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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.

ib,Google

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 ontr aftsr waaki
oCdalay.

Thoa. th* plan itallad natU Iha tiaal waska of tha 9*th Congnu whan tha Sanata Baoktat
Comndttaa Damocratlc ipokatman. Sanatot Praimlra. propoiad a cotnpmnlM. Tha
baodlns pUn would b« Unitod ta ana yaar at iha antaat and a ealllng of tS billion la
baodlnc anUwiltT wo«ld ba impoaad. Snb)«ct to Concraaatoaal approTat, tha bowUna
•ttbotttp cooIS b« raaa wad for rabtaqnant T**n, If naaded.

Tba U.S. Laagoa la Norambar riemutltatad tii FSUC TMk Porca with an addad mandata
to axaraiiu Iha rastooal aGDOoaile problanu aRactias many of tha natlon'i financial

foAaaraaea (nidaltnu Imtad in ItIA — to davalop racommandatlam for tm<JH«n thoia
limlliillian' pnblasu without raionlnf to whalatala dotlasi.

Tba pmgiam daralopad br tba Taik Porea U daseilbad In tha mala body of (hli nvoit.

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Ona at Om malar ciiUei«m* af iIm U.S. Laaina'i paT-aa-you-ia plan U tlwt It did act
proTlda aom^ raMorMi UnmodlaMlf to tha FSUC to illaur it to aoln It* moat f i aaihii
prablsnu qoleklT' In^ieit, and ial«*d aomatinw* aipllcit, in tUa criUdam mu tba
aMoitloa that by not taklni flnal action awlfttr In daaUni with pnUam inatUiitiODa, tba
ultimata coat to tha FSLIC mtold ba inatlT incrsaaad llnca tha alia and M*ailt7 of tha
ch tnatltntiooa Moold coaUnoa to fiow.

It la naaonabla to aaaoit that If problam li
of and avsntaal coat to the FSLIC (rill llkaty ba Incnaaad. HowaTar, bilnalnt tuch
bntltaUooa wrfoi control li not naeaaaaiUr ijuuuriuona with ciafttng a final
NaotaUOD. Tha Sank Boaid baa manr wara of ananrtng that Inatitutlona do not
GoatiOM to fawr a aaa tba rlato to tha FSUC. Thaaa Inclada lapUdnf maaaiamant and
boatda of dineton or lormaUr tafciat Hi* butltntion orar and pottlna it In tba
Hanacamant Conalfnmant Pnfram. tndaadi naponalbla aavtaca ia*tltntiana>
bmdanad with billioni of doUan in ipaelal Inanranc* aaaaaamanta, afflmutkvatr
demand that thn Bank Board msura tbat such Inatltntlofw an not allowad to contlnoa
U act In a mannar Ukatr ta coat tha Indnatiy ai

Aaaata takan arer br tba FSLIC can ba c

■etlTB B _

AMoeiatlon, thronih n

Onca datarlontlon U hUtad, m Infonned dadalon can be made aa to whatbat the
beat comia la to dlipoaa of aueb aaiata. brlnf them to completion If Umt an in tta
development atage ar mana|e tham on an Income •prodndnc baiii. If Immediate
dlipoattion it to the FSLIC'i. the builneu' and, where appropriate, tha comnnaitr'a
adTtatasa Dm that option la open, f rovldlDg further option* that coold tncieaae the
retton t« the FSLIC ua ontjr bo to the timd'i advaat^a.

Adopting a rapid approach to the dlapoaitlon of problem aaaata can ■etnally be
aip«n*t*e for the FSUC. A* pointad ont alanabare b thli report, the problem aaaaU
the FSUC haa takan orar era concentrated la a fair atatea, moat notably lUta* that
era mliad In economic dlfncnltiaa. If the FSUC w«n Is dlipo*a of thoae aaaeu
Immadiatetr, It woold likely be doing ao at fln-aala pilcM.

■n la the affected ereaa.

,iy to tUa altoatlon wai the pllsbt of acTlaci laatltuioa* In the onfaviiniMe
t In lf(l-a2. Aa painted out In Appendix A, by UUni an
a atumde at that time, the FSUC laved Itaalf 14.7 UllloB
■a by the OAO.

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Ob tha Mter bMl, dw OAO ku bM* wIMr «wud u Mytag tb« PSUC fraaU n«w
lOMM U h teB tlD Brt to -mnlwaM* taMlrat thrtfu nnUl tha nd ol 11*7. F«r
InuBcai tai K tfMwmlual Utur to t«y. Dene Busud, ika Chilrmin at tb* Ra«M
Subcommlttaa on Commarca, CauaaM Md MMatAiy Affaln, tha SAO itfttad:

d paUaTB of •!
FSUC.* fCoit of Dalaytat Actiao on
bwtlt«U<M»*. GAO. Soptnabw It**, H. 4)

Tbam an ra$aj ptoHmm wltk the matbodakm la tha GAO ttatt bu lu ceoelMtaa
that thara li a dfiiltlcaM coat to PSUC In daUylai aetloa hai baan trtdaly aeeortad
tha latalUblo itaun co mm o n ly tnotad to lorammant lUtlitlu.

PB—rar. if th. CAP ita^T ■* ■»« ■^UhUltf tt Oyf^ In f «it. that tha P3UC will
MTa aomwhara ac»ro«'->><— «* « MlHnn h. „..i»-.^. .!„ ^j |g-ttfUJ Inaolrant
thrifti fnim Daeambw »M to Daeanbar 11*7. (TUi U In addition to tha t*-* bUllon
tka GAO compvtad aa bains uvad bf ■"—'"—*-( 107 Inaolvont thiUti from
Docambor If *1 to Dacambar IvaS).

>r tha If U-17 pailod,

I moitfaia ratoi ara appioaebln* tha V

With Iti mathodoloiical probUni, tha co>t-u*lnsi rafarrad to by tha CAO lUidr may
tM actoallir ba farthcondnc. -Hawarar, naithar !• It poolbla [itm tha GAO'i nnaiban
U pn«« that than li a caat to tha fSLIC in dalaying Rnal raMlntloo on ptnUam

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Undar cnmnt nilM, th* Padaral Homa Loui B4iiki u
tlulr Incosw uch yaar In irtut li c«U*d tha lagil n
Ineonw U not 4*slliU« for wa u dMdand ptTmont* u

»«ALHOIHLQtmjllI

SpoclflcaltTi If DOfdod, a taMof coipontlon ■ranld bo otubUtlMd to luna lonc-tarm
•an-cat9on twods. Tlti* ooiyonUOD vranld cbeo lat 19 • ilnklat fond to ratin tho
principal and bitaivic on thaia boodi it tho and of 10 yaui.

Thn Rank Syitaoi would unnullf conulbiito to tha ftmdiBf corporation tha (nator of |17S
mlllloQ — 20 parcont of Ita ailimatad Hit nat bicoma — or 10 parcant of lu prior TMf
not Income, Tu cnaurc that tha Imrdon of contrlbotlni to tha fuolins cuporatloB did not
fall raoToolr on the Indivldoal bank) or U obTlata tha poulbUlty of a particular bank
■hlildnc it! raipondbUltT thioiish minimising lu aarnlngl. tha nat Income for tha ijnom
ai • iilulo would bo uiod al Aa calenUtlon base. Twont; porcent of tUi comUnad nat
incoma flcnre would b« calculated. Tba renilttni contrlbmion would bo lavlad on each
beak br u*ln| tha ratio of total eieete of FSUC-iniored Instltntloni in lu dletilct to the
total M*et* of lU FSUC-inaarad iaeiltutiinu nationwide.

BiMblt > abow* that U tha Bank Sjratam'a Incoma powe at *.Ga poneot por yu,
dedicating 10 parcont of that Incoma would t»a lufflelant to pay off, la the yaai 100T> tbm
total principal and Intarait on tl-S bUllon of laro-conpon bonda lold In I9S7 and enothor
$1.5 Umon Inoad in !«<■ (with a eomUnod face Tatua af tH.A billion m 1D07). TUa
aunmol that tho boada can be lOld with an Interoit rata of ■ parcaat. It alao laamDaa
that fnnda paid Into tho sinking fund would earn at *a eBanal rate of S porcest, a
coniarTsttve eisnmptlon. Bseeuae thay would be eannailced M ratlra long~ti
there la no reason why such funds could not be placed la Ic
oa tiia ylaU cnrra.

Of coorMi then li ao gsenutaa that the Bank Srsum'i earning! vronld grow enoa^ oeeh
year to provide intflelant contrlbntlona to tha funding corporation, elthongh the System'!
eeiaingt have grown at an ayaraga ammal rate of 14.7 percent ilace 1971. Howeieri tba
Bant System 1* forecasting that lu aernlngs In I9t1 wUl grew very tittle and mlgbt area
shrink. There are two main raasona for thli pessimistic forecast:

1. A lisaUa portion of tha System'! earnings for the lait year or more waa tnsda up of
laeoma from penalties on the early propsyment of advancos by bin in wing
Inttltntloni. Tldi li esientlelly s non-rscurrlng source of income) and

1. Tha Pederel Home Loan Banks derlye the bulk of Ihalr net income from aanilogi on
thatr cepital bese. On other operations, they lun at aa eisenllelly bteekerea UraL
nth (he decline la interest rates, the eemlags oa their cepitel bese heye eleo
declined.

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B pay off thi
u U Ow itaiklat tmtt. ta that mh, It
ta cootaaiplattd llwt tt* bort—w woold mate tv llM dUrarMK*.

Haw T w , it It iltB poatlU* Hut th* ratatnad aamlnit of tiM Bank Syltam could alia Im
vaad w a i aaa i »i -U ba^ pay off tha boodi It, aftar ■ pariod of, uy, flTa yaant U wai
dotaiwtaad that tfca raiovrcai alna4y commlttad to aolva tha FSUC* problmna irara
•otnelaM aadi thaiafon, It woold ao Icatsr ba oacaaarr for than kaaptoa tha latalnad
•aniasi la ttw backtroood ai a potaatial *— -m-i for fUuia boirowUci.

D tta nont eaaa aeaBaiio b ""■■"■^ and lank Syalam aamtici do not gpiw at aU ovar
tta BMt M j—x* (Of U thaqr daeUMl. tha Baak Sntam mmU contUbMa tba —*-i— — -
t27S ■dlUea aach yaar. TUt would ba anttielaat to pay off tta pitaOpai and tnt��n*t so
tl.1 bUBaa of bowow ln ai laa«fa« tba boAMi* to pay off tha prtadpal and Waiwt oa tha
MkH 0.9 hiUaM — It a total of tS bUltas U bonvwad.

ma ra p ra a w ta dM dnwmMa For tha Indvttiy. To imima that the Bank lyitam'i aamlnc*
wooM ba nn hlsbar 20 yaan tiom now than thay ara today li vary r*"*"''"'' and.
miibablii totally OBaallitle. If> for tawtanca. tha aandnst of tha Bank Syitam grsM at t
paiEant par y«ar, Ihaa tha Bank lyatom ■onld ba llahlg for tha paynant at Intarelt and
' ' ' OB t».S Ulllon at tha poMlbla (S bUlioa in dabt with tha bwinau botaw
la for tha othar tl.'

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/ £2111111

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iTOtMT 1. ininr.. n. wi w ■»-« .tut cMH 'J^**?™' "iTllHft"" Mnnim

Ti»u«CT/B«ak Boud

.» CAM FLOWi

TOTAl

IlH-m» CAW tLPWi

t«JI.

MOB.

tia-« B.

M-4B
!».» B.

TOTAL

M.0 1.*

lUUL

iiTT

t«JB.
too B.*

tll.t B.

14.* B.
10.0 B.*

f 10.0 B.

iO-OB-

moT

|l.tB. tl.*B.

11.1 B. tU B.

10.0 B.* te.o I.*

u.oa. ttjt*.

M.» B. nTi.

M.l B.* * I94Jk*

M-T B. !(■(■:

|4.t B. M.( 1.

M.1 B. t«4 B.

too B.* ta.o B.*

11 0.0 B. I1 |,0 B,
1. tU.IB.

tlO.4 B.

t«.*B.

t4.«B.

t0.0 B.*

to.o a.

110.04.

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D,j,ii.db,Google

natn it nrTT - ma-n

(SCatM u« nicludad only It tMjr iMd Mnk ClMlnsi)

CalUornU

Colorado

riorut

HMt VirstnU
wiaeoaoln

131 120 7» U 42

Soutcm: reic. Daorlcan Mnkot. WLl Strott JounMl

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D,j,ii.db,Google

218

■ M. IMS t nw

*/wt» t/9a/M

u,tn,ta t.w,

,11 n Ht.n

rw.M) lot.

a,**t,Ki ■i.nr.aa ttjn.ta

>1,H4,Mt M Il.fS»,M

Mtr,(ii m.m ns.w

H.H« M.m.m

Digit zed by Google

i»,wi ww.oo

N ll.tM.M

H,)M,n» (i.ut.M

a.«M.n* ii.iu.nr tt.w.m

Digit zed by Google

nwiM

CCmUTKW

0*riclmqr

of unit

20* of

■nua

•orritlngi

1. S3.S a.

KttM

iMlng

2. S3.9 B.

lamii.

WVDBS

iLie

BMK mm

tHnnuiioM

Digit zed by Google

— " "" "■ ** "■

45.00 BItX.
•at. 44 BILL.
>.9]%

9.00%
1.00%

VUlKXPUi t

ut«

11.

91.

IHt

91.

1H9

91.

1990

1991

19*3

IHl

93,

1994

93,

1993

9J,

199«

9i,

1997

91,

199I

94,

199*

94,

3000

94,

3001

99,

3003

»s.

3003

94,

3004

97,

3009

97,

3000

9a,

3007

911,749 914,930

67-884 O - 87 -

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AssuMpnani

TOTAL BOSBOWIHGS

95.00

HUDSS FUIIDC

in TWEMTK

YXAM

933 . 44

•aONTH HATK

OP SYSTEM

UltMIHGS .

0.00%

EASNIMS RATE

or K0HZE8

IN SIHiaKG

rUMO

9.00%

LORO-nsiI BORROHZHG RATE

8.00%

SBOJfTPALL

AMOUMT

BAKX

KAOe OP

MIT

BX THB

SBnOMG

YUR

COHTRIB.

BOBZmtSS

FOHD

1916

1M7

»a75

9279

isas

»275

$3«

9590

1MB

S275

S5S

9949

1990

Sa75

S8«

91,358

1991

S379

S131

91,823

1993

S375

tisa

93,348

1»»3

S37S

$300

93,918

1994

9379

$249

91, COS

199S

S37S

$394

94,399

1996

$37 S

$349

- 95,198

1997

92fS

$408

$6,139

1998

$279

$473

97,199

1999

$279

3544

$8,374

3000

$379

$623

$9,690

3001

$275

9708

911,198

3002

$379

$aoa

912,793

3003

9379

9904

914,611

2004

9379

91,017

916,631

200S

$37S

$1,140

918,880

300S

$37S

$1,274

931,371

2007

932,442

TOTAL

S27,S00

$9,500

$9,428

AMOOMT or

OZBT

COVBRIO

$3,137

92,873

PRISZira VAUIX

or COMTRIBUTIOHS

$3,700

93,138

j,Googlc

IIKIUKU TOM XH nU'FI fUH

aaovn mn or aimn uuamiu
BunriNS UTi or iioinit zm innmn i

9S.0O SILL.
Sa2.44 BILL.
5.00%
9.00%
• .00%

itac

n,"8

itii

$1,444

9375

IMI

$I,91<

9399

1M1

•1,S92

9303

1.9»«

$1,C71

9319

Uff]

»1,T99

9134

19ff3

n.*43

9391

1>9]

n.9ss

93«t

I«t1

43.033

9307

IMS

13,113

940«

Iff*

$3,240

9437

1991

»3,3S3

9449

1991

»3,4«9

9470

199)

•3,S93

9494

200«

93,723

$519

200

«3,t59

$944

2003

93,001

$572

2003

$3,153

9«00

2004

93,109

$C30

200

93,4TS

$S«2

2001

93,«4a

$S9S

2003

TOTI

a. $47,739

$9,093

AMOt

OR or OUT

nmn

$3,291

tm vusi

COMTUIOTtOin

93,949

$105

$133
$1C3
$197
9335
9378
9336
9179
9439

$9,935

$1,749
$1,999

i by Google

imnn'i -mrnr—— ~.— —

D,j,ii.db,Google

ASSOCIATION OF THRIFT HOLDING CCMPANIES
tat iTik aoM. N.W., sdu )oo

JanuwT 30, 1907

Th« Bonorabl* Carroll Hubbard, Jr.

Subco^aittaa on Ganvral Ovarstght

and Ranagotlatlon
Cc^alttaa on Banking, Flnano*, wmI

Urban Af f alra
Unltad 8tat«a Houa* of lt«pr*aantattv«s
B304 Raybum Houa* Offle* Building
Waahtngton, D.C. 2051S

Daar Mr. Chalxaan:

Bnolocad, piaaaa find tha doouaanta you raguaatad of us In
tiM haarlng of tha Housa Co— Ittaa on Banking, Flnanoa, and Urban
Affalra on January 21, 1987. Inoludad ara, to My knowladga, all
of tha no— i n ta fllad with tha Padaral Ho— Loan Bank Board In
raaponaa to tha Board' a propoaal to aztand tha diract Invaataant
rula to January 1, 1989. In addition, I hava providad a
rapraaantatlv* aanpllng of thoaa ooaaanta, as rsquasted. That
aaapling haa Inoludad all ooanwnta that vara draftad apsolflcally
for tha propoaad aztanslon of tha rula and oalts only attaohManta
and addanda t "

as a 1st tha CoMalttas in any othar way, piaaaa

i by Google

UMITBD STATES LaUSl'E af SAVINGS IXSTITlTIONS ". utJ-KwnV-i'^

Inforaation Services Sect
Office of the Seeretitlii
Federal Hoie Loin Bank Bo

Dear Sir;

The U.S. Leajue
this opportunity to
1986 proposal to re

RE: RetoIUClon

>bl*in Bank Board per
>ore Vhin 101 of Ihel
■ecurltlei and equity

Inlerssti in

stinj an »gs"iate of
corporations, equity

expire January 1, I9ST,

•The U. S.
J.SOO aeabo

i't.'sJit^tfs^i-iSiJr

■ake up the il

\ tHu":

include: 1

Irald J. Levy, c'airi

bank businesse
institutions

in MU-'"'k''"

- Ee"fal
Ston"p«i

il'lii

League headquarter?
llnoii 60601. The 1

ashlnslon Pffi.

t Wacker Dl

Telephone:

(30:l 6J-.g90o!

ib,Google

- 2 -
and the Bank Board has toufht public cosaent on whether that
■ansat data ihould b« extended to January I, 1919. The Rank
Board al*o has a*ked interested parties to address the question
of the continued need tor the refulatloni In their present Eoru
In lijht of the aiencjr's recent adoption of hlfher resulatory
capital requlreaents (or FSLIC-lniured Institutions. Ptnall)',
the agency has- Invited eoaaent upon the adalnistratlve
flexibility of the direct Investaent rule.

The U.S. League has recognltad the potential threat to th*
PSLIC insurance fund posed by the excessive and unskillful
■aking o( direct Invastaents, and supported the iapositton by
the Bank Board of the present structure of rsgulitory
preapproval thresholds governing such investscnts. It Is our
strong Upression that this structure has been effective in
curbing the worst abuses In this area without depriving
well-uanaged Institutions of a reasonable opportunity to take
advantage of the leglllaate prof It-saklng possibilities that
direct Investsents offer.

Concerning the appropriateness of aodifylng the direct
investnent Itaits In view of the strengthened systea of capital
requireeents recently iaposed on FSLIC-insured institutions,
Including increased reserves required ijalnst direct
investaencs, we believe that the possibility of ■ trade-off is
quite proBising, but are cognliant of the need lo proceed

i by Google

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,

i by Google

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.

i by Google

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

i by Google

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

i by Google

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'

i by Google

•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-

i by Google

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-

i by Google

)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

i by Google

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.

..Google

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

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. . 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 '-

as w«M at, cP-a

gei ir a

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Th* FeAnl Home L
P«9e Tfiree
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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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 Bom Loan Bank Board, was presantad at a Hay 198S
conference sponsored by the Federal Reserve Bank of Chicago
and subsequently published in the Proceedings volume. The
second study, entitled "Thrift Institution Failures;
Estimating the Regulatory' s Closure Rule' was eonpleted
after the OPEB study (a copy of this study is attached) .
Both studies examine a sample of failed and non-failed
institutions to identify the causes of failure. Neither
study finds that direct investisents contribute to increasing
the probability of institution failure. In the more recant
study, the authors review the previous empirical studies
that they consider to also be the most important. They find
that- direct investment is not a significant variable in
explaining the probability of insured depository institution
failure in any of these studies. They then proceed to
construct another model explaining the probability of savings
and loan association closures and test it for a sample of
340 closed and 628 non-closed thrift institutions over the
period 1981 through 1984. Among the explanatory variables
included in the model is the ratio of direct investments to
total assets ('OITA'), measured both six months and one year
before closure. On the basis of their tests, the authors
conclude "the variable DITA is never significant, meaning
that direct investments relative to total assets does not

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344

affect the likelihood that an iastitution will be closed.
This finding is consistent with earlier work by BBSH [the
same authors) (19BSs) and Benston (1985)... It is surprising
that direct investments do not affect the likelihood of
closure by the regulator who passed a regulation limiting
direct investments" (pp. 14-16).

9. Because the earlier OPES study by the. same
'authors finds that direct investments do increase the loss

to FSLIC from failed and closed institutions, this suggests
that the failed institutions increased their risky direct
investments shortly before closure and that these losses
could have been prevented by speedier action by the FHLBB in
closing these institutions as soon as they became GAAP
insolvent, no less market value net worth insolvent. Thus
it appears that nothing in the OPER study or the other
studies conducted by the same authors provides any justifi-
cation for the FHLBB's regulation regarding direct investment
nor do the authors of these studies make any such claim.

10. The same conclusions are reached by Professor
George Banston of the University of Rochester in his revised
1985 study. In addition, Benston shows that the greater the
proportion of direct investments to total assets for an
institution, the lower is the risk of direct investments as

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S45

BMasurad by th* volatility of total caturns and that, avan
though th« graater is tha total risk of tha institution, the
direct invBstmant reducaa tha total risk balow the risk of
the remaindar of tha institution's portfolio. Tha risk
reductions in both instances may be attributed to greater
diversification. In sun, tt appears that the Padaral Home
Loan Bank Board is using tha OPER study for purposes of
convenience to justify its own preconceived conclusions.
-In no way does eitljer the OPER study or the other studies by
the same authors provide justification for either the
limitation on direct investment or the extej
regulation beyond January 1, 19S7. In addi'
studies examines the evidence for insti
invastnents exceed either 10 percent of the;
or twice their net worth.

litial
on of this
n, none of the'
whose direct
total assets

Further, Affiant saye^/not.

' l.i^:.> S

.(■..

Notary Public

My commission expires:

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October 17, 1906

Dir*ctoc

Inforaation sarvic«s Section
Office ot tha S«cr*tariftt
Tadaral Hoaa Lo«n Bank Board
1700 G St««t, M.W.
Washington, D.C. 2aS52

CoBiants In Opposition to tti*
Propoaad Extanaion by Jbandaant
o£ tha "Sagulation of Diract
Inveataant by Znaurad Institutions"
fSl yad. nag. 329251

Daar Sir or Hada«i

X M writing on bahalf of Lincoln Savings and L6ah
Association in opposition to tha proposad axtansion of tha
"Ragulation of Diract invastnent by Insurad Inatitutiona"
(tha "Rula" or tha "Diract Invastaant Bula") (51 rad. Ran.
32935) noticad by tha Padaral Hosa Loan fittik Board (tha
"Board"), and in rasponsa to tha Board's raquast for commants
tharaon. j

It is my profassional opinion thst tha Rula should
not b« axtandad. Z ragard tha rula as not only unwisa but aa
potantially harmful to both tha savings end loan industry and
tha Padaral Savings and Loan Insuranca Corporation ("PSLIC").
Tha Rula ia unaupportad by tha sola study which tha Board
citas in its dafanaa and is daaonstrably in conflict with tha
ralevant available siatistical data.

I basa ny conclusions on tha following facts:

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StatistlcAl r«Bttarch shows tlMt dizcct lBV««taanta

do not Incrsas* risk to sttvings and loan

•ssociations or to th« FSLIC fund.

StBtiaClcal rssaarcb sttows that diract Invaataanta

tand to incraaas Industry proCitablllty and

Incraasa or ara posltlvaly aaaociatad with hl^ar

ast worth and, eonsaquantly, sarva to pravant

falluraa and protact the rsLZC fund.

Ttaa raaaarcb papar on which the Board rallaa doas-

Bot, and was not daai^nad to, avaluata tha offac-

tlvan aaa or tta« naad for tha Rula. It doas not

provida a^lrical support for tha preposad axtan-

slea of tha Kula.

Tbm Beard'a statad ralianca on its "auparvlsory

aieparlanca" to dafand tha Rula Is analytically

ooBtUsad, Incanalstant and unsupportad. Tha Beard

rallaa en data that ara Irralavant and ignoraa cha

eiq^arianca ef its own paraennal that naqmtas its

elalas la at^pert of tha Itola.

Bv«n If ona assuaas for tha salca of artpisant chat

direct invescacnt« Incraasa "risk," the Rula has

bean candarad nnnacaaaary by tha Board's naw

Capital Raquiraaants Rula. ~

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On th* basis o£ each of th«s« r««sons, which I
discuss in graatcr datail bslow. It is ny profaaslonal
opinion that tha Rula should not ba axtandad.

1. Tha Data Indicata that Dlract

Invastnsnts Do Mot Incraasa Bislc
tfl th« Industry or to tha FSLIC.

I hava racantly publishad what I baliava is tha
Bost elaborata and conprahansiva study nada to .data that
axaninas tha ralatlonahip batwaan dlract Investmants and
risks to tha savings and loan Industry and to FSLZC. Scs'
Gaorga J. Banston, An tnalyats of tha Cauaaa of Savings and
Loan Afsocl^^tl9p Failuraa . Salonon Brothers Cantar for tha
Study of Financial Institutions/eraduata school aCBusinass
AdHinlstration, Maw York Dnivarsity, Honograph Saries in
Financa and Bconoalcs, Monograph I98S-4/S (1986) M In this
vonograph I studlad all associations that fallad batwaan
January 1, 1981 and August si, 1985, analysad in datail aach
of tha Individual associations that fallad batwaan thasa
dataa and that had £lva i^reant or aora oC its assats In
dlract invastaants, and axaMlnad all FSLICrinsurad associa-
tions (a total of 2,377 associations] ovar tha pariod froB
Juna 30, 1981 through Juna 30, 1964.

1/ I annax harato a -copy of this monograph.

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Th« statistical data in this study show that:

(1) dirset invsstssnts ara "not significantly
posltivBly r«lat*d to failura" (p. 73);

(2) statistically thara is "no nlationship
bstwaan diract Invastaants and [association] falluras"

(p. lU)f

(3) "diract invastaanta ar« net positlvaly
associatad with FSLIC payaants" (p. 73); and

(4) tha "data do not support tha FHLB&'s
assartlen that diract invastaants are Baaningtully associatad
vitta •risky* assots and llabllitias." (p. 118)

I eoncludad Croa thasa Cindinga tbati

daragulatton of invastaant powara w«a [not] « causa of
tha orciclal Cailuras. Consuaar and comBsrcial loans
wat-a naqligtbla at tha SIAa that failad. Diract invast-
nants — dafinad aa raal astat* hald Cor davalopaant,
invastnent and racala, and aquity Invaataanta in sarvlca
corporation aubsidtacias — vara found to ba naithar a
Causa of failuras nor rasponsibla for highar FSLIC
payouta at Cha associations that fallad.

3. Direct invasCaants Centributa

Subatantially to Industry
Profitability ojid Halp
Pravant AaaociatJon Faily i ^f s

My study producad Mora than aaraly nagatlva find-
ings. It alae ravsalad that diract invaataanta tand to
incraasa tha proCitablllty and nat vorth of associations
and/or that assoclationa with highar nat worth tand to aaka

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67^^84 0-87-12

direct Invcstiwnts; con*aqu*ntly, the FSLIC rund Is
protected.

Specifically, the deta ehow that:

(1) "there ie rMmon to believe the direct
Invflstnents have served to reduce the nunber of failures by
increasing SIJL ts^vlngs and Loan Association] net worth and
reducing their vulnerability to intarest-rate risk'
(pp. 122-123)1

(3) "direct investments, nore so than othst '
assets, considerably increased net worth, or were made by
associations that increased net worth for other reasons. In
either case, the risk to the FSLIC is lower" (p. 115) ;

(3) the "average returns on direct invast-
■ents for all ol the size groups [of asseciation] are consid-
erably above the returns on other assets" (p. 94] ;

(4) "without direct investaents, the average
SIA would have had negative returns" (p. 94) ;

(5) "direct investments significantly improva
the reported net returns to SLXs" (p. 9S) ;

(S) "[tjbese higher returns reduce the risk
that an SLA alght fail, causing resources to flow froB the
rSLZC" (p. 121} ; and

(7) overall association "risk, as neasured by
the standard deviation of ratums, is reduced by direct
Investnents." (p. 99)

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trom tlMSS findings I eenclnd*d that:

tlM data . . . indicate that diract invaataants provtdad
SlAs wiUi nucb bighar aamlngB than did thair othar
opsratlons, vhlle reducing somewhat the varianca of
earnings. Hore aesnlngful than tha varianca as a
neasure of risk to tha PSLIC ia the extant to vhicb
aaminqe are negative. The study found an inverse
relationship batwaan negative total net earnings and tha
proportion of assets in direct investaants Hence, the
regulation adopted by the FHLfiB in 19B5 that reatricCa
direct investment* to a Mxinum of ton percent of assets
(unlaaa the PSUC-insured association obtains specific
permission) appears to ba counter-product iva.

lii at 171-72.

The policy Ij^licetions of these findings eeea

clear. As I statsd in ay atudyi

SIAa ahould ba pemittad to use thair cosparative
advantage In real -eatate-rala ted projects to Kaka and
aanage direct inveatnenta . The investments referred to
are thoae that are the subject at the atudy presented in
Chapter II — aaaets that 4re owned by SIAs, not loans
that the FHLBB defines aa direct invastmenta (generally
low -borrowed -equity acquiaitlon, development, and
construction — ADC — loana) . Direct Investments oftar
SIAa several advantagae over other investments, first,
they tend to provide SUa with higher aamlnga than can
be obtained from many other investments and operations,
apparently because thay allow SU managers to use their
■kills and experienca in aoXlng and monitoring real-
'aatate-relatod inveatmants. Second, direct Investments
have shorter duraClone than many other assets in which
SLA* have inveated; hence, thay reduce the institutions'
exposure to intaraat rata risk. Third, the ratuma on
direct investmenta tend to be imperfectly correlated
with the retuma froa suls other activltiasr hence, the
varianca of ratums tends to ba reduced. All three
factors reduce the riak . ijq^oaed on .the PSLIC. - —

lii at 173^

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Thic «vid«nc* ahowa that the Itul« la not only
uniwcassary, but la alao positivaly haraful totha induatry
and to tha FSLIC.

3. Tha Statistical Rcaaarch on
Which tha Board Itallaa

P9fff Hot SuDPOT-t th« Rule

nia Board citas a aingl* rasaarch papar In support
of tha Rula.^ (SI Fad. Rag, at 32926} Tha paper doaa not,
and cannot, provide aupport for tha Rula.

Tha papar cited la directed towarda evaluating
different eethods of neesuring the capital structure of
aaaocietions. It was not designed to axanine the critical
quaetion that Muat be answered in attaapting to evaluate the
Rule eapirically: do direct invastaants incraese or. decrease
risks to associations and to the FSLIc fund? Tha paper did
not Attaapt to examine whether direct InvastBants ealca _
failure aora or lasa lilcely, because the authors aicauinad
only thoaa associations that had already failed.
Conaaquantly, the findings reported on the relationship '
between FSLIC payouts and direct investnents are relevant, at
■ost, only to the behavior, assets and liabilities of

Janes R. Barth, R. Dan Bruabaugh, Jr., and Daniel
Sauerhaft, "Failure Costs of Gove mnent -Regulated
Financial Firms: The Case of Thrift Institutions"
<June, 1986} .

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•■■oaiations that had cloa* to s«re or iM^atlv* iMt vorth.
TlMa« aaaocistloM taea v*zy ditCsTMit Incwitlvas th«n do
ttWM vitb aufflQlMt IMt worth. Onllk* Kwt aolvwtt
inatitutlons , th« eiM« *tudi«d e«n bcnoflt txom taking graat
rislu. loeh risk* >l«tit Ineluds, and eortalnly would not b«
llaitad-ta, dlr«et InvastaMita .that proisa aithar vary high
ratuma or loaaaa. But tba propoaad rula doaa not aaanlng-
fnlly ^vly to Insolvant or naar inaolvant associations) thay
ahould ba eloaad or cloaaly aonitorad in all dlnanslona .
JUtbar, tha rula appllaa to aolvant, auttlclantly capitalisad
aaaocitition*. Tba atudy cltad doaa not provida any findinga
that partaln to thla gnM^.

Moat i^Mrtant, tba Board'a papar doaa not (and was
not daslgnad to] taka Into account tha aubatantial and
tindaniabla banaCits asaociationa darlv* froa dlract invaat-
■•nta.^ It tharaCora ignoras tha axtant to whlob incraaaad
proeitabllity and nat worth froa dlract invastaents hava
protaetad tba FSLIC fund and anablad It to avoid tba coata of
additional falluraa that it would etbarwiaa bava bad to baar.
■y ■oBograph axaminad both tha poaltlva and nagatlva raaulta

Tba Beard itaalf acknowladgaa tbat dlract invaatvanta
—can ba banatieiali "whan pr^arly ondarwrittan, diract
inraataanc* say ba profltabla for an inatitution and a«.y
aoMatiBaa offar aora poaltlva divaralfication banafita
for tha antlra portfolio." 51 Zut^. itaa. at 33926.

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ot dlract lnv«BtB«nts, utd consaquwntly Its findlnqs are aore
comprahansiva slid bal«nc*d, and it bears directly on Cha
merits of the Sula. Since direct investaents vera generally
bigbly profitable and contributed to increased net worth,
they Boat likely prevented nany associations fron failing.
Collaterally, dlract invastaants tended to be Bade by asaocia-
tlona that held relatively hic^r lavals of net vorth. These
findings are not contradicted by tba Board's study. It does
not show that direct investaants are in general harmful or -
particularly "rislcy"; it does not question ■/ findings about
the general profitability of direct investaents; and it does
not contain any reason to doubt that profits from direct
Invastmants have helped prevent potential failures from
occurring.

Horeover, although the Board's paper Baasured the
relationship batwaan asset holdings at failed associations
and the size of PSLIC payouts, it was not directed at deter-
mining tba variables related to failure. It aalces no effort,
for eicample, to measure the effect of past declines in asset
values (such as those that arose from interest rate risk) on
FSLIC payouts. Tttm paper contains no variable measuring the
losses associations incurred on mortgages and other long-term
flxad interest obligations, and it contains no variable
measuring the effect of such losses on the size of PSLIc
payouts. Hor does it separate the effect of fraud (which has

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■ devastating afCcct on th« FSLIC fund) froa th* •Cfaets oC
aasat dacllnaa and liquidation loaaaa.

Rovavar, anothar atudy conductad by tha Board's
OCClca of Policy and Beonoalc Raaaarch did analyza tha
statistioal ralationahip BMtvaan diract Invastaant and tha
probability of fallura. Tbls study^ found, as did tha
raaaar^) I conductad that is discussad abova, no significant
ralatlonahip. It tbua indieatas that diract Invaataants do
not oausa aaaoeiationa to fall.

I^mrtantly, it should ba notad that an association
"falls'* whan tha rSLIC chooaa* to clcsa it or bava it vcrga
with anothar institution. As tha papar citad by tha Board
statas, "tha daciaion about irtian an institution has failad is
a ragulatory ona. As a rasult, not all insolvant thrift
institutions are failad." (p. 4) Considering tha Board's
baliaf that diract invastaants ara aspaclally risky, ona
would axpact tihat tha Board has aonitorad associations that
bold talatively high amounts of diract Invastnants aora
cloaaly than It ha> aonltorad othar aaaoclatlbna and that tha
Board haa closad or aargad ("failad") thosa that bacoaa

Jaaas It. Barth, Jr., R. Dan Bruabaugh, Jr., Danlal
SauaAaft, and Gaocga N.X. Hang, "Thrift Institution
Falluras: causes and Policy Issues.' Procaedlnas ef a
Conference en Banking Strqrtvyg ^nd CeBpyt;l,t; i ff p. Federal
Reserve Bank of Qiicago, 19S5, pp. 1B4-216.

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liuolvant. H«nc«, studiu tbat axasln* £«llad associations
and s««k to axplain thsir failuras would liksly ba biasad
towards finding a significant, though spurious, positive
relationship batwaan diract invastaanta and "failuras." Tha
fact that naithar tha Board's study nor nina found any such
significant ralationabip indicates. If anything, that direct
invastBsnts arc Invarssly related to economic (as contrasted
to regulatory) failure.

4. The Board's Reliance on Its
"Supervisory Experience" la
Confused. Inconsistent, and Unsupported

The Board states that it relies on its "supervisory
experience" to support the Rule. I find its position here to
be confused, inconsistent and unsupported.

Xs its notice of proposed extension indicates, tha
Board's position is based on a refusal to distinguish care-
fully between certain types of loans (particularly certain
acquisition, developnent and land ("ADL") loans) and diract
investaents.-^ Regardless of the extent to idilch ADL loans

Th* Board has, by rule, deteralned that certain types of
"loans" should be treated as "direct Invastnents . " See
58- red. Reg. 18233 (April 29, 1985). Tha problem with
this rule, aa with the Board's direct Investaent
regulation, Is that It refuses to recognize the
differences between ADL and other types of loans that
create special risks and atralght- forward direct

(Continued)

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and diraet invsatBwits Bay, In m»m vay«, b» censld*r«d ••
■iailar, tbay arc quit* dlfe«r«nt In l^mrtantraspacts. IC
tb* Beard has avidanca that ineraaaad riaka arlaa froa AOL
loana, mneb avidanca aay conatituta a raasonabla basla to
ragulata thaaa loana. But tttla avidanca la not a raaaonaDla
baala on tihiah to ragulata trua dlract invaataanta. Indaad,
tha aingla raaaarcb papar on which tha Board rallaa afaowa
that ADL loana ara aa ralatad to hlghar FSLZC payouta aa ara
dixact Invaataanta at Callad aaaoclatlona. Navarthalaaa, tha
Board parslata In Halting dlraot invaataanCa while ignoring
tha apparantly aqually troubling U)L loana. The Board ahould
aittaar take ita papar aarloualy or, batter yat, ignore it
eaiVl-ately. To ragulata only dlract invaatiaanta on tha baala
of tha papar eitad la eonfuaad and inconalatant.

rurthar, tha Board'a contantiona .In aupport of tha
aula are inconalatant with at laaat such of ita actual
auparviaory axparianca. A vary conaidarabla part of tha
Board'a auparviaory axparianca, in fact, yielda conclualena

( Continued]

inveataanta (where tha aaaooiation owna and directly
aanages the property] , that it rafuaes to focua ita
^ regulations on tha typaa of loana it aaaa aa posalbly
troublesone, and that it Inalata on attributing to trua
direct invastments tha danger* which it sees in thaaa
troublesome loana. As a raault, ita econonlc analysis
ia confused and it haa undertaken dysfunctional
regulatory actiona.

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eiatly contrary to thosa tb* Board atataB in attanptln? to
support th« Jtul*. Hr. Scott Taylor, a Board •aploy«« vtio wa*
in charg« of liquidating failad associations, recantly
auanarizad th« results of bis supervisory sxpsrience, as

For aors than two years I hava baan in charga of
liquidating failad FSLIC-insurad institutions. During
that tiaa ovar 50 institutions vara placad in racaivcr-
ship, and 16 ware so badly scarrad that tbay ara baing
fully liquldatad, with ovar $3.2 billion in historical

Thosa coNpanias did not fail bacausa of nisusa of
broader aasat and investaent powers, or because of
direct investsents in real estate. Thay failed because
of fraud, inconpetanca and criminality which waa not
deterred or detected early enough, and which has little
if anything to do with the ability to sake direct equity
investaents or with broader asset powers.

Despite strong assertions by some, I can see no
basis to claia that direct investaent authority is a
cause of increased failure or a risic to the PSLIC. But
if regulators do not escamine and Biiparvlaa adequately to
prevent and deter wrongdoing, crlae, fraud and incompe-
tance will cause increased failures regardless of legal
liaits on investments. It is difficult to see the
wisdoa of barring the great majority of sound, well-
managed savings institutions from safe and profitable
business sinply because regulators fail to prevent or
deter others from crime.*'

I aa attaching hereto a copy of the complete letter,
dated Hoveaber 29, 198S, fro* Kr. Taylor to
Kr. George P. Rutland.

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For thM« r*uoM, tb* Board's nlianca on its
saparvlsozy oxporivnc* to dafand tb* Rule is inconsistwit and
onsupportad by avidanca.

5. Tba Board's Rula Incraasing Capital
RaqulraaanCm Cor Associations
Has Kada tha Diract Invaataant

Hula Onnaeassary

Tba Board bas aakad apactfically wbatbar thara is
aiqr cmitinaad naad for tba Rula In tba waka of Its naw
capital requireaants ragulatlon (tba 'Capital Raquirasant
Sula'j. iaa SI ZmA^ taa^ 33563 (Saptaabar 32, 19B6). Ttia
abort ansvar is tbat tbara la no aucb naad.

I a^raa with tha ganaral approach talcan in tba
Capital Raqutreaant Rula, to raiaa tba ganaral laval o£ nat
worth that associations Kust maintain. Such highar net worth
will aarva as an additional and strong inducaaant to associa-
tions to oparata aeundly and pmdantiy, and It will provida a
largar cushion to forastall tba P8LIC fund Croa having to

Tha Capital RaquiraMant Rula aafcas tha Diract
Invaatmont Rule unnaeaaaary. Tha Board bas dafandad tba
Diract Invastaent Rula on tba ground that it will pravant
associations froa engaging in rialcy invaataant practicaa and
will raduca losaas to tba PSUC. Evan if tba Rula contrlbutad
to thcsa goals — a conclusion whidi is unsupported and .*.' .-^
inconsistent with the evidence — tbe Capital RaquizwNnn

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ttul* will «cbl*v* th« 9oal9 ttor* «ffici«Rtly and •ffactlvcly.
Tha rusona Cor this *r« sij^l*.

Firat, ttM Capital Raquiramanta BUl« will indue*
graatec caution and halp inaura sound invastmant practicas,
«rtiila at tha sane tiiM it will praaerva tba oparational
flaxibility and aarkat Craadoa which ia raatrained by tha
Olract Invaataant Rula. It will diacouraga rlajcy invastmants
while still allowing aaaociations to undartaka proniaing
opportunitias for profitabla direct invaatnants. ' '

Sacond, tha capital Requiraaant Rule will create an
added safety cushion to protect aaaociations and tiha FSLIC
against losses. The Direct Invastnant Rule, however, will
likely hinder aaaociations (particularly uutuals) in tbair
eCforta to aeet the required higher net worth levels. Since
direct invaataenta increase industjry profitability and hat
worth, aaaociations can use direct invaataants to help then
■eat and aaintain tha higher capital requir^ents. The
Direct Invastaant Rula would than be an obstacle to aasocia-
tiona atta^tting to reach tha higher and mora desirable
protection levels sat by tha Capital Raquiraaants Rula.

Third, the Board's Capital Requiraoents Rule aakes
an additional capital requirement tor direct invaataants
onnacassary. Hi^er required levels of capital work to -
reduce Incentives for associations to engage in all typas of
excessive risk taking. Low and negative levels of capital

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•ncoturag* nceasslv* risk taking o£ aany typ««, of which
dlraot Invastaanta Is only ona possltals altamatlv*. Indaad,
It Is saslar tor rlsk-pron* kssociatlons to attwipt to gain
largs profits at th* risk of having to taks laxga lossas by
soch Bsans as porehaslng long-tsra flx*d-lntar«st obligations,
buying or sailing Intarsst-rat* futures and options, and
•aklng risky loans with larg* up-front f«e>. Only a ganaral,
rathar than a spseiflc, capital raquiraaant can addrass
•tfsctlvaly tha problaa of •xcosslvs risk taking.

For thsss raasons, Z concluda that tbsxs is no
rsasonabla- ssonoaic nsad for ths Dlract Invsstmsnt ttula, that
th« Board's statistical rasaarcb and "auparvlsory axparianca'
do not support tb« Rula, and that tba Rula should not bs
■xtsndad.

Purthar, I rsquast that tha Board axtsnd tha
eo^ssnt parlod for sixty days to allow tha public to conant
■ors fully and fairly upon tha Rula. Z ak currantly working
on an updata of sy aarliar rasaarch, and tha bravity of tba
I iissaiil pariod has pravantad aa fros coapl«ting It within tba
Board's announead tiaa liaita. Z think ay updatad rssaarcb

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will hAV* coftsid*rabl« valu* for th* Board and tb» public in
•valuating thm Rule

G«org« J. Banatan

Digit zed by Google

363
ARNOLD- ^^ PORTER

1*00 «cwpi*»«>.iv "Wvi-a- •■

*•"-*»• Octobar 17, 1988

Hand D«livr*d

Director

Information S«rvlc«s S Act Ion
Ofttc* of the 5*cr«tarlat
p*d«ral Ron* Loan Bank Board
1700 G Straat, U.H.
Huhlngrton, D.C. 20953

R«: Proposttd Rula to Extand tha Expiration
Data of tha fadaral Kama Loan Bar.k
Board'! Dlract Invastaant Haoulationa

Dear Sir:

' Ha raprasant a nuHbar of aavlnga and loan

associations tha accounts of which are Insured by the

Federal Savings and Loan Insurance Corporation

("FSLIC"). This letter la automittail in response to the

proposal of tha Federal Hone Loan Bank Board ("FHLBE")

to extend the expiration date o* the FHLBB's direct

Investment ragulaticn, found at 13 C.F.R. | 5£3.9-E

<"Dlrect Invaataent Regulation"), to January 1, 1989.

S2S, 51 Fed. Reg. 32935 (September 17, 1936). Tha

Dlract Invsst&ent Regulation, which generally restn ^-^

tha type and emounc of permiaslbla direct InvestTnan*-

FSLIC Insured Institutions ("Inaured Institutionally

tecese afrec-ive on Jar!'.:ary 31, 19S5 and by its <. "

set to expire on January 1, 1&87. ~~ -^

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Director
Octobdr 17, 1986
Pdg* 2

As dlscusssd In greater detail below, the Direct
Investment Regulation should noc be extended Cor the
Collowing reasons:

— The Direct Investment Regulation improperly
restricts the authority of the states to
regulate the investment decisions of atate-
chartered insured institutions.

— The FHLBB laclcs the statutory authority to
promulgate and extend the expiration date of
the Direct Investment Regulation.

— The promulgation of the Direct Investment
Ragulation ie in contravention of the express
provisions of the Administrative Procedure
Act.

Coneeq[uently, the FHLBB should reconsider the proposed

extension of the expiration date of the Direct

Investment Regulation and defer to the discretion of the

state regulators with respect to the permissibility of

the investment decisions of state-chartered insured

institutions. In the alternative, the comicent period

should be extended so that the FHLBB and the thrift

industry can thoroughly analyze the Impact of the Direct

Investment Regulation, particularly in light of the

promulgation oC the FHLBB's new capital retirements, to

be found at 12 C.F.R. I 563.13. Sea 51 Fed. Reg. 33565

(September 22, 1336) .

