Obligations Limitation: Resolution Trust Corporation's Compliance as of March 31, 1990

Published by the Government Accountability Office on 1990-07-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


      ;                                                                       l , c   .
                        United       States   General   Accounting   Office
                        Report to the Chairman, House
                        Committee on Banking, Finance and
                        Urban Affairs, House of

July 1990
                         Resolution Trust
                         Compliance as of
                         March 31, 1990

                  RE3TRICTED --Not     to be released outside the
                  General Accounting OfPice unless specifically
                  appmved by the Offlce of Congressional

GAO   United States
      General   Accounting
                     D.C. 20548

      Accounting    and Financial
      Management      Division


      July 27, 1990

      The Honorable Henry B. Gonzalez
      Chairman, Committee on Banking, Finance
        and Urban Affairs
      House of Representatives

      Dear ,Mr. Chairman:

      In a December 19, 1989, letter, you requested that we report quarterly
      on the Resolution Trust Corporation’s compliance with the maximum
      obligation limit set forth in the Financial Institutions Reform, Recovery.
      and Enforcement Act of 1989 (FIRREA). The act provides the formula for
      calculating the limit and provides $50 billion in financing to resolve
      troubled savings and loans placed into conservatorship or receivership
      from January 1, 1989, through August.9, 1992.

      On June 7, 1990, the Corporation issued to you its first quarterly report
      of the estimated values of its obligations, assets, and contributions
      received as of March 31, 1990. The Corporation reported that the
      financing it has received from the Resolution Funding Corporation
      (REFCORP) and the Treasury, plus its outstanding obligations exceeded its
      assets by $15.4 billion, and that its “adjusted obligation level” is there-
      fore $34.6 billion below the $50 billion limitation on outstanding

      Although the Corporation included $18.8 billion received from Treasury
      in its calculation, it was not required to do so by FIRREA. If this amount
      were excluded, after the Corporation reaches the $50 billion limit on
      outstanding obligations as presently calculated, the Corporation would
      be able to incur an additional $18.8 billion in net obligations without
      violating the section 501(a) limitation. However, FIRREA does not provide
      funds to pay the additional obligations. In a September 26, 1989, letter,
      the Chairman and Ranking Minority Member, Senate Committee on
      Banking, Housing, and Urban Affairs, advised the Secretary of the Trea-
      sury of this matter and stated that nothing in FIRREA should be viecved
      as permanently expanding the Corporation’s $50 billion limitation. C‘on-
      sistent with the Chairman’s September 26 letter, the Corporation
      included the $18.8 billion in its calculation. The Corporation’s report and
      an accompanying schedule we obtained providing details on the mas-
      imum limitation calculation are included as appendixes I and II.

      Page 1                              GAO/AFMD-90-101 Resolution Trust (‘oqxmtion

                   Based on our review of the Corporation’s June 7, 1990, report and
Results in Brief   schedule and its financial records, we determined that none of the cate-
                   gories for the formula required by FIRREA were omitted from the Corpo-
                   ration’s calculation. During our review, we identified potential problems
                   that can or will impact the maximum obligation limitation in the future.
                   We did not attempt to determine the amount of any undisclosed obliga-
                   tions or overvalued assets of the Corporation as of March, 3 1, 1990,
                   which, if disclosed, would have affected its calculation. However, con-
                   sidering the results of our review and the size of the reported excess
                   balance available as of March 31, 1990, we believe there is little risk
                   that the Corporation exceeded the limitation.

                   The Secretary of the Treasury, as Chairman of the Resolution Trust Cor-
                   poration Oversight Board, stated’ that with an aggressive case resolu-
                   tion schedule, the Corporation could reach the $50 billion limit as early
                   as the fourth quarter of the current calendar year. The resolution pace
                   has increased and, as of June 30, 1990, the Corporation had resolved
                   207 institutions. This figure compares with only 52 institutions having
                   been resolved as of March 3 1, 1990. In testimony given in early April
                   1990,’ we estimated that the Corporation’s costs will likely exceed
                   $100 billion. As a result, we testified that the Corporation will require at
                   least an additional $50 billion in funds in the future.

                   In his May 23 testimony, the Secretary of Treasury also stated that the
                   amounts authorized for the Corporation in FIRREA will fall short of what
                   is required. He further stated that the Oversight Board intends to work
                   with the Congress and the administration to develop an approach which
                   will provide the Corporation the resources necessary to carry out its
                   responsibilities while maintaining adequate controls.

