillioB t *.7

S Taart tlS-* Billion tl«-* Billion

10 Taan $30.0 Billion $19.0 ~ "'

10 Teara tU.7 Billion tl>.7

IB other worda. orar the ihort-term (1987 and 19SS)i tha Indnatry lall-balp program w
proilde (lightly mora raaonrcai to tha FSLIC than tha Treaaury/Bank Board plan. It w
•1*0 provUe aigaiflcaBtly mora over the long term ilnce the PSLIC would not bnnli
with paying the intsreat on tlO billion to $1S billion In boirowlngi. Only vifaen meas
ovar a ftra-yaar hoiisaa doaa the plan provlda laaa than the Adminiauatloa plan.

ib,Google

^nfun^qgj qr tm lAvmoi amrniTMiii nLg-mt.* ■■na»*i«

Oa« eilUtliM Ivtalad tt tt» l.at(Ba'i ptj-u-ytn-gu prapoul wu that It did sot
liuildi Tiifc MOMT Ib thi Ihott im [or tb* FSUC to >ali« lU moat pnntD(
ffBliliMi, adw uH, tha pncadlai n«nr«* ibow thtt Uw oav *«U-balr pt«iTun eoold
■raflte tb* PfUC tiUk azunMl e^t«l ot- 1'-» MlUoa ovw tha oaxt nnrjuit, tlOO
• tha« in tte Tmamr/BaBk- Boaid pi a pM il If that profOMl «TWaMd
' " ' . iTM If tlS Mllloa la bonowtai* ««n nUad tndai

T 1700 smiM MM* wonld b« f aaaldad to tha FSUC

(, tha FSUC hai lU ai

Ttaa, onr tha aaxt two yan, tha FSUC Aodd hava u Inflow of foodi of |1D Ulllon
01 mora, am avanga of M bUllon far roar — M-S MDhw Bora la aifandllarai Utaa
tha raaocd laaal ta tbcal 19l«.

If tha FSUC wmn actoaUr 1
proUam 4Mat« — m ai*M
raaotatlM — than to a taal

Mdmgwanr, obaarvara doAt that tha P8UC Mn ««ad man Umi (S bUUon par yaar

naff Ita toy Faallleaa. Alae tt nwt ba ramanftarad that ntU ItU, tha FtUC
haadlad Boat of Ita problama thraa^ mar|an. Al a (vcatt, tha FSUC could
traditlaaallr aparaU Mth a iniall >Uf[ bacaoaa U did oat ha*a a Mf llvaidatiiia
oparaiioa. Aa comparad ta tha FDIC, Mth Moca than 9,000 aavlaya** mmUos oe
baak faUaiaa. tha FSUC tacaload a tnnaadaaa atatot Itom tha todoncy Uuonib tba

Al a raaolt, tha FSUC did oot badn to faea aumai w aa ot aariaaa liquidation
>utU I9S4, Htien pnUam eaaaa atialni ftom naiative iataratt nta ipiaadi
ba ovanbadowad bf eaaai trpiflad br bad aaaau.

k l aa FOtt M , tha Sank Baaid aad tha FSUC (bowal eaoaldonbla lataaatty 1«
I— OTittTa wayi to haadla tha naw tItaatleM. In yaitlcnUr, thar lattlatad tha UCP
prafram and lat op tha Fadanl A«Mt DIa p orttten AiaocUtloa to lala eoatiol of
prohlam ImiIiiiiIimh and to cnmn ooB-eandBf MMti to aandsi aaaati.

Naoathalaa*! Uka aor bnatBaii or tovammani orsaalsation thai f«ca> rapid grawth
and a radical ehaaga in Ita opanticc am1ii<iii>aiil tha FSUC ihoold bo raonanlaad
aad ^datad. Whan aa BoUty tram *«nr rapldty. It ii dltflcnlt to ouBafa tha irowth,
aa typlOad by tb* pnhlaaM at thoaa MTl^i iaitltatloni that tran rapidly.

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lb* B«Bk Baud twi • uik (ore* mrkbic on * raortioliaUoB pUn (or tte FSUC.
TUi li commandabla uid tlis U.S. Leafus wUi loiiport that •ffoit. UaaawtiUsi
howvWi It do«( Bot nuln mom to torn ovar Utte nuu of monoy to in orfmlsttlon
that dosi not >]9ou'> at thl* Uma. to b« capabla o( haodUng and ipandlng luch nmn
•fdeiotly.

In addltloa to tba addsd moorcoi the profram providai the P3LIC, tha agaacy aUo
haa available iti own caah rewnicai ~ S4.i blUioii at the eod at SeptambaT 19S6. It
la trua that tUi fisara ii hlghoT than tba official raierrai of tba bunrance fund. That -
la bacauaa lonu of Itt cath ruonrcai um aa backing for lou coatinfaoclaa for tha
future — partlcularliri tha (anenl tou conlliisBncT of Jl.i blUion that wai act iv at
tha and of IfSS. In an accomtlni tenia, boMaver, iMi It naitalr taUnc fnda from
ona ganaial ntaira — the Iniunnea raierve — into another saneral raaaire — the
contlniancT for ftttnn loaaei.

Thui, orer the next 10 yean, the FSLIC will lure 19 to tSO billion for u«e in caaa
raaolntioBi fnnn axtanal caih flow, Inraitment Income, aatat ditpoiltloa and tnun
Iti Initial raioQicei, Including tho» lel ailde a* taierrei for future loaiei.

Another ciiliclim leveled at the League'* pay-ii-TOU-go propoial wat that it tacked
fleidbUity to pnvlde even more fundi for tha FSLIC If iti problenu require them.
The Tittitury pointed out that. If uecsiiacy, lt( program could ralia tlS Mlllon or
mora Initaad of tlO billion through boirowlaci In caplul marketa. (Already
concemad about the ImpUcatloni of borrowing tlO billion, laTingi lonitulloa* ware '
not raawored that the borrowing aipoture could rlie te tlS bullon or mora.)

Iha Leaane'i roTliad nroaram conierrei flidblUtT. It doei not coaalder ^"l->'jni *1\-
11.1 billion euirentJT hiM || "fHIrt -flmtllBI "ll ^b* Padaral Heme Loan Bank
Srttem . tf tha fS billion in boirowlngi that the League'! program could ralia over
the next two yean prove Innifficlent, Consreii would have the option of ualng the
11.1 billion In retained earning! aa bacUng for further bomwingi along the tlnei of
tha Traatury/Baok Board program.

Furthermore, If the flO bUllon or mora provided to the FSLIC over the nan two
yean ii not iuffldent for the fund'i needa, than the League conaidan It appropriate,
that the Congren ihonld ravUlt the itiue rather than leave It adminlatrativaly
poaalblBi without Concraaakmal revlaw. to canthme burdening the lyitam with further
huge amoonti of debt.

Ovar the next 30 year*, the Leagna'i protiam la far cheaper than the Treaniry/Bank
Board propoaaL nhen maaaured in ^reaent vahie termi. the coat of the fecial
■naiiptaata and debt larvica under tba Laagae'a alternative la far laii than that of
tha AdBdniitratloa't — (9.6 billion compaiad with tlS.S billion.

Over the next ID yean, tha League's propoial could have the Bank Syitem contribwa
(14.9 falllloa (with a currant value of tS.B billion] to retire tba debt. Tha
Traaaury/Bank Board plan would tap tha Bank Syatam for H billion. However, the
latter would be over a much thortar period — thraa to five yean. Furthermore, the
contribution of the tit.9 billion it contln(enl on tha Bank Syitem being able to afford
It. If tha Bank Sytlem'i einlngt do not gniw ovar tha twenty-yair period. Ita
contribution would be limited to fS.S bUilon. with a preient value of only tl.' blUloo.

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fbM— oat Dm vmUI ■

Imennti: With tta iiiiiilMilii 4«kt Mfvlc* borta »dw tha UnteUtimtloa pUo,
n baUn* tha powiWHtr of fhMlBC down ad •nunattr allmlBatiDi tbi
MMttfarawra ranou.

nttai > Hnt uU a

iw Ibu tb* MOM b«dtM MOttaf fMhiMM ftom tb* CmcHMlSMl B«dcM Offlca.
With (b* UiJ^blnrliiii flu. tba CBO ■•*• oatT irnlUm iftnnl Uit yMr aad
eodt cbn«« lu porttiM ibta TUT U It b Mata MiM «M tor as ofMsM.

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APPgro g ft; KQDHL8 OP aUPRKVOORT FORBEAIAMCl

Tha lAtUtlonuT tplnl o[ tha 1970i and lu cnn In the ISaOi Iuts nqslTad ttiat policy
makan trffi^ with many cUiloutloni la tin ecoBomr. Hni* unomiu o( Wqwyar funds
hava baan pound Into tlw taimlag taelor In u) effort Co pnwiva tha nation'! agrtenltural
tatTtitncnsa. HowaTsr, la u age of hlitoiically laria (edsral bnd(et deftciu, inoit
efforti to orarcoBia econnale dUIoeatloni have takm the fonn of tbne-biiTini itntchout
■tratasiet. Than ttiataslai prorlda roodeli and precedenta tor helpinf wall-manated
MTlnai Inatitvtloni woA oot of problam lituatlon* vrtiois came ll beyoed tboae
iutttntioni' coatioL

B. The laclilatad aecouatlnt ehansei for the Fann Cndlt Syatsm. and

C. The forbaarance guldallnei adopted by the federal commarclal bank reiulaton.

A. SAVINGS INSmunOHS' KBCOVBBY PBOMBARLT-19a0i DIFFICULTIBS

In 1981 -ti, the yaat majority of tavlnf ■ lutltulloni nif fared deraitatlni oparatlng loaaai
aa a remit of a pioeaM of uneven deratulation coiqiled olth IntereM. ntai at Uatorlcalty
Ugh layall. The canylnc coit of nawly-derepilated depoalu aoarad irtiUa tha rauun on
malnty long-tann flxed-rata auata remained relatively itainsnt.

Daring tbaM two yaui> FSLIC-lniurad lavlngi Inililatloiu reported bottom-Una lotMi of
tS.9 bilUon. a itaggailng If .7 parcant of tha aggregata oat worth of the builneu at tha
end of 19tO. Indaad. If tha markac value of their portfolloi were computed at the height
ot the Interait rate cycle, the vait au)oiicy of lavlngi Initlcutloni would have been
Iniolwnt. Soma obiarven predicted the and of the lavlngi InaUtutioa budnau.

Paced with a dliaitar of Ihla mignltuda, the only practical ulotlon waa to buy time and
ilda tha crtila out. Congrsii adopted tha Nat Worth Tartlflcata program, and the
ragulaton allowed many Inatltutiona to operate below tha "'"*'"'"" capital itandardt.

Tha raiultt have bean gratifying. In the tint half of Iftl, FSLIC-faiiured tavlngi
InitituUona had an annuatliad ratnm on aaieti <ROA) of -0.B3 percent. By the flnt half
of 19a«, tha buamau had an KOA of tO.SD percent.

Bven mora ramarfeabla li tha turnaround In tha builneu In lome ttatai. In tha Itgl-g2
farlod. tha boalnaai In tha large 'mat-bait' itatei axparlancad among the most
proaouoced dUficoltiaa. For Instanca, imtltutlona In Maw fork had an aggregate BOA of
-1.51 percent. ^ In Ulinoii, ot -1.0 percent. By the flnt half of 1986. Inatltuliona In
Haw Tork postad an aggragate BOA of il.lt percent and Klluoli Inatltutiona an BOA of
+1.11 percent. Prom being among tha wont In the nation, tn aaily 148i InatltoUoni In
theia itatai tamed In toma ot tha bait parformancei.

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■UiW Omoa (OAO) «

tk* rsUC "w m fco w id' at laut Ml tbilfu tat wn* m aU of Um p<
AUoiMdi Item tb« ohuca U imfc back to hulth wai obrloMlr bowflcUl to t^M
fa wt ttotlBwi ad th> MwumuBlU w ttoy •or**. Howivar, tba QAO nyoit bam eloqaaot
tMtlmoar to tha bwMati to Ow FSUC itaalf ot taUof a nadwl appnaeh to pnntdtdt

Tba tlma to diifoa* of taUtuUMW cilpplad br Iomm tea to nasativa ipraadt waa nat at
tha paak of tba latanat rata qreU la 19ai-a3. Sj fklni man a{ a mit-aad-aaa

I, tJw PSUC land tttaU bUUoM of datUn. SyacUlealtjr, tha OAO [ond that, la
I that tt «labMd tha fSUC mnhooMd for aU of tha yatlod

A 1>U aad 19U. tha FtUC n

Traaamy. for eaanvlak It w
a IntotMt M tho food'* ai

addlttOMl fl.T MUioa lo lauiaat om tha thraa
row ported to Dotaolbar ISIE. ta total, wa
aatlmata that tho FSUC M«od |4.7 Ullion br
dolarlns raaolatloA of 107 of tha lawlTaat thrift
eaiaa ta IMl.* (*Coat to fSUC af DoUTiai Action
M haatWM Savtaci taitltniloaa*, OAO. Saptambar
1*U. p. 11)

It aUght ba aotad that Iha aittmatod |4.7 bUlloo In taTtnga almoat meiMlr e^ul* tha
$4.1 bUliga )■ eaih and (OTainma&t lecmltlai tha FSLIC had aa hand at tha and of
3«vtaiab«r 19M. Won tt not (or tha abora MTiii«i, tha FtLtC woold now ba totaltr out ot

a tUla, tha SAO itndr malatalna that what Moikod In tb* palt will

1. La., that adopthii a tlma-borlni Kntao for tu corrant pioblaau

t rathar than aava tha FSLIC moaar. TMi GAO coatantlon U agamliwd In dBt«U

B. ACCOUHTIMO CHANOU POK THI f AUf CKKDfT STSTIM

In iva*. tha Cmaiaai pMiad tha Pun Cndlt Act AoMndnwnU, fai wUeh It latUbtad
nfalatofj aeeonntlcic pnnlalaaa tor tha farm Cradlt Syatam (FCSI lau tban a yaar iftar
It Iwd — -J-»-J that tba FCS koop Ita booki In accotdaaea with GAAP. Tha aaw
lafUlattoa allawad tha cfMom to dafar tha taeopltion of coitala Mtcati eoata and lotio*
i«p to a parted of U ytttt. TUa waa ''— 'f*^ to allow tha PCS to:

1. DoUy tba d^laUM of It* capltali

3. Dolay tba twod (or a (ovammaat bailout) and

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Ai > dadluWd Iradar u ths tnnittlBd >(ilculunl wctor, tlu faim Cndlt Sjntsm hu
b««i dsvMtatBd by loiiu. piDblmn luett and ttnncar bornnran flaafnc tha tyMem. b
tlu 11 mootht fnm tha ba(liiniqi of IfM thranch mlil-1186, (ha FCS had lonas of $>■<
bUIlon and for tha (oor-Taar pariod from 19BS threnfh IMS prelactad tonu of |t.S
biUlon. >7 mld-lMti tha iritam had noucenial and problam loafli of aboUlO parcantof
lU poitf olio.

Ik* tratam hat axpoaad Itaalf ta (Ineuaitoai i« lnt«nit nUi fef fODdloi vaiiaUa rata
loaM trtth lni(-tann flxad-rata booda. Ai a nnlx, it li da«Ur Ut br a iltfllnt O
lanatlan and intarait latai. Tha FCS hai an ovaihani a( laD(-tann> hich'cmt IlaUlltlai
acqidrad in tha aait; IVSOi. BaeaoM of thit tha PCS baa bad to charie abova-Buikat
ratal on lU loaM. Thil ha* oalnad bonowan irtth othar fondins mvcm to (laa tta*
■TiMD. liDraover, rach boimtran faar tha ion of tha FCS itock thvr an raqnirad to hwjr
la ordsr to boiroir [rom tfa* lyitam. Tha nnlt ll a claaiic adTsna aalactloB preblam
arldsoead In a rapid dacliniac poitColio o( loam oatitaaUng (fallini from tM billion at
tba and of 1983 to %tl.S billion In TiBia I9»t), a dccUna In ca^Ul itook and a ramalnlna
tr bale of waak boiToafan.

To baj tlma for the lyatam, tha Farm Cradlt Act Amandmanu of litt lefliiatad
accoDnlliic chansai for iha PCS. Snblaet to pilor approval from thair rainlator. tha Farm
Cndit Admlaiatralion, tha Farm Cndit bank* can caplutiis and wiita off over a pariod
of up to 10 jtean:

1. The dlffarence batMaan tha iTaTaie Intarait rata on obliialion* lacnrrad bafsra
faanarr 1, IVB5, and tha rale oa Dear obUlationi at Hie tlma of tha paiiaie of
tha laclilation. Tha confiranee report aiUmated tite difference to ba 4.4
percanc, (ID.6 percent on old obUiationi *amu i percent on current odm). Tba
effect ll that tha 4.6 percent annual exceu coat on about tSO bUUon of
obllaationi can ba aipanud orat twenty yeaia ntlier than orer the 3-1/1 year
avarats ramalnlnt life of the abllgationi.

1. The amount by wtdch the banki' actual loan loini and proriilon for loan lOMM
dnrinc 19lt thron|h IVM ascaed one-half of one percent of tha loan portfolio
(the laval ot^roriilan tor loiiai 'ordinarily* matatalnad by the lyitam}.

In both HoQie and Senate delibaratioiu on thi* legliUtlDn, an Intareitin* latter wai road
Ino tha record that eridenced a praimitic Wall Stnit view of the proceadinci. Tha
latter from tha Inreitmont nim of Rothacbild, Untarbar), Towbin, faic., lUtad In part:

*Wa an leu concerned with the acEoimtinc
tiaatmant of FCS Iohbi mder the now act Uian
the reality of the pi^Ien» the FCS entraatty

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n* Omt HbM tte ret nHht ^OoAUtf nfiln
fadwd flMAcUl 4wlwiiir« will ba poi t ge— J . nt
th« iMIHnnil bmtklai vac* tha act pnrldM
iBUHTai tba ret ebaacOT of nM*ina
iariataadaBtlT. SIdc* tha VCS cw fnd tba loaaaa
■fUk caah raUad is Om eapiul nwrkaU. thU
aolMlaa li wnifcaUa, and tha aoda cartataty twUTr
tba laaa,* [Coa«rawlan»l Sacort. Oclobar 17,
19M, I*. H 1I4M aad t ItMl)

C. VORBtARANCI GUOILINU FOE COHKIKCIAL BAHCt

I conealvad mora u ■ toeUl Inniiuca pmsnin ts fniruttaa
dapodUm ■ uf« tad nUibla tlMaeUl (jntan thin u * laiia npoallarr of caah rafanai
(Mdy to k« aKpandad U una tima. Ivan ta the wttaat that thar nMOAla tba operation of
a prirmta laaiimii a cuMnpaoTi Ibar could not ba avactad to finance In ■ ttavla year or
Mmal jmia tba oloalni or ncapltallnlai of lo man; wukaoad tmtlnBioaa.

Tha licond ■"'——— lupaiiliun face li that wUla tba ecoooniy and the Financial lectar '
fa^aOf bava baan «4eTla| • ptoleatad r«eo*WT> mm* ladaatrta* concantntad In
Mvaral rafloaa at lb* eawitiT Imt* boaa Uft baUnd. Coataqttantly, ■ f aw bondred utrtns*
J bnatradi af co qiinafcl al buk* that ba*« baan opantad unfnlly
I ua appraachlai

--l-i-t-l tbaia dUemmai, tba thio* fodanl coaimarcUI bank rainUtorr ifeoetai (tha
Fadanl Xaaarra Board, tba Pedant Dapotlt tmonaca Corporation and the Comptnllar af
tba CnnnncT) In a Haicb II, 19Bi )e»at poUcp itMamant oolllnad ■ pntram af
■aparrlaoTT forbearance towetd aeiMdlr nua«|«d banki baiTUr dependent on ■■ricaltw*
or tha M and gai Indoitilaa.

fai Ita fanplanHntliif policy ttatanant, tha Coovtmllar of tba Cnrrency cbaractarlsod tbe

n of lUi
n in effect for lavaa rean from lt> Inception In aaitr
i9<t. For at laait that period, the reiuUtarr aiendei ware Jointly acknowtedflni
It of tawtltutioai tlad to the dlitrataad tactan of tbe economy
I. Tbe Cenvtitillar farther aiplilned:

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'FnUami In tta* tcilciiltiml tcenomr ksv*
iSnctlf aflectod tlie b4nki that provid* flaiaelni
for the agilcnltunl Mctor. Savan [faunclal
pTouont on bomnrsn dopandsnt on tha
^■ilcnltural aconom; tuve raiulud in in tacrsaM
in Iota dallnvwoeiu. Aj condllioiu have
woimdmI, boirmran incnulntlr ttu Fonclommi
hUIb btak«n u* iBcrauliisly concanwd about
■upan4»rr aetlou that may mult fmo radncttoo
In thalr builB' cafltal aa a caB«aq;ii*ne« of Icwa
lotMi.* [op.dt. ff- 1S3(U-1J306]

1. '...■ncooraBinf baoki to muk with thaif tmoblad
agricoltural and oU and laa boiromn...*

I. '...eitabliabiag a capital Foiboaranca policy...'

3. '...anconraitDf the uae of geoarally accaptad
aecouatlni piinclplei which may paimlt loan
raitxuctuilnti without loii racocnltion..,*

*. *...reUxln« lending UniiU.' [op.dt. p. ISSDS]

Tba OCC and othar rafolatoiT aganclai mada it clear that poortr managad banki «
not ba abla to take adrantai* at the forbearance meaiuraa. Esamlnen and tapmir
tataln authority -to enforce lound btnklnf operating itandaidi. In ontllnini tha capital
forbaaranca portion of the pmiiami For example, the OCC itatsmanc. tald:

Tha OCC raaaivai the right to tannlnata capital
forbaaranca for banki ongagad In uniafa or mwound
or other ob|actloiutbla practice), or U It become*
apparent to the OCC that the bank ia unwUllng or
unable to convly with an acceptable ca^ul plan.'
(op.elt.pp. lSaO*-158C7]

Secognlslng the lagmentad economy and pockati of dapraatloni tha bank ragolaton had
aarllar Indicated thatr daiire to avoid doting well-nunagad farm bank* or nndnly
pratraiing hard-hit agricultural bomwan by tha twarrlaory action* taken agalntt toeh
banka, A toint itatemant in April, 14tE, for axamplo, randndad banki that tba fadarsl
ragulaton wantad tham whara pottibla to:

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Tk* capital f oilMsnaca

'—(etmaily actaavriadcM that caplul itirmM Im
■m4 dvint pwladi of wwaMlDr huvr kiui Iomm
«ad that capital fplanUhmant takM tima.* (op.dt.
P.155W1

Tha Mttaamt ««elfl*d that ttaa OCC '...will not taka admWttntlva action to onlotca
tha mtiriimnn cafttal raqntiemaata...* to eaaw wban ttaa bank ii an aiilcnltnnl or oil and
Sai laniar and Ua waakanad capital potltloa naolu tima prablami in Ihaaa Mcton of tha
aeoaomr. To qoalify, tha bank naat iatlify tha OCC that It U mll-naBa|ed and that It
hat a mnkabla plan ta raitora Ita c^tal to laqniTad lavala by 19t8. AppUcatiooi for
oapital [aibaaranca ara avtamatlcally irantad if ttaa Caavtnllar'* office doai not
impood (rtttaln tO dapi. Spacifkalty:

•riwaa prtmacT capital ratio daeUnai bolow t-1/1
PMcant to oa lota than ( panaat balora D
31, l*a7' [ar.clu p. lUOt)

proTldad that tha bank b

tlpan wiittan raqnail of an asrlcoltaral/oil and
■aa bank and at tha dltcratlso of the OCC, the
capital fortearaaea policy may be aztandad. In
iptrlil cifcnmatancai, to a bank dth a primaiy
ei^tal ntlo lower than 4 percent.' [op.dt. p.
ISMt]

The rafnlaton' repeated eaconragement over tha paat aaveral yean that banki enter Into
*i*Drt-aat* Bcneaenu with troobled farm aector bo n o— ra and the lle^blllty of the
capital forteaiance poitioa of the profram ware both made poulble to uma extant by
another key element of tha forbearance program: PermlHion for the affected bank* to
con tln ne carryini ilow paylns or non-payln| loana without racopdnint them on tbair

TUa aeeminc loophole In commercial bank ragnlatory diiclpUne occon bacanie of the
appllcatlsa of an accoontlni mle adopted In 1177 ai part of GAAP by the FlnanBial
Acconntlnt Standard! Board.

