oversight

Financial Audit: Federal Savings and Loan Insurance Corporation's 1989 and 1988 Financial Statements

Published by the Government Accountability Office on 1990-07-17.

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

July   1990
                 FINANCIAL AUDIT
                 Federal Savings and
                 Loan Insurance
                 Corporation’s 1989
                 and 1988 Financial
                 Statements




                   -   --
GAO/AFMD-90-79
GAO   United States
      General Accounting  Office
      Washington, D.C. 20548

      Comptroller   General
      of the United States

      B-l 14893

      July 17, 1990

      To the President of the Senate and the
      Speaker of the House of Representatives

      This report presents our opinion on the Federal Savings and Loan Insur-
      ance Corporation’s final financial statements, disclosing that significant
      uncertainties remain that will affect the ultimate cost of assistance
      already provided to failed thrifts and the estimated cost of resolving
      problem thrifts not yet assisted. We expect final costs to be higher than
      estimated. This report also presents our reports on the Corporation’s
      internal accounting controls and on its compliance with laws and regula-
      tions. We conducted our audits pursuant to the provisions of 31 USC.
      9105 and in accordance with generally accepted government auditing
      standards.

      On August 8, 1989, its last day of operation, the Corporation reported a
      capital deficit of $87 billion-the  largest ever reported by a public OI
      private corporation. The Financial Institutions Reform, Recover?;. and
      Enforcement Act of 1989 (FIRREA) provided mechanisms to pay off the
      Corporation’s obligations, which were transferred to a resolution fund.
      It also created the Resolution Trust Corporation and provided it $50 bil-
      lion to resolve problem thrifts placed into conservatorship or receiver-
      ship from January 1, 1989, through August 9, 1992.

      On April 6, 1990, we testified before the Senate Committee on Banking,
      Housing and Urban Affairs that at least $325 billion will be needed to
      pay off existing obligations, to resolve the problems of institutions
      awaiting resolution, to pay interest on the bonds issued to effect resolu-
      tions, and to pay some administrative expenses. We recommended that
      the Resolution Trust Corporation Oversight Board and the Federal
      Deposit Insurance Corporation develop proposals to provide the addi-
      tional funds and semiannually report to the Congress on the total cost.

      The $325 billion represents a least cost estimate based on present condi-
      tions that are subject to significant change. It is also based on the ( )ffke
      of Management and Budget’s optimistic interest rate assumptions. This
      estimate could easily rise to $400 billion if more thrifts fail than r hcl X0
      identified by the Corporation and could reach $500 billion if the
      economy suffers a downturn and interest rates rise.

      On May 23, 1990, the Secretary of the Treasury, as Chairman of rho
      Oversight Board, testified before the Senate Committee on Banking.


      Page 1                  GAO/AFMINO-79   Federal   Savings and Loan Insurancr   ( ‘~~~MWHIWN
B-114893




Housing and Urban Affairs that the amounts authorized for the Resolu-
tion Trust Corporation in FIRREA will fall short of what is required.
Depending on the ultimate number of failures and amount of losses
incurred, the Secretary estimated that the Resolution Trust Corpora-
tion’s cost would range from $90 billion to $130 billion if paid today.
The Oversight Board intends to work with the Congress and the admin-
istration to develop a funding approach for the necessary resources.

We are sending copies of this report to the Chairmen of the Senate Com-
mittee on Banking, Housing and Urban Affairs and the House Committee
on Banking, Finance and Urban Affairs; the Director of the Office of
Management and Budget; the Secretary of the Treasury; and the
Chairman of the Federal Deposit Insurance Corporation.




Charles A. Bowsher
Comptroller General
of the United States




 Page 2                GAO/AFMD9@79   Federal   Savings and Loan Insururr   C~oqwntion
Page 3   GAO/AFMD-9&79   Federal   Savinga and Loan Insurance   ( orpwa~rtim
Contents


Letter                                                                                                            1

Opinion Letter                                                                                                    6

Report on Internal                                                                                            12
Accounting Controls
Report on Compliance                                                                                          14
With Laws and
Regulations
Financial Statements                                                                                          15
                       Consolidated Statements of Financial Condition                                         15
                       Consolidated Statements of Income and Expenses and                                     17
                           Reserves
                       Consolidated Statements of Cash Flows                                                  19
                       Notes to Financial Statements                                                          21