                   Although the pace of resolutions is a significant factor in determining
                   when the Corporation will reach the maximum limitation, we identified
                   three other potential problems that will also directly affect the cost of
                   resolutions and the rate at which the obligation limit is reached. These
                   are recent and future events concerning the fair market value of assets;
                   noncompliance with Corporation policy governing pledging of collateral;
                   and proposed policies governing representations, warranties, and con-
                   tract services.

                   ‘Statement of Secretary Nicholas F. Brady on Behalf of the Resolution Trust Corporatwn Hefore the
                   Senate Committee on Banking, Housing, and Urban Affairs (May 23, 1990).
                   ‘Resolving the Savings and Loan Crisis: Billions More and Additional Reforms Needed (GAO T-

                   Page 2                                         GAO/AFMD-9@101       Resolution   Trust (iwporation

             The Corporation needs to undertake certain actions to resolve the
             problems we have observed and to establish the basis for measuring
             associated costs so that future quarterly reports are accurate and
             informative. We provide recommendations aimed at addressing these

             In response to the savings and loan industry crisis and the Federal Sav-
Background   ings and Loan Insurance Corporation’s (FSLIC) mounting losses, FIRREA
             (Public Law 101-73) was enacted into law on August 9, 1989. The act
             abolished FSLIC and transferred its insurance function to the Federal
             Deposit Insurance Corporation. Except for those assumed by the Corpo-
             ration, FIRREA transferred FSLIC’S assets and liabilities to a newly estab-
             lished fund, the FSLICResolution Fund. FIRREA also established the
             Resolution Trust Corporation to resolve the problems of institutions
             placed into conservatorship or receivership from January 1, 1989, until
             August 9, 1992.” The act provided the Corporation $50 billion to resolve
             the problems of those institutions and to pay administrative expenses.’

             FIRREA provided the Corporation with certain powers with which to
             accomplish its task, including the power to issue obligations and guaran-
             tees during the course of acquiring an institution within its jurisdiction.
             The full faith and credit of the United States is pledged to the payment
             of such obligations if the principal amounts and maturity dates are
             stated in the obligations.

             However, section 501(a) of FIRREA limits the outstanding obligations of
             the Corporation and provides a formula for calculating the limitation on
             such obligations. As stated in FIRREA, the sum of contributions received
             from REFCORP plus outstanding obligations may not exceed the Corpora-
             tion’s available cash plus 85 percent of the fair market value of its other
             assets by more than $50 billion.

             “In addition to creating the Resolution Trust Corporation, the act created the Resolution Trust Corpo-
             ration Oversight Board. The purpose of the Oversight Board is to review and have overal! responsi-
             bility for the Corporation’s activities.

             ‘As of March 31. 1990, the Corporation received approximately $29.5 billion in funds. The Corpora-
             tion was provided $18.8 billion from Treasury and %1.2 billion of contributions from the Federal
             Home Loan Banks which was transferred to the Corporation through REFCORP.Additionally. the
             Corporation receives proceeds from the $30 billion of bonds authorized by FIRREA to be mued bg
             REFCORP.-4s of March 31, 1990, REFCORPtransferred $9.5 billion in bond proceeds to the

             Page 3                                           GAO/AFMD-90-101      Resolution   Trust Corporation

                        Obligations are defined as including (1) any obligation or other liability
                        assumed by the Corporation from FSLIC, (2) any guarantee issued by the
                        Corporation, (3) the total of outstanding amounts borrowed from the
                        U.S. Treasury as authorized by FIRREA, and (4) any other obligation,
                        direct or contingent, for which the Corporation has a liability to pay.

                        FIRREA  provided for the Corporation to receive $18.8 billion from Trea-
                        sury in fiscal year 1989, which the Corporation included in the formula
                        for calculating the limit on outstanding obligations. However, the
                        formula in section 501(a) does not explicitly contain the Treasury
                        funding and there is no basis in the law for concluding that it is encom-
                        passed either by the REFCORP contributions or the obligations compo-
                        nents in the formula. Therefore, as a matter of law, the Corporation is
                        not required to include the Treasury funding in its calculation of
                        whether the FIRREA limitation on outstanding obligations has been
                        reached. However, as previously stated, the Corporation has included
                        the $18.8 billion in calculating the limit on outstanding obligations.