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The nitoi taio«m m SUUaMU of WniacUl AeeoiBtinc Stasdudi No. IS (SFAS IS), *ni
wtitMn la auace u kUow ccnttnarcUl binki to work thalr my out of waak at
aon-paiformlni touu that nnutiud oa tbali booki (oUowliii Um Ddd-lV7l)i collapt* of
nil uUU inTaiuaaot tnuti md iha loin dafinit by Naw ToA City. In effact,
toAeanace wai wfittoa into the f omul aeeouatint nlM.

Ja thaii (arbsamica pn>|TaD, tha bank rafoUtory agandaa advlaad tarm and anatir buiki
to conalder niint thli reitnctuiliic udmlqua to avoid a loan lota rathat than taUos 'man
pradpltoiu action neh as (oradoanra.* Uaa of SFAS IS la Juatlflad wbaia economic
coodlthnw hare ted to problem toana, tbe Comptrallar*! itatsmant reaaonod. It noted that
Iha "downtnnu* were canftnad to caitaln paiu of ttaa economy and wara axpactad to b*
Oort-Uvvd. Tba ComplTollar'a itatamaat daicilbad Ita podtloo tUt my:

■Altboncb OCC ezamioan wUl point out to
manatamant the waiknaaaas that may ba ptaunt
In loanii tha OCC doaa not raqnlTe fonctoaora on
collatoial or tha acceleration of tha matuilty of
loaw. Ttaa OCC raeoinliBi that downtnnu In
cetuin Mcton of tlia economy era eipeeted to ba
tfanaltoiy- Tberafora, lenden may find that tha
mo)t prudent policy U to natnictnn tha loan
tamu rather Itaan V> take more prec^toni action
luch ai foreclomra.* [op.clt. p. IS306]

avoid recosnttion ot

*TU* itandaid allow) a loan to continue to be
catrlad on tha buik'i booki without any Ion
neosnitlon if Che loan la formally restructured in a
nunner so that It Is probable and estimable thsl
the borrower can npay the loan under the new
terms, and that the total future esah payments by
the borrower (ptlnc^al and interest combined) at
least eqoals tha loan amomt on the bank'a booka.'
|op.eit. p. 155D7I

Is other woids, while a suhalantia] portion of any noo-payins loan would noimally taeve to
be "written off or deducted from a bank's Income and capital as soon s> it bacoous
apparent that it will not ba repaid or that tha borrower cannot meat tha interest
payments, a loan eata|orlzad aa a restructured troubled debt can continue to ba conntad
as a good asset — even if no interest payment under the orl(lnat terms of the loen ts erer
peld. The Co^ptroUw's statement eonUnned:

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nCMd tlM loui 4mOBt dOM Ml OMd to (•MtBiM

I ten on tha nnnctattac ta tkoM dtMtlOM
■ban It li aQactad that tiM ttttan cadi paTmaat*
m tha raatnctarad iMa wUl ba ten thaa iba loan
taeiMt, tha tan neoanlsad li Ilmltad ta tha

•Kpcetad caih flaw Jallelaaer.* lop.dt. p. ltM7)

■ ■■ dlnOCCtat]

•l^la benoHW. lb* OCC »«pUtoadr

*...tha dacUaai la capital atutbnubta tc
pnUana la tha oU aad lu and (gricnltatal h
af tba ai

taMUof Uadu dariag tha parted la which tha
oapltal totbaaianea rtHej i* ia atfact (La., thran^
IHl].* (op.ett. p. ISSDT)

Mat of nUilai tha ralM tanvonrttr.

It aadonM tba coaeapt of Bontlai iw^aifnrmlm dabt mmu at tan *atM IT
that* li a raaUatle pnapaet that tha ta Ki iwa ii will pay tham back aftar woitlag
thalt way thtoa|b aa.aeoaontfe ii

It malatala* tha Wacrttr of tha R.

MV«m*on to tup la whan saata aad moand prtctleai an dlacmwnd, «

wbaia aa laiUUiUoa li aaiong rlmii othaiwiM aatttlad to foibaanaBa.

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Currmtlr, than >ra liffiificuit differancai In tlu mstludi of iccaiBitinc for pnbUm
uiaU on > lenanllT 4ccepleil ■ccoimUiit ptinctplei basU uid tha bull of ftCconaUns
■rtdch may bt pnicribsd uoder reinlstoiy iccDimUna practical. Undor ncuUtorr
accouatlnc pncllcM, chs reinUlon tura authority to raqulra ■ larlafi inatlttuion to
obtain an aftpniaal for a pniputy taeurina a loan, and ad)nit tha loan Ctnirinc valaa to
tha appraliad vahia of tha Gollataral piopaity If tha aptmlaad vahw li lati than tb*

Tha regulauuT rulea raqnlra that mch appralial ba paifonnad undar tha fdidellnai of
Uamorandum Bile. K41c raqnlrsi tha appnliar to diicount tha propartT'i axpactad lalai
price at a rate which. In almoit all caiai. wUl ezcaad tha Iniilwtion'i coat of nonay.
Thii dUcoont rite 1> Intended to compeuata ■ currant pwehaiar of a property for 1)
intereit coit of cairy, i) riik, and 3) profit. TMi 'deep dbconntinc' typically reniltt In
the R41c ippraiied Talue of a proparty balni ilsnlflcantly lower than tha net carr^nc
Talus of a problem loan valiied on the bull of lenenlly accepted accoDntlnf principle!.

Under lenerally accepted accountlni prlnclplat, a loan raeeirabla li canlad at the leaaar
of coit or I) net realUable nlua, or 1) a canylng value detemdnad In accordance with
the piOTlalani of SPAS 15 relatlof to tnnbled debt reitructorlna where the oilclnal.
obUfor ramaliii lii placa.

Tba Taluation on the bait* of net realltable value reaulu' In the Initltutlon dlicauntln(
future net caih flowi from tha lalei and oat ravennai auoclated with tha property at the
tnitlMdon'i coit of money. Since the Initltutlon'i eoit of money rata will almoit. alwayi
be lower than the diicount rata oiad by an appralier in appralitag a property on the badi
of K41c, tha auet'i regulatory canykng velue will be reduced to a laval below tba
canylnt valuat required under senenlly accepted accountlni principle!.

In a troubled debt raitructuitng In accordance with SFAS IS when the orl(lnal borrower
ramalm in place and (he tsrmi of the recftlvable are modified only ai to lalei«at rate
and/or term, a dltcoont rate ai low ai percent may be uied In eitabllihlnc tha carryinf
value of tha related loan. The ate of thli lower interait rata, then, rsiulti in the carryinf
value of tha auat balnc hlchar than Che carrying value if tba aiiel wai valued on tha net
realliabla value baiki, and ricnlflcantly Mcber than If valuad on the bull of an Kdlc

Tim Taak Force bell«vei the Bank Board ihould adopt (eneraUy accepted accoontint
prindplu tor pnipoiei of . utiUllUni reieivea for loan louei. In ciiat where It li
appropriate to determine the net' teatliabla value undar leneratly accepted accountinc
piindplui the carrylni value wilt be let at an irootint more cloeety In line with the actual
valua to ba received by the Jnitltntlon net of all cotti (Including Intereit cotti) of
etpjin a p tnper t y to Iti final dlipoitl. Thii repreiantt a far more accurate accounting
far ' the aiiet tUa n ]&e acpo^ttlns pe^tted loder regulatpty accounting prlnclplat.
involving an B41c appratoaL

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lb* <M« of a« K41c i|»r«l«il iiriii wpUlnty 4a«MBUM wlM k lai(w than 4etMl

PrajKtM NM «M«tlit iMtm:

MmN Mil* of Otllatanl Hi'

DM-of-MckM n«Hati to «• IM>
kv ■orrcMW (SkvM ky IMMr of
CTitflt) $100,000 pw ]Mr

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^a,^a.om

InmMnt Imcm 100,001 flDO.OOO MO.OOO tMS.OOO fl, 100,000 2,100.000

Mil OK HtpMltlw

or LOM 1 a B g LOLBI 3.m , ooe

Wt InotM EffMt of
AccouMlm f«ltcy tl3,IU,000) tMO.OOO »00,<X» (900,000 t«,3«2,000 $2. 700,000

awpimiiMitattUwiu.

Loii on M-tM On* of

(1,012.000)

703,000 n4,000 3,112.000

H.OOO rM.OOO 183.000 . 774.000 z.iro.ooo

ti on Antruetur* of

* 112,000 133,000 SH.OOO 3U,0D0 M2,000

Oilii on Dlvaittlon of

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*»WBW e. ««P«n»niam >« ».r'»»Ti-»i »»-rin>i

<■ tha rBd'icaAyadtlaa,tt(ng)dteaMUattoMn^tbH
■u "■""■ iBaau ABB uw praUam of tk* ItUi li ■ iboRltU of aqaltf — t b'lf^t ifaMt
fnUaa — rathn ttau ■ Uck of avUttr.

Bm |I 1 ' h tUs [law l> tha 1 paicaat dapoalt anthoiltT, Ika Baak Boud atfand a pl>B to
moiUj thit nwhorltr- Tb* ■■mom coMriboMd mmU ba Oa Mma 1 panant ef an
iMUtatiao'i taaand dapoatt*. bat tmuad of bafati • lou to tlM PSIJC. U Koald Uka tka
lorai or ■ MplUl bWMtmaat tax tha PSUC <*l«k tht PIUC umiU com

ThaM Inelsdail MUbUthln* Uw Fadaral A*Mt DI«o«tUM AtMCiaUoa
(FADJU, ■ tadanllr-ckuwrad umcUtlon lat 19 to twly naUia tha miThniaii ratun oa
dafidtad prapania* aad otbar mmU tuld by iwlnBt taatltuUanu MtlaUm of Iha
MM«a»aBt eOMl^mat pngnn OtCt) aniai <Aicb nmmomant tuma bononrad tiM>
hatlttay mtUtUlaM could ba put tn cfcufa of traoblad tnitUutloin mtalnlBi Ui^a 1o«m*i
marlni tha axamlDatlon ilatf lo tba )iiri*iUcliaii at tha twalra rational Padaral Homa
Loan liBfti ao that ■mild ba oaanr to tha tanltnttoaa tbay wan chanad trtth arawlntin
■ad 10 thalT nsBban aod larala of a^aitlaa eoold ba ultancad without tha aaad to daaL
with fadanl pap aad baad cooat Umllatiaali and enatioa ot a a*w Otttca ol Infarcamaat
at tha Baak Boaid with a italt aaparaU fiaai that af tha Oltlca of Oaoanl CooaaaL

Tb* Baift Boaid at tUi point alao had baan imUni to tnpOH coatmla one axeaaalTa
dqpoalt growth aad liakr oparatlai pncticaa at imw laiUtatlom ta which tha Boatd
■ttilbotad a laiga ihara of tha blama for Ita incnaaad prablsm taiUtotlon caaaload.
8a*ta| triad namccaaafnlly in tfM to ilow tha growth o( dapoilta at rapidly gnwint

t, tha Baak Board tunad u

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inlad br niffldant c4pltAl. in
I taitantod to trow h an laaaal nu in ocau a( IS p«rc«nt to
flnt obutn appioTal tnm Iho mpervUorr ■othoilUot. Th* Boaid alio aiMitad a fadortl
OTonicbt ml* with raipact to th» appronl of diract Invutmeati by itaU'cluit«nd
bntitntloni in nal Mtato, aqoltr McmlUM and larvlca cotporatioat. to tha axtaat that an
iHtltmion inlrad«d ta hold inch InToitraanti which, in tha atcrsgata, would amount to
mora than 10 paraant of atiau or twlca nst woith.

Thaio rafolatloai tTPi^ ■ hntad and ImpraiilTe mova by tha Sank Saatd In tUt pailod to
limit tha drain on Um F3UC f^ br pranatl** maaauni. A latar azampl* at ancb nU*
waa tlw naw ■"'■''■™"" oat wmth raiioiivmanta in Angnit, 1116, wUdi miadat* an
avantnal nat worth laral of at Isait f paicant of aiiata for all tnittnuli»i.

I that tha U.S. Laarx at SaTliit* butlUUlooi, whlta laiiiiliii tba rl(ht to
commant on ipactfic aipecti at ■arlona piopotali, Tlgorouilr andonad tha policy o(
Impoilnf mora diiclpUna on high-flyint initltulion*. lodaad, tha La*(Qe took tiM
InltlatiTa of a laadanhip rola In calllni lor tuch diicipllns.

But all along, ai tha
It daar that It itlll t1

In Norambar. IISS. U.S. Laagua Chairman Ganld Levy appobitad a taak force to craft
aolotloni ta Uw fnndlnc problam* nl iba FSLIC. Tbi uilc force daralopad, and t^ U.S.
Laasua Boud a[ Diiecton approved, a convrahenalTe' lat of racommendatloni. Thaaa
iMlndad ■ lacapltallsatloa program which einiilonod maatlng tha FSLIC funding ihartagg
by agraeing, on a icIiedDte ptkaaed dowa otbt lima, to tha contlmutlDD of tha ipadal
Inmranca aateiament on tha bnalneii tint Impoiad at tha bagtnnlng of 19U and by
tramferrlng to tha FSLIC part of the Federal Home Loan Baoki' capital nuplni and future
aamlngi. Together with other aanrcei of PSLtC fundi — regaUr pramfaima and
tUi plan wu pn)aeted to provide the FSLIC wlih total reioorcei of

bi addition, tha taik forci recimiDandad 33 other lamadlal itopi ta be taken by tha
Federal [Inma Loan Rank Board, the FSLIC, Congrett and the iivlnsi initicntloiu
bntlMu. Among them were taduiquei to give regnlaton early warning of Impandins
troobla at iBitltntioni to they could ttop Iwhavlor which lad ta fallurei or take contiol of
falUog lutltiitiaiu bafara they bnUt \9 large lottei. In general, the recommendatloni
callad for nverviian to gat tough with the few minagen who wera operating Imprndantty
and paaad the graatett riaki ta tha Ininranee fund and ultimately to the entln lavlngi

Whila tha U.S. Laagoa pUo waa being temmiatad, the U.S. Traunry and the Federal Home
Lorn Sank Board were alao working on a plan to racapltallna the FSLIC. On the day tha
Leagoa'i plan wu to be publicly innoancad In Waihlngtoni thi Traaiory/Bank Board plan
wai outUnad in pi«M accomti.

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ba obuinad m naadad tiom latanul ruonicai ol
I t— •*"*'"| tha ?adaral Hob* Loam Bank Stiudi which U
Baeaoaa it pnrldad tvtit on ta M-aaadad baali Hitbent
IBM knowB 41 tha *PaT-u-Ton-Go* plan.

Tba boiionliii la tha aterialnnUoii pUn ■xiald ba aidaitakan thiaafh a tpacially eiaatad

„ Cboadain iba eaptul mukaU ta rilaa batmrni 110 UlUoo *ad tit

tiaaatar (i«m tba Padanl Homa Loaa Baaki' ratanaa (faold ba

co^oa Traaanj ucsritiai whieh la tnm mmU ba araatuiUj mad te

tbt boada Hootd hacoaia aa oagolnc

Xha Admialatntiaa rabsduad latUUtloa li
to FILIC raca^tallaation. Tha Homo aad Saaala BaaUnt COBUoitUas adoptad tha plaa
aad Mot it la tha tnll Hoqm and Sanata, Howerar, ivpoit for tha boodini pretram with
lu aan i »aaa dabt laiTlca boidan was nndantudaUr iballow la tba MTlnii taatitntlon
«T, ralatad Isinai nieh a* tha praUfantloa af nra-baak bank* wan Unkad
» by mlooi BiaiDban of Can(ran. To fmUwr eoaplleaU tha plaa'i '
pTOipotta, tta CoBfiaaaloaal Bndiat Otflca nlaad ■ lariov* qnattloa a« to whathai the
p ca a aada niaad by tha booda coold ba liTaii t^ oaadad icorias u a lovarmoaat recaipt
for bodcat potpotM. Tb* lattar qoaatloa waa nibsaqainitlr raiolTad, bvt ont proBising, but are cognliant of the need lo proceed

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cautiously in this area. In light of the elisination for nost
Institutions of the lt)\ safe harbor for direct Investnent
reserves, the U.S. Leafue would support .as an iBiiediate sc<p a
■odest raising of the lOt direct investnent threshold to ISt
for organiiacions in conpliance with their BinlBuo capital
benchnarks, but would regard any more anbltious .lifting of
constraints as deferrable until we have had actual experience
with the workings of the restructured net worth requirements.

If this experience indeed reveals that the new net worth
regulations are accoapllshlng substantially the sane objectives
as the direct investnent linitations, then we certainly would
favor extensive liberalization of those linitations. But,
given the weakness of the FSLIC fund, ue believe precipitate
action to dismantle significantly the direct investment
regulations would not be in the best interests of our industry
or those it serves. We note, too. that delay would allow us to
factor into the policy equation the inpact of FSLIC
recapitaliiatlon legislation, should it be enacted.
Accordingly, the U.S. League suggests that the Bank Board
refrain froa naking other than the modest adjustsienis noted
above in the direct investnent threshold figures at this tine,
and extend the regulations' expiration date to January 1, 19B8,

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With reipect to the adalnistratlTS flexibility of the
direct iny«»t»ent role, our lBpre«»lon U thet Initial fears of
Inflexible ne|ati>l*a have proven to be unfounded. On the
other hand, we »till hear eoaplalnts of excessive delays
forestallinf transaction*. While recofnlilns the treaendous
lupervlsory burdens belnf shouldered by the Bank Board staff at
present, particularly In those FHLBank districts sufferini
widespread econoalc difficulty, we nevertheless would hope that
steps could be taken to assure the ■inlBtiation, If not
ellBtnation, of such coaplaints. Rapid processlnf of
applications Is absolutely central to the equitable functionini
of the resulatory fraaework the Bank Board has erected In this

A final concern In the flexibility area hat to do with the
frandfatherini of projects with definitive plans. Our
understanding when the reBulailons were Issued was that
"definitive" by no aeans iaplled that frandfatherini only
extended to projects or se|«enti thereof where the precise
shape of the end-product was known in advance, but only that
the Institution was proceeding in a definite direction with a
clear plan of operation. Real estate developaent projects
frequently are evolutionary in nature, requiring the ability t<
react flexibly to opportunities as they occur, he hope the
Bank Board uill take advantage of the current ruleaaking
proceeding to clarify this point.

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Tha U.S. L««gue ipprecUtes having had this opportunity to
rxprass Its views on the proposal in question. If you have any
luestlons regardlni our positions, please do -not hesitate to

Uhuu^'^.ii'^

D,j,ii.db,Google

Oct»b<( IT, l»H

11121 ««7-a»5

iBfoiaatloa Itivlcai ■•otlan ,

oftle* of thi ■•ctatarlit 1

Psdatal aoa* Loan tank toaid i!

n»e a. Itraat. H.H.
Mshlaqtoa, O.C. lOlll

tei CowMiiti la OpvDtltian to DrauHtiM iwlt U Hi
Ut th* ■■pUdlan at (h( ••uIiUUmh Mni>«ih1hi|

jit Fad. MB. 11118 UlBUlbli 11, liilll

N*ab«(* »[ cb« radaial ib« (.aan liiit Ih*><Ii

CLlneoln*),

a Calllocnl

.a-charl

land

ll«lll«* 1

nii

Ti-iN •;.:

tlon Inli

jrad

by tha radaial ■■>

Ida.!

and hm-

tatloo.

Lin

1 tha n

1 Haai 1. .

I'Maid-

1 pr

Dpoaad tula

to dif<

i Milltl '

oov

ilaan

t* Ry (•!

pnbllihad at

i II*

Btiabii

:h aubai

^■ntlVllv *H>I ,

Sllld'bt

. una seacd

lack* ,

lutho

rl(y m , •

bacaui* 1

th.

Boacd h» ti

■ll.d to pes

vlda «n •

paiiod.

1 th* c.aoi

1* aeC :

toith

in tna ainsi

rA 1,\

July 10,

1)B

4, which «a

piavloi

«ly

aubaictad

ppoaitlon ti

3 ehi o'

tHin

■1 Dlrigl

inv*iiain( 1

ib,Google

KatC. Scholcr. Fierh&h. Hitrs C HaHOLXK

r«d«tal VeB* Loan Bank Board
October IT, 1916
r«qa riv*

thii aoprqacli haa b«»n •tt«ctlv In
controlling rlali and trt)«th«r turthat
Taqttlatory action la ramilriiJ T For this
caaion, tna Board haa aooptad tha January

Accord 49 rad. Ra^. 4ST56 (Dacaabar 14, 1984) (Suwiary by tho
Board t Sacond Fropoaal). Accordingly, tha Board Intandad that
all o( tha iaiuaa ralaad in tha -Initial rula^aking procaas
would ba ra-axaainad thoroughly bafora tha Xagulation could ba
axtandad.

In fact, Con^raaa itaalf, during tha aaaa yaar that'
tha rula bacaaa atfactlva, aaphaaitad that baaad on tha Boatd''i
avidanca, tha diraet invaataant rula waa daalgnad only to ba a
taaporary aaaaura and that tha avidanca "wa* not autticlant to
iupport a coneluaton that auch • rula would ba naadad ovar tha
long run." rederal Regulation at Direct InveBtmcnf By Savlngl
and Loan Aaaociatlons , H.B. Bep. Mc. 156, 99th Cong., lat Saaa.
14 (Nov, S, 198S). The HouEe Repott enplalned that:

Tha long-tar« daairability of ancouraging
prudant risk taking auggasta a praauaptlon
against a syata« of prior Padaral
rastrainta. . . .Spacific naw avidanca will
ba naadad it this piaauaption ia to ba
ovarriddan In tha Cuturt. . . .Bafora
angagtng in ruleaak ng to sxtand tha dlract
Invastaant rula, tha Bank Board should
conduct new and coaprahenslva aaplrical
atudiaa of thrifts' oparating sxparlenca
with dlract invsscaants In the period
following lapleasntation ol the nst worth
and ADC loan accounting rules. Id. at
16-17.