                       Abbreviations

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


                       Page 4               GAO/AFMD-99-79   Federal   Savings and Laan Insurance   Corporation
Page 5   GAO/AFMDBlWB   Federal Savlnpr and Lum Imumnce   Chrporation
GAO
      United States
      General Accounting  Office
      Washington, D.C. 20548

      Comptroller   General
      of the United States

      B-l 14893

      To the Board of Directors
      Federal Deposit Insurance Corporation

      We have audited the accompanying consolidated statements of financial
      condition of the Federal Savings and Loan Insurance Corporation (F-SIX)
      as of August 8, 1989, and December 31, 1988, and the related consoli-
      dated statements of income and expense and reserves and statements of
      cash flows for the periods then ended. These consolidated financial
      statements are the responsibility of the Corporation’s management. Our
      responsibility is to express an opinion on these financial statements
      based on our audits. In addition to this report on our audits of the Cor-
      poration’s financial statements, we are reporting on our consideration of
      its system of internal accounting controls and on its compliance with
      laws and regulations.

      We conducted our audits in accordance with generally accepted govern-
      ment auditing standards. Those standards require that we plan and per-
      form the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts
      and disclosures in the financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made
      by management, as well as evaluating the overall financial statement
      presentation. We believe that our audits provide a reasonable basis for
      our opinion. However, as discussed in the following paragraph, the esti-
      mated liabilities for assisted and unresolved institutions are subject to
      significant uncertainties that limited our audit and precluded us from
      opining on these reported balances.

      To develop its estimated liabilities for assisted institutions and
      unresolved institutions, the Corporation used information available at
      the time. However, actual costs depend on various uncertainties, such as
      the extent of continued operating losses; the quality of each institution’s
      assets; future interest rates; the potential effect of the Financial Institu-
      tions Reform, Recovery, and Enforcement Act of 1989 (FIRREX); and the
      economic outlook for certain sectors of the economy. For assisted insti-
      tutions, the actual cost to the Corporation is also dependent on the
      results of independent audits to determine the value of each institution’s
      assets and its negative net worth, most of which were not completed as
      of August 8, 1989. For unresolved institutions, actual costs will btl fur-
      ther affected by any delays in completing resolution actions and anj
      increase in the universe of troubled institutions. As a result of t hcstl



      Page 6                  GAO/AFMD-99-79   Federal   Savings and Loan Insuran~   (‘orporation
             El 14893




             uncertainties, the Corporation’s estimates are subject to significant
             change, and we expect final costs to be higher than estimated.

             In our opinion, except for the effects that the uncertainties discussed in
             the preceding paragraph may have on the cost of assisted institutions
             and unresolved institutions, the financial statements referred to above
             present fairly, in all material respects, the financial position of the Fed-
             eral Savings and Loan Insurance Corporation as of August 8, 1989, and
             December 31, 1988, and the results of its operations and its cash flows
             for the periods then ended, in conformity with generally accepted
             accounting principles.

             In response to the savings and loan industry crisis and the Corporation’s
             mounting losses, FIRREX was enacted on August 9, 1989. FIRREA abolished
             the Corporation and transferred its insurance function to the Federal
             Deposit Insurance Corporation, which, among other things, will admin-
             ister a newly created insurance fund for savings and loan associations,
             the Savings Association Insurance Fund. FIRREA also transferred the Cor-
             poration’s assets, debts, obligations, contracts, and other liabilities to a
             newly established fund, the FSLIC Resolution Fund. The Federal Deposit
             Insurance Corporation is responsible for administering the fund to
             ensure that its assets are sold and liabilities paid. The necessary funds
             to pay these liabilities will come from a variety of sources including sav-
             ings and loan insurance premiums and recoveries from asset sales. -Any
             shortfall in the amounts needed to pay obligations and expenses is to be
             provided by the Department of the Treasury through appropriations.

             FIRREA  also created the Resolution Trust Corporation (RTC) to resolve the
             problems of institutions placed into conservatorship or receivership
             from January 1, 1989, until August 9, 1992. It provided RTC $50 billion
             to resolve the problems of those institutions and to pay administrative
             expenses.

             The following sections provide details on the Corporation’s liabilities
             and discuss the amount of funds needed to resolve the savings and loan
             industry crisis.




Assistance   associations already merged or sold with Corporation assistance. I IoM.-
Agreements   ever, the Corporation estimated that net cash outlays for these ~WY-
             ments over the next 9 years would likely be more than $60 billion.