                        As agreed to with your staff, we performed a limited review of the Cor-
Objectives, Scope,and   poration’s report to test its reasonableness. Specifically, our objectives
Methodology             were to determine if (1) all categories for the formula required by FIRREA
                        were included in the Corporation’s calculation and (2) the values
                        reported appeared reasonable for select components of the calculation.
                        In addition, we uncovered other factors which could significantly impact
                        the obligation limit and the usefulness of the quarterly report.

                        In order to determine the reasonableness of the values of selected com-
                        ponents included in the Corporation’s calculation, we confirmed that the
                        Corporation received contributions from REFCORP, funding from the U.S.
                        Treasury, and Federal Financing Bank loans for working capital pur-
                        poses in the amounts reported. We also reviewed the framework of the
                        calculations of allowance for losses on claims against receiverships and
                        advances to conservatorships. These calculations are essential to deter-
                        mining the estimated fair market values of the Corporation’s non-cash

                        Our review of the allowance for losses calculation was limited to deter-
                        mining that the framework used to make the calculation considered all
                        appropriate items. For example, the Corporation’s allowance for losses
                        on claims against receiverships properly included an estimate of losses
                        from future assets sales, as well as contingent liabilities arising from

                        Page 4                              GAO/AFMD-ml01   Resolution   Trust Corporation

                       assets sold under asset put arrangements.’ Further, in calculating the
                       allowance for loss on advances, the Corporation applied the rate of loss
                       it expects to incur on conservatorships.

                       We performed our work at the Corporation’s headquarters and, in some
                       instances, in its Central Region. We also performed selected procedures
                       at three conservatorships in the Central Region and made inquiries of
                       management and other personnel where necessary during the period
                       from February 1990 to June 30, 1990. Our procedures primarily con-
                       sisted of interviews, confirmation of balances with third parties, and a
                       determination that amounts reported by the Corporation were sup-
                       ported by the agency’s official financial records. Except for the proce-
                       dures performed, we did not test or verify the books and records of the
                       Corporation or the data contained in appendixes I and II. We performed
                       our work in accordance with generally accepted government auditing
                       standards. The scope of our work, however, did not include a review of
                       the internal control environment. Also, our review of compliance with
                       laws and regulations was limited to the Corporation’s compliance with
                       the obligation limitation.

                       We did not obtain written comments on the draft of the report. We did,
                       however, discuss its contents with cognizant Corporation officials and
                       have included their views where appropriate.

                       In the following sections we discuss various potential problems that can
                       or will affect the measurement of reported components’ values used in
                       the limitation calculation. We also provide recommendations to the Cor-
                       poration aimed at improving the usefulness of the quarterly report.

                       The pace of resolution has a significant effect on the rate at which the
Factors That Could     Corporation incurs obligations and, thus, on when the Corporation
Significantly Impact   reaches the maximum limitation. But, our review identified three other
the Obligation Limit   important factors that could affect the cost of resolutions and the point
                       at which the obligation limitation is reached. These factors are recent
and Reasonablenessof   and future events concerning the fair market value of assets; noncompli-
Its Calculation        ance with Corporation policy governing pledging of collateral; and pro-
                       posed policies governing representations, warranties, and contract

                       ‘To encourage private enterprise to purchase assets of failed thrifts, the Corporation has been
                       offering, with the sale of assets, “put back” clauses in the contract of sale. These clauses allow the
                       purchaser to give back (to the Corporation) assets it purchased within a specified time penod The
                       Corporation would then pay the purchaser an agreed value of the assets.

                       Page 5                                            GAO/AFMD-90-101       Resolution   Trust Corporation

Fair Market Value of       Overall, the market value of assets is a key component of the calcula-
Assets May Be Overstated   tion. As of March 31, 1990, the Corporation’s financial records showed a
                           book value for receivership assets of approximately $13.3 billion with
                           an estimated fair market value” of $7 billion, a loss of 45 percent. The
                           book value of real estate accounted for approximately $2.3 billion, a sig-
                           nificant portion of the $13.3 billion in receivership assets.

                           The Secretary of Treasury cited, in his May 23 testimony, the weak real
                           estate market as one of the reasons the Corporation needed additional
                           funds. If real estate values for receivership assets are reduced further
                           as a result of the weak market, then such impaired values will further
                           reduce the amount of additional obligations the Corporation may incur.