In its Notica Of Proposed Rulaaaklng to sxtand tha
Direct Investaent Regulation, the Board haa ignored its own
aandate; it haa not attaapCed to evaluate tha underlying basis
for tha regulation, xathar. It has dlcactly circuaventad Its
aandata by seeking only coaaentt on tha flsxibillty of the
regulation and the continued need for It In light of Its
adoption oC other regulations. Horeover, tha recent eaplrical
Study cited by the Notice which purports to analyta the lapact
of direct Investaents held by failed thrifts on tha PSLIC fund
Calla far short of the requisite full and thorough exaainatlon

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KAICSCHOkCR, FlCRMAN. HatS & hiAHOkCR

radaial Ro«* Loan Bank Board
October ITj 19B6
Pa9« Six

of the n«*d for, and propriety of, regulating direct Inveat-
■•nta today. The Board atatai that thia atudy deaonstrate*
that, of those Inatltutlona that have failed, their direct
inveetnents were 'poeltively related to the FSLIC's coat*.' 51
Fad. Reg. at 3292S. These reaulti liapiy do not address the
issue of whether direct inveatnents, by the>selves. Increase
the clsh of failure or Increase FSLIC's costs, noceover, even
if the study (conducted by Board eaployees) is a coaplete
analysis of the iasues — and it clearly is not — the Board
has not requested the public's coKaents on, and analyses o(,
these issues.

Accordingly, the Board Is conducting Its ruleaaking
in a aannar directly inconaiatent with its own and Congress'
mandate. The current notice contravansa the type of review . .
contaaplated under the Direct Investaent Regulation and, for
this reason alone, it is invalid.

Very truly yours,

?..Aa.h-^^:JiJU:..^,

Peter M. rishbeln

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KATt. SCHOLEH. FlcnMAN. hIAVa S H

Mln, Eaq. Mi P(opoi*d Rul* of Ui*

Fader 4l Homa Loan
Bank Board L In 1 ting

Inauiad Initleutlona

Thli Baaotindua axplllna qui conclualoni that tha
radaial Bos* Loan Bank Board ('Boacd') doaa not hava authority
to pcOBulsata tha piopoaad tula publlahad at 49 Fad. Raq.
lOlM (Hay It, 1984).

Tha Boatd atatai t.t ta authoitiad to pcoaul^ata tha
ptopoaad rula llaitlng diract tnvaatManta undai its itatutoiy
authority to aupacvlia *un>afa and uniound* pcactlcaa. Hhila
va aipraaa no opinion laqacdlnq tha Boaid'i authority to pro-
■ulqa^a luch ragulationa for t«daeallv- ehart«r»d inturad in-
■titutioni, tb* proBulgatton ol auch taqulationi for itatt-
chattaiad Inautad Inititutiona la bayood tba Board'i author-
ity. The Board' a ptopasad rala cosplataly ignorai Congraia'

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•xpEVSsed intent that the Integrity of th« dual financial sys-
tan, allowing f«d*cal and atat* chartacing and control of such
Inatitutiona, b< maintainad.

Tha reaaona why the Board lacks such authority, dis-
cusiad in detail below, ai* as follows:

4)- The BOB.rd's statutory authority to supetwisa
'unaafa or unsound practices* does not grant the Board rule-
aaklng authority to determine per se unsafe or unsound prac-
tices by atata-chartared Institutions; ' '

2> ' The proposed rule Inparinlsalbly usurps the au-
thority of the sovereign states explicitly preserved by Con-
gress through the dual financial system and is therefore
beyond the Board's authorityi and

31 Promulgation of the proposed rule by the Board
without additional tine for conusant and a full evidentiary
hearing would be arbitrary, capricious and an abuaa of its
discretion because there Is insufficient factual evidence be-
fore the Board that the direct investments which are the sub-
ject of the proposed rule arc inherently unsafe or unsound.

1. The Board Lacks Statutory Authority To
Deteralne By Rulemaking That Such Direct
Invcataants By State-Char tared Institu-
tlona Are Per Se Dnsafa Or nnsound.

The Board's statutory authority to Institute cease-

and-desiat proceedings for "unsafe or unsound' practices ra-

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Kiuc.ScholC". Fie">"i

qulESB caE«fuJ, cBse-by-c««« analysis by tht Board o£ tht spe-
cific facts ragacding a partlaulac Insutad institution; Ttaa
lagislativa history of tht Board's 'unsafa oi unsound* pcac-
ticas autlioclty nakas clear tbat such an Indlvldualiiad analy-
sis Bust -ba-don* by tha Boacd. By dataiaining par ff that
certain direct Inveatinent practices by vtate-charteied insured
laatitutlonti alloved under state law, are unsafe or unsound,
tht Board hat exceeded its statutory authority.

In considering whether to extend to the Board cease-
and-desist authority for unsafe or unsound practices. Congress
was particularly concerned with the definition of such prac-
tices. Board Chairman Borne subaitted to Congress a oenoran-
dua in which he explained that 'the term 'unsafe or unsound
practices' has a central aeaning which can and aust be applied
to constantly changing factual clrcunstancei. * 113 Cong. Rec.
26>474 (Oct. 13i 19fi<t. His aeaorandun conclude* by etatingt

It should be understood that in cease-and-
desist proceedings based on . . . grounds
[of unsafe or unsound practices) > there
would have to be a factual showing on the
record which succaeds In convincing the
hearing exaainar or the Boardi . . ., that
the particular practice In the particular
case should be characteciied as 'unsafe or
nnaoundt* and a ceaae-and-deaist order is-

Jj. (eaphaels added). Chairaan Borne provided an attachaant
to hla aeaoranduB which containa categories of unsafe or un-
sound practices and four exaaplas which are quite fact speclf-

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)Lei>. Fie"M*H. ha's 4 M

Ic. J±. ac 26,474-75. A full reading of Chairman Home's
■MBOiandun and attacbnent oakas claac that such findings by
the Board waca and would continua to ba made on a casa-by-caia
contidecatlon of tha specific fact* and ciccunstancas sur-
rounding the allegedly unsafe or unsound practices. Kone of
the practices discussed by Chairban Home are allowed under
state law. Congress therefore had absolutely no reason to be-
lieve it was granting the Board authority to determine that
activities of stata-char tared institutions allowed under state
law would be ruled per se unsafe or unsound practices by the
Board. Promulgation of the proposed rule therefore exceeds
the Board's statutory authority.

The preamble to the proposed rule asserts that 'sec-
tion 407 of the [National Housing Act] (12 U. S.C. 1730) autho-
rizes the IFSLIC] to make rules and regulations defining prac-
tices it deems unsafe and unsound." In fact, 12 U.S.C. S 1730
does not authoriza the Board to make rules prohibiting invest-
nents expressly authorized by state law. It merely authorizes
the Board to make rules pertaining to adjudicative piocaedlnga
under 12 C.S.C. S 1730. 12 O.S.C. t 1730<ai)(3).

The Board relies on Independent Bankers Association
of America v. Helmanp. 613 P. 2d 1164 (D.C. Cir. 1979), cart .
danle^l. 449 U.S. 823 <19B0), for its autbority to define by
regulation practices of state-chaitered institutions it deems

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unaaf* oi unsound. H<ia«nn coniidared th* authority o[ the
CoaptEOllvc oC th* CuEEMcy to liau« cagulatlons pcavanting
inaidecs of nationally-chactarad banks from an^aglng in c*e-
tain piactlcaa whidi ha conaidaiad "unaafa and unsound.* in
upholding tha Coapttollac's authority to issua such ragula-
tlons. tha court called on Congcaas' I'ntant that national Iv-
chactatad banks ba "vaciculouily cagulatsdr ' which requlcas
'tha closest nonitoring and continuous aupacvlslon of these
Institutions* by tha Coapttollec. 613 F.2d at 1168.

Bacaus* Haliiann only calsad tha quastion of the
CooptEollac's authority to ragulata natlynal banks, and did
' not considac statutory laquiiements for notice and deference
to state supervlsoiy authocltias cagacding intended ca«se~end-
daaist proceedings against atate- char tared Inatitutions for
unsafe oc unsound pcactices. th* Boacd'a reliance on Belmann
for its authority in the present case Is totally niaplaced.
In Haiaanq. th* court r*li«d heavily on the Conptrollar' s au-
thoclty, provided by Congrass. to conpletely regulate national
banks. Tlie Board has no such authority over state-chartered
institutions. S*e 13 O.S.C. S 1730(b] and (o). Congress has
Eopaatadly stated its intent that aadi atat* ratain control
and suparvlsion ov*r th* activiti** of institutions It
chartars.

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A racant couct lullng laltciatas tbis point. The

■utbOElty of the Pedaial Dapotit Insuttince Corporation (fdic)

and tha Board to pronulgata regulation* affecting the Inaur-

ance coverage of brokered deposits w«s struck down In PMC Se-

curltlee. Ine^ v. Onltfj S^'f °t tearlca. Civ. Action »o».

B4-0959 and 84-1136, illp op. (D.D.C. June 20,' 1984). The

court held that the 'unsafe and unsound practices* provisions

in 12 O.S.C. Sf 1730 and 1818 , .

relate to specific enforcement actions
brought against individual banks, and the

fower to prescribe regulations which *ef-
ectuate the purposes* of those provisions
c^earlv does not contemplate across- the-
* board regulations of the type at issue
heta.

Id. , slip op. at 10 n.7 (entasis added). The court reasoned
that 'it Congress has deternlned an Issue, the agency is not
free to change it.* Jd. It struck down the regulations as
'Inconsistent with the statute and therefore not lawful,' and
noted that courts Must avoid the 'teaptation to approve good-
faith agency efforts despite the agency's apparent lack of
statutory authority.' J^. , slip op. at 13. Because the Board
lacks statutory authority to coapletely regulate the activi-
ties of state-chartered insured institutions, and Its proposed
rule would prohibit Invastaents allowable under certain state
laws which Congress did not intend to be preempted by the
Board, the proposed rule is beyond the Board's author!^.

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It Is iBpoetant to net* that Judg* G*stll wcote the
opinions in both B»i»«nn and MIC S»eutltles . Th« lattac
opinion, which obviously liaits a bcoad axtansion of the
Board's authority und»r Balwann, was not issuad whan th* Board
publlihtd Its pcoposad cul*. Tha Board night wall hava cacon-
sldarcd Its aiaartion of atatutory authority to pconulgatathe
pioposcd ragulations llBltlng dlract invastBtnt If it had the
banafit of Jud^a Gaaall's decision in TMC Sacuritiaa .

Siaiilatly, reli«nc* on tha Board's pionulgatlon of
cegulatlona concarninq <ia novo institutions Is misplaced. The
Board's authority to sat raqulmants lor approving insurance
•pplicationa of de novo, nawly chartered institution* is far
broader than its authority to control by regulation activities
of ■tate-chaitered institutions which are explicitly allowed
nnder state law. in fact, tha Board's de novo authority is
based on a different statute. Sea H D.5.C. S 172fi.

nie Board's only other citation of statutory author-
ity is the ■emorandun by Chairaan Bocn* which was subnitted to
Congress in 1966 and discusses the definition of an 'unsafe or
unsound practlca.* As noted above. Chairman Borne's menoran-
iiiM aakes clear that such findings by tha Board were and would
continue to be based on individualised consideration of the
specific facts end clrcunatances surrounding the allegedly un-
safe or unsound practice. All of the examples contained in

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the mcnorandun Involve practices that would be considered
leckliss in any buainesSi e.g. , self-d«aling, nisleadlng ac-
counting nethodSr inadequate investigations of loans, oveiap-
pralsals of security pcopecty, and dividend rates that cannot
be supported by Income. None of these practices are specifi-
cally allowed by state law.

By datetmlning per se that certain legal investment
pcactices of state-charteced institutions are 'unsafe and un-
sound,* cbe proposed rule is totally contrary to Congress' iiri-
decstanding of the substance and procedure of such findings by
the Board, as explained In Chairman Borne' s memorandun. Pur-
thatnocei the case cited by the Board as quoting Chairitan
Borne' s nemorandum, Gulf Federal Savings and Loan Association
of Jefferson Parish v. Federal Borne Loan Bank Board. 651 F.Jd
259 (Sth Cir. 19811, cert , denied, 102 S. Ct. 3S09 (1982),
held that the Board did not have authority to determine that
certain practices by a federally-chartered savings and loan
association were unsafe or unsound.

' The Board sinply does not have the authority to
state by regulation that certain direct Investment practices
by state-chartered institutions, allowed under state law, are
per se unsafe or unsound.

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3. CoDfiess OiS Not Intand That Tti« Boaid
Dsucpf Accoss-Tb«-Board, Th* Ability Of
Statc-Chait«r*d InatltutloiiB To Bngaga
In Practicaa Allowad Undac State Lav
Ot lb* Autbocity Of Tb« Stataa To Supar-
viaa And Ragulata Such I natltuttona.

Con^raas gava tha Board carefully liaitad authority
to find activitias of stata-cbartarad inatitutlona to be un-
safe or unsound. The Board was authotlied to terninata the'
insured status of an institution foe having 'continued unsafe
or unsound practices' in conducting its business under, the
Bousing Act of 1954, Pub. L. Ho. 83-560, S 501O) , 66 Stst.
590. However, for such tecMinations of state- chartered insti-
tutions, the Board was requited to 'first give to tha author-
ity having supervision of the institution* a statement ax-
plaining the 'practices or violations for the purpose of se-
curing the cotraction thereof. . . .* The Conference Report
Bakes clear that Congress intended the Board to respect and
initially defer to the states and their supe^.'isocy authori-
ties t

The conference aubstltuta adopted the Sen-
ate asentkent with changes designed to as-
sure that the aaanifaient woul d not lapaJF

Itutlons other '

than Federal savinas and loan assoei-

atloBs. Hie local supacv isory author i ty
would be given an opportunity to attenpt
to secure a correction of the unsafe or
unsound prectice before further action is
taken by the Bone Loan Bank Board to ter-
ainate the ineured status of the Institu-
tion.

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B.R. R«p. Ho. 2271, .S3d Cong,, 3d S<». 84 <19S(> {emphasis
•daed} .

In 1966, Congraas authoilsad tha Boacd to taEninati
eha Inaucance of an institution which Is angaglng oc has en-
gaged in an unsafe oi unsound piactlcai oc is in an unsafe oc
unsound condition, explicitly requiring notica to tha 'appio-
ptiate state supecvisoiy authority* for the purpose of secur-
ing corrections. Financial Institutions Supervisory Act of
1966, Pub. L. Ho. S9-695, S lOIIa) , 80 Stat. 1036. Addition-
ally, the Board was given authority to institute cease-and-
desist proceedings if an insured Institution "is engaging or
has engaged, or IFSLICI has reasonable cause to believe that
the institution is about to engage, in an unsafe or unsound
practice* in conducting its business.

The Board's authority to institute cease-and-desist
proceedings for unsafe or unsound practices resulted from a
compromise vhich explicitly recognized the dual financial sys-
tm and the importance of maintaining state control and su-
pervision oC Btata-cbar tared institutions. Both the House and
Senate Reports dlscuaa tb« substance of this provision and ex-
plain that the Board is required to permit the state supervi-
sory authority an opportunity to 'take satisfactory corrective
action* prior to the Board's commencing its own proceedings.
B.R. Rep. No. 3077, S9th Cong., 2d Sees. 7 (1966)) S. Rep. No.

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1412, eSth Cong., 2d S«ss. (19«6}, r^PtJnttd in (19e«I U.S.

Cede Cong, uid Ad. News 3S32. 3S34. The 5«n«te Rtpott ia ccy-

■tal clear on its intant to pccsacva tha dual aavinga and loan

•ystCB. It stataas

Tha couiitta* vaa concainad with tha «f-
fact oC thia bill upon tha dual bcnKing
syataa and the dual aavlnga and loan sya-
taoi, .... Tha cowwlttaa did not with
\o Ui^t *"v action which would do vlolanea
to tha balanca batwaan Stata and Fadatal
fuBctiona and caaponilBilJtHa which un-
da tltaa tha dual b anking avatea and tha
dual aavlnoa and loan avataa. On tha con-
tracy. the connittaa was in full agceament
with tha atatamant nada by the [conwittaal
chaitnan in his raaacks before tha Na-
tional AsBociation of Supervisoca of Stata.
Banka at Willlamabur^i va. . quoted in tha
haaringa; *Th* dutlea and power a of (he
Federal Raaetve Board and the FDIC are
bioad and awaeping. They suat be in order
to carry out their functiona. But neither
they nor the State ncnbar and inaurad
banka nor tha Stata bank aupaivisort
ahould evat format for one nonent that the
Stata banka are chartered by the Statea,
and are operated undcE Stata laui, and are
reaponaibla flrat and fotanost to tha of-
ficials of the States which created then.*

S. Rap. No. 14B3, auprf . at 3S38 (emphasis added). The Con-
■ittaa therefore required that In cases Involving a state sav-
ings and loan aasoeiation, 'the appcopriate Stata supervlaory
authority auat be notified and aust be given an opportunity,
during a reasonable tine under the citcuastancea, to take ef-
fective corrective action — or to convince the Federal agency
it is mistaken if the State supervisory authority thinkj thla

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is tha MM." Jd.. Finally. th» Senate Report states that
"ths cowmlttM consiaers that the bii; fmofiasliea the role of
the State chartering and supervisory authorities, and In no
way lessens the status of these Stat e authorities. • id- at
3S39 (emphasis added).

Both the hearinqs and the' colloquies durin9 the
House and Senate floor debates make clear Congress' intent to
■aintaln tha integrity of the dual banking system and the au-
thority of the states concerning activities of state-charteced
institutions. Chairman Borne testified that:

Primary responsibility for supervision of

State-chartered Qflapcjal Institutions

lies on the State authorities. We have no
quarrel with that concept, .... Our
objective Is quite simply an effective
backup capacity when needed, and hence we
do not object to the amcndnents adopted by
the Senate to assure State authorities of
notice and opportunity for action or ob-
jection on their part before we commence a
proceeding involving an Insured State in-
stitution.

rinanetal Instltutiorif Suf^tyiaotY and Insura nce Act of 1966 ;

Hearings on S. 31S8 and 5. 3695 Before the Bouse Committee on

Banking wid Currency. 89th Cong., 2d Sess. 38 (1966) [emphasis

added) .

Chaicnan Home made clear to Congress that the Board

would proceed against unsafe or unsound practices engaged in

by state-chattcced institutions on a fact specific, case-by-

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cas« basis wblch ■fiords notice and defscanc* to tha state au-
pscvisocy anthorltlas. Tbo proposed cagulatlon, which diaal-
lOHS pat sa cartain invastaants by stata-chartarad thrifts,

which Bay b* pacfactly lagal undar tha state laws which con-
trol those institutionsi violates tha Chairman's statements
and Congress' insistence that state laws and the authority of
state supervisory agencies not be undermined by the Board.

Discussions of the proposed legislation in the Sen-
ate contain expressions of concern by a number of Senators
that the dual savings and loan system be protected. Senator
Promlre discussed the requirement that state supervisory au-
thorities be given notice and an opportunity to take satisfac-
tory corrective action regarding the practice alleged to be
unsafe or unsound by the Board. He stated:

This provision gives a very substantial
Raasure oC protection to the bank or sav-
ings and loan association involved. For
all practical purposes It gives the state
supervisor an opportunity to review the
matter, to hear the Institution's side of
the story, and to bring the Institution
and the Federal agency together in a sat-
isfactory aolutlon of the problem. In mv
iudcment. this is one of the most impor-
tant and most sianlflcent fe atures jn ^fte
ant^rf ^»1.

112 Cong. Rec. 20,081 (August 19, 1966) (emphasis added). An

escarpt from the Cosnittee Report was then printed In the

Congressional Record, including the statement thati

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The connlttca concludad that th* adninii-
tcation's request for additional flexible
and effective supervisory power should be
granted f within eatefullv guarded limits.
in otder to make sure that our banks and
savinga and loan associations would con-
tinue to serve the Nation effectively and
well.

Id. at 20,083 (eapbasis added).

The Senate bill pcoviding cease-and-desist authority

for unsafe oc unsound practices was debated again on August

32, 19SG> at which tine Senator Hocse of Oregon expressed cdn-

eerns cosimu nice ted to him by officers of Oregon State banks.

Senator Morse stated that:

The general tenor of these letters was a
fear that enactment of the bill would mean
the further deterioration and eventual de-
struction of the State banks, and of our
dual banking system.

I am advised by the counsel to the com-
mittee that the committee amended S> 315B
in certain ways that bear upon the objec-
tions presented to ne.

112 Cong. Rec. 20.244 (August 22, 1966). Senator- Morse ex-
plained one of the objections as follows:

First. The bill gives disctetionary au-
tbotlty to redcrel agencies to institute
cease-and-desist procedures against State-

State banks, whereas the Oregon banlcfT^
division of the Oregon Department of Com-
merce already has fuch powers and is the

agency which Issues charters to state

banks. The supervisory responsibility of
the [Oregon] state Department of Commerce
would be grossly undermined.

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la. (tBphasli addad) . Senator Pioxmlc* ch«r«ct«cli*d these

iMMlU as uMful to 'tb* leglslatlv* hlstocy on the bill.*

Ij. B« then espleined thati

niB bill provides safeguards. We pro-
vide that, before the Federal ragulatocy
agonelea can act vlth regard to State
banks, that notice shall be given to State -
banks and supervisors. After that notice
is given, they have the opportunity to
d ^yeusa the situation vlth the Federal au-
thorities, and perhaps to dissuade thf
ffdetal a uthorities from action.

Id. (o«[4tasis added).

When asked whether 'the Federal authorities can act
only if the State authorities fail and refuse to do so,' Sena-
tor ProxBlre responded that 'this is', true for State banks'
with the exception of suspensions and removals of officials
based on charges or convictions tor a felony involving dishon-
esty or breach of trust, li. at 20,34S. Senator Cooper stat-
ed that he intended to vote for the bill and noted in particu-
lar that 'the manager of the bill (Senator Pcoxnire) has stat-
ed that ... the Federal Hcoe Loan Bank Board will fallow these
proeeduies' which allow the state supervisory sutborlty to ef-
fectuate corrective action for each specific situation. ^.
at 20,246.

The proposed legislation was again discussed in the
Senate on October 13, 19SG. The requirement that a state
banking authority 'will have the first opportunity to correct

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any situation and to present findings to the appropdata Fed-
eral agency* was reiterated. 112 Cong. Rec. 26.476 (statement
by Sen. CoopeE). Additionally, Chalman Home's menoiandum
discussing the tern 'unsafe or unsound practices' and the fact
specific nature of such findings vae reproduced. The Senate
clearly considered deference to and recognition of the impor-
tant cole of states in supervising state-chartered institu-
tions as critical in obtaining passage of the legislation. , .

The debate In the House also focused on the dual
savings and loan system. See 112 Cong. Sec. 24,984 (Oct. 4,
1966) (statement by Sep. Pattnan] . Both houses of Congress
were extreeiely concerned with the possible effects of granting
the Board authority to issue cease-and-desist orders against
state -chartered institutions for allegedly unsafe or unsound
practices as restricting the supervisory and regulatory au-
thority of states and state agencies in controlling state-
chartered institutions.