             Page 7                 GAO/AFMD-90-79 Federal Savings and Loan Insurance   Corporation
               El14893




               To develop its cost estimates for assistance agreements, the Corporation
               made various assumptions regarding future economic conditions and
               acquirer actions. For example, the Corporation assumed that, for most
               assistance agreements, interest rates would increase moderately and
               assets would be sold over periods ranging from 3 years to 7-l/2 years.

               Using these various assumptions and information on the financial condi-
               tion of the acquired institutions, the Corporation estimated its expected
               future net cash outlays. It then discounted these outlays back to present
               value. The resulting present value cost represents the estimated amount
               the Corporation would have needed at the report date to pay its liability
               for assistance agreements.

               However, actual costs as well as cash outlays will likely differ from
               those projected. In particular, the Corporation needs to review detailed
               asset management plans on the assisted institutions’ significant assets,
               most of which were not due until 1 year after the date of the agreement,
               to provide a more accurate estimate of the value of assets covered by
               guarantees. Also, it needs the results of audits of the institutions’ finan-
               cial condition to adjust the notes issued to acquirers for the estimated
               amount that liabilities exceeded assets. Once the required audits are
               completed, we expect the Corporation’s costs to be higher.



               liability for resolving 560 troubled but still operating institutions. How-
Unresolved     ever, the Corporation estimated that net future cash outlays for these
Institutions   resolutions will likely exceed $63 billion. To estimate its liability, the
               Corporation made various assumptions regarding future operating
               losses, economic conditions, interest rates, and projected resolution
               costs. For example, the Corporation assumed that half of the 560
               troubled institutions would be resolved by March 31, 1991. It also
               assumed that the troubled institutions would continue to incur operating
               losses through resolution at a slightly increasing rate based upon third
               quarter 1989 losses.

               In December 1989, the Office of Thrift Supervision estimated that 6 10
               institutions not included in the Corporation’s liability at August 8. 1989,
               would fail to meet the new capital requirements imposed by FIRHEA
               Some of these 610 may be able to increase their capital to meet the new
               requirements or be acquired with no assistance from RTC. However. it is
               also possible that some may be placed into conservatorship or receiver-
               ship. In that case, they would represent a future liability for R-K'.


                Page 8               GAO/AFMD-90-79   Federal   Savinga and Loan Insuranrr   (‘orpwation
                     5114893




                     Because the Corporation’s estimate was based upon information avail-
                     able at the time, actual costs may differ from those projected. If asset
                     values continue to decline or operating losses are higher than estimated,
                     costs will increase. Also, any delays in resolving troubled institutions or
                     growth in the universe of troubled institutions will increase ultimate
                     resolution costs.


                     On April 6, 1990, we testified before the Senate Committee on Banking,
F’undsNeeded to      Housing and Urban Affairs on our analysis of the amount of funds
Resolvethe Savings   needed to resolve the savings and loan crisis.’ In that testimony, we
and Loan Crisis      stated that at least $325 billion would be needed to pay off the Corpora-
                     tion’s obligations, resolve the problems of institutions awaiting resolu-
                     tion, pay interest on the bonds to be issued by the Resolution Funding
                     Corporation and on working capital funds RTC will need to borrow, and
                     pay administrative and other expenses.

                     The $325 billion represents a least cost estimate, based on present condi-
                     tions, of total cash needs over 40 years using the Office of Management
                     and Budget’s optimistic interest rate assumptions. Actual costs depend
                     on various uncertainties, such as the number of institutions requiring
                     resolution and the extent of continuing operating losses, the quality and
                     value of assets in assisted or troubled institutions, future interest rates,
                     the economic outlook for certain sectors of the economy, and the poten-
                     tial effect of FIRREX Therefore, this estimate could easily rise to
                     $400 billion if an increased number of institutions fail and could rrxh
                     $500 billion if the economy suffers a downturn and interest rates rise.

                     As a result of our analysis and RTC'S need for additional funds, we made
                     recommendations to the Chairmen of the RTC Oversight Board and the
                     Federal Deposit Insurance Corporation regarding the need to develop
                     proposals to provide the additional funds RTc will need and to jointly
                     report semiannually to the Congress on the total cash needs, net costs.
                     and sources of funds to pay for FSLIC’Sobligations, RTC resolutions, and
                     related costs.