                           Recent statements by the Corporation’s management have indicated that
                           asset sales, particularly in real estate, have not progressed as expected.
                           On May 4, 1990, the Corporation’s management testified7 that it is con-
                           sidering accepting prices as low as 70 percent of appraised, or esti-
                           mated, fair market values. Such actions would cast doubt on the
                           reasonableness of the reported fair market values and indicate that the
                           Corporation’s current valuations of these non-cash assets may be

                           A factor which also bears on the reasonableness of the fair market
                           values reported for these non-cash assets is the quality of appraisals. In
                           a soon-to-be-issued report on the Bank Insurance Fund, we found a
                           number of examples of asset appraisals based on optimistic assumptions
                           that reduced the credibility of the appraisers’ asset valuations. Because
                           the Corporation also uses appraisals in valuing its real estate and other
                           assets, it needs to be alert for optimistic assumptions used by appraisers
                           that could result in the estimated fair market value of assets being sub-
                           stantially overstated. The Corporation’s management stated that they
                           closely monitor the appraisals on real estate and do not believe there is a
                           problem with appraisals made.

                           Failure to reasonably estimate the fair market value of assets could
                           result in overstating the amount of obligations the Corporation may
                           incur. This is a concern that becomes significant as the Corporation

                           “The Corporation deducts, among other things, the costs of disposal to arrive at the reported fair
                           market values.

                           ‘Testimony of William Seidman, as Chairman of the Corporation’s Board of Directors, Before the
                           Subcommittee on Financial Institutions, Supervision, Regulation and Insurance, House Committee on
                           Banking, Finance and Urban Affairs.

                            Page 6                                           GAO/AFMD-90-101      Resolution   Trust Corporation

                        approaches the limit. Thus, the tracking and reporting of the actual
                        results of asset sales would improve the usefulness of the quarterly
                        report by providing information necessary to evaluate the accuracy of
                        the estimated fair market value of assets. For example, information
                        such as initial estimated fair market values assigned, date available for
                        sale and date sold, sales price, and gain or loss would be useful. The
                        Corporation’s management stated that they currently track asset sale
                        information for conservatorships, and are planning in the near future to
                        implement a system to track this information for receiverships.

Noncompliance With      We found instances of noncompliance with Corporation policy con-
Corporation Policy on   cerning advances made to conservatorships. Such noncompliance could
                        impact the Corporation’s return on asset recoveries, thereby increasing
Advances Could Reduce   its resolution costs. The Corporation’s written procedures require that
Cost Recoveries         all institutions receiving advances execute a promissory note for each
                        advance, pledge collateral to secure these advances, and perfect the Cor-
                        poration’s security interest in the collateral. However, we found cases
                        where (1) promissory notes had not been executed as late as 8 months
                        after the respective advances were made, (2) collateral had not been
                        pledged against advances in accordance with Corporation policy, (3) the
                        security interest had not been perfected against collateral that had been
                        pledged, and (4) conservatorship managing agents were uncertain about
                        the Corporation’s collateral requirements.

                        In one of the three institutions we visited, the Corporation could not
                        locate 12 of the 18 promissory notes for advances provided to the insti-
                        tution through October 1989. Subsequent to our inquiries, the Corpora-
                        tion provided signed notes dated June 25, 1990. Furthermore, two of the
                        three institutions we visited had received approximately $250 million in
                        advances from the Corporation, but no collateral had been pledged
                        towards these advances. Due to the limited number of institutions vis-
                        ited, we do not know the full extent of this lack of compliance with Cor-
                        poration policy. Since, as of March 31, 1990, the Corporation had $12.7
                        billion in advances outstanding to institutions under its conservatorship,
                        there could be substantial sums unsecured.

                        Officials of the Corporation’s headquarters stated that regional manage-
                        ment was responsible for insuring that sufficient collateral has been
                        pledged. However, regional management we interviewed stated they
                        were not even aware, until recently, of the total amount of the Corpora-
                        tion’s advances to individual conservatorships within their geographic

                        Page 7                              GAO/AFMD-90-101   Resolution   Trust Corporation

Prior to issuing advances, the Corporation’s guidelines require that a
blanket security agreement8 be executed. This is important in protecting
the Corporation’s interest. However, failing to perfect a security interest
on pledged collateral could also adversely impact the Corporation’s
interest. Perfection is performing the steps legally required to give the
Corporation a claim to an asset and protects that claim in the event that
it is challenged. According to internal documents, as of March 31, 1990,
the Corporation has not perfected its interest in collateral securing $12.1
billion in advances. Failure to perfect the Corporation’s interest could
cause the Corporation to unnecessarily be in a position secondary to, or
of lower priority than, other creditors.