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ARMOLD * POSTER

Director

Oetebar 17, I9a«
tmq* 3

I. TOT DIRECT IMVESTKEHT MCUIATIOM
IMPROPERLY RESTRICTS THE AITTRORITY
or THE STATES TO REGUIATE THE
IKVESTKENT DECISIONS OP STATE-
CBARTERED IWStlRED IMSTITUTIOMS

Tha •xt«nalon of th« axpiracion dat* of the
Direct Invaatnant Ragulation r«pr«a«nts a continuation
of tha FHLBB'a iapropar aaaartion of powar ovar tha
invaataanc activitiae in which atata-chartarad inaurad
inatitutiona paraisaibly may angaga. Tha FHLBB'a
propoaad action would continue Co thwart tha aCforta of
tha individual atataa to anabla atata-chartarad inaurad
inatitutiona to maat tha cradit naada of tha paopla and
inatitutiona in thoaa atataa and raprasants a continuad
aaaault on tha dual fadaral-atata chartarin? aystam.

In addition, tha adoption and axtansion of the
Oiract Invastmar'. Sagulation ia in direct conrravantion
of tha expraaa intant of Congress to defer to t^.a s::ate£
in detenlning tha approprlatenesa of the investiiant
activltiaa of a tat a 'Chartered insured inatitutiana.
SU, S-a-. Kaat Halann Savlnaa and Loan Aas'n v. Fadar-l,
Home Loan 3sp.k Baana, 553 F.Zd 1175, ISO (8th Clr. 1977)
(Congrats ional atatutaa "craatad and contenplate the
continuad exlatenoa of a dual system of savings and l^^^^
associatii.-.s. . . .") This Cor.grassional i-tan^ ia
reflected in aavaral cajor places of baniting legisl^^

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AII740I.D » PORTER

Director
Octobar 17, 19B6

recently «nactad by Congresa. gaj, j.g.. Depository
Institutions Deregulation and Honetary Control Act of
19S0, Pub. L. tro. 9«-221, 94 Stat. 132-93 (1980):
Gam-St Gemain Depository institution Act of 1982,
Pub. L. Ho. 97-320, 9S Stat. 1492 (1982). In both of
these acts. Congress refused to tighten federal control
over state -chartered Insured institutions, particularly
in the face of broader investnent powers conferred upon
such institutions by the states. To the contrary, these
laws loosened restrictions on Insured institutions by
eliminating geographical lending restrictions and
conferring broad new asset powers on federally chartered
savings and loan associations. In fact, the 5am-5t
Germain Act, which established a special federal
assistance program for troubled, insured institutions,
iaposed investment limitations only on troubled
institutions which reijuired special federal aid.
Congress clearly intended to leave to the states the
control of the investment powers and practices of state-
chartered insured institutions.

The statutas originally relied upon by the
in promulgating the original Direct Investment

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ABMOLD * POHTER

Director
October 17, 19B«
Pag* 5

R*9UlBtion did not provido tho FHLBB with authority to
prohibit conduct of state-charterad inaurod Institutions
which othatwlaa has ba«n authorizad by stata law.
Methinq en th« faca of th«s* statutas or In thalr
lacflalativa historias supports tha FHLBB's assartion of
powar to intruda into araas which Congrass haa
hlatorlcally and quit* purposefully kapt within th*
authority of tha statas.

For axaapla. Section 407 of tha Rational Housing
Act ("mU"), 12 U.S.C. f 1730, doaa not authorize
across-the-board regulation of practices deamad unsafe
and unaound by tha FHLBB. Rather, that section merely
permits case-by-case adjudications by the FHLBB of
unsafe or unsound practices. Section 403 of tha KKA,
13 D.S.C. I 1725, is equally unavailing as a source of
authority for this type of regulation. While
Section 1725 grants some rulesalclng authority, it does
not grant tha FHL3S blanket authority to bypass the
aathod axpraasly ordained by Congrasa to deal with
unsafe and unsound practices — individual caea-by-cise
adjudications nandatad by f 1730.

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AiiNOLD I

Oir«ctor
octob«r 17, 19S6
Pag* 6

III. THE PROHITLSATIOK OF THE DIRECT ZHVESTHENT
REGULATION IS IN COKTRAVENTION OF THE
EXPRESS PROVISIONS OF THE ADMINISTRATIVE
PROCEDURE ACT

Tha Adalniatratlve Procedure Act, 5 U.S.C. f 551
si seq . , aandates that an administrative agency
r«£ar*nc« tha source ot legal authority (or its action
pclor to promulgation of a rule. 5 U.S.C. | 553. Aa
previously discussed herein, the FKLBB's proposal merely
cites provisions of the FHLBB's jurisdictional statutes
without providing any type o£ analysis in support of Its
legal authority to promulgate the Direct Investment
Regulation. This omisalon is espscially troubling in
light of the commants initially received by the FHLBB
when the Direct Investment Regulation was first
proposed, disputing the validity of the FHLBB's legal
authority to adopt it such regulation.

Further, it is wall established that an agency
has a duty to consider responsibla alternatives to its
chosen policy and to give a reasoned explanation tor its
rejection of such alternatives. Saa . s-g., F^ y ^ l fr^
Union Central Exehance. Inc. v. C£B£, 734 F.2d I486,
1511 (D.C. Clr.), cert. denie<3 . lOS S.Ct. 507 (1984).
However, it appears that the FHLB3 has failad to
consider regulatory altarr.atlvas to the Direct
Investment Regulation. In fact, the conucentary

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ARNOLD * PORTER

Diractor
October IT, 1986
P»g« T

•eeoRpanyln? th* propoaad ml* suggests ttaat'th* FHLBB
has rscognlisd that tha axtanslon o£ tha Diract
Invaatmant Ragulation In Its prasant form may no longar
ba naeassary In light of tha FHLBB's racant adoption of
blgbar ragulatory capital raquiramants for insurad
Institutions. SSA SI fad. Sag. 33565 (Saptanbar 22,
1986) .

Finally, in proposing thia amandsant, the FHLBB . .
has failed to provide an appropriate cosaant period,
consistent with Its own policy expressed In FKLBB'a
"Suleaaking and Regulatory Simplification Notice," Board
Rm. Mo. -80-S84, 45 Fed. Reg. 63135 (September 23,
1980) , idiich provldee for at leaet a sixty-day conraent
period unleea tha FKLBB states in its published notice
the reasons why a shorter period is practical or
necessary. The FHLBB merely has relied on its own
aesertion that a shorter comment period is appropriate
becausa "the direct investment rule has been previously
published for public comment and because the public
interast requires prompt Board action." 51 Fad.
Reg. 32927 (September 17, 1986).

The FHLBB's rationale does not provide a
sufficient tasis to justify a shorter.ad c;K.-;*r:t periad.
First, tha FHLBB has aclcnowledged that new capital

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RNOLD & PORTEB

Director
October 17, 19S6
P«g« 8

rsguiramanta , which will b*com« affectiv* subscqusnt to
th« original promulgation ot th« Direct Invastaent
Regulation, may substantially affect th« need for the
extension of the Direct Investment Regulation. Second,
the FHLBB also has recognized the need to'assess "after
sufficient experience with the rules, whether the
approach taken had been effective in controlling risk
and whether further regulatory action was required. . .
Since the FHLBB has not had the opportunity to analyze
the continued need for the Direct Investment Regulation
in light of the new capital requirements, the FKLBB
should extend the comment period in order to make
meaningful comment and analysis possible.

eowcLusrou
In light o£ the foregoing, the FHL3B should not
extend the expiration date of the Direct Investment
Regulation. In the alternative, the conwent period
should be extended so that the FHLBB 's proposal can be
analyzed by the FHLBB and the savings and loan industry
in light of the new capital reguirements ■
Slncarely,

Richard K. Alaxander

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AMERICAN
SAVINGS

t.-s ;

Ottie* at a
Mihinguni D.c. 20SU

. Xl.>4> Ragutation e( dlrKt lnv»tMnC in (quity •

raqulatQfy capiul l

. (T)h.

eon»ia»r»tioB o( cn» ea

(uirUi»- Tivimv

^Irickl .

up.:^laoiy .<p.tl«™. . . .

dincc in'

1 iurLa9<d «:£

Hfcguacdi

. »• pOMtOl

.■d with dlr.

i^ontl sC Wl

o«pit«l.

n» rinU Bul

I. CXI a^l.

itsfy cipitil

.««ti™ly

invwt^-.tJ .i^MdL-^ B»r;ti

In tf.r^.!Bld.

L^l laviU.

U'JlJ-Jih c*

iMl:; dir^t

jr».^{i;Mr«), '

i.-vu-.»nti u

OicKC Invucc*

30, IMS piirsuu

It to ch« DltKC Inwiecvic

R^I.ti«.

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Fedocal Hods Loan Bank Board
ExUraion oC DirecC Invastin«nt Itule
Octotwc 17, 1986

■direct inveatDenca" and Che lesser of its net worth or 10 percent of
assets in diract real estate investcients. Hovevec, the Final Rule on
Regulatory Capital limits such invescmants ■ At Septenber 30, 19S6,
American Savings had regulaCoey net worth slightly in excess of 7
percent) or $170 millic»i of regulatory capital. Including approximately
$13>S niillion of appraised equity capital. PvirsuanC to the Final Rul*
on Regulatory Capital, Arerican Savings .could have direct investments
•qual ' to 10 percent of assets- (approxirrately $250~ million) without
incuccing additional capital requ ir amenta . Aaacican Savings actual
direct Investinants total aKMroximately $125 million.

Ainerican Savings would agree to sup^rt a continued prohibition in
investment in savings and loan stock below the aciount required to be
deenad a savings and loan holding cctpany, but does not agree that '
additional restrictions on direct investjiients, given the adcnCion of the
Final Rule on Hegulatocy Capital, are appropriate.

Sincaraly,

Edward P. Kahonay

EPtl/mjo

cc! Etawrable Edwin J. Gray
Honorable Donald I. Hovde
U. S. League of Savings Institutions
Florida Lsague of Financial Inatitutlooa

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JONES. DAY. REAVIS ft POCLE

October 11, lia«

Ditactor, Public InCorHtion
SbttIcm Branch
Office of tha Sacratariat
Fadatal Hom lean Bank Board
ITOO -8- etraat. B.t*.
HaatiinQton. D.C. 20552

Thll fita

•P

the oppo

tunlty t

t on bah

of lavaial c

ien

Board' ■

toposal

o defer

the

azplraClon o(

rebuilt

on gover

109 '""e

by insur

Inititutlona

■ (i.^

equity

sacurit

caal aitate.

ice corporation a

a operat

ng lubs

Idiaries

publishad It

ed. Keg.

12>75 {September

T, 19SS

y. He

itrongly ancc

■ the Bo

m of die

InvattiMnt ragul

tion. We do not

Board ha

damonsttsted

antlBl

improving th«

ety and

oundneii

of insur

d insti

dacreising th

nd. Fui

wara to acce

t the prerais

inherent

involve more

rii

Chan ot

ments pe

r^ttted

tectlve

rds to b

applied

minnec. The

app

Ication

s caused

Inty dje

the lack of

the appi

ngly, we

believe that

the

Soata h»

other.

nore affective de

Cur rant Bgqmlatip p Ip^ jje ctive

A priiraty bisis erp;;v=3 by t

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aov«[iuDenC-ll*gulated Financial Firms: Th* Case of the Thrift
Institution" (tha -Stufly). The Study identities jii
characteristics of failed nst tutiona that ate slgnlf icantlj
related to loasss eipetienced by the FSLIC. While direct

secondary Inpartance. Nevertheless the Board concluded Iron
tha Study that direct investuenta by failed Inatlcuc ons inay
increase the FSLIC's cost The Study doss not state that an
institution that makes d rect nvestments Is more llkelr to
fail, thus It is unclear what lelevance Che Study has to the
Board's stated purpose of reducing tha 6>f]CSUi:e of insured
institutions and the FSLIC Intuianca Cund to risk.

There 1

1 • simple eiplanati

n to the fact that i

of failed thrifts a

e mote costly to ths

institutior

that Is

early inso

vent on a RAP basis

generally i

nsolvent

n a GAAP b

Qf such 1

stitutions

are aware that they

e value i

ution. At this poi

would be in

dined to

(as well

as other i

vestments permitted

institution

s) that would result

provide the

institut

vency on a GAAP bas

provide the

FSLIC, a

with the sionifican

osta dete

mined in the Study. Indeed, t

of FSLIC to

take con

UiP- nsalvent instit

pointea to

tide wri

ten by the

he Study.

/ Accordingly, we do not beli

Study or ot

her infor

ded by the Board re

absolute but may be subject

Further, the Study does
Institutions that have dir«
threshold of lo percent of

and institutions that hive

requiring prior Boa:d approva Accc
there is a determent to the FSLIC ttc
Board had not demonstrated that the (
currently under review is effective i
problem.

twice regulating r

ib,Google

hixju

tJiniH

iaa

Tha Board baa raquaatad coaoant on Bola (lailbla loluC
to ptoblaaa with diiaet InvasCaMciti ■ Tha taquitanant Chat
pcior ragulatonr approval ba aought (or cactain typaa of
invaatrnant* aa wall a* all dltact Invaitnenti over a thres:
laval ia axtraaaly Inflaiibla and bucdansoma on the Inatlti
and tha Boaid'a leaCf. Tha aiparlanca of our clianti Indii
that tha tiam laquirad far raviaw of applleatlona la
unpiadlctabl*! rat, tha avldanca provided by tha Board In
diacuaaion of tba propoaal to extend tha rule auggaati thai; i;i
Board and Ita dalagatea have not aubatantlally limited direct
tDveatnanti. Tha Board baa atatad that In allghtly leaa thi
Din* o( 10 appllcatlooa tha inveatnant la approved. Thiougl
tha prior approval ceiiuireiienti the Board haa hindecad the
ability of an inatitutlon' a nanigament to make timely decis:
concaintng Inveltnants. This regulatory lagtlate may cauae i
inatitution to miaa an opportunity to oake an investment at
tiB* such invaatnant would be nore profitable. Accocdlngly,
believe that the Boaid should not extend a rule requicing

tine conaiuiing, pro forma appiovala are a baiii for rescinding
the regulation, not eitending it.

:tiot

the

:ould take t

) the FSLIC from direct Investments. A primary
concern ot the Board should be Imprudent direct investir.encs
■ade by desperate managanent of GAAP- insolvent institutions.
First, the Board should make more efficient use of its staff
By alleviating the burden of reviewing applications for
epprovBl of direct inveltraants by healthy, well-run
institutions, the sta(( uould be able to regulate more close
the investments of (Inancially-Croubled Institutions. The
Board could limit the approval requireinents to review of die
invaatnents by institutions with minimal capital as it has i
in the branch sale context. 5u 12 C.F.R S S'l.S(j)<3)
<1)SS}; Such an express procedure is probably unr.eceissry,
however. In light of the far-reaching supervisory powers the
Board possesses over institutions failing to meet their
regulatory capital regulrenants . S£c 12 C.c.R, S S£3'13(d)
<198£). Further, by freeing the staff from the rrear.ingless
I of proposed direct investments by well-itanaged

inatiti

inatltutior
management frc
Board should c

:ould I

ClO!

ely dec

iOlv)

.vinq despe:

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While MS do noC baliave tbit
denonsttated between direct
fallul« of an initltution, tbe noit di
with this Issue is thcougb tncrtasod c
of the subject piopoail

iti effoi

I to I

newly-ioviied tegulatory capital
legulations adopted on August 15,
contingency factor of Its legulal
' 1 the amount

ract fashion

;al lequlEsnent*.
le Board' aide noti
through Its

:ion hss been

led risk of

of dealing

tal

nstitution'i

iquicenent will
inta made by

ist obtair

the InBtitutioi

depend on the current amount of capiti

such that institutions with less capital

aiDOunts of additional capital for each d

system will allow an institution to

Investments based on market factors

approvals, and will protect against poocly capitalized

institutions making high-risk direct Investments.

these stringent capital cequirenents, the prior appcovi

direct investments by the Board is now superfluous.

Accordingly, we strongly urge the Board to allow the pri

approval requirement of Its regulat'" " "* '" " ""

healthy institutions expire, contir
Increased capital requirements based on direct investments, *Dd
concentrate on direct Investnents nade by institutions that ate
Insolvent on a GAAP basis.

Ight Of,

catlor

Dt these natters-
Very truly Youts,

C. Thomas Long -^

Joseph LonglDo, Esq.

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A.Gary Shilling & Comferty, Ine^^ ,

COMMENT ON THE FEDERAL HOME LOAN BANK BOARD'S

PROPOSAL TO EXTEND THE EXISTING PREAPPROVAL

REiJUIREMENTS ON DIRECT INVESTMENTS

A. Gary Shilling & Co., Inc.
October 17, I9S6

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Commcfil on Extwition ol Direct InveMment Regulation

We believe the FHLBB'i supervisory review process lor direct investments thould
not be extended past December 30, I9S6. The intent of the rule is fulfilled by
new regulations on net worth and balance sheet reporting, as iiell as the
FHLBB's enhanced power for supervisory control through imptementalion of the
classification rule. Continuation of the current rule would impose unneccessary
costs and delays on thrifts contemplating direct investments, without enhancing
the effectiveness of the new regulations.

As the proposal for continuing the direct investment supervisory rule

"The direct investment regulation was designed to allow i:
flexibility to exercise their investment powers, as Ind^endently authorized
by applicable law, in a manner that would expose neither the institution nor
the FSLIC 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."

The guarantee that a firm is operating in a safe and sound method is insured by
the new net worth requirment, which requires additional capital for all direct
investments by thrifts with less than 6% RAP capital and on direct investments
in excess of 10% of total portfolio for thrifts with more than 6% RAP capilaL
The guarantee thai they are still fuifilling their obligations for economical home
f inartce is ensured by the 60% thrif tness test.

Violations of either the additional net worth requiremenl or the Ihriftness test
are now easier for the FHLB6 to spot due to the new monthly reporting cycle.
Moreover, spot checks of thrifts near the additional capital thresholds are
possible under the FHLBBs normal auditing procedures — with the power of the
classification rule available to bring miscreant thrifts back within "safe and
sound" guidelines.

*e agree that in recent years direct investments have increased the cost of
failures to the FSLIC, as supported by the FHLBB's recent papers on this topic.
%e point out, however, that these papers were based on data collected during a
time period in which thrifts could — while still satisfing the letter of the law —
invest heavily in oirect investments with little or no new capital. That
investments made in this "head 1 win, tails FSLIC iose^' world went bad shouid
not be surprising.

As we noted in our earlier comment tetter oi
the basic problem of the early 19SCs

uncapiialized di.-ect inv eitn-.ent. Furthermore, tie pfiibiem uas causaa nc;
simpiy by direct irrjestrr.eni, but the rate of grc*th in these investments an:
other risky asset types — usually by institutions with inaoequate capital bases.
The majority of liquidations In the 1983-85 period involved cases of hypergrowth,
and majority of thrifts currently operating under supervisory administration are
also hypergrowth cases.

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The problem of hypergrowth was more than adequately dealt with lut year In
the nrw growth regulation*. fr>deed, the recent rewision to exempt thrilti with
imre than 6k capital from the preapprcwal requirement i* a definite
improvament. Similarly, the problem of undercapitalization li very eflectivety
dealt with in the FHLBS's recently tmalized net worth regulation. %lth respect
to direct investments the steep additional capital requirements, combined with
the need to meet capital requirements on a contemporaneous basis, place the
investing thrift at significant risk In any direct investment. Given this existing
disincentive to direct investments, we feel second guessing a thrift's
management through the preapprval process is unneccesary.

Indeed, the strongest argument against the extenlion of the need lor
pre-approvai for increasing direct investment above certain threshholds is the
current lracl( record of the review boards. Of the l<tO applications put before
the boards since the rules inception 42 are still pending. The time delays
involved in recieving pre-approval, arxl the filing process itself, are not costless
to the filing thrifts. Particularly disconcerting ii the fact that that 23
applications were dropped before a final solution was handed down. Clearly
either the investment opportunity became unattractive due to the delay or the
filing thrifts realized the weak merits of their application. The new additional
capital regulations preside a significant enough deterent to spurious investments,
while the potential loss of viable Investment opportunities and cost of filing are
unreasonable burdens for well run thrifts to suffer.

Finally, the fact that only 11 of the 9$ applications acted on have been rejected
is a strong argument against, not for, the retention of this pre-approval process.
The cost of filing and the potential loss of investment oppurtuniiie* lor the t6%
of thrifts not rejected must be weighed against the potential savings to the
FSLIC from the rejections. The FHLBB must ask itself whether these it
rejected inveitrr.enli would actually have been made if the applying institution
had to put up at least 11% in basic capital — on a contemporaneous basis.
(Current regulations require 6% on the underlying liabilities of a for a well
capitalized thrift plus )% for for supassing the tO\ direct investment
thretfihold. A more weakly capitalized thrift would have to put up at least 3%
on the underlying liabilities and lOt in additional capital for direct investment
in excess of I OX).

The board points out that at least i of the li rejected application* came from
one institution. 1 e assume they uere rejected because the l.rm wa* already in a
deficit capital position, or heavily invested in direct inveiimcni*. Conii such a
firm meet the l3X-pius capital requirement for weak thrift* desiring to rake
direct irwestments over 1C% of the asset porclolio (1£X if the direct ir>estrrent
was funded by new depctits). More ir.portantly, *oold tr^ PSA bo*-; "a^e
rejected any prsposal where :.-.e thrift hac *.n« appropriate a/r.3>jnt of ctp.i*:,'^

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In conclwion, we feel the existing regulation for preapproval of direct
investment in excess of 10% ol a thrifts portfolio is unnecessary. The
triumpharate of the FHLBB's ne* monthly reporting system, combined with the
need (or thrills to meet capitai requirements quarteriy (on a contemporaneous
basis) and the FHLBB'i piower to empioy supervisory overview on capital deficit
thrifts provide a powerlul deterenl to undercapitaliied direct investment. The
steep levels of capital required on direct investments in excess of 10* of s
thrifts portfolio provide substantial protection' to the FSLIC and to the investing
institutions ability to continue operating — and fulfilling its obligation to prcTvide
for adequate home finance — even if the investment turns sour, both of the
regulations original purposes are still enforced. This redundant regulation, which
adds costs to the system with improving safety to the FSLIC, should be dropped.

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MMariB.Wbi
OiAua tX Tkf Bum
CWif EiaeiiOn Offlor

October Zl, 1986

Hr. Htrbcrt L. »*yberry. Ofrector
Informatton ScrvJcci Section
Offtce Of the Secrei»ri»t
Federal How lo»n Bank Board
1700 e Street, N.U.
UathJngton, O.C. 20KZ

tear Sir:

Ue appreciate the opportunity to coaaent on the Bank Board's proposal of
Scpteaher 17, 1986, to extend the tilitlng direct Investment regulation
Kheduled to expire January 1, 1987.

The Board It leeltlng puplk comient on nhether the sunset date of the exiiting
regulation should be extended to January 1, 1989. The Board is further
Inviting coiMent upon the adaini strati ve flexibility of the direct Investaent
regulation, particularly in light of the agency's recent adoption of higher
regulatory capital requlreaents.

Because of the Board's Increased capital reflulrewnts for FSLIC Institutions
scheduled for January, 1987, and beyond, we believe that the direct Invcitnent
thrashold car safely be raised to tSI for those instUutlons aeeting the new
capital requlraaents. We have found that direct investnents, when utlHied
properly and prudently, have proven to be t valuable nenagenent tool.
Concurrently, we would recaawnd that the Board forn a task force In
cooperation with the industry's trade associations to study the effects of
direct Investaents in helping Institutions restructure their balance sheets,
lie believe that a coaprthansive study on tht part of a blue ribbon task force
would terva to allalnate the aany ■! sconce ptioni that abound regarding direct
investaents, therefore, shedding additional light on this Ifiportanc Investment
vehicle.

Silverado Banking is a FSIIC Insured savings Institution with SI. 6 billion I
assets, anij VZ ailllon In regulatory catilal. It ocerates 14 retail office
In tht aetropolitan areas of Denver and Colorado Springs and the sountain
resort cowajnity of Frisco. Principal officers Include Micnae! H. Wise,
Chalnaan of the Board and Chief Executive Officer; Richard K. Vandapool. Vic
Chaiman artf Chief Operating Officer; Robert H. Lewis, Vice Chiinnan and Chi
Financial Officer; and. John C. LoNneyer, Senior Vice President anc Director
of Corporate ano Public Affairs.

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Hr. Herbert L. Hsybeiry. Director

Page Z

October 21. 19~86

In view of thU recortmended study, we encourage tlie Board to initiate a single
year extension of the rule, rather man a two year extension as 1t Is
currently proposed. ^Mi will allow adequate Study tine and proposed
revisions to the rule. IF that Is warranted based on the findings of the task

Sincerely,

Michael R. Wise

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Natjonai Association of

State Savings & Loan Supervisors

IMi awicKUi aayi

On S^tabar 17, 19BG, the Fmlaral Ben* Loan Bank Bcud puhli«B!d foe
public cansant a pco|>osed cola which would anend Its Bxlitliiq raqulation
govmcBiO} ii iuaatJ i Bi its ty ijutltucions tha aeoounts ot whli:^ ara iiuurad ty Ch*
rwkral Saving! and Loan Iniuranc* Corporation in aqulty aacuritiaa, raal
aat«t«, larvice corporationa, and opacating aubaidlariaa . Ihis propoaad
aBantaant Co tha 'diract liii«*aiBnt* rula would defar tha aspiration of tha
cut* UtM Jviwry 1, 1917 to JOniary 1, 19S9. "Bm RLBB has Indifatad that It
la ^lacifically [wtuaatlng cmiant on tba a^inlatratin flaxlbillcy of tha
'diract iinw iliiiaiiT * rula and, ^sraovsr, tha oontiniBd oaad foe tha rula in Lta
praaant foia in light of tha FBLBB'a racant adoption of higher regulatory
capital raqulraiBnta for inaurad inatltutlom .

A of 5UU Saving! t lean Si^Mcviaoc! ^(icaciacaa
thii proposal. Tha 'diract Invaitaiant' rule
■hoold ba given tha caraful comldaratlon of all eoncamed parties. !ASS&LS
vl«M thia proposal ai of tha utaoat ifl(>ortanea. Spactfically, NASS&LS
ballavas that tha Isiua of lAethar tha 'direct Invastasnt' rule li itill
oacassaiy in light of tha FRLBB'i racwitly promulgated r*galatlon pertaining
to the capital requirsiBnti of lAaured institutions dnwss the hi;ghast level
of scrutiny. There Is not unlvsrsal agraement si to tha appropriateness of
the existing regulation, aiuch Isss the issue of extending the 'sunset*
provision for an additional two years. Many believe that Che existing
regulation was illconcaiv«d and hastily put InCa affacc. others believe that
the regulation is essential. As ths ropressntative body of the state
regulatory ara of oui (kial systoii of regulation In tha f L-iancial institutions
area, !«S»I£ bellevvs that this regulation, which directly inciacts tOSStLS'
nembers and, moraover, tha institutions of which thay are the primary
regulatory auUDcities, and in light of the Ata available, does not need to

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clglnally conCe^laCad

be, and theiafore should nst be, extandsd be^nd the c
e^icatlon date of Janiary I, I9B7.

To our Iciiowledge and belief,, no significant enpirlcal data ha* been
produced ty either the ^SLIC or any other person or entity which warrants an
extension of the regulation for an additional two years. Itie FHLSe has had
a sufficient period of time within which to analyze and evaluate the success
or failure of the regulation and, ncreover, the underlying rationale and basis
upon which it was initially pr<xiiul9atacl. TTw proposal does not speak to any
empirical data other than a survey which studies the extent to which direct
investments in the portfolios of failed institutions increase the coat to the
FSLIC. This survey does not address the success or failne of the investaient
policies of c^wrating Institutions, the causes of the failure of tha
Institutions studied, the level of direct investnents in tarious institutions
or a variety of other relevant factors t^lch at a miniimm must be considered.
In the absence of any additional studies of a rore sctensive lature, the FHLSB
does not appear to have tie ibta whic^i hoold clearly indicate a need for the
regulation. As the honorable Coug brnard, Jr., Chairman of tiie Ccmierce,
Consumer, and Monetary Affairs Subcominlttee of the House Comniittee on
Goveriunent Operations stated in his cemrent letter *ted October 2, 1986, "In
the absence of a coniprehensive study ty the [FIILBBl, the rule should be
renewed, if at all, <xily after the most thorough analysis [of] the rule rraJung
itself.* IASSSI2 concurs with this position.

In light of the RILSS's new regulation relative to regulatory capital
requirements, which expressly addresses direct investments by insured
Institutions, >'hSS&t,5 must concliije that this E>roposal to exteni the 'sunset*
provision for an additional tkio years is unnecessary. The recently adi^ted
regulatory capital requirasents .specifically call for increased reserves
relative to direct investments by Insured institutions. This element of the
PSLIC's regulatory schane would appear to respond to the FSUC's acknowledged
concerns in a more appropriate manner. Itell capitaliied institutions arc
provided a higher degree cf freedom to conduct their operations, ne
perceived problens which protpted the pronulgati
rule would seac to be addressed ty the new regulatory capital regulatio

AS an alternative to the present proposal i
regulation is either extended or permitted to 'sunset
review of the substantive aspects of the regulation
Cdmient period, possible sufcatantive eeviaiona and modifications might be in

KASStLS again stresses the favorable impact our dual system of
si^«rvision and regulation has had on the system of financial institutions in
this country. The dual system of supervision and regulation has fostered new
and innovative products and services over the many years. The 'direct
inuestment** rule is one regulation which borders on transgressing the time
honored and time tested toundaries of our dual systat.

N^SSSLS would like to reiterate its support for the FHLBB and its
overriding concern for the safety and soundness of the thrift industry and
specifically the FSLIC. N^SStLS Is second to nsne L-i Its vigil to see t.hat
participants in the thrift Industry conduct themselves in a safe and sound
e again stress our belief that quality s'.^iervision rather

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ttwn MCMsiM nguUtloa wlU adtiaw this goal aera quicUy. (HS<;(LS OAca
•gain axtandi to th* fHUB lu a(f*r of kw"^ "^ BUlscanc* in irtMUwr wy
possibl* to achiBwt ckk oombda goal.

msscLS [■ipKtIuUy raqiBsta that tha EorsgDlnq ocnnenta ta cansittad to
tha record on this «attar and axpraaaaa Ita appraciatlon for your
conaidaratlon tharaot.

Mtay truly yowa, .

T« EXKurnn coMmn op tw
mnoAL l^3^ocuTION op
nxtE Mvncs 4 low

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^6 - 9X-^^~^

Fcdaral Bcna La

Fadanl hob* Loui b

il.o .uboittlng a> aupplu
Jing docuMnt* which Ml at

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MUL, VirSl, KIFEINO. VHARTON • CAKKIION

, datad Jftimary 15, 19t5, froa
Archur L. LlBan Co Lincoln Savinqa and Loan
Association

f roB Artbur L.

MaaoranduB, daCad July 10, 19t4, froa Patar
Fiahbain to Lincoln savlnga and Loan
Aaaociatlon

Lincoln's position has always baan that tha PRLBB
not bava tha lawful authority to ragulat* or li>it tha
actlvltlas of stata chartarad savings
and that ttia FKLBB has not yat pro-
ional baals for Its praaant and past attaapta to

suhaCanclvi
and loan

vidad a L

limit dlract invasCaants.

Sacauaa at Che complex and controvsralal natura of
tha Diract Invaataant Rula, and bacsusa of Lincoln's daaira
to bava tlaa to thoughtfully respand to tha iaauas raiaad by
tba RLBB in lea Saptarabar 17, 1386 notlca, Lincoln raquasta
an axtanslon of tha conmant parlod and a public haarlng on
tba propoaM axtanaion of tha Dlract Invaataant Rula.

Vary truly yours,
Artbur L. Llaan

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), THARTON ft GARRISON

Dm October 17, 198G

XrUitir L. Lljoan

FHLBB PropoBad Rula:
■Ra^ulation of Direct
InvaBtmant by Insured
InetitutionB," 51 Fed.
Re?. 32923 (September 17
1986]

Tble BeaocanduB setB forth our opinion as to the
legal authority of the Federal Bo»e Bank Board (the "Board"] -
to adopt and extend ite "Direct InveBtment Rule." The
Board'B new proposal would extend the expiration date of the
Direct Inveetxent Rule froB January 1, 1987 to January 1,
1989. "Regulating Direct Inveatxent by Ineured Inetitu-
tiona," 31 Fad. Re?. 329ZS {September IT, 19S6) . The Dlraet
Investment Rule sets limits on the direct Investnenta which
can b* Bade by Institutions insured by the FSLIC. t9 Fed.
BUL. 4S73 (December 14, 1984).

In proposing to extend to the Direct Investment
Rule, the Board haa acted arbitrarily and without rational
basis. The Board ignores the uncantrodlctod atatistical
evidence of three separate studies that demonstrate that
there is no relationship between direct investment and
association failures. Further, it ignores equally its own

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MapnrriuoTy •xpcrianc* irttidi conCiEBs tha findings of tli«*«
thr** r*s«arch papers. Tb« Boaxd sttopts to fill th«
rssulting «vid«ntisry void with a single study which is not
•van ralavant to an •valuation of tha Diraet Invastxant Rula
and with Bultipla rapeticion of an isu ]lixi£ about its
"Eupervisory axparianck' that can ba basad only on analytical
confusion and factual ignoranca. Tba Board's action -stands
as an arcbatypiesl sxsapls of airbitrary agancy action.

In addition, as w* fully axplainad in our ssMoran-
dna ot January 15, 1985 (-Jan. 15, 19a5 HaBo"], wa baliava
that tha Beard lacked the legal authority to adopt tha Direct
Inveataant Role. The Board now aaaks to extend its life. In
our view, 'the Board lacks authority to eictend the operation
of the Direct Investaent Rule for the reasons stated in our
prsviouB mmma and because, with respect to its current notice
of extension, the Board failed to follow required procedures
in proposing its asendsent.^

We annex hereto copies of our earlier subaissions
stating our opinion that the Board's action in
proHUlgating tha direct investaent regulation was
unauthorized by law:

19S4, froa Arthur L.

■■Uw

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I. Th« Direct Invcstnent Rul* LacKs
a Rational Foundation, and tba
Board's Action in Proposing It
IB Arbitrary

A. The Available Evidence Eatab-
liahes tbat There la Ho
Connection Between Association

Failure and Diract Tnvestmant

The Board's action in proposing to extend the
Direct Inveatnent Rule is arbitrary and irrational. The
Board ignores the uncontradicted empirical evidence that
refutes its contentions about direct investments and hides ' -
from the fact that much of this damning empirical evidence
was produced by its own researchers. The Board's
researchers, attempting to find soBe empirical support Cor
the Direct Investment Rule, found the opposite — that no
such support existed. The Board's response demonstrates its
irrational bias: it continued to pretend that Its rule had
some empirical basis while it attempted to sweep the contra-
dictory findings of its personnel under the rug. Indeed, its
notice extending the Direct Investment Rule does not even
mention, much leas discuss, this worlc.

Put bluntly, the two internal studies, a^e James R.
Barth, Jr., R. Dan Brumbaugh, Jr., Daniel Saverhaft, and
George W.K. Wang, "Thrift Institution Failures: Causes and
Policy Issues," Conference en Banking Structure ynd Competi-
tion. Proceedings (Federal Reserve Bank of Chicago, 1965),

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pp. 1S4-21«} and JaB*B S. Bartb, Jr., K. Dui Bruabaogh, Jr.,
Du)i«l S«v«rtMft, and C«oz^ W.K. Wang, "TliElft iMtitution
Fallurw; Kstlaatlng fcb* Ragulatory Agancy's Cloaur* Sula."
(Divubllabad paper, availabla frta authors) diraotly contra-
dict tlia Board's aaasrtion that dlract inwataants Incraasa
th« probability that an asaoclation vtll fall. Both studlas
shov that dlraot Invaatnanta do not incrvasa tba probability
that an asaoclatlon will fall.

Tha Board's failura to taka tbasa studlaa Into
account Is tha aeat arbitrary typa oC agancy rula-aaklng
bahavior. Tha conclusion Is unavoidatala: Tha Board has no
answar to tbaaa studlas, no aaplrical avidanca to offar in
oppoaitlon, and no rational dafanaa for its Diract Invastnant
Rula.

Tbm Beard'a inability to oountar tha findings
of Its own r aa a a rchars ia not surprising. Thosa findings
ara oanaiatant with tha findings of tha Best alaborata
and coipr^wnslva study nad* to data that axaalnaa tha
ralatlonship batwaan dlraot invaataanta and riaks to tha
aavinga and loan industry and to TSLIC.'' Profassor Saorga J.

Caerg* J. Banston, An Analysis of th« Cam— of Savlnna
»inl iamj\ ftaiflB Jation y gilBrBBr Saloaon Brothara Cantar
for tha Study of rinanclal Inatitutlona/Graduata School
of Bualnasa Adnlnistratlon, Maw York Dnivarsity,

(Continuad)

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Benston, Profa««or of Accounting, Econamlcs, and Financa,
Graduata School oC ttauiagaaant, Dniveralty of Bochaster,
Btudiad all aacoclaClons thaC £all«d batwean January 1, 1981
and August 31, 1985, analyzed in detail each of the individual
associations that failed batwaen these dates and that had
five percent or more of its assets in direct investments, and
examined all FSLXC-insurad associations (a total of 2,377
associations) over the period from June 30, 1981 through
June 30, 1984 (hereafter, the "Benston Konograph"). His
findings are the sane as those of the Board's researchers,
and they show that the Direct Invastnant Rule is not only
unwise but also that it is positively hamful to both the
savings and loan industry and the FSLIC fund.
The data in his study show that:

1. direct investments ara "not significantly
positively related to failure" (p. 72);

2. there Is "no relationship between direct
Investments and [association] failures" [p. 119) ; and

3. "direct investments are not positively
associated with FSLIC paymants" (p. 72).

Re concluded from these findings that:

(Continued)

Monograph Series in Finance and Economics, Monograph
1985-4/5 (1986) .

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Dlract invaaCaants — OMtUimd as fmI «atat« h«ld for
development:, investaent aad r«sal«, Uld equity inv«St-
Bants in aarvica corporation subaldlorlsa — .V«r* found
to b* nalthar a cauaa of fallazws nor roopoiwlbla for
bi^lwr PSLZC payouts at th« associations that failsd."

(p. 171)

Purthar, Profassor Banaton's study also daaon-
stratad tbat dlraet invastaants tand to Incraasa tha profit-
ability and nat Morth of associations and taanea to protact
tba rSLIC fund. Spacifically, ha found that:

1. 'tbara la raason to baliava tha dlract invaat-
■ants hava sarvad to raduea tba nuabar of failuraa by Incraas-
ing SIA [Savings and Loan Association] nat vorth and raduclng
thair vulnarablllty to intar«st-rata risk- (pp. 132-133)1

3. "dlract invastssnts, aora so tban othar
assats, consldarably inersassd nat vorth" and banc* lovsrsd
"tha risk to tha mic- (p. 115} >

3. "witbeat dlract Invastbsnta, tba avaraga SIA
would hav* had nagativ* ratums" (p. 94);

4. tha "avarag* ratums on dlract invastnants for
all of tha alaa groups (of association} ara consldarably
abova tba ratums on otbar aasats' (p. 94);

5. "[tjbaa* blgbar ratums [tros dlract invast-
bsnts] raduea tha risk that an SU sight fall, causing
raacnureas to flew fron tha PSLIC" [p. 121) t and

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6. overall aasociation "risk, as Hsaaurail by the
standard daviation of ratums. Is reduced by direct invast-
aants." (p. 99)

Prom these findings Professor Banston concluded

"the regulation adapted by the FHLBB in 1985 that
E-eatrlcts direct invastmants to a naxiium of ten percent
of assets (unless the FSLIC-insured association obtains
specific penlsBion) appears to be counter-productive."

Id. at 171-72. His ipolicy reconmendations wera soundly based

on these clear findings:

■SLAs should be permitted to use their comparative
advantage in real -estate- related projects to nalce and
manage direct invastmenta. The investments referred to
are those that are the subject of the study presented in
Chapter II — assets that are owned by SLAs, not loans
that the FHLBB defines as direct investments (generally
low-borrowed- equity acquisition, development, and
constniction — ADC — loans) . Direct investments offer
SIAs several advantages over other investments. First,
they tend to provide SIAs with higher earnings than can
be obtained from many other investments and operations,
apparently because they allow SIA managers to use their
skills and experience in making and monitoring real-
estate- related investments. Second, direct investments
have shorter durations than many other assets in which
SLAB have invested; hence, they reduce the institutions'
exposure to interest cats risk. Third, the returns on
direct investments tend to be imperfectly correlated
with the ratums froM SLAs' other activities; hence, the
variance of ratums tends to be reduced. All three
factors reduce the risk imposed on the PSLIC."

lii at 173.

Moreover, actual supervisory experience aonficms
the empirical findings of these three papers that failures of
insured institutions are not In any way related to direct

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Invcmtaants. Scott Taylor, than Mputy Diractor of

Uquidatlonm for tho TSLIC, bM atatcd that, baa*d on hla

■uparviaory axparlanca, diract invaataanta ara unralatad to

aaaociatlon failura. Taylor obaarvad:

For aora tban tvo yaara I hava baan in chorga o£
liquidating failad FSLZC-lnaurad inatitutiona. Durlnq
that tiaa ovar 50 inatitutiona vr» placad in racaivar-
ahip, aod 36 vera ao badly acarrad that tliay' ara baing -
fully liquidatad, with ovar $3.2 billion In biatorical

rhnmm eomanlM did not fall baeauaa of alauaa of
hroad«r aaa.t and invaatmant powara. or bacauaa of
dl,y»Ct Invaataanta In raal aatata. Thay failad bacauaa .
of fraud, incoapatanca and crialnality which waa not
datarrad or datactad aarly anough, and which haa littla
if anything to do with tha ability to maka diract equity
invaataanta or with broadar aasat powars .

Daaplta atrentt aaaartlena bv aoaa. I can aaa no
baata to ela)^ tha^ direct Invataant authority la a
eauaa of ineraaaad failura or a rlak to tha FSLIC. But
if ragulatora do not axaalna and auparviaa adaquataly to
pravant and datar wrongdoing, crina, fraud and incompa-
tanca will eauaa Increaaad falluraa ragardlaaa of lagal
liaita on InvaatMnta. It la diff icult to aaa tha
wladOM of barrlmji tha oraat malorlty of aound. wall-
■anaaad aavlnaa Inatitutiona from aafa and orofltabla
bualnaaa alaply bacauaa raoulatora fall to pravant or
datar othara troa crlne.3/

Tha Board willfully ignores this suparviaory

axparlanca. Together with tha two studies conducted by the

Board's raaearchara and Profaaaor Banston'a coaprahansiva

Latter, dated Movaaber 39, 198S froa Mr. Spott Taylor to
Hr. Gaorga P. Rutland. <aaphaaia added] A copy of
Mr. Taylor's letter is annexed.

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analysis. It •stablishcs that th« Board's position Is unsup-
portabltt, and that its propossd action is Irrational.

B. Tb« Board Prssants Ho Evidanca
In Support of th« Rula that
la Entltlad to Any Halerht

Th« Board rellas on a single place o£ research and
a confused, inconsistent and antlrely unsupported claim Baaaed
on its "supervisory ejcperienca" to support the extension of
the Olrect Investment Rula. Halthar place of "evidence" is
entitled to any weight. - -

The single study cited by the Board, prepared by
the saa* rasaarchars who prepared tha two papers that contra-
dict ttaa Board, ^ does not and cannot support the Rule. The
study was not designed to answer the dispositive question,
.whether direct investaents increase or decrease tha risk to
the PSLIC fund. The study axanlnas only associations that
had already failed and discusses the relationship between
FSLIC payouts and direct investments at such failed associa-
tions. Tha study does not, and was not designed to, provide
any evidence as to why any of these associations failed or

James R. Earth, R. Oan Brumbaugh, and Daniel Sauerbaft,
of the Board's office of Policy and EconoDolc Research,
"Failure Costs of Government -Regulated Financial Forms;
The Case of Thrift Institutions" (cited at 51 Fed. Reg.
32926) .

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wh«tl>ar direct Invaatawits eontributad to or h«lpwl delay tha
£alluT«a.

Hoflt eaaviouM, tbm study do*c not avan attaapt to
conaldar tha banaflta that diract invastaants brln? to
aasociatiena or tha nuabar of aaaociatlons wbicb vara aavad
froa Inaolvancy by profltabla dlract InveaCmenCs. Thua, it
doaa not and cannot question Prafaaaor Banaton'a finding that
dlract Invaataants »r» genarally hi^ily profltabla, contrib-
uta to Incraaaad nat worth, and help pravant asaoclations
froa falling.

nia Board's ralianca on Its "supervisory axperi-
anca" Is equally aisplacad.

First, tha Board's discussion of its supervisory
axpariance Is devoid of a single specific or ascertainable
fact. On the face of its notice, the Board has failed to
present any supervisory evidence to support extension of its
Direct Investaant Rule.

Second, analysis of available public records has
repaatadly shown that tha Board's supervisory experience does
not support its contentions about direct investments.
(Banaton Monograph pp. 80-88) In tha past, the exaaplea
Board personnel have attempted to utilize to show the dangers
of direct investnents have repeatedly proven to be irrelevant
to that issue and to be examples of problems caused by fraud,
■Isaanagaaant or certain kinds of loans. Based on tha

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Board's track racord, th»r« is no raason to aasuM* that any
ralavant facts aupport tti* Board's conclusory assartlons
about th« nssd for axtandlng tha Diract Invastnsnt Rula.

Tbird, the Board's analysis is confused and incon-
sistsnt. Even its bara and unsupportad claim about its
■ Buparvisory exparlance shows tbat tha problsD it parcaivas- —
whathar raal or inugined ~ is not true diract investaants
but rather "land loans and nonrasidantial construction
loans." 51 red . Reo. at 32926.'' Evidanca of tha dangars of
cartain types of loans is not evidence of problems with
direct invastaanCs. Tha Board's emphasis on the
"mis classification" of land and construction loans further
highlights tha irrationality of the Board's approach. To the
extent that cartain types of loans are risky, the Board
should regulate them and do so directly. "Hisclassification"
becomes a problem only because the Board refuses to regulate
these types of loans directly and Insists on lumping them
together witb true direct investments. In refusing to
regulate based on the facts in the record, the Board is
acting arbitrarily and irrationally.

Indeed, its prior references to supervisory experience
have consistently raised examples of associations that
were harmed — when fraud was not the culprit — by
various types of land and construction loans. (Benston
Monograph pp. 80-88]

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II.

£S_]

TlM atatutaa r«ll«d upon by Ui« Board in proaul-
gatlng th* original Diract Inv«at»ant Rul* do not givo the
Board tha authority to pr^ibit conduct of stata-chartarad
institutions tbat has baan authorizad by atata law^ Nothing
on tha faca of tha statutaa or in ttiair lagislative history
auppoi-ta tha Board 'a aaaartion of powar to intruda into areas
^ich Congraas has historically and quite purposafully kapt
within tha authority of tha atates.

A. Tha Board Has Ho Li

Baala for tha Rule

Tha various statutory sections on which the Board
has troB tiaa to tiua attempted to rely simply do not author-
ize tha Board's Rule.