                     On May 23, 1990, the Secretary of the Treasury, as Chairman of t hcb
                     Resolution Trust Corporation Oversight Board, testified before t htl
                     Senate Committee on Banking, Housing and Urban Affairs that t ht~
                     amounts authorized for the Resolution Trust Corporation in FIKKt:.\1~111

                      ’ Resolving The Savings And Loan Crisis: Billions More and Additional   Reforms Seeded ( ; \I 1 I




                      Page 9                        GAO/AFMD-90-79      Federal   Savings and Loan Insuranrr    t ~~rprrat ion
B-114993




fall short of what is required. The Secretary cited three primary reasons
for the increased costs: larger than expected losses in thrifts, marginal
thrifts likely to fail sooner than expected and becoming the responsi-
bility of the Resolution Trust Corporation, and an increased number of
thrifts expected to fail. Depending on the ultimate number of failures
and amount of losses incurred, the Secretary estimated that the Resolu-
tion Trust Corporation’s cost would range from $90 billion to $130 bil-
lion if paid today. The Oversight Board intends to work with the
Congress and the administration to develop a funding approach for the
necessary resources.




Charles A. Bowsher
Comptroller General
of the United States

February 9,199O




Page 10                GAO/AFMD-9@79   Federal   Savings and Loan Insurancr   (‘orpwation
Page 11   GAO/AFMD-90-79   Federal   Savings and Loan Insurancr   (‘t>rpmstion
Report on Internal Accounting Controls


                  We have audited the consolidated financial statements of the Federal
                  Savings and Loan Insurance Corporation for the period ended August 8,
                  1989, and the year ended December 31,1988, and have issued our
                  opinion thereon. As part of our audits, we made a study and evaluation
                  of the Corporation’s system of internal accounting controls to the extent
                  we considered necessary to evaluate the system as required by generally
                  accepted government auditing standards. This report pertains only to
                  our study and evaluation of the system of internal accounting controls
                  for the period ended August 8,1989. Our report on the study and evalu-
                  ation of internal accounting controls for the year ended December 3 1,
                  1988, is presented in GAO/AFMD90-34, dated October 31, 1989.

                  The purpose of our study and evaluation was to determine the nature,
                  timing, and extent of the auditing procedures necessary for expressing
                  an opinion on the Corporation’s consolidated financial statements. For
                  purposes of this report, we have classified the significant internal
                  accounting controls into the following categories:

              l   assistance to merged/acquired institutions,
              .   costs related to closed institutions,
              .   costs related to unresolved institutions,
              .   expenditures,
              .   financial reporting,
              .   revenue, and
              .   treasury.

                  Our study and evaluation included all of the control categories listcti
                  above.

                  The Corporation’s management is responsible for establishing and main-
                  taining an effective system of internal accounting controls. In fulfilling
                  this responsibility, estimates and judgments by management are
                  required to assess the expected benefits and related costs of control pro-
                  cedures. The objectives of a system of internal accounting controls :ircL
                  to provide management with reasonable assurance that (1) obligat ICES
                  and costs are in compliance with applicable laws, (2) funds, propt*rt y.
                  and assets are safeguarded against waste, loss, and unauthorized IIS(’ ()t-
                  misappropriation, and (3) assets, liabilities, revenues, and expentllr I I r(ls
                  applicable to operations are properly recorded and accounted fc)r (( B
                  permit the preparation of reliable financial reports and to maint a111
                  accountability over the Corporation’s assets. Because of inhewn t IIml t a-
                  tions in any system of internal accounting controls, errors or irr(w I LIIJ-
                  ties may nevertheless occur and not be detected. Also, projectiorl (bt .rn>


                  Page 12                GAO/AFMLMO-79   Federal   !Savings and Loan Insurance   1 ~wpwa~~on
Report on Internal   Accounting     Controls




evaluation of the system to future periods is subject to the risk that pro-
cedures may become inadequate because of changes in conditions or that
the degree of compliance with the procedures may deteriorate.

Our study and evaluation, made for the limited purpose described in the
second paragraph, would not necessarily disclose all material weak-
nesses in the system. Accordingly, we do not express an opinion on the
Corporation’s system of internal accounting controls taken as a whole or
on the categories of controls identified in the second paragraph. Our
study and evaluation did not disclose any internal accounting control
weaknesses which we considered to be material in relation to the finan-
cial statements taken as a whole.

During our audit, we identified several internal accounting control mat-
ters which, although not material, nonetheless merit corrective action.
Accordingly, we are reporting them separately to the Federal Deposit
Insurance Corporation, which has taken over responsibility for the Cor-
poration’s activities.