Congress understood that 'unsafe or unsound prac-
tices' were to be detemined by the Board through careful
analysis of all facta regarding an insured institution's oper-
ations. It additionally recognized that state -char tared in-
stitutions were enpowered under state law to engage in certain
activities, and were extremely conoeined that federal agencies
not asutp the power to control and regulate the operation of

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C $C-*OlK> F<t»xAH. K»s t HAHO^t*

such institutions. 1h« proposed icfulation govs b«yond eh*
Soatd's satlioritr and Confivas' nndacstandlng at th* >««rd'»
rot* «nd pcoc«duT«s In d«t*ninin9 vtMtbor pcaeticts o( state-
chartacad institutions ats unsafa or unsound.

ift yjtat ■■tlonal Bank of lallaJTa v. COBP^tallat of
tha CurranCT. S97 P. 2d «T4 (5th Clc. 1913), tha couit both at-
fiimad snd sst aslda oidats by tha Coaptrollat against a na-
tional ly-chartaccd bank to eaasa and dasist cattaln activltiss
consldacad unsafe ot unsound. In discussing the Conpttollst's
authority to issua caasa-and-dasist ordais and Congrass' stat-
•d intant. the court noted that 'Itlhe Coaptroller nust not
bacoa* so obsessed with protecting tha Integrity of the na-
tional banking aysten that individual benks are arbitrarily
treated unfairly {footnote onittedl.* SST P. id at til. The
court want on to state that "(lit is inportent to renenber
that (cease-end-da si St ordeca) are United to practices with a
-reasonably direct effect on a bank's financial stability.*
Id. stating by requlatlon that investaents by •tate-ehartered
institutions which sre allowed under stste law are JU. IL u"'
safe or unsound, without considering sll other tsete relstlng
to a particular Institution's finanolal stability, la tantf
■ount to treating state-chartarsd institutions srbltrsiily snd
naf airly.

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The statute And legislative hlstocy explicitly show
Congress* inttnt to allow supetvision and cagulation of state-
ehaiterad institutions to roialn with the statas. Additional-
ly, it evidences Congcess' undatstanding that the Board's au-
thority to control unsafe or unsound practices oE state-
chattered institutions would be exercised on a case-by-case
basisr giving deference to the views of the state supervisory
authorities and careful consideration to all facts regarding
the financial integrity of each such Institution. The pro-
posed rule violates Congress' intent on both points. When a
sovereign state's legislature empowers its chartered, insured
institutions to nake direct investments or engage in other ac-
tivities, the Board is not authorised by Congress to prohibit
or restrict such activities by blanket regulation.

Congcess granted the Board authority to institute
cease-and-desist proceedings for unsafe or unsound practices
on the explicit condition that state supervisory authorities
receive advance notice and a substantial opportunity to object
oi disagree with the Board's judgment. Ibis delicate balance
was intended to insure the continuation and vitality of our
dual savings and loan system. If the Board did not pronulgate
the proposed rule, it would have to proceed on the basis of
cease-and-desist proceedings in each factual circumstance re-
garding such direct investments which it believes result in

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KMC.SCxOkC*. riS'HAN. Hats « MaholO

wia«f* or unsound pr«ctlc«s. If th« piopoitd rula ia codi-
fied, wqr iasnccd institution vhleb vlol«tat tt will b« in
violation of th* rv^ulaeion and tbaroCora aay liava its insui-
aaea tatainatad ot ba subjaet to a caaaa-and-daslat procaadlng
slaply on tba baala of having violatad tba cula. Congiaaa
giava ttaa Board no such authorl^ cagaidlng atata-chactacad In-
stitutions.

Coucts hava conslstantly racognlzad Congiass' Intant
In ptaaarving- authority of stacaa and stata aganclai ovac
atata-chartctad institutions. In Otaro Savings and Loan *n y-
etatlon v. Fadaral Ho«a Loan Bank Board. <CS r.2d 27) <10th
Cir. 1>I1) f tha court affinad PSLtC's caasa-and-daslst au>
thority and danlad tba Board's authority to Issua a lanadial
ordar for an Insucad stata-chartarad institution to caasa of-
tacing cartain aarvlcas. Iba casa involvad a violation of a
law, rula or regulation rathar than an allagad unsafe or un-
aoond practice. Hovatter, tha court netad that 'Otaro, as a
state-chartered institution, is net subjoct to the sane all-
aacoMpassing regulation 'froa its ctadla to Its corporate
grave* as era federally ehacterad Institutions. . . .* <I9
r.3d at 2*5 (citation oaitted). tt goes on to state,
■[Qlbviouslv. the tact that s atata ehartarad ;fn,tf ^tf^ien such
as Otaro la insured bv the fiLIC d9es not Jlwa at the aooto-
prlata state aaaneias of lurlsdletlon ovf it. ■ (enphasls

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KAICSCKOLE". F'""*H. M»i»iM*HBLe»

added] . Id. In a footneta to this statcmant, th« coutt noted
that In 'promulgating i 1730(a) as part of tba financial In-
stitutions Supacvisory Act of 19S6. Congcass axpllcitly lacog-
nlsad the dual nature of federal and atate regulation of state
savlnga and loan associations by enacting S lT30(o)* and quot-
ed the entire section. 665 P. 2d at 28S 'n.4. As noted in dlc-

Congress's Intent In creating cease-and- . .

desist powers vas to grant the Bank Board
and other federal agencies supervising
banks and savings and loan associationa
■additional flexible and effective su-
pervisory powers . . . , within carefully
guarded liwjts. in order to .naka sure that
our banks and savings and loen associ-
ations would continue to seive the Nation
effectively and well.*

665 P. 2d at 288 (quoting S. Rep. Ho. 1482, ISth Cong., 2d

Sess. , reprinted in [19661 D. S. Code Cong, and Ad. News at

3538) (aolloway, J.) (enphaais in original) . Siailarly in

Plrat State Bank of Hudson Countv v. Pnlted States, 471 p.

Supp. 33 (D. M.J. 1978), aff'd. 599 F.3d 558 (3d Clr. 1979),

the court held that the FDtC could not be held liable under

the Federal Tort claims Act for failing to report exceptions

to proper banking practices to the bank's board of directors

because the federal agency did not owe a duty to regulate and

ao Inform the bank's board of directors. In aupport of this

holding, the coutt atatedt "Firat State la a state-chartered

bank, it Is not a nenber of the Federal Reserve System. The

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267

Dtlwrv f unction ot r^iil*tlon ■ltd ■up*tvl«iow. th«fttoc«. ^y
on* to tM c«rtl«d out hv th« ami JmtBmf Ca—li«ion«r of ifnU-
inq. not bv th« FDIC. - «1 F. Supp. «t 35 (Mpb**!* add«d) .
Th* couit't FMSonlng «nd holding w«c« ateinitd on app«al. rt-
lylnir on th* oUigctiona ciHtod undcc How Joisoy. law. S9)

r.3d SSI.

tho lan9u«9« of tbo atatuto autbocliing co«a«-and-
dositt ptocoodinga t^ tho Board, 12 D.S.C. S 1730(*), (fl, and
(o) r Engross' intont aa stated in coaaittoo tapotts and dls-
euttions on th* floor of tha Hous« and Stnatai and court in-
tarpiotationa ot caaaa-and-doalat author!^ ovar atata-
cbaicarod Inatitutlons art clear. Thay vast prlaary regula-
tion and auporvision of inaurad atato-ehartarad institutioni
with tb« atatos and stat* «utboriti«s. ih« Boaid'a propotad
culo uaarpa thia authority by abating that eartain dlract in-
v«sta«nts ata par ff unaafa or unsound. Tlio pfovialon of tha
propesod rula ptoviding a procadura (oc valvar of tta* dltact
Inrastnant limitations is axttaaaly burdonaoaa and doas not
Siva sufCiciant dafaronea to the cola oc viawa of tba atataa
and ttioii snparvisory aothoritios. Th« pcoposad rulo thaia-
foca oxcaada tha Board' a autboci^.

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K"C, SCHOLC". PlC»Ml

3i rcoaul^ation Of Tb« PropoHd ltu;L*
Nlthout Addition*! Tia* roc Co*a«rtt
And A Full Bvldftntftty Hvirlng Kould >•
Acbltcary, Capricious And An Abua* Of
DlscEetion S«caua« Th«t« Is Insufticlsnt
Factual Bvldanca That Dlrsct Invastaants
By Stata-Chattaiad laatltutlona. Allowed
Dndac Stat* Law. Act Dnaafa or Unsaund
Ptaeticaa.

Aa axplalnad by Chaliaan Borna. detetalnatlons by
tha Board of unsafa or unsound pcacticea ar« to ba nada on a
casa-by-caaa basic with careful consldecation of all facts ce-
fardlng tha financial intagrlty of an Insured Inatitntlon.
This procedure was fornallzed in Hemorandum R4> 'Unsafe or Cn-
sound Practices,' issued by tha Board on August 9, 1967.

The only factual basis given by Che Board in Its no-
tice of ptopoaed rulemakfhg Is tha 'losses associated with the
davelopoent of the 1-30 corridor In Dallas, Texas* 49 Pad.
Reg. 20,720. Press reports suggest the 1-30 losses resulted
from fraud or gross inconpetence in granting loans rather than
from direct investment actlvltlea. Such anecdotal evidence is
an insufficient basis for the Board to determine by regulation
that all direct investments above the stated limit are unsafe
or unsound. At a ainimuii, the Institution's full Investment
portfolio, Method of operation, and all aspects of Its finan-
cial integrity must be considered. If the Board is relying on
additional evidence that certain direct investments are unsafe
or unsound, it should be made available so that the public may

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UTC,SC"Oi^«.'''eB>«i

co^Rt on It. Hitboiit an appoctunity to ccvlw such avl-
doneai tbt public is dapcivcd of a ■•anlngful opportunity to
ceaasnt en th« piepossd cul*.

An ifsncy's action %ar !>• found aiblttaiy and capri-
cious If tb* agency 'baa [allad on factoc* which Congrsss haa
not Intended it to considsc. lorl sntlcoly f«llod to consldar
an InpocUnt aaptct of Ch« pcoblMi. . . .■ Motor Vhiela Man-
ufacturars iUioclatl on ». Stato Parm Mutnal Insuranca. 103 6.
Ct. 2B5C, 3BS7 (1983). In this casa, ths Board has antlraly
failed to consider facts regarding the safety and soundness of
direct Inveitaants, preservation of the dual financial syateni
and deference required by statute to be given to the views of
the states and the state supervisory authorities.

As you know, studies suggest that the direct inveat-
aents which would be Halted by the proposed rule are in fact
profitable and socially beneficial rather than risky, unsafe
or unsound. Instead of proceeding based on anecdotal evi-
dence, the Board should conduct a full hearing on the safety
and Boundneas of such Inveataents by state-chartered Institu-
tions before pionulgatirfg the proposed rule, in the absence
of such a hearing, or clear evidence that in all cases Invest-
aents over the stated limits are in fact unsafe or unsound,
the Board will be acting in an arbitrary and capricious Banner

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and will b« AbuBlnf Its dlsciatlon. As Cbalnnan aorne in-
terned Conqicisi

Tht concept of 'unsafe or unsound prac-
tices* ia one of general application whicb
touches upon the entice field of the opec-
ationa of a financial institution. Poc
this reason, it would be virtually inpos-
sible to attenpt to catalog within a sin-
gle all-inclusive oc rigid definition the
bcoad spectrum of activities which ace em-
braced by the term. . . . Contributing to
the difficulty of framing a comprehensive
definition is the faet that particular ac-
tivity not necessarily unsafe oc unsound
in evecy instance nay be so when consid-
ered in the light of all relevant facta.

Chainnan's Hemoranduni, 112 Cong. Rec. at 2e>4T4. Fact specif-
ic determinations of what arc unsafe or unsound practices
should be made before the Board prohibl-ts by regulation cec-
tain Investments allowed under state law 1^ state-chartered
institutions.

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COMMENT OH PROPOSED

AMENDMENT TO FEDERAL BONE

LOAM BANK BOARD REC;iTLATION

OF DIRECT INVESTMENT BY INSURED

INSTITUTIONS 12 CFR 1 S63.9-a{h)

IXICMDIMC THE RULE'S EFFECTIVENESS

ONIIL JANUARY I, 19S9.

SUBMITTED BY:
ASSOCIATIOH OF THRIFT HOLDING CONPAHIES

Octobar 17. 1986

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tirntoDUCTiw

On S«pt«Bb«r 17, 1986 th* F*d«ral Hom« Loan Bank
Board ("Board") ^jbllahad a propo««d rul* that vould, if
adopted, amend the current rule on Regulation of Direct
Investment by Insured Institutions ("direct Investment
rule"). Tbe proposed ainendnent would extend the application
of the current rul'e from January 1, 19S7 to January 1, 1989.
this amendment to the sunset provision of the direct invest-
ment rule would leave in place for an additional two years a
regulation that has been the subject of great controversy,
that is legally deficient, and that is not supported by
empirical evidence.

nie direct investment rule limits the aggregate
holdings of institutions insured by the Federal Savings and
Loan Insurance Corporation ("FSLIC") In real estate, service
corporations, equity securities, and the like to a maximum of
the greater of ten percent (lOX) of the Institution's total
assets or twice the institution's net worth. That limitation
nay be waived by the Federal Home Loan Bank that acts as
Principal Supervisory Agent ("FSA") for the Institution upon
application from the institution. The FSA must consult with
the state agency that oversees the Institution applying for a
waiver, but need not accede to such agency's wishes in the
matter of the waiver. The FSA may deny the application if It
determines that one of the four broad, and somewhat vague.

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fladiitga ean ba a*d* that sugyast to tha FSA that cha dlxact
Invaataanta would prasant a risk that tba FSA did not cara to
aeeapt. If an lastltutiea' a application for a valvar la
danlad by tha FSA, It aay appaal that dacialen to tha -FSLIC
Cor radatarml nation.

"Dm propoaad axtanaion of tha diract invaatnant
rula by tba Board In tha praaant nilamakl'nQ la Inaupportabla
Cor- tha Collowin? raaaona: (1) tha Board's procaduraa in
conducting tbia rulaaakinq ara In violation of Ita rulaa of
practlca and Its own ragulatioaa; (2) tha Board lacka suffl-
eiant statutory authority to proaulgata tha dlraet invamtBast'

^ Spaeiflcally, tha findings ara:

'(A> Iha ovarall pollcias, condition, and
oparation of tha applicant afford a basis
for suparvlaory objactlon;

(B) Tba proposad Invastnant or laval of
InvastHant Is llkaly to incraasa aithar tha
applicant's risk of dafault or tha financial
axposura of tha Corporation;

<C) Tha diract investments of tha applicant
and Its sarvica corporations and oparatln?
subsldiarias In equity Bacuritias and raal
astata ara not appropriately dlvarslfiad.
Diract invastnants shall ba daanad to ba
"appropriately dlvarslfiad" if tha consoll-
datad direct inveatments of the applicant
and its sarvica corporations and operating
subsidiaries in equity securities and real
aatata. whan daamad to ba those of tha
applicant, Beat tha raqulramanta of para-,
graph (a) of this saction; or

(D) The applicant's policies ara inconsis-
tent with sconomical home financing, as
avldencad by its failure to comply with tha
definition of a "qualified institution" as
sat forth m I.S84.2-2(b) of this chapter."

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264

rul«; (3) th* Board b«« usurped th* rol* of atkt* regulator*
grantad by Convrcss ■■ part of tli* dual (Fadaral and Stata}
bankin? aystamt and (4} tba Board's proposad axtansion of tha
direct imrastnant rule In tha absence of amplrical evidence
supporting It la arbitrary, capricioua and an abuse of
discretion.

PROCEDURAL DEFICIENCIES

Hie procedures adopted by the Board In promulgating
the rule in question are deficient and open to serious legal
challenge, ^e deficiencies arise in the Board's imposition - -
of a truncated public comment period for tha proposed exten-
- slon, and in tha Board's failure to grant a raquastad public
hearing .

first, the period for. public comment on the
proposed rule is legally insufficient for the following
reasons: (1) the Board's restriction of the public comment
parlod to 30 days la an unjustlCiad contravention of Its own
Resolution on Rulemaking and Regulatory Simplification man-
date that the public be given 60 days to comment on proposed
rules; (2) the 30 day comment period cannot' be Justified on
grounds that the direct investment rule has previously bean
the subject of public comment, because 30 days allows
insufficient time for public consideration and comnant upon
tha two years of sxparlenca that havs transpired since the
previous comment period; <3) the shortened comment period is
inconsistent with the Board's past practice of citing the

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iMttd for pronpt aetlen ia thm public lQt«r*st only wh*r*
•xlgwit eircxttutancas r*qulr*d ■ ch«iq« of Board policy or
rulat <4) tpM coaMaat period as pcopeaad traata tha axtanaloa
of tha dlract invasciaant sula aa if It vara ■ alner proca-
dural Battar rathar than an ti^orCant and controvaraial Isaua
with aignlflcant coaaaquaneaa for tba thrift laduatry; and
(5) tha prepeaad coaaant parlod la too brlaf for raaaenad-
publle eoHMttt upon tha voluna and acopa of ai^lrlcal atudlas
that axaalna tha dlract invaatmanC rula.

In 1980, tha Board adoptad Raaolution 80-594
•ddrasaiag Ita rulama)ting practieaa, tdilch nanlataa a 60-day
coMMat parlod axcapt tAan at laast ona of alght apaclfleally
llstad clreunatancaa obtaiaad. Tba Board, to nalntaln any
raasonabla da^raa of conalatancy In Ita practieaa, nuat limit
tta axcaptlona to thia atatad policy to only tba aoat axlgant
of clreunatancaa or to wholly ualMportant and noa-
eontrovaralal rulaa. In thla Inatanca, two exceptions hava
baan eltad by tba Board: (1) tha rula baa baan pravloualy
publiahad for public coMtaat and (2) tha public Intaraat
raqoiraa preaipt action.

Aa to tha axcaptlon for ravlatona to pravloualy
publiahad rulaa oa tdileh thara has baan eoanant. It la
eorract that tha dlract Invaatnant rula baa baaa tha aubjact
of axtanalva public eoDinant and dabata. Howavar, tha dlract

Proposad Rula, 51 Fad. Rag. 32925.

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lDV«stB«iit. TUl* eontftlns a aiiRset prevision pr*cis«ly b*caus*
It was int«Dd«d to eev*r a specific tamparary period, and
during that period th* spaeifle axparlanca undar t^a rula
could ba drawn upon for coaaldaretion of nodi fi cation,
•linlnation or axtanalon. Thua, thara la a wtaola naw
unlvaraa of axparianca available for public comment that waa
not available when the rule waa previously considered.

The Board's ua« of the exception for reduced public
coooBent in the event that prompt action is required to
protect the public interest la even laaa supportable. The
specific exaa^les of such exigent circuaatances listed in the
Beard's governing Resolution include matters such aa further-
ing Board housing goals, responding to adveraa market condl-
tlona, ^nd correcting. errors. Slailarly, the Board's own
use of this public Interest exception over the last two years
indicates that It has consistently been cited only where some
change In the Board rules was necessary to effectuate a
change in behavior or circumstances of the regulated indus-
try. Simply put, the Board has utilized the public interest
exception only where exigent circuinstances required prompt<
action to effectuate a change. Previously, the Board has not
used the public Interest exception to attempt to Justify a
truncated comment period on a propoaed continuation of a
current and ongoing policy or rule.

Res. No. 60-584 at 3(b).

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■3h» <Ur*ct lnv*sta«Qt ml* Is • subseantlv* natter
iffactiog buadrads of r««ulat*d instltutiona , and its cxtMi*
■ion for two sdclltloiul y«ars asy net b* treated «s if It
vara a aara procedural lasua. In January, 1985, Baabara of
tba Houaa of Kepraaaatativea conaldarad tba rula ao contre-
varalal and l^Mrtant that 226 RaprasenCativaa Joined in
iponaoring H. £on. lea. 34 axpraaalaQ the saaaa of Congress
that tha rula' a effective data ataould ba delayed while sore
Congressional investigation was eosqplatad. Additionally, tha
Bouse Coatlttaa on CovamBent Opacatieas vas quite explicit ,
in Its report on tha direct Investaent rule that '(bjafora
engaging in ruleraaklnq to extend the direct iavastnent rula,
tha Bank Board aheuld conduct nav and comprahensive empirical
■tudiea of. thrift's operating expariaaea with direct Invast-
■ants in tha period following iiaplanantatioa of the net worth
and ADC loan aceountiag rules' (Enphaais added) . In light
of such previous expressions of concern with conducting
•xhauBtiva analyaiB Of tha baaia for the direct Investment
rule, tha Board's choice of an abbreviated eonnent period la
unst^iportad by necessity, arbitrary, and an abuae of the
Beard' s discretion.

Finally, tha direct InvastBant rula has been tha
subject of ouch debate and study both before and after tha
prooRilgatlon of tha rula in Narcb 1985. Indeed, the OFER

1 Covamnant

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study elt*d by th* Board in lupport of th« proposed
•xtonkloa o£ th« rul* llata S7 studiaa that bear on tb«
•valuation of avan tba limitad mattars that it addrassas. Of
thasa rafarancad atudiea, 20 bava been conplatad sinca tha
last rulamakin? in which tha direct invaataant rule waa
considered. It ia unreasonable and a further abuaa of
dlsOration for the Board to talte the position that an issue -
as complex and controversial as Che direct investment rule
can be properly and adequately addressed, when parties have
only 30 days In which to gather the applicable studies,
exaalna their own relevant experience, evaluate the often
confllotln? findings of the studies and their experience,
prepare their comnents, and file such comments with the
Board. Under such circumstances, a failure to allow at least
M days for public comnant suggests that tha Board is not
interested in receiving or considering meaningful comment on
tha proposed rule. Moreover, the failure to allow 60 days
for public comment is an unjustified violation of the Board's
own rules of practice.

Second, tha Board may not proceed with the. instant
rulemalting without first holding public hearings, if such
hearings are requested by mora than 25 mambera of . the Federal
Borne Loan Bank System In accordance with the provisions of 12
crR f 507.10. That section. In relevant part, requires the ■

Berth, Brumbaugh, and Sauerhaft, Failura Costa of
Governnent'Regulatttd Financial Fims: The Case of Thrift
Institutions, June 1986.

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26»

Board to aft a tlaa and placa for tha coaduct of public
baarlaga on th« propoaad Tabulation to vhlch tb« raquaatlng
■aMbara objact. Furtharvoira tha ragulatlon la qulta claar
that tba prepeaad rula to which tha haarlng raquaatora objact
■ay not ba aada affactlva until aftar such haarina* ara
conductad.

sua ragulatory provlaloa and iti pracuraars hava
atood uncballanTad aa a chack upon uanaeaaiaty or unsaamly
basta by tha Board In tha adoption of ragulaCory provlslooa
aiaca tha Board* a vary incaptioa. Excapt for slight
Bodlflcationa, in aach Inatanca daaaad by tha Beard to be
procedural rathar than aubatantlv*, asaantlally the ■«ma
raqulatory provlaion haa axlatad aa a part of tha Board's
r*9ulatlons govamlng tha Fadaral Soma Loan Banks and tha
institutions which Maka up tb« fadaral aona Loan Bank Syatav
ainca tha Board ialtially publlshad ra^ulationa In tha Coda
ot Fadaral Ragulations in 1938. As part of a procedural
raorgaai cation of all of tha Board's rsQulations in 1958, the
Board coabinad tha two previous provisions that granted the
right to request a hearing on a propoaad (or axlatlng)
regulation, respectively, to the Federal Hone Loan Bsnks and
the institutions that are members of the Federal Home Loan
Bank System, and to the members of tha aystem and the Fadaral
Savings and Loan Advisory Committee. The combined provision

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was ■av*d te Subchapter A at th* Board'* rvqulatlona to tak*
Ita placa alongaid* other provisions o£ general applicability
to the Many roles played by the Board.