Title 13 U.S. ex. I 1730 does not authorize across-
the-board regulation of practices deemed unsafe and unsound
by the Board, but only pemits case-by-caae adjudications by
tha Board of unsafe or unsound practices. See Jan. 15, 1985
Heno, pp. 4-8, 13-19. Title 12 D.S.C.A. 1 1725 is equally
unavailing as a source of authority for this type of regula-
tion. Section 1725 grants some rulemaking authority, but it
does not grant tha authority to by-pass the method expressly
ordained by Congress to deal with unsafe and unsound prac-
tices — Individual case-by-case adjudications as mandated by

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■ 1730. SU Jan. 15, 1985 Kuo, pp. 11-13, 31-23. Tltl« 12

U.S.C.A. ft 1434 and 1437 provld* no dutbority for rulaaaklng

vltb r««p«ct to tbm F8LIC fund. Th*y bt« eonc»ni*d wltlt tb*

P*d«ral HoK« Loan Bank Systca. Sat Jan. IS, 1995 Haso, pp.

10-11, 19-21.

B. Tha Board 'a Sol* Vlolataa Th* Infant
of Congraaa In Estiabllshing thB Dual
BanltlB<;t svaCm

Th* Diroct InvaatiMnt Rula conflicts with Con-
graas'a Intent that statoo axarciso authority ovar th«
invaataant daelslona of stata-cbartarad Inatitutiona. Sn,
m^a^. ■■■t H«l«n« Saving, and Loan *M'n v. Fadaral Hoaa Loan
Bank Soard . 553 r.3d 1175, IIBD (atb Cir. 1977) (Congraa-
slonal statutas "craatad and contavplata ttia contlnuad
axlatanca of a dual ayataa of aavlnga and loan aaaocla-
tiona.-).

nila Intant haa raaainad flra in aach auccaaalva
piaea of laglslation Congraaa baa paaaad. Including tha two
Kajor banking acta paaaad In tha paat alx yaara. DapoaitoEy
Inatitutiona Daragulation and Honatary Control Act of 1980,
Pub. L. No. 96-331, 94 Stat. 132-93 (1980) ; Gam-St Saraaln
Dapoaitory Institution Act of 1983, Pub. L. Ho. 97-320, 9«
Stat. 1492 (1982). Tn both of tbasa acts, Congraas rafusad
to tlghtan control of atata Institutions in tha face of
broadar Invastoant powara grantad by tha atatea. Both thaaa
Acta loosanad rastrictiona on fadaral aavlnga and loana; for

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•3caHpl«, til* ISSO Act clisinatad gaographical landing raatrlc-
tiona and tba 1982 Act canf*rr«d broad n«w aB«*t powara on
federal aasociatlona. Th« Gam-3t Gatmaln Act, which aatab-
lishad a apaclal fadaral aaaistanc* progroa for troubled
aaaociatlona, i^a««d investment liiaitations only on troubled
inatitutlons wblcb required the apeclal federal aid. The Act
again desonstrited that Congrass intended to leave to the
state* the control of the Inveatnent powere and practices of
healthy atate-ch arte red Inst itut ions . Sea Jan. 15, 1989
Keao, pp. 3B-30.

The basia for these conclusions are set forth mors
fully in the attached memoranda of law. As to ths Board's
lack of statutory authority and its violation of tha dual
banking systav, see expressly Jan. IS, 1985 Meno. pp. 4-30.

A. Jinadequ aCe Comment Period

In proposing this Bmsndmant, the Board has failed
to provide a sufficient comment period. Given the controver-
sial nature of the rule and the daslra of affected institu-
tions to respond fully and fairly, a thirty-day period is
clearly Insufficient. This is particularly true in light of
the Board's specific request for comments on the continued
need for the Direct Investment Rula after tha Board's adop-

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tion at ■ Tul« i^poalng hi^«r ragulktory capital roquire-
BMltS. Si Tait. BOOi. 3292« (SaptwdMr 17, 1986).

TtM Board'* policy wcpraasad in its ■RulMuklnct and
Ragulatoxy SiMplification Notica," 4S OA^ iao^ 63135 (Sap-
taabar 33, 19S0) , providas for at laaat a aixty-day comnent
pariod. A shortar pariod ia panittad only it tha Board
stataa In ita publlahad notice t&a roaaona wby a aborter
pariod is practioal or nacaaaary. Hara, ttia Board'a atata-
Bant that a ahortar pariod is peraissibls bacauaa ttao public
interast raqulraa proapt action naitbar statas nor anplaina
adaquataly tha raasona for tha ahortar pariod. Tha Board
doas not atata lAat public intarast la servad by prompt
action, or how it ia aarvad by auch action.

Tha Board statas that a ahortar coaaant pariod is
sufflelant bacauaa tha Dlract Invastnant Rula has previously
bean submitted for public counant. nils aakaa no sense Cor
two distinct and compelling reaaone.

First, the Board has acknowledged that new regu-
lations adopted subsequent to original promulgation oC the
Direct Investment Bule may substantially affect the opera-
tion, purpoaa, and need for the Rule. Tha Board haa spe-
cifically aaked for comments on the relationship batvaan
these various rules, and thirty daya is siaiply not sufficient
to allow adequate comments. This ia particularly true In
viaw of tha Board'a raeognitiOR of "the ooaplexity of tha

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r«C«nnea ca ttaa aoozca of 1«9«1 wKAarxtj- t^M- \t« *,'« \,ms
12 cr.a. ■ 5M.12 [UK): TiU* S 1I.S.C.&. t M>* v\«"' >N>
r«f«r«Boa to snch lag*! «uttmrity 1« Mrte \n tli^* V>tvvv<Mi\
•BOm oalAsloa is a^iwsiAlly troublinq flvMt th* ^«iMMw«a Mw
Board rMCttlvwd whwi tiM Oirwct lnv«»UMnt «ul* va* t\\*%
proBulgat*d disputing ttt* v«lldlty of th* IMktvt'a (*4«)
authority to adopt it.

FurttMT, th* Board eentlnu** t>« r«lt 1-<i i>ttH>l>l«t
r«gulatory altamativaa to tha Diraot Inv«al«Mi\» M»la. tl- la
wall aatabllshad that an aqancy haa a JtiTv <•* >'»iwltt»»

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responsible alternatives to its chosen policy and to give a
reasoned explanation for its rejection of auch alternatives.
Sat, e.g.. rannars Prion Central Exehanoe. Inc. v. £EB£, 734
r.2A 1486, 1511 (D.C. Cir.), cert, denied . 105 S. Ct. S07
(1984). Tbera ar« several alternatives to extending the life
of the Direct Investaent Rule irtiich the Board should consider
and evaluate before talcing the action it now contemplates.

The Board alludas to the fact that the Direct
Investaent Rule may no longer be necessary because of the
adoption of the new Capital Requirements Rule. "Regulatory
Capital Requireaents of Insured Institutions," 51 Fed. Reg.
3365 (Septeaber 22, 1986). The purpose which the Direct
Investaent Regulation was meant to serve — preventing
allegedly risky investaent practices and protecting associa-
tions and the FSLIC — is now served by the Capital Require-
ments Rule. The Capital Requireaents Rule will induce
greater caution and help inaure sound investment practices.
Therefore, the Direct Investaent Rule, if it ever served any
useful purpose, has now been aade redundant.

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III!

GMtf* p. llDtland

t MI yoor ncMit t— rti tmtltri«t baton tte HauM iMftlnf
liiii—lllM on rlandal Inatltotlai* tiv*rrl*l«. Wy I ts^mu my
Mteag ladi*lda*l m iwi ni witti |«at vtw [«(vanad ^ Dr. Qtetqi

• of liquidaciiH

fallal nUC-iaanad InatiCBtloaa. DoeIdi ttat tim o«w H inaUtueloM
nan plaoad 4a racelianhlp. and M nara ao badly acamd that Vmr at*
balng toUr Uqut^Md, Hit& avac n.l blllloi to hlatoimi aaaata.

aaaat Mri liiial—nl poimn. sc baeauaa af diract tnvaaaanta In laal
aataca. tb^ tallad baeauaa aC trari. loc^pManca and eitalnalltr
lUeh HM net dacanad at dataetad aarly nougti, arf Hhldi )iaa llttla
if aqrtMaf ta da ottti tha abiltV *» ••"^ dlraet aqulty lavaaoanta
oc irttti teeadai ar

n aaa ne baaU to data

rt Bf i|i9Tael«cIan nd fuppan toi youx cmcki.
Vary Buly youra.

(oBtt Taylot "^ ^■'^■.._

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

Thundajr, January 22, 1987

House of Representatives,
CoMunTEB ON Banking, Finance and Urban Affairs,

Washington, DC.

The committee met, pursuant to call, at 11 a.m., in room 2128,
Raybum House Office Building, Hon. Femand J. St Germain
(chairman of the committee) presiding.

Members Present: Chairman St Germain, Representatives Gonza-
lez, Hubbard, Barnard, Wylie, McKinney, Leacn, Wortley, Bartlett,
and McMillan.

The Chairman. The committee will come to order.

This morning we resume hearings on efforts to recapitalize the
Federal Savings and Loan Insurance Corporation and to stabilize
the thrift industry.

The witnesses. Under Secretary of the Treasu^, George Gould,
and Federal Home Loem Bank Board Chairman Ed Gray, are key
drafters and promoters of the administration's $15 billion plan te
put new capital in Federal Savings and Loan Insurance Corpora-
tion.

The administration plan now faces a rival in a proposal being
circulated by the U.S. League of Savings Institutions. The League
plan is on a smaller scale and a shorter term and would require an
earlier review by the Congress of the recapitalization and the ef-
forts to stabilize the industry.

While it didn't come over on the Mayflower, the administration
plan, now incorporated in H.R. 27, was heard in the committee in
the last Congress, reported by the committee on September 23,
1986, and approved by the House on October 7, 1986, only to fail
final enactment.

In announcing these early hearings — before the committee has
even been formally oi^anized — it was my intention that the critical
issue of Federal Savings and Loan Insurance Corporation be heard
out and determined in the House before more volatile issues pro-
moted by various special interests muddied the waters.

But, judging from news releases bearing the letterhead of the ex*
ecutive branch, various meetings of lobbyists, and frenzied promo-
tion of finemcial industry wish lists, it appears that some ha'-
qufdms about letting Federal Savings and Loan Insurance C
tion issues be caught up in the lobbying storms of the mo
of Washington's special intereste. Let us hope that the t
(407)

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tion'B decision to join the Mayflower loU>ying combine does not
create confusion about prioritiee in sorting out the problems of the
financial community.

Prior to hearing m>m them I will call on Mr. Barnard for a short
statement.

[The opening statement of Hon. Femand J. St Germain follows:]

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Till* BornlnQ »• raauB* haarlnga on afforta to raeapitallt* .tha
Fadaral Savlnga and Loan Inaucanc* Corporation and to atablllik tha
thcift Industry.

Tha nitnaaaas, Dndaraacratary of tha Traaaury Gaorga Gould and
Fadaral Bomm Loan Bank Board Chalnun Ed Gray, ara kay draftar* and
proaotaca of tha AdBinlatraclon'a SIS billion plan to put new capital
In F8LIC.

Tha Adainlatratlon plan now faeaa a rival in a pcopoaal baing
circulated by tba U. S. League of Savlnga Inatitutions. Tha Laagua
plan i* on a anallar acala and a ahorter tern and uould require in
•arliar review by tha Congress of the recapitalization and tha efforts
to •tabilit* tha Induatry.

While It didn't eooa over on the HayClower, tha Administration
plan, now incorporated in H. R. 27, waa heard in the Connittaa in tha
last Congress, reported by the Committee on September 23, 199G and
approved by the Rouse on October 7, 19BS, only to fail final

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In announcing thai* aarly h«arlng*-~-b«Coca th* Coanltt«« h»»

•van baan fonully organitad It waa By intantlon that th« critical

taaua of F5LIC ba haarS out and dataralnad in tha Houaa bafora Bora
volatlla Isauaa proaMtad by vacioua apecial Intaraata Muddiad tha

But) judging froa nawa ralvaaa* baarlng tha lattarhaad of tba
Exacuttva Beanch, varloua Baatlnga of lobbylBta> and franslad
proaMtlon of financial Induatcy wlah liata, it appears that soaa hava
no qualna about latttng FSLIC iasuaa ba caught up In the lobbying

atocaa of tha moat apaclal of Washington's apaclal intacaata. Lat ua
hope that the Adnlnlstration's decision to join tha HayfloHer lobbying
coMblna doaa not create confusion about priorities In aorting out tha
problena of tha financial comnuntty.

Halcone Hr. Gould and Mr. Gray. First we will hear froB tba

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411

Mr. Babnasd. Thank you, Mr. Chairman.

Mr. Chairman, I want to reiterate again today the importance of
these hearing and the early expediting of H.R. 27, which you have
certainly taken under control.

I respect the concerns of those who would drastically modiiy or
even oppose H.R. 27 as it is now written. Yet, we can tarry no
longer, find I agree with you that it should be l^istation in and of
itself, that we should seek early resolution, and I say that for this
reason:

1. We know the bonds issued under H.R. 27 would be acceptable
to Moodys Rating Service at Triple A. I have the reports here that
show it. As the Chairman's questions brought out yesterday, we
know next to nothing Eibout what happens under mtyor alterna-
tives with respect to marketability and, therefore, Uieir entire
workability.

2. We know the 0M6, the C60, and the GAO found H.R. 27's
provisions acceptable last year — only after months of protracted
negotiations te provide neutral impact on the Federal budget. We
know no such thing about the m^or modifications we have seen to
that plan.

8. We know we have a bill which is almost verbatim what this
committee sent to the floor merely 4 months ago and that nothii^
has changed except that the ui^ency has incre^ed.

4. We know the Washington Post's story of yesterday that the
Home Loan Banks are close to refusing to honor Federal Savings
and Loan Insurance Corporation guarantees is accurate. We have
the memos to prove it. This development means the Home Loan
System itself, is reaching liquidity shortage limits. That, in turn,
means the Federal Reserve will be the last line of defense.

5. We know that indecision and self-deception can lead to the
kinds of crises experienced on a State level by Maryland and Ohio.
They no more thought it could happen there than we think it could
happen here. But it did. This indecision et the Federal level meftns
breaching faith with thousands and thousands of constituents in
every congressional district.

6. We know that separate concurrent resolutions, like S. Con.
Res. 72, of the 97th Congress, asserting the full faith and credit of
the U.S. stands behind Federal Savings and Loan Insurance Corpo-
ration, are not binding, are not authorizations, and are not appro-
priations. In short, they are merely intent.

7. We know the Home Loan Bank System does not even have to-
tally clear 1^^ authority to use ite ultra-emei^ncy one percent of
deposits assessment authority, as the hearing records of the 99th
Congress demonstrate.

8. I know— and everybody who reads the money rate columns
knows — the basic statistical runs in the proposed alternative are
just inadequate to support the assumptions of that alternative. For
just one example, all tiie alternative scenarios, starting on page 51
of the U.S. League of Savings Institution's Task Force report,
assume an 8 percent long term borrowing cost on the zero coupon
bonds which decrease over the long period of 20 years. That is just
not realistic, even if we could get tnem out and sole tomorrow m a
low interest climate. The rate has got to be at least 9 percent.

412

Finally, I have great misgivingB about the forebearance program
suggested in testimony yesterday. The Government Operations
Committee put out a detailed study of appraisal practices in Octo-
ber of last year. It clearly showed funny evaluations of real estate
are largely what got us into this mess in the first place. However,
gotten into it, 1 see nothing short of a calamity which cannot be
contained to Texas if we don't go along, for a limited period, by
statue, or better, convince the Federal Home Loan Bank Board to
go along by regulations. Statutes are hard to modify and regula-
tions are more flexible.

Finally, I would hope that a policy of forbearance would be
enough to halt the need for a Berlin Wall lockup.

People will stay if they get soft accounting treatment. But more
importantly, new capital will come in if Congress does not signal it
thiiiks the thrift industry is so dead that it has to pass a statute to
keep people in it.

Iliere are those who advocate merging the Federal Savings and
Ijmr Insurance Corporation and Federal Deposit Insureince Corpo-
ration might or might not be right — eventually. However, Uie
project they propose is far beyond the horizon of immediate actions
which the figures indicate is mandatory. Talking about mei^ing
the funds, in reality, means reworking hundreds of pages of stat-
utes and incredibly controversial issues when, in truth, we must be
ready to go to rules right Eifter the presidential work period.

Finally, I have put away my ornaments and tinsel. I hope every-
one else will do the same. Now is not the time for decorating a
Christmas tree, it is time to build a lifeboat. If we do not, ^e con-
sequences to the reputations of all of us are getting very clear.

Thank you very much.

[The prepared statement of Mr. Gould can be found in the appen*
dix.]

llie Chahiman. At this time we will first hear from Under Secre-
tary Gould. We will put your entire statement in the record and
you may proceed.

STATEMENT OF GEORGE D. GOULD, UNDER SECRETARY FOR
FINANCE, DEPARTMENT OF THE TREASURY

Mr. Gould. Thank you veiy much, Mr. Chairman, for having me.
As you requested, I will limit my orsil remarks.

I am delighted to have this opportunity to testify on our plan to
recapitalize the Federal Savings smd Loan Insurance CorporaticHi.
We are greatly encouraged by your early hearings, particiuarly be-
cause there is an urgent need to address immediate safety and
soundness concerns.

Recapitalizing Fedend Savings and IxKm Insurance Corporation
is our top priority. For the reasons I outline in my testimony, we
think the need is pressing and the time to act is now.

When that essential safety and soimdnesB issue can be put
behind us, we stand ready to work closely with you on other com-
petitive and consumer issues. We believe a comprehensive r
luring of our financial services industry is overdue.

oogle

As Treasury Secretary James Baker stated last week: "America
needs to reposition itself on the leading edge of the flnancial serv-
ices world.'

A little over 1 year ago. Congress asked us to devise a plan to
come to Federal Savings and Loan Insuremce Corporation's rescue.
We responded early in 1986, because we are no less concerned
about the safety and soundness of the public's insured savings.

The problems of the thrift industry and Federal Savings and
Loan Insurance Corporation's dwindling reserves are well known,
with highlights contained in my written statement.

With that as background, and working with the valuable assist-
ance of the Federal Savings and Loan Insurance Corporation, the
Federal home loan bemks, and members of the industry, we devised
a ^an which is betsed on two fundamental points.

First, it is truly a self-help plan on the part of the industry; no
tfuroayer money or government guarantees are involved. Taxpayers
will not be required to bail out an industry that with some meas-
ure of sacriiice over time can help itself, and where the healthy in-
stitutions are ei^oying record levels of profit.

Second, our recap plan has sufTlcient resources, available when
necessary, to meet the real problems which exist today. These are
not theoretical or prospective problems; rather, they are an accu>
mulation of the present and the past and involve safety and sound-
ness for depositors with almost $900 billion in savings.

I am pleased to note that our plan has been endorsed again by
many responsible people in the thrift industry, including president
of the Home Loan Banks, the National Council of Savings Institu-
tions and the New Englemd League of Savings Institutions. As you
know, it was also passed by both Houses of Congress last year.

Wl^ole some people may think our plan is complex, the concept
really is quite simple. Money is needed now and over the next few
years in an amount well beyond that which is available either from
Federal Savings and Loan Insurance Corporation's existing re-
sources or from what it is reasonable to expect from industry as-
sessments over the same period of time. Any home buyer who
needs a mortgage understands that concept well. The actual finan-
cial structure we have used to accomplish the concept is rally just
detail — but detail that works.

As you know, our plan also meets CBO requirements — with GAO
concurring — to be considered an ofbetting collection rather than a
Federal bo rr o wi ng for budgetary purposes.

You have heard testimony about an alternative plan by the VS.
League of Savings Institutions. Let me take just a moment to com-
ment on iriiat we eoaader to be a largely "pray as you go" ap-

If you start with just the simple arithmetic of their financing
scheme, you will see that the numbers don't add np to meet what
we oonaider to be a responsible level cf resources needed for Feder-
al Savings and Loon Insurance Corporatioa's existing caseload,
Abo, the league's own workriieets reveal that it is a Esr lev etR-
dent way to raise funds for Federal Sovinf^ and Loon Insorance
CorporatioiL Tlie league would raise mly % of the oioaey for over
H (M the cost of our plan.

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414

Indeed, even to get as far as they go, there has been a substantial
shift of responsibflity for the industry to the Federal Home Loan
Bank Board Bank System, a government sponsored enterprise and
an agency borrower with a $4 billion line of credit from the U.S.
Treasury.

Their plan — like a bad check — ought to be rejected by Congress
due to "insufHcient funds."

Let me make one other observation. Based on my personal expe-
rience, the U.S. League bonds are not salable, except at prohibitive
rates of interest, unless, of course, they are meant to be sold with
some backing of the Federal Government.

We have devised a plan which specifically avoids any Federal
guarantee and whose bonds are salable because of the internal
structure. Our purchase of zero coupon bonds matches against the
principal due and thus guarantees its repayment. We do not be-
lieve our bonds need a Federal connection to be deemed credit
worthy.

Simply put, our bonds will sell at a reasonable rate on their own
merits. The U.S. Leagues bonds, if salable, would be terribly expen-
sive.

I would be happy to comment further on their plan during the
question and answer period.

Mr. Chairman, before I close, let me take a moment to touch on
a subject that I understand came up in your hearing. Some p^)le
in and out of government have suggested that the solution to Fed-
eral Saving and Loan Insurance Corporation's funding problems is
to merge uie two Federal Deposit Insurance Funds, I want to be
certain to clarify Treasury's view on this subject, because there
may be some confusion.

First and foremost, let me assure this committee that the Treas-
U17 Department has no hidden agenda to met^e the funds.

It is true we have stated that failing substantial success to enact
our Federal Savings and Loan Insurance Corporation recap plan,
the concept of merging Federal Savings and Loan Insurance Corpo-
ration and Federal Deposit Insurance Corporation comes ahead of
using taxpayer money, which would be a last resort only to prevent
systemic problems for depositors.

It may be useful to clarify precisely what this merger concept
would mean:

There still would be two funds, not one comingled entity. The
merger would be at the regulatory level.

Money still would be n^ed up front and still would have to be
borrowed. Federal Deposit Insurance Corporation's reserves would
not be available, except possibly as a backstop for an Federal De-
posit Insurance Corporation guarantee of the thrift fund borrow^
mgs.

The S&L industry still would not avoid the costs, a premium dif-
ferential is inevitable.

Debate and negotiation would be time consuming and extremely
difficult, contributing to uncertainty in the marketplace.

Moreover, if the Federal Savings and Loan Insurance Corpora-
tion is merged with the Federal Deposit Insurance Corporation, the
Federal Deposit Insurance Corporation's reserves should not be
made available to resolve Federal Savings and Loem Insurance Cor-

; VH_>t.f»^lV

415

poration's problem cases both because they represent accumulated
aasoasments on the commercial banks and they are needed to reas-
sure depositors of those institutions.

Incidentally, there is also an unfavorable budget implication. The
present reserves of the Federal Deposit Insurance Corporation have
already been scored as a budget receipt as they were accumulated
Thus, their use, unless offset by an equal amount of new receipts,
would be a direct hit to the Federal budget. Our plan, however,
would bring in $15 billion as budgetary receipts that will ofbet
Federal Savings and Loan Insurance Corporation's case resolution
costs and thus would not increase budget outlays.

Merger of the funds has become a diversionary tactic for some
wealthy members of the S&L industry who don't want any legisla-
tion tlus year. We are all well aware that a merger would be legal-
ly and administratively complex, and a political nightmare. The
bankers would resist vigorously. So would smeill and medium sized
S&L when they reeilized the implications for this industry.

I urge the Congress to reject calls for further delay, more study,
and grand schemes that fall short of providing Federal Savings and
Loan Insurance Corporation with the necessary funds.

In the final analysis, no one in government wants to see deposi-
tors standing in lines, like they cUd in Ohio and Maryland. We,
therefore, urge you to pass our recapitalization bill quickly and
cleanly. We stand ready to assist you in any way we cem, and again
applaud you for your early attention to the important issue.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Gould can be found in the appen-
dizj

The Chairbian. Thank you.

Now, we will hear from the Chairman of the Federal Home Loan
Bank Board, Mr. Gray. We will put your entire statement in the
record and you may proceed.

STATEMENT OF ED GRAY , CHAIRMAN, FEDERAL HOME LOAN
BANK BOARD

Mr. Gray. Thank you, Mr. Chairman, members of the committee.

I appreciate the opportunity to join with you here in this impor-
tant hearing.

This is the fourth calendar year I have come before you in simi-
lar proceedings as Chairman of the Federal Home Loan Bank
Board, to share my views on the condition of the savings and loan
indusby and to present recommendations for strengthening the na-
tional thrift system.

The thrift system itself, continues to et^oy the paradoxical dis-
tinction of enjoying the best of times and the worst of times. One
the one hand, the vfist m^ority of the thrift industry is very proiit-
aible. After tax earnings for the roughly four-fifths of the industry
which is profitable, were $6.9 billion in the first three quarters of
1986, the latest comprehensive reporting period. This is just short
of the earnings performance roistered by the profitable sector for
fill of 1985. In summary, the profitable s^ment of the industry —
Eigain, the vast majority of the thrift institutions — is healthy, and
many, many institutions are robust performers.

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416

On the other hand, the unprofitable one-fifth of the thrift indus-
try is very unprofitable, but more particularly the failing sector of
the savings institutions business.

The Federal Savings and Loan Insurance Corporation, the depos-
it insurance arm of the Bank Board, is called upon by law to stand
behind the insured accounts of savers who have placed their funds
in the Nation's more ttuin 3,000 Federal Savings and Lofin Insur-
ance Corporation insured savings institutions. These savings ac-
counts, which amount to some $890 billion, are today backed by a
deposit insurance fund with less than $2 billion in primary re-
serves, the lowest ratio of such reserves to deposits ever.

Moreoever, the thrift deposit insurance fund's reserves continue
to deteriorate. Absent prompt action by the Congress to help us
remedy this situation, the reserves will continue to fall, wit&out
the prospect of adequate replenishment, to even more alarming
levels in the months ahefid.

Needless to say, this situation presents all of us with a funda-
mental challenge — and yes, obligation — which must be dealt with
soon. Nothing, simply nothing, is more important to the mainte-
nance of a sound financial system than the maintenance of public
confidence in it. The thrift system, which is an integral part of the
Nation's overall financial system, is no exception.

None of us can afford to forget the nature and consequences ctf
the loss of public confidence which occurred in connection with the
Ohio and Maryland thrift crises. The public did, in fact, lose confi-
dence in the backup mechanisms which had been instituted to safe-
guard the funds of depositors in the Maryland and Ohio systems.
And the repercussions of these thrift crises were felt, as you will
recall, far beyond the borders of the two States involved.

We also must address the issue of public confidence in the Na-
tion's federally insured thrift system, in a decisive and expeditious
memner, which conveys maximum certainty to the public that the
problems of the thrift deposit insurance fund are being dealt with
in a way which merits their full confidence in the thrift system,
now and in the future.

For a year and a half now, I have been saying the thrift insur-
ance fund must be recapitalize. Even earlier, at the beginning of
1985, the Bank Board exercised its full statutoi? authority to raise
insurance premium contributions from Federal Savings and Loan
Insurance Corporation insured member institutions to the maxi-
mum permitted by law.

It becEmie clear to me in the summer of 1985 that these inBUi^
ance premium resources would not be enoi^h to maintain the level
of reserves needed for the Federal Savings and Loan Insurance
Corporation to truly meet its obligations.

Working with the Treasury, the Bank Board developed a plan to
recapitalize the insurance fimd in the first several months of 1986.
liiis plfm was presented to this committee last April and the basic
firamework was, in fact, adopted by both the Senate and House in
the waning days and hours of the 9dth Congress, although no con-
ference action was taken thereafter to resolve the differences.

This plan, which would provide some $32 billion to the thrift
fund, if needed over the next 7 years, v/aa reintroduced in both
Houses several weeks ago.

; \^H_>t_f»^lV

417

The plan, which is described in the etatement I sent you yester-
day, would, if adopted, enable us to begin the process of restoring
puoltc confidence in the thrift mtem right away by sending a
clear signal to all that there will be tools and requisite financial
resources in place and available over time to restore the health of
the thrift fund and being to put many of our problems behind us.

I want to emphasize that the Bank Board-Treasury plan will not
require the innision of emy taxpayer dollars. It is entirely self-
funded by the thrift system.

We are estimating that the financial resources which will be
needed to resolve terminally ill thrift cases — cases that we now
know about — will be some $19.5 billion. We also have included an-
oUier $4 billion in our overall estimate of $23.5 billion to cover
what we consider to be borderline cases which could well require
Federal Savings and Loan Insurance Corporation assistance in the
next 5 to 7 years. This leaves another $9 billion, which would be
available if needed, for contingencies over the next 7 years.

Again, the basic outlines of our plan, which both Houses saw lit
to adopt late last year, would, in my view, provide enough money
to deal with severe thrift problem cases over time, sending a clear
signal to the public that miproved public confidence in me thrift
sj^rtem is fully merited.

This would have the very beneficial effect of improving dep(»itor
perceptions of the thrift insurance fund itself and therefore, reduc-
ing interest costs the thrift industry is now paying for deposits,
thus further enhancing opportunities for profitability.

A study we completed last year showed that the thrift industry
as a whole was paying at least $4 billion a year more than neces-
sary for deposits, precisely because of market concerns about trou-
bled thrifts and negative perceptions of the Federal Savings and
Loan Insurance Corporation's strei^h, deriving from its we^ened
conditions.

The spillover effects of perceptions of a weak thrift insurance
fund, which is incapable of resolving severely troubled, terminalhr
ill thrift cases, because the fund doesn't even begin to have the fi-
nancial resources to do so, directly contribute to hisher than neces-
sary costs of operations at all thrifts, healthy or unhealthy.

Today, the 347 most severely troubled thrift institutions in our
system are losing, on an operating basis, roughly $6 million a day,
or $2.2 billion a year. This annual loss is more than the insurance
fund's entire pnTninl income, and is $350 million more a year than
the Federal &ving8 and Loan Insurance Corporation is collecting
in insurance premiums.

Our recapitalization plan would enable the Federal Savings and
LoEm Insurance Corporation to begin to get at this problem by pro-
viding ^e resources we need to resolve such cases early on.

We will soon be implementing a variety of measures to improve
the thrift system's ability to haindle Federal Savings and Loan In-
surance Corporation resolutions as efficiently and as cost effective-
ly as possible, using the expertise and organizational resources of
ue entire system in a fully coordinated manner.

I would note on page 10 of the written statement that 1 submit-
ted yesterday, we enumerated these measures. In bo djii^, ^re wiU
be using the expertise and the full orgzuiizational re^eatcfis c£ tbe

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418

entire thrift s^tem in a fully coordinated manner. Nothing is more
important to ua in the Federal Home Loan Bank Board — Federal
Savings and Loan Insurance Corporation System than to saf^uard
the monies in the insurance fund in the Federal Savings and Loan
Insurance Corporation case resolution process.

The Bank Board-Treasury recapitalization plan has the attribute
of providing, over a known period of time Eind in the most cost ef-
fective manner, the greatest amount of certainty that the thnft in-
surance fund will have the financial resources it needs to protect
and strengthen the thrift system, without the use of taxpayer
funds, whUe at the same time, improving public confidence in the
system.

During these past few years, the strains on the thrift system
itself have been enormous. I mentioned time and again to this com-
mittee and in many of the speeches that I have made to the indus-
try over time the system was, frankly, not prepared to deal with
the vicissitudes of a deregulated thrift operating environment.

The Bank Board has mside very considerable geiins in its efforts
to modernize and strengthen the regulatory oversight apparatus
and process. The progress which has been made must continue and
be further strengthened. Without the commitment and resolve nec-
essary to assure that safe and sound operating practices are ob-
served and enforced throughout the thrift industry, and without
the appropriate discipline necessary to assure that this does in fact
occur, recapitalization of the thrift insurance fund, no matter how
much money it provides, cannot truly succeed in its intended goal:
that of getting the difficult problems we now face behind us.

I am committed to the goal of making recapitalization work by
carrying out the continued vigilance and regulatory discipline
which that commitment entails on our behalf, and on behalf of the
American public. I look forward to working closely with you in the
weeks ahead to achieve common objectives.

Thank you, Mr. Chfiirman.

[The prepared statement of Mr. Gray can be found in the appen-
dixj

The Chairman. Thank you, Mr. Chairm£in.

The chair would like to inake an observation. This committee,
and the House, on one occasion did indeed pass or adopt the Feder-
al Savings and Loan Insurance Corporation recapitalization. No
one, I venture to say, on this committee would, if eisked, reply that
this weis a perfect piece of l^islation and the best that could be
devised. So, I would caution the witnesses today not to wave the
flag as one that everybody should follow.

It wEis done on a time constraint. There were many, many items
that came to bear upon us. We felt — I think many of us felt that it
was the best available at the time. That does not mean that we
should now put blinders on. Etnd since it was passed last year it
should just go that same way with each dotted "i" as we did last
year.

Mr. Gould, ^our bcickground, as I recall it, is that of an invest-
ment banker, is that not correct?

Mr. Gould. Generally speaking, yes sir.

The Chairhan. You were in the firm of Lufkin and Jenrette,
correct?

i by Google

Mr. Gould. Yes. I spent 25 yeare in Wall Street.

The Chaieman. A very distmguished career.

Now. I appreciate your ability and have no reason to doubt your
veracity. By the same token, I tnink you agree the reason you have
a lot on investment firms is that there is much competition, and
there are other reasons some investment banking firms will take
on an issue that others won't. They reach different conclusions, is
that not correct?

Mr. GouLO. Yes, that is what makes markets.

The Chakhan. That being the case, I think you agree that we
indeed should be certain that we have the opinion not only of your-
self, or your statement — you stated that in your opinion this recap
plan would be salable. Now, we have attempted, Mr. Gould, to find
some investment bankers to come in and testify on this. We have
not been able to. No one has come forward, no one has volunteered.
Even further, those we have asked have not agreed to testify.

Could you give us a list of investment bankers that we could
have to come in and to testify and to give us their opinion of this
plan?

Mr. Gould. We would be happy to furnish you with a list, Mr.
Chairman, of people that we think wOuld by background and
market experience, would have opinions worth listening to.

liie Chairman. Not only opinions, but what it really comes down -
to is the fact that unless you have the investment bankers who are
going to say yes, we are going to take this and we feel that we can
aispoee of these in the marketplace, then the plan has no vEtlidity.

Mr. Gould. Well, the bonds had to be sold publicly, so we wul
need someone to do that. I am sure you understand, as the organi-
zation of the Home Lotm Bank system, they do indeed have a fi-
nancing office in New York, they have some $87 billion of bonds
outstanding, so they are in contact with the street and with selling
organizations, and I would also suggest that their opinion should
carry some weight here. We have had some people look at this last
year and we have received a series of letters from investment
bankers as to the plausibility of our plan.

The Chairman. Could we have those for the record?

Mr. Gould. Yes sir, you certainly can.

The Chairman, Because perhaps we would call upon some of
these people to come in and testify.

You know, we are not asking, I am not asking anything of this
plan and of you that I didn't ask of our witness y^terday. They
submitted a plem that included zero coupon bonds. I said, well, on
what do you base your cjiinion that these are salable, and they said
they didn't have it yet. So I said, you had better submit it.

Mr. Gould. As you probably are aware, Mr. Chairman, we sub-
mitted to you last week the names of a number of investment
bankers. I would be happy to submit them again if you would like,
sir.

The Chairman. Staff informs me that we were indeed given a
list of five individuals by Treasury.

Mr. Gould. Sir?

The Chairman. Treasury gave us a list of underwriters available
to respond to market questions. You gave us five names.

Mr. Gould. Yes sir.

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420

The Chairman. The problem is it is like LeRoy says. LeRoy says
he doesn't want to go into the ball game. No one wants to come in
the game, they want to sit on the bench. We would like them on
the field. Maybe you could help ub to convince them to come in and
tell the public at large in the sunshine, under the lights of the com-
mittee, what they feel about the plan and how adequate they feel it
is. Would you help us?

Mr. Gould. I would be delighted to help, Mr. Chairman.

May I take a moment to comment on one of your earlier state-
ments — that the ffict this is perhaps not the world's most perfect
plan. We have no pride of authorship

The Chairman. I bet you agree with that.

Mr. Gould. Well, nothing is perfect really. When we start out ae
we we do to try to blend the concerns and the understandable self-
interest of a variety of people, we tried to get a plan that faced
down the special assessmente of the industry. For 5 years we tried
to create a plan which utilizes some of the capital of the Home
Loan Bank System but did not unduly impinge on the credit of
that system when it sells its bonds in the marketplace.

We tried to do it in a way that kept even the implied involve-
ment of the Federal Government out of the picture, and we tried to
do it in a structure — this is important — that raised enough money
' to handle the problem as best we could define it.

When you start from a variety of different premises, one I think
inevitably arrives at a plan which would not be perfect in the eyes
of those parties, but does indeed fit the basic criteria laid down,
and we think this plan does it.

Earlier the U.S. League of Savings Institutions had a plan which
I gathered they abandoned, because it clearly did not provide
enough funds, which they termed pay as you go. Now, I can in 5
minutes give you a true pay as you go progreim here, that involves
no borrowing and no future interest costs, but I think the industry
would very quickly tell you that this assessment needed roughly V^
of 1 percent a year of deposit each year for the next 4 years, would
be simply too great a burden for them to shoulder.

So, yes, there are various ways that one can construct a plan.
Yes, there are other things that certainly should be given due proc-
ess and should be looked at, but we have to, I think, Mr. Chairman,
come back to what we are trying to accomplish: Enough money to
solve the problem as it is known; no involvement of taxpayers;
money being drawn down as it is needed so no one gets burdened
up front with more than might be necessary later; and industry
based.

If you wemt to establish other criteria, surely you could come up
with a different structure.

The Chairman. Mr. Hubbard.

Mr. Hubbard. Thank you, Mr. Chairman.

To Mr. Gould, on page 7 of your statement, you call the U.S.
League of Savineg Institutions new recap plan a phony proposal
and you say the League is trying to stop a real recapitalization of
Federal Savings and Loan Insurance Corporation. Are you willing
to suggest that the League proposal is designed to ultimately necee-
sitate a taxpayer financed bailout of the thrift industry?

oogle

Mr. Gould. Well, sir, I think there are a number of agendas op-
erating concomitantly. Here I think there are certftinly part of the
Lea^e that are playing a giant game of chicken with the adminis-
tration and with the Congress. You know, we can just delay every-
thing long enough, there won't be any crisis, and if we are going to
have to protect S900 bUlion of deposits there so suddenly, in tnat
crisis, money is appropriated, and if the money is appropriated, the
industry doesn't have to pay themselves.

I am not saying that is a universal agenda for the industry, but
there is certam parts of that would be happy to embrace such a
movement. Indeed, they have publicly to me, euid to others, cloaked
that under the bfinker that tne Government caused ^is problem
bjf prematurely — their word — prematurely directit^ interest rates.
If tne Government caused the problem, the Government ought to
pay for the problem.

I would su^^est in this job I have heard that about a hundred
times from different groups so far, that when things are going well,
that is, their money, and when things are going badly, the Govern-
ment should step m and pick up the tab. A constant refrain. We
have heard it in farm credit, we have heard it in a number of in-
stances, and I think that is a refrain that should be rejected, par-
ticularly since there olten is this same line of argument come from
the pe^le who have most profited from their S&L franchisee.

Mr. Gray. Congressman, can I add to that?

Speaking of the U.S. League plem— and I certainly have no aver-
sion at all to any good faith attempt to come up with various eilter-
oatives to financing basically our problem — but as I have looked at
the U.S. League of Saving Institutions plan, I cannot help but con-
clude that it is very inefficient, to begin with, in that under their
plan the financing corporation would issue $32 billion in zero
coupon bonds, emd these would be 20 year bonds for which there is
no current market.

Certainly Mr. Gould could comment on that, but theoretically
even if there were, the interest costs on these bonds would be sub-
stantially greater than what the U.S. Lesigue says. They have put a
figure of 8 percent on that, but $32 billion in terms of bonds that
have to be paid for, which only produce $5 billion in the first 2
years, is a tremendous obligation for somebody to have to pay.

So, if we assume that there could be a market and even though
the interest coete would be tremendous, the fact is that the debt
service on those bonds would have to be paid by the FLBs. That
would amount roughly, at least in the beginning, to about $275 mil-
licm a year. That $275 million would over time be invested in the
long term and theise investments would produce some $16 billion.
Then you have $16 billion that has to be repaid, because the Feder-
al Home Loan Bank Boards are really, through their investments,
and. the investment income that would ultimately occur, get only
$16 billion. So there is ano^er $16 billion obligation that has to be
met over time.

It is quite easy to see that $16 billion would require for a longer
period of time. Just for the $5 billion that you get up front, this
would require the imposition of the special assessments or the
maintenance of the current special zissessments for, we think at
least 5 years, if not more — that is only for $5 billion — we are talk.-

422

ing about providing ae much aa $15 billion in the Treasury-Bank
Board plan.

Now, if you can't sell 20 year, if you can't issue for all practical
purposes 20 year zero coupon bonds efficiently, then what about 30
year zero coupon bonds? At 30 years, the League plan would still
produce $5 billion, but the obligation that would have to be repaid
in the end over 30 years would be $80 billion. Somebody would
have to pay that. If it were 30 year bonds, the Federal Home Loan
Bank Board contributions to service the debt and the investment
which would ensue, would yield $35 billion. But that is $35 billion
that could be repaid on the 30 year bond, but what about the other
$45 to take care of the $80 bUlion obligation? Where would that
money come from?

I could see a special assessment imposed on the industry for
nuiny, many years to do that. So, the problem here is with the U.S.
League plan, as I see it — I am trying to be constructive in my com-
ments — is that it is unfortunately very inef^cient, but it leaves a
tremendous amount of money that has to be repaid by someone
and if we assume the taxpayers are going to pay it, then the costs
to the industry over the bonding period are going to be just ateo-
lutely immense, if not counterproductive.

Mr. Hubbard. Thtrnk you.

The Chairman, 'nme has expired.

Mr. Gould. I was trying to explain the difference.

The Chairman. Mr. Leach.

Mr. Leach. Thank you, Mr. Chairman.

I appreciate the testimony of both the witnesses this morning. It
is clear we have a financial bombshell in the industry comparable
to the international lending problems of the larger banks, if not
more so.

It is also clear that the Congress is going to have to act. I am not
sure that it has been made as clear as it should be that when you
have a fiscal crisis it is difficult to borrow on one's way out of it
emd the Treasury-Federal Home Loan Bank Board plan is largely a
borrowing rather than a recapitalization, although there are some
recapitalization components. "That means it is a step beyond smoke
and mirrors, but not a terrible large step.

But I would like to stress, eis Mr. Grav did in his written testimo-
ny, that the quid pro quo is that I thinK Congress ought to be con*
cemed within the strongest of the quid pro quos, as we look at the
increasing liquidity of Federal intervention, is to seek strong r^u-
lation and the sternest of regulation I think can't be underestimate
ed, particularly the need for recapitalization within the entirety of
the industry. Particularly because it is only through capitfdization
requirements that one can have any containment of the issue of
growth and growth can be very profitable, particularly in a deceler-
ating interest rate environment in the industry. But it can be very
reverse under reversed circumstances, and I know very few econo-
mists that are not suggesting we may well be having a little more
inflation in the years which produced record profits for 80 percent
of the industry, may well turn around.

So that brings me to the dilemma that I see, that relates partial-
ly to Federal regulations and partly to States. Some of the States
have basically gone bonkers in terms of powers given some of the

, \^n_>t_j»^iv

423

thrifts. This is of enormous national significance, because even if
one represents a State like I do, with fairly tou^ regulatory stand-
ards, many of our deposits are taken out <» the State to assist those
institutions in the less strong regulatory environments and that
raises this whole issue of what powers are being offered b^ States
and whether there ought to be quid pro <^uos in the l^islative envi-
ronment as well as in the r^ulatory environment.

We have all observed that at the Federal Home Loan Bank
Board there has been some controversy on whether direct invest-
ment ought to be restrained and the current rules extended. I per-
scmally nnd it somewhat scandalous that the current rules are as
weak as they are, and to have a controversy based upon extendi^
imbelievably tax standards is tmbelievable and I would just simply
suggest that, Mr. Chairman, as we take a new look at that, one of
the areas we ought to look at again is the idea that maybe in a
statutory environment some of these direct investments that are
allowed to be made by relatively weak institutions, and that are
largely to be made in the future m less ideal interest rates environ-
ment, ought in find of themselves to be curtailed.

Would you care to comment on that, Mr. Gray?

Mr. Gray. Well, I have been, as you know. Congressman Leach,
bringing these issues before this committee and the Finemcial Insti-
tution's Subcommittee for several years now, almost with a kind of
messy anti-fervor. I guess with you, that the direct investment reg-
ulation is not as strong as it should be and I have stated that on a
number of occasions. It happened to be the best I could do back
when we adopted it, euid at the very least, I believe it ought to be
extended, if not by the Bank Board, by the Congress itself

I would prefer that it be extended, as weak as it may be, by the
Bank Board, to maintain flexibility, but if that can't be done, I
think in mv own view, given my very strong concerns— and I spent
a good deaf of my written testimony, which I hope you had the op-
portunity to read — to make many of the points that you have
made.

Safety and soundness and regulatory disciplined, particularly
given our experience over these last few years, is absolutely neces-
sary so far as I am concerned. As I said even in my opening state-
ment, this recapitalization plan, imperfect as it might be, is not
worth the paper it is written on if we cannot bring back to this in-
dustiy the kmd of discipline to protect this insurance fund which
we and the American taxpayers, nave to stand behind.

I note, by the way, that the Federal Reserve has proposed a regu-
lation that says that only a very limited amount of capital can oe
set adde for making direct investments in a holding company eiflili-
ate not in the insured institution, for that matter. So it is far more
Featrictive than ours is.

"Die Chaisman. I am goin^ to have to ask you to be fair to the
other members of this committee, and if you want them to look fa-
vorably upon you, if you are going to impose on their time the way
3rou are amng, you see, if you Eire going to give 20 minute speeches
on each auction, then a lot of tnese members are going to say
what Una of fellow is this.

Mr. Ijeach. Mr. Chairman.

Mr. Gould. Mr. Chairman.

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424

The Chairman. The lime of the gentleman from Iowa has ex-
pired.

Mr. Leach. My time has expired. If I could make a 15 second
comment, simply to stress when the point the gentleman made, rel-
atively speaking, when bsuiks are much tougher on the r^ular sav-
ings and loan industry, are a better reserve funds, and secondly,
that the rules of the savings and loans industry currently amount
to a government guarantee of high flyers.

This Congress has an obligation to look at it if the Bank Board
fails to, but even if the Bank Board acts, this Congress ought to
look at it in addition.

The Chairman. Mr. Barnard.

Mr. Barnard. Since I expressed myself in my oiwning statement,
I will waive my questions at this time, but I will be back for a
second round.

The Chairman. Mr. McMillan.

Mr. McMillan. No questions.

The Chairman. Mr. Price.

Mr. Carper.

Mr. Carper. Thank you, Mr. Chairman.

Secretary Gould, and Mr. Chairman Gray, welcome. "Diank you
for your testimony.

A question that you may have addressed in your testimony that I
missed, but the question I would like to first pose is, how do we
keep healthy S&Ls from bailing out of tiie Federal Savings and
Loan Insurance Corporation savings banks and seeking insurance
from the Federal Deposit Insurance Corporation. How do we go
about doing that?

Mr. Gray. Well, first, I think through recapitalization we im-
prove public perceptions of the system as a whole.