Page 13                           GAO/AFMDW79   Federal   Savings and Loan Imwanrr   ( 4qm bra c ticm
Report on Compliance With Laws
and Regulations

              We have audited the consolidated financial statements of the Federal
              Savings and Loan Insurance Corporation for the period ended August 8,
              1989, and the year ended December 31, 1988, and have issued our
              opinion thereon. Our audits were made in accordance with generally
              accepted government auditing standards and, accordingly, included such
              tests of compliance with laws and regulations as we considered neces-
              sary in the circumstances. This report pertains only to our review of
              compliance with laws and regulations for the period ended August 8,
              1989. Our report on the review of compliance with laws and regulations
              for the year ended December 31, 1988, is presented in GAOIAFMD-90-34,
              dated October 31, 1989.

              The Corporation’s management is responsible for compliance with laws
              and regulations. In connection with our audits, we selected and tested
              transactions and records to determine the Corporation’s compliance
              with laws and regulations, noncompliance with which could have a
              material effect on the financial statements.

              As part of our audit, we reviewed and tested compliance with provisions
              of title IV of the National Housing Act, as amended (12 U.S.C. 1724-
              1730), title III of the Competitive Equality Banking Act of 1987 (12
              U.S.C. 226 note), the Prompt Payment Act (39 U.S.C. 3901), and such
              other laws and regulations as we considered pertinent to the Corpora-
              tion. In our opinion, the Corporation complied with the terms and provi-
              sions of laws and regulations for the transactions tested that could have
              materially affected the financial statements. In connection with our
              audit, nothing came to our attention that caused us to believe that the
              Corporation was not in compliance with the terms and provisions of
              laws and regulations for those transactions not tested.




               Page 14              GAO/AF’MD-99-79   Federal   Savings and Loan Insurance   (‘orpcm~tion
                                                                                                                                                                                       -
Financial Statements


Consolidated   Statements      of Financial          Condition

r                                                                       AUGUST 08.       1989 AND DECEl48ER 31,                  1988
                                                                                         (in thousands)

                                                                                                            AUGUST 08,         1989          DECEMBER 31.         1988

                      Assets

                      Cash and Cash Equivalents                             (Note 3).........           $     1.930.934                        $    3,090,776
                      Investments          (Nois 3).......................                                       574,226                               574,002
                      Interest       Receivable              on Investments.........                                       0                                765
                      Insurance        Premiums and Accounts                           Receivable.               112.615                                 8,497
                      Subrogated        Accounts             from Receivers                  (Note 4)         5.191.380                             5.200.380
                      Collateralized            Advances              due from Receivers
                         (Note S)..................................                                              403,536                               558.791
                      Loans to Receivers                   (Note        ZI)................                      109,100                               128.612
                      Interest       Receivable              on Loans to Receivers..                                       0                             5.217
                      Collateralized             Loans to Insured                      Institutions
                         (Note 6)..................................                                             800.000                                830,000
                      Other Loans to Insured                        Institutions               (Note 6)         198,803                                205.123
                      Interest       Receivable              on Other Loans to
                        Insured      Institutions......................                                            5.423                                11.485
                      Real Estate,          Mortgage             Loans and
                        Other Assets          in Process                of Liquidation....
                        (Note 7)..................................                                            1.286.370                             1,356.096
                      Income Capital            Certificates                  (Notes 8 and 10)                   182,152                               257,819
                      Net Worth Certificates                        (Notes 9 and lo)....                         162.325                               171.200
                      Miscellaneous           Assets.......................                                       11,378                                17.473

                      Total     Assets...............................


                      Liabilities

                      Accounts      Payable          and Other Liabilities.....                                 199,049                                127,066
                      Notes    Payable        to Insured             Institutions
                        (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          19.014,401                            19,748.114
                      Miscellaneous             Liabilities             to
                       Insured      Institutions......................                                          289,008                                286.690
                      Accrued     Interest           on Notes Payable               to
                       Insured      Institutions......................                                          243,233                                220,456
                      Notes Payable           to Federal             Home Loan Banks
                        (Note 6)..................................                                              800.000                                830,000
                      Allowance       for Loss - Assistance                      Agreements
                        (Note lz).................................                                           22.018.995                            22,645,OOO
                      Allowance       for Loss - Unresolved                      Cases
                        (Note 13).................................                                           55,240.OOO                            43,550,ooo