We interviewed regional management as well as several managing
agents of conservatorships in the Corporation’s Central Region. Based
on these interviews, we found there was uncertainty over how much
collateral should be pledged, what recording procedures should be fol-
lowed, and whether collateral information should be sent to the regions
or headquarters. However, headquarters management had issued guide-
lines to regional management and managing agents concerning the
pledging of collateral and perfection. Headquarters management further
believes these guidelines are sufficiently clear. For example, in addition
to requiring that advances be backed by collateral, the procedures also
require that the Corporation’s interest in the collateral be perfected.

The Corporation’s management has stated that its legal counsel is cur-
rently researching whether perfection of the Corporation’s security
interest in collateral is necessary to protect its interest in the event a
claim is challenged. The Corporation’s management believes that perfec-
tion of the Corporation’s interest may not be necessary. They believe
that, more importantly, a blanket security agreement protects the Cor-
poration’s interest in the collateral. Furthermore, they believe that since
they, in effect, control the operations of the institution, the collateral
would not be pledged to other parties for the purposes of securing addi-
tional funding without their knowledge.

Headquarters management informed us that it is currently taking steps
to correct the problems we noted. In future reports we will follow up on
the Corporation’s implementation of corrective actions, as well as eval-
uate its position on the need to perfect its security interest.

‘Under the blanket security agreement provided in the Corporation’s policy circular, an mstltution
pledges as collateral to secure repayment of an advance all property of the institution in the Corpora-
tion’s possession or control. The agreement grants the Corporation a security interest in the collateral
and its proceeds.

Page 8                                            GAO/AFMM@101          Resolution   Trust Corporation

Proposed Policies           The Corporation is also considering other actions which, if adopted, may
Governing                   affect the additional amount of obligations the Corporation may incur.
                            These are (1) giving representations and warranties to the secondary
Representations,            market and (2) contracting with the private sector for asset
Warranties, and             management/disposition functions. According to internal Corporation
Contracted Services, When   documents. the Corporation is currently considering making certain rep-
Adopted, May Impact         resentations and warranties on asset-backed receivables sold to the sec-
Obligations                 ondary market. As of March 31, 1990, the Corporation’s
                            conservatorships and receiverships controlled approximately $87 billion
                            in receivables that can be sold in the secondary market. Furthermore,
                            the Corporation is attempting to sell the rights to service approximately
                            $50 billion in mortgages,” a transaction that generally includes the
                            offering of warranties and representations.

                            Warranties and representations create contingent liabilities and, if
                            offered, would require the Corporation to estimate related potential
                            losses and reflect the estimates in the obligation limitation calculation.
                            Contingent liabilities of this nature would increase the Corporation’s
                            outstanding obligations and decrease the additional amount of obliga-
                            tions the Corporation could incur.

                            According to Corporation management, sellers of asset-backed receiv-
                            ables to the secondary market are expected to make certain representa-
                            tions and warranties, in the form of factual disclosure, about the assets
                            being sold and are expected to stand behind the accuracy of those state-
                            ments. It is further asserted that, if the Corporation were not to provide
                            representations and warranties commonly found in the secondary
                            market, the mortgage assets under its control would likely be subject to
                            a substantial discount above and beyond the cost of making such repre-
                            sentations and warranties, and certain assets may not be marketable at

                            The Corporation’s management has stated that it intends to record these
                            contingent liabilities when appropriate, in addition to establishing a
                            system to track representations and warranties offered and their corre-
                            sponding expiration dates.