Mr. Carper. What we are hearing from some spokesmen from
the S&L industry is that what is going to happen faced with the
likelihood of anticipation of special eissessments over a lengthy
period of time rather than have to face that, they will decide to
become insured elsewhere.

Mr. Gould. Well, our experience is a little different, at least
from what we have seen in terms of movement toward savings in-
stitutions being acquired, for example, by bank holding companies.
This is a bit complex issue but some of the bank holding companies
that have wanted to do so because they can achieve as a result in-
stant penetration of the market. I certainly understand that.

The problem is, if we are going to have that kind of recapitaliza-
tion plan, there has to be a way to keep it viable. So we have dis-
cussed the need for authority to deal with the exit fee issue, merely
to keep the recapitalization plan viable, because it is a long term

E reposition to get money up front, and it has to be peiid back. You
ave to have the premium stream from insurance premiunis to
make sure that you can meet the servicing costs of the debt that is
involved, and if our recapitalization plan we are phasing out over a
5 yefu* period, the special assessment in any event, whidi I think is
b^cally the approach that even the U.S. Lea^e tfikes, they un-
derstand that there has to be a phase out of tma if at all poMoble.
Mr. Carper. Thank you.
Mr. Gould.

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425

Mr. Gould. Well, we have said before that we are not convinced
that there is a mtu'or movement potentially ahead of us out of an
industry where the Iranchlse in many ways is far more expansive
than that of the commercial bemk and that those people who have
prospered in the S&L industry with their S&L franchise may or
may not be that anxious to exit and become a bank and be part of
the FDIC.

However, if there are people who qualify and those are tough
qualifications, we are not convinced that say more than 15 percent
of the deposits in this industry are capable of making that move-
ment today and meeting FDIC standards. But if they do feel they
would now like to become some other animeil we do not favor on
the basis as it is really just un-American, to say you cannot leave
what you are doing and go do something else.

But we have been supportive in concept of the idea that if you
are going to leave and go somewhere else with the integrity of the
plan, you should pay an exit fee. One of the equitable aspects of
paying an exit fee is that one of the reasons FSLICs are in trouble
18 that these people have been undercharged in the past. As it
turned out the inherent risks in the industry have been greater
than Via of 1 percent assessment a year would pay for. So an exit
fee is nothing more than saying you have ei^oyed the advantages
of this &ancluse but you were undercharged in the pEist and before
you go to some other metamorphosis we think only appropriate that
you pay an exit fee.

Now, I think one other thing is very important, if I may say so,
Mr. Cf^per. If we can get this industry settled down so that people
in the industry know what the ground rules are which is one of the
reasons that we object to only a 2-year and inadequate refmancing
of the U.S. League. If we can just say this is what you are faced
with ahead these are the rules, then I think you will keep a lot
more people in place because they won't be fleeing some amor-
phous uncertainty in future years.

Mr. Carpeb. Thank you.

I understand that each of you have a somewhat different view on
what the future of nonbank tanks should be. I woidd ask first, Mr.
Gould, then Mr. Gray, to just comment on their perceptions of the
need for closing or not closing the nonbimk bank loophole and as it
applies to the safety and solvency of the FSLICs.

Mr. Gould first.

Mr. Gould. There is an argument with which we do not agree
that if you don't close the nonbank bank loophole you are endan-
gering the FSLICs. Now as best I cein understand wliat I believe is
rather tenuous logic here, is that all kinds of conunercial firms will
come in and establish nonbank banks in competition with S&Ls
and the S&Lfi won't be able to make it in that competition and
therefore, they will decline and if the S&I^ decline obviously so
does the FSLIC because the future assessments won't be available
to the FSUC.

I go back, at the risk of being redundant, that a nonbank bank
has limited powers, far more limited than eui S&L franchise so I
am not sure it is — they are not equal. You don't just create de novo
a nonbank bank and have the total equivalent of an S&L and an
S&L franchise. Indeed, I think the omer logic prevails the other

, \^n_>t.f»^iv

426

way, which is that if one were to ease the restrictions on unitaiy
and multiple thrifts holding cost find one were to settle the ground
rules here you might find more people willing to come in and buy
S&I^ and add capital and add management.

So I do not think FSLIC is endangered. I don't think nonbank
banks are going to put the S&L industry out of business even if you
allowed a lot of them to be chartered and therefore if they don't
put the S&Ls out of business, they are not going to endai^r the
FSLIC.

Mr. Gray. Let me respond.

Mr. Gould. Now for a different opinion.

Mr. Gray. I don't think nonbank banks will put the S&L busi-
ness out of business, no. I would like to see the nonbank bank loop-
hole closed once and for all closed shut, and my druthers would be
to see no grandfathering at although I don't think that is practical-
ly possible. Basically my experience is that when you can get a
frfinchise right in a State or several States and this seems to be
Ic^cal, also, for several thousand dollars, why would you want to
come in and take a failed thrift and because there is uncertainty
on this issue, there wasn't before when we were getting a good
many more responses at our bidding conferences for failed thrifts,
since that time, since the advent of the nonbank banks really in
1984, I believe, we have seen the kind of interest that we had
before begin to di^ up and so I don't take the position on the
merits of having nonbank banks at all. It is simply a practical
thing for me that it makes it more difficult to whatever degree to
sell failing thrifts when you have an alternative that costs you very
little, to nothing, to begin.

Mr. Carper. Thank you.

The Chairman. Congressman Price.

Mr. Price. Thank you, Mr. Chairman.

Mr. Gould, in your statement you referred to improved supervi-
sion as an important element in your plan. You really don't elabo-
rate on that. I wonder if you could do so briefly.

Mr. Gould. Well, we have been very much in accord with Chiiir-
man Gray and the attempts that he has made in the last few years
to improve the size of his supervisory staff £md to improve their
quality. Indeed the fact of moving many of those people out to the
12 Home Loan Bank Systems as tiie principal supervisory agents in
each geographic area was also a step that we thought was well
worthwhile.

So I think one of the things that has happened here eis the Chair-
man suggested earlier is you want into rate deregulation Euid you
went into a variety of expanded activity particularly at State-char-
tered levels and then at that point the Bank Board was not ade-
quately staffed for the, indeed, more sophisticated supervision that
had to take place.

The Bank Board has moved quite aggressively and Ed can quote
the numbers better than I, but they are impressive as to the
amount of increase taking place in the supervisory staff at the field
level.

Mr. Price. Beyond that question of staffing levels do you have in
mind a substitute for changes in regulation?

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Bfr. Gould. Well, sir. we try to draw careful distinction between
supervision and r^ulation. R^ulation to us means setting the
rules and supervision means malting sure th^ are bdng followed.
We have supported the supervision, increased supervision. We have
not involved ourselves in the direct regulatory an>aratus of the
Home Loan Bank Board as an independent regulattny agency. We
in the Treasury and executive branch try to walk a proper line be-
tween involvement in the regulatory process in terms of general
policy support

Mr. Pbick. So your recommendation here simply has references
tostafiing levels?

Mr. Gould. Staffing level systems, everything that has to do with
making sure the institutions in the field are being run by safe and
sotmd standards. The standards, however, being set by the regula-
tor, the Home Loan Bank Board.

Mr. Gray. In other words what I heard was you are not trying to
iitject yourself into the policies or processes of an independrait reg-
ulatory agency with respect to rules.

Mr. Gould. That is correct. Nor am I at all certain that that is
our role.

Mr. Puce. If I could turn just a moment, Mr. Gray, to your testi-
monj;. You on page 2 refer to a study that you completed last year
showing the tluiit industry as a whole was paying at least $4 bil-
lion a )rear more than necessary precisely because of marltet con-
cerns about troubled thrifts and negative perceptions of the FSLIC
deriving ^m its weakened condition.

How do you arrive at such a figure? On what basis do you make
that estimate?

Mr. Grat. It was a very complex study that was actually under-
taken 1^ the Federal Home Lcun Bank System. A numb^ of the
Federal Home Loan Bank presidents. It was headed by former
Bank Board member Don Hovde. I cannot get into all of the details
of it, particularly here, except that was the result of that study.

Mr, Psicx. That is the doUar figure you put on the lack of mvea-
tor confidence and its impact?

Mr. Gray. Yes — well, and this obviously applies to troubled
thrifts and severely troubled thrifts. The public knows in one way
or another that they are having problems and in addition the gen-
eral perceptions of the FSLIC fund. I think both of those contribute
strotii^y to this problem.

Mr.PBiCE-OK.

Mr. Gray. I have a note from staff that this was a statistical
study as such. It compared FDIC statistics to the FSLIC for a 5-
year period, and on that basis we found that the cost in 1985 was
at least $4 billion more.

Mr. Peicb. That is unng FDIC figures as a base point, for point
of comparison?

Mr. Gray. Well. both.

Mr. Price. Iliankyou, Mr. Chairman.

The Chairman. Iiie committee will be in recess for 15 minutes,
at which time we will return and call upon Mr. Wylie. We will go
until 5 to 1, at which time we will break for lunch to 2 o'clock.

mecess.]

The Chaibican. The committee will come to order.

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428

WUl you shut that door back there, please.

Mr. Wylie.

Mr. Wylie. Mr. Secretary Gould, my very expressive, articulate
colleague from Iowa a little while ago referred to your plan as just
one step removed from smoke and mirrors. I think the gentleman
from Connecticut early yesterday talked about it as being maybe
some smoke and mirrors, too. I would lilw to have your comment
on that.

I thought it was a pretty good plan when I heard you testiiy
about it last year and I co-sponsored the bill that would put it in
place with the chfiirman at your request. I think you ought to have
an opportunity to comment on it.

Mr. Gould. Well, I appreciate, Mr. Wylie, a cheuice to do that be-
cause I worry that in some of these complicated proposals that are
put forth people often look for sort of pejorative shorthand ways of
characterizing them.

I think that is unfair to our plan.

The Chairman. Excuse me, Mr. Gould, I sm glad to hear that
but read your own testimony as to how you characterize some of
the others.

Mr. Gould. Absolutely, and I think justly bo in their case.

If I may return to our plan.

The Chairman. Wowee, the man has been beatified.

Mr. GrOULD. No, no, what Mr. Leach was getting at is the princi-
ple here that I think you should all consider, and we should be well
aware of. The fact that money is borrowed is not the basis for call-
ing it smoke and mirrors. Let me give you an example. If you are
in Iowa and you want to build a highway and you do not have the
money to build that highway nor do you want to sock the taxpay-
ers with enough money up front to do that, what you do is you go
out and you borrow the money to build the highway and do Uiat by
selling revenue bonds. A well-established pattern of municipal fi-
nance. It has been around a long, long time.

Then you pay those bonds off over time, either by appropriating
money from the tax revenues each year or in many instances by
constructing toll booths and paying the revenues from the toll
booths to pay off the bonds.

The same certainly was true in my home State when I was the
chairman of a number of State agencies having to do with housing,
havii^ to do with hospitals, having to do with college construction,
and all those instances where it was considered to be in the public
good to have institutions created or to have buildings created,
schools, houses, and the money weis not available at the front end.

The way municipal finance works is you go out and borrow it,
and you pay it back over a stream of future revenues. That is what
our plan is and I do not consider that to be smoke and mirrors.
Indeed most of us on a personal basis often have to go on and es-
tablish lines of credit for things we want find we pay it off over
time. Paying off over time to me is not inherently smoke and mir>
rors.

Mr. Wylie. Thank you. I knew you would have an answer and I
think your analc^ is appropriate.

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429

Mr. Gray, Chairman Gray, this question has been conunented on
before but I do have a specific question, and it is rather lengthy but
before I finish you will see where I am comiag from.

Yesterday the question of FSLIC exit fees was raised a number of
times. Mr. Sullivan testifying on behalf of the National Council
stated that the Council supports imposition of a reasonable exit fee
and suggested a formula of 2 plus 2, that is ein exit fee equal to 2
years r^ular deposit insurance premiums plus 2 years of special
assessments.

On page 15 of your testimony vou also call for statutory language
to reaffirm and expand the authority of the FSLIC to impose fair
and reasonable exit fees.

At yesterday's hearing, I believe it was my friend Mr. Neal from
North Carolina who mentioned that in a conversation with you,
you stated that an exit fee equal to 10 years of assessments would
be appropriate emd in fact I understand that such fees have been
impMed.

While I recognize that consideration mayhave to be given to op-
posing some bar from withdrawing from FSLIC to protect the de-
posit base to the success of recapitalization proposfil, do you feel 10
years is reasonable. You alluded to the recent Supreme Court case
m your testimony today. In that case the Federal judge character-
ized the 10-year exit fee imposed on Eagle Saving & Loan which

was acquired by a Merit Trust from my State as extortion. The
Judge further questioned the Bank Board's
such an exit fee.

judge further questioned the Bank Board's authority for imposing

Just what in your opinion is reasonable? Is it 10 years or 2 plus 2
as suggested by the National Council or does it lie somewhere in-
between, and exactly what is your authority under current stetute
for imposing exit fees. You now have the authority to impose a 10-
year exit fee; that would be pretty expansive. I wonder if you need
additional authority?

Mr. Gray. Well, let me start by sayii^C that in my conversation
with Congressman Neal I pointed out that we were envisioning,
hopefully, a kind of recap plcm like the one that the Bank Board
and the Treasury has proposed. We are hoping that it would be
adopted. In order to make sure that the long-term obligation can be
paia for the debt that has been incurred, we have to have some
means by which this can be done, and that basically in our plan is
through the meuntenance of an adequate premium stream to do it.

In several cases we have said if the acquired thrift institution
were to remain in the FSLIC and pay pursutmt to the terms of our
recapitalization plan, or 10 years, and we determined what that
figure is on a present value basis, then that we felt would be at
Irast under the current circumstances appropriate. In fact as we
have gone through the numbers, by coincidence it works out to be
what we believe would be in fact needed to make sure that the
recap plan would be viable. In other words, about 10 years or be-
tween 1.25 and 1.5 percent of deposits of the institution which
would exit would constitute a means by which we could in fact
maintain the viability of this Treasury /Bank Board recap plan.

The numbers, the arithmetic works out that w^.

So in that case I think something in that area would be appropri-
ate. Short of that, I am not sure that investors in the bonds that

,V,t..^.n^lV

430

we are talking about would be interested in acquiring those bonds
unless they can be absolutely assured that there is going to be a
sufHcient stream to be able to deal with the repayment of our debt
obligations.

Mr. Wyue. My time has expired.

The Chairman. Mr. Bamanl.

Mr. Barnard. Excuse me, Mr. Chairman, I wasn't ready.

The Chairman. Oh, you are always ready.

Mr. Barnard. Thank you, Mr. Chairmem.

Mr. Gray, there have been some questions that individual home
loan banks have been overly rigorous and arbitrary in their super-
visory actions, including the closing of certain savings and loans.
For example, in Texas, people are especially concerned over situa-
tions like Vernon Savings and Loan and Independent American
Savings and Loan.

I have two questions. First what does the Bank Board do to moni-
tor these situations?

Mr. Gray. All right, that is the first one. I don't normally talk
about individual institutions and I am not sure you want me to. Do
you want me to talk to

Mr. Barnard. It has been in the press.

Mr. Gray. Well, in both ceises we are talking about severe diffi-
culties eind insolvency and it is severe. In the hundreds of millions
of dollars.

We exercise continuing close oversight over those kinds of insti-
tutions and in some cases of course those kinds of institutions are
placed in management consignment prograims of varying types. I
believe that in one case for more than a year now there has been a
State of Supervisory agent in effect managing the day-to-day oper-
ations of the institution. In the other case a board of directors was
put in place to govern the operations of the other institution.

Mr. Barnard. But do they actually report to the Federal Home
Loan Bank Board in Washington? What kind of monitoring do you
do over these decisions

Mr, Gray. Those are supervisory actions out of the supervisory
staff of the Federal Home Loan Bank of Dallas.

Mr. Barnard. Does the Washington office have any oversight
over those at all?

Mr. Gray. Yes, it certainly does.

Mr. Barnard. Do you concur with the decisions that are made in
the individual home loan banks?

Mr. Gray. If the issues are brought to the board itself, but we
have the Office of Regulatory Policy and Oversight in Washington
working very closely with the supervisory operation at the DaUas
bank.

Mr. Barnard. I don't know whether I got the answer I want or
not, but

Mr. Gray. I would be happy to ti^ to answer more if I could.

Mr. Barnard. I was wondering if you could later provide some-
thing for the record of these kinds of cases, and how that oversight
takes place.

Mr. Gray. All right.

[The information from Mr. Gray regarding referred to cases and
how oversight takes place can be round in the appendix.]

;, V_H_>t.JVH.

431

Mr. Gray. In many cases I would sajr that we institute superviso-
ry agreements to assure that speculative and risky operations are
not permitted.

Mr. Barnard. Do you know of any cases whereby the Washing-
ton office has differed from the re^onal office in a closiiuc of an
institution?

Mr. Gray. The FSLIC would close an institution.

Mr. Barnard. In other words, are there any instances where the
Washington office would take a different position or the FSIJC
would take a diflerent position than the r^onal home loan bank?

Mr. Gray. I could conceive of that but I think generally there is
a good deal of consultation.

Mr. Barnard. I think that we need to probably go into that fur-
ther, but I will do it individually as to how forbearance would work
if we don't have some monitorii^ of the decisions of the regional
banks.

Mr. Gray. Well, we do monitor. The Office of Regulatory PoHct,
Oversight and Supervision does monitor very carefully specifically
for the Bank Board what supervision is doing in any of the bank
districts.

Mr. Barnard. Mr. Gray, I understand that my colleague, Mr.
Vento, is considering an amendment to H.R. 27 that would impose
some kind of a direct investment rule. As you know, you know my
position on that and I made it plain yesterday that I would like the
Home Loan Bank Board to finish its hearings and its study and
that we should deal with the direct investments outside of the H.R.
27 l^islation.

Mr. Gray especially, would you believe it premature for Congress
to l^islate such a rule in H.R. 27 before the hearings of the Home
Loan Bank Board have been held?

Mr. Gray. Well, the hearings will be held very shortly. The deci-
sion of the Bank Board to be made will come lat«r.

Mr. Barnard. But I am hoping this bill will be passed a long
time before then.

Mr. Gray. Well, let me be very frank and candid with you. 1
would like to see the regulatory flexibility of the Federal Home
Loan Bank Board in dealing with this issue maintained. I believe
that placii^ things in statute takes away from that flexibility.
However, if the Bank Board were to fail to extend that regulation
which I feel is already too weak in any event

Mr. Barnard. That is not my question, Mr. Gray. My question is
we are expecting to bring this bill to the floor of the House and I
am sure the Chairmfm concurs in that, within the next few days,
as soon as we can have general, a meeting next week and have uie
markup. That means it is going to be on the floor of ihe House
very shortly.

"me question 1 am saying is, would you agree that we should
wait and not involve direct investment rules with this l^islation
until the Home Loan Board acts?

I^e Chairman. Let me interrupt to get the time certain here.
The markup I think in full committee occurs on February 10. That
being the case, I don't anticipate that we would be on the ffoor
until sometime after the recess.

Mr. Barnard. Still that will be long before

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432

The Chairman. Which would be approximately February 18th or
the following week. I don't want the press to wnte any stories that
we will be on the floor 7 days from now. We really don't know
when we will be on the floor, but it will be subsequent to our re-
turning from the Washington/Lincoln Day recess. I don't know
when the board meets again.

Mr. Barnard. I am sure that will be before the Home Loan Bank
Board reaches a decision on this bill. You and I both know what
Mr. Proxmire in the Senate, he offered a closing of the nonbank
bank loophole but he also put a direct investment rule in it. Now, I
just don t — I want to know how do you as chairman of the Home
Loan Bank Board feel about us acting before the Home Loan Bank
acts?

Mr. Gray. I have to come back again and say that in my humble
opinion if there is any chEince that we will not continue that r^^-
latory process, einy chance, then I think it should be included in
statute. I think Congressman, it is absolutely necessary, it serves as
a symbol of the resolve and commitment of the Federal Home Loan
Bank Board to do its part to make recapitalization worth doing, not
only the direct investment regulation but the others.

Mr. Barnard. Mr. Chairman, if the three-member board of the
Home Loan Bank cannot at this point without the hearings and
discussions reach a decision, how do you expect a 52-man commit-
tee without any hearings to feiirly address this subject of direct in-
vestment? So the question I am asking you, and I guess I am not
going to get the answer, is do you favor us including an amend-
ment in uiis bill, H.R. 27, to address direct investments? That is
the H.R. 27 bill.

Mr. Gray. Yes, I would. Let me tell you what I would do. I would
say that an attempt should be included which would go out of ex-
istence at such time as the Federal Home Loan Bank Board adopt-
ed such a regulation.

Mr. Barnard. In other words, what you cannot do you want Con-
gress to do?

Mr. Gray. I

Mr. Barnard. In other words, if the r^ulatory authorities are
not capable of regulating in the area of the savings and loans, you
want us to put it into the law?

Mr. Gray. That is right.

Mr. Barnard. Well, I will tell you what, if it was — if it comes up
it is going to defeat this bill. I guarantee you that.

Mr. Gray. Then if we don't even have the will or resolve to deal
with simple things like this, I cannot put my

Mr. Barnard. It is not simple.

Mr. Gray. You cannot put the recapitalization bill in.

Mr. Barnard. It is not simple if the Board cannot reach a deci-
sion.

The Chairman. The time of the gentleman has expired.

Mr. Gould.

Mr. Gould. Yes, sir.

The Chairman. Let's simplify this thing. The Home Loan Bank
Board voted. We are going into a time capsule, we are projecting
ourselves into the future, and 2 new members of the Board said nix
on direct investment rules. So the Congress, we the Congress, are

, \^n_>t_j»^iv

now having hearingB, and my question to Secretary Gould is where
does Treasury stand on the direct investment r^ulation that now
is in existence and is up for essential

Mr. Gould. AU right, sir.

I think we have to give you a partially hedged answer on the
basis that we, too, would like to benefit from whatever tlie public
hearings produce. We would like to see how the industry looks at
this and we would also like to see what the deliberations are of
academics, and their arguments on

The CHAnufAN. Secretary Gould, are you telling me that a man
as brilliant as yourself doesn't know the industry has already
taken a position on this? They are not in total agreement. They
never will be. Let me ask that 25-year experience Wall Street — I
am trying to think of a wonderful word to describe it — avatar.

Mr. Gould. Sir?

The Chairman. Avatar of Wall Street for 25 years, let me ask.
you, Secretary Gould, to take off this hat as Secretary and just tie a
man of much experience. Now you are testiiying of and on your
own on the direct investment rule. You have looked into this and
you have heard Chairman Gray's ar^mente in this area. You have
looked at the situation in the S&L industry. What is your opinion
on the direct investment rule?

Mr. Gould. All right, sir, I think those are worthwhile ground
rules. One of the things I have learned from 25 years of experience
in Wall Street is to t^ to learn as much about a subject before I
do, before I have to make an important decision. So I would go
back to saying that I would like to have the benefit of the public
hearings, and I would like to have the benefit of the deliberations
of the Board, and it is not a subject that I have followed that close-
ly in the past.

Having said all of that on a personal hasis, Mr. Chairman, I
would say that I think there is an, as best I understand the issues,
there is room for some regulatory discretion on the following basis
and that is if you grant people a series of powers broadly as a regu-
lation passed by the Board applies broadly to the industry, maybe
it is modified by the amount of capital ein institution has but basi-
cally it is a broad twulation, some people handle those powers
better than others, and that is where I think some regulatory dis-
cretion comes into the picture, that there ought to be a point at
which someone says you have been doing a good job, I will let you
go a little further; or you haven't been doing a good job, I think we
ought to have a hiatus.

But as to what that level is, or how much capital and so forth,
we don't know. It hasn't been something that we have been in-
volved in to the degree at the Board find I am sincerely anxious to
see what arguments are brought forth at those public hearings.

The Chairmam. Thank you.

Mr. Gray. Let me just add that the hearing comes up next week.

The Chairhan. How am I on time?

Secretary Gould, essentially the insurance on FSLIC and FDIC is
about the same over the years when you consider the rebate.

Mr. Gould. The rate, sir?

The Chairman. The rate, the insurance

Mr. Gouu). The regular premium of both is Vi e.

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434

The Chairman. That is what it is boiled down to, however, the
premium has gone up on commercials in the recent year or two be-
cause the rebate has not been there. Thw have eliminated the
rebate. So it has gone up to %, has it not? No?

Mr. Gray. No.

The Chairman. No.

Mr. Gould. The FDIC or

The Chairman. I am talking about FDIC.

Mr. Gould. Not to my knowledge.

The Chairman. It is at V^. I thoi^ht I heard a couple of our
bankers complaining they were not getting the rebate.

Mr. Gould. My understanding

The Chairman. OK

Mr. Gould. Is that the FDIC until the last couple years has run
at a proHt.

The Chairman. What has the rate been?

Mr. Gould. One/twelfth.

The Chairman. And beyond the Via they had a rebate? Your
staff is saying yes, behind you.

Mr. Gould. Let me try to answer. To the extent that the FDIC
runs each year at a profit, there is a rebate to the industry.

The Churman. Absolutely.

Mr. Gould. That has not occurred in the last two years. So the
effective amount has gone up because there has been no rebate, but
still it is only Vis in total.

The Chairman. So it has ^one up to Viz. It was less than that.
As you know the FSLIC rate is Via.

^lr. Gould. Yes, sir.

The Chairman. That is set by statute.

Mr. Gould. Right.

The Chairman. Now, when did the Treasury recommend to this
committee or to the Senate Banking Committee that we increase
the rate, the FSLIC insurance premium?

Mr. Gould. You say did we?

The Chairman. When did you?

Mr. Gould. I am not sure we ever did. I believe that the Bank
Board put on a special %, I do not believe the Treasury was in-
volved in that in any way.

The Chairman. You see I am looking at your testimony, you
stated that they had not been — this insurance premium was too
low, correct?

Mr. Gould. Too low historically.

The Chairman. Yes. And I am wondering how come Treasury
can say that now because of what happened when interest rates
stmied to jump way up.

Mr. Gould. Yes.

The Chairman. Back in the late 19708.

Mr. Gould. That is a retrospective judgment, yes.

The Chairman. Correct. In that intenm period, I am wondering
how in view of your testimony today, how come we haven't re-
ceived any request from Treasury to increase that premium?

Mr. Gould. Well, I suppose there are a number of answers. One,
the special premium did ^o on in 1985 at the discretion of tiie Bank
Board and I believe that is when the Bank Board, the independent

;, \^H_>t_J»^lV

435

r^ulator who oversees such things, felt that the problem was be-
coming of a nature that requirod that. Prior to the last few years
most of the perception of the problems in the early 19808, for exam-
ple, were that of interest rate differentials and that the nu^orprc^
lem of the S&Ls would be cured if interest rates went down. Iiiere-
fore, did not call for a special assessment.

Indeed the interest rates did go down, they went down even more
substantially than people might have thought, and the special as-
sessment was not needed for that. However, what began to be seen
as the 1980s proceeded was that there were quality problems out
^ere that required more money than had been perceived before. I
think when that perception became sustainable, the additional spe-
cial assessment was imposed.

The Chairman. Thank you.

Now I call on — looking at the time of arrivals — Mr. Saxton.

Mr. Saxton. Thank you, Mr. Chairman.

I just would like to revisit so that as you said, Mr. Gould, you
like to know what it is that you are makmg decisions on and so do
we.

Mr. Gould. All right, sir.

Mr. Saxton. As much information as we can get is certainly
helpful. So I want to revisit what our vice-chairman, Mr. WyUe,
had brought up shortly after we returned with regard to the fi-
nancing- mechanism which is certainly considered by me at least to
being the key to making this entire program operable.

My understanding of that is — ana I am going to recite for just a
moment what my understanding is so that you can correct any of it
if it is incorrect — that you would form a new financing corporation
which would receive funding up to $S billion from various Home
Loan Board banks from the 12 districts across the country.

Mr. Gould. Yes.

Mr. Saxton. And that money would be used, $2.2 billion of it, to
issue long-term bonds which, on which the interest would not be
due £ind payable until

Mr. Gould. No, sir, that is indeed the aspect of the U.S. League's
plan.

What we do with the $3 billion which is taken down gradually
over several years because the Home Loem banks don't have an
eeimingB surplus of $3 billion at the moment, but we take it as it is
coming in over several years. We then of the $3 billion, take $2.2
billion and buy, not sell, buy, all probability U.S. Government zero-
coupon bonds, of which there is a well-established market out
there, and we say those bonds at maturity will pay the principal of
Uie bonds that we will issue to the public to reuse the money.

So what we have done with the $2.2 of the $3 billion is to guaran-
tee the repayment of bonds that the financing entity then sells,
r^ular bonds with coupons that pay interest yearly.

Tlie interest on those bonds we sell will be paid under our as-
sumptions by in essence the diversion of part of the assessment and
premium fees of FSLIC, only to the extent necessary to pay the in-
terest.

So if you buy one of our bonds you have from day 1 a govern-
ment piece of paper backing it that says at maturity you wUl get
all of your principal back.

,V,t..^.n^lV

436

Mr. Saxton. Excuse me but you are getting ahead of me.

Mr. Gould. But we are not Belling zeros, we are buying them.

Mr. Saxton. I appreciate that and I am not qu^ioning what
you are proposing to do. I £un only trying to understand it.

Mr. Gould. Sony, go ahead, air.

Mr. Saxton. You are going to in effect lend $2.2 billion over a
period of time.

Mr. Gouu). No, sir. We don't lend it, sir, we use it to back up the
principal value of the bonds we sell.

Mr. Saxton. I Eim having a hard time understanding what it is
you are going to do with the $2.2 billion.

Mr. Gould. Are vou familiar with the — this is relatively new. It
all has to do with the magic of compound interest.

Mr. Saxton. I have no problem with

Mr. Gould. $2.2 billion after 30 years compounding at roughly
today's interest rates will produce $15 billion, so we invest the $2.2
billion Emd invest in government bonds which at maturity will be
equal to $15 billion. I^at is the same $15 billion that we borrow in
the public market and we use it to back up these bonds so they
really have a good credit. So we invest that, sir, not lend it.

Mr. Saxton. You got me to that step, I understand that, and that
will pay the principal on the bonds at the end of a 30-year period
roughly.

Mr. Gould. Yes.

Mr. Saxton. The only question left to be answered is how we pay
the interest.

Mr. Gould. The interest is repaid — the interest is paid every
year bv a portion of the regular assessment. Via of 1 percent a year
leveled by FSLIC on the industry. A portion of the special assess-
ment which is five-phased down to zero in our plan over 5 years;
and that is an adequate stream of future earnings to pay the inter-
est on these bonds.

Now, there are always in these things certain assumptions, as-
sumptions as to the deposit growth in the industry, there are as-
sumptions as to reinvestment rates, so a set of assumptions out-
lined in some computer runs, that is adequate money to pay the
interest over the year and in the earUer years to produce money
left over after you pay the interest.

Mr. Gray. Let me add there will also be a certain amount
coming from FSLIC investment income and also from the realiza-
tion of the disposition of assets. So in toto

Mr. Gould. But that remains in the FSLIC, not in the financii^f
mechanism.

Mr. Gray. Right.

Mr. Saxton. So we might say the toll booth that you referred to
in Mr. Wylie's question is in this case the ¥12 percent.

Mr. Gould. Yes, but idso a portion of the Vs which is now in fiill
effect and which under our plan phases out of existence over the
next 5 years.

Mr. Saxton. Did you leave yourself latitude to raise the total up
tothe %?

Mr. Gould. Yes, sir, we did. We said this is— this is really be-
cause of the industry concern about this amoimt of special assess-
ment wA have said the special assessment phases down but if it is

; \^H_>V>»^1V

437

necassary to reimpose it in order to bolster what is available to pay
the interest or other emergencies, the Beuik Board at its discretion
can reenforce it.

Mr. Gray. We have another cushion, that is $800 million in the
surplus of the reserves of the banks which could also be used if nec-
essary.

Mr. Saxton. I thank you very much.

The Chairman. Mr. Kennedy.

Mr. Kennedy. Thank you, sir.

Just following up on that question

The Chairman. Let's make sure your microphone is turned on.

Mr. Kennedy. I Eim sorry. Thank you.

In following up on that line of questioning, it just seems that — I
don't question your ability to sell $2.2 billion, to provide $2.2 billion
which is going to gain you $15 billion, but it seems to me that that
is just a clos^ loop. What you said earlier as I understand it was
that FSLIC currently cannot make it using Vi 2 of 1 percent of its
institutions' total deposits in order to make payments, which is
why it is in deficit.

So, therefore, if you draw down the $15 billion to pay off the
banks that are in trouble, then how do you — goes back to the
Chairman's earlier question — how will you attract anybody to buy
these bonds?

Mr. Gould. Well, let me try it if I may from a different point of
view and perhaps, and I would be very happy to do this, I know
this is somewhat new to you, compared to people who have been
working on this since leist year.

Mr. Kennedy. It is probably a silly question, sorry.

Mr. Gould. No, I appreciate questions that are confusing people's
minds. I would be happy to furnish you our computer runs because
it is a little easier to do working from hard copy. But the premise
that really underlies all of this is there is an existing problem of
FSLIC wluch is greater than any reasonable aimount of assessment
could handle when necessary. So you have to go borrow money to
take care of the problems of the past.

Now, how do we borrow money that really gives people a strong
sense that they are going to get it back and doesn't involve the
Federal Government? Well, we nicely have over here a bank
system that will contribute $3 billion of their earned surplus and
we invest $2.2 billion of that into bonds which will mature com-
pounding with interest over 30 years, will be the $15 bUIion we
borrow. So we say to people, your principal, if you buy our bonds
we guarantee you based on these underlying U.S. Government zero
coupons that you will get your principal back.

So you say, fine, but what about my interest? We say, the way
this program is designed there will be plenty of room to pay the
interest on those bonds out of the regiUar assessments on the in-
dustry as they have been in the past.

Mr. Kennedy. But you get two people that have their hemds on
the $15 billion, right? You ^et the $15 billion you will be using

Mr. Gould. The $15 billion you borrow from the public is paid
back by investing $2.2. Monies advanced to FSLIC, FSLIC never
has to pay the financing company money back.

i by Google

Mr. ICennedy. The $15 billion will be used to bEul out the banks,
isn't that correct?

Mr. Gould. It will be used to resolve them.

Mr. Kennedy. Sorry, whatever word you want to use. So you will
use the $15 billion to resolve the banks' problems, then now are
you going to also assure that the person that is willing to put up
the cash, that he too will be paid back?

Mr. Gould. By investment of the $2.2 billion contribution of the
Home Loan Bank System compoundeid over 30 years.

Mr. Gray. Congressman, what happens is that leveraged $2.2 bil-
lion in effect goes into a trust fund emd that remfiins untouched
during the life of the bond and at the end you have $15 billion be-
cause of the compounding effect of the zero coupon bond. So that
pays, that redeems the bonds after the 30-year period.

Mr. Gould. It is very much like our Savings Bond Prograia.

Mr. Kennedy. The only one thing I don't understand, and then I
will yield or my 5 minutes will be up. The point is you got two
people getting their fingers into the $15 billion. You have the
bemKs in it and you have to still pay back the $15 billion.

Mr. Gould. $2.2 billion is a contribution. They give it to us. We
are able to invest it because somebody has given us money to
invest and we don't have to pay back which is what the Home
Loan Bsmk Board System is in essence doing. That takes care of
the bondholders, all right? It pays off the principal.

So that enables you to take the money you borrowed and you are
saying this investment will pay the bondholders off in 30 years,
therefore the money I borrowed I can use to resolve the bernks.

I would be delighted — it is easier if I can show you hard copy. It
is hard to explain and I would be delighted to do that personally,
sir.

The Chairman. The time of the gentleman has expired. As the
Chair stoted earlier, we have gone beyond the time that we origi-
nally stated, but we are goii^ to have a luncheon break so we
cannot overtax the stamina of our two delightful witnesses, and we
will come back rather than 2 o'clock since we have gone over, we
will come back at 2:15. We stand in recess until 2:15.

[Whereupon, at 1 p.m., the committee was recessed, to reconvene
at 2:15 p.m., the saune day.]

AFTERNOON SESSION

The Chairman. The committee will come to order.

The Chair would observe hopefully everybody in the audience
has brought their sleeping bags and what is it they eat, that dried
beef.

Mr. Gonzalez. Beef jerky and things like that. I have some in
the office.

The Chairman. The committee will come to order.

The Chair recognizes Chairman Gonzalez.

Mr. Gonzalez. Thank you, Mr. Chairman, and I also want to
themk the two very distinguished witnesses that have taken their
time and have cooperated. I want to compliment ^ou particularly
for very effective hearings in a very, very expeditious tmd timely
way, because as you and I know, everyone else knows we are
having a crisis out there. I did have some specific questions from I
f could say my special viewpoint on bousing and I wrote

out a Bpeciiic question, I am going to stick to it, that I would direct
to Mr. Gray.

Yesterday, we heard from the industry most directly involved,
who have worked I am sure very hard to try to figure out the best
way to resolve a dilemma. But, if we recapitalize the FSLIC, and if
your regulatory fictions keep the industry from disaster, would
housing finance be any better off since it is — and also are clearly
movement away from housing flnance as their main reason for ex-
istence, would homebuyers be any better off if the industry returns
to health or should Congress be thinking in terms of going whole
h(K and homogenizing banks with S&La because it seems to me,
and this is just a little side barrack, as things now stand, maybe
such a meiger would not make much difTerence insofar as housing
loans and financing are concerned. So actually, that breaks down
into an about two-three different questions, the first if you do suc-
ceed, what if any will be the benefit to the housing finance frame-
work reference of things.

Then, since S&Ls are clearly moving away from housing finemce,
Eifler all they were created for this purpose, no nation in the world
that has set forth on a national commitment to provide housing for
all its citizens, has ever failed to set up the financial mechanism or
the freimework of financial reference, and this country did beauti-
fully, their leader of our Nation at that time were great leaders
and S&Ls were founded for that very specific purpose they were
given to the complaint of the banks special privileges, but only be-
cause they were going to be the financial reason for the building at
affordable prices and the availability of those houses to the Ameri-
can family at affordable rate, and I know that so many things have
happened that have impacted especially on us internally, that per-
haps it was inevitable but seems to me that this from our stand-
point is a big issue, otherwise, then what we are doing here is just
providing money so that we can enable the S&Ls to survive in a
homogenized financial institutional struggle, and it would be tough
in my opinion. So I got that off my chest.

Mr. Gray. Congressman Gon^ez, as I have indicated in my
written statement, in my opinion going back through the long-
standing body of law, the principal purpose of the savings institu-
tions system is primarily to support housing finance and home
ownership opportunities for Americans, and indeed many of our
healthiest institutions Eire doing just that, in fact, many of our
most profitable institutions have OEisically stuck to their knitting
and they are achieving great profitability because they are engag-
ing in the kind of business that they know best!

Let me say that at the end of 1986, savings institutions in this
country held in their portfolios more than half of the residential
mortgage debt outstanding in this country for nearly three quar-
ters of a trillion dollars. Thirty percent of the Nation's mortgage-
tocked securities were not hem oy private investors or insurance
conipanies, or pension funds, but by thrifts. That is to the tune of
$156 billion at the end of 1986. During that 1986, savings and loans
originated half of the home mortgages in the country compared to
only 19 percent by commercial banks. It is my belief that the re-
capitalization of I^LIC will have a very salutatory effect in that by
restoring confidence the cost of money to operate for these institu-

; \^H_>t_J»^lV

440

tions, wilt be lessened. As a result I think that that may well re-
flect on rates for mortgages find in addition to that, the confidence
that people will have to a greater extent in our ayeteni will in over-
all sense benefit us greatly in that r^ard.

But I think were a mei^er to occur, there would be very definite
pressures to move away from the primary thrust all of these areas,
it is the intent of Congress that savings institutions, primarily do
this, £18 justification for a separate system. So I think in the whole
maintaining a separate system that is hefdthy, that has the regula-
tory discipline to keep it heitlthy, that heis the public perception of
a Btroi^ system, is certainly in the best interests of home owner-
ship owortunities in this country.

Mr. Gonzalez. I thank you very much, Mr. ChEurman. My time
has expired and I will just wEut so that I don't deprive somebody
else, but I do have three questions that have been requested that I
propound to Mr. Gray, mostly emanatii^; from the industry in
Texas and so I will defer.

The Chairman. Mr. Bartlett.

Mr. Bartlett. Thank you, Mr. Chfurman.

Mr. Gray, Chairman Gray and Secretary Gould, you presented
very good testimony for us today and clearly a well-thought out
plan. I want to ask you about an element I don't believe is in the
plan at this point, but I get your sense as to whether it ought to be
included. That is, in the area of amortization of loan losses as op-
posed to the immediate realization of Io£m losses.

Chairman Gray, you said eloquently on page 2, you have said it
elsewhere, that Uie Bank Board is exercising appropriate forbear-
ance, as you can, and so, in that context I want to inquire as to are
there, it seems to me there are some opportunities to give you some
Eidditional tools for forbearance when you are willing find eager to
provide forbeeirEuice, but in fact you don't have the r^ulatory
tools.

Would the tools you think that it would be in order to provide a
r^ulatory tool to provide for an amortization of loan losses similar
to FASB 15 by FDIC to amortize over a multi-year period of time
those losses that are recc^nized in the current year, to give you the
tools for forbearance as opposed to simply the willingness?

Mr. Gray. Well, the use of FASB 15 is available to any savings
institution in this country already to restructure its lozins in any
event.

Mr. Bartlett. For commercial real estate loans?

Mr. Gray. Yes, it is already available to institutions. Obviousty,
FASB 15 doesn't operate as a restructurit^ device if the loan is not
going to be collectable. But, that is alrea^ available and is being
used.

Mr. Bartlett. Chairman Gray, when an institution under the
classification of assets regulator has a loan loss or a loan that ia
declared to be substandard or otherwise classified, does that insti-
tution then, that loss ^o against the net worth in that area, or is it
amortized over a multi-yeeu* period of time?

Mr. Gray. Under FASB 15 it is my understanding that there is
not a write-down involved.

Mr. Bartlett. How about under today's current practicee?

; V^H-Jt-f'^lV

441

Mr. Gray. Under today's current practices there is not a write-
down involved unless a oetermiDation is made that the loan is not
going to be collectable. And in the whole scheme of classification of
assets which we adopted in order to try to make progress to bring
ours closer to commercial banking practices, I think in large peirt
our practices are very similar to theirs. I can get more specific on
this in this hearing if you wish, or I can talk to you at later time
about some of the specUlc aspects of classification, but, we the staff
had a meeting yesterday with the staff of the FDIC, and while
there are some slight differences the thrust of the difference is
very minimal. Let me say this. In the case of the commercial bank-
ing regulators, if an institution becomes insolvent, that institution
is immediately put out of business. We have many institutions in
our industry that are operating with substantial amounts of nega-
tive net worth. I think that frankly we are providing ein incredible
amount of forbeareince in our practices, we are looking carefully at
the quality of management of these institutions, we want to see
them, it is in our interest to see them have the chance to turn
around and in the case where that is true, we continue to exercise
forbearance.

It is those cases where you have a terminally ill institution that
frankly got into its problems and had its difficult problems before
the price of oil went down. The price of oil in some of these de-
pressed economies has merely exacerbated what weis already for all
practical purposes a terminal case. That is what we really are talk-
ing about here.

Mr. Bartlett. In many areas, there has been a dramatic reduc-
tion of collateral value that is different from institutions, specific of
institutions, that were also very aggressive with all institutions in
areas where real estate prices have declined by 40 or 50 or 100 per-
cent. Then, all institutions then have, if not negative net worth,
close to negative net worth, if their new appraisals were recognized
immediately.

Are there opportunities in this legislation to give you additional
tools to amortize those losses? If not, provide for us instances in
which compilation in the way in which loam losses recognized today
have been amortized over or been allowed to he amortized over a
multi-year period.

Mr. Gray. You mean through FASB-15?

Mr. Bartlett. Whatever the mechanism that you employed. I
hadn't heard of institutions that have been given that opportunity.
But I would like to work with you to find out.

Mr. Gray. Absolutely.

Mr. Bartlett. Further, to work with you on this legislation to
make certain that the legislation which is desperately needed is
used to provide for a way to work out of the problem and not to
precipitate any immediate problems.

Mr. Gray. The difficulty here is we have to be very careiiil that
when you can't work out of the problem, when there is no real way
to work out of a problem, that there is no redemptions in the end,
even if oil prices were to go back to $40 a barrel, particularly given
the substantial operating losses that some of these institutions are
inccurring on a daily basis.

..Google

442

Then you have to say at what point does forbearance serve any
purpose whatsoever if there is no way in the end that this institu-
tion can possibly, even with good management, even with observ-
ance and of sound operating practices, cannot come out of? Then
what do you do?

Mr. Bartlstt. My time has expired, but either a second round or
later time I m^(ht want to pursue this with you.

My question wasn't related to oil prices. It is related to real
estate values.

Mr. Gray. I understand. But one of the reasons for that is the
drop in oil prices in the Southwest. Maybe not the only reason

Tne Chairman. Secretary Gould, drawing upon your expertise,
when you consider the large borrowing you would be loolung for
under this l^islation, if you would share with us your thoughts on
the necessity or non-necessity of an exit fee as far as the market-
ability of the offering is concerned.

Mr. Gould. Well, I consider it to be an add-on. I consider it to be
another piece of reassurance. But, in light of the fact that the spe-
cial assessment which is phased down can be reimptwed at the dis-
cretion of the Bfuik Board, I would see that, if you will, as the first
line of defense against not having adequate flow of funds to cover
the interest payments.

I think the exit fee, to me, fdmost becomes a matter of equity or
fairness, and as I said earlier, that comes from the perspective that
perhaps there was undercharge here in the past and people have
prospered because of their franchise. I look at it as really a matter
of equity that before people sort of abandoned ship and went the
way understandably of their own self-interests, they should pay an
exit fee. It does help the plan because of the contribution of money.

The Chairman. There natursdly is going to be a controversy over
what form the exit fee should take. Under the circumstences.
Treasury has not expressed itself in this area.

I would appreciate a memorandum or statement or position
paper from Treasury on the type of exit fee that they feel would be
fair and equit8i>le.

Mr. Gould. We would be very happy to do that, Mr. Chairmtm.
In fact, we have been working with the Bank Board actively in the
past week. If I recall, there is a cushion built into our plan, so you
can survive some deterioration of membership in this industry
without impinging upon our plan. Bevond that, we have worked on
levels of exit fee which would be or the category of sort of hold
hannless people; people could leave and you woulim't care.

At the same time, we don't want the fee to be fungible, equiva-
lent of forbidding somebody to leave. We would be very hapi^ to
share our work, and the Baiik Board, with you.

[The Treasurys' statement on exit fees can be found in the ap-
pendixj

The Chairman. Thank you.

Mr. Wylie.

Mr. Wylie. Thank you, Mr. Chairman.

I would like to follow up on that. I asked Chairman Gray earlier
this morning about the exit fee, and speciflcally referred to the
Florida case, the Bamett case, which you referred to in your testi-
mony; and to ask, if I may, your authority to impose the exit fee.

,Vnt.,^.n^lV

443

The judge in that case questioned whether the Board had the au-
thority to impose a 10-year exit fee, which is what you did there.
Whether you think he is right — or I am sure you are going to
appeal the case — or whether your statutory authority is limited to
a fee equal to 2 years, as he put it, plus two regular deposit insur-
ance premiums.

Could you comment on that and tell me what exactly you think
the Federal Home Loan Bank Board authority is on that? And I
think it is pertinent, to the question of Chairman St Germain as to
what kind of exit fee should be imposed, whether you have the
present statutory authority. I am asking whatever exit fee you
think is necessary, is as good a way to put it eis I know how.