Lest It be argued that ! 507.10 is not intended to
^>ply to regulations, such as the instant extension of the
direct Investment rule, that govern activities of Institu-
tions as th4y relate to the Federal Savings and Loan
Insurance Corporation; It Riust be noted that the Board has
proDiulgatad both f 507.10 and | 563.9-8 (the direct Invest-
aent rule] under authority of f 17 of the Federal Hone Loan
Bank Act ("Bank Act"). Further, repeatedly, the Board has
argued that the Bank Act and the National Housing Act, under
which most FSLIC regulations are pronulgatsd, must be read
together as an Integral whole operating to promote a system
of economical hone financing.

In addition, the Board has cited S 507 aa one of
the procedural sections generally applicable to tha question
of lAether or not a hearing is required in proniulgating the
direct Investment rule. While on those occasions hearings
vera denied, presumably that was because requests had not
been nade In the form and number required by f 507.10.

" SO Fed. Reg. 6912,
' Id. at 6914.

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Tha proposed rulo Cor ttM •xtenalen e£ tb* direct
iBVOBtBant rul* is eertaisly oa« th*t falls within i 507, 10' a
■■bit aa 'ralatisg to tha Fadaral Hob* Lean Banka." Tbm
Banks play an integral role In tbe direct Investaent rule's
schaate for allovlng waivera. Specifically, if an institution
vishes to make direct Investments in excess of the rule's
threshold llsd,t of ten percent (10%} of total assets or twice
net worth, then it oust apply to its regional federal Home
Loan Bank, acting In the role of Principal Supervisory Agent,
for a waiver. The BenJcs in their roles as Principle
Supervisory Agents are even Bore directly Involved in the
i^tloBentatlon of the direct inveatnent rule than the Board
itself.

. If the Board promulgates a final rule without first
extending the period for public cooment or without first
holding the public hearings required by | 507.10 of its own
rules, it will do so in violation of its rules of practice
and its regulations, ^ese defects -- particularly the
failure to conduct a hearing mandated by the regulations --
would be sufficient to invalidate the proposad rula.

INSUFFICIENT STATUTORY AUTHORITY
The Board has prsvioualy considered and diamiaaad
arguments that it is without sufficient statutory authority
to promulgata (or, by analogy, to extand) th* direct invest-

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■Mnt rul*. Bow«v«r. th« Board'* position on th* qu«stlon of
statutory auttiority is aarlously undercut by Its own
charactcrlxatlon o£ th« facts.

In brief, tha Board's assertion of statutory
authority to promulgata or axtand tha dlract invastaant rule
rests on two principles arising out of the interplay betvraen
the National Housing Act ("NHA") and the Fedaral Borne Loan
Bank Act: (1) th« development and maintenance of a Bystam of
sound and aconoalcal home financing; and, (2) the protection
of the FSLIC fund from undue risk. . .

First, the Board had cited to | 402(a) of tha HHA
(12 D.S.C. 1725(a)) as empowering the Board to prescribe
rules and regulations for carrying out the purposes of the
HBA.^° TheBoard then asserts that "[slinca the direct
inveatnent regulation is designed to maintain safe, sound,
and economical home financing as well as to protect the FSLIC
fund from undue rislt, the rule carries out the purpoaes of
tha NHA and so represents a permissible exercise of regula-
tory authority under section 402(a)." The mere assertion;
however, of the design or purpose of a regulation Is not
sufficient to support the argument presented. For the Board
to be correct in Its analysis of the scope of authority
provided by the language of | 402(a) of the MHA, it must
prove that the regulation in question, in fact, does carry

50 Fed. Reg. 6912.
50 Fed. Reg. 6912.

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out th* M**rt*d purposas o£ th* &et. llor*ov«r, th* Beard ia
net fraa to iasua broad ranging ragulatlona, aucb aa ttaa
dlcact invaat»anc tula, if auch rulaa ara iocoaalatant wLtb
tba autheritlaa grantad to financial Inatitutloaa by vlrtua
of tha provlslena of tba HHA and tha Bank Act.

In an affert to bolatar Ita aaaartlea of atatutory
authority tba Board has eltad to its maeh Bora ■pacific
authorlzatlona undar SI 407(b) and 407(a) of tha KBA to
tarmlnata Inauxanca covaraga antiraly and to inltiata caaia
and dasiat proeaadlnga to pravant "unaafa or unaound prac-
tleaa." Tba Board than l^llaa that it la a "laaa drastic
powar" to aaraly pravant unaafa or unaound practlcas by
ragulatory prohibitlona such aa tha diract invaatmant rula.
nw Boainl ia subtly and rathar cavaliarly ignoring tha fact
that ita rula inpesas a burdaa acroaa tha board on all FSLIC
Inaurad institutiona without ragard to whathar thair individ-
ual practices ara unaafa or unsound. Tba Board lovllaa that,
bacausa it could taka drastic action undar authority of tha
statuta against ona institution whosa unsound practlcas could
ba provan, it may subjact all institutions to such "laaa
drastic' actions as it saas fit.

This was precisaly tha typo of Board- Instituted
draconian saaaura that a district court ovarruLad in FAIC
Sacuritlas Inc. v. United States , No. 84-0959, slip op.

50 Fed. Rag. 6912, at 6914.

Id., at 6914.

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(D.D.C. JUr« 20, 1984). There the district court held thet
the Board could not, by regulatory fiat, virtually eliminate
FSLIC coverage for deposits placed through deposit brokers.
The court indicated that the proviaiona o£ Uie MBA gave the
Board Che authority to ragulate unsafe and unsound practices
as they "related to specific enforcenent actions" but "do not
support" this regulation (id. at 9 n.7). Moreover, the court
was not porauaded that the NHA provided for across-the-board
regulations such aa the one then in question and, by analogy,
such as the diract inveatmant rule. , .

The Board's assertion of statutory authority to
issue the direct Investaant rule prohibitions based on the
purpose of preventing unsafe or unsound practices is sharply
undarcut by tha board's repeated assertions that it makes no
finding that direct investments are inherently unsafe or
unsound. The most the Board seems willing to say is that
some direct investments are unsafe or unsound, or that in
some sets of circumstances they present too great a risk to
the FSLIC. Mo one would seriously argue with those proposi-
tions. Moreover, it is Just this case by case nature of
detamining what is unsafe or unsound that the stature
intended as the Board's role in protecting the integrity of
the FSLIC. Nothing in the Board's characterizations of
direct investments leads to a conclusion that the broad-
sweeping limitations currently imposed on an entire Industry
by the Board are supported by either logic or statute.

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;rauRFAri<»i or states' roles

As wltb concern* «b«ut statutory authority, ths
Board bas prsvloualy had occasion to censldsr and - rsjsct
arftnsonts that Its systsa of regulating dlrsct Investments is
In contravention of Congressional purpose in creating the
dual (Federal and State) banking systen. Hhile the Board
attempts to characterize its schetae for the regulation of
direct InvestnentB as including a meaningful role for state
regulators, it has reduced that role to that of an insignlfi-
caat and powerless commentator. The states no longer have
the practical ability to determine what kinds and amounts of
Inwstment are appropriate to the localized conditions of its
state -charts red institutions. The Board's regulations usurp
all of the ultimate power to determine investme.nt guidelines.

The direct Investment schema created by the Board
provides stats regulators only a hollow, powerless opportuni-
ty to comment on the appropriateness of granting a waiver.
It must be noted that the PSA need not accede to the prefer-
•oces 6t the state regulator. Further, the entire waiver
process Is an in^osition placed upon state -chartered institu-
tions without regard for the state determination that must
already have been made to allow the direct Investment in
(juestion.

Congress has conaistantly sought to maintain the
dual banking system, allowing there to co-exist both federal
and atata chartered institutions. One a£ the great benefits

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of our fa^eral aystan of gov*rnm«nt la that th« various
B9«nci«a of tha statas often take a quite different approach
to tha ragulatloa of some sagnent of the economy than do
their federal eountarparto. This diversity h«* great valua
In allowing local differences to prevail, in providing many
modals from which to gain eicperience, and in maintaining
closer connactiona between regulators and the regulated-
Wlth its direct investment rule the Board chooses to supplant
■11 such benefits In the regulation of financial institutions
vith its own all encompassing fiat, based on the scarcest of
a^irical avidanca. Within the dual system fostered by
Congrass, the Board simply does not have sufficient authority
to usurp tha role of state regulators.

As discussed supra, the Board doas not have
statutory authority to define an entire class of Investment
babavlor as an "unsafe or unsound" practice. The statutory
provisions to which the Board looks for support for Its posi-
tion do not grant such authority and certainly did not
contauplate that tha Board would impose such a broad Judgment
on practices which properly impowered state authorities had
dacidad to permit for state chartered institutions.

Th* Board relies heavily on tha csasa and desist,
authority granted to it by Congress in 12 U.S.C. | 1730(b)
for tha purpose of curtailing "unsafe or unsound" praetieas.
Tha legislative history Indicates that neither the Congress
nor the Board itself contemplated that such authority should

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b« us«d tn anythiag oth«r than • cas* by c&s* approach. On
b«haLC ot feba Boardt tban Chairman Bom* provided Congrasa
with a tailing ceaclualon on tha propar applicaUon of tba
"uasafa or unsound' practicaa datarvlnation:

. . . thara would hava to ba a factual
showing on tha racord which auccaada in
coBvinclng tha haarlng axamlnar or tha
Board, . . ., that tha particular
practica in tha casa ahould ba ch^rac-
' tarlzad aa 'unsafa o» unaound, " and a ~
eaasa-and-daaist ordar laauad.
Going furtbar. Chairman Roma' a aubnlttal to
Congraas quit* plainly anvisionad that th« unsafa or unsound .
practicaa datannination would bo made in an Individual, casa
spacific, racordad procaadin?. Tha axamplas of unsafa or
unsound practicaa suggastad to Congrass by Chairman Soma
vara agually fact spacific; It is not cradibla to now assart
that Congraaa intandad to grant the Board tha authority to
Ignore tha express provisions of state law allowing certain
Icinda or amounts of invastnent and to determine such
practices to ba 'unsafe or unaound."

nM Board, perhaps recognizing the foregoing argu-
ments has responded that it la not defining direct Investment
to be unaafa or unsound practices, but merely setting thresh-
old limitations which, when exceeded, trigger requirements
that an institution apply for a waiver. If, indeed, tha
Board does not rely upon tha authority of 12 CFS i 1730 (b)
to Issue cease an desist orders, than it is left without any

112 Cong. Rec. 26,474, October 13, 1966.

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baa* for ita lapoaltien of tha direct invaatmant rul« upon
atata chartarad inatltutlons . The Soard miat chooa* it*
statutory baaea and atay with than. It cannot prohibit
behavior on the basis of th« authority to order an inatitu-
tlon to caaaa and desist from unsafe or unsound practices,
and at the vary aana tine assert that it has made no dataml-
natlon that the prohibited behavior da unsafe or unsound.

The Board indicates reliance upon Independent
Bankers Association of America v. Haimann . 613 F,2d 1164
(D.C. Clr. 1979), cert, denied . 449 U.S. 823 (1980) to
eatablish Its authority to define unsafe or unsound
practices, nie Helmann case resolved. In favor of the
government, the_ question of whether the Comptroller of the
Currency had sufficient authority to Issue regulations
prohibiting certain conduct by "insiders" of federally
chartered banks on the ground that such conduct was "unsafe
and unsound." The regulations were issued under a atatute
slnilar to 12 CFR S 1730 (b) upon which the Board relies.

The circumstances of the Helmann case were, how-
ever, quite different. The banks regulated ware federally
chartered, thus there had bean no state law date mi nation
that the practices in (juestlon were expressly permissible.
Moreover, the Comptroller of the Currency was not engaged in
« shell game of implying that specific types of practice ars
unsafe or unsound for purposes of enlisting statutory
authority and, at the same time, saying that he had not

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279

ii«— d tbip unsaC« or unsound for putposos of avoiding *n
apparont conflict with both •■plrlea]. facts and contrary
atata dataminatloaa.

Mora to tha point la tba nora racant daciaion in
FAIC Sacuritiaa. Inc. v. Unltad Stataa of America . Id. ,.
dlacuasad aupra . Tbara tha dlatrlct court waa daallng
dlractly with tha Board's atatUtory authority and bald that
tha unsafa and unsound practicaa rafarrad to In 12 U.5.C.
1730 ralata to apaclflc anforcanant actions brought against
individual banks, and tha powar to prascriba ragulatlons
irtiich "aCfactuata tha ptirpoaaa" of thosa provisions clearly
doaa not contaaplata across- tha-board ragulatlons of tha type
at iaaua hara.

Congress has rasarvad a rola in tha dual system for
state ragulationa of atata chartered Inatitutlons and, absent
apacific inatancas of unsafe or unsound practice, has given
tha Board no authority to remake the detemlnations of the
states. As the Court In FAIC noted we nnist guard against the
'tanptatlon to approve good-faith agancy efforts daapita tha
agancy'a apparent lack of statutory authority." The

Board's well meaning intentions aside, it simply has no
authority to substitute Its Judgment for that of the states
In their area of regulation.

Id . , slip op. at 10 n
Id., slip op. at 12..

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Even In tboa* instances tdi«r* th« Board baa b««a
glvan authority to taka action to tarmlnata tha Insurad
stAtu* of a atata cbartared inatltutlon upon tha apaclfle
data rmi nation of unsafe or unsound practlcas by tbat spaciClc
Institution, tha Board is raquirad by »t»tuta to first qiva
stata raqulators notice and the opportunity to attanpt to
eerr«ct.tbe unsafe or unsound practice. TbiM provision
recoqnlzed the essential quality of the dual system te be
that the states reaaln the primary regulators of the state
chartered institutions. Indeed, in testimony supporting the
provision, Board Chainaan Home stated;

He have also bean conscious, in drafting
this bill, that under our dual systan the
primary responsibility for supervision of
State-chartered finaiiclal Institutions lies
On the State authorities. We have no
quarrel with that concept. . . . Our
objective is quite simply an effective
backup capacity when needed and hence we do
not object to the amendments adopted by tha
Senata to assure State authorities of notice
and opportunity for action or objection OB
their pact before we conmence a proceeding
involving an Insured State institution.
in sun. the Board cannot assert authority over the
direct investment activities of state chartered Institutions
without Invoking what it refers to as the "leas drastic
powers" Inherent in the authority to issue cease and desist
orders or termination of Insured status orders whenever an
Institution is engaged in "unsafe or unsound" practices.

Financial Institutions Supervisory and Inaurance Act of
1966: Hearings en S. 31S8 and S. 3695 Before the House
Cnmnittee on Banking and Currency, 89th Cong.. 2d Sess. 38
(1966).

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Howavar, b*eaus« th* stKtsa b«v« already axplleitly datar-
ainad that diract InvaattBantta in ganaral ara paniiaalbla and
tharafora net "uaaaCa or unaouad, ' and bacauaa aaEplrtcal
avldanea will not support a gaaaral finding that diract
invaatsaata ara unaa£a or unaound par »• : tha Board ia unabia
to Baka any aueh dataralnation . Tha Board'a prohibitlona
agalnat diract Invaataanta ara thua invalid, aa thay lack tba
nacaaaary atitutory authority wban appliad to atata chartered
laa'tiCueiona .

INSUFFICIENT EHPIRICAL EVIDENCE
The Board'a proposed axtanaion of the direct
investment rule ia not supported by empirical evidence of a
relevant or convincing nature. Even iC it were aasuned that
tha Board took action to correct tha procedural defects of
this rulemaking, that the necessary statutory authority could
be found to Justify the rule, and that proper sccommodations
ware made to allov the states to play their proper role; the
propoeed rule lacks sufficient grounding in fact to survive
legal challenge.

The Board had stated originally that the diract
investment rule was designed to prevent "unaafa and unsound
practlcea that othervisa would expose the institutions and
the Insurance Fund to an unacceptable level of risk."
Later, tha Board cited the additional concern that institu-
tions Bdght exercise direct investment powers granted by tha

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■tatas "In a numar Incehslatant with their obligation to
provide «conoBlcal hon* Cinancin?."^ Wh«n th» final diract
invastmant rula wa» adoptad, tha Board statad that it was
"daai^ad to allow Institutions tha flaxibillty to axarciaa
thalr Invastiaant powers, as Indapandently authorized by
appllcabls law. In a nannar that would not expose either the
institutions themselves or the FSLIC Insurance fund to an
unacceptable level of risk, while at the same time ensuring
that these institutions continue to fulfill their obligation
to provide economical home financing." Finally, in

proposing the extension of the direct Investment rule, the
Board has repeated without alteration this last formulation
of purpose.

It, is worth noting that the Board makes no attempt .
in tha rule as adopted or In its various supporting atate-
ments to define what constitutes "an unacceptable level of
risk" or what constitutes the extent of the Institutions'
"obligation to provide economical home financing." The Board
appears to be perfectly willing to leave auch terms vague and
undefined, perhaps, prcciaely because there Is no empirical
basis for asserting that any particular objective level of
risk 1> created by Increasing levels of direct investment to
institutions themselves, to the FSLIC fund, or to the home

^^ 49 Fed. Reg. 48743, at 48744, December 14, 1984.

^° 50 Fed. Beg. 6912, February 19, 1985.

^^ 59 Fed. Reg. 32925, at 32925 and 32926, September 17,

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fliuuielii9.Bkrlc*t. ladttad, tb«r« mr« m*ny Indicationa that
■uggcat ttast Incraksln? levcla e£ direct invasUMnt by tt
r*latlv« fmr laatltutiona in th* aystan kr* wholly uiu:*l«t«d
to Cho purport«d purposes of the ruls.

Th« Board's us« of certain an^irioal studies and
supervisory experience to atteiq>t to nake a connection
between direct Investnents abd the stated purposes of the
rule llvltiag then requires the closest scrutiny. Tha
Board's srsuments fall into three broad categories:
(1) those that attempt to ahow a link between increasing
direct Investnertta ajid decreasing availability of hone
financing funds; (2) those that attempt to show a link
between incrsaaing direct investment and increasing risk of
failure to the institution; and (3) those that attempt to .
show a link between increasing direct inveatnents and
increasing costs to the FSLIC fund In the event of institu-
tion failure. The first and second categories would relate,
rationally, to the regulation of all institutions within the
Federal Home Loan Bank System. If the concerns posited there
ware bom out by empirical evidence and experience, the
strictures necessary to alleviate the concerns might logical-
ly be applied to all institutions. On the other hand, if
only the link between direct investments and Increased cost
to the F5LIC in the event of failure were established, then a
rule which makes no attempt to differentiate between instttu-

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tlons whlcjt prcient a likelihood or probability of failure
and institutions which are financially healthy is both
logically and legally overbroad in its scope.

Of particular interest in regard to the appropriate
•cope of the rule ia the experience which the rule itself has
provided. Conmendably, the Board recognized the somewhat
tenuous empirical underpinnings of the rule as issued in
February of 1985 and provided a sunset provision that would
allow it to "assess, after sufficient experience with the
rule, whether the approach taken had been effective in
controlling risk and whether further regulatory action was
required." Leas commendebly, the Board seems not to have
taken the opportunity to seriously reflect on whether the
rule' has any relationship to the Board's original concerns
and rationale.

In proposing that the rule be extended Cor an
additional two years the Board has offered no evidence,
whether empirical study or supervisory experience, to
establish the supposed link between direct investraent
activity and a reduction in the availability of economical
hooe financing. Indeed, the Board, except for repeating its
concern about home financing fails to mention that category
of concern at all. To find any support for the Board's

■ must search the statementa of the Board made

51 Fed. Reg. 32925, at 32926.

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prior to tho rulo's adoption. Evan tharo tho noat th*

Board baa baan abla to do Is point to tha ralatlva highar
parcantaga of diract invastmonts in the portfolios of soma
inatitutiena and (bacausa aucb parcontagos by definition
antail a £aro-sum situntlon) tha ralativa lowar parcantaga of
boaa Bortgagaa in aucb portfolios. Savaral points must ba
Botad: (1) tha Board has not shown in tha two yaars of tha
rula that thoaa instances of increaaing diract inveatnant
cauaad a dinlnution in the actual dollar value of outstanding
hone Bortgages; (2) tha Board has made no attempt to show
that the overall bona financing market has been reduced or
even affected by direct investment; (3) the Board has
ignored euggaationa that the benefits of direct investments
■ay actually make greater dollar values (through smaller
parcentagas) available to home financing;' and (4) the Board
haa ignored the degree to which the greater returns on diract
investments may have Increased the stability of soma institu-
tions thereby assuring that they will continue to exist in
the long term and continue providing economical home
financing. In aua. It must ba aaid that there ia neither
empirical data nor supervisory experience to support the
inclusion of concerns for continued hone financing as a basic
purpose for adopting or extending the direct Invaatnant rule.

See generally, SO Fad. Reg. 6912 at 6918.

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similarly, the Board's Iftteat proposal for th*
extttnsion o£ th* dlract invsstment rule contains no support
for the Board's aasertad concam that increased direct
investments are linked with « greater probability that insti-
tutions will fail. In fact, as with the concern Cor hone
financing availability, the rationale supporting the proposed
extension is silent on the subject of increased risk of '
Institution failures save for reiterating the concern Itself.

The question of whether or not increased levels of
direct investment are linked to failures has been the subject
of much conunent, study, and analysis since the inception of
Board proposals to limit direct Investments. One point

stands out clearly in all of the debate over this issue —
Aot one study, of all those conducted, has found a correla-
tion between direct investment level* and institution

See generally!

Berth, Janes R. ; Brumbaugh, R. Dan, Jr. ; Sauerhaft, Daniel;
and Wang, George E.K. "Thrift- Institution Failures: Causes
and Policy Isauas," Bank Structure and Competition . Federal
Reserve Bank of Chicago, 1985, pp. 184-216.

Berth, James R.; Brumbaugh, R. Dan, Jr.; Sauerhaft, Daniel;
and Wang, George H.K. "insolvency and Risk-Taking in the
Thrift Industry; Implications for th* Future," Contemporary
Policy Issues . Fall, 198S.

Benston, George J., and Kaufman. George G., "Risks and
Failures in Banking: Overview, History, and Evaluation,"
mimeo, December 1985.