                            Liabilities incurred as a result of contracting for services also increase
                            the Corporation’s outstanding obligations and, therefore, decrease the
                            amount of additional obligations it may incur. Management has stated
                            that it intends to contract out 80 percent of its asset management and

                            %ervicing a mortgage includes collecting loan payments and controlling mortgage escrow funds

                            Page 9                                         GAO/AFMD9@1O1       Resolution   Trust Corporation

                      disposition functions, as well as other services. Although we do not
                      believe that the amount contracted as of March 3 1, 1990, is material, the
                      contracting of such services to the extent the Corporation has indicated
                      could significantly affect the additional amount of obligations the Cor-
                      poration may incur. Management is in the process of implementing a
                      contract management system which is intended to monitor the perform-
                      ance of the contractors, as well as track expected costs. Because these
                      costs include estimates that could ultimately have a significant impact
                      on the obligation limitation calculation, we will be following up on the
                      system’s implementation during future reviews of the Corporation’s
                      quarterly reports.

                      Although the pace of resolutions will have a significant impact on the
Conclusions           rate at which the Corporation incurs obligations and the amounts which
                      it reports it may incur, other factors could have a significant impact as
                      well. These include overstating the fair market value of assets and
                      implementation of the Corporation’s proposals regarding representa-
                      tions and warranties on receivables sold to the secondary markets and
                      contracts for asset management and disposition functions. Tracking and
                      reporting on these factors in future quarterly reports would enhance the
                      usefulness of those reports by providing decisionmakers with more
                      informative disclosure on the Corporation’s compliance with the obliga-
                      tions limitation. Furthermore, noncompliance with the Corporation’s
                      established policies on advances could also impact on the rate at which
                      the Corporation incurs obligations.

                      We recommend that the Corporation’s Executive Director take the nec-
Recommendations       essary actions to ensure that

                  l the Corporation’s future quarterly reports to the Chairman, House Com-
                    mittee on Banking, Finance and Urban Affairs, disclose actual results on
                    asset sales in comparison with estimates;
                  l the Corporation’s policies and guidelines on advances to conservator-
                    ships are clarified and followed; and
                  . if representations and warranties are given in connection with the sale
                    of asset-backed receivables and mortgage service rights, an appropriate
                    estimate of the resulting contingent liabilities be made and reflected in
                    the Corporation’s obligation limitation calculation.

                       Page 10                            GAO/AFMD-90.101   Resolution   Trust C’mporation

                  We did not obtain written comments on this report. We did, however,
Agency Comments   discuss its contents with cognizant Corporation officials who agreed
                  with the report’s findings and conclusions. We have incorporated their
                  comments where appropriate.

                  As agreed with your office, unless you publicly announce its contents
                  earlier, we plan no further distribution of this report until 30 days from
                  the date of this letter. At that time, we will send copies to interested
                  parties and make copies available to others upon request.

                  This report was prepared under the direction of Robert W. Gramling,
                  Director, Corporate Financial Audits, who may be reached on 275-9406
                  if you or your staff have any questions. Major contributors are listed in
                  appendix III.

                  Sincerely yours,

                  Donald H. Chapin
                  Assistant Comptroller General

                  Page 1 I                             GAO/AFMD-SO-101   Resolution   Trust Corporation

Appendix I
Resolution Trust
Obligations and
Assests as of
March 31,lQQO
Appendix II                                                                                              16
Resolution Trust
Corporation Maximum
Amount Limitation on
Appendix III
Major Contributors to
This Report


                        FIRREA    Financial Institutions Reform, Recovery, and Enforcement Act
                                     of 1989
                        FSLIC     Federal Savings and Loan Insurance Corporation
                        REFCORP   Resolution Funding Corporation

                        Page 12                           GAO/AFMD!TJ@1O1   Resolution   Trust Corporation
Page 13   GAO/AFMD-90-101   Resolution   Trust Corporation
Appendix I

ResolutitionTrust Corporation Obligationsand
Assestsas of March 31,199O


                                                            June 7, 1990

                 Honorable Henry B. Gonzalez
                 Committee on Banking, Finance
                   and Urban Affairs
                 House of Representatives
                 Washington, D.C. 20515
                 Dear   Mr. Chairman:
                 Thank you for your letter      of March 9, 1990. We are pleased to
                 furnish the quarterly     report which you requested relating    to the
                 working capital     needs of the Resolution  Trust Corporation.    The
                 quarterly    report provides estimated values of the RTC's
                 obligations     and assets as of March 31, 1990, which are used to
                 determine whether the RTC remains within the maximum limitation
                 on obligations     as mandated by the Financial   Institutions  Reform,
                 Recovery, and Enforcement Act of 1989.
                 We hope that this information  will    be of assistance     to you.   If
                 you have any questions,  please let    me know.