                      Total     Liabilities..........................                                        97.804.686                            87.407.326
                                                                                                             ==========                            s=========




                                                                  Page 16                             GAO/AFMD-90-79              Federal   Savings and Loan Insurance   (‘orpwetion
                                      Financial       Statements




Insurance        Fund Reserves

Capital   Stock..............................                                          602,500                           497,000
Capital   Certificates.......................                                       6,897.SOO                         5.353.000
Insurance    Reserves.........................                                   (94,256,444)                      (80,841.090)

Total     Primary       Reserve       (Note       17)............                (86,756,444)                      (74.991.090)

Total     Liabilities          and Reserves.............                    $ 11.048.242                         $ 12,416,236
                                                                              =======m==                           =P-=*II*Pli

The accompanying             notes      are      an integral        part   of     these   financial      statements.




                                       Page 16                                  GAO/AFMD-90-79        Federal   Savings and Loan Insurance   C‘orporation
                                                                                                                                                                                   -
                                                                   Financial    Statements




Consolidated   Statements       of Income and Expenses                         and Reserves

                                                FOR THE PERIODS ENDED AUGUST 08. 1989 AND DECEUBER 31.
                                                                      (in thousands)
                                                                                                                                       1988                                       -l
                                                                                                August     08,      1989         December        31.     1988

                    Income

                   Insurance         Premiums (Note                 l).............             $         29,397                   $        473.167
                   Special       Assessment                Premiums (Note l)....                         602,218                         1.195.037
                     Less Secondary                 Reserve       Offset           (Note 1).             (64,878)                          (162.220)
                   Interest        on Investments.................                                       128.679                            179.978
                   Interest        on Collateralized                    Advances          and
                     Loans to Receivers.....................                                               1.372                               36,378
                   Interest        on Other Loans to
                     Insured       Institutions...................                                        25,183                               44,130
                   Interest        on Collateralized                     Loans to
                     Insured       Institutions...................                                        48.321                               62,627
                   Interest        on Advances                to Insured
                     Institutions...........................                                                        0                            1.256
                   Interest        from Real Estate,                    Mortgage
                     Loans and Other Assets                       in Process            of
                     Liquidation............................                                              35,119                               11.432
                   Gain on Sale of Assets..................                                               27,601                               54,457
                   Gain on Transfer                   of Insured           Accounts....                    2,967                               73.998
                   Other Income............................                                               87,059                              482,603

                   Total      Income............................                                        923,038                          2.452.843
                                                                                                    ~=~~~rl~=l                         i======P3=

                   Expenses

                   Insurance         Settlement               and Administrative
                     Expenses................................                                            174,306                              223.928
                   Services        Rendered              to FSLIC by the FHLBB
                     (Note Z)................................                                             23,825                               30.562
                   Interest        on Notes Payable                   to the PtiLBanks                    52,918                               64.731
                   Interest        on Notes Payable                   to Insured
                     Institutions............................                                        1,090,850                                522,351
                   Provision         for Loss on:
                       Subrogated           Accounts            from Receivers.....                       (4,554                         2,813,697
                       Collateralized                 Advances        due from
                         Receivers.............................                                            6,560                               (3.780)
                       Real Estate,              Mortgage          Loans and Other
                         Assets       in Process              of Liquidation......                           (169                        2,587,454
                       Loans to Receivers.....................                                             1,777                               8,775
                       Other Loans to Insured                       Institutions....                          400                            97,600
                       Income Capital                 Certificates............                                498                           113,938
                       Assistance           Agreements..................                             1,301,981                          35.794.457
                       Unresolved           Cases.......................                            11.690,OOO                          26,150.OOO

                   Total      Expenses...........................                                   14.338.392                          68.403.713
                                                                                                    =========3                          ----------




                                                                   Page17                           GAO/AFMD-90-79         FederalSavingsand            LoanInsurancr   (‘o~~~ra~ion
                                           Financial      Statements




Net Loss       From Operations.................                                      (13,415,354)                        (65,950,870)
                                                                                      ==%z===z===                         ==========

Primary      Reserve          at     Beginning          of   Period...               (74.991.090)                        (13.690.220)
     Net   Loss.............................                                         (13.415.354)                        (65.950.870)
     Capital       Stock........................                                           105.500                             367,500
     Capital          Certificates.................                                     1,544.500                           4.282,500

Primary      Reserve           at    End of         Period     (Note     17)    $ (86,756,444)                         s (74,991,090)
                                                                                   =icIPIDsI==                            ======a==%z

The accompanying                notes         are     an integral        part   of    these     financial      statements.