Mr. Gray. Well, on the basis of our studies to try to keep this
plan that we have proposed viable, we believe that the two-plus-two
is insufficient. You are talking about two regular premiums and
two speciftl assessment premitmis is insufficient to maintain the vi-
ability of it, particularly if this were to become more of a problem
over time. And, of course, we have a long-term recapitaliza^on pro-
gram.

I am not sure we know everything today that could or might
happen out into the future, but we have to take into account if we
are going to be able to obligate to this long-term plan, what could
happen, especially if we want our bonds to be marketable, because
they will be looking at that very carefully.

I was given a note here by the general counsel which I am not
sure I can read. He probably couldn't read my writing, either. But
it says we believe the Board has clear authority to charge an exit
fee equal to twice the most recent annual premium, including spe-
cial assessment. Our authority to charge more than that is prob-
lematical, and it probably doesn't make too much sense to say
more about that because we are in litigation on that issue. As you
know, that is the Bamett Bank case.

But, we obviously, as I am suggesting, would like the Congress to
give us the authority that we believe we need to charge an exit fee
agEiin sufficient to preserve the viability of the recapitalization
plan. That is all we are talking about.

If the Congress cemie to us tomorrow and said we are going to
give you $25 billion — not that I am in favor of that — if Uie Con-
gress were to provide an appropriation to recapitalize the fund,
then this wouldn't be at issue at all.

Mr. Wylik. You have answered my question.

You think you do have the authority to impose a fee equal to 2
years the insurance premiums, plus 2 years regular deposit. And
you have said that you think it is problematical whether you have
the authority to impose the 10-year exit fee, which is the issue in
the Bamett case.

The Chairman has asked Mr. Gould to suggest what he thinks is
an appropriate exit fee for purposes of this legislation.

Secretary Gould, on page 8, you urge Congress and the regulators
to accommodate now acquirers of insolvent thrifts, and I think you
accurately note that such action would reduce FSLIC's cost wlule,
at tiie same time, bringing in important new sources of capital.

; \^H_>t_f»^lV

444

Does Congress really need to act on this? Doesn't the Bank Board
already have the authority to sell a troubled thrift to virtually
anyone it weints to?

Mr. Gould. It is my understanding that the Bank Board has
rather broad discretion in determining who can be the buyer of a
thrift. My personal observation, which is true of the Bfmk Board
and true of the Federal Reserve and otherwise, is very often inde-
pendent regulators look to a sense of Congress as to perhaps how
broad a definition of that should be. So that my impression is that,
yes, the discretion is quite wide; but that we would appreciate some
feeling from Congress to the extent that Congress felt was feasible.

Mr. Wylie. So you think we probably ought to extend Gam-St
Germain and get on that and pass your regulators bill to help in
this regard?

Mr. Gould. Yes, sir. I said in my testimony we support the re^-
lators bill. But I think it is probably when it comes to the specific
of how subsequent State action has preempted the need for Federal
action, I can't speak to that personally, but the r^ulators certainly
are able to do so.

Mr. Wylik. Garn-St Germain, I think, applies in the case of
failed thrift institutions. I think their present authority extends
even beyond that whether we find a troubled institution situation.
And you agree with that.

My time has expired again. Thank you very much.

Mr. Gray. Yes, I agree with that.

Mr. WoRTLEY. Thank you, Mr. Chairman.

Chfiirman Gray, I support the recapitalization of FSLIC. But let
me ask you, what is the fallback plan in the event this does not
pass the Congress?

Mr. Gray. Let me — I don't know whether I can answer that in
certainly a way that I would like. If we do not recapitalize the
FSLIC and things get worse, and in not very long a period of time
much worse — so if you are talking about a fallback plan, in our
case we have been in that the only fallback plan available since we
don't have the money, we can't even resolve cases. We are now in
the fallback plan.

Mr. WoRTLEY. Mr. Secretary Gould, under what circumstancee
would you support a merger of the insurance funds.

Mr. Gouij). Well, I have tried to define in my prior testimony
what sort of flesh-out, if you will, what the merger of the funds en-
tails by

Mr. WoRTLEY. In other words, if this recapitalization pn^ram
does not fiy by the Congress, Chairman Gray.

Mr. Gould. I have said that the Treasury priorities are simple.
They have a three tiered approach to this.

The first is Federal Savings and Loan Insurance Corporation
recap, which is a function of self-help by the industry — no taxpay-
ers involvement.

Failing that, our next priority was the concept of merging the
funds, but in our concept of merging the funds, there would still be
the necessity to raise money to solve Federal Savings and Loan In-
surance Corporation's problems because we did not mean by the
concept of merging the funds that we comii^fle the $18 or $19 bil-

, \^n_>t_j»^iv

446

lion of the Federal D^ioat Insurance Corporation with the prob-
lems of the thrift; industiy.

So it depends a little bit, air, on how you define merging. Ours
required two separate funds and a differentiation of assessment
that was our second priority.

Our third priority, and only in the case of ssrstemic problems for
the depositors in the thrift institutions, did we say that we would
favor appropriating taxpayer monev. I would say rarentheticallv
here that the Federal Savings and Loan Insurance Corporation al-
ready has the $750 million tine to the Treasury, but that is the
limit of it and in this game, I fear that is a drop in the bucket.

Mr. WoRTUT. I wouldf hope we would not have to go that route.

Mr. Gould. Yes sir.

Mr. WoRTLEY. Chairman Gray, the other day the American
Banker reported that the San Francisco Federal Home Loan Bank
was refusing to accept Federal Saving and Loan Insurance Con>o-
ration guarantees. Could this ext^md further than the San Francis-
co Iwnk? Do you anticipate anything like this happening?

Mr. Gray. I am not sure that is me case, that the Seui Francisco
Bank

Mr. WoETLEY. The American Banker was wrong?

Mr. Gray. I understand, I would merely say this. Every board of
directors of every Federal loein bank has a fiduciary responsibiUty
to that Federal loan bank and when advances are requested and
the initiative does come from the Federal home loan bank itself,
not from Federal Savings and Loeui Insurants Corporation, to deal
with a liquidity problem in a very troubled institution, then thej'
will say we will make a loan to that institution to maintain its li-
quidity, but the Federal Savings and Loan Insurance Corporation
must guarantee it.

Now we have day one, we have $3.6 billion in advances which
are guaranteed by the Federal Savings and Loan Insurance Corpo-
ration outstanding about $1.6 billion of that $3.6 billion is collatei^
alized in one way or another. That leaves $2 billion that is uncolla-
teralized and the Federal Savings and Loan Insurance Corporation
reserves of the Federal Savings and Loan Insurance Coiiwration
serve as the only security whatsoever for paying back that borrow-
ing.

And we also, I might note, only have $1.9 billion in the primary
reserve of the fund, but this is not the end of the story, we have, as
I understand it, pending requests for guaranteed advances. Federal
Savings and Loan Insurance Corporation guaranteed advemcea
fbom Uie Federal home loan banks of $2 billion, and that indicates
probably less than a half of that $2 billion would have an^ collateiv
al whatsoever. So we could soon be in a position of having $3 bil-
lion in advances guaranteed without any collateral or more and
the Federal &ivings and Loan Insurance Corporation, of course,
simply does not have the security to back that up in a very practi-
cal sense.

So it is a severe problem and one can understand why those who
govern the Federal home loan banks with their particular fiduciary
responsibility may well be very reluctant, very understanding they
would come to us after a period of time for more advances that are

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67-884 0-87-15

446

not really guaranteed at all because there aren't the fUnda to guar-
antee them. So it becomes fiction.

Mr. WoBTLEY. There has been trouble out there and I appreciate
the Chairman holding this hearing and getting this legislation
moving forward. We better move witn dispatch.

My time has expired.

The Chairuan. Mr. Gonzalez.

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

I have these three speoiic questions:

How much of the loss experienced by Federal Savings and Loan
Insurance Corporation insured institutions in third quarter of 1986
are a result of the write-down of assets required by R. 41?

Mr. Gbay. I will have to respond very specjficdly for the record
because I don't have those iigures.

Mr. GoNZALBZ. All right, I would appreciate that.

^t the present time the information referred to from the Feder-
al Home Loan Bank Board is not available.]

Mr. Gonzalez. The second one is, I understand that many insti-
tutions are having problems with the asset write-downs mandated
by R. 41 standards, as applied to problem loans. Have you consid-
ered using a different standards, as applied to problem loans. Have
you considered using a different standard for problem loans write-
dovms while retaimng the fiill protection of strict appraisals for
new loans.

Mr. Gray. That is always a continuing process, Congressman, but
with respect to I believe some comments to Congressman Bartlett, I
have talked about the forbearemce that we are exercising on a con-
tinual basis, particularly in the southwest, which we intend to con-
tinue to do.

Mr. Gonzalez. All right, sir.

The third and final question: The United States league has re-
quested, according to yesterday's testimony from the Bank Board
policy statement, forbearance on capital requirements such as that
or similar to that of the Comptroller's in the case of banks and spe-
cifically as of April 23 last year, have you thought, or have you
issued such a statement, or do you think it likely that you would?

Mr. Gray. Well, we certainly will consider emythmg that is
brought before us. I am one of three members of the BEtnk Board
and I did meet with representatives of the United States League.
They told me that they had a suggested statement we certainly will
take a look at that.

Mr. Gould. I really do implore that you do so. I don't mind
saying that back in my home State of Texas, I am not just speaking
of a handful of institutions that are very, very bitterly feeling that
the Federal Home Loan Bank Board has been red limng Texas, bo
to speak, in considering these very serious problem situations uiat
they confront now.

I have requested specific cases and information and will expect
to be in touch with you the moment that I do have any documenta-
tion.

Mr. G^ay. Let me just say that in that connection, I just cate^(n>
3 idea -■■---•-- - - . -

ically object to the idea that the Federal Home Loan Bank Boexd is
in any way, shape or fbrm red lining Texas. Frankly, that is
absurd. I almost don't even want to dignify the suggestion and you

; VH_>t.f»^lV

are just passing on what you have heard, that we are red lining
Texaa. That is not true at all.

Mr. GoNZALSZ. I yield.

Mr. Gray. We are trying to treat evety State alike.

Mr. GONZALK. I did ask and raised that issue because, as I said,
it wasn't one or two disgruntled or disappointed institutional offi-
cers, but quite a number, emd more than in my own area, and let
me say that I think you know well that I have spoken of my high
r^ard and have felt very— what should I say?

Mr. Gray. Supportive.

Mr. Gonzalez. Well, I mean about the statements. I have been
questioning and I have raised that as an issue, given my relations
since you came aboard and since I have been on this committee,
and it seems as if on two occasions — one of them in Dallas, TX of
all places. Dallas has the other part of Texas — no affront to my col-
league from Big D. I am from San Antonio, and that is a sort of
free State of Bear Countv, find almost turned out to be flghting
words. One fellow said, who are you representing, Texas or North-
erners, and I said, no, he is not, he is from California. He is a west-
erner, am I right?

Mr. Gray. I am a westerner, bom Texan. My father was ^m
Texas.

Mr. Gonzalez. That will shock them, and it will help me. I
thought I would raise the issue because this is— in fact I don't mind
saying it led to a discussion with the Attorney General of Texas,
who nas been under considerable pressure m that respect. So
thank you very much, Mr. Chairman, for your generosity. Your
grandfather didn't fight at the Aleimo.

Incidentally, the Alamo is in the middle of my district. When
anybody tries to press me hard on that, I say I have ancestors who
fought on both sides.

Mr. Gray. I just want to say

Mr. Gonzalez. That is literally true. Not specifically at the
Alamo, but my great grandfather was the North Mexico co-leader
against General Santana, and it was after Santana put them down
that he came to Texas. So we were fighting in a way the same
forces.

The Chairiian. Mr. Bartlett.

Mr. Bartutt. Thank you, Mr. Chairman.

I am going to try another pass at the amortization of loan losses
and Chairman Gray, I want to say we have worked together on a
lot of issues and worked quite well, so please I will ask the same
q^uestion of Secretary Gould but please let me try to make the ques-
tion clear find please don't be defensive about the word "forbeai^
ance". I will try to ask the question without using that word if tt
bothersyou.

The Bank Board is exercising in my judgment the Texas, and
Chairman Gonzalez would concur, a great deal of forbearance in
not closing institutions. But my question is that do you believe you
should have the ability which you do not now have, to amortize
loan losses over a multi-year period of time so as not to have this
one set of a hundred percent drop in collateral value on the books,
put a savings and loan with a negative net worth. The Bank Board
- IS not using FASB 15 for a varied of reasona, and it is not lack of

iyV_H_>t.JVH.

448

interest or want to, but you are not using it today because you
CEinnot. It is too clumsy.

So my question is, wiould this committee — would you work with
this committee if this committee could develop a mechanism to am-
ortize those loan losses particularly in circumstances where you
have a hundred percent collateral loan value, so you don't end up
with large negative net worths to add to your problems.

The question is not whether you close the institutions down that
you can save, you are not. The question is, how those loan losses
are placed on the books. Would you work us in constructing a way
to handle that?

Mr. Gkay. I would be delighted to. But let me say if you are talk-
ing about instances where the institution was already beyond re-
demption, if you will, before we begem to have the problems in the
depressed economies, I £un talking about in the last year, would
you agree basically within the last year?

Mr. Bartlett. That is when Uie collapse in collateral values hap-
pened. I am not talking about those institutions, though, Chairman
Gray. In fact, I would suggest we have an objective or quantitative
methodology so the Board is not in the position of choosing good
versus bad guys. I think that is the wrong approach.

I will suggest a way to amortize loan losses that applies to every-
body. Those institutions then that were overly aggressive in direct
investments and that is a euphemism for it, and were already in
trouble before the drop of loan values, they can get their amortiza-
tion of loan losses but it may be of no help because it may be just
too far gone.

But there were many institutions that were not— the loan collat-
eral values have dropped absolutely through the seller. The values
will come back. It is the board's intention and prsictice to not dump
that refil estate on the market and I encourage you to stay to that
practice, but to work that real estate out over, to get it to earning
income over a multi-year period of time, and all we are asking is to
amortize in those losses that you have to realize, amortize over a
period of time so you don't have to show a negative net worth and
give you some extra ability.

Secretary Gould?

Mr. Gould. Well, Coi^ressman Bartlett, I guess I would have
several things to say about it. First of all, we were supportive of
bank r^ulators when they looked at agriculture and energy loans
in terms of forbearance and said indeed tiiey have the toc& to do
it, but did not need l^rislation, but there was a definition of for-
bearance inherent in that which is worth looking at. In fact the
OCC and the FDIC required in order to give forbeiuance on capital,
to ask the institution to come forward with a 5-year business plan
which gave the r^ulators a sense of whether it was really possible
for them to come out of this problem into which they have them-
selves stuck.

In other words, that is a way of defining forbearance as applying
to those people caught in cyclical downturns, in agriculture,
energy, real estate, where there was a reasonable expectation that
a return of an up cycle would straighten out the difEculties and
tiiey were not pieces that no amount of miUennium could ever drag
out of the l»d judgment they had exercised before.

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449

So that WEI8 an important differentiation.

As to this specific case, my understanding of FASB 15 is it is an
existing rule of the Accounting Board, of FASBI. The way FASB 16
functions is it allows you to restructure a loan so you, if you get
back the principal of the loan, however divided between principal,
and interest over the term of that loan, you do not have to write
the loan down. This is a very flexible tool on the books to allow
restructuring of loans to fit uie needs of the borrower in adverse
conditions without it impacting back on the bank in terms of writ-
ing it down.

You might write off 30 percent of the principal, make it up in
interest, vice versa, but it is out there and can be and should be
used when it is awUcable.

As to writing off losses realized or recognized over long periods c^
time, and here I don't wish to pose as an expert because indeed I
am not, but I thought that was already inherent in the rega^tory
accounting by which this industry has largely measured itself. We
have talked about movii^ to Generally Accepted Accounting
Standards as inducing greater public trust smd calling it as it is,
sort of approach.

I would just point out that there are groups of people who say we
ought to move to GAP, we ought to move to stronger accounting
standards for the S&L industry, matching those ^ready used in
the commercial banking industry, I m^ht say.

But that talking about long lost amortization is in fact a step
away from that and maybe it is worth whUe, maybe it is impor-
tant, but it is a deviation from that test.

Mr. Gray. Let me just add that it would be incorrect, I think, to
say that the Bank Board uses or doesn't use or isn't allowing, what-
ever, the use of FASB 15. That is a device for savings and loans
themselves. They can in fact use FASB 15 under our rules. But jrou
have to understand that Etcquisition, development and construcuon
loans which have caused by far our biggest problems in Texas and
elsewhere, can rarely be restructured to comply with FASBI be-
cause the borrower has never had any equity anyway really. So it
IB difficult to use FASBI in those cases.

But I will just eay, I of course would look forward to working
closely with you, recognizing these problems and any time we are
avail^le to meet with you and discuss this in great detail, we will.

Mr. Baktlstt. Thank you, Mr. Chairman.

The Chairman. The time of the gentleman has expired. The
Chair asks unanimous consent to insert into the record at the con-
clusion of this hearing, which we are now at, a letter to me dated
Januaiy 9, 1986 from the Texas Savings and Loan League, that
among other things at page 4 of its attachment includes a discus-
sion m the FSLIC recsvitaBzation issue.

Is there (Ejection? Ilie Chair hears none.

[The letter of Januaiy 9, 1986 can be found in the appendix.]

The Chairiian. Gentlemen, we want to thank you for your as-
sistance this morning and afternoon. We will have further ques-
tions that we will be submitting to you in writii^ from memben)
who couldn't be here all morning and this aftemocm while we con-
ducted tills hearing.

i by Google

450

Mr. McCoLLUM. Can I? I was here all morning and I just couldn't
be here at 2 o'clock, Mr. Chairman. I would really appreciate it. It
would only take me a minute.

The Chahuun. OK.

Mr. McCoLLUM. I apologize but I just couldn't be here at that
particular hour.

The CHAiRBiAN. I cancelled a meeting with the Speaker of all the
Chairmen to be here.

Mr. McCoLLUM. I understand that, Mr. Chairman, but I did sit in
here a lot today and if I just walked in, period, I would not fed
thatwa*.

The ChiAiRMAN. Go ahead.

Mr. McCoLLUM. Mr. Gray, I just wanted to ask a follow-up ques-
tion to a lot that I heard discussed earlier as I did sit here, about
these exit fee questions. And about the questions pertaining to the
issue of movement of people out of the fund from the FSUC to the
FDIC.

My concern has been, and I am sure I think both you gentlemen
are awEU*e, Mr. Gould, you and I discussed this, is not so much with
savings and loans switching or converting to banks. I really don't
have a problem that although I understand it could present prob-
lems if too many ran off. Obviously that could happen. I do not feel
though that le^slatively we thought to restrict that. Perhaps exit
fees would be appropriate as you discussed because of the loss that
might be incurred in that area.

But what concerns me is while there are still savings and loans
remaining, switching over and using the FDIC when the FSLIC
really needs them to be a participant. Because of that I, last time
we had a markup, I attempted to try to put some inhibitions into
the legislation to either absolutely bar or later in some other form
mfike them think twice about simply switching, not converting.

What do you feel about that?

The Chairman. If the gentleman would yield.

Mr. McCoLLUM. Yes, Mr. Chairmem.

The Chairman. What we did a few minutes eigo is ask Mr. Gould
on behalf of Treasury to submit a memoreuidum, because they had
not testified as to their opinion on this and he has agreed to submit
a written memorandum on this, so we can then have the benefit of
Treasury, the Home Loan Bank Board plus the industry recom-
mendations in this area.

Mr. McCoLLUM. Very good. I really appreciate that.

Mr. Gray, I think you supported sonfe inhibitions or restrictions
in that respect, did you not, at one time?

Mr. Gray. What I have always supported is having a viable
FSLIC recapitalization plem. If the impression was erroneously left
that I favored a Berlin Wall then that would not be correct. What I
do favor is assuring that there is sufficient compensation when an
institution leaves.

Mr. McCoLLUM. When it leaves to become a bank or when it
leaves to go from the FSUC to the FDIC?

Mr. Gray. When it leaves our premium stream system.

Mr. McCoLLUM. Whichever way it goes?

Mr. Gray. Right. If they are not going to be paying premiums at
a certain point to the FSOC then I become concerned only because

iyV_H_>t.JVH.

451

I want to make sure there is compensatioti to keep this plan whole
over the long term.

Mr. McCoLLUH. I wanted to clarify that.

Mr. Gould, you will submit a memorandum so that will be fine.

Mr. Gould. Yes, sir.

Mr. McCoLLUH. One last question that I wanted to ask, Mr.
Gray. Iliere have been a large number of complaints to me from
people who are in Florida which naturally they would be, now
starting up savings and loans, the ones that are actually (MFT the
ground now that I am t^tlHng about. Hie newer ones that are there
say tiiey feel that the Home Loan Bank Board in Atlanta, perhaps
your shop, have gone a little further than necessary in restricting
their growth, not in the way that they are out of some area that
you have been restricting their participation in, but in areas where
they Eire allowed to participate, by the manner in which their plans
have been set, they say ^u can have only so much capital asset
expansion for this year and over the next 2 or 3 years.

Have you had anybody discuss that with you? Has that been a
problem?

Mr. Gray. No, I have not. If you are talking about de novo insti-
tutions

Mr. McCoLLUM. I am.

Mr. Gray. All right. All institutions operate under our regula-
tions.

Mr. McCoLLUM. Absolutely.

Mr. Gray. I mean whether they are de novoe or whether they
are large or small. I am not personally aware of anything that the
Atlanta bank would be doing — and I haven't heard anything —
which would in any way depart irom the regulations that EtfTect all
institutionfi.

Mr. McCoLLUH. What concerns me about it, and I will submit
any particulars to you, I didn't want to plead an individual case,
but what concerns me is if we don't have growth in the institutions
that are sound emd have plans that have been generally approved
and we restrict these de novos too much that we will not be able to
fund the FSUC. That is my problem.

You have to have somebody getting out there getting healthy in
a big way.

Mr. Gray. I am very pleeised to tell you that over the last several
years for those de novo inBtitutions which have been chartered in
just these last seven years, that we see a good deal of health and
we see high levels of net worth.

Mr. McCOLLUM. Yes. That is what I see, too, and it just bothered
me that more than one hfis said that. But individually I will
submit some of that to you. I was looking at a policy question here
and I appreciate the opportunity to Eisk the questions. Thank you,
Nb-. Chauman.

Thank you for your patience.

Mr. Gould. Mr. Cluiirman, might I submit something for the
record?

The Chairman. Well, what is it?

Mr. GouLo. You asked me this morning, I referred to letters
from investment bankers.

The Chairman. Yes.

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462

Mr. Gould. And I said I would submit them to you. I find we
have them here and if I may I would like to leave tiiem with you.

The Chairman. Your staff is working expeditiously.

Mr. Gould. Very quickly even in the snow, sir.

The Chairman. By golly, you got some huskies out there? With-
out objection.

[The letter from investment bankers furnished by Mr. Gould can
be found in the appendix.]

The Chairman. We accept your submission by the Secretary.

Mr. Gray. Let me just say that Rothchild and Comptmy, a mi^or
New York Wall Street bond dealer, has done an appraisal of the
FSLIC Bank Board plan and I believe they have done that in writ-
ing.

The Chairman. And which you will submit?

Mr. Gray. I believe your staff has it.

The Chairman. Thank you.

Do you have any questions?

Mr. BuNNiNG. No questions, Mr. Chairman.

The Chairman. Mr. Bunning has no questions.

The Chair would like to themk both the Secretary and Chairman
Gray for their assistance in this matter. I wish you well on your
return trip to wherever you go. Let's hope we all get there safe and
sound and not too wet. We will be submitting additional questions
as I stated earlier, in writing for you to respond to.

We will continue to keep open our lines of communication so
that we CEUi do what has to be done in this area. And again, I don't
think there is much press here. I think they abandoned us. We are
going to move expeditiously but, by the same token, we are going
to move with caution as well.

However, I think it is evident that we had these hearings early
on, prior to the subcommittees having been chosen, because of the
importance we attach to the situation that faces all of us.

With that the committee will stand in recess until Tuesday
morning at 10 o'clock.

Mr. Gould. Thank you for having us, Mr. Chairman.

Mr. Gray. Thank you.

[Whereupon, at 3:15 p.m., the committee was adjourned, to recon-
vene at 10 a.m., on Tuesday, January 27, 1987.]

i by Google

tot MUM! Of piLIVlltl
UfWB U lliSO a.a.

VDdAC S«eratary tor r Inane*

O.S. Dapartaaat of tha traaaary

Mtoca cba

Canaitta* on Baaklng, Plnanca and orbaa Mfalra

■r. ChaitMU. Mr. «tU*> aad Maabara a( tha CoMUttaa:

I aai dallvbtad to har* tte apportunlty to tastlty batora yoo
today on oar plan to racapiuUlsa tba radaral Savlnqa and Loan
laaaraaea corporation (PSLIC). I ■■ graatly aacoarajad by roar
•arly haartaga. Ibay ara an indtcatloa that thta Co^ittaa
■anaaa tba argaat aaad to addrasa laaadlata safaty and soondnoaa
eencama. particularly tboaa atfacting tha thrift lodnatry.

In ordar to atroaa how itrongly «• bolloTa that FSLIC racaplta-
Itiatlaa la aacaaaary by aarly aprlnq, wa aakad tha blpartiaan
laadarablp of tho taaata and lonaa BaaklDg Ceaaittooa to ralatrodac*
Odr propoaad bill on tha day tha aov Congraaa convaaod. It ia
tba aaaa baalc plan that paaaad both hooaaa of Congraaa laat
yaar. Slvaa tba laawdlacy of tha pr^laa I will daaerlbo, «•
eanaet afford dalay.

Tha MaiBlatratlon la co^lttad to aalntalning a aat* «ad aouod
financial ayataa — aapacially itbaro Inaiirad dapoaita ara lovolvad,
Xb* aafaty of eoaaoaora* laaarad savlaga la a critical laaoa for
all taarleaaa.

■iia of tho Problaa

fba preblaaa aftactiog rooghly 3D parcant of tba aavlnga aod
loan Indoatr; ara'aall knovn. I bava taatitlad on thaa aitaoaivaly
and eonaaqooDtly will focua ny raaarka today on tha Fodaral Savinga
and Loan inanraaea Corporatloo (PSLIC).

..Google

TIM Fadaral Hom Loan Bank Board (FBLBB) ••tlaatas that th*
FStIC vill need -about $30 btllion to raaolva tba problems of
inacJEutlona In ehe FSLIC easBload, thoae considered aigniflcant
supervisory cases and ocher anclcipated eases, eowever, the FSUC's
total rosarvoB aC tha end of Oeoembor 1986 wore only sllghcly over
93 billion $800 million of which Is In FSLlc'a secondary reserve
and i» carried aa an aaaat on the books of Che Induatry) and could
fall rapidly to under 32 billion by tb* end of February 1987. when
the Governnant Accounclnq Office (GAO audita the P5LIC ' ■ bookSi tt
juy require the fSLlC to add to Ita resarvea for losses and thus
reduce reserves even further, quite possibly to a nagatlva position.
TO obtain a "clean* accounting opinion for the year-and 1985 financial
Btaceaent, the P3LIC waa required to incraaaa Ita provision for loss
continganclaa by 51.6 billion.

10 19BT, the FSlic expects to racaiva about 83.4 billion in
total taeoaa, which Includes regular ptMiiUBa, apacial pramtuma,
invastnent and other incoaia. Thia *am faila even to cover the
operating loises of about $2.t billion pat yaar piling up on FSLIC's
□■••load — to aay nothing of resolving soma of these Insolvent s&LS.
Dalaying the reaolutlon of problem Institutions will significantly
locraaaa the pSLIC'a ultlnata coat.

la addition, the raduead aiaa of the PSLIC resarves la already
causing the fbl aanki to voice foncern ovat their ability to accept
the FSLIC's guarantees of advances loans) that the FBL Banks lUlk*
to distressed Institutions. The FSLIC haa reported that the Insolvant

but still open) Institutions will be forced to aora aggraaalvely
solicit new.depoalta which will raise not only their coat of
fnnda — and the ultimata resolution casta to the FSLIC — bat also
ralae the cost of deposits for all depository institutions in local
aarkets and beyond.

Treasury's Three-Pronged Strategy

In previous testimony I recommended a thrae-pronged strategy
to help the thrift Industry and the FSLIC. wa atill aupport thla
plan, which I want to briefly summarlie Cor you now.

First, we have stated ttaAt ■• need to ■
Industry as a whole. To do this we encoora^
targets and create incentives for the indust . . . _
capital, and concurrently to halt the growth of the industry ■
problems through Improved supervision. Last August the FHLBB
adopted new standards for Insured thrifts which phase-in higher
capital requirements over tiiM. The Board alao haa signif fcaatly
increased the number and quality of aiamlnars in an atfoct to
iaprove aupervialon.

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francblaa value of alllo? thrlfcs and dim Incresilng Cha pricv
acqalian ara Hilling to pay for thaa* EhrlfCa- In clia paat yaacr
ttM FHLBB haa adopcad cagulatloni Chat Incraaaa tha tranchiaa valoa
at inaolvant tlirifea by paralttlng acquirlaq aavinga and laana to
axpand Inco t&raa additional atata*. Nor* aaada to ba dona. I ulll
discaaa this part of our atratagy sora fully latar in my taatlnony.

Third, Ha callad for Incrasalnf tha PSLlC's raaontcaa ao that
it could hand la a graatar numbac of Inaolvant loatltuttooa in tha
aaxt lavaral yaari. Tha tlsa to act ia aow. Tha Low intaraat rata

anvLronnant haa anablad oraat of tha Induatry to hava high aarnlaga.
Evary day <ra Malt, rsLIC attinata* Ita coata Incteaaa by S6 million.
(A datailed deacrlption of tha racapltsllzatlon plan ia attachad. )

Tha Tcaaaury/FKLBa f3LlC Bacapitaliiation Plan

I tb« PSLIC, two aiapla .

rirat, tba tiaa-taatad notloB of aalf-halp «as vital. Tba
taxpayar auat not ba callad upon to ball out an induatry that vith
■oaa idaaauf* of aacfifica o^ar tiaa can halp itaalf. Utar all
oany thrift! hava pcofltad graatly froa thair franchlae and thay
probably cara paying too saall an tnaaraac* praoiun in tha past.

8*eoiid, tha cacapltaliiatlon plan auit hava anough raaourcaa
avallabla up front to owat the raal problama wa all racogniza today.
To thla end tha PhLsb, the Federal Hoae toan Bank ^yaten, and tba
Traaaury davlaad a unique induatry- baaed plan that would anabla tha
rSLIC to devote about 425 to $30 billion over 5 years to baadltnq
its alieable load of problaa <;aaaa, whlla 1b all likelihood being
abla to phaaa-out tha apaclal praoiun aaaaasnont ovar tba a««a partod.

I aa plaaaad to nota that our plan haa been andocaad again

by many raapoaaibla people In the thrift Industry xho share our
concerns. He Halcona the strong support of groups like tha National
council of savings Institutlona and tha Haw England League of
SaTiaqa Inatitutioas.

■rtatly, ondar oor plaa tha rHLBB would charter a rlnancing
Corporation which would ba eapltalltad with up to 33 billion of
tha PHL Bank Systaa's aurplua over fiv* to six yaars.

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Th* rtnanclag Corporation tban kouU borrm up to SIS billion

by isauin? long-teno bonda over the f Ive-to-alx-year period aa th«
funda -were naeded by P3LIC. It oauld aaaure paynant of tba bonds'
principal by uaing up to $2.2 billion (of th« S3 billion) of tha
FBL Baoka' Invaatnent to purchaaa long'tariD, zero coupon iostriUMnta>
which at maturity would equal the bonda' principal. (The raaalninf
SaOO nillioD froB tha FBLBanka' Inveacnent would aarva aa a apacial
'intacast raaarva* Co anaure the phaae-down of the special asaessnant
«van undar advarsa clrcuaatancoa. ) The Interest an the bonda would
ba paid by the Financing corporation through assesamants. Each
inaarad Institution would pay In an aaount not to exceed 1/1! of ana
parcant of an inacitutlon's total deposits unless the FHLBB deter-
■inaa an additional amount up to 1/3 of one percent of deposits Is
naceaaary. In other words, the Financing corporation could have the
authoritY to uaa all of the FSI.IC s current premium and special
assessment income. Any assessments made by the Financing Corporation
would reduce PSLIC's aaaasaaent authoritj dollar-for-dollar.

Tha Financing Corporation would than lovaat tha )1S billion
It ralaaa In nonTotln9 capital stock and nonradesBabla capital
carttfieates of the PSMC.

The FSLIC would thus have available tha )13 billion, the annual
pra«iiin ineo«a in «icaas of interaat coata (phaaed down over five
years), income froa Invescnents and reflows fro* the sale of aaaats
acquired fron raaolvlnq cases or a total of J3S to 930 billion OTer
5 to C years) to resolve the problem cases.

Sobs BeBbera of tha Induatry arfua that tha P8LIC could not
efficiently use nora than 31. B to !2.0 billion in any one year
CO resolve pcobleu inatitutioos. This ia not tran. Tha FSLIC'a
case resolutions la 1996 coat about !3.0 billion. This >onay waa
used to r-esolve SI eaaaa with about $33-. 9 billion in asaata.
FSLIC covild have done sore if it weren't concerned about Balnbalninf

To aaalst in liquidating theae saseta at the highest price for
tha FSLIC, the FBLBB In Hoveober 1985 chartered the Federal Asset
Disposition Association IFAOA). The FADA is a nonprofit organization
that has been raspcnsibla for disposing of tha aore conplei and
large properties the FSLIC has acquired fron failed institutions.
The FAOA does not taka title to any aasaes, but now has about fl.OI
billion under its oanageaent.

The Treasury /FBLBB plan was carefully dealgoed ao that the
money injected into th* FSLIC would be an offaetting collection
rather than a borrowing tor budgetary purposea, so as to offset
auClaya for caaa resolutions. Therefore, our plan provides $15
billion of extra budget receipts (beyond aaseaamant income) over

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Kaarly an* yaar ago, Congra«a aakad oa to provid* a ■oluttoii
for tha problaB of dacllnin? FSLtC raaourcaa. Ha auppllai] a vork-
abla plan which !■ induaery-baaad and '9«ta tha jab dona now. Our
plan gaca cha Bonay into FSLIC a* naadad. ic phaaaa out tha apacial
aaiaaaBant, protacta tha lategrtty oC tha FBL Banlci, aad aafaqiMrdi
tha Intaraita at tha FDIC aanbaca of tha t6X- Sanka. Ma ha*a praaantad
a plan that ■■!»■ good aanaa Croai a budgatary paripacrtlva.

la tlM final analyaiai no on* aanta to ■•• dapoaltois standing
in lln*a, llXa tbay did la Ohio and Maryland whara atata-chartarad
ioanranea funda war* not aquippad to asat tha challangaa arising
froa problaa laatltutiOBa. It ia tlaa tor Congraaa to act.

For thaaa raaaona, «• hopa yon Kill nova thli ccltieaily
Important la^lalatlon, vhich both houaaa of Congrasa paaaad on
tha last l«9i>lstlve day last yaar, qolckiy and claanly through tha
na« Congraas lo that it can baeoaa lav by thla aprlng.

PSLIC cannot wait,

Problawa of Induntry AltarnatlTas

fba D.8. Laagua'i plan for lolrlng tha rapidly ahrlnking
PSLIC fond is ilnilar to iiadaquataly rapalrlng dangaroualy
dacaylng atraati. It only patchca the potholea (so tbo problam
Hill occur again and ba even larger} Inataad of rabulldlng and
thaa reaurfaclng the uhols road bad. Horoover, it laavaa F3LIC
in a atata of ahoclt, ihakas up tha PHL 8ank*t and ]olta tha
nation's dapoaltors — all baeauaa tha Laagua'a plan naglacta
tlaaly rapalra,

fha Laagaa'a plan provldna Inauffjclant funda . Tha plan t

,ook at Che plan revaala it would
on on FSLIC'a cash (liquidity)
capital). But tha PSLIC can

liabilitiaa axcaad

baat provides SS bill
a««n condition raising this S5 bill.
poaition, not Its reaarvaa tFSLIC'a
b«va eaah with zero or negative reai
asaata). Hhat good li ■ plan chat luy
tha public knows the FSLIC '

Tha loH'ger tha raaolutioaa of inaolvant thctfta aro poitponad,
tha graatar the nltlaata coat will b«. Tha logic ia atralght-
toriMrdt if an Inaolrant thrift ia auftarlng oparatlng loss*a>
•yataalc — that ia, PSLIC* — loaaaa are building.

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of t«lllM thrift! ia piMtpoa»d th« grwttT tlw ri«lc that Infr^it
r«f ■ ytll rlM . Hlqbar lat:ai:«at ratam would ralma tha FSLIC'a
rasoltttion coats •noiaoualy. nia coat of dapoalta would rtsa,
inorcaalng oparatlnq loaaasa and dccraaalog tb* ralua of sob*

K SAO atody In Saptwibai: 19S6 found tliat « 2 parcootaga point
rlaa In Intcroat rataa wanld ooat tha FSLIC an additional 17 billion
In raaolotlon ooats orar tha naxt cm yaara. Lowar iataraac rataa
ar« not going to balp S4L*a with problaa loans that ara baaad on
poor quality.

Tha Laaque'a plan way not agnn pcoduca tha S5 btlltoo. It la
hard for naw corporatlona to laaua 20-yaar bonda. It gata avan
hardar to sail 20 yaar laca coupon bonds bacause the Investor baa
to Halt 20 years befi^i^e he gets one cent back. Hhsn Che aourcaa
of rapayoent are as vague aa the League propoaas — a share of the
?HL Bank a ' earnloga suppLaoented In some faahlon from the industry —
tha debt looks apeculatlva at bast.

In contrast, tha Treaaury/FBLBB plan tssoss rsgular bonds and
can asBura tha bondholdars' principal froa day ons by buying Traasury
■•CO coupons.

Dssplta tha spsculativa natura of tha Laagua'a laro coupon
bonds. It ossuNas an B parcant lotareat rata. Thla Is unraallatlcally
low.

Tha Laagua'a plan placss a vagus (but likely vary. large) futara
burdso on the industry to cover interest coats with astra asssssosnts.
(k hlghsr borrowing rate than they have assumed would naks thsss
hogs.) In contrast, the Treaaury/FHLBB plan includes a olsarly
evident phase-down of the special assessment -Over 5 years, backed
by an extra SBDO millloD interest reserve cushion.

The l.eaqne'a plan i» inefficient: it would raiae lesa and coat

Tha burden l^oaad on both the PHL Banka and the industry (with
jincartaio tutura assassaants) by tha Laagua'a inefficient venture
would Maka it aitrsaaly hard or i^osslbls to call on either to
help, if FSLIC needs Bora than SS billion (as wa already know It

does).

parcant of earnings, whichever 1
percent of sarnings la the sta'
so for 20 years the FBL Banjis
by law for safety and aoundoess.

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If tha FHL Banks vara to gat Intc
raduc« dlvldanda to tbair aaMbara or
00 a cendltional S4 bUllon Una of cradlt with Traasury.

Tha plan vould alio daawnd aora froB the FBL Banka with FDIC-
Inaurad aaabori priaarily In tha Moithaaat, Mid Atlantic, and Par
Waat) In oontcaat olth tlia Treaaury/rSLSB plan.

Tba Laaqua'a plan inereaaaa tha real rlak of ■ liquldtty crlal*
at ao^a Inatitntiooa. Aa itated earlier, the FBL BanXa may find
they can do longer accept the FSLIC'e guarsnteo of advance* (loana)
osde to troubled thrifts.

First, tha Laa^ua denied tiMre «aa a problaa. Then thay killed
tha It recapitalization proposal, ttow they have a phoney proposal
to atop a real recapitalization of fSlic Finally, they try to
tilda behind aasertions that tSi-lCm problsas are not really that
bad and that tliera are not costs of delaying its existing caseload.

In our *iaw, it is high tise to Eulfill oar joint raaponaibllitr
to protect iLBerlca'a thrift depositors. I arga yon to ra]aot calla
for further delay mot* atody, aod toying Kith grand acbaMaa that
fall abort of providing P81IC vltfa tha neeaaaary funds to carry out

Soaa people have anggaatad that tha aolutlon to FSLIC'a funding
problems la to tterge the two fadaral dapoait ioauraoca tunda. Let
■a assura this cooMittae that the Treasury Dapartannt has no hidden
agenda to merge tha fanda.

It la true we have stated that failing substantial auccaas to
enact our FSLIC recap plan, the concept of aerging P8LIC and FDIC
coaaa ahead of using taxpayer eoney, which would be a last resort
only to prevent syetemic problsna for depoaltora. It nay be useful
to clarify precisely what this oerger Mould neani

o there still would be two funds, not one commingled entity —
the merger would ba at tba regulatory levalt

o money still would be needed up front and atill would have
to be borrowed niC'a raaervaa would not be availabla
ajccept possibly as a backstop for an FOIC guarantee of

the 'thrift fund' borrowingal;

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o debate and ncgotlaclon vould b* tlM conauHlng and

•ittanalr difficult, coatributing to iiae«rt«lntr in th*
urfiacplac*.

gneouraqinq the Flow of Prlgata Capital Into the Thrift Induatry

Another part of reducing the loag-Cens coet of aolvinq the
probleo of falling thri£ta Id to encourage bank holding conpanieSf
financial ■acvlcaa firm*, and othera to acquire them. The FHLBB baa
reported that Che coat of Hrging falling or failed thrlfta for 19>1
to 198$ ranged between 4.2 percent of aaaete to T 3 percent.
Liquidation coata varied froa 31.9 percent of aeaets in 14AJ to 4S.T

nreent in 1986. The Federal Maarve Board FRB haa moved cautiouali
pamltting bank holding companiea to acquire Inaolvent thrifts,
■nd the FRB'i taodea reatrictlona on BBC's acqulsltiona of ailing
thrifts are exceedingly stringent. When the FRB last Hay aiked for
public coDDent. we encouraged Chem to review carefully their
restrictions and liberalize them to attain aore reaaonable standards.
Me are atill waiting tor FRB action.

The PRB's regulatory separation betwaea an acquired thrift and
other subsldtarlea la much greater than that b«tw««n the SBC'a bank
and othar subaidiariea. These rules are veetlgea of acquisitions
during an earlier era when statutory interest rata differentials
were in placa, and before interstate banking conpacta took hold. In
addition, 'tandan* restrictions make thrift acquisitions exceedingly
leas attractive and strike a blow against consunsri by prohibiting
crossoarketlng and other business connections that Improve service
and coDpetltion. Perhapa the Fits is In part waiting for signals
froa Congrasa with raapect to the current usafalnaaa of su^

The unitary thrift holding cosipany ta an esa^la — with
OTar 20 yeara of proven hlatory — of how aonfioanoial ioatltutiona
have added capital to the industry by purchasing failing and non-
failing thrift*.

Ne recognise that lotariadnatry thrift acqulsltiona are a
touchy subject, especially for aoae legnenta of the industry that
wish to avoid conpetitlon. Bot the acqulaltion logic is straight-
forward and undeniable. The problen inatitutiona have created
real coats that the fSuiC the Induatry, and the conaunar oust
bear. K brooder range of purchasers can help rsLiC lower these
costs by reducing the coats of dispositions, knd they can bring
additional capital to an industry that needs it badly.

In summary, we urge congress and the regulators to accoMBodata
new acquirers of iuaolvant thrifts. If we are cenesraad about
buslneas tiea, we aboald cope with than tbreagh.regalation of
sftlllata transactions sod contlicta of interest, not through
prohibition of ownership.

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Cattcloalon

In cle«last Mr. Chaltmui, I atrongly •neoaraga you aod your
eallaagaaa to glva Cha hi^ast prloeity ta our PSLIC raeapttaUiation
proposal. Than, attar «• hava addraaiad thaaa urgant aafaty aod
aouadaaaa eooearna, wa ahoald work Jointly toward a (undaMaatat
raatructnrlag of oar ttnanctal aar*loaa indaatry so wa can «aat tba
challangM of tba chaaging aarkacplaea aiieeaaatully aad safaly.

M Traaanry Baeratary Ja«aa Bakar atatad jnat laat vaaki

It's tlaa for a changa. Aaarloa nasds to
raaaaart Itaalf on cha laadtag adga of tba
tlaaaelai aarvicaa world. Na'va got tha
ability. Ma'** got tba aotlvatloa to do it.
And wa cartaialy hav* good raasoa to do it
if wa want to ba intarnatloaally caapeettiva.

1 will assist yoQ

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Th* Trauury and Eha Fvdaral aoaa Loan Bank Board |m.BB)
davaloiivd U)l( pLan la alllaaca wleb cba laadanhip of tha cualv*
radaral. Bona Loan Banki (paLBanki), uhoaa concrlbutlon of jp ta !3
bilLlan of capital li at ttia eora oC thli aCEort Co Btrangthac FSLIC.
M alio hair* Hockad clsaaly itlUi tha laadao o( Cha chclft Ludiiscry.
TtM FMOle. ia a propoaal that will atranqClwD TSllC. frM rSLIC to
r«M>l*a its prabtn oa««a aora axpadieiooaiy, and laeraaaa dapoaicer

■wd tor Thta tropoaal

lielaaCaa of tha alia of tha problaa eoofroDtin; ttZK vkry
wldaly. Noac ran?* froa above 113 to 130 billion. Tha enii of tha
problaa ia tbat tha' aaaiatanea coata, aran undar tha Boat coosarvatlva

M«iaataa, axcaad rSLIC'a

dafarriag tha
only laeraaaa

lant flaaaolBl r

• tlM fund, rSLIC Kould naod to ooKinua
any probLam 9«La. Thla dafarral woold
■ata coata With tha appropriata fiaan-
reaa, the FBI.BB and rSLIC could aat
Bolva aora caaaai aora quickly.

Tbla la a propitlaoa t
aDTiconaant providaa tha Idaal window of opportnalcy I
vlfotoasly to daal with allinq StLa.

ketioQ no* on tha thrift loduatry problaa abould raaffira
dapoaiCor eaoCldanea In tha naalth and atabllity oE dapoaitory loatlcu-
tlona and tha viability of tha dapoait ioauranca fiuida. Purtharaorar
pto^t handlinq of tha Boat dabllitatad BtLa ahoiild balp baaltby
aclia by looaclaq thair ooat of dapoaitsr vblch hara baan bid up by
tha laabla ms' oall for funda at any prlea.

If wa do not acran^tban rSLIC now. «• aay plaea tha SiL induatry
«t oaoaidarabla risk in th* fntnra ahould intaraat rata* rlao
algalfleaotly.

Six aajor objactlToa gulda our FSLIC racapita Illation propoaal.

rirat. tha propoaal balancaa tha financing burdao batwaaa tha
rodaral Bom Loan Banks (PBLBaekal and tha tOa. Tha coat will

ba bora* antlraly by Chaa, without any taxpayar (unda.

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••eondr fuiJi ar* wwMC«cr*d fr«
tliraafb a iwblaiti— of aaaaasi

a a««a«l*« bnAvavary aCtaet.