Luses of Savings and

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287

Absent any study to support its eoneora, tho Board
has choaan to eCCar a faw, aoaawbat va^ua rafaraaeaa to
axavplaa of suparvlaery axparlanea In which it ballavaa that
diract iDvastBanCa playad a rola In causing Institution
fallura. Aa othars hava notad for tha Board in Uta past,
thaso iiuUvidual axaaplas ara all aaaociatad with anothar,
■era powerful failure causing factor -- fraud and Kisnanage-
■ant. While the direct invastaant activities of such failing
institutions nay vary wall be a proper aubjeet of concern for
tha Board, they do not raprasant tha atata of the industry as'

The Board appears all too willing to conbina thaaa
Isolated inatances of ■iananagaaant caused failure with
. certain questionable data which suggests. • link between
direct Inveataant levela and the cost to fSLIC of auch
failurea. The result at which the Board arrives from thla
statistically insupportable combination is that diract
Inveataant levela mat be related to the risk of institution
fsllura. Hot only does the Beard fall to provide a single
piece of eapirieal analysis which would support such a leap
of regulatory faith, it also ignores tha conclusions of
studies which have axanined that question and failed to find
any such connection. nie Board haa chosen to either

^^ 49 Fad. Rag. 48744, at 48748-48749.
» S.e =

Berth, Jai

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quibbi* wl^th th* mattaodolsgy of studies whoae outcom* it does
not like, or to Adopt convenient and convoluted explane-
tlons for why the outcome of the analysis Is not what the
Board predicts.

Because the Board has chosen in the rationale Cor
the prop>oBad extension to rely so heavily on the empirical
study of Barth, Brumbaugh, and gauerhaft ol the Board's
Office of Policy and Economic Sesearch ("OPER") on the
Failure Costs of Covernmant-Regulated Financial Firms: The
Case of Thrift Institutions (June 1986), it bears particular.
examination to determine what light it may shed on the
question of a link between direct Investments and the likeli-
hood of Institution failure. First, it must b« understood
that the OPER study took no consideration whatever of healthy
or non-failed institutions. The only conclusions which may
be reliably drawn from the study are conclusions which relate
exclusively to institutions which have already failed — a
very small end unrepresentative subset of the thrift
industry. The sample limitations make it absolutely clear
that any attempt to use the study, as the Board does, to

(footnote continued from previous page)

and Wang, George H.K. "Thrift- Institution Failures: Causes
and Policy Issues," Bank Structure and Competition . Federal
Reserve Bank of Chicago, 19B5, pp. 184-216.

An Analysis of the Causes of Savings and
50 Fed. Reg. 6912, at 6915.

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iaply ttwt, tbar* Is aemm link b*tw««a cUract linr««ta«at and
tba Ulwllheed s£ failure is a gross Bisusa of th« study's
findings.

Horsevsr, it is l^ortant to undsrstsad that the
basic data t^ea which tb« OFER study Is foundsd coatalaa a
strong poaalbllity of bias. Ih* "sctusl cost" to F5LIC of
ths fallurss studlsd is not la tb« ordinary ssas* of tha wort
sn "actual' figurs at all. It Is, rathsr, ths FSLIc's
•stlnats of costs bsssd oa Its vslustloa of tha assats and
lisbllltlss of ths fallsd lastltutioas.^^ Thsrs Is tho v«ry
rssl possibility that ths OFER study rsally only haa value li
sxamlalag tha astlsation biases of the FSLIC. Hors directly,
It amy be that ths statistically slgniflcaot link that ths
OPCR study found between direct Invsataants and the cost to
FSLIC of failure. Is really only a quit* predictable
tautology. If ths FSLIC eatiastors are predisposed to
believe that direct invescmencs are inhereatly risky sad of
relatively less value tbsa ether acre traditional aaseta of
thrifts snd build that predisposition into their "actual
costs" estimations, than any exaninatlon of such "actual
costs" would hsve to identify direct Invastaanta aa a
significant contributor to coot of failure. Moreover, the
sxlstsnca o£- such a bias would explain the apparent anomaly
in the failure of the previous work of ths OFER study authori
to find any link between direct inveatuenta end the occur-

-^^ Berth, et al. I9B6, footnote 2S, at p. 32.

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r*oc« oC £ailura its«lf. Sine* tb» quastion of whether or
not th*r* has be«n « failure does not hinge on ESLIC estima-
tiona, the possibility of bias cannot affect the outcone.

In -mum, there is no evidence empirical or experien-
tial to support the need to limit direct investments for two
of the three fundamental purposes the Board eet out for the
direct investment rule. . ^lere is only a single entplrical
study of limited sample, with potentially biased data, to
support the need for the limitations with regard to the third
purpose set out by the Board. Nothing in the Board's
proposal supports a link between direct investments and ■
reduction in economical home financing. Nothing in the
Board's proposal supports a link between direct investment
and the. causes of institution failures. The only possible
link la between direct investments and the cost to FSLIC of
failures. In view of these conclusions the extension of the
application of the direct Investment rule to all institutions
without regard to their financial stability is overbroad and
an abuse of the Board's regulatory discretion.

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G>nU H. MeQHRk

Octobar 14. 198*

Chairman Edwin J, Gray :^'; ^

Fadaral Hob* Loan Bank Boaid -•i'- ^ -~>

1776 "G" Straat, H.K. - .

Waihington, D. C. Z0SS2 ^ &

REi COMHEHT OH REGULATION OF DIRECT IKVESTHEHTS (S£'9t3: ^

Dear chainan Gcayt -'• ^

Aftsr tha axparlanc* of baing in an HCF Program . .
witb Buttarfiald Savings for tha pait y«ar, it li raadlly
apparant that varloua control* nuit ba nalntainad by
ragulatory authoritiaa to curtail rapid growth. Ha ara
in conplat* agraamant with tha ragulationa on aaaat grovth
and tha naw ragulrananta on naintananca of adaijuata nat

In analyzing tha proviaiona of tha naw nat worth
raguiranant ragulation, it ia our baliaf that it adaguataly
covora any potanttal problaaa of both growth and invaat-
■ant. Na, tharalora, urga you to not axtand tha diract
invaitnant cagulaclon past Janaury 1, 1987.

>&*Vjfer<g*tw

- .-33a- ■

ol Sttett. RO. Box 600C Com

(TUI 549'6S11

..Google

. . BEC, ■ , .

SAVINGS C.LOAN LEAGUE -loew i*THST.-AUSTM,TEXAsn7Di'Gi>M»4i3i

InfoiutloD 3*[vlcaa Sactlon Octobai: IS, 1»S(

Office of th* Sacratarlat
Fad*i*l Boae Loan Bank Board

CantlCBoni

On SeptcBbai 11, 1»BS, Cbe Fideial Bob* Loan Bank Boaid notified systes
aeabeia of Itl intaot to ceadopt ita Regulation of Direct Inveataant by
Inaured Inatitutlona. By thla action, the Board would eiteod the Direct
InT*atn*Dt Regulation eipiiatlon date to January 1, IMI, rather than
January 1, 1987. Further, the Board caquaatad comunta froB the Induatry
on the Regulation, its adalnlatratlon and tb* continued need Cor the cole.

1 Tfheo tba Initial

^-•Loan League reapond ...

eaaence of tba Laague'a poaltlon waa that direct Inveataent, If lnuccu ».
poaad aerloua rlaka for the FSI.IC, should be tailored to the
capitalliatlon of our senber Initltutlona, not to the arbitrary llnita
vhleh coold only be exceeded by auparvlsion naking buaineaa declalona for
aeabar Banageaant.

Quite recently the FBLBB adopted a nev cule governing nenber
eapltalliation requicaaenta auch In line phlloaophlcally wltb the
reeoaaendation aada by tba League In I>B4. The nen rale adopts a act oE
extCBordinailly stringent raquiraaanta governing not only direct
Invcataants, but alao loans collatcrallied by the land and construction
outlays of ita iaproreaent. Noceover, the rule incorporatea a €\ capital
factor on any liability groetb above tba level prevailing aa of Dacanber
31, 19B«.

a redundant and 1

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2^ bMfO* tb«(«(OM , _____ _. . . _

(U onrtaat rHolitloa ob direct iDvattaanta . In tI** Pt th« nawly
^Mptid i*9DlatlM« voratnlBf ■■■tiir capital liatloa, cba piaaaat iDla '-
jitact InvaatBanta aatraa ne naafnl paipoaa.

Tact tcBlr raaia

S.WS).

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^A/ESTeRN'SAylNOS

otiyttOfiBai *'?c,''':,-- '^-""'Pp

% Section

October IS, 1986

Dlrtetor

Infomatlon Servfc

Office of the Seer

Federal Home Loan Bank, Board

1700 Street. N.W.

Washington, X 20SS?

Gentlenen:

The Federal V

ome Loan Bank Board is considerfng

the direct 1

vestment regulation. When the ori

inal regulation was proposed

WeJlerr Savi

gi made nuuierojs suggestions many

f which were adopted In the

final regjla

ion. We have supported the direct

investment regulation both i

e Federal Hone Loan Bank Board and

in testtnony for congress.

The regu1at1

n has served a very important purp

se of focusing attention on

the potentia

risk and In providing appropriate

supervisory review on over-

sight of dir

ct Investment!- However, the prop

sed extension perhaps should

be evaljated

in the light of the addftional (mp

rtant regulations which have

been jubsequ
Include the

ntly adopted by Federal" Home Loan
BCently adopted higher net worth r

ank Board, These regulation
Ouirements. the asset classl

ficatlon req

All of these regulations have foe

tions of loahi versus direct

of the bant<'

ly capltaliied, that suffi-

ciert capita

be provided for investments that

ave potential great risk

the FSLIC of direct

nvestm

higher capital reoul

capital requirements

limitations on assoc

atfon'

the pajt problemi w1

high growth. inttitgt

oni.

rts. Th

that iand^acquisitio

n andd

board has approprlat

ely dea

t1ons on growth and

through

The recently aOooted regulations have addressed
The recently adopted net worth regulation recogniied

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Th« Fwlaral HOM Utn Unt. Board
Octobtr tS. I9U

3. Ho HalUllani thould b* pIlEid o

t worth (ictcdl llx pircant.

Iitlon. Thti r*-

1 ragulitory offi —

Ills by

Tha pratant rtgulatlen provldat that aitoelatlons aay coaiplata diract

Invaitaantt vhara thi a laclation ^ad t daf nitlva | ~

at of tha iflopl en af the et it n^ air-ect n»eit«afil

QUlrawnt pUcai in undue burden on both asioctatloi

c1ils. Thara auit ba a^aa Oy the supervisory agent

was a dafinltlva plan ind association's «uit spend stgntflcint aaounl

and adailnlitrativa effort tn trying to docunant what wis in tha nind:

plant of tha -mocUtlon's a of Dacaabar 10, 1984. Itegulitory offli

thair natura ara not gaaraS up for tha rapid rata of decHion making

:by the couplet on .of rail astata tJevtlopment*. It 1t -n^^iprDD'-iice to plice.

the rasponslbH t> ma burden an supervisory tgants to get Into tna niddia of

adaquacy of plana. In the cise of an isioclatian fiHin^ to meet ts higher
ragulatory nat worth It Is entirely appropriate for regulatory offic a s to
atiert a hlghar level of control. Since the tine of reguU-.c-y offic aU Is
naeattarlly llnltad their efforts should focus on thoia Institutions who ara
falling to Mat ragulatory regulrenantt and not be In a butlnati planning or
daclalon aikjng node for astodatlon't who ara In coaip!

ardi.

by daflnltlon a d'
raally naan that '■
Xim*. Bad Icar <i

g to melt tha n
errc loni) Issue

t wo-th
and in i

eo that whanavar

a fatljr

ack was In fact

a (Jiraet

true any loan

ha-, goat

such a Oanrtrln

--ion doa

man* a «i-»;t '-

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October IS, 1986

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g *##JJ| Nationat Association ot

ISJf J State Savings &Ei&afvSUft!a-visors

UrKtoc, infen— tlon SarvlcM
Off lea of tl> SKraUKlat
radani Kb* Lou Mnk Baud
1700 G Strast, H.W.
IkaTiiogun, D.C. I0S51

RBi RagulatloD of Direct Inv*Bta*nt ^ Iiuui*d IniEiEutiona—PWdaral
iMgistu lb. M-M3

EMT M. ItiiMi

On fftp'-^'"'- 17, 19l(, Um TMaral Bcaa lowi Buik Board publlihad for
public coomant a pro()OMd ml* which would uBnd It* •■iatlng raqulatloD
90v*caln9 iDinitDanti ty Inatitutiona tha ■coninta of xtitch ara Inaurad ty tha
Fadaral Saaingi and Loan Inauranca Corporation la aqulty aacuriElaa, raal
aitata. larvlca cotporaciona, and oparatlnq lubaijiaiiaa. Tbia peopoaad
■iiaii^am to Uia 'diraet iiFAataant* nil* ueuld difar tha aspiration of tha rula
fc<M January 1, 19§T to January 1, 1169. Tba FHL88 tiaa Indicatad Uiat it la
^aclfteally raquaattng coBoant on tha ■^Intatntlva flavihilicy of tha 'dlracc.
InvaatBtanC* rula and, aoraovar, tha aontiniad noad for tha cula in ita praaant
fora In light of tha FRLSB'a cacant adoption of highar Ta9ulatoTy capital
raquiraoianta for invivad instlti^iona,

Tba National Maociation of Stata Savlnqa 4 Loan SifMrviaora viaui thia
propo^ aa of tha utmat liEpoitanoa. Spaclfloally, ■AS54L5 ballavaa that tha

of whathar tha "diract InvuDnant' rule ia (till nacaasary (n light of tha

a racantly prcnulgatad regulation partaining to tha capital raquireoanta

' inaurad institutions daiarva* tha highaat leval of acrutiny. Ihara l> not

al ^r o ae an t u to tha B;^cpriatenaaa of ths axlstlng ragulation, much

■>» iaaua of axtanding tha 'sunaat* proifiaion for an additional tw yaara.

Iteny faaliavB that tha axiating rsgulatlon kaa lllconcaivad and haitlly put into

•ffact. at.>Krs beliava that the rsgulatlon ia aasantlsl. la the r^reaantatlva

body of tha stata regulatocy am of our dual ayitaa ot regulation in tha

" (ncial inatitutlona ar^a, N^SSiIS balieves that an iesua of this m^nituJa,

y are tha priTar-y rsgulaiory ajtSarltisa, djiarvea more t.^T a 3S-day camr.;

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Th» PHUB's standard caeanont period is 60 &ys. Miy, orat must ask, <toa
thi FHLEB view-thia proposal as not mrrantiog its standard treatment? 30 days
Is ■ wholly insafficlant paclod within which to expect conmenta fran the
ccoss-saction oC interested parties, the FSLIC, tha various regulatory authori-
ties, cha insured institutions, tba Osngrsss of the (Mted States, and consuiers
at large who raaliie the significant and iinrediaCe Inpact of an extension of ttie
'sunset' provision for an additional no ynara. As the Sinorabla Douii Barnard,
Jr., Oiairnan of the Qsneice, COnsmer, and Monetary Ufairs Subcomnittee of
th« Housa Cooniittee on Oovernnent Clperationa stated in his ajnrent letter Aited
October 2, 19Si, *ln the absence of a coof rehensive study by the [FHLB8], the
rule should be renewed, if at all, only after Che crost Choroi^h analysis CoEl
the rule making itaalf. In these circiiiBtancea, eKtensi\Fe coninent and comnent
analysis saam crucial.' ■aSStt£ eoncizs with this [xuition. Additionally, no
significant nparicsl data has baen produMd whidi (1) wrrants an extension and
(3) in light of this fact, an abfaceviated aax&nt fnriod.

In light of the FHLBB's new regulation relative to regulatory epical
raipiirenEnta, which ejipreasly addresses direct investjsencs by insured institu-
tions, NASSbLS must at a mininisn respectfully xetj'jest not an sctenaloij . . but
lathar, nere ccnpllance with the FHL£a's own Basolution Ho. aa-B54.

N^SSiLS would like to reiterate Its support Joe the FHLBB and Its
overridir^ oonzsm for the aafety and soundness of the thrift industry and speci-
fically Che PSLIC. NASS1L5 is second to none in its vigil to see that
participants in the thrift industry conduct themselves in a safe and sound
manner. However, we again stress our belief that qiallty snjervision ratlar
than excessive regulation will achieve this goal more quicUy. (WSSH.S once
again extends to the PHLBB its offer of stfiport and assistant in whatever tay
possible to achieve our connDn goal.

ansion of the public ooirent
Utecy truly yours .
Ihe Bscutive Coimittee of Ihe

lAjhrJiAJi

Vice Frssident

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office of the Sectetattst
Federal Hone Loan Bank Board
Octobec -16, 19Se
Page Two

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dential mortgage lending nay, in the
ngs and loan associations.

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UNCOLN
k. SAVINGS

Octob«r 16, 1986

M«. &ob*TtB Whit* ^

Dlraccor-InfoTvatlon Sarvtcaa SacClon ''

Offlc* of th* SccratarUc >^

Fadcral Bod* Loan tank Board
17DD C Straac. H.H.
Waahlnston, D.C. ZOSSZ

RE: CotMcnc* In Oppoaltlon to Propoaad Two-
Yaar Extaniion of "Ragulatlon on Dltacc
Invaanant hj Inaurad Inacttuclon*"
(SI Pad. lUg. 3292S)

Daar Ma. Whlca:

Lincoln Savioga and Loan Aisoctatlon .

a Califomia-chartarad thrift Inatltutlon Inaurad . . _
Padfltal Savlnga and Loan Iniuranca Corpoi-atlon ("F5LIC") ,
aubalta thaia cooDanci oppoalng tha Fadaral Hooc Loan Bank
Board'a propoaad cwo-yaar azcaniion of Iti "Ragulatlon on
DiracI InvtiEBent bjr Inautad Initltutlona," 12 C.F.R.
SSe3.9-8 ("Dltact Inveatnane Rajulatlon") .

Tha Dlract InvaaCmcnt Ragulatton va> an 111-con-
calvad and unnacaaiar? cagulatory axpailaant wfian fine
pcopoaad by tha Board in Ha;, 1984. At Chat time, Lincoln,
■■ong dozana of othar Intaraatad partiaa, raiaad fundaiaanCal

3uascioni ragarding both tha abianca of any statutory ba*as
or tha ragulation and tha lack of any ampirlcal support for
tha proposition that tha lagulstlon vould not do mora hara
than good.

Two and one-half years latar, tha Board has not
cespondad adaquataly to either of chess fundansntal concatna.
Accordingly, Lincoln's congents on the extanston of tha
Direct InvestDsnt Regulation suggest first, that tha Regula-
tion should not ba extended because tha Ranilation is in
excess of the Board's ststutory authority antT in derogation
of the regulatory authority cxpriisly rassrved by Congress
for tha sCataa. Second, Lincoln reviews the axtsting factual
and cttpitlcal studies and danonatratas chat the necessary

'te

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lU. Kofasrca Vhtt*

Padaral Hob* Loan Bank Board

Octobai 16, 1986

•vld*ntlaT7 i

lacking. Finally, Lincoln auggaaca thaC tha axtacalon of tha
Dtract InvaanwoC Kagulation ia claarly Impropar In llghC of
racanc ragulatory drvalopiaaiiti , aapaclallT tha ravlaad
Hac-Horth Ragulatlon. and availabla, laaa Incruaivc altama-
ttvaa .

Lincoln also raquaaCi additional tima to aubnic
furthar atudiaa analysing tha affacta of tha propoaad ax-
tenaion of tha Dtract Invaacaant Ragulatlon, and an oppor-
tunity to aaka an oial praaantation to tha Board.

«rk''S.

Vice Praaidant and

fiaoaral Counaal

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Uncoln Savings and Lout Association'*

CoawanCa In Oppoaition To Propossd

Extsrtsion oC Federal Ho»« Loan Bank

Board ReTUlatioii On Direct lovestasot

By Inaurad Institutions

Prepared by:

Karyery Wucaan

Benjaain H- Heinewin. Jr.

Craig L. Caesar

Hark D. Bopson
SIDLEY & AUSTIN
1722 Eye Street. H.w.
Washington. D.C. 20006

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304

HEMORANDUM

Proposed Extension of Federal Hone Loan Bank
Board "Regulation of Direct Investment by
Insured Institutions" (SI Fed. Reg. 32925)

October 17, 1986

This memorandum has been prepared Cor Lincoln
Savings and Loan Association ("Lincoln") to set forth its
opposition to the proposed extension of the expiration date
of the Federal Home Loan Bank Board's "Regulation of Direct
Investment by Insured Institutions," 12 C.F.R. S 563.9-6 . .
(1985). In its September 11, 1966 Notice of Rulemaking, the
Board requested interested parties to provide comments on the
desirability of extending the regulation for an additional
two years, to January 1, 1969. 51 Fed. Reg. 32925 (1936).
The Board specifically requested coniments on the "administra>
■ tive flexibility" of the Direct Investment Regulation and on
the continued need for the rule "in its present form," in
light of the Bank Board's adoption of other regulations,
including the so-called "Net Worth" Regulation, 12 C.F.R.
S 563.13 (1985).*

* The Net Worth Regulation is also scheduled to expire on
January 1, 19B7. On August 15, 1966, the Board adopted a
replacement rule, known as the "Regulatory Capital" Regula-
tion, which requires an insured institution to maintain a
level of regulatory capital equal to 6 percent of total
liabilities, and imposes additional capital requirements
based on factors such as the Institution's level of direct
Invaatment .

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TtM Board should not axtond tha Dlroet Invostmonc
Ragulation. Which vas outsida tha acopa of it* authority when
first adopted. After its initial proposal in Hay, 1984, tha
Direct Invaatmant Raqulation was opposed In more than 200
coraBanta aubaittad by intarastad parties. Dasplta funda-
nantal concama reqardinq tha Board's legal authority to
promulgate an across-the-board regulation Intruding so
profoundly upon an, area of regulation reserved-to the Statea,
and significant quastiona with respect to the adequacy of the
factual evidence offered In support of such a rule, the Board
adopted the regulation, with some modifications, in January..
1985. In recognition of the controversy generated by the new
rule, however, the Board did Incorporate a "sunset provision"
requiring the regulation automatically to expire on January 1,
1987, absent further Board action. The Board has now taken
that action by proposing an extension of the regulation for
another two years without addressing the outstanding issues
presented by the original adoption of the regulation.

Indeed, the. number of important factors relating to
the Direct Investment Regulation that the Board has not
addressed In seeking to extend the regulation is striking:

o the impact of the regulation on state law
and state regulatory schemes;

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o th* n««d £or th« rvgula^ion qivtn oth«r
1*88 costly meani to protect th« FSLIC fund, including
increased supervisory pr«ictic*s;

o the absence of Board authority to promulgate
across the board prospective regulation of savings and loan
investments;

o how, if at all, direct investments cause
savings and loan failure;

o the costs of precluding direct im
both to the industry and its customers;

a . the extant to which the limitations on direct
investment make the industry less competitive and the related
costs of the regulation in lost deposits and ultimately lost
premiums for the FSLIC fund; and

o the absence o£ any criteria by which the
Board is able to make a non-arbitrary decision to waive the
direct investment limits.

The Board's lack of legal authority and factual
support for the promulgation of this regulation has not been
remedied. The Board must show a clearly defined congresr
sional grant of power permitting it to either preempt state

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lawa >llo«ln9 dir«et Invtstawnt by atatv-chartarad thrift
inatitutlona or to ragulata concurrently with state authorl-
tiea In an araa hiatorically policed by the states. The Board
could not do thia whan the Direct Invastment Regulation was
originally proposed in 1984 and cannot do so today. The
naceseity of sharing auch ■ grant of authority has bacone
even more significant since the regulation was adopted. The
United Stataa Supreme Court has recently examined the federal-
state balance in a regulatory context not unlike the dual
system of regulation characterizing the savings and loan
Industry, and it has reaffirmed a fundamental rule that a
federal administrative agency cannot enter an area of regula-
tion traditionally reserved to the States absent a clearly
defined statement of congressional authority. Bowen v.
American Hospital Asa'n . 106 S.Ct. 2101, 2121 & n.33 (1986).