                                            Page 18                                  GAO/AFMD-9@79          Federal   Savings and Loan Insurancr   ( Iqnlration
                                                              FinancialStatements




Consolidated   Statements       of Cash Flows

                                                   FOR THE PERIODS                 AUGUST 08, 1989 AND DECEUSER 31,    1966
                                                                                      (in thousands)

                                                                                                AUGUST 08,     1989    DECEHBER 31,      1968

                   OperatinE       Activities
                     Net Loss..................................                                   $   (13.415.354)            $ (65,950,870)
                        Adjustments           to Reconcile           Net Income
                        to Net Cash Used by Operating
                        Activities:
                           Gain on Sale of Assets................                                         (27.601)                  (54,457)
                           Gain on Transfer                   of Insured  Accounts..                        (2,967)                 (73.998)

                            Provision       for Loss on:
                                Subrogated         Accounts             from Receivers..                    (4,554)              2.813.697
                                Collateralized               Advances         due from
                                  Receivers..........................                                        6.560                    (3.780)
                                Income Capital               Certificates.........                              490                 113.938
                                Assistance         Agreements...............                           1.301.981                35.794,457
                                Loans to Receivers                                                           1.777                     8,775
                                Real Estate           and Mortgage              Loans......                    (169)             2.507.454
                                Loans to Insured                  Institutions.......                           400                  97,600
                                Unresolved         Cases....................                          11,690,OOO                26.150,OOO

                             Changes in Operating                    Assets    h Liabilities:
                               Decrease       (Increase)              in Accounts
                                 Receivable.........................                                     (104,118)                     3.054
                               Decrease       (Increaee)              in Accrued
                                 Interest       Receivable................                                 12.044                    (2,183)
                               Decrease      (Increase)               in Subrogated
                                 Accounts       from Receivers.............                                15.512               (2.917.454)
                               Decrease      in Other Assets............                                    6,095                      9,081
                               Increase      in Accounts                Payable........                    71.983                      7.643
                               Increase      in Interest                Payable........                    22,777                   120.444
                               Increase      (Decrease)               in Miscellaneous
                                 Liabilities          to Insured            Institutions                     2.318                  (15.455)
                               Paysrants made on Assistance
                                Agreements.........................                                   (1,868,908)               (1.715.490)
                               Sale (Purchase)               of Acquired           Assets..                97,496                   (85,092)

                     Net Cash Used by Operating                       Activities                      (2.194.230)               (3.112.636)




                                                              Page19
                                                                                                                                                         -
                                       Financial     Statements




                                                                                                                                                               1
Investing        Activities
         Maturity         of Marketable         Securities...                               1,001                                54,007
         Purchase         of SLL Stock...............                                               0                         (133.230)
         Repayment of Collateralized                    Advances
            due from Receivers.................                                            68,695                              259,270
         Repayment of Loans to Receivers.....                                              17,735                              (23,804)
          Increase        in Other Loans to Insured
            Institutions.......................                                             5,920                              (15.109)
         Redemption           of Income Capital          Certificates                      75,169                                 2.334

   Net Cash Provided             by Investing           Activities                        168,520                              143.468

Financing     Activities
        Sale of Capital            Stock.................                               105,500                                367,500
        Sale of Capital            Certificates........                              1.544.500                              4.282.500
        Redemption        of Notes          Payable       to
          Insured      Institutions...............                                    (784,132)                            (1,512,880

   Net Cash Provided             by Financing           Activities                        865,868                           3,137,120

   Increase      (Decrease)          in Cash h Cash
     Equivalents       (Note       l).....................                          (1.159.842)                                167.952

   Cash h Cash Equivalents               Beginning              of   the
   Period (Note 3)...........................                                        3,090,776                              2.922,824

   Cash h Cash Equivalents              End of          the
    Period (Note 3)..........................                                 s      1,930,934                         s     3.090,776
                                                                                     =PIIIII==                             aIw=IPI=wI

             The accompanying             notes      are       an integral   part    of    these        financial     statements.