Third, tuia pUa cao aupply up to tSs-lO bllUaa to lUlC ovar
tba naxt 9 to ( T«arj, h1c& <ppcoilaaealy tLS blllioo avallabla ia
tha flrat 3 yaara. Qlvaa rSLIC'i orqaaliatloaal eMmttmlat*, thla
tafoaiaa probably ravraaaina ta* aaxlaia la*al at ta a aarc— tbat
raLIC eaa afflelaatly oaa to caaolia pcoblaa caaai. laaaai a tba
plan la tlailbla by daaign. rsUC aaad not draa ettla fall aawa a t
If tba Ilia of tba problaa tarna out to ba at tha loo and of Cba
••tlaatad rasqa.

a aar

riftb, ttn propoaal aaaki to accooaodat* tba nLlanka' eoDcaraa

about « subauBClal lacraaaa In Cttalr dafit eoata and tha ■ceoUDClng
traataant of thalr cmpltal caBcritxiclon. IE alao roco^Dliaa tta«t
Um alloeatloo at coatribueloBa aaoaq tba FlUaaka aaada to taka
lato aeeooat -tbalr pio^ortloaa of roiC-laaarad aaabari.

SlKCbi thla plan addraaaaa tha S&L Induatry'i oTarvhalAlaq
eoDcaro tha coatlnaatioo of tha FSIiIC ipaeial aaaaaaaaDC —
by eraatlaq tha subataatlal Llkalibood tbat thla axtra uaaaa-
aaot can ba phaaad one orar tha dbii; fira yaara. (Tha ipaclal
aaaaaaaaot la oaa algbth of oaa parcant of dapoalta. In iddlclsn
to tha laqular aaaaaaaaot of oaa twalltb of oaa parcaat.) Ma ballava
It ia laporcABC ta ahow tha hl^h probability of allalaatla? thla
axtra praaloa ovar tlaa (aiaa it tha pcoblaa coat turna out eo ba
139 to 330 blllioo), bacauaa it la a haary burdan oo tha tadoacry
and thia Kill taod Eo dacraaaa tha iocaativa for haalthy ChCifCa

to awiteti froa rSLic to rutc laaaraoea.

Oaacrlptieo of tha Propoaal

In aaaaaea Eha raoapltalliatlon propoaal lavaragaa both tha
-cnrraat aaroad aorplaa of tba rSLBaolca aad futura rSLIC aaaana-
■aanta Ca gat aqulty fiuida ioEO fSLIC mora quickly. X aaparata
-eorporaclan (eha 'Fliunciaq Corporatlan* ) eapltaliiad by tha
rsLSaoka laill iindarEaka a ipacialiy daaignad Ciaaoelng ovar tlaa
to ehaonal aqulEy InTaatBanta ioEO FSLIC. Tha prspoaal coDtataa
laportaot aataguarda to anaura that both tha principal and Intaraat
OD tha rinanelog Corporation'* spadal borrowioga hIU Ba rapald.

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NMt oC ttM riBudiiq Corpocation't lavaatBaae in rSLIC,

(v*r. will ba la eiu fora of soa-radMaabU eaplul earCUicatas

Uae will amnr b* rapald. Tha rauludar of tha riModBa Corpora-
ttao'a ImraatMM lo fslic oill ba la th* taca af non-vociDq
eapital atock thac aa; or aa; hoc b* rapaid. wltb or wlthodt ■
twtata, dapandlag oo rSLIC'a eiaanclal parfanaaoa (-as aoasarad
throagh FSLIC'a raaarva-eo-dapoalta ratio).

na kay alaaanta of Cba propoaal ara aa follomt

O Tba PILSB cbarcara a ■Plaanclnq CorpocaeloB, ■ oaplta-
litad wicb no aoro tban $3 billioo at tha W Llanka '
aurpina 9*ar aboae 9 to 6 r*ara. (Tha paLaanka had
tl.t billion io aarnad aurploa at yoar-and IXS and thU
la aipaetad to laeraaaa to ovar II. 3 billion mt y*tt-
•ad 1)H. I Tha rlDanciaq Corporation alll BOt bava ita
own paid leaf f.

a Tha rinanalnq corporation borroaa approiiaacaly SlS bil-
lion Utroogb locq-tara booda (IJ to 30-7aai lutuclciaa)
o*ar tbaaa flva to ali yaara. it aaauraa paynanc of
thaaa bonda' principal by uaing no aoca than 32.2 billion
of tba 13 billion to parebaaa loa^-tara. laro-coupon
laatroaoaca, Hbicb will aqual tba bond prlaeipal upon
■BtatlCy and alll ba bald la a aaparata aaqtagatad
aeeoont. Tba raaalnlng SBOQ BlUloa or aora of tba TBI.
Bank invaataant otll ba oaad to pay faaa and latacaac
coata. Tha Corporation will ba aubjaet to itrlngaac
lialta on actlvitlaa. lararaga and lifa. ITba FaLSanka
aatlnata that tba Corporatton'a dabt will yiald S0-7S
baala polata, a balf Co tbrao qiurtara of ■ porcantaqa
polnti aboT* Iraasurlaa of eoaparabl* aatiirity.)

a Tha rlnanelag corpoiation than invaata tba aaaa aaonnt
tha FHLSaaka lavaatad in it (a aaxiaum of fl billion)
in oon-voclng capital atodt of rSLIC aad an additional
fio billion (or ^ra) la aoo-radaaaabla eapltal cartlfi-'
cataa of rSLIC.

a -Tha rinaneinq Corporation would ba givan Liaitad aaaaaa-
mant authority ovar tha rSLIC Inaurad Inatltutiona Tha
Pinancinq Corporation would uaa tba incoaa caiiad chcougb
tha aaaasananta only for paying the Intarait on ani
iaaoaoca coata of tha J15 billion of long-tarn booda
and for cnatodlan faaa for ita aagragatad account holding

a Tha FlDBnclag -Corparation'a aaaaaaaanC authority would
ba furthar raatrlctad to 1/13 of ona parcant of dapoalU.
Hitb aieaptlonal authority to cliarqa an additional 1/1
of ona parcant if tba FBLU gava Ita approval.

i by Google

b« rsdncnd by Um uount of all Flaaaeliif

Corpocacloa us**BBaaca for tlwt raar.

P3I.IC aa«a tlw ■•■•■■■■at ineoa^ not uaad by cb*
Tloandaq Corpocatioo to add to ICa ca«* [•■olatloD

aad •anioq so LovaatmBts •nabla* P3LIC to inlaj abooC
tl5 blllloB iB aa* rasolucioa fooda in ttu flrat J
yaara aad aboot tio blllleB aera o**r eha a«it 1 raars.

iXiy o»ar
for rSLIC.

Tha rloaacing Corporatiao Kouid lapay ita d^t prladpal
Ithrough ttia Baturlaq laroi) aroaBd 1020. miC voald
DOC t» raspBOBibLa tor rffavlOQ thla daHi BOr KOOld it

Ga~eoetin9aatly iiabla Cor It.

rSLIC Koald catlr* ica sucataadio^ icack, bald by tba
Flnaadag Corpoi^tioa. afcar tba CorporacloB capay^ all
Its dabt. cnia book vslua at tba PSI>IC atock could ba
■a biqh >■ 13 blllloa, IE tHa rBLBaaka uka tbalr full
eapital ooatrlbatloa te tha Carpocation Th* pmyaiS
OC both tlM book *alua and ■ rBturn oo tbia atock upoo
ratiraBBDC would ba totally dapaodant on fSLIC'i
floaBeial parfotaaaca (ICa raa«r*a'-ta~dapoaiti ratio).
Aftai I39t, If rSLIC'a caaarva-ta-dapoalti ratio raaehaa
cartatD lavala, rsi.lC would naka cast ributi ana to aB
aquity ratiira aeeoant Thii account, Mliieh would ba
bald by FSLIC uotll tha Pioanclog Carporatlan paid ait
all iCB daDc, would ba tba aola aourca of funda Cor
paying oil tba ?3LIC itock. Tna oan-radaanabLa capital
cartiflcatas iiauad by FSLIC woaid ba aitlnguiabad
witiiout any rapajaant.

Ttiu riDascloq Cocporatloa Boat anaaat by 3016 (or aarliar
if It baa rapald all ita tebtit iu ability Co borrow
aat BH (uBda would aod la L19«.

I llluacrata bow tha propoaal would
rla^ibilttv of tba Pcopoaal

Mta]
:am thi

*Uy.

i by Google

rirat. In th* BTane lQe>rast rau» rli*i tlM fac* valiM el th*

Mfo-couiioo- iDiermaaDU (tin valua ac macurityl ttut can tM pur-
-e&aaad by tha Flaanelog Corporatlao vlll incraaaa. Noca Caca
■alua can tw acqulrad bacauaa ■ laro-coiipoa IsitTusant in alfact
pay* off all iatacaae, at > coapouadad rata, togatbar with Oia
aoount originally invaacad, whan ttia inatruswat aacuraa,' is a
blghar Intaraat rata coapouadad ovar tlsa olll prodiica a bigtiar
Eaca valua anounc at a laro-coupoD iattruoast (or a glvan intcial
IsTaataant. ttiia ineraaaad uaunc at akturity uould aoabla tha
fiDancing CorporaCian Co uaa ita initial capital Co back a
largar aaount of borrowintta.

daeood, tbm rlnaaclng Corpocatioa eonld gaDarat* a largar
payolf Eros t&a laco-eoupon inatroaanea It pnrcbaaaa by aalactiag
aaaa witli longac aatarltiaa (Mora yaara to eoapaand tba Incaraac).

TUld, If PSLIC naada Bora aonay aarliac. the TO ■anka could
invaac « graatar paicaotaga of chair 93 bllllea In aiirpliu Id tbm
eirte aararal yaara. Currantly, ua bave thm fSL Baoka' invaatmaot
apcaad out oval a aavan yaar pariod.

raanh. oncrancly, eba plan ealla tor 1100 allllaa ol the
rU Uoka* 13 billion iovaatMnt in tha Pioaacing <:ocpocaelon to
ba aae a«lda la a l***tv* ta pa; for intaraat and otaar anpanaaa.
TBla fonat eenld ba uaad to purchaaa additional laro eaupoo boaija
to pay tba principal of ineraaaad borroving it aacaaaary.

rlftb, if abaolutaly ni

of tba apaelal aaaaaaaane. .__ _

tloaal aaaaaaaant anthotity, tta aaa bayood tba S-yaar pnaaaout
abould ba avoldad it at all poaaibia,

ftadqatary Traataant

I propoaal ii atraetarad carafally t
■ Ul off

Laafe yaar tba Coograaaional Budgat Oftlea CBO), aitb tba
coQcucrtnea of tbe caaaral Accounting Qffica (SAO), ralad that
it vould icoca aa of fiaccing collactioaa eba Cull aaoont of funds
providad to Cha ?3L1C by tha financing corporation. Tha raeapitallia-
elon of eba PSLI-C uill not ba countad aa fadaral borroolag by CBO.

3 aoaMclia tba baaatita of tbla rSLIC raeapitaliiatlon

PSLIC xtU ba abla to aaploy about 12; blllioa o*ar
S yaara to laaolva ita caaa load of problaa ehrifea.
thaaa tuada ahould ba tranafarced to PSLIC about aa
quicUy aa xa can raaaonably aipact tha ?9I.IC
orgaaiiation to haodla ita problaa caaoa a((acti*aly>

appcoprlata budgoeary racolpCa that will offai
tlon eoata (ubich ara acorad -- ^-'-— — ■

ib,Google

tb* ctruio ■vailablirty oC abouc SIS bllllan for rSUC
•hovid ineraaia dapoaltoc confidanca. Tbla coafldanea,
plua tha lala. aargar, or Liquliucloa of tAa tMakaat S4La.
atiould balp tba Lnduatiy lowar lea colt of Eitada.

rha rSLIC lacapltalltatloD burdaa will ba aharad Ealrly
babMaa Uia 3u,a aad tha FBUankl. Horaorar, eha
cooeribiieloaa ara acructucad ca alalaiia Cba advaraa
affacea on boch. TDara li a blqa probability tbac tba
•paeial aaaaaaaaac on eb« 3«L induacry can Oa phaMd oaC

4 tba laglalatloD raquiilnq Uia FSLSanka'

Tba aqulcy oai
FSLIC'i fioai

ba FBt.aaaks' capital ctrntributlan
ration — which Link* ttia rapaynant
oaaiblLltiaa oj BUttar returna to
oraanca — ahould aaaa tita PHI.San>ii
i^oracrar, It gt»a» tat fHLOanka
Iwhoaa FTaaldaaca ara tba rsLBB' ■ principal iiiparvlaory
aganca (or aacb dijtrlct) an additional Cutura aconoBic
intacaat In tba eendieton of rSLIC and tha indnatry.

Tba formla that govarna tha FBLSanka'
tioD will acODBKidata rHLBank
ot FDIC-liuurad aaobara.

riuUy, tba eiailblllty balle iato tba propoaal parmlt*
Bba raui to raiaa a ranqa of tiwds for rSLIC. dapaodinq
on rSLIC'a oaada.

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snTBfBMT or

COMUTm OK BkMXIMG, riMUICI Um DRBUI &miB8

Digit zed by Google

Kt. Chairman, and dlatln^ulahad Mnobaia of the ComniCtaa;

Th*nk you (oi inviting a* Co thia vary iaportant haacing.

Hothlng. alBply nothing, la boc* iaportant to tho
mai'ptananea of a aound financial ayatan than tha aalntenanca of
pobllc conCidanea in it.

In ay opinion, that la tha eaal iaaua w* ata h«r« to
diacuaa aa m* approach tho laaa* of tacapttaliiatlon of ch«
thclft dapoait Inaacanea fund.

Nona oC us can affacd to focgat tha natut* and consaquaneas
of tha loaa of public confldanca which oceutead in connaction
with tha Ohi<3 md Maryland thilft cilsaa. Tha public did, in
fact, loaa confidence n tha backup machanlama which had baan
inatitutad eo safeguacd tha funda of dapoaltora in tha Maryland
and Ohio ayataaa. And, tha rapatcuaaiona of thasa thrift caaaa
wata fait fat bayond tha bordara of tha two atatas I'nvolvad.

I baliava wa muat addraaa tha iaaua of public confidanca In
tha nation'* fadatally-lnaurad thrift ayatan with dlapatch ~
and in a daelalva aannat which convaya aaxiiaua cartainty to tha
public that tha pioblaoa of tha thrift dapoait insucanca fund,
naaoly tho FSLIC, are being dealt ulth in a way that macita
thair full confldanca in tha thrift ayataa. This includaa not
only tha aalntenance o£ adaquata financial raaourcea to aaauce
tha health of tha ayataa but also tha commicaant and raaolva of
Togulatora and lagislatoea allka to aaaura the integrity of tha
regulatoty process so that fadoeally insurod flduclaclaa of
other paople'a sonay employ such funda in a aafa and aound and
pendent — • yaa taaponaibla — aannat.

tcauaa of the kinds of pcoblenis
I 1981 and 1982 when the coats of
aoney baing paid by thrttta waa rapidly aicaoding tha catuen on
largely lasaaE-yialding fixad-rat* moctgaga assets. The thrift
InsuEanca fund was able to daal with those kinds of pcoblams at
lalativaly far lass coat. Since than, intareat rataa have
cacedad vary aabatantially.

Today, tha underlying problam is that of pooc quality
assets which, in too many cases, have roaultad from risky loans
and highly speculative invastaants which have gone sour. Many
of those assets at sovoialy troubled inatitutlons did not coaa
about because of tho energy problem in some states, Thoy wore
bad asaota bafot* th« price of oil tumbled. The affect of oil
pricea on sooe econoalcs naroly furthar aiacorbatod tha
difficulties Involving such assets.

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in thla eoanactlon, w* ae* •xaeclsing caosld*cabl«
dlsccation in sue, •Cfoits to uotk clo««ly and conatcuctlvaly
with EBiponilbla Chclft Inatitution managananta that sra
opaiatlng In dapcassad aconaala*, partlculacly In Eha aouthwaat.
Na ata taking into ationg account tha natuia oE tha difficulciaa
thay faca in such acononlaa, and nhata ua taaaonably can tta ate
aaaking to aKatclaa approptlata foeabaaranca, aapaclally in
caacs where theie la good aanagaBaat and tha likelihood Chat
such inatltutlona can be tutnad acound and eaatored to health.

I want to eBphaaiie that coughly feuc out of evaty five
FSLIC-lnaucad tniCltutions ata opetating pcoCltably. The latest
figutes we have, for the ftrat thcee quarters of 19Sfi> ahow that
tha profltahla sector of tha induatty aatnad 36,9 billion fot
that period, which la only S900 ailllon lesa than the «acnin9a
of tha piofitablc sactoc of tha business during all of 13S5.

On the other hand, Che unprofitable, and Charafota
troublad, sectoe of tha Industry — that la to say, roughly
ona-ftfch of Che Industty — tan up losses in the tlcst thtss
quatteta of 19g6 of $9 billion, up froa S3. 6 billion fot all of
1989.

Hevaethalass, tha fact is the ptofitabla sector — Che vaat
oajotiCy of tha Induaciy — la highly ptofitabla. Thia is a
tact everyone nust keep fully In mind as wa approach the issue
of PSLtC tecapitallzatlOD. Despite suggestions by soma that the
thrift InduaCiy is "on tha rocks* and 'going down the tubes' tha
facta belie such 'doon" scanacios. Again, tha profitability of
tha vast majority of tha Industry tells me that the Industry Is

Becauaa Che ptofitabla sector of cha induatry must bear cha
brunt of depositor parcepciona about the unprofitable seccor,
the Industty as a whole la paying fat higher rates fur deposits
than Ic ocharwise would or should. Indeed, a study we completed
lasc year showed that cha thrift induatry as a whole was paying

1 year

ibled I

: least $4 billK
because of market
perceptions of the FSLIC deriving from 1
The higher rates paid Cor deposits by c'
Institutions, healthy or unhealthy, ar<
off the bottom line and therefore huct
Industry as a whole.

The spillover effects of a weak, t
thrift deposit insurance fund, which li
severely troublad, terminally-Ill thril
doesn't even begin to have the flnanciz
affecting public confidence In the thri
detrimental and an all too pervasive at

:ifts I

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Th« public is cla«rly vary such awar* of Cha in«daquiCe
caaouEcaa ot the F8LIC »ai, «a a caault, tha cntlra thrift
Induatry la paying a heavy price in tha ptamiuD tataa it must
offet to attract and Eetain depoalt*. Savaraly troubled
thrifts, ao Ion<3 aa they ce»» n open, have no choice but to
continue thaii opsrationa with eicaadlngly high-cost deposits If
thay aca to maintain liquidity. This la a salf-dataatlng
pEopoaition because the highat tha cost of such opa tat tng funds,
and by this I neart deposita, tha aoea difficult it Is to teach
pcof ttabilicy, hanca tha highat likelihood ot such cases
ultiaately tequlrlng F8LIC assistance.

Both the PSLIC and Federal Hone Loan Banks are directly
affected by the liquidity needs of aarloualy troubled thtlfts.
In an affott to land these thrifts funds to naintaln liquidity,
the Federal Hone Loan Sanka raqulre that the loans ("advances*)
be fjuaranteed by tha FSLIC. Thata are S3.G billion in
FSLIC-guaranceed advances outstanding but only Sl.G billion ate
secured by coll-ateEal froa the thtlfta. This mean* there Is no
security behind 81 billion in auch FSLIC guaranteed advances
except the prlnaiy raaarvas of tha FSLIC, Itself, Since the
FSLIC haa only $1.9 billion in prlnaty reacrvea , a call on these
advances by the Federal Hona Loan Banka would uipe out tha
prlnaty raaerva. This damonatratea - the non-exiatent nargin
between FSLIC-guarantaed advances and current primary casarves
which guarantee such Federal Home Loan Bank advances. Indaad,
another S3 billion in Tequests far FSLIC-guarantced advances are
pending. If approved, they would ralaa the uncollaterallied
portion of auch fSLlC-guacai^teed advances to over $3 billion, -
1 dollars note than currently eitlats In tha

istltutions currently in our significant
which includea 167 FSLIC caaes, are losing
y day of the year, on an operating basis.

: total S2.1 billion, more than the FSLIC's
thout recapitalization of the thrift
'3LIC can hardly 'tread water," let alone

.ng InatUutloos.

Early In 198S, the Bank Board, in its role as operating head
of tha FSLIC, cODunanced the full exercise of its statutory
authority to augment the reserves of the fund by assessing a
'special [pfent tin) aasesainsnt'' on all FSLIC-lnsurad institutions.
This assassraant, which anouncs to l/S of one percent of deposits,
added a billion dollara to the fund's reservaa In 19es and SI.l
billion in 19S6. The special assessmenf is in addition to the
regular preniuD paid yearly by insured institutions. Tha regular
preDlun is 1/12 of one percent of deposits. It provided tha FSLIC
$704 nlllion in 1985 and S74S nilllon In 1986.

pri.a

y teae

Of t

Tha 347

thrift i

supacvisocy

load.

S6 Billion a

day, ava

These

oparat

losse

1986

ncona.

Insur

nee fund.

tha F

resol

e caaes o

fail

ib,Google

Aa m*ntlon«d ptavlouslyi th« primacy Eeaacvas In Cti* fund
coday Btand at 41.9 blllton. Today, tha ratio of pclnacy
Eaa«cvaa-ta-dapoalts 1* II on* hundtadtlia of on* paccanti an
•ll-tln* low.

FEon aarly on In ay tanuta at tha Bank Board, I hava sought
to kaap the Congrasa and tha thrift induatcy appclsad of the
waakanlnq condition of th* Inaucanca fund, including tha ataadlly
dataclotating raaarvas of tha fund and tha declining ratio Of
FSLIC casacvca-to-dapoalta. Soma in tha Induatcy hava, ovar the
couEia of By tliiia In office, admoniahed na not to talk about tha
fund'a weakening condition, apparently In hopaa that by awaaping
tha probiaD under tha tug it would aoaehow go away. I did not
take that advice.

In tha lata auoiier of 1995, after coaing to tha concluaion
that the additional "special asaeaanent* would not be lufficient
to deal with the PSLIC'a problama out into the future, I called
(oi a recapltal'liation of the fund during a formal apaech before
th* Annual Convention of tha Califoenla Laagu* of Saving*
. Inatltutlon*. In October, 1985, I teatlfied to the Congrasa thai
the fund would have to be recapitalized and that the only two
aoutcea I knew of were the thrift industry or the taxpayers. I
have continually opposed tha notion of a taxpayer bailout.

in early January, 19S6, I appointed a task fores of the
Federsl Home Loan Bank presidents to develop a plsn to
recapitsLlxe the fund, utilliing avsilabla financial rasouec**
of the Federal Home Loan Bank System snd Che industry, in
combination. What emerged then still conacitutea the baaic
outlines of the Bank Board-Treasury recapltaltiatlon plan which
waa firat presented to th* Subcommlcta* on Financial
Institutions on Hay 8, 1986. Th* plan. In ditfarant forms,
paaaed both Houaes of the Congreas In the laat days of th* 99th
Congress. However, final sction was delayed. On January 6 ot
this year, the Chairman of this Committse and Congressman Wylle
jointly introduced H.R.I7, This bill incorporates the same
basic FSLIC recapitalisation framework approved by both the
Senate and the House Isst yea;.

I intended to pcovlde
: resources over the next five to seven years to resolv*
' * "1 w* know about or can

i by Google

Laat Spring, I «atla«t«d tha coat of raaalving known casaa
taquielng FSLIC ••siatanca to ba In tha nalghbochood of S16
billion. A good daal oC work tiaa gone Into a cavialon of laat
yaac'a aatimata and wa now put tha kaown coat «t $19.5 billion.
Thaca ara bordarlina caaaa, howavat, which I want to adii to this
aatimata which would bring tha total to S23.5 billion.

tha FSLIC w:

supocvlaoiy
intarasi

.1 ba ovar tlma. But I aa coBfottabl* that thaia «ca
itimataa baaad on vacy conaldatabla ralavant
ind financial data. Claail; a significant tiaa in
la, ot othat unfOEaaaan acononlc citcumatancaa in tha
,d affact any cutrant aattnata.

:all plan to cacapltalit* tha thrift inautanca
which wo hava pcoposad contamplstaa — If nacaasaty — a* n
as 832.5 billion foe taaolving tacDlnalLy-ill thtift casaa
tha naxC savan yaaca. Thua, tha plan providaa anothac $9
billion to daal with additional, now unknown continganciaa,
thay davalop, abova and bayond tha aatimatad S23.S billion
could poaalbly ba naadad to rasolva caaaa, aa daaccibad abc
How tha plan works la auamaiiiad in Saction II Ipaga 13) ol

In focusing on tha recapital Itation iaaua. It saams U
also ahould focus on tha futura of tha thrift induatEy, iti
and tha statutory eystao which tha Congraas haa put in plac
both govarn its public purposa, consistant with the intent
and to cagulat* for ssfsty and aoundnaaa, pursuant to atati
ragulatory atandacds.

tdeial law enacted ovot tt

v* s public policy purpoi

I thrift ayat

tha Intel

if thrift

principal public policy goi
nonaownership. This is, '~
stance of thi
f law -- the
ara intandad tc
anka, than thai
of a ai

1 of financing housing and

no moans I the aole caaaon I
hcift ayatan but it ia — pi
incipal reaaon. If it wete
play the same identical to]
a would ba little apparent i
te and distinct statutory-basad

ib,Google

Th« Conge«ts davls*d. and has contlnuoualy^ suppottad tha idaa
bahtnd tha lapacat* axlatanca of eha thrift aystan foe nota than a
half cantury, avidantly bacausa ft has baliavad that calatlvaly
apaclaliiad financial Inatltutlons with a particular aiparttaa In
housing finance aacv* to affactlvaly luppott tha public policy
goal of maxiaidng hoaaownaiahlp opportunitias tot lUMtican
faailias.

Indaad. at tha and of 1986. thrift inatitutlona hold in thait
poctfolioa moia than half tha raaldantial Mortgaga dabt in tha
country, or naacly thraa quartara of a trillion dollaea.

Thirty paEcant of tha nation'* nortgaga backad (acutitias
waca not hald by pclvata invaatora, panaion funda, inautanca
coapanlaa, ate. but, by thritta , to tha the tuna of $156
billion at tha end of TTTTT Eucing 1986, insured thrift
inatttutiona originatad half of tha hone BoctqagsB in the country,
conparad to 19 parcant by coanarctal banks.

To tacilitat* tha purposas of tha thrift systam, tha
Congrasa craatad a aaparata central banking structure for thrift
institutions in the fotn of tha 12 ragional Federal Home Loan
Banks. Thaae government-apanaored Inatcumentalltiea of public
policy land funds ('make advances') of varying maturities,
including long-term funda, to thrift inatitutlona at attractive
catas. Tha Federal Hone Loan Banks also fully pay the costs
of tha front-line regulatory systam, namely examination
and supervision, for tha purpose of aasueing compliance
with statutes and regulations — including Insurance
regulations vhich are intended to safeguard the resources of the
thrift deposit insurance fund. Notably, this insurance fund was
established by the Congress under the authority of the National
Houainq Act .

In 1982, the garn-St Germain Act conaiated, in significant
part, of amendments to the HomeownefS Loan Act of 1933. My own
understanding of the intent of the Sarn-St Germain Act is that
it was intended to maintain the essential traditional public
policy purpose of the thrift system, that of principally serving
America's housing finance needs. In order to do thla, the
Congraas felt that thrift institutions ought to have
significantly more bank-like lending and operating flexibility
to niorc effectively support their basic, or principal mission,
of providing funds for residential housing finance. Sonie atatea
have gone well beyond what Congress appears to have Intended in
this regard by providing their own atate-chartered thrifta tar
more expansive lending, investment and operating authorities.

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still, tha body of iBw cnactwd by th« Conqrvaa up to now foe
tha thrift tystan it claar in its aaphaais on housing finance ■■
tha pilnclpal public policy justification toe tha continual
ailatanca of a aapaeata antS diatlnct statutoiy thrift systao.
8a«a Bay not agcaa with that aaphasla but, in oy.aind, th«t saans
to ba tha Intant of congtaas in tha atatutas — Hhich I tat sworn
to uphold and carcy out.

Soaa in tha financial coBBuniby aegua that tha thcl^ft ayatan
has outlivad ita aaafulnaaa, that it Is bbtolata in tha «aacglng
financial aacvlcas anvtronmant, and that tha thrift daposit-
Inaueanca fund ought to ba "aargad' with tha PDtC fund.

Thay cacogniia, as you muat, that a ao-callad "margar of the
funds* would signal the beginning ot tha and of tha thtlft
industry and tha statutory thrift aystan, and in my opinion, thay
aca basically cortaet in this ragatd.

Those who talk of 'narging" the thrift and comaarcial bank
deposit insurance funds sucaly cannot expect to be taken
literally. I do not balieva there Is any chance, whatsoavar, that
tha Congress would seriously consider 'merging,' that is to say
'coalngllng* or 'Integrating' resources ot both funds Into a
single deposit insurance fund at any time in tha fotesaaabla
future bacausa tueh a comlngllng of tha dollars available in one
fund is stoply not politically feasible.

In 'merging ' -- yea, 'comlngling" — tha finances of both
insurance funds into one, under the governance of the FDIC, such
a pooling of finances would be called upon to pay for both
thrift and eomsiercial bank failures. Again, I do not beliave this
is politically feasible. Beyond the political consideration, such
a metgat would only serve to weaken the resulting, integrated and
coainglad common deposit insurance fund because ita obligation* to
pay for losses would be fer greater, without a commensurate
increase In ita ■

Those who talk of a 'nerget of tha funds' surely must really
be talking about a transfer of tha current governance of the
thrift deposit insurance fund from the Federal Hcmie Loan Bank
Board to the Board of Directors of the FOIC. were this to be tha
case. It would not constitute a 'merger of the funds' at all, but
rather 3 conaol idation oE the gowernance and management of cwo
separate deposit: insurance funds under one board of gouernors .
And, it thia were the ease, recapitalization of the thrift fund

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Th« lasu* of which board of govm^aaza should ov*es«e and
nanaga tha thrift fund does Indaad hav* profound, hlstOElc
iBpLfcationa (or tha futuca of tha thrift aYitan, as I suggaatad
aacliar. Tha POIC, vhich aatvas «s tha dapoait insuranca aza of
tha commarclal banking tagulatoty appatatua, and which axacciaaa
author ty over aona 14,000 commaEclal banka In thla country, la
orlantad toward an industry which ganarally ia quite diffarant
ftoa tha mora apacialliad natura of tha thrift ioduatty. Thia
suggaats, to na at laaat, that auch an oriantatian, IE the
FDIC we£* to govern both insurance funda, would subsequently lead
to a conaolidatlon of tha thrift regulatory and credit (Federal
Hone Uan Bank) apparatus w th that is to say, into — the
comaarcial banking system apparatus Thus, if ny Instincts are
cocract, the consolidation of governance of both depoait insurance
funds under the FDIC would not meraly represent a 'change of
control- ovar tha thrift insuranca fund but would definitely
slgnsl a profound change in direction for tha depository
Institutions system In this country — namely that any
statutorlly-basad system primarily oriented toward specialization
in home mortgage finance might wall ha saan as significantly less
relevant to naating public naada In tha futuca.

Tha Congraas could, of coursa, eatabllah a new and diffecaot
public policy rationale to justify tha continued existence of a
separata 'thrift* systmi, but that too might well signal a major
dapBEtura from its longstanding support for a rather mora
■pacialiiad housing finance system within the overall depository
inatitutions structure of the nation's financial system.

Whether the Congress chooses, at any time, to consolidate
governance of the two depoait insurance funds under the FDIC is
a call the Congress and the President will have to make. I hope
tha tecapltalliation issue doaan't gat us to that point, but
rather that our racapitalizacion plan movee us in the opposite

Bagardlass of how that comes out, recapitaliiation of the
thrift deposit insuranca fund Is, and will be, necessery in any
evant. In my view, the Bank Board-Treasury plan — though not
perfect, but what is? — is far superior to any other plan of

I believe vary deeply that recapitalization of the thrift
insurance fund requires a comoiCiiient — that is to say, deep
resolve on the part of regulators and leaders in the
Congrass to assure Chat effective measures are put in place to
belt future hamorrhagaa, resulting from new caaas. In order to

I recapitalization tha bast chance to succeed. Indeed, without
:ommltDent, tha likelihood of such success

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What 1* raall/ eallad for. In this tagaed, la coutaga.

Ragulatocy Initlativaa to aasi
ofCan contcovacslal In tha thrift i
Congcssa somet:iiD«B brtn^ subatantlal ptaaaut* to baar on
za^ulstota to relax or avan withdraw cagulatocy Initlativaa
lnt«nd«d to stcangthan aafaty and aoundnaaa In tha Induatcy. In
■y opinion, what thay ought to ba aaylng to ua Is: "Vou taka tha
haat. Wa'll back you up. Do what you hava to do to raaka tha
■ystaa woik."

It saaoi to ma that' any coonitaant to Eacapitalizs tha thrift
Insucanca fund by tha Congcaaa, Itsalti doaa, Indaad, Eaquite a
corollary comltmant to Maintain tha viability of tha plan by
Maintaining tha ttua Intagrlty of tha lagulatary procasa. During
My tanura In oEflca, nost of tha ragulacoty actions taken by the
Bank Board. In ita cola aa oparating haad of tha thrift inaurance
fund, hava bean intandad to ptoaota aafa and aaund and pcudant
thrift operating practlcaa, and thus ceduca tha clsk of lass, as
wall as actual lossaa, to tha Insucanca fund.

When thrift deregulation, on both the aaaet and dapoalt
side, went into effect a feu years ago, the cegulat<»ry apparatus

R the Federal Hone Loan Bank System uas simply unpcaparad to
effectively manage the new rlaka deregulation brought with It.
In the face of considerable obstaclea over tine, the Board has
navarthalaaa nada consldatable progress In overhauling and
tDodarnldng tha cagulstory apparatus to batter assure that safe
and aound oparatlng pcactlcsa are obaarved in the Industry. The
Board has takan positive, forward steps to move tha Industry
coward connan accounting and capital standards with tha
copBBarclal banking saccoc. But note remain* to be accoiaplithed.

Throughout my tenure, I have worked hard to inpLenent
inportant refanos to encourage contlnuad safe and sound
operation in the deregulated thrift environment. One of tha
moat irapoEtanc dccoraplishments of the Board hsa been tha
strengthening of the oversight function, nanaly examination and
supervision. Today, we have over 1,S00 field exanlnecs
throughout our aystam. That la twice as nany as we had }uac a
year and a half ago. In little mora than two years, w* hava
tripled the siie of our profaaaional supacvisocy staff
throughout tha 12 Federal Home Loan Bank ("FHLBank'l districts.

I also have strongly advocated higher thrift capital
standards that move us strongly In the direction of commarcial
bank requirements. Last Auguat, the Board adopted a new capital
Ctfla that requires all fSLIC-lnsurad thrifts to increaaa their

67-S84 O - 87 -

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n*t wotch to th* aix p«rc«nC ranga oval • phata-ln patlod tiad
to induatiy profitability. Tha naw cgla alao incotpoeataa a
tlak-baaad facmula. Thcifta muat poit addad capital Cot tli)ii«E
investaanta auoh aa acquiiltign and davalopaant loaoa.
ilBllariy, the eu1« pacnits caductlona baaad on affactiva
Intacast-cata clak aanaganant.

Tha Boatd haa alao aovad algnif icantly in tha dlcaction o(
eaqulcln? InatituClona to tapoct to ua ualng ganatally accaptad
accounting ptlnclplaa. In 19S4. wa did away with loan loaa
dafattala foz accounting putposaa on s ptoapactiv* baala.
rlva-yaar svacaglnq and twanty-yaar phaaa-in of -tagulatoty
capital ata gona. Putthat apptaisad aqulty capital ttaatiaant
foe thtift ofCicaa and beanchaa haa axpliad.

Ha aia moving quickly to iaprova tha PSblC'a ability to ua*
tha funda that recapitalization could pcovlda. Laat yaac va
initlatad an tn-dapth ceviaw of out FSLIC caa* coaolution and
tacalverahip opaiationa. Saaad on tha flndin^a of that taviaw,
I have charged a syatan-wlde Taak Focca to ptaaant
racofflaendatlona and inplanentation plana to tha Cull Boacd
within the coning aonth. Tha Task Potca haa been aalcad fori

Inplaaantation pEOcadutaa to auppoit a tacooaandatlon
foe delegation '.c tha regional fadacal Kod* Loan Banka
of tha staffing foe FSLIC caa* caaolutlona;

-- Inplanentation peoceducaa to auppoEt a caconnandatlon
for ateongai Boaed oveeaight oC FSLIC eacelvaeshlpaj
and, tha fullaat poaaibl* uaa of the Fadacal Ilaaet
Dispoaltlon Aaaoclation (FADA) foe both FSLIC aaaat
aoalyalai and the nanaganent and dlapaaltlon of
Eacelvacahlp aaaata;

~ Inplaoentation peocedueea to auppOEt a recoDnandation
foe a conplata ceateuctuEing of tha caae teaolution
procasa to peovlda note tinely due diligence eapotta,
earlier deciaion-naking by the Boacd> and a eavanpad
national narkatlng pcog.ean;

Inplanentation pracedurea to aupport a eaeoanandatioa
for the creation of regional counsala at .tha Padaral
Hon* Loan Banka to provide legal aupport for local Sank
case resolution ataff work;

— Inplanentation plans to aupport a recoranendation for
tha cceation of naw budget, case planning, cash
nanaganent, and audit review procedures for FSLIC. The
evaluation of FSLIC ataff parCocnance and bids for Ct)*
acquisition of inatltuttona will now be judged undac a

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coMplataly ravlaad ayatam which capltaliiaa Cha holding
coat of aaaata in datarninlng banchawika for adaquata
lacovacy of valuat

~ Imp lamentation pioeadiiraa for a naw nanaganant

infocnation jyatan ncludln^ ragiilat and aicaptlon
lapotting to luppoit bcoadai BoaEd dalaqatlon of
VSLtC functiona. Thla recoraoandation will laquira tha
davalopnant of atandardlzed FSLIC proceducea Cot tha
bid valuation pioeaaa foe dua dUi^anca xapOEta, for
all casa analyala, for bid packaga praparation, and for
poat-audit raviawa.

Wa aipact to stait tha procasa of iaplaaanting thaia
taforma within 60 daya. I an confidant that tha propoaala I
hava juat daacEibad will pacmit tha Board to giva tinoly and
accurata capoits to tha Congtasa of oue diapoaltion of FSLIC
funda. t fucthaE axpact that thaaa rafoEiaa of tha FSLIC caaa
EaaoLutlon and raceivaiship pcoceducaa will inauEa tha mailnua
EacovaEy of valua foe tha FSLIC fund by uaing fully tha ragional
tasouEcaa of tha Fadacal Homa Loan Banka. tha OEganiiational
axpactiaa oC ruDK, and tocuaing tha work of oue FSLIC cantcal
ataff on caaa planning and budgating, policy ovaEalght and
poat-audit ravlaw.

In By Eola as ragulatoEi I hava not pandaEad to tha industry,
and Boat particulaEly to tha high Elaktakaca, tha high EollaEa and
daEedavils, who thzough thaic gsaad and lack of pEudanca in
opoEatlng fadacally'inauEad aavlnga inatltutions hava craatad haga
losaaa, and praspectlva loaaaa, foe tha thtlft InauEince fund. On
tha contrary, ! have sought, with soma considarabla oppoaition at
tinaa, to put in placa tulas which I hava bellavod would laaaen
tha Eiak of loas to tha Inauianca fund, without unduly EaatEicting
sound oppoECunitiaa fOE thrift inatitution pEOf itabillty. In
part III of thla statonant t addrass ona InpOEbant 'axaBpla of
such a rula, tha dlroct Invastaant rula.

kt a tine whan wa sEa talking about tha stata of atfaita
which has bEought ua to tha critical iaau* erf FSLIC
racaplta Illation, thla la no tina to tanipOElx* on tha dlract
invaatment iaaua. In ny nind, tha racapltaliiatlon of tha
thrift fund makaa littla aensa if wa fail to daal with tha
diract invaatnant Iaaua and ita tnpact on tha raaarvaa of tha

FSLIC.

The effort I hava undaEtakan over time to rastora
diaciplina and aafaty and soundnass ptinciplaa to tha thrift
ayaton nust continue. Call it ■ta-ragulation' If ona foala
conpallad to do so, but there is sinply no aubatltuta — by
whatever nan* — for aafaty and aoundneaa it racapltalliatlon of

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th« thrllt inauratica fund i* to b* aCtcctlva in both th« ahott
•nd long tara. Without appropriata diseiplina in th« thtift
induatryi and • racognitlon on tha pact of avacyona that a*t%
and sound ehciCt opacationa ara tha kay to tha thrift industry's
futuca, any plan to cacapitallia tha thrift insucanca fund can
only and la ultlaata falluta. A hanoichaga of loaaaa to tha
thrift fund fcoa a spata of nax thrift failuraa (abova and
bayond anticipatad raaolation costa] arising froB a (alluca to
insist on, and yas daaand. that thrift aanagaaants Oparata thair
institutiona safaly and soundly and pcudantly> would ha a
aalf-dafaatlng phanoaanon.

Kanca tha naad (or giaatar ragulatory disciplinai to aaaura
that aafa and aound thrift oparating practlcas do pravail in tha
futurai and a strong raalltation on avaryona's part that
protecting tha futura raaarvas of tha fund Is-, In tha daapast

. truly in tha public inCarast, bacauaa it la tha tarpayars

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II. THl fHtBa-TKMSDW PUUI TO KlCKPITALriB THE FSLtC

Th* CEUK of tha propoaal haa not changad tzom that outllnad
in aarly 1988. It allowa the ua* of tha letainad aainin^s of
Ch« FHLBaDka to tarva aa aaad Bonay for a n«u ^ovAEnnant corpo-
lation (tb« 'Financing CoEpoiatioa") , which would lavecaga tha
sa«d Bonay to boctou fron $10 to SIS billion ovac tha i^aitt raw
yaara. Tha Financing Corporation would than u>« thaa* funds to
purchaaa stoclc in tha FSLlC Wa aatinata that, Ovat tha nait
Clva to aavan yaara, tha FSLIC would obtain capital of froM )2S
to a* auch aa 53a. S billion fro* its aala of atock to tha
Financing CoEpoiatlon, ptanluB collactiona, incoaa fton tha
diapoaitioD of aasata uodar tacaivarahlp, and Incon* from Its
lDvaat««nta.

Daring tha naxt fiv* to aavan yaara, th« FHLBanks would
centrlbuta to tha Financing Corporation aa much as S3 billion of
thalr ratainad aarninqa. Tha FHLBanka ' ratalnad aarnings, as of
Dacaabar 31, 19SS, aggragata in axcasa of S2 billion. Evan
aaauBlng slow aconoaic growth, within flva yaara or ao thasa
ratainad aarnlnga ara arpaetad to grow to approrlmataly $3
billion.

Tha Financing Corporation would opatata in two concurrant
■odas — aa a funding corporation and in a sanaa, aa a truat.
It would hav* all tha aa«« atttibutaa as « govarnaant agancy
opaiating in tha capital narkata. That la, it would b* daamad a
•afa, high quality aacurity utiliiad tor a high public purpoaa
and thus aligibla for putchasa by various trusts and
fldttclactas. Howavar, iti dabt would hava no guarantsas from
tha Traaauty oi tha FSLIC. Fucthsr, it would hava no paid staff
of its own, bat would utilisa tha axiiting staff casouecas of
tha PHLBank Syatan. Tha Financing Corporation would sunaat by
3017.

Tha Financing Corporation ' a borrowings would taka tha form
of collataraliiad Inng-tara bonds. It could accasa tha capital
aarkats, as tha JStlC'i naeda dlctatad, ovar tha nart fiva to
savan yaara. For eianplc, f tha FSLIC'a rasolution coats ovar
that pailod wata less than the roughly sas.S billion wa
anticipate, the FinAneing Corporation would slaply uss Cswar
FKLBank retained earnings aa seed nonay for borrowing in tha
capital aark*ta. Thia flexibility allows the plan to deal with
resolution coats on an "as naeassaiy' basis.

Pay««nt of tha principal and interest on the bonds would be
tha sola obligation of tha Financing Corporation. Inportintly,
no paynant would be guaranteed by the 0.8. govarnnent. Payment
of the ptlncipal aaount of tha bonda would b« asaurad, bacausa
tha principal would be fully collateralliad at aaturity with
govarnaant sacucitias held in trust for that purpose. Tha

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rioancin? Coipoiatlon would puechaaa this collataral with a
poctlon of th« funds it r«c*iv*a fcon th* PHLBanks. Ovar -21 to
30 y*ars> tha Carm of th« bonda, continuing catutn on tha
collataral would coapound anoagh Intaeaat to aaauza paymanc of
tha pElnelpal amount of tha bonds. Sii(;h Invastnant taturns ai«
«OBt aasily assurad by tha purehaao of taio eoujpon bonds, but
othar aaans «ra also arallabla.

Invastots also could taaaonably axp*ct pcoapt payaant of .
Intatast oa tha bonda of tha financing Coepoeatloo. tntatast
would ba paid with funds Icora two jouicas: (1) a taaaiva fuodad
with a pottioa of tha funds concrlbuted by the PHLSanlts and (21
dedication of f. portion of the fSLIC prainluiii attoan froB
Insucad institutions. To prevent a 'doubl* whamy" to insucad
institutions th« bill csducss PSLIC's piamium assassasnt
auchocity by any dabt saivlcs tha financing Corpoiation inicurs.

Advantages of the Ptopoaal

Tha proposad bill ptoducaa savatal iMpoetant banafits.
Pitat, the FSLIC would ba able to aaploy as auch as 93^.5
billion oval seven yeata — If necasaaty — to raaolvs its caa«
load of taEainally-ill thclfts. Thia would halt expansion of
tha PSLIC's ptoblama and boost dapositot confidence a ttre
PSLIC, tha thrift syatan and tha ovetall financial systsa.
Host inpoEtant, tha taxpayacs would not apend a penny for tha
cost of Eecapitalization: Tha coat would be bocne solely by tha
FHLBanka and FSLIC-insurad thlifta without any gavecnnient guar-
antee of financing Corpotation debt. Third, the flexibility
built into the bill patnits tha Boacd to taise gcsduslly a range-
of funds for tha rSLIC — as needed to resolve cases invpLvlng
teraiinally-ill thtifts. Ikdditlonally , the bill Is structured
catatully to cccats budgetary recaipts from the equity
investments in tha PSLIC that will offset budgetary outlays
resulting fton the FSLtC's case resolution costs.

ProD the industry's perspactlva, renewed public confidence
plus the sale, norger, or liquidation of the weakest thrifts
should help tha industry lower its cost of funds. The cost
diffacential that thrift Institut ona pay over that of
commercial banlts is in excess of S* billion a year. J"
addition, tha bill providea for the PSLIC racapitalizacion
burden to be shared fairly between the thcifta and the FHLBanks,
with contributions structured' to ininimiza the adverse effects on
both. It oust ba kept in mind that tha PHLBanks will still be
able to economically pYtivide long-tern funds to many., of the
snaller thrifts which cannot sccess these markets themselves,

ability of tha FHLBankB to Prcvide Seed Money

The PHLBanks, whose stock is wholly owned by nembar savings
Institutions, derive their inconefrom the advances and other
services provided to thetr member savings institutions, in 1986,

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the FHLBanka aiEnad Sl.t billion and paid ouc ovar $900 Billion
dollacs in cash and aCock dividands. At D«:aBbai 31, ISas, eh*
FHLBank Sy*t«a had an agqtagae* of 3131 billion in aaaaCi and
Sll.T billion In capital with total latainad aarninga of S3. 3
billion; nwking It ona of tha atcongast financial antitiai tn
the woe Id.