With respect to the issue of factual support, the
Board must resolve a number of factual concerns before its
restriction on direct invaatments can be justified. First,
the Board must establish causation — the Board must show
that direct investments cause thrift failures. Second, it
muBt show the relationship between the cost of thrift failures
and the level of direct investment. Third, it must show that
the costs to the FSLIC fund cannot be avoided by more vigorous
use of the Board's lawful enforcement power — the power to
conduct ceaae-and-deaist and Insurance termination proceedings
pursuant to 12 U.S.C. S 1730. Fourth, it must show that the

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costs avoided by th* dlcect investment rule exceed the
additional fund premiums which would be paid by thrift
Institution* that could prosper as a result of direct invest-
ments,* and the savings to the fund from marginal institu-
tions which are put on a sounder financial footing by direct
investments.

The Board has not shown any o£ these necessary
facts. It did not demonstrate chem when it first adopted
the Direct Investment Regulation, and it failed to correct
any of these deficiencies in its September 11, 1986 Notice '
of Rulemaking. In its September Notice, the Board offered
three new items in support of the Direct Investment Regula-
tion. First, the Board cited a recent empirical study —
funded by the Board's Office of Policy and Economic Research —
which purportedly showed that higher levels of direct invest-
ment increase FSLIC costs of resolving thrift failures.
Second, the Board asserted that the waiver provision of the
Direct Investment Regulation affords sufficient flexibility
to permit well-managed institutions to exceed the supervisory
thresholds established by the rule. Third, the Board referred
to a 1985 report by the House Committee on Government

* Profits from direct investment do not automatically
translate into higher fund premiums. However, because more
profitable institutions attract more depositors due to their
ability to pay higher interest on accounts, those institution:
ultimately pay higher fund premiums based upon the increased
level of deposits.

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Operations which tcnMd th* Direct Inv««ta«nt RaquLatlon "an
■ppropriata and necaaaary rastrlction. " Sea K.R. Rap.
No. 3S8, 99th Cong., 1st Sass. 14 (Nov. S, 1985).

Nona ot th«aa new items aupporta axtension o£ the
Direct tnvaatmant Ragulation, because none addcassas the
fundamental flaws inherent in tha regulation's adoption by
the. Board. Before dealing with tha naw items. It is necessary
first to address those fundanantal flaws which hsve affected
the regulation fron the outset and which would make its
extension unlawful. ' ■

Vfhen first adopted by the Board, the Direct Invest--
Dient Regulation was unlawful for two reasons. First, the
Board had no statutory authority to issue a regulation that
preempted or supplanted the enactments of state legislatures
authorizing unlimited or less restricted direct investment by
thrift institutions operating pursuant to state charters.
Second, the Board lacked tha statutory authority to issue an
across-the-board, substantive regulation governing thrift
institution conduct. No factual showing could overcome
either of these infinnities. Because of them, the Direct
Investment Regulation was improper when adopted and should
not be extended. These two separata and independent defects

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in the Board's authority to adopt the Dlract Inv«stn«nt
Regulation will be separately discussed.

Contrary to Congressional Intent, the Direc
Investment Regulation Undermines the OUal'
System o£ Thrift Regulation.

Although thrift institutions have been operating
pursuant to state charters for more than 130 years, federal
involvement in Che savings and loan industry Is a much more
recent phenomenon. Beginning in 1932, with the adoption
of the Federal Home Loan Bank Act. eh. 552, 47 Stat. 725,
codified at 12 U.S.C, SS 1421-49, through the Home Owners'
Loan Act of 1933, ch. 64, 48 Stat. 128, codified at 12 U.S.C.
IS 1461-70, and the 1934 National Housing Act, Title IV, ch.
S47, 48 Stat. 1255, codified at 12 U.S.C. || 1724-30, Con-
gress created the basic framework for a dual system of
savings and loan regulation In Which federal authority over
state -chartered thrift Institutions was penaltted on a
case-by-case basis only to the extent necessary to protect
the federal thrift deposit insurance fund administered by the
FSLIC*

• There is a clear distinction between the Board's role in
the Federal Hone Loan Bank System and its role regarding the
federal thrift deposit insurance fund of the FSLIC. The
Board's powers with respect to the latter are more narrowly
drawn; its only goal is to protect the insurance fund. As a
result, the Board must clearly establish that actions to be
justified using statutory authority relating to the FSLIC do
in fact protect Che insurance fund. Compare 12 U.S.C.
S 1425a(a) with 12 U.S.C. | 172S(a).

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Stat*-charc«rMl in«tltution« that obt«in t»d»r»l
depoBit insuranc* mimt «ubj«ct th«ns«lv«s to "»uch •xan-
in*cionm aa th« [Board] ahall d««n nacasaary . ..." 12
U.S.C. I 1726(b). Thi« provialon, addad by tha National Houalnq
Act, waa tha flrat and araat aubatanttal grant of ladaral
aupervlaory authority owar atata-chartarad, fadarally Insurad
savlnga and loan asaociatlons.

Othar than the right to conduct pariodlc •xamlna-
tiona, the regulatory authority qrantad to the Board in the
National Housing Act was carefully drawn to be aa narrow as •
poasible. In contrast to the Board's authority over federally
chartered and insured institutions, there was no general
grant of supervisory or rulenaklng authority that would allow
the Board to oversee the operations of insured institutions
chartered under atate laws or otherwise issue prospective
regulations governing their operations, cf^ 12 U.S.C.
i 1464(a) (granting Board plenary authority over the "oper-
ation" and •reflation" of federally chartered savings and
loan associations}.

In 1954, the power of the Board was expanded by
Congress to allow the egency to act on a case-by-case basis
and terminate FSLIC insurance if any insured institution
engaged in "unsafe or unsound" practices. However, the
procedures imposed by the statute required the Board to give
•tata regulatory authorities notice of the problem and an

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opportunity to correct it b«£oc« th« Bo«rd could t«k« •ny
•ctlon. Sm TltU V, f 50l{3), 68 St«t. 633, codlfiad at 12
U.S.C. I 1730. According to the legislative history, the
requirement that the Board initially defer to the state
regulatory authority was "designed to assure that the (federal
lewj would not impair the supervisory authority of the atate
or local bodies over Insured institutions . , . ." Conference
Ref>. No. 2271, 83d Cong.. 2d Sess. 84 (1954).

Congress continued to mandate deference to state
authority when it again modified the enforcement powers of ■ ■
the Board In 1966. The Financial Institutions Supervisory
Act of 1966, Pub. L. No, 89-695, S 102(a), 80 Stat, 1028 ("the
1966 Act"), for the first time granted the Board the authority
to institute, on a case-by-case basis, ceaae-and-deaist proceed-
ings directly against a state -char tared, federally insured
savings and loan association upon a finding that the insti-
tution in question was engaging in "unsafe or unsound"
practices.

The legislative history of this wnendmant again
demonstrates that the Board's enforcement power was not
Intended to override the authority of the States, and that
the primary regulatory power over state- chartered insti-
tutions was to be left where It had always rested -- with the
States. The Senate Report relating to the 1966 Act makes
this point explicitly:

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Lon

would do

to th.

b.lanc

.nd F«d«,

a tesoc

which

underlies

the dual

L banki;

ng syac

em and

Che

''"gs

made by the (committeel cha ... ,.„-

before the National Aasocistlon of Suparviaors of
State Banks at wiLllamtburg, Va., quoted in th*
hearings 'The duties and powers of the Federal
Baeetve Board and the FDIC ara broad and aweeplng.
They must be in order to carry out their functions.

But nei

banks r

lor the State bank sucervisors should ever

foraet

State J

.aws. and -re reaoonslble Urst and foremost

to the

off.ciaU of the States which created th.., '

S. Rep. No. 1482, flgth Cong., 2d Sess. (1966), reprinted
in (1966] U.S. Code Cong. & Xd. News 3532. 3S38 (emphasis
added).* The Senate Report further stressed that " the bill
emphasiaes the role of the State chartering and supervisory
authorit ies, and in no way lessens the status of these

Id. at 3539 (emphasis added).'

* The legislative history of the Act contains referencas to
the Federal Rejserve Board and FDIC because the Act dealt
with the supervisory authority of all of the "Federal agenciai
aupervisin? banks and savings and loan associations -- th»
ConpCroller of the Currency, the Board of Governors of the
Federal Kaaerv* System, the Federal Deposit Insurance
Corporation and the Federal Home Loan Bank Board . . "

S Bep. No. 1482, reprinted in 11966) U.S. Code Cong. & Ad
News 3532.. 3S33.

•* At the hearing on the bill. Chairman Home statad:

"We have also been conscious. In drafting this bill,

that 1

under o

1 SVE

ancial insti-

tutio:

as lies

_2R

..th

.e Sta

te authorities.

We have no

(Footnote continued on next page)

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814

Aa r«c«ntly as 1982. Conqraas naffimttd its
conmltmant to th« dual ayatam of aavlnga and Loan Tabulation.
Pursuant to aactlon 123 of the Garn-St. Cacmaln Depository
Institutions Act of 1982, Pub. -L. Ho. 97-320, 96Stat. 1469,
tha FHLBB was pamittad to authorize, on an anerqancy basis,
acquisition of • stata-chartarad, federally inaurad iTisti-
tutlon by an institution in anothar State, based on a finding
that severe financial conditions vara present and auch an
acquisition would lessen the risk of potential loss to tha
FSLIC. 12 U.S.C. S I730a(in). Before the FHLBB was allowed
to make auch a datamiination, however. It was required to
consult with the state regulatory body having authority over
the institution to be acquired, thus providing an opportunity
for the affected state regulators to object to the acquisition.
Idj., i 1730a<m)(l)(B]. That Congress determined to provide a
role for the States in these circumstances, where tha risk to
the federal Insurance fund was both inuoinent and substantial.

(Footnote continued from pravioue page)

quarrel with that concept .... Our objective is
quite sim ply an effective backup capacity when needed ,
and hence we do not object to the amendments adopted
by the Senate to Assure State authorities of notice -
and opportunity for action or objection on their
part before we commence a proceeding involving an
insured State institution."

Financial Inatitutiona Supecviaory and Insurance Act of
1966: Hearinga on S. 3158 and S. 3695 before tha Coaunlttee
on Banking and Currency, 89th Cong., 2d Sass. (1966)
(anphasls added).

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d*aoDstr«Cas Congress' continued conmitmant to ■■Intsinlng
th* dual systcB of rogulaclon.

Congcoms' conc«rn In «n«uring th« prlnary rol*
of the Statos in r«(t«latlng tho savinga and loan assoclatlona
chattorod by th« laavas littla roon for doubt that tha
Board's proaulgatlon of a regulation going to tha vory hsart
of atats authority -- tha powsr to datorwina how atato-chart-
erad thrift inatitutiona invest the funds deposited with
them " went beyond the scope of permissible adiaini strati ve
action authorized by the Congress. The Direct Investment
Regulation Intrudes upon state respohsibilities in one of two
ways, either of which is demonstrably outside the scope of
Board's authority. First, the Direct Investment Regulation
preempts the laws of States which allow Levels of direct '
investment for their state -chart* red savings and loan Insti-
tutions that exceed 10 percent of assets.* But, for the
reasons stated above, the Board cannot remotely demonstrate
that Congress explicitly or implicitly intended that the
Board would have authority to preempt state law judgments
about levels of direct investment of state -chartered insti-
tutions. See Jones v. Rath Ptcklnq Co. . 430 U.S. 519 (1977).
Louisiana Public Service Comm'n v. FCC . 106 5. Ct. 1890,
1901 (1986)(''an agency literally has no power to act, 1st

California, ;o r example, grants broad authority to maHe
■estments In real estate. Gal. Financial Code { 7300, as
.1 as othsr types of direct investment, including equity
iurlties, see Cal. Financial Code ^ 7250, subject, of
irse, to strict state supervision.

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alona pre-empt the validly enacted legislation of a soverign
state, unless and until Congress confers power upon it.");

Second, in the absence of a clear congressional
statement authorizing the Board to regulate concurrently
an area of savings and loan association operations which has
been solely within the province of the States, the Board is
powerless to engage in such concurrent regulation. This
fundamental rule has recently been reaffirmed in the Supreme
Court's decision in Bowen, supra -. 106 S.Ct. at 2121 {1986):

"'(Wje must assume that the implications and limi-
tations of our federal system constitute a major
premise of all congressional legislation. ..."
United States v. Gambling Devices . 346 U.S. 441,
450 . . . (1953) (opinion of Jackson, J.). Congress
therefore 'will not be deemed to have significantly
changed the federal-state balance,' United States
V. Bass , 404 U.S. 33S, 349 . . . (1971) -- Or to
have authorized its delegates to do so — 'unless
otherwise Che purpose of the Act would be defeated'.
Trade Comm'n v. Bunte Bros. , 312 U.S. 349, 351
. . . (1941)."*

• In support of its holding, the Court cited several deci-
sions holding that intrusion into historic areas of state
regulation by concurrent federal regulation may only be
justified by a clear statement of congressional intent.
See, e.g. , Heublein. Inc. v. South Carolina Tax Comm'n , 409
U.S. 27S, 281-82 (1972); Davies Warehouse Co. v. Bowles . 321
U.S. 144. 152 (1944) ("Where Congress has not clearly indi<
cated a purpose to precipitate conflict (between federal
agencies and state authority], we should be reluctant to do
BO by decision"); Pcnn Dairies, Inc. v. Milk Control Comm'n ,
318 U.S. 261, 275 (1943) ("An unexpressed purpose of Congress
to set aside statutes of the States regulating their internal
affairs is not lightly to be inferred and ought not to be
Implied where the legislative command, read In the light of
its history, remains ambiguous"): Apex Hosiery Co. v. Leader .
310 U.S. 469, 513 (1940) ("An intention to disturb the .
balance [between state and national governments! is not
lightly to be imputed to Congress"). See Bowen , supra , 106
S.Ct. at 2121 n.33.

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817

Th* Dlract Investacnt Ragulation repr«*«ntad a
najor departure Cron th* carefully construcCed balance
between federal and state regulatory authority over the
savings and loan Industry. The Board simply overstepped the
bounds of Its authority. In nullifying the determinations of
state legislatures and regulators to permit the institutions
they chartered to engage in direct invescnent, the Board
completely ignored Congress' determination to leave certain
areas to the States. What the Supreme Court declared in
striking down a similar attempt by the FCC through rulemaking
to supersede state regulation which Congress had intended to
preserve applies directly to the FHLBB's proposed regulation;

"[Wja simply cannot accept an argument that the FCC
may nevertheless take action which it thinks will
best effectuate a federal policy. An agency may
not confer upon itself power.' To permit an agency
to expand its power in the face of a congressional
limitation on its jurisdiction would be to grant to
the agency power to override Congress. This we are
both unwilling and unable to do.

Louisiana Public Service Comm'n v. FCC, 106 S.Ct. 1901-1902.

The Board's action was unlawful when first proposed
in 1984; it remains unlawful today. Allowing the Direct
Investment Regulation to expire will restore the proper
balance between federal and state regulators.

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Vflien the Board initially proposed the Direct
Investment Regulation, it relied entirely upon 12 U.S.C.
i 1730 as statutory authority for the new rule. Follow-
ing the receipt of numerous comments suggesting that the
Board l«cked statutory authority to promulgate the regula-
: tion, the Board stated in its notice reproposing the direct
investment rule, 49 Fed. Reg. 4B743, 48745-46 (1984), that 12
U.S.C. §1 1424(a), 1437(a) and 1725(aJ provided "additional
authority" £or the Board's power to regulate the direct
investments of state-chartered institutions. As is shown
below, none of these statutory provisions, either individually
or collectively, supports the Board's position, because none
provides a general, prospective grant o£ rulemaking authority -
over the operations of state-chartered savings and loan

Section 1730, upon which the Board primarily ralie:
for its authority to promulgate the direct investment rule,

sions of the National Housing Act. In adopting the final
version of the Direct Investment Regulation, the Board
pointed to Section 1730' s grant of authority to institute
cease-and-desist or termination proceedings to argue that

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>19

such authority to pr*v«nt "unaaf* or unsound practic**"
TMcaasarlLy '•nconpaaslad) tha less drastic power to prevent
or unsound practices t>io] through regulations such •■ the
direct investnent rule." 50 Fed. Reg. 6914 (1^85). But
across-the-board regulations are hardly a "less drastic
power." tnetead, they constitute enormous federal interfer-
once in the business activities oC all state- char tared,
Cederally insured savings and loan institutions. Koreovar,
close examination of the language, structure and legislative
history of Section 1730 £ails to support the Board's position.

The plain language of the cease-and-desist provision
of Section 1730 provides:

"If, in the opinion of the Corporation, any
insured institution or any institution any of the
accounts of which are insured is engaging or has
engaged, or the Corporation has reasonable cause tc
belieVB that the institution is about to engage, Ir
an unsafe or unsound practice in conducting the
business of such institution, or is violating or
has violated, or tha Corporation has reasonable
cause to believe that the institution is about to
violate, a law, rule, or regulation, or any con-
dition Imposed in writing by the Corporation in
connection with the granting of any application
or other request by the Institution . . ■, tha
Corporation nay Issue and serve upon the insti-
tution a notice of charges in respect thereof . . ,
- and shall fix a tine and place at which a hearing
will be held to determine whether an order to ceasi
and desist therefrom should issue against the
institution. "

12 U.S.C. i 1730ee). There is no language in this sectl
from which the Board could reasonably derive authority t

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promulgate accoB8-th*-boai:d, prospactive rastrictions on >n]
typa of investment which would apply to all institutions.
Indeed, the only authority to promulgate any rules or regu-
lation provided by Section 1730 appears in the following
passage (12 U.S.C. | 1730(n)(3)):

" In the course of or in connection with any pro -
ceeding under this section , the [BoardJ . . . shall
have power to adminiEter oaths and affirmations, -to
take or cause to be taken depositions, and to
issue, revoke, quash, or modify subpoenas and
subpoenas duces tecum; and the IBoardI is empowered
to make rules and regulations with respect. to any
such proceedings ." (emphasis added)

In short, there is not the slightest suggestion
in the language or legislative history of Section 1730 that
the Board is empowered to deal with potential "unsafe and
unsound" practices through any means other than the
adjudicative proceedings provided for in the statute.*

* In FAIC_ Securiti"es. Inc. v. United States . 595 F, Supp.
73 (D.D.C. 1984), a££' d . 768 F.2d 352 (D.C. Cir. 198S), the
district court considered whether the Board had the statutory
authority under Section 1730 to issue regulations limiting
the insurance on "brokered" deposits. The court held that
the authority granted jn Section 1730 to seek to halt "unsafe
and unsound" practices in an individualized, adjudicative
proceeding did not include the authority to issue general
regulations addressing the same conduct. According to the
court, the provisions of Section 1730 (595 F. Supp. at 78
n.7):

"relate to specific enforcement actions brought
against individual banks .... ITlhe power to
prescribe regulations which 'effectuate the pur-
poses' of those provisions clearly does not con-
template across-the-board regulations of the type

(Footnote continued on following page)

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821

As noted prtviously, th« Board withdrtw fron Ita
Initial poaition that Sactlon 1730 alon* provided sufficient
statutory authority for the direct investment regulation.
See 49 red. Reg. M745. However, the "additional authority"
cited by the Board -- Sections 172S(s), 1437(a) and 1424(a) —
added nothing to ita poaition.

3. Section n2S(al

Section 1725(a). which was added by Title IV of the
National Housing Act, f 402, providea that: . -

"There is hereby created a Federal Savings and
Loan Insurance Corporation . . , which shall insure
the accounts of institutions eligible for insurance
as hereinafter p'rovided, and shall be under the
direction of [the Federal Howe Loan Banlc BoardI
and operated by it under auch bylawn, rules, and
requlationa aa it nay preacrlbe for carrying out

- ■ :ltle [Titlo IV of the National

12 U.S.C. f 172S(a) (emphasis added). The plain language of
the statute limits the "bylaws, rules and regulations"

(Footnote continued from previous page)

The Board's reliance on Independent Bankers Ass'n
V. aelwan . 613 F.2d 1164 (D.C. Cir. 1979), as support for its
authority to promulgate the Direct Investment Regulation,
Bee 49 Fed. Reg. 48746 (19S4), was also misplaced. That case
concerned the authority of the Office of the Comptroller of
the Currency to Issue regulations defining certain "unsafe or
unsound" practices. In upholding the regulation, the court
relied on the Comptroller's statutory authority to issue
broad, substantive regulations and pervasively regulate
national banks. The FHLBB has no such authority over state-
chartered institutions.

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proRiul9>ted undar this section to a narrow subject matter —
the "operatlloni by (the Bank Board]" of th« FSLIC. Thar*
is no basis in tti« Language of the statute to expand a
limited power to promulgate internal "housekeeping" rules
and regulation* into a grant of authority substantively to
regulate insured institutions.

Such a reading Is also'inconsistont with the
structure of the statute. The origin of Section 172S --
section 402 of Title IV of the National Housing Act, entitled
"Creation of federal Savings and Loan Insurance Corporation". --
was the first substantive section of the Act. In addition to
the language quoted above, the section contained a detailed
description at the structure of the newly-created FSLIC,
Including such items as capitalization of Che FSLIC ^und,
accounting and reporting requirements, and the location
of the fund's principal office. All of these relate to the
FSLIC and not to the institutions that it insures . It is in
subsequent sections of the National Housing Act that Congress
defined the duties and authority of the FSLIC and the Bank
Board with respect to savings and loan institutions. Accord-
ingly, reliance upon Section 1725 to provide the authority to
Issue substantive regulations relating to insured institutions

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S2S

3. Section 1437f«l

The next provision cited by the Board. Section 1437(a),
spvcifically states that the Board's authority Is linltad to
"such rules, regulations, and orders as shall ba necessary
from time to tine for carrying out the purposes of the provi -
sions of this Act ." 12 U.S.C. 1 1437(a) (enphasls added}.
The "provisions of this Act" -- i.e. , the Federal Home Loan
Bank Act — have nothing to do with the federal thrift
deposit insurance fund. They concern only the creation,
operation and management of the Federal Home Loan Banks.* . .
The Supreme Court's decision in Laurens Federal Savings &
Loan As an' 8 v. South Carolina Tan Comm'n . 365 U.S. S17, 522
(1961), identified the "purposes" of the !

"[The act] set up a system of federally chartered
Home Loan Banks for the purpose, as stated in the
House and Senate Conunittse Reports, of placing
' long-term funds in the hands of local institutions'
In order to alleviate the pressing need of hone
owners for 'Low-cost, long-term, installment mortgage
money' and to 'decrease costs of mortgage money'
with a resulting benefit to home ownership in the
form of lower costs and mora liberal loans."

Similarly, in Association of Data Processing Service Organi -
zations. Inc. V. Federal Home Loan Bank Board , S68 F.2d 478,
486 (6th Cir. 1977), the Sixth Circuit defined the power

• It is striking that the Board attempts to rely on Sec-
tion 1437(a) to support a regulation that purports to protect
the FSLIC, when that agency had not even been created at the
time Section 1437(a] was enacted.