                                                        David C. Cooke
                                                        Executive Director


                         Page14                           GAO/AFMlH@101ResolutionTrustCorporation
      Appendix I
      Resolution Trust Corporation       Obligations     and
      Assests as of March 31,199O

                     RESOLUTION              TRUST CORPORATION

                                  Obligations          and Assets
                                              (S in billions)

11.    /Outstanding Obligation5

I I       Notes is&d toFederal Financing Bank
          Other Obligalions
           Total Outstanding Obligations
                                                                        )         ‘,:“,I
                                                                                                 A      /

2.      ‘Full Faith and Credit’ Obligations                                       2.6            B
3.      Total Fair Market Value of [Non-Cash)
          Asse1s Held by RTC                                                   16.2              C
4.      Cash Held by RTC                                                        3.2
5.      Obligations [Bonds) Issued by REFCORP                                   9.5              D

A     Includes current liabilities (e.g., accounts payable).
      Also includes expected costs from contractual commitments
      (e.g., leases) and other contingent liabilities unless
       already applied lo the net realizable value of RTC claims.
       Exclude5 the estimated future costs of resolving RTC
       conservatorships and other troubled thrifts

 B       Includes current liabilities and notes issued lo FFB.

 C       Includes (1) advances 10 conservalorships      ($12.7 billion. less
         a $4.0 billion allowance for a share of the losses 10 resolve
         these institutions). (2) the net realizable value of RTC claims
         on receiverships ($7.0 billion), and (3) accrued interest and
         other assets. Net realizable values of receivership claim5
         account for estimated total loss85 to RTC for resolved cases,
         including conlractual expenses (e.g.. asset management,
         legal, and appraisal fees) and, where applicable. expected
         losses resulting from ‘put’ agreements. The obligation
         limitation counts the tolal of all non-cash assets at 86
          percent of the fair market value estimate stared above.

 D       Sum of October ‘69 issue ($4.5 billion) and January ‘90 issue
         ($5.0 billion). The maximum volume of bonds lo be issued by
         REFCORP is $30 billion. RTC alSo received $18.6 billion in
         Treasury funds and a $1.2 billion contribution from Ihe Federal
         Home Loan Banks (through REFCORP).

       Page 15                                                  GAO/AFMD-90-101            Resolution   Trust Corporation
Appendix II

ResolutionTrust Corporation Maximum
Amount Limitation on OutstandingObligations

                                                        RESOLUTION    TRUST CORPORATION
                                 MAXIMUM             AMOUNT LIMITATION     ON OUTSTANDING                 OBLIGATIONS

                                                                    (IN   MILLIONS)

                                                                                             AS OF MARCH 31,        1990
              A)   CONTRIBUTIONS                     RECEIVED:

                   1)       TREASURY            :                                                         18,800

                   2)       REFCORP:                                                                       10,726
                                         TOTAL        CONTRIBUTIONS                                                            29,526

              B)   OUTSTANDING

                   1)        LEGAL            EXPOSURE     -     ESTIMATED      COSTS                               84

                   2)        LIABILITIES                INCURRED      FROM ASSISTANCE
                             AND FAILURES                                                                             4

                   3)        CONTRACTUAL                OBLIGATIONS          (LEASES,      ETC.)                    95

                   4)        ACCOUNTS               PAYABLE      AND OTHER      LIABILITIES                         15

                   5)        NOTES            PAYABLE     AND OTHER          DEBT                             2,562
                                             TOTAL    OUTSTANDING         OBLIGATIONS                                             2,760

                           Page16                                                       GAO/AFMD-88101ResolutionTrustCorporation
                  ResolutionTrust CorporationMaximum
                  Amount Limitationon


             1) CASH AND EQUIVALENTS                                                          3,181

             1)     CLAIMS AGAINST RECEIVERSHIPS                           5,974
                             7,028     @ 85%

             2)     RECEIVABLESFROMOPENINSTITUTIONS                        7,751
                           9,119 @ 85%
             3)     MISC. RECEIVABLESAND OTHERASSETS                                 3
                                     3 @ 852

                         TOTAL OTHERASSETS                                                   13,728
    AWUSTEDOBLIGATION LEVEL (A+B-C-D)                                                        15,377
    MAXIMUHLEVEL                                                                              50,000
             OBLIGATION LEVEL AT 3/31/90 l *                                               $34,623

         l   * A positive   amount indicates     compliance with the obligation
                limitation.    It does not represent the limit on additional
                borrowings.    Additional    borrowing authority   depends on
                the estimated value of RTC assets and the volume of REFCORP
                funds raised.