Sivan tha laval of tatainad aainlngs and lnco«*> «• axpact
that cha FHLBankB could ptovid* S3 billion to tha rinanclnq
Corporation ovar tha naxt savaial yaati. Thit anount. In

raLatlon to ita extrasaly atrong capital basa, insuiras that
FHLBank dabt would ba protactad from poaaibla highar boEcowlng

Phaaa-Out of Spaeial Aaaaawant

Finally, tha Induatry will banatlt bacauaa tha cacapital-
iiatlon funding will pacnlt the FSLIC ta phaaa out Ita apacial
(praniun aaaassment Ondar our curcant aaauniptiona, tha
apacial aaaassntant couid be phaaad out gradually ovar flva
yaara. w« balieve such a phaaa-out of tha apacial aaaaaaaant
providaa ttia many healthy institution* an opportunity to aaa "a
light at the end of tha tunnal' with taapact to that coatly, but
now nacasaary, bordan.

g»lt Faaa

In short, I baltava that this plan rapiasant* tha nost
faasibl* and cost-conscious nathod to assure tha continued
strangth of both tha FSLtC and th* thrift Industry. Ho caspon-
sibla parson, however, can ignore the fact that the plan's
ultiaate viability depends on reliable revenue projecCiona. The
plan can work over its projected Life only If we take into
strong account now the need to maintain a growing deposit base
in tha induatty to support FSLIC'a activltla*. However, soma
menbers of th* Industry have threatened to chang* th*ic ch>rt*ts
and abandon tha FSLIC insocanca syatm, thua avoiding th*
payinant of FSLtC insurance pcemluns.

To avoid any doubts that night undercut the plan's overall
design oc Investor confidence, I believe the beat approach ia to
devls* an express statutory safeguard to Unit erosion of the
FSLIC-lnauranca pramiuiii-paying bas* . Th* National Housing Act
currently authorlias th* F5LEC to charge a fa* against instltu-
tlona that voluntarily leave the FSLIC insarsnce s>'Stem, kt you
know, the FSLIC has been aaaesaing "exit feaa,* but recent
litigation may have a chilling effect on the flexibility I belleu
the F'SLIC urgently needa . I propoae that tha bill under consid-
eration be rev sed to reaffirm and expand tha authority of the
FSLIC to impose fair and raasonabl* **sit f***.* In my vi*w,
adopting approprlat* languag* to raatfirn out authotity In this
regard is crucial to naxinlie the leng-tem auccass ol re-
capitalization.

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F8LIC foe Chif or och«E lagitlnata butlnasa puEpaaas. Rowavaci
tha axit faa «uat roughly covat In pcaaant valua tanis tha lost
pta>luB Btiaan ovaE tha aarly yaara of our plan, uhan It is nor*
vulnarabla. Sons of our axle faaa to data hava baen daaignad
with thaaa dual objaettvaa in aind. Ha will aoon peovlda you
vlth • pcoposad aaandnant to tha bill to addtaaa this problaa.

liUka

Finally, I cannot ovacatata tha utgant naad to adopt tha
racapltalisaCion plan as soon as posalbla. Waiting six months
ot BOca could fatally harm our plan by atodlnq consumar and
invaatoE confidanca and fuEthaE inpaElling tha FSLIC. To

• Tha aajoe eisk of dalayad pasaags is that It vould

jaopardisa tha guaEantaad advancaa pcogcam of tha WSLIC and
could pxaeipltata a liquidity eclais oc dElva up tha cost of
catall daposlts. As piavlously aantlonsd tha FHLBanks hav*
■ad* roughly S3. 6 billion In advances to theitts that at*
FSLIC casss, on condition that the ESLIC guarantas thass
loans, knothat $2 billion In such advances has baan
Dequeated at this tlaa. It thssa advances wera not mads and
soma of tha outstanding S3. 6 b lllon not csnawed, it would
taqulEa tha Inatitutlons to compete aggteaalvely foe what
at* claaEly high coat catail deposits, thereby Increasing
coats foE thanselvea and othac institutions in thait
aackata. Some institutiona would be fOECad to seek
amacgancy funds directly fron tha FSLICi placing a graatae
strain on tha slim priRiaiy rasarvas of tha FSLIC.

e The ongoing operating coats of failing thrlfta that the FSLIC
cannot afford to close is mounting by ovar St million a day
or almost $2.2 billion a yeat. He aEe haedly even able to
'tcead wataE' If we don't close coatly and teEmlnally-ill

a FuEtheE delay say wall jaopaEdlia the ability of the

Eecapitaliiation plan to go foEwacd. The plan can succaed
only if capital aackat funda are obtained at a Eaasonabl*
cost. InvaatoE conceEns about tha continued waalt stats of
tha FSLIC and the abil ty of CongEesa to deal with it could
undetmine confidence to the po nC where such bonds would b«
vety costly. If such uncettalnity tises to. this point tha
plan could became infeaaible Coi two Eeasons: (1) debt
aeEvlca could axcsad peamlun Incoma ot (3) tha Invaatoc
base could ahtink as those constrained to high quality
invastasnts withdraw. This would prsvant raising sutfleiant
funds for easolvlag casas.

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• riaally, daisy Mould sbacply Inciaaa* coaea dua to tha loaa
of caceatfl tai provisions that now zaduca PSLtC costs, aa
auch provision sts schsdulsd to axpirs Dacaabai 31, 19Sa.

III. OIHICT IMVKSTMHIT

As I ssvhaalzad aarllac, rscapltaliiatloa la not a paoacas
bat siaply ths £ltat stsp to csstortoq tho rSLIC to ioag-tsta
viability. la my own pscsooal visw, ao lapoitant taqulatoey
adjunct to rscapltallaatlon Is ths dlract invoataant culo.

Tha cagulstloo la plscs aow, wblch waa adopted by ths Board
aoaily two ysara ego, usss ths concspt of a auparviaory tsvistf
tbcesbold beyond wUch stats-charCsred FSLIC-laaiiEed thrift
InatltutloDS nust obtain supstvlsory approval to exceed the
thresbold. The threshold 1* tsn percent of aaaeta or twice net
vorth, whichever Is greater.

In Decenbsr, a aajoclty of the Board voted to srtand tha
rule's sunset date to nsrch 13, 1987, to hold a public hearing
on January 29 and 30, and to ssek sddltional coa«snts. Ths
views t express here are ay own, and reflect my understanding of
the facta at this tins. I will, of course, consider any nsw
facts presented In the cooDsnta or at the hearing before I cast
■y vote on the ruls.

The few vociferous opponents of ths rule constantly
aiseepresant what the rule requires. I would like to anplaln
what the current rule Is. The rule doss not prohibit a thrift
froei Making direct Investasnts. State-chartered thrifts nsetlng
their ainiauB net worth regulreraents nay place up to tan percent
of thalr aaaeta or twice their net worth, whichever ia gtaaeer.
In direct nvestmanta allowed undsr state law without ssslcing
any approval froM the FSCIC, Aa I will siplain in mora detail,
this la an sxciaoEdlnacily genacaus level of dlcect Invastnsnt
that tar aicaeda what you in Congrasa have decided la
appropriate for federalLy-chBrtaratl thttfca and what our slstar
banking regulators have proposed for connatclal banks. AIL our
rule does la aatabllah a chEaahold beyond which FSLIC la sllowad
tha opportunity to dateraina whether tha thrift lacks adequate

direct invastments bsyond threshold levels in a safe and sound
aannar. TSLIC beats the ulttaats risk of loss on such direct
Jivaatmants because it insures these state-chartered thrifts.
The threshold allows the FSLIC a modest ability to tlait Ita
risk axposura before It la too late.

The rule was carefully doaigned to alnimlsa raqulatoty
burdens, to avoid re9ulatlan to tha lowest coaiion denonlnstor
and to consider tha view of state regulatoEs. First, ths
regulation affactlvaly crsstes a prasuapcion of approval. An

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appLlcacion to aicaad th« tht*«hold mat b« appcovad unlaaa th*
Principal Suparviaoty Agant ("PSA") can aaka an* at aoca of fouc
apaeltlad findings Indicating avcaaalva clak.

Sacondi apaady pracaaalng of appllcatlans la aaaurad. A
coaplata appllcatloo la "daaaad approvad* unlaaa tha PSA aak aa
ooa of tha fout findtoga and danlaa It within 30 daya.

Third, tha applioatloo raquliaaanta ara BinlBal. Iha
application principally taqultaa a bualnaaa plan Chat
-danonatiBtas tbat tha thrift haa ««aagaclal raaouccaa with
aipartlaa in tha plannad araaa of diract Invaataant, aound
UBdarwEltlng piactlcaa and ntenda to d vaeaify Ita invaataanta.
I Auat adait that I an atunned when oppooanta of tha tula
eonplain of tha nacaaalty to pEepare a bualnaaa plan prior to
aaklng huga dlcact invaataanta of a aagnltuda that woald aacaad
tha thcashold. Tha fact that thay would aaback on auch a rtaky
eoutaa without a bualnaaa plan cavaala praclaaly why tha F8LIC
badly naada procactlon tea* auch gsablara.

Fourth, tha application to axcaad tha thtaahold naad not
aat forth tha spactflc dlcaec invaataanta enntanplatad.
Opponanta of tha lula hava coaplalnad that buaiAaaa daala hava
short fuaaa, and tbat a«an though a coaplata application la
'daaaad approvad* attar 30 days, tbay alll losa sojoa daala it
thay hava to apply to aaka each Individual diracc nvastmant
bayond tha threshold. This critlcisa alght hava soma validity
if tha rula laposad such a caqulcaaaDt, It doas not. Tha cul«
asprasaly authoiliaa applications tot authority to go to aoaa
laval of diract invaataant, a.g. 30 patcant of asaats. Such sa
arellcation can bo fllad In advance and. It not daalad, will
allow Inaodlata conaunnatlen of future direct Invaatmant daala.

ritth, tha rale provides an iaportant tola for state
ragulatois. If tha state cagulator supports the applloatlon,
tha' PSA aast contac with that isgulatoc and consider his or hex
views In evaluating tha application. In tha event that tha PSA
dlsagcaaa with tha atata regulator, tha application la
autoaatically cafarced to tha Bank Board for decision.

Sixth, there la a right of appeal to the Bank aoa«d It tha
PSA danlea the application. Once again, if the Bank Board doaa
not affica cha PSA's denial of the application within 30 daya of
the Sank Board's receipt ot tha appeal, tha application is
'daaaad approved.* Even It the Bank Boaid atflms tha denial,
tha thrift can obtain judicial review of tha Bank Board's
decision.

Seventh, tha rula clearly doas not regulate to tha lowaat
eonoon danoalnator. Thrttta that do not aaat thalr net worth
taquliaaant cannot aaka direct lovkstasnta without ptloe PSA
•ppcoval. Sttongae thrifts can invost up to tha thrsahold
without any necessity of seeking approval. The fact that tha

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Tal« s«U tlM thtashaLd aC th« gcaatat of ua p«cc*nC of asaats
OE twlca amt worth alaa Cavots atcongcr theifta. Whlla PSLIC la
io a aavaca fiaanctal cclals, w* aheuld not totqmt that «ost of
tba ChEltt induatry ia haalthy and pcodtabla. Any
acata-chactacad thrift with nat worth abova five patcant haa a
thraahold In aicasa at taa p«rc*nt of aaaata. Flfty-alght
paEcant of all itaea-chBceacad thrifta hav* oat worth la axeaaa
of f va paccont. Equally Inpottantt thrifta with atrong oat
worth and aanaqaiaanc mtt thoaa aoat llkaly to cacaiva approval
to aacaad tha tbroahold.

I hopa yea will agtaa with aa, that your alatar coaulttaa
on Govacnaant opacatlona waa Eight iriian It pcalsad tha EUla for
Ita flaxtbility and auggaated it aa a aodal for othar financial
ragalatory atfoeta.

Tha lulo naa not only caEafully daalgnad; IC'a woEkln^. Aa
wa thonghtr tha thraaholda waca aat at auch a ganasoua laval
that only a tiny pareantaga of thrlCta hava aought to arcaad
th«B. Indaad, avan thoaa atata-chaetarad thrifta which could
axcaad tha tan paEcanc of aasati piong of tha thEaahold without
any application, bacauaa thay hava nat woEth In aicaaa of flva
parcaot, Earaly do ao. Foe aiaapla, of 73 inatltutiona (54 of
vhich aca itaca-chartarad) In California with taaijlbla nat worth
graatat than six parcant only olght thrifta placad aora than
tan paicant of thair aaaacs in ditaet Invaatmants For Taxaa,
only thcoa of H thttft* 38 which ara atata-cnartarad) with
tanqlbla nat worth giaatat than all parcant placad aora than tan
paEcant of thaiE aaaata in dltact invaatmancs Hhlla
fadaially-chaEtarad thrifta cannot oaka such laEga dlract
invastaanta. It is ralatlvaly aaay to convart fEoa a fadaEal to
a atata chaiCaE. Bacausa chc thraahold allowa a thrtCC to
Invaat tuica ita ragulatoEv nat worth, which a invariably
graatar, and of tan auch ^raatar, than taaglbla nat worth, aach
of thaaa 137 thrirta could hava invastad at laaat 12 parcant of
Ita aaaata In dlract nvaitiaenta without tiling any dlract
lavaataant application with tha VSA. It la claar that tha vaat
aajoclty of thrifts do not find It prudant to Invest auch high
propartlona of thalr aaaata In riskier direct nvaitnenta,
noraovac, as I aiplainad eaillar, the antra expense of filing an
■pplloatlon abould ba «lnt»ali bacauaa the only time-conaualng
raqulraMant, preparing a buslnaaa plan, would be dona by any
prudent thrift, even in tha absanca of a eagulatocy raquiraaant.
It direct invaataanta ware believed to produce aubatantlal
prailts safely, tha alnlaal aztta coat of providing tha other
data Eaqultad in tha application plainly would not dater any
tilings.

The lataat coaplata data I have ahew that through Saptaabar
JO, ISIS, only 74 applleationa had baan Iliad to azcaad tha
threabold. Twelve of thoaa applleationa wera withdrawn. -
Thirty-savaa vara approved. Tan ware denied. Pour of those
daniala ware to the aaaa two inatltutiona. Plftaan applications

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w*M paodlog. Thna. o««e 90 p*re*nt of all applle«elana wblcb
had bam dacld«d had baao appcowd. Th« ayaeaa la tMcking
•ttEaaaly wait, tc iMeka axpadlcioualy, wleh alalaal Eaqulatftcr
bucd«aa an tba induatTy, anO th* PSAa arc diCIaEanGlaelii?
batwaao thitCta on ground* foe whieii thar* la beoad a^raaManc; ,
tadaadf eba danlala hava not peovad eoatiovacalal. Only ana - -
baa baan appaalad to tha Kank Baaed. Mo ona baa auad. "^ ■■ ■ ',

Iraeyeoa know tba c«La la vary eoateovaeatali bat la*tact>
It haa baan cloaa to davold o( contcovaciy. Thai* la tba aoafe .-
aaailog ptopaganda caiapal9n oppoalng thla tula that I bava auac '
•aan. Ttia chatoric and Eacclcs uaad hav* baan vltupatatlva, bu(
thay aca ch* pcoduet of a alnnacula nu^aoc of thclfta.

I aantionad aatllae that tba cula'a thrasholda aca qanaeoua
In coapaciaon to thoaa »»t by Congraas and tha banking
cagulaCori. Congeaaa baa aat tha lavala of dlraet Invaataanta
It cooaldaca prudant fot ladarally-chartarad thrift*. That
laval ta three peccant of aaaata, and it la a flat Halt on
dtcact lavaatMant, not a thrasnold chat can ba axcaadod abaanc
danlal by tha PSA. in >y axpaclenca, Congcaaa alvaya catafially
conatdaei Ch* lapacc of thrift InvaacinonC authority on tba
haalch of tba rSLIC fund bacatia* at ita eonc*rn for tha fund and
baoauae of ctia potantlal Inpact on tba Traaaury of any collapsa
of tha fund. Stata laglalatur** hav* no fioaoelal ataka In cba
lawa tb«y paaa authorlitng dlcact InvaattMRta by rSLIC-lnauead
thrifta. Franklyi aoaa atacaa do not aaad to hava 9lv*n caratul
eonaidatacion to tba Inpaet on tha PSLIC fund of tba
aztTaoedlnary dieaet Invaataaot authoclty thay bava gcaotad to
thrifta thay ehartat but PSLIC Inautaa.

Tha banking ragulacora hav* propoaad fat aora attln^aot
llnltaclona on dlcact Invaacmanta. Th* FadaraL Baaarva Board'*-
("FBB') pcopoaal would raqulr* auch dlraet lovaataanta to ba - -
nad* thEough aacvlca corporation* and Unit • national bank'a
aqulty Investnene n Che service corporation to no aor* than
flv* pecc*nt of the bank a prlnary capital. Conteaat thl*
peopoaal with ouc Chcosliold which allow* a thrift to Invest
twlc* Ita cegulacary nat wotcb, 1.*., 100 p*rc*nt of n*t worth.
In direct invescmanta without oaklng any application. That 1* 40
tin** graacec Chan the FBB a propoaal, but that conparlaon la -
•la leading. Much of what a thrift can count aa rogalatary nat
worth [e.g., subordinated d*bt and goodwill) ia not aliglbl* far
traatnant as pclmary capital. Indaadr ha lf of all lagulatory
nat worth 1* goodwill. Thus, our thEaaSoIB' 4a appcoxlnataly 80
tloas greater than tha FBB'a propoaal, Anothac way to analyza
tha altuation la to conaldat a thrift with the** p*rc*nt n*t' .
hfocth. It can place Cen p*cc*nt of lea aaaata {333 p*rc*nC of
n*t woEtb) In dttoct lnv*Btaanca befor* tEigg*Elng th*
che*ahatd. Tha thraahold fot suifli an InatitiKlon ia ov*r (S
tinea gc*at*r than undac th* m'a pEoposat, Ind**dr th* FRB
probably would not allow a bank with such low. capital oo aak*

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•ny dlcAct invcaUMnta (at avap atmy In taiaiaaaa). And
c^MBbat, out ehtvahold la aiaply eha pdlnt at wblch tha PSA
9«ta a ebanea eo tavlaw an •pplleaClen.

Tba FDIC pcopoaal la mat* gaoatoua than tha fU'a, buc
atlll Bueb NOi« stetDqaoC than out tut*. It would allow a bank
to Invvat op to ona-halC its prlmdcy capital In dlract
lavactaanta . Our nat uocth thcaahold is fom tlaaa gcaatve than
that (ganaially avar alghc eiaaa seaatai whan tha diffaEanca
batwaan cagulscocy na« vorth and bank pei««ry capital la
conaldaEVdl. Our tan peccant of aasata theaahold, for a Chtltt
with tbcaa pareant tagulaiocy nat worth, would aqain ba 333 '
parcant of oat worth or over siK eimea graatar than for • banN
undac tha FDIC'a pcopoaal. One* aota, tha faw ahEill opponanta
ot tha cula bava triad to plccute cha Bank Board aa out-of-stap
wich Conqcaas and banking eagulacora. Aa ay axplanatlon show»,
if wa ara out-of-atap it can only ba bocaua* wa aca tat too
eaatiatnad In out caqulation of dltaet Invaatvanta.

Tha final ataa ot dlapnta on dltaet Invavtnwnta la thalc
calatlva tlak. Thla is ona of ohoaa caia acaaa what* coNson
aanaa, aeonoale chaocy and actual taaults agcaa with aach
othac. CoaMon aanaa talla us it is battac to ba a aacucad
ccadleot of a bankrupt coapany than a atockholdac In It.
Sacurad ctadltoca taka fitat, aquity Invastora tacovat only If
thaca ia anougb aonay Co pay all tha ccadltots In full.-
CoiMian aanaa talla aa that If aoaaona ia otfaEing aa a hlghar
axpoctad rata ot latutn on • dlcact nvascmant than a aoctga^a -
loan ha la doing It tor a Eaasoni not bacauas ha la ganaroua.
Tba taason ha haa Co ofI«r ma a hlghar axpactad cata of catutn
ta bacauaa I taka on nora c sk It I niaka tha dicact InvaataanC
Chan if I aaka tha homa raoccgage loan Economic thaocy says tha
saaa thing — dicact nvaatnant* aca ganacally claklac and
Chacators caccy a hlghaE aapaetad cata ot catuen.

Out aiipatvlaoty atpatlonca agraa* with coaaon aanaa and
aconoaic tbaory. PSLIC has suffaead cacclbla loaaaa ftom dicact
Invastaanta and putpoctad loan* chat wata easily dieact -
Invaataants.

U« hava dona a

•twly

of our loasaa froa dicact

est«

In recant failuras.

In a

Juna, 1986 study by Jaaas

ft."

Bar

Dan Brumbaugh, Jt.

■nd Da

lal Sauarhaft, tltlad *Fa

a C

of Govarnnant^Hagul

■tad r

nanclal riraai Tha Csaa c

cit

of tha study concluded c

for

failad thrift inati

, each dollar of direct i

tae

jnct.aa.a tha coat

C bv do to as cent*.

ib,Google

Also, I E«c*atly aakad ay *tmtt to E«vi«w the status of
thrift Inatitutlon* autvayad In a 19B4 study prapaiad by Or.
Oaorga Banaton. In that study. Pcofvasoe Banatoo ar^uad agalnat
any easteietlana whatsoavac on dlcact aqutty invaatawnts. In ay
opinion, tha Easglts of this updata ptovlda Cucthac
justification foe tha propoaad axtanalan of tha cagulatlon.

In his original study, Ot. BansCon piehad a saapla of 34 oC
37 fSdC-loaarad inatltutlona vbleh bad dicact invaataanta In
azeaaa of tan parcant of aaaata in Docanbae 1983, In 1913, tha
avataga cagulatory nat wottb of ttiasa 37 natltutlona, aa a
paecantaga of llabllitlaa, vaa *,3 parcant as conpacad to tha
thElft Industry's avaraga nat worth, of 4.18 parcant In
Dacaabar, 19B3. On tha basis of tbls.coaparison. Dr. Banaton
ciaiaad that di'ract invaataanta poaad no additional cisk. By
Juna 30, 1986, that ratio for tha 37 inatltutlona had droppad
fion 4.3 parcant to 0.33 parcant whila tha Industry avaraga had
rlaan to 4.66 parcant on Juna 30, 19S6.

Of tha 37 institutions, 21 havo slnea althar baan eloaad.
or ara Inaolvant, or ara projactad to ba Insolvant within a
yaar.

Tan of tba 21 laatltutlons ata In tha F8LIC caaaload today.
Thay hava aaaata of S6.3 billion and tha projactad losaaa to tha
rSbIC through Easoluelon ia 92 billion.

Bight of tha 21 caaaa ara projactad to ba Insolvant within
a yaar. Thay bava aaaata of 93.75 billion and urn astlaata tha
eoae to tha PSLtC ot casolvlng thaa ia 91.2 billion.

Thraa of tha 21 1
aaaata of 9730 allllor
PSLIC: 93S0 nlllion.

Tha ochar 16 Cof tha 37 1 natltutlona J had a raturn on
asaata of 30 baala polnta on Juna. 30, 1986 — far balow tha
avaraga tatucn on aaaata of tha profitabla four-fittha of tha
thrift Induatry, 103 baals points, on tha aaaa data.

Tha 21 Inatltutlona t havo daaeribad abova hava cost, or
ara axpactad to coat, tha PSLIC about 33. S billion to casolva — -
ovar 91. S billion dollaca nora than tha total prlaacy caaaeva of
the PSLIC today » and, again for Juat 31 fallad or falling
iaatitutlons.

Tha 37 Institutions, which had in axcass ot tan parcanc oE
aaaata In dlcact invaataanta In Dacaabar, 1983, and which had
an avacaga tagulatory nat worth of 4.18 parcant, now ara down to
0.23 parcant — an avaraga varglng on Inaolvancy. In auai, tha
very saapla chosan by Dr. Banston aa an laportant baais for hia

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elala cbat 41e*cc iav«Bta«nti b«yond th* thcvshald* raducad elsk
and tnct«aa*d ptofits has peovldad dttvaatatlog avldaoe* of eha
•etoEa of hla analyals.

Tba Bank Board atatf ha* dooa anattiai study along th* aama
lliMa, but baa llaltad It to tba Callfotnla •ipveiaac*.
CalifoEiila, «• yoa know, baa the aoat libotal law tor
stat*-ehaEt*E«d tbcltt Inatltutlona In tb* eountcy. with th*
anthoeity ^caatad to tta own chactcta to plaoa up to 100 poccant
of aaasta in dicact aqulty tav«at>anti.

Tba atudy ahows tbat 33 Callfocnla itattt-ehartarad thcltts.
Inaotad by tha rSLtC, had dtract lavaataanta In axcaaa of flra
paieant la Dacaabat, 1983. la Saptaabac. 1936, 37 of thaaa
laatltatlooa waca laft. Flva had tatlad. Ooa had aargad.

Tba avacaga eagalatoty nat woeth, aa a patcaotaga of
llabllltlas, foe tha 33 California tbttfta was 3. OS paccanc In
Daeaabar, 1983. Thay bad an avataga eaturn on assats of 0.066

By Saptanbac, 1986, ttia 27 Callfocnla Inatltutlona whlcb
ramatnad had an avacaga nagatlaa nat wocth of 0.304 paccant and
an avaiaga naqativa eatutnon ••■ata of 3.34S paccant. Eight of
tba 27 initlcuciona aca pcbjaetad to ba inaolvant within a yaac,
aavan aca FSlic inaolvanelaa and flva hava fallad. Thaaa 30
fnatitatloaa la California ara axpactad to causa loaaaa to tha
PStIC aaounting to 83. IS billion.

DaeaoEac, 1933, alavan cainatn.~ In Daaaabar, 1993, thaaa 13
Institut ona capoctad cagulabory nat worth of 2.771 paicant and
a nagat va eatuin on asaata of 0.172 parcant. By Saptaabati
1986, thv alavan Inat eutlona which ranalnad wara rapottlng
avataga n agat Ive nat worth of 9.692 parcant and an avaraga
nagat iva caturn on assats of 13.691 parcant.

Thcaa of tba alavan tastituttoas ara ptojactad to ba
inaolvant within a yaar, flva ara FSLIC insolvanalaa and two
bava tailad. Thasa tan California Institutions ara pcojoctad to
rasult In loaaaa to tha PSLIC of an astlaatad 91.9 billion.

To put this in pacBpacttva, by campaelng tha pacfocnanca of
tba Calltoenia thtitt Institutions which waca not, and ara not,
•ahiog dlract investments abova flva parcant of aaaats (148
institutions in Saeaabar, 1983),'*^ea* inatltutlona had an
•varaga nat worth of 4.699 percent and an avaraga ratucn on
assets of 0.486 parcant In Oacaabor, L983. By Saptaabar, 19S6,
these institutions had Incraasad thalc avaraga nat worth to
S.3S0, and thalc avaraga return on assats had nearly doubled to
0.8S4 percent.

..Google

Rcvtawiog tti*«* studi*S( I ••• *aa« vccy algoitlcaac
tranda. Ftcst> eh* studiaa ■••& Co ahou ttiac a thcllc doaa noc
Itava to aoga^* In high Icvala of dliace iov*st«Mnt to t>«
pcofitabla.

Sacoodi th«y damonatcata vaey elaatly Cbat aa InstlCutlon
can loaa ita ahlct if it'a not vary caeaful In aaklog dlcacc
invaatBaata.

Tblrdi thaaa atodiaa ahow that tha FSLIC can auCfac lacga .
loaaaa. Tha aatiaatad loaaaa, aliiply fton tha 20 Callfocala
Inatttueloaa I ]uat daactlbad, fat aieaada tha PSLIC'a pciaary

Fourth, ttia aKiattng thcaaholda say ba too high. Tha study
of California thcifta with aora that tlva patcaat of thaic
aaaata in diract invastaaata ravaala that thay hava facad nuch
woraa than thrifta ulth lowac lavala of diract InvaaCmant. Th*
tan paccant of aaaata thcaahold aay ba too high.

I caetainly aa not arguing that tha atudiaa daaonstcata
that dleact invaataanc autoaaticaily cauaa failuca*. But thaaa
tranda do auggaat to aa chat a auparviaocy ravtaw procaaa ia
Juattflad whan an inatitutton wlahaa to aicaad tha tao-patcant-
of aaaata thcaahold in diract Invaataanta. And that caviov
pEOcaaa, In ay opinion, la a nlnlmal coat whan waighad agalnat
tha ti«k of aubvattlnq tha full racovacy of tha induatry and tha
P3LIC by invltlnq alailar anomoua loaaaa in tha futuca.

Aftac a langthy atudy by tha Housa Govacnaant Opacatlana
Coaatttaa on tha Bank Boacd'a Diract Invaatmant Bagulation In
198S, tha Comtittaa concludad that tha tula waa 'a prudant
pcaeautlon whila tha FSLtC la In a waakanad condition.' Tha
Coaalttaa did not hava tha banatlt of tha studlat I hava just
highlighted whan thay caachad thla concluaion.

No ona can possibly dlsagraa that tha fund camaina in a
waakanad condition, avan mora so Chan whan tha Caomlttaa tapott
waa prapaiad in 198S. Indaad, tha FSLIC'a ptiaaey raaacvaa hava
dscllnad by 11 parcant slnca 19S3, to 51. » btlllan today. And
thosa ceservas stand bahind mora than 9800 billion in doposits,

I would hats to saa a conaltaent to cacapital iiation of tha
thrift inauranca fund without a concurrant coaaltaant to tha
safaty and soundnaaa principles this regulation saaks to
addraas. tn the abaance of appropriate extension of this rule
by tha Bank Board, t request that, at a aintmuai tha language of
tha rule ba included In any lagtalation to racapitallia the
thrift Insurance fund.

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At a tlaa «>i*n «• at* talking about Cti* atata o( atlaita

which haa brought ua to tha critical iaau* at FSLIC

cacapltallaatlon, thla ts a« tlaa to taapocls* on th« ditact
InvaacManc laaua. to ay Bind, cb« Eacapltalliatton aC tha

thiiet (uDd Mk«a llttla aana* IC w* tall to d«sl with ctia

dlc*ct invaataant iaaoa and ita lapaet on tha laaaivaa ot tha
FSLIC.

IV. TUB rEDEKAI, XSSET DISPOSITIOM »SaOCI*TrOB

Saetloa 7 of N. 11.27 subjacta tha Fadoral Aaaot Dlapoaltten
Aaaoclatloo (FADA) to tha caqultananta ot tltla 31 ot tha Onitad
Stataa coda daCinlng FADA aa a nlxad-ownorahlp govacnaant
corpocatlon, eaqulelng GhO audit, and to tha provlaiona of
•action 5S1B ot tltla 5 ot tha Onltad Stataa coda calatlng to
tha 'Sunahino Act'. In addition, Sactlon 7 would raqulta FADA
to raport dttactly to tha Houaa and Sanata Banking CooMlttaaa
with caapact to a apacltic list ot intocnatton.

)und, FADA is « Fadacal Savlnga and Loan
uddat tha ptoviaiona of aactlon 40fi ot tha
National Housing Act. All at Its stack is ownad by FSCIC, which
haa capltalliad It <<lth 536,000,000, and haa actangad ■
<S0, 000,000 opatatlng Una ot cradit (ot It with tha Fadaral
Hoaa Loan Bank of Topaka, FADA's mission is to aaaist tha Bank
Boatd and tha FSLIC in daillng with ttoublad taal aatata asaats.
It la apacltlcally pcohtbltad by ita bylaws tram taking tltta to
any et thoaa aaaats and is also not allowad to bocrow any nonay
in tha capital aackats unlass thosa boceowlngs at* ntada by, oc
approvad by, tha FSLIC.

Tha tull tapllcatlons of Saction 7 of tha bill foe FAOA's
oparatlona aca not claac. Tha Bank Boatd and FAOA ata atud/lng
thoa* inpllcations. At this tlna, I can say that tha GAO is
conducting a sutvey of FADA, and ua walcona such Inqulty. In
addition, audits foe fodaESl saving* and loan associations at*
eaquirad undac Bank Boatd tagulatlons (12 CFR S63.17-l(a) (I)).
Pucsuant to that fadatal tagulation tha national accounting (Icn
ot Past naewick and Nltchal haa baan *ngag«d to conduct audit*
of FADA. In addition, tha Bank Boatd and FSLIC conduct
•xaainationa and audits at FADA in accoidanca with fadatal
cagulatlons.

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V. CCHCLDSIOH

Th* FSLIC fund nou has a much lou*[ ratio oE reserve* to
depostca than th« Ohio and Naeyland Cunda had immediataly pcloc
CO thair collapa*. Without cecapitalization, the FSLIC fund
will continue to d*clin«. All of us are awace of the terrible
prica inflicted on depoaitora, coauiarce and Caapa/ars by the
Ohio and Maryland thrift failueea. Thosa fallucea alao created
political criaes that atill reverberate in both atates. He can
avoid Chat calaaity if we act reaponsibly and decisively now to
put the FSLIC-Tteasury racapitallzatlon plan into operation.
Those who would anqaga in continued brlnkamanship with the
solvaocy of the FSbIC fund are risking diaaatar.

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Mdltlona) Material Subaltted for the Record
onus or naoLOfKr folict.

OmSIOBT, AM) SOFDTISIOH

Th* Offle« of It«0ula«arT PoXXoTi Ov«iai.^t, and Suparvialon
<-0ftFOS~) «s.atato tha Fadaral Hom* Lou Bank Board ('Boaurd'] and
the Fodoral Bona Loan Bank Srstea ("Sratoai") in carrrlnc out the
■iaaion of foatarlnf a aaf* and aovind savings Instltutiona
("thrKf) todostrr-

ORPOS Is tha focal point for govarninc and directing, on bahalf
of tha Board, tha ongoing «x««inatian, auporvtaion, and casa proc-
•saing of thrift inatitutiona by tha Board's Principal Supervisory
Agants in tha twelva Fadaral Hoaa Loan Bank districts. In this
capacity, the Office Is responsible for overaaaing, influenoing,
and laproving regulatory, exaaination. and supervisory functions.
Reporting directly to the Board, (»tPOS is reaponslbla for proaul-
gatlng fair and consistent national standards In the areas of
exaalnatlcn and supervision. ORPOS Is also responsible for
monitoring the Banks' adherence to the standards and their
effectiveness in carrying out exainination and supervision
functions. Any regional regulatory, case processing, examination,
and supervisory differences are identified and resolved by OkPOS.

ORPOS, with a unique perspective over the entire Systaa, provides
the Board with policy initiatives and offers expert advice in the
fonaulation and developaMnt of j(^gulatory and supervisory policy.

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mPOS Is raapanslbl« tor tb* idantlf icatlon of IssvMS praaantlnc
Byataalc risk •nd tha foEula-tlon of policy lntfriativ«s responsivo
to such risks. ORPOS coordin«t«s th« inpleiuatatioD of Board
pollc/ throuch th« Srata* by providins appropriate suidance and
Interpratation to th« Banks, Board acanta, and rosuiatad
Institutions.

ORPOS aarvas tha Srsten with expartise and Information in a variety
of disclplinas to enhance effactiva parfonnanca of the System's
raculatory functions . ORPOS interprets and communicates tha
field's poller developBQnt input and views on reculatory issues
to the Board and cosununicates Board policy to the System. Finally,
ORPOS serves as a facilitator of new ideas, concepts, and techno-
logical innovation for tha Board and the Systeo.

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Omt. hw pl«9uad Ciw thrift Induatiy.
oiMT ttaa pavt aavKal >— ct toe* Its toll «n tha Board'm oapnoity b»
maadiw nd npwvia* ttw livtltntlcna nnaar lt» jurladlecitxi. Dmtng
thla tiia, wa CcaqiMnkly had to um owe liaibad rawascaa to handls only
critical sltuatms, raUwr ttim to Mgaga In lyitj— tic, wall-daai^wd
Mfri nation Mid aivarvlslon alvad « pE«a«:ving tha haaltti Of
PSUC-lMni«d Inatitutlona. Thla altuatlfln. If alloMad to ocaftliue,
could havB deatiayed our Ability to pvOtact tha aafaty and aouiatMS of
ttw thrift Indunxy. Thactt&xa, th* Bo«d hM ta)cn poaltlve nd
«99rMsl«« actlcxi bo atr arq tt iap Ita wwrt nation and nparviaocy aftorts.

Aa of JUly «, 1965, ttw Bond tranat acr«d Ita fl«ld cotaainatian
Cimctioi to tha nOBanka. Sii« historic nain anbled ua to pursua, with
all daUbarat* apaad, tha fcooan of. faoildlng a tuall-tEalnad, aftectlva, .
and offlciBtt Eiald n^flntlon fceoa. By Dacvfaar 31, 1985, tha rastar
of pvofasaloratl •MMlnora on tha Raff ■ of tha nOBankB grew frtn 747 to
1,003, an incraaaa of M.3 paacant. Aa I statad in ny tatlanny last
year, ths Board astablistiad a cfoal of «t loaat 1,500 axaminaes for the
FHUanka by tha and of 198S. I tm plaaaad Co rsport that thara vara
1,524 profMslonal ao a s a nsis en board «a oC Oeombta 31,- 19S6. This
brings tha total Incrsasa to 777, or 104.0 pace m l ; of tha staffing Ittvala
aa of tha dat« tha fimcUons Mara transfennd. Of this ijKranaa, 376 or
48.4 paroMtt, ttsn In tha Atlanta, Oallaa and San Franclnxi districts,
Hhare lany of Om wamt aarlouB indus tr y peoblasM exist. Ths flexlbJLity
•ftoidsd ty the transfar of ths wcasdnatian function to the FHLBanks also
has raaultad In hiring a Bi±etantlal nurtier of additlcnsl exanlnsrs ehos«i
fron aaong far better qualified candidates than was previously posaibla.
Kany have attained advanced daijraaa and/or professional designations, such
as Certified PubUc Accountant.

n« supervisory staffs in tlM EHUanks hai« also been ooraenauratiBly
strengthened. The professicnal supervisoy staffing levels wan
Inoreaaed by G3.2 percent to 550 netioiwids during calendar year 1986.
Training of both exanlnation and aupecviaory p er so nn el was conducted at
m all-tliK high Itrmi. during 19S6-. I ^ ploaaed with the progress wa
hawa aciilewad. However, note needa to be done and will b« done, to add
to the quality and quantity of our SMsdnatian and ■uparviston etfocts

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B. Cwation of the Offica ot RBgulatory R)liev, Ovgrait^ and

"Om Office of DcMiinaticna and Sufisrviaicn (CES) has always
perfonrad a [jivotal role in the Board's bcaadnation and survcvision of
liMused instituticns . Thla offios has been re a ponslblc for reoonnending
and l^ilfMit liij Board policy en amplication and case processing,
MonltOEing and aystcn naJntanancBr and post-audit review of delegated
authodtiaa. During the past eewaral yeara, nuneious factors, including .
dengulatiixi and -Om <teclining financial health of the thrift inluBtry,
have coaleaoed to raise th« d«nand for a stranger exsaiination and
aupervision function.

In the woke of the transfer of the field ejaninatlon f uncticns f zm
the CBS to thA nosanks, the Board decided to reevaluata the role of tAe
CES. A task force, chaired by fomer Board Iki'lier HcnxJe and made up of
rapreeantativas of the Board and the FHLBanks, vna eatabllshad to
conduct this study. On Hazidi 12, 1986, the task force roxaaiended ttat
the Board transfer the ctoalnlng functions of ces Ccem under the aegia of
the Board to s poeition vitilin the FHLBank Systeai.

After careful consideration ot the recconiendBtlona of the Task Force
and of staff, the Board detaradned tint its purpoee of Inprciving the
effectiveness of its examination and supervtsocy functions would be beet
served ty eBtabUshing within the FHIfiank Systeoi a nau Office of
Regulatory i^licy, Oversight and Supervision (ORPCSI through trt^ldt to
enerclae its statutory respcnslbillty to oversee, ce n trol, and, where
necessary, liifirove tticee Einicticxis. On July 2i, 19W, the Board voted
to establish CRF06, anl this was dene effective Scpteaiier 27, 1986. The
establisivent of CBFOG followed as a natural ccnclusion to the transfer ot
ttw exonination staff to the FHLBanks. Basic to this determination was
the Board's finding that such restructuring would give it the managerial, '
flexibility it urgently needed to re s pond nore sucoess fully to Ute
cod^lex challenges posed by thrift industry cbnditlons. To take
advantage of the econmics and efficiencies of ccoibined operations,
CRFOS shares, to the extent practicable, accounting, budgeting, payroll,
personnel, and other attaiinistratlve services with the E1II£ank's Office
of Finance. CRFOS is charged with the respcnslbillty of advising and
assisting the Prlnclpel Siq»rvlsory Agents (FSAs) of each FHISank with
respect to the activities of officers or oiployees of the FRUanks as
agents of the Board and the PSUC. It assists in the Eawcesaes of
and si^Mcvislcn and advises as to any necessary oc .
: or standardizatldi. dtPOS advise

the PSAs and Board with reelect to matters of policy, legislaticn, or
regulation relating to its functions as the Board requests. Moreover,
CIIFC6 perfonns for the Board ai^ ncnltoring, evaluation, post-audlt
review, processing of apr'Ucations , or other functions deaoed necessary
or aiproprlata by the Board to ensure the integrity and efficiency <^
the exwtinaticn and supervisory functions. In addition, the new office
succeeds to oiy delegation of authcvlty by the Board to the tactxic CES

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TO a *«UE» that OVOS chi post effectively carry out it« mndatad
raepcn«ibilittts, the Director of CBFCS repeats solely to the Board,
there ore no interpedlariee co: ooaadttees of any type Intemiptinq ttut
direct line of authority and respcniibility. Uille the operaticn is .
funded. throuQh asaesaaanta levied iv?' tt^ FHUinnki, Uw bud9et,
aaaeasnenta, staffing levels and all op^raticxial natt«rs ace decided by
ttw Soacd. In this eenMr, the Beard haa assured that there will be no
txaprcadde of Its Matutocy respora ibllitie« and authoritiea.

A ayata* of opantional audits of tha vhiSm*s will ba aataUiahad
by CSEoe. It is antldfata) that audi audits will ba conducted foe e>c±i
FBIAmJc at least ev«:y t«o yaaxs. nw findings of tlM audit teses will
be reviewed by CWOB nhiidi will then prepat* auHaary and ano^itiai
nporta tox the Board. ITm audit teea Inailiii ■ will conduct follof-up

Ttm audit nvl«r will accwa to idntlf y problna in tha analnatlon
and si^aLvlsocy fimetlcD of each FHUacric Id additlcDt sDRthly r apoc ta
of raaulta will ba anbdctad ty tha FHUaidu on ewatnatiew c^lea,
including fraqiMncy ard ttwallnaaa of regular axMdnaticna, length cC
I Imi spsft ejuadiiing inatitutixxs, rt^hmr and ^pe of special
•xasdnatlons, and tlaellness of mjpaxviacay actione. Ttm retflaw will
alao focua en ecapl lance with net wocth, growth and direct inveeteHnt
regulaitions, and related actions takan by the st^iervisory agants.
flnaUy, FSUC related sattars, audi aa the MCF, wiU be reviewed.

C. Oagiter-tealated EnBJ^tlon and Supervisiop Progess '

Early In 1987, the Board laplftni.^il a najor ia^irciveDBnt to the
aMBdnation and supervision through the introductio n of the cce^uter.
In dcwelopBent foe one year, this peoject oonstituted a aajor invcatinnt
by tin Bank Board and the Federal Bene Leon Bonk Sy>t««i in ccetuter
haxA<ar« and software as h«11 as staff resources to achieve a najcc
mhanc— n t of the examination and supervision functions, as well as
integration of these two function*.

Hie changes included Introduction of three new systesa. Tha aaport
of Ei^sinatiai Syst^ is designed to capture the repxt of aMsdnatlcn
cn-li(w for later retrieval and analysis. Exmlnation teas» In the field
are now provided with personal ccspiters in order to oonduct on
•xaadnatlon. An electronic pre-facvatted blank report of eaadnation Is
[rovided to each enodnaticn teas on the personal ooafubar for use in
preparing the report. Mtm ocsvlBted, tha rapoct ia cMained in

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The Ewndnation Data SwMw capture* on-line «uf pl— n tol

infcEinatlcin developed (hiring an «xaininacicn whldi has been prwloualy
retained in workpapers. niis infonnation is also input into the
personal conputer at the examination site, and is subeequently forv«cded .
^ectconically to Uashinqton for later retrieval and analysis. ' Hie
SupervisorY Action Control Sy st aa captures data recjarding the issues or
problcBH facing insuced instituticns and the actions whidi supervisicn
in a Federal Hane Losn Bank my taJca to addrosa these probl«tM, nw
ia su e e included in the systen include autcoetlcally pmblens repccted in

InplcDentation of these systems included a Bajor ocnmitiant of
tine, DOney and personnel In the Pedeial Hcne Loen Bonk Systm and the
Bank Board. As a result, hcwevert the Federal Bes* Loan Bank Systaa baa
ocilisued nejcc enhanoonents in its axanination and supervisicn
(zocesses. nie first major outocme was developnent of a standardlzad
format for the Repeat of Exandnatlon. As part ~ of the Refnrt of
Semination System, there is ralntoined en the oeinfrane a current
version of the Report of Eionination fcmnat a oopy of which is then
transferred to the on-site examiner for his en; her use in prefacing tlte
report of eioniinatian. The Bank Board believes that use of a consistent
ard uniform report fomat will make the extodnatlon ceport, b* the
prlncijwl product of the examlnaticn process, a nare useful and
effective tool in the Board's requlstory function. Ul readers of the
report thrcughcut the Bank Board and the Bank System will be able to
anticipate where major cconents and other features of the report will be

A seccnd major cutcone of these changes is to accelerate and brcodm
the availability of the examination report docummt. Vv Board beXieves
that the r epear t findings will be more meaningful and have greater effect
if made available more iainediately and widely to those within the agen^
with a need for access to the docum^it.

A final DBJor outcone of these ettangea is to increase the quality of
information available cn-line through the system to analysts. Siis
includes, en the examination side, infonnaticn previously retained in
workpaper files. Cn the supervision side, this includes key infonnatlcm
regarding actions taken to address key supervisory issues.

Significant aocounting issues involving the thrift industry ccntinue
to emerge at an ever increasing rats. Ducing 1966 tha Financial
Accounting Standards Board (FASBI Issued a final statonnt on loan
origination and ccandtment fees and an exposure draft for public ujuueiiL
en accounting for incme taxes. Both issues have widespread effect to
our industry.

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Dus in a Itrge part to valuable ii^iut <)urlnq Uw cxnnent period team
QUE irdustry, the Biuik Board staff and the Bank System, the final Yta
statexent or loan ariglnation and txnmitment fees is nuch noce fair and
meaningful to our induatxy than the original exposure draft iaaued in
Deocober 198S. "Rie Btatement calls for. aoicrq other tilings, tha
deCeml and anortiiatian of origination fees and tlie copitalixatian of
related coats of the ariqlnation proceas. nn effective date ot the
atatooit is fee yean bagimlng after Decanber IS, 1987 and retnectiwa
effilication is allowed but not required.

The BxpoBure Draft entitled Accountirai for "inoome Taxes which was
Issued In Septeofaer 1986, ocntains a ptfvision whldi could reduce the
net worth of ouc industry by a[:f)ZQociaiat«ly $4 billion. This prcfnaal
would require n retnactivs and continied booking of a tax liability en
taxes currently excused by the IRS for bad &Et3t deducticns. n» Bank
Board isauBd a re ap o nse to the eiqpoaure draft that took a strotiq stance
against this pcovlsicn. Host other oiganizatians that re^ontod to this
prDVlslca took a si>d.lar view to our reapcnaa. nte n^S will evailuste
ttisss coBHnta and plans to issue a final statesent during the third
quarter ei 1987.