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824

granted tha Bank Board under Saction 1437(a) as "llmltad to
basically one important function" -- establishing tha Federal
Home Loan Banks and ensuring that funds are available for
local institutions which make loans to home buyers. Because
statutes relating to the Federal Home Loan Bank system have
nothing whatsoever to do with the federal thrift deposit
insurance fund, there was no basis for the Board's attempt to
use the limited power granted by Section 1437(b) to adopt
regulations restricting direc

The Board's attempt to rely upon Section 1424(a),
which is also a provision of the Federal Home Loan Bank Act,
suffers from the same infirmity. Section 1424(a) simply sets
forth the eligibility requirements for membership in a
Federal Home Loan Bank. It ma)<«s no mention of, and bears no
relation to, any activities of the Board relating to thrift
deposit insurance. Section 1424(a) provides that:

"Any building and loan association . . . shall be
eligible to become a member of, or a nonmember
borrower of, a Federal Home Loan Bank if such
institution ... is subject to inspection and
regulation under the banking laws, or under slmilaj
laws, of |a| State, or of the United States. . . .'

plain language of the statute simply states
:utlon seeking membership in a Federal Home
; be subject to state or federal regulation.

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It do** not provid* »ny authority for ths Bo«rd to crests
■ubst4ntiv« ragulationa.

In aum, the Board lacked the atatutory authority
to iasue the Direct Investment Regulation. Abaent a clear
congreaaional statement permitting the Board directly to
regulate the investment practice* of state-chartered thrift
institutions, the Board did not have the power to invade this
area of traditional state regulatory authority. Furthermore.
absent a grant of substantive rulemaking power, the Board was
not permitted to create Buoh authority from statutes providing
for individualized cease-and-desist proceedings.

Because the Board lacked the statutory authority
initially to adopt the Direct Investment Regulation, it does
not have the power to extend that regulation. Accordingly,
the Board should permit the regulation to expire on January 1,
1967. Moreover, even if the Board had the statutory authority,
it has not made, and cannot make, the factual showings
necessary to support the Direct Investment Regulation.

As the Board itself has recognized, the "complexity
of the problems" which the Board sought to address with the
Direct Inveatment Regulation is such that assessment of the
rule's costs and benefita is especially difficult. Indeed,

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this was th« raason Chat the regulation was adopted £or a
two-year trial period. SI Fed. Reg. 32926 (1986). Unfor-
tunately, the Board has never dealt with those complex
problsms in a satisfactory fashion. Thus, the Regulation has
never had the factual basis required to support its adoption.

As the Supreme Court noted in Bo wen (106 S.Ct.
at 2121-22):

"The need for a proper evidentiary basis for
agency action is especially acute . . . (where)
Congress has failed to indicate, either in the
statute or in the legislative history, that it
envisioned federal . . . (participation in an area
traditionally entrusted to state governance.

"'[T)he propriety of the exertion of Che
authority must be tested by its relation to the
purpose of the [statutory! grant and with suitable
regard to the principle Chat whenever the federal
power is exerted within what would otherwise be the
domain of state power, the Justification of the
exercise of the federal power must clearly
appear'. . . . That is, 'it nusC appear chat there
are findings, supported by evidence, of the essen-
tial facts . . . which would justify . . . (the
agency' s) conclusion. ' " (citations omicCed)

The Board's promulgaCion of Che Direct Invescment Regulation
was precisely. the type of federal administrative action Chat
Che Supreme CourC was discussing in Bowen . The Board was
obligated to show Chat it had evaluated the impact of its
action on Che regulatory regimes of the various states; that
there was a relationship between direct investment and thrift
failures! that those failures imposed costs upon the FSLIC;

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that tboM fftllurvs «nd costs could oat bsvs bMD sveidwl
through s Isss intrusivs ssans. such ss ■ors vigorous uss of
Ssction 1730 c«ss*-and-d*sist and tsntnstlon procsodings;
snd that ths costs of dlrsct invsstasnt vsrs not outwaighsd
by ths bsnsfits of such Invsstasnt to ths savings and loan
Industry and ths FSLIC. Ths Board has nsvsr sads such a
showing.

Host strikingly, the Board has navsr attaapted to
analyss ths naturs and sffact of ths laws of the SO States

en this Issue, snd to explain why there is a problas with the
adKinlstrstion of those laws which justifies broad federal
involvement.

In the Nay 16, 1984 Notice of RulsMslcing in which
the Direct Invescnent Regulation was first proposed, ths
Board offered nlnlsal factual support to show the link
between direct investMent and thrift failures. See 49 Fed.
Beg. 20719-20 (1984). Indeed, the only data offered was an
anecdotal reference to losses associated with the development
of ths 1-30 corridor outside of Dallas, Texas. Id^

Ths paucity of supporting data offered by the Board
was criticized by nany of the interested parties offering
commsnts on the proposed rule. Those parties submitted
empirical studies, ths nost eignlflcsnt of which hsd been
prepared by Professor George Bsniton of the University of

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Rochester, that showed the lack o£ a relationship between

direct investment and thrift failures. Attempting to meet
the factual challenqe posed by Professor Senaton' s results,
the Board offered additional data supporting its position
vhen the Qirsct Investment Regulation was reproposed In
December, 1984. See 49 Fed. Reg. 48747-50 (1984).

All that the additional data provided by the Board
demonstrated was the greater variability of return associated
with certain categories of direct investments. The data did
not show that this variability, which the Board accepted as a
proxy for the degree of ris){ associated with such Invectments,
accounted for the failure of thrift institutions making such
investments. For that necessary step, the Board reverted to
its "supervisory experience" -- i .e. , anecdotal data of
questionable application to the savings and loan industry as

The Board rejected Professor Benston' s findings
"because of material methodological and analytical defects."
Id. at 48748. Those "defects" purportedly included an
insufficiently large sample, differences between Professor
Benston' 3 and the Board's definitions of direct investment,
and a failure to perform tests of statistical significance.
However, the Board's criticisms of Professor Benston' s study
were not valid. Moreover, in dismissing Professor Benston'a
work, the Board failed to note that his study was the only

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anklysia •vallabL* that diractly daalt with Um natur« of tb«
Mlatlonahip b«twaM dlr«ct lnv«stB«nt and thrift (ailu'r*.

Whathar or not Ptofaaaor Banaton'a study waa
diapoaitiva on tha tactual laaua that tha Board had to
E«aolva in ordat to adopt tha Diract invaatMnt Ragulatlon
in a lawful ounnar, it la claar that his work, and tha work
of othat axparta in tha fiald, raiaad aub*t*ntlal doubt* aa
to tha ralatlonahlp batwaen diract inveataant and thrift
failure a.

Indaad, oven ona of th« Board'* own axport* on th«
causes of saving* and loan failures, and tha related coat* to
tha FSLIC ha* adnlttad that tha Direct Investment Regulation
is unnecesaary, if not harmful. In a letter to George P.
Rutland, CEO of California Fedsral Savings and Loan Associa-
tion, Hr. Scott Taylor, who had at the tina "been in charge
of liquidating failed FSLIC-lnaurad inatitutlons" for over
two years, stated: "I can see no basis to clain that direct
investment authority is « cause of Increased failure or a
risk to the FSLIC." Instead, according to Mr. Taylor,
failure to "prevent and deter wrongdoing, crime, fraud and
ineoHpetenc* will causa Increaaed failures regardlesa of
lagal liaits on invoatnonta. It is difficult to see the
wiBdoB of barring the great majority of sound, woll-managad
saving* Institutions from safe and profitabla business simply
bocauae regulators fail to prevent or deter othera from

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crime." Letter to George P. Rutland from Scott Taylor
(November 29, 1985).

Given the substantial doubts regarding the burdens
and benefits of the rule, the Board should not have adopted
the Direct Investment Regulation. Moreover, the Board should
not extend the regulation without a much more detailed

In its September 11, 1986 Notice of Rulemaking the
Board offered only one piece o£ additional empirical evidence
to support extension of the Direct Investment Regulation.
That evidence was a recent study performed by Messrs. Barth,
Brumbaugh and Sauerhaft and entitled "Failure Costs of
Government -Regulated Financial Forms: The Case of Thrift
Institutions." Focusing on 324 failed thrift institutions,
the study analyzed the relationship between the cost of
thrift failures to the FSLIC and various characteristics of
the failed savings and loan associations. According to the
Board, the results of this- study show that thrift institu-
tions which engage in significant direct investment activi-
ties impose greater costs on the FSLIC when they fail.
Limitations on direct investment thus are deemed necessary
to.protect the federal thrift deposit insurance fund.

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SSI

Th« Board-citMl study doai not support th«
proposed •xtanslen of th* RsqulMion.* First, lik* pri«sr
•nslysos cit*d by th* Board, ths Barth, Bniabaugh and Sauathaft
study doas no£ shew that dltact Invaataant eausas thrift
institutions to fall. In ordar to pcovlda tha inCor«atlon
aacassacy to aatabllah such a ralatlonship. a study nust
Includa both failad and haalchy thrift Institution*. Bacausa
tjie Board^cltad study doaa not includa haalthy Institutions,
It Is of no valua In this ragard.

Tha authors of tha study cltsd by tha Board hava
p«rfor>ad two others which do focus on tha issue of causation
batwaan dlract invastmant and thrift failura, Tha first of
thasa, "Thrift Institution Failures: Causas and Policy
Issues," was published by the ^adaral Reserve Bank of Chicago
iB 198Si it thus has been available to the Board for some
period of tine. The second study, "Thrift-Institution
Failures: Estimating tha Regulator's Closure Rule," has been
available for several aonths.

Both of these other studies include healthy and
failed thrifts; therefore, they are able to shed light on tha
relationship between direct investiient and thrift failures.

■ Attached as Exhibit A to this msmorandum is the affidavit
of Professor Ceorge Kaufman of Loyola University In Chicago.
Professor Kaufman, a noted expert in tha thrift regulation
field, has examined the Barth, Baumbaugh and Sauerhsft study
and the Board's use of that work to support extanalen of the
Direct Invaitment Regulation. Profeasor Kaufman cenclndsa
that the Board's attempt to use the study is Inspprs
and therefore does not support the re«ulstlon.

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Boch atudias show, as did the work of Profassor Banston, *
thAt direct investment has no causal r*lationship to thrift
failure.

The Board's selective citation of empirical studies
Is disturbing. At least four different studies •- two by
the very same authors as the study that the Board does
cite -- sHow the lack of a causal link between direct invest-
ment and thrift failures. All were available when the
September II, 1986 Notice seeking to extend the Direct
Investment Regulation was issued. However, the Board chose .
to iqnore all four and instead cite another study which does
not even address the basic factual issue that must be
addressed for the Direct Investment Regulation to have any
factual support.

Moreover, even the fashion in which the Board
employs the study that it does cite is inappropriate. The
results of the Board-cited study do show a statistically
significant relationship between the level of a failed
thrift's direct investment and the cost to the FSLIC of
resolving that failure. However, the results show an even

* Professor Benston has performed another study c
issue which has just become available. That work,
An Analysis of the Causes of Savings and Loai "

1986), reaches the same
that direct

investment has no causal link to thrift failures.

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S8S

•trona«r r«l*tionablp btttwcwi F8LIC costs And «!• psriod of
tims th*t passes bcfor* ths Bosrd sets to close sn Insolvsnt
thrift. If ths Board sctsd aors quicklyin this rsgard, ths
Board-citsd study suggests that FSLIC costs would b« draaati-
cally rsducsd. Howavar, tha Board doas not aven osntion

^•ra Is an intarrslatlon'ship bstwean ths tin* an
insolvsnt thrift is allowad to oparats and ths lavsl and
quality of its diraet invastaents . Once it becones inselvant,
a thrift institution is living on borrowed time and borrowed
money (in this case. Federal Hone Loan Bank advancea). In
an attaapt to obtain sufficient investnant return to iaprove
the thrift's financial situation, its nanagsaent is likely to
undertake aora risky inveataants, including direct invsatnants
of questionable quality. Whan the thrift is finally closed,
tha rSLIC Kuac absorb the coats of these elavsnth-hour diraet
inveataants. Had the Board clossd the thrift wore quickly,
the risky direct Inveataents may not have been made, and no
relationship would be dlseernable.

The benefits of the Diroct" Investment Regulation
reaain unproved. However, the rule's drawbacks -- the
profits denied well-asnagod aavinga and loan associations
such as Lincoln, and the resulting delay in needed recapitali-
zation of the thrift industry -- are undeniable. The Board
stteapta to miniaize these drawbacks by focusing upon tha

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384

"•dMinl«tr*tiv« fl«lbillty" affor<l«<l by th* rcqulatien' a
w>iv«r provtBlon. Howttvar, tha walvar provialon cannot aava
tha Diract tnvastnant Ra^ulation, particularly aa it haa b«an
put into effact by the Board.

In its Saptambar II, 1986 Kotic* of Rulamakiog,
tha Board atates that only 14 parcent of tha valvar appli-
cations upon which the Board haa ta'kan action hava baan
denied. 51 Fed. Req. 32926 (1986). In fact, if ona includaa
tha number of waiver applications that hava been withdrawn,
the number of casea where walvara hava not baan obtained
rises to 39 percent of the total. Although tha Board may
argue that granting mora than half of tha waiver applications
recalvad demonstrates the limited effects of the Diract
Investment Regulation on appropriate thrift institutions,
•uch an argument Ignores the number of institutions which may
have simply decided to forego diract investments authorized
by state law simply to avoid tha administrative difficultlaa
Inherent In any approval process.* Given the delays in
obtaining such waivers. It it highly likely thst this has
occurred. In any event, the Board had a duty to evaluate
this issue, too, before It extends tha Regulation. Moreover,
th* Board's assertion ignores tha fact that in certain
instances, the Board has arbitrarily denied waivers. This
was Lincoln's axperianee in the Spring of 1985, whan It

* The Board s statistic also ignores the substantial number
of reiiuests for waiver that are pending at tha present time.

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■ought, and w«s d*nt«d, a w«iv«r Crom lt« Princlp*l Super-
visory Ag*nt and tha Boam.

III. EXTENSION OF THE DIRECT INVESTMENT REGULATION

IS UNNECESSA RY IN LIGHT OF AVAILABLE ALTERMAIIVES.

Although axtanaton of tha axpiratlon data of th«
Diract Invaataiant Baqulatlon would ba improper bacausa of tha
Board's lack of statutory authority and factual support. It
Is also unnaccstsry in light of tha •vailabla sltsmativas.
ForSDOst among thasa Is incraassd usa by tha Board of tha
caasB-and-dasist and insurancs taminatlon powars provided
pursuant to Section 1730. Such activity is unquaationably
within tha statutory authority of tha Board. Moreover,
bacausa it focuses on the individual thrift institutions
which posa clear, imminent threats of loss to tha FSLIC,
Section 1730 enforcement avoids imposing broader restrictions
on savings and loan institutions which are well-managed and
*rt»o»e ability to make more profitable diract invostaants
ultimately will lead to additional payments into the federal
thrift deposit insurance fund.

Mors vigorous enforcement by the Board ie supported
by tha Barth, Brumbaugh and Sauerhaft study which the Bosrd
cited In Its September 11, 1986 Notice of Rulemaking. As
noted above, that study suggests that the more quickly the

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Board acts to r*tolv« Individual thrifts' probluis, ths lowar
ths costs to th« FSLIC*

A lass dasirabla altematlv* — but ana claarly
pr«f*r«bL« to adopted Direct Invastmant Raqulation — is con-
tinuation of the newly adopted Net Worth Raqulation.**
Although there la a significant doubt that the Board has
statutory authority to adopt across'- the-board regulations, if
such authority exists, the Net Worth Regulation is a much
more appropriate exercise of such power than the Direct
Investment Regulation. The new Net Worth Regulation, - '
which was adopted on Septamber 22, 196fi, requires Insured
Institutions to maintain additional levels of capital for
direct investments. This addltionaL-capital requirement
creates a cushion designed to protect the FSLIC should the
thrift fall. Thus, the new capital requirement obviates the
need for a flat restriction or direct inveatmenta.

Lincoln currently maintains a level of net worth
far in excess of the minimum required by the Board. There
is no question of Lincoln's solvency; it poses no threat to
the federal deposit insurance fund. Under the laws of
California, the State granting Lincoln's charter, Lincoln

* This approach has been supported by Board officials. See
Letter from Scott Taylor, Federal Home Loan Bank Board, to
George P. Rutland, California Federal Savings and Loan
Aasociation, dated November 19, 1985 {attached as Exhibit B).

•• SI Fed. Reg. 33S65 [September 22, 1986).

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387

could •!!«*«• iB dirset liiv*BtB*nt b«yond tha 10 p«re*nt
Unit of th* ftul*. With th« M«t Worth Ragulatloa in plac*.
Lincoln vould ba abla to naka tha dlract investmants author*
lead by atat* law.

CCaJCLUSIOH

Aa notad previously. In Its Septanber 11. 1986
Nottcs of Rulemaking, tha Board refers to a 198S congressional
conmittaa report discussing the Direct Investment Regulation
and taming it "an appropriate and necessary restriction."
51 Fed. Rag. 32926 (1966). Reviewing the House Report In its
totality, one finds, however, that it provides a moat effec-
tive aumniary of the points which argue against extension of
tha Dlract Investment Regulation (H.R. Rep. No. 3SS, 99th
Cong., 1st Sess. 13, lS-17):

"Notwithstanding the increased rash of failures,
the conmittaa finds it reasonable to expect that
the higher profits among th* majority of the
institutions making direct investments should far
excead the losses among the unsuccessful ones
because direct Investment is a highly profitable
activity. For this reason, it would appear
dealrablc to encourage controlled direct Investment
expansion, in spite of the prospect of increased
failures, because of the contribution it should
make to the profitability of the thrift industry aa
a whole and its needed recapitalization.

"Decreased regulation
strainta in federally Insured eavings and loan
institutions. Including those relating to diraci
real estate investments, is . . .a desirable

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lonq-run obj«etlv«, bccauM prudent us« of broad-
end«d inv»«tm«nt authority e«n anhanc* th« profit-
ability of th« Industry and contribute to its
racapltaLlzation. '

The lonq-tarm dealrabiHty of encouraging
prudant rlak taking suggeata a presumption against
a syaten of prior Federal reatrelnts as long aa
thrift failures do not threaten the insurance fund
or the stability of the system. Specific nftw
evidence will be needed If this presumption is to
be overridden in the future.

Before engaging in rulemaking to extend the
direct Investment rule the Bank Board should
conduct new and comprehenEive empirical studies of
thrifts; operating experience with direct invest-
ments in the period following implementation of the '
net worth and ADC (aci^isition, development, and
■ * -'-n) loan accounting rules."

As the House Report notes, the Board has failed t
provide the empirical evidence needed to support extension
of the Direct Investment Regulation.* The Board has not

* In a letter to Board Chairman Gray, Congressman Barnard,
the Chairman of the House Subcommittee on Commerce: Consum<
and Monetary Affairs that prepared the Report, states

"We could not have expressed wore clearly tin the
Report] . , . that our approval [of the Direct
Inveatment Regulation) was based in large measure
on the temporary nature of the rule and on the
aaaumption that the Board would continue to
examine the factual evidence and abstract analysis
on which the rule was founded ... i note with
disappointment, therefore, that the notice
publishing the proposed extentlon of the rule
references only one new study, a study that cannot
possibly (be) considered comprehensive' in the
sense in which the Committee used the term."

(Footnote continued on following page)

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shown that dlract lnv*atm«nt causaa thrift Cailuraa --
bacauaa it doaa not. Tha Board haa not ahown that dlract
Invaatmant hams the aavings and loan induatry (Including tha
FSLIC) — bacauaa It doaa not. The Board baa not ahown that
mora vlgoroua SacClon 1730 anforcamant la not a bettar way to
limit tha coita of thrift failuraa — bacause It is. Having
fallad to maka tha factual showing naceaaary to support
restrictions on direct investnant, and in light of the
aarloua concarna ragardlng tha lack of atatutory authority to
iasua tha Dlract Invaatnant Ragulation, the Board ahould
allow that ragulation to axpire. ' '

(Footnota continued from pravious page)

Based on the Board's failure to provlda adequata empirical
support for tha Rule, Congresaman Barnard requested that the
Board expand ~he conn\ent period 60 days to allow for the
"most thorough analysis in the rulemaking itself." Clearly,
the Diract Investment Regulation cannot stand on the record
developed to date.

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GEORGE G. KAUFHAN, b«ing duly sworn, deposes and
says as follows :

1. I am John F. Stnith, Jr. > Professor of Finance
and Economics in the School of Business Administration of
Loyola University of Chicago.

2. 1 have been involved in matters of banking
and thrift regulation as an academic, practitioner and a re-
seacher. t have been associated with the Federal Reserve
Bank of Chicago and the Comptroller of the Currency, and was
Deputy to the Assistant Secretary of Policy of the U. S.
Treasury Department.

3. I am the author or co-author of t
books and professional articles in the area of financial
institutions and financial institution regulation. I an
also on the boards of editors of several professional journi
including the Journal of Money, Credit and Banking and the
Journal of Financial and Quantitative Analysis .

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4. Z luiv« tM«n a auiibttr of tb* Board of Diractora
of tha AaMric«n rinanca Aasoclatlon. paat-Pra aidant of tha
Haatarn Flnanca Aaaociation and an cuxrantly Praaldant of
tha Hidwaat Financa Asaociation.

5. I hava aarvad on task forcas to invastigatc
various aspacts of financial institutioa safety and souodnass
sponsored by the Federal Home Loan Bank Board and .the American
Banker's Association and am currently working on major
research projects in this area sponsored by the American
Enterprise Institute and the Mid-America Institute.

6. I make this Affidavit to describe my analysis
of the Federal Home Loan Bank Board's use of the results of
a study performed by Messrs. Berth, Brumbaugh and Sauerhaft
and entitled "Failure Costs of Government -Regulated Financial
Failures: The Case of Thrift Institutions' (the OFER study)

to support extension of its 'Regulation on Direct Investigation
by Insured Institutions', 12 C.F.R. $563. 9-S. See 51 Fed.
Reg. 32925.

7. From a sample of failed institi
OPER study statistically identifies determinants o£ the cost
of failed insured SLAs to the FSLIC in the early 1990s. Six
characteristics of the failed institutions are found to be
significantly related to the losses experienced by FSLIC.

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DlrBCt invAstnents is on« of the«*, but is of r«lativ«Iy
SBCondary importanctt. The most inpoit&nt variables are the
delay between the time a failed institution became GAAP
insolvent and when it was closed or declared insolvent by
FSLIC and the cost of Federal ilome Loan Bank advances to the
tailed institution. The last is related to the volume of
advances to the institution. Both of these factors ai'e
directly under the control of the Federal Home Loan Bank
Board and FSLIC. Thus, quicker action in resolving failures
would be the most important and efficient cost-reducing
strategy for the FHLBB. Indeed, the failure to close in-
solvent institutions faster may also contribute to the
losses from the direct investments.

8. Most importantly, the OFER study does not
deal with the factors that determine failure as opposed to
the cost of failed Institutions to the FSLIC. The same
authors have addressed themselves to this problem in two
other papers. The first paper, entitled "Thrift Institution

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843

rallur«st Causes and Policy Zssuas- by Jams R. Barth, B.
Out BruMbauqh, Jr., iXsnUl SsMrhaft, siu) Gmotq* M. K.
ttonq , all of which at tb« tlM ware associatad with tha
Fadaral B