                    Page17                             GAO/AFMD-90-101          Resolution   Trust C‘orporation
     ResolutionTrust CorporationMaximum
     Amount Limitation    on
     Outstanding Obligations

                    FIRREA Section 501(a) (j)
      Maximum Amount Limitation     on Outstanding        Obligations
                         Explanatory Notes

A.   Contributions       Received
     Includes the $18.8 billion       of initial  Treasury funding, the
     $1.2 billion   FHLB contribution    (through REFCORP), and REFCORP
     bond proceeds.
8.   putstandinu      Obliaatiom
     1.:                     The expected cost of those pending or
     threatened litigations,     claims, or assessments where an
     estimated loss to RTC (in its Corporate and Receivership
     capacities)    is both probable and reasonably estimable.
     These are over and above any legal costs already included in
     the resolution    loss estimates,
     2. Liabilities        Incurred from Assistance and Failures : These
     include,     among other items, the full face value of the
     liability      related to pending claims of depositors     (insured
     deposits owed but not yet paid).
     2. Contractual    Obliaations:         The non-cancellable   portion of
     outstanding    contractual    obligations.        As of March 31, 1990,
     these included primarily       multi-year     leases   for space in
     Washington   and other locations.
     3. Accounts Payable and Other Liabw:           Full            face value
     of routine,    current liabilities such as accounts            payable and
     accrued liabilities.
     3. Notes Pavable and Other Debt:          Full face  value of all
     Federal Financing Bank borrowings         and accrued interest    due

     A.               Any expected cost to the Corporation of any
     guarantee issued or assumed from the FSLIC (i.e.,    FHLB
     advances guaranteed by FSLIC). No expected cost to RTC
     since  there are no deficiencies  in the underlying  collateral
     on any of these guarantees at March 31, 1990. There were no
     other guarantees as of that date.
     8.:                  Included in the allowance for losses on
     resolved institutions        is an estimate of 1OSSeS on assets
     likely    to be returned to the RTC under a put agreement.
     Therefore,     the receivables    for resolved cases have already
     been adjusted for the contingent           liabilities      relating to put
     agreements.       No additional   calculation         is necessary.

      Page 18                                GAO/AFMD-SO-101   Resolution   Trust Corporation
     Appendix II
     ResolutionTrust      Corporation   Maximum

                    t Lidbill 't ies Related to the Resol ution
     c , Con t* inaen                                           0f
     conservatorshios      and Other Troubled Thriffig: Not included               as
     outstanding    obligations.
C.   Bsh     and Cash Eauivalents
     Includes          cash, cash equivalents     (as defined   in   FAS   W95).
D.   Estimated Fair Market Value of Other              Assets   Held bv the
     Corooration 185% thereof)

     1. Claims Agdm.t     Receivershm    : Included at 85% of the Net
     Realizable Value of such claims.       Lass allowances against
     these claims are estimates at the time of resolution.            RTC
     currently   is implementing policies    similar to FDIC policies
     for valuing   claims against receiverships,       which consider
     nondiscounted cash inflows,      net of liquidation    expenses, in
     determining   the cash available    to repay the Corporation.
     2. Receivables From Ooen Institutionq:           Included at 852 of
     fair market value.       Includes principal    on advances, accrued
     interest      and other receivables  from   conservatorships.   The
     value of the advances is reduced by an allowance
     representing      a share of the losses to resolve these
     3. Miscellaneous   Receivables and Other Assets:  Includes
     current assets, claims from depositors   pending or unpaid,
     all at 85 percent.

      Page19                                      GAO/AFMD-90-101
Appendix III

Major Contributors to This Report

                             William D. Grindstaff, Assistant Director
Accounting and               Kurt W. Hyde, Audit Manager
Financial      Management    Timothy P. Gonzales, Evaluator
Division,      Washington,   Kent L. EbY, Accountant

 (917570)                     Page 20                             GAO/AFMD-90-101   Resolution   Trust ( ‘orporation
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