Uditlonally, the n3 has undertaken a mlti-ftiaBed Icng tana
pioject on financial instruMnts. Ttiis project, whic^ is the largest
and aost far ceadUng that the FKSB has ever atteopted, was prtxipted by
concern over the plethora of acccuntiiq issues ccncemlng financial
institutions and financial Instrumnts. The final [coduct of this
undertaking will fom tha accounting and reporting nodel Ctx all
financial institutions in the future. The board staff has been an
active participant in tha develcpient phase of this project and has been
asked by the FASB to be part of the task force developing this project.

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luuuiM'MWWMaLmuiLi

• 40t wii«m ST. ■ Mjsm, TBus Tsm '

TiM lonoiaU* mnand J. ft QarBala
loaa* of Mpc«MnUtlT«a

Wasblngtoo, D.C. 1151 S

■Blnapttat tet Aetlon* «C tha *■>••

Teat aoD«M*tatlon vUl ba daaplr appcaolatad.
■Inoataly,

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II HH^W Himillll I limilHllllf mill I III! Ill iiiiiiiii iiinii miiii iiii iiiiiii

Do tggfclw cuimtly basattlng Ow
tlirift imiatzy ham ban aU too mU dooaMUd or -^' ' — ^- __ ..

BdMd, tfa* trefcl— na o^ilaii «] KiluCtfiia •IubIv*. Ilm asvii^ «] lean

iiAMCrv did not: audlBay (Migan — '— -' "- '■

HBlthac wlU it Mctrlo

mxrav of tMa al

w- .WW,-! ini* i.-,wiv»ii.i— ii^.w<,^, DiiKt Invartsnta
^ad aa tlia [cad^rta caiaa ot fSLlC'm Mijcr Entil^H. Uta
ba ariad ^tv did tliB paipiftimxxa of QMaa attodtlaa ua* dia

ady txata on ba r a uil id <■■ Uia iMnrlaMm'a book*. Ustaad, ttM "fit^mc^
uaad Fadoal Ragulatlai Sac. M9.U|d) uhlA ipaclflcBUy auttniaaa ■ lo«i of
lOM ot Xt» wmiHd Btkat valua of am collataral. mla dvfloa bUbw)
tnacn^ulcua davalcvan »nVx aaaociatlaia to build In [Kactically any «
ftaay lEnav naoaaaaiy ts <any oi " ""

„i, MC or aw otDar n

a datzlaait. Ihla ctianga HSild alas go
- r •nd, In fact, a^ evan allaliiBta

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a datarianUan In

s will not f
m^ Kioauntar. It waj/ b
b«n BEplisd, to allw a— B c la t i w to i
wlttKi off onr 20 yaan, Biidlar ti
- ■ fcKa

businwa plana tor uocldng out thalr pc^Oiim leans, Oia n»i1awlrli ill Im of
Aoaata Mg dnuU ba (Qralad wlUi diacratlcn. IhU Rag, il^udidouBly uaad, haa
Um potaitlal to dstny tl» iwt wrttB of virtually awaly BtL In I«Ba. U a
tlMa ^Imi tha nst wortli of the Infcistiy Is at an all-tlaa low, turtlier zagulatocy
raids en aasata ara tcCally iD a pprcpciMa. Oils Is aqaclAlly txua i<Mn IMlc la
uaad at tlaa of forecloaure. Forcing an R-41c iffxaiaal at Uiot particular tiae
ii—iiiaa naoessary writa-offB that oould destroy asaociatlin.

a. BBHgflgfl — Waiknita aatwan Oaaianit-.lvw Tnatitiitlena anrt a^Hty

BffnuwiVIT- Distarlct aifiarviaory agvits "* — " """ "~

restructuring of loans lAanawar pnsalbla t

fit laallstic c uiwiL cadi floua. COq.

BOtlvated bociiciUBr doing his best to uke a pro}a e t [rof itable Is a
altaxnatlva to f oraclccure end nutoainent diipli^ of the oollatand o
saturated real estata naiAcBt.

£. '^T"^'^'' OayHatory n»flnlf»- r^ n»tna

. silnlt business plans and mdcoit pgogtaa s to district
x^jsivisory i^ents, they have a ri^it to axpaot answers within a laasi nil lie
tijps. District Bifiaviaory egwits Aould ba instructed bo act aa ■Hpadltioialy
as possibls to 9at the ansusrs these assodatlcns need to anabla ttioi to ga thaat
tha businMS of scOvtug thalr prcblcaB. UMua delay In this process atly teings
about rtaVBtlcn in thaaa pcojacta and lanilts in further duaes s len of Otir

El ftTTv^n- itfid Irtjemiify Haw Itenaoaiiait. m acna InBtltutlm nanega—it

cAarqas hove been and will ba aeiwd naoasBary fcy regulatory authoritlas. It is
BbBlutoly Hieaiitlttl that the sana gamnt taana brou^it In to cwaiaai ttww
Institutlaia add work out th>ir pcdilans ba glvm ccaiilBta ri eeil ■ to
0|>erata — free frcn ths apect r a of leusuits and losses resulting trtn aaklng tlis
difficult decisions th^ ara forced to naka.

fi. OotTBiata with tha StBt» gmrl™ anrt T/«n fH»i1a«Hr.»- CHer 200 of tl»

■ oftnaa
I aooctange of InfatDatlm, Including MoailnBtions data, oould hs^ boUi tba
regulatora and tha institutlens. In pAl^ cases, tiaely, decisive action by
both ragiilataca acting In ccncsrt could often load to solving prcbLess tliils th^
ara atlll of nenageebla sica an] natma. Daisy" oily Bxaoaibnta Um tii i i i1 —

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n Om rMl Btata b
e p rcy r tl— It haa acqiilzad ml will aoq^ilia tnv
Ito poMlblj "dumping* of tins* prct r tl— at Clxa ^da
cnly to fUcthir iitbmmUj tb» almdy aiistantlal doutuaid
•■tBta vnlUM In ngow. nw potsftial fee ■Iwtiinjniil Btaas
^liuilx Crom Urns [cebiBB arawi

&. TMIlftTljlP PtrwrM— m^f M Y fn» THTJC tr. »f.itA.tTi,» Tn tlMM

I ptlilaa sua una ran aid Um accniv In g*nnal hm ■ Lhj i jw , ttn
dliaot ttansfar eC pi^iKtiaa O^ RUC ts U^ildatcra n—d faw pnxtii«B.
Hbh, tOMVM:, mia dlnct LmmBu gnatly IncxvaM* Uia Ukslihoad that tbMa
H. i 4 i »lt U< will ba ik^ad en tha naaa HOkat. Dia twi<:>l livldtatlon oontnKt
Mil* fcr WHTHjmKt- faaa of a» h alf to trm paront mid dtj^oaltlon faaa of i«i

^_ ^^... . ^ . .. ^_. j^^ j^jji^ analyala ^ilddy mvala Uiat tha taal

rot txtm wirmjmtrt- but tzi dl^xaltlcn of tha

ia little latlMalj on ^odalilng tlia porlca. nittho', Un

_ ... ,_ j^^^ aatsta aaimj— il,, resulting In on

lanes, la uqnllflad to adaquotsly acnitor

ifcnajdny F8LIC PirT»+t» rr,^ a eaefcal tiar«taetiw, Tha dvlalan aa to

aada tttm a glctel psnpactivB ky an «itl^ poaaaaaltq an cNacviw of FSUC'a
sttizs tnldinga in a pacticular atats car nglcr. It ia lutnaslbla to axpect a
tWcobls outiT—, If tbsas dadaimB are allowd to ba aada Ind^ndHitly by a
divwaa v'V of annagaiV l I iriicht ora, lagnidlaaB of how knswladgaabls and
wOl-intantienad Uvy elicit ba. ih^ >i^>ly «■ not raad Into tha ^ig plctura"
of Uia total ISUC holdliqa In ary cna atata ik laglm.

C "t-"**'"? '^»-<»'t'w> q*wrtT.r*,|,^, TUmli^ ovar Qm «ntl£a pistfolio

. of Ml inaolvait iiatltuticn to aa *""*f V ''T'1'1nt "r will not laidsiza tha
aollaia to ba dnlvad out of UMaa aaaata. DiftaiwA aiAocntzactccs have
diCtannt tvpss of aagsE t laa; tfaitmttttM, atrip cantan, laaalng cxatdlitiM,
■be. B^actlnq anf am a timiU actor to do a flrat-claaa ji±> en a divaiBlfiad
pcrtfblio of ii»»Mt— ita la laitasllatic. lb »«"<-' " tha ratum m tiwaa aaasta,
'by typm «nd aati^ad viOi aAxnitsractcca imaaMliij Qm

ffi ajril~'"' Kx tha laaaoia atetad abna, nu» iinild ba utUlzad to the
full actant of Hia iJu ii aLa giantad In Its diaztar and Aculd noelva all
-'-- ■^—. cna into Urn posaaaslcn of TSLK ft» dlractlcn and dlBoluticn.

Hw 1*km aavliqa am loan iidstry ball«faa that a aathsd ck aathak rtnuld
ba davali:pad to hOld laal aatsba intil Qia accniv lafnwaa and abacKpUm intaa
labsn U iKcaal.. ly alloulng iiaaii liil liia to uaa thaaa imovntiva ijmaii— iliil
mO/OK privKta aactcr vibldaa to bold raal aetata, VSUC wuld bviafit fay not
bHdng to tala omr iiaait lalluM thay otbnwiM Kuld. tUla wa ara liatlng cnly
fbur i-^<hi<m.<-. tha naai li an qat^ can aintfy ooa i«i witb naiy aara itan wa
put our alnte to weak en w<<« tiiiil^ area.

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__^___^___ bd) OlMrlcC bank could diutar a Ftdnal nvliicia am Itxm
M^irlntlifl tac tlia malm popoaa of aofiiring nal astata fim Stia In MaJ ai^i a
ter a 1% caril uan'a faa and ttm giving ol t«i yi«r zaco-^nficn bcnla. iha
SiucndMal aaaodatien oould ttMn wlrpi to vllling dwalciacB ttnai iBr^artlaa
te daual^aant, wiUi tia (kwalepnr aaawdiq all carxyliq cxxta «ami(it IntaraaC
en tlM ml Mtot* (aaU IntariM dafacnd uiCU f iiBl ail* aid cloaa ouC of
KolacC) . If tlw prcpaity camot ba pcofltAIy aold nlQilii a» t«n yoar pndod,
Ua crlgliBl asaociatloi wuld aan taka tha loaa. Itila glvas at least a tm
yi- holdliq in^l^xl Bv Imii.iiiHMi'ita In larkat to oocur.

asvln^ BR] loana (skI placad in a pidic offaring ty
Inld tbw pnfartiaa fcr afpnclstioi ovar a ludiar of j

SUB Muld thm ba frae " " " *

WKi Mui i e* of problaa raal

IV. CCN3CSSICHU. FWTICIFKnCH

A. diMa tha aavBank ear" in.'.*^!- iha al^ilast and mot dixact My to

Infuaa ca^tal Into ttw Tmaa inAwtry an5 taka acaa of ti» preasura off Qm
VStK la throucfi Oia puxdiaaa of traOlad Tkeb BOm by aut^if-atata sititlaB.
Vm recent accfiilBitlan of Teoaa Oanaraa BmicSMiaa ty iTtiaKlcal Baidc of Ngh YcaSc
•vidcnoaa Qia alimst uilvarsal dwira of cut-ot-atota Inatltutions to gain «tiy
into Oa •Daaa aarkat. It la totally l^nctlcal to aif^icw tlat IWoa
instituticna are goinj to b^ traidad Tama Uiriftai Hiof ai> alzaody In ttila
BBTkat. Slallarly, it la totally ii^nctioal to at^poaa that If an ait-ot-stata
institutlcn can gain antzy Into Taxas tliia^ ttia diartarliq of a da noiio
non-bank bardc, it will nouaiilialaaB jm^ a prBim for a tnublad wtam thrift.
Iha non-bank bank lao|tiole BBt ^ cdcsed for a pariod of On to thrae ysaia to
Eocca ttnaa cut-of-stato Inatituticna daalriiq Bitiy into tha TmcoB nnikat to buy
Uialr vay in. Die aost isfiortant vehicle to attract punliaaa of thiaa StL
diartors la to Raintaln tha ikillty of Uw wiltacy boldln? ixB^enf wiUi tandm
qparaUaia to aurvtva any furUiar natrictlcns. iVUitlcnally, tlien rimld not
ba cnacCad any raotidctlcna en ocBnercial ctai(enieB fna ounJng an SiL Oiarter.

1/ fi. Ban»p<f.H7e tha FSI.Tf: T^^r^y in 19B7, In order to ralnforoa piilic

ccnfidencs in the FSLEC, aiKI IndaBl in tha antlre StL Inbstry, recapltallzaticn
of tha FSUC rinuld lacBlve tha hlghast priority vhKi Cutjiiaia racormnea in
Januoy. mgatdlaaB oC tha ueUiodalagy used, theis ar« critical Isauea

aurrouidlng FSUC T»nfi<*-«i A n^im n a large, cna-tina Infiialcn of coital is
iTiiiiniT m axf ori ato, ito didxirsanent ahould ba in ocntiollad allocaticn. ihe
•Dfcndlture of tuo to thraa billion dollars per year may very wall aatucate
ISIJC'b ability to aanaga tha aaaata It uill aogulra as a reaUlt of tha
a^mdlture of thraa fmda. A vtfilcae can ba created t*vldi vlll allow this
arnial IJait to ba Increased in the event of wmcqmsif. laglSlatien to
lacapltall^a tha TSUC iAiculd ccntain laixiuage eliminating tlia ena-algfith pannt
^wcdal priBiUi asaaesnant, possibly [iiaalng it out ever a flva^ear patlod. 9m
nat Mccth of the Industiy Is alieei^ stiBined to c^iaci^ aM ito furthv snsion
is uiQcnacicndila. If tha InAjatiy is to tnadisr Qia curxef* crlsla mid tagain
ito vidallity. It >UBt ba allowed to retain ito capital in ecdec to paxwot s

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V^iMju m wcijcad in Hai Ycrt aauwrnl ym> ago. wu VC«k nvlngi institutiots mw*
In graat difficulty, but vitti Hia aid of tb* nat uocth oartif icatas ixogr^ plua
' m ind tiBid wrk, ttiay ax* Unriving tnatttutlora Codiy.

n tlM Bldat of a atcDi of vlolMnt

1 BtcEBB tafcra, and wltli Un nailtaocy bcxn of

_ Htt aooR^ and ywn of aovla to TWMi

tte aavln^ and loMi bualnw will ttaaUT tfaia

'1 not ba an ao^ cna but fUlloHliig tl» Bt*|)a futllnod

a full and ccntilata cacovary.

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508

AOBHBY G.LANSTON& CO.IKC.

TlM Honorabla EAcln 3. dray

radaral Heaa Loan Bank Beard
1700 Straat, N.N.
Waaklngton, D.C. 10593

Daar Mr. Orayt

Flsaaa allow na to offer m<t support of yo«r rniC
Bacapltallaatlon Plan. It is a caraEully ciaCtad plan
tbat offara cha baat proipect for bringing the PSLIC
back to a fin* financial foundation.

CMa kay aapact of this plan la tliat tba praaim of l/8t,
which ia currently balng lavlsd on tha aavlnga and loan In-
dustry, will continue to ba asseasad. Thla will be dona to
tha axtant it is required to augnant other PSLIC incoaa in
cedar to insure tha servicing of tha debt of tha nnw
rinencias Ccrpocation. The ictentlon of thle special pre-
nluH Is absolutely assentisl to the auceass of the debt
offerings of the Financing Corporation. It give* nackat In-
vestors conteaplating purchase of tha debt confidence that
there will be sufficient funds available fron HLIC source*
to adequately service this debt.

Tha ia^ortant point to underscore la that thla PSLIC
BaeaplCaliHtlon Plan should ba Jneorporatfid as • coinpleta
package, ka a wbola, It promises to do the Job* but this
saess keep all lea components intact. Including tbe Isvortant
1/St special preBium.

Slacaraly,

X)a^^ M. QfyJl

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509
Kiddtr.FBibody 6 Co.

Th* HoMrAto Edvln 3. Qrv

PadmJ HvM Lnh •■* lotftf
l7H0.9tn«NV

Th* PJU.A plan IM- 4» Nc^ttOMbn of P4XJ.C> hehita 1
divnrim «1 « P&UbC. Pkwndng CorMntm. Uriw «M fImi *• PlnMcMf

s P.llJ<. tt la cdMciMfaMd Aat irtt Nrvk* «n 4wm
•MurlUM w»uH b« pkU (tm) riiiui w %*mAm ta PJXXC. Mui^ tlw l/tH
l^al Mil H W Mt. A ptaM Mit 4< tMa InportHit mum* el f AiL4A rwanw
weuU «•» BdvMitir ittict iha pinvieh| CtipanitaM abUlty w ••■ lu

McMitlM h th» ptMIe iMriNt*

W« wMiU w|« At CongrtM ta nMln tfw l/W tpwW aaUMmmt m m
Inteiral pan of At P ALXC. rac^tuUntisn plMh

Sliwirtl^

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STB^RNS

Kr. Edwin J. Gray, Chatnaaii
Fedaral Hobs Loan Bank Board
17CK) C Straet. H.W.
Waiblniton, D.C. Z05S2

Dear Hr. Crar:

A bill ia being Introduced In Congreai vblch would place a Civ*
year Itaitatton on the auChoricatioo for the apcciaL f^tmiim
tfwmaat of l/8t of total depoaita of the thrift inatitutlena
vboae depoaita are covered by FSLIC inauranee.

Under tbe propoaad recapitaliaatlon plan for FSLIC, the regular
prenuia aaaeiiaent of l/lZl and tbe tpectal aaaessoent of 1/81 are
to be uaod for ■arvlcing the debt inatnaenta to be iaiued by tbe
new FSIIC Funding Corporation. Although it ia planned that the
•pecial aasaaaaant la to decline linearlf and be reooved after tbe
year 1991, the (act that authorication for the (pecial asaettBent
reoaina will Instill confidence In the invaataent coonmnity. Thla
confidence ia vital to the auccesaCul aarketlng of tbe Funding
Corporation debt on the aoat advantageous term.

The Funding Corporation will be borrowing for tern* of twenty to
thirty yeara. tt ia Impotaible to look that far Into tha future.
Hopefully, no additional revenues will be necessary to service the
debt after 1991, but the authorisation for the special prealua
assessaent should be Maintained as a aafeguard. This will greatly
enhance the quality of the debt Inatruaenta lasuad by FSLIC Funding
Corporation and result in cheaper borrowing costs-
Very truly yours.

iZLc ^^—^

Alan C. Creenberg

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Mt.ld«i>J.Onr

F«d«nl Hmm LMn iMli Boud
ITMOStTMNW
WHUMtM,IXC MISl

dmi Mr. Onr.

. I «Bd«nrty to tUmlMM tbi 1/1 of IH IpMltl'

.-4 by tkt FSLtC OB w*U«i and Iom d*w«ln. It li my imai b«U*f ihtt

tki uiitoea «f tUi pnaioo. *U«b wsaU b* oMd to nppott d«bt HnUt ea
Bbllntlowi of tb« projBMi FnjC FlatBolaf Cerpontlon, U ctMlBUlir oMaiiil m ibo

■B CW wfBl, OOK^ffMtlT* BBrknlHt of FFC dtbC MSBXltlM.

t b*U«vo lb*l iBvntan *1U *iiw tbi BtaUablUtr tt tba irmUI flUC UMumut M bb
inpOTtut obOIob tiBlBn BBOBpoeud Bt|Btlv« oub flow d«*«l9auati. ud tborof «• ihtl
In (ItalBBiloB would m>ko iBvoMn BBWlUlBf W pnrehu* FFC Mcnritia ubUm ib«|r
eirtlid TSTT dialfieaBi jrlald pfMti«ai evor Tnanry ud otbar iicaey Mcntliln.

Tb* FSUC neapitillatlaa ptopoMd tnbaJKod by iba F*d*nl Homt Lobb BiBki pravidn
for nmilea of ibi ipooiBl pmdna wiib b (rtdBil pbaM^oBl o*tc a tlit^m period,
d*p«Bd«Bt OB tkt FlUCIi BbUliy to mako latwal pByBMti OB FFC dibt wltbeot ibMO
•ddltlonal foadi. I tappon tUi plaa, u I faal that tb« ooBtlBDOd oxlMfaet of du tpiclal
piOB^aa woBld frailly aataaaoa tba marbot*i awwiaiant of tb« FFCi orodlt qoallty lod
weald tharafon lowar tba proapanlvi B«aBay*i fl

loalCoraiia — J

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DUN Mmi lEmocos SIC.

atLtmifSamiLNniYa*.NYHI

Tha looorabl* Bdvln J. Qraf

radaral Mmt Lou UBk Bwrd
ITM ftb StCMt R.W.
VoSbtDgtoa, D.C. 10»2

DMt Kc. Cbalnui

Od balMlf of BT collaaguaB
•ipEvaa BT appitciatloD to you and
HOtlng at tha Haw Xoik Fad last va
■avlnga and Loan Induatcy'a affocta
■aabara and tfaa cola of P5LIC aa va

at Daan Vlttar. I woald llk« t
1 roar atatf loi tba infonatlTo
Na aio *acr wicb avaca of tb*
nlda atabltlty to Ita Taciooa

I of aaai

Hy abola caraar baa baaa apaot altbai la tba D.B. goracioiaiit
■aikatf oc cloaely aaaoctatad vttb tba aackat. I bogan ar cacaar aa a
tiadai of Vadacal Agancy obllgatlona at Chaaa Haabattan and tbao paifocaad
tba aaaa fonetloii toE Coldaan taoba. Id 1)TS> I vaa a|ipolatad Dapaty
Vlacal Agant toe ramila Kaai wbara I apaat taa yaaca Backatlng that

Aoaney'a dobt. I baTa aipailanoad pacloda o* ■" -- — '

dlttlcDlty in aackatlng Kgaae; dabt.

■ veil aa aatian

Mcally

roctoDatalyi aa aca axpariaDclng a pailod tbat 1
friaodly to Agancy taaaaca and partlcolarly In loagar aatuiiciaa.
Biatorieally, aa yoa knoa, tbera haa baap fairly llaltad capacity foi tba
Barkat to abaorb naw laana Aga&claa. That waa piiaacily dae to tfaa baavy
coDcaatratloo of eoaaarclal banka aa Agaaey invaatoia and tbalr baalc
lalnetaaca to Invaat bayoDd tba lataiaadlata ranga. Aaotfaar raaaon. of
couiaa, la tha anoiaona liquidity in longwc datad 0.1. Ttaaanrla*! a
iDinry not aharad by Agonclaa.

lacantly. faovavaci Aganclaa bava baan abla to boiro* la looaar

■aturitiaa. laigoly bocaaaa of tba a ~ ~

InaatoiB, abo aia wore Intaioatad 1. .

I ballava tba dacialon to atlllia tba longar aarket la ■

oppoitnntattc.

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nmtm ■!• MV«t*l oM«r*Btleaa that I itaald oIEac «lth ra^acd M
tb* ptoponl, fcgw w r. rU«t, Om InatroMBt ma InrtfMutality ara aav

aad vlll raqnln aaaa adusatic* aaa uikatiBg. sacoad, tba rsLIC
rlaaaclBg CoipotBtlw vlll ba aciatlniaad al^ly baoanaa It I* a na«
eatitfi bat aAlavlBg Aganey atatna tbioagb Ita aaaoclation with tba rau
vtll probably allalaata aoat nnaactalDty. Maxt, tba Bailing aioop, altb
Ita baalG foiilUr atrnotaca. ahoDld land itaalC vail to tba laaunca of
tha d^t. rlnally, tba atiBctnr* for aopiipartlng tba dabt aanica ia
aomid ud aboold allar Boat coBcaio aboat tba viability Of tha inatimaDt.

It ia thia laat point vhleh baa pioavtad ay lattac to yog. Mbll*
wo ballavB tba atcnctuo to ba aonnd, thia atiBctara li aaaantlal- Ma aM
aoaawbat coocainad aboat <i«aaanta aa ba*a haacd with tagaid to tha
allainatlon of tha pcaaiiH aaicbaiqe which tba Boaid say lory ovar aad
above tba nonal 1/13 of II rSLIC piaaioB.

Wa baliava that tba [•ranaa gaoeiBtod by tba oonal pcal^ aad
the aaicharga piovlda coaf ort to tmaatoca inaotal aa tha rtaaaclBg , •
Coiporatloa'a ability to >a«t Ita dabt aacviea laqniraBaat. in Eact* It
la eaaaatlU that thia progiaa vblch will ba of aaonooi banatlt to tba
IndDatiji ba anceaaatal. I aantlonad aacllar aboat tba ganacally naaatlva
btatorleal aapailanca of Aganciaa la tha loagar aaikat. Irary aifoct aaat
*- '- "B aivpoct tba Miiketlag of tbla dabt and that •Dicharga Is

rlaaaa accapt tbta lobtai in tba apLrit of eoopacablon aad aoppott that
wa faal Cor the Baab Boacd.

JB_

ib,Google

tggsf <nH--f MBt.~~- I^S

Mr. EdviE i. any. CteinM
rMaral llaa« Lmi Itak iMid
ITM a ttrM N.V,

Dnr Ur. Onr,

Ittinl Biabui or Inlal faovtltlM las. IncladUi ayitU tttn
Mir ■. 1M« prncBUtioa sr IM FSLIC KMipiMllnitDB Mta. «
pnltBJMry MoiaMtiem wM-pftaUi >id Ui qanclan ud u
lUI toUond wu ««U-tddrMMd.

buad OB tba InraisaHoa u ptoMilod. Tton in two k^ imltaHi utMk
woiM (Mil* ihcM usuriiiu vitu* to ilM Ii*atli( coBtnalir- nnt, Uw
principal wa«M btpnwrvtd AroofkocMoaiadt' " * -'-

H*it(i tad lota ladutry u

iBdaiuy. If thii ipMiU pm .

yttn, the wfny af ikt ouh flow lo oonr laii

ailed late qaallloa. Th* lamiar would qaui

uoM rwun, iki umnptloai (Ivin tl th( priMnniioa tn

[00 oetlalitle. 1 fol Icililtilvc teiloa on thi ipwltl pn

rogiln wac typa of loxmntii luppon la arrm iht ad

In tM Fodtnl A|tnoy

ib,Google

D Bankers Trust Company
One Bnkn Tnac Fbn, New Yctk. Nor Yorit 10»

Mr. Edwin J. Gray

ChaiTvu

Federal Hoaa Loan Bank Board

1700 G. Street NW

Washington, DC Z0S52

Dear Chairaan Gray,

In my estlaation, the PSLIC recapitaliiation proposal,
set forth by the Federal Hob« Loan Bank Board on 8 Hay
1986 contains a nuaber of key coaponents which will assure
the viabilit/ of the plan and provide the highost degree
of acceptance in the financial aarket.

First, the Financing Corporation will be sanctioned -
by Congress. Second, all principal repayaents on Funding
Corporation debt will bo assured through defeasance. Third,
dobt service will be assured by FSLlC's preaiua incoae
and the ability to eaploy a special assessaent on thrifts
if the standard preaiua incoao proves insufficient to service
the debt. As a result of these three features investors
will in essence have an obligation froa the govemaent
entity (FSLIC) of both principal and interest.

Because of the defeasance of principal It is the
assurance of interest which becoaos the aost iaportant
concern for investors. If the ability to assess the special
preaiua of 1/81 is repealed it will Jeopardize the viability
of the entire recapitalization.

I urge strongly that the current proposal as stated
on May 8th reaain intact, particularly the features which
assure repayaent of principal and interest.

y^<u

}£?M,^

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BankAmarlea
CapRd Itarlwto Oroup

Tt» HofHirable EAtln 3. 6rv
Chat nun

Federal Hoae Loan Bank Board
17Q0 6 Street H.H.
Mashlngton. DC 20552

Dear Mr. Gray:

Bank of taerlca supports legislation prowfding for the
recapitalization of the savings and loan Industry through the
establlshnent of the FSLIC Financing Corporation, Ue agree that tha
Financing Corporation Is needed to restore financial Integrity to the
Industry as outlined In the FSLIC Recapitalization Plan and presented at
the Federal Reserve Bank of Maw York on Nay B, 1986 for the FHLB SelMng
Group aoabers.

In our capacity as a Selling Group noabtr Me have revlewad the plan
and have concerns about one of fts ujor conditions. As part of the
proposal to fund the FSLIC Financing Corporation, the additional 1/St
pmin Mhlch Is being charged to aNber Institutions Is anticipated to
be phased out In 1991. If this phaseout were undatory, tha Financing
Corporation's ability to raise necessary capital In the debt Markets and
achieve the desired financial stability In the Industry My be lapalred.

Conditions attached to the 1/Bt prcalue mast create uncertainty
regarding debt service In the Binds of Investors who «ay tie reluctant to
buy obligations of the FSLIC Financing Corporation, or Might create
greater Interest rate spreads that would in turn Increase the funding
costs to the FSLIC. These funding costs would be higher than those
currently enjoyed by other Federal Agencies.

1 of

B«nhotMii«lcaC«Mt BaiSIDOS

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Federal ttons I^»n Bank Board
1700 G StTMt. H. W.
Uashii«tcn, D. C. 20552

Attenticn: The Hsnorable Etbin J> Gray, O^aiiiHn

Daar He. Qet^;

In reviewijig the proposed recapitalization plan for ti» FSLIC.
it is our opinion Uiat tha structura, as outlined, la viable
and would be well received by our custoner basa.

It has ccme to our attenticn, however, tiat there is seme discussion
as to the necessity of retaining the l/8th percent special assessnent
as part of a legislative padcage. While ue can understanl the reasons
for the savings and loan industiv's request to have tMs prevision
removed, the inclusicn of this premiun is essoitial to the positive
recqiticn of the securities ky investors. The back-up capability
insuring a revenue sti^oin to cover the interest paymsnts en the
debt Ehould the FSLIC probleos be irore severe than currsitly anti-
cipated, allcus an inpcctant level of ccnifort to the investca:^.
llierefor«, we most strcngly reormnend that ttie l/&th percent special
1 be )oq>t as pert of the proposed legislation.

Very truly yours,

^Eduard Means
Senicr Vice President

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. U>iD J. Qrar

DMT Mr. Gray:

Na at Chaa* Kuihattan Bank, after careful conaldaratioa, would Ilk* to
aff«r our support foe your eAc^ltaliiatloa plan for rSLIC. Ma agrsa
that a •trong initiativa 1« naadad to Bolntaln tb* viability of V8LIC '
and to anaura tha prolongad atablllty of thair thrift ayat^.

In our rola as an undarwrltar, distrllwtar and «arlwt wakmc of Uwaa ami
aacurltlaa, wa faal It la cur raaponsibillty to you and to tba atrn
antity to offar conatructiva advlca ragarding tha atmctura of thia mm
drt>t to anaura tha baat poaaibla racaption for thia antity within tha
capital narkata. In thia ragard, wa au^ort your ptopoaal of
nalntalning tha 1/S% apacial praoiun aaaaaamant to anaura, aa a
contingaocy, adaquat* raaarvaa for dabt aarvica. Itila, «a baliava, will
ba intagral to aatabllah tha pr^par lavala of Invaator confidanca and

p).h-^^M-^

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TkENORTHERHlkUSrCOHRMIY

HMiorabl* Bdtfln J. Gray, Cbcln
Fadual Hoaa Loan Bank Board
1700 6 StTMC, N. N.
Haahlngtoa, D. C. 30SS2

Daar chairaan Gtayi

Ma war* tapraaantad at tha Hay B, 198S praaaotatioa of tha Fadaral
Savioga and Loan Inauranca Corporation Racapitaliaatlon Plan and'
bava caralnlly raad tha aupporting docunantation whlcb datalla tha
propoaad offarinq of bonda by tha FSLIC Funding Corporation. Ha
bava graat coalldanca in tha atcangth of tha PHlf ayataa and aupport
ita afforta to aaaiat tha troublad FSLIC. In doing ao. hcwavar, wa
baliava that graat car* aniat ba takan ao that tha Invaating public'*
parcapcion of tha PHLB ayataD ia not waakanad. In thia ragard, wa
think it aaaantlal that tha atraam of ravanuaa which ara availabla
to flow through FSLIC tor backup dabt aarvica pucpoaaa in connaction
with tha bonda ba adaquata to aiaat any continganciaa. Ha aca oon-
camad by raporta «■ haac that thia atrBam at eavanuaa »ay ba
dlainiataad by tha dalatlon of tha spacial l/BI aaaaaaanant on total
StL dapoaita prior to its plannad axpiration. In our opinion, auch •
dalatlon, unlaaa caplacad by anothar idantifiabla sourca of funds,
■i^t wall ba parcaivod aa matarially dlslnithing tha dabt aarvica
covaraga naoaaaary to support tha propoaad bonds. Such an occucranca
could Baka tha Barkating ol tha prc^oaad bonds difficult, if not io-
posalbla to achiava.

Ha urga you to taka whatavar stapa ara naoaaaary to aaintain as strong
a straa> of funds aa poaaibia flowing through FSLIC to support tha
propoaad bond issua and, thus, Inaulata as mcb «■ poaaibia. In tha
•yas of tha aackat placa, FHU fron undu* axposura.

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•IheOodErBank

iZl%H

cawliMii FadHoM LoMB
1700 8. K. N. ».
MNhlngton, 0. C. HWBB

Throu^ oonvirMtldiM Blth othar MlLIng gm^ Babar* of th* RILJ JrtM'-
1t h*« oeaa td our attantfon that than la praaantlr a aova ta allBlnata tiia
apaslaL 1/B InAiatnr aiMaMant aa erIglMlly propoaad tn tha Itajr B, ISBB
RBDapftatliatlon Plan. th thDught that yau ahuuld ta wara that aarlat
oauntarparta and olfanta alth ahoB aa hava talkad hawa axpraaiad eoneara Mar
tha paaalbla affaeta thia aatlon al^t hava en tha auaaeaa ef upooalng
ftnanelaga.

Aa a aalllng group aaabar aa aLaa faala eeapallad ta axpraaa aur anaeara
orar tha peaatbLa al1«lnatlDn of thia aaaaaaaont aa aa faar It aeuld aAraraoLy
affaot tha a«araLL taeLanoa riiaat ef RLIC and hama, tha sarfeata porooptlon af
tha aradltaorthlnaaa of FBLIC banda. Ma faal that tha appoaranoa of tha
balanoa ahaat allL pLay a arltloaL rala In our ablllti to aarkat papor
affaatfvalf ainaa ft will ba Initial antrr to tha aarkat.

Aa a B^bar of tha HILB group ma alll da avarythtag fn our poaar to aaka
thia finanatng a aueaaaa, but oa aould urga you te conai^r ratalnlng tha 1/B
aaaaaMant ahlob allL halp Inaura tha auooaaa af thta naa finanvlna vMitola In
tha MrlatpLaao.

Yeura vary truly.

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9iCi9Vm

^CtlS^SX

mil i*» * w<Kw i ii tt XMi

^^^S^'

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tax IS. 19M

Thv proposed AllBlnatlen of th« rsuc apcelHl
iararane* prMiiun iiaa«snwnt of l/ll currontly
under ctenaidtration by Congress would undsmlns
ssriously th« fiiiji pl«n for tho xeespltsllsatlon
of tho rSLXC. Th* plan would astabllah aa FILJC
financing cocpoEatlon that would dlatributs dsbt
ssourltlas to ralso additional flnnnalal rssouress
for ths FSLIC.

Ha feci that ths ability of tha financinq corporation
to markaC dabt aocurltlsa to ths puhlle would bo
iapalrsd sines dobt sorvics on chsae sacurltiaa
would bs paid partially fron this spscial a*iMSM*anL..
Hs urge CongxssH to rataln the 1/lt spsclal aititHasaani:
as a crucial fsatura of tha FSLZC recapitalization plan.

Hinian H. Brachteld
Zxoeutivs vios Prosldent
Dalwa Sacurittaa Kmarlea Inc.

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OCMRTMDITOrTHtTIIEAnjRV ^/%

~ '^«■/^

Fabruary 9, 1987 f(^o ^O

— "■■' . w '^*,

Mar Mr. chainani ^^ ^ ^

I aa plaaaad to raapond to your lattar o( January 2S, 1!ie7,
ra^ardiaq eilt feea ttae PSLIC might (Aarga ttirifta obanglng to
POIC UiBursnce and lljilts on direct iavastMnU ud* by

stace-ehorteced, FSLlC-ioaufad Instltutiona. '

Flnt, I

■hould

■ tr

■as that 1

,n Bmt

tei

. la m

it aaaantlal t<

th« Ilnanclil

.pit

:ion plan. Out

plan proildei

a nuabe

lllty,

Includin

an intereat .

SSDD m:

1111

tha Fl

-iglnal

fclao. Federal

1 analyi

:hat at

laaat 1» of <

Industry'!

ia PSLIC

irbila iMTlng

ind

lirlng

tha pha

le-

ogt of th<

! ipecii

il J

LiBeamient.

B01M«*r,

•>■ ball***

that con;

iresalon*!

Intan

,at In

action

on th* aitt f<

(■pp Muriate tor

-eral i

tbara li an «.

rging i

itL a 1

.OBvlnq

PSLIC a laa t.

n coBpBn

1 tor 1

LnadaqL

late payn

third potnti alao hava the banaflt ot reducing uncertainty for
a an impoctant approach to •Dhanclag tha Induatrv'a long-tana

Capandlog on ona'a Tl«« of the equltlen anil the wslght ot
tha Dtbar two factorBf tha alia ot an exit fee that alght ba
[lanBldered approiirlate ranqsi fcoa a lov of 0.22t of deposits to

pcaaent value of two years ot the acheduled declining special ,

Vlll pranluB on the aj-quntent that another Insurer iiill haita to
b* paid the aaaa anoaat. Che hl^gh end vould represent tha
pcaaant valua ot tha remaining declining special asaesBment and '
tan yaara of ragolar premiuas hIUi both sssessed on a groiflng I
ioaurad dapaalt baaa. Valuaa In batoaen woald depend on cue's
salactloo of tlaa fraaa. dapoait grovth rate assumption, diaeouat
rate, and Incluaion or aiclusloD of tha regular premium In
addition. Ha baliave It vould ba appropriate, particularly for

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hlglMr !■*•!■ of ailt faal, for
■cal* that irauld bo looer tha 1
■ould IM aqultabla to include

OBBlCtaa to qlva Ita full conslderat

"1th regard ta tha naod for Unl

riat -t Is Appropriate and pradaat

liich ia Hliat tba FBLBB la doing,
n January 39 and 30 on thli iiaua

InatltuClans,
crucial point

■ould limit th
Finally,

;;i;lffi;;/HS';r.

act ivitiai
s 4 raaalt,
ule that

at sharp divialona eila

«lthln

■ FSLIC bill cleanly and quickly
o work Kith you and your itaff o

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U.S. HOUSE OF ft^RESBtTATIVES

tm pw Maft lUwuMloa, t]« C^BlttM eijiM your JCSMoni M
10 tJt., on nmdw, JHUHT Hi U*T> In >0CB lUi 1411101 ftui oefle*
■uiUliV ID I tl ^ at Om vpMalam at HJI. 17, ■ snr oC t'llA t*

M Ml polnud out in Nf (UtHMBt OB Cta occMlon at cht Ijiamkictlan

Mil art OH piMil ly cte ftuaa Ijsc yaar !■ CM pnrt«lcn nlatliiQ ta GK)
audit aiMlntrKy i«lcli I m lt nlM ^ Ma bvn Cmtfit Co CIi> attviclai at yeuc

R 1* alao quit* liMly Uat ch* dAjvt oC dlncc IjiimUwiLi >>1U b*

pubUdCy AcntfKUdg Ktivltlaa otf Cte IMKal UM Ubi BhM Baart*
manfian I ^ ^■'^■■''"q Lnrttaclona m vtcnaoaia nCio td.ll nflact q^csing
TtaiiB uuwHiilfla thla Mi>et and Mllaoa It to M (gpncdata Coc you to b*
' 'a guaatiaiB amcnljig ttia ■id>j«cc cc ca advlaa Ua

Vi (ooal poaltlsp ngutflng cti* amwit Boud

n adUClonBl tiHrlng on Jwuuy B ■« 10.

In ■cocRtafE* with OonltbM culaa, plaan dallHc ITS copiat od your
pnvand itifint W Ma S303 mrbun Bouaa Oaioa kiUdlng, wahlngion,

O.C. MSIS, » houra In adnnea — .—..-- —

' 'n lu (DClzacy vUl tn

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U.8. HOUSE Of RffRESENTATIVES

^^^V"^"::/

, .- Ci^lllaa I iif —!,» jnir ^/gmarmiet ae

10 a^., on Umdv JMucy U, IMT, ia toot 2UB Bwturn BDun OCUo
■uUdlna to MstiQ' CO Ua gccvtsism oC BJ). IT, a ecfv oC lAleh U
neland.

oC BJL 2Ti ■ oonr of t^lA la aljo mdoaad, da miy dlUaiuja BiOni Uia
bill ad ttwe pwad t^ cba Kuaa Ijat jmat !■ eta pnvialtxi nlitlng to ao
audit aithod^ italiA I . — T-.^i-j hw b«n tsou^ to ttaa atCntim of yOK-
*taft.

It la alao i|vlta Uloay Oae tta ■«>(« of <£

|tUlcl^ awiiouadlag ^AlvltlM oC Ua Fvdaral B

tt Mftj w I K axeandlng Inritatioa to vlti

vlMa oena am lnB ttils wbjace ari Mllava II

MMniMxaUai to M p CTp aB w l to r aapend to iiaattena ecnoa m l n B fa aiAJact

n to advla* tM CcmittM oC th* jaonlatntlon'a looal poaltlon cagndlns

Jawny S aid 30.

m ■eec rim ea iilth Coatfttaa rulaa, plava ilaliTvr ITS oopiaa of yaic
pEtparad atataant to Msai B303 Rqttuzn ttaaa Otftca BuUillnB' MablogtEn,
D.C. 2OSU1 24 InuEa In adnnca of your arhatital ^f lana. Mue
■111 ■ml In Ita aiUiMy will ba <— i.-wt in tta hHuriiiQ caeorda ari, U
daUvand xtan laquaatad, tta itKaaDt trtU t» ■■]■ nalljbla Co all

~ — ' NBbaca In J d»au at tim taarlng. To prorlda all n^ll laa

b Hiiflclanc ci^ tec <vaatianiiiQ, Cha onl piaaaitatlon at your

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Himarabl* remind J. St fitmlti ». ^f^

Chalnwn ^*7 . <*

CoMltttt on Bulking, Finuici k Urban Rffdrs 4l 'Jib.

Raybum Hmm OffiM Building ^^^ ^^

Houst of KiprMantatlTM ^a

Wuhlngton, D.C. »515 ^^^

Detr Mr. Chainwi: ^V

As you know the Treisury - Bank Boari) reCS()lt»liHtlBn pUrt Is bastd on
vtry conservatt>e aiiumptlons regardlno the roits of 1 Iquiditloni, It U
assumetl fiat Mgultlitions oin nive t «0 percent to 42 percent nit pniant
value cost ana that the funflt f ro"i it 1 tng the f ina' t uteti dI 1 1 be r»co»-
•rwJ over 5 years. FSLIC experienc* Ind-lcates liquidation coitt art )Mt
than those Incorporated Into our plan Therefore, the plan does not require
that FADA b« more successful ii disposing of assets than FSLIC. If FAOA 1«
successful in Its n'fsslon and causes HquiOatlons to ae l«i eipenilve, then
«SS nunejy wOuld need to be borrooed and tne FSLIC MOuld b« financially
stronger t^aJ^ currently envisioned under the recapUaHiatlofl plan.

The FAOA will be evaluated through a ■ultl-faeated process which will
measure Its performnce wttti respect to its ■Isslon, It) success In manage-
■ent and dlsposUion of Individual assets, and Its operational Integrity.

FACA s success In meeting lis mission will De evaluated In lermi of Its
buiines olan which details planned operetloni and provides pro-forma operat-
ing statements. FADA i business plan is updated regularly to reflect chang-
ing conflittons ani] the uncertainties Inherent in a new entity.

FADA's performance with respect to the assets It managei for the FSLIC
Is based on Individual asset business plans prepared by FADA. The asset
business plans, ohtch must be approved by tne FSLIC, detail reconnended
strategies for asset management and disposition, asset budgets, cash flows,
net realisable value, and appraised fair mrket value for each asset. FAOA'i
actual performance will be compared to the projections lat out In the asstt

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Pursuant to r«gu1at1ont, FAOA Is sufiject to tha audit raquiraawnts for
fadaril savlngt and loins and has engagtd tM national accounting fim of
Paat. Harwick and Hitehall to conduct audits of FROA.

undtrgolng Us annual
FSLIC M Muld havt n
FAOA.

Nr. Chairaan, tha Treasury - Bank Board recapitalization plan is da-
signad to be sufflciantly robust that undar most fortsatabia drcunstancas It
would provide sacurlty for tAa bond holdars, adaquate resourcas for Uvt FSLIC
to resolve Us currant and future cases efficiently and effactlvaly, and
illOH for the timely phase out of tha special assessment. However, thara are
Circiaistances undar uh1ch tha special assassaant would have to be relnsti-
tutad. Dn« scenario that would not paralt the 'phase out* of the special
assesstwnt would ba a flight of 30 percent of the industry to FDIC and Indus-
try deposit growth dropping to 4 percent annually. Under this scenario the
special assasswnt would have to be continued at 50 percent of the current
levaT (1/ie of 1 percent) through 1996 to aatntaln debt service and suffi-
cient funds at the FSLIC. Likewise, a revisiting of tha high interest rates
of 1979 - 1982 would result in high debt service costs and large additional
nurtiers of thrifts falling. This would, without doubt, cause a continuation
of the special assessment. U.vjer a wide variety of reasonable scenarios,
where the 1800 million interest reserve Is used as a cushion, tha Treasury -
Bank Board plan Is extreMly robust and the special assassnent can ba phased
out, as planned.

Best regaros.

"■^T

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U^OOSE OF RffHESENTATIVES S™™3r

tefitleni tr. ataf WlKcn

Savlnoi at] Loan D

A hMTlng noort), pl»— pcovid* orlttan «

• Dapamant of TTaaaury'a pcalticn en an
■nrctxlu* Bit Em ok panal^ to thclCt liaCiCuCiona that laav* tha
nUC Inauranoa find to Uw FDIC aC ana tlma war tha Ufa of tha

nopltallutlon plan.

• artieulaCa Cha ratiii laaiil of ftvaaiuy and tha

oalclcn en tha Ftdaral IKaa Loan BMi Boacd'a dtract
d prtyala to vdlfy that rula. ttauld tha Itaaauiy
■■■ l inclnllna a llsdCatlon on auch dlract
n tha FSLtC racapitAlisatton plAn? Plaaaa axplAln»

nufiltallntlan plan In aaily Fatauaiy.

Again, thank ^u, and I Icofc fcnard to yoir nply.

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U.S. HOUSE or REPRESENTATIVES ss^rsT-^nsr

bDCBbl« Uvln J. &^

Itiank vt:u Ccr voir CastljEf^ at laat i«ak'i hairijig on th* Padtral
[con Inmnm Cocpocatlcn EF5LIC) rvc^itallEaticfi plan. In ccrtor to i
bMTlng caCQci] plaMa [icovid* wrlttan •rawra to thi COlloiilng guBstion

□lapoalcicn taKiclatlcn (m

all ''^-■

PlMM plOvid* th> O

r tt» ll£a OE

by Hhlch Uw Fadsnl i«m u

k you and I look forvard to ycur laply.

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