                                                                                                                                                         -




                                         Page20                              GAO/AFMD-90-79               Federal   Savings and Loan Inauranw   (‘~w~~wation
                                                                                                                                          -
                                                 Financial Statements




Notes to Financial   Statements

                                                  AUGUST8, 1989 AND DECERBER31, 1988


                                  On August 9, 1989 President      Bush signed into law the Financial
                                  Institutions    Reform, Recovery and Enforcement Act of 1989 (PIRBEA),
                                  PL 101-73, which abolished      the Federal Borne Loan Bank Board, its
                                  authority,   and its functions.      The act also dissolved        the Federal
                                  Savings and Loan Insurance Corporation          (PSLIC) and transferred        its
                                  insurance function     to a nevly-created     thrift    industry   insurance fund
                                  called the Savings Association       Insurance Fund (SAIP).          In addition     to
                                  the transfer    of FSLIC’s insurance function,         the act transferred       all of
                                  PSLIC’s assets, debts, obligations,        and contracts       to a newly-created
                                  PSLIC Resolution     Fund (FM), except for the liability           for unresolved
                                  cases, which the Resolution      Trust Corporation        (RTC) assumed. Both
                                  SAIP and FRF funds are to be administered            by the Federal Deposit
                                  Insurance Corporation     (PDIC) in its corporate capacity.            These
                                  statements   reflect   the the final accounting of the Federal Savings and
                                  Loan Insurance Corporation      and the Federal Asset Disposition
                                  Association   as of August 8, 1989.


                        1.   Summary of Significant      Accounting     Policies:

                             a)   Principles    of Consolidation       - The Federal Savings and Loan Insurance
                                  Corporation    (FSLIC) began accounting         for its investment in the Federal
                                  Asset Disposition     Association      (FADA), a wholly ovned subsidiary,
                                  through consolidation       effective    December 31, 1986. Bowever, these
                                  consolidated    statements do not include accountability           for assets and
                                  liabilities    of closed insured institutions          for vhich the Corporation
                                  acted as receiver     or liquidating      agent. The Corporation      furnished
                                  periodic    and final accountability       reports of its receivership        or
                                  liquidating    agent activities       to courts, supervisory    authorities,     and
                                  other interested     parties    as requested.

                             b)   Premium Income Recognition          - Insurance premium income was recognized
                                  as earned vhen member institutions            vere assessed.      These premiums were
                                  assessed annually and semi-annually            based on an institution’s
                                  insurance anniversary         date.    On August 10, 1987, the Congress passed
                                  the Competitive      Equality     Banking Act of 1987 (CEBA), PL 100-86.          Title
                                  III,    Section 305 of this act limited          FSLIC’s authority     to collect
                                  assessment preriums by a combined limit shared vith the Financing
                                  Corporation.       The combined maximum rate of assessment could not exceed
                                  l/12 of one percent of the insured institution’s               total savings
                                  capital,     whether the premiums were paid to the FSLIC, the Financing
                                  Corporation,      or a combination      of both.    As a result of CEBA, $452.8
                                  and $340.8 million      of insurance premiums vere assessed and collected
                                  by the Financing Corporation           through 818189 and 12/31/88 respectively.




                                                 Page 2 1                      GAO/AFMD-8879 Federal Savings and Loan Insuranrr ( orpora~ ion
                       Fincial    Statements




c)   Special Assessment Recognition      - In addition      to the regular insurance
     nremiums. the Cornoration      had the authority     under Section 404(c) of
     ‘the National    Eousing Act to assess each insured member a special
     premium not to exceed l/8 of one percent of their total savings
     capital.      The special assessment was billed      quarterly    and income was
     recognized     as earned when member institutions       were billed.     Title   III,
     Section 307 of CEBA authorized       insured institutions      to offset against
     future special assessment premiums amounts that were previously                part
     of the “Secondary Reserve”.       This offset reduced special assessment
     premiums by $64.9 and $162.2 million        through 818189 and 12/31/88
     respectively.

     Title   III,  Section 306(c) of CEBA also placed limitations        on the
     amount of special assessments for the years 1987 through 1991. The
     1989 limitation     was l/16 of one percent, while the 1988 limitation      was
     l/12 of one percent of total savings capital.         liovever,   the Act
     allowed the Bank Board to postpone the reduction          in this assessment if
     the Board determined that severe pressures on the Corporation
     warranted an infusion      of additional    funds. The Board approved
     postponement of the reduction        in both 1989 and 1988.

d)   Allowance for Loss - The Corporation’s                policy was to establish        an
     estimated allowance for loss at the time the Bank Board approved
     either     financial     assistance      to or the liquidation    of an insured
     institution.         Financial     assistance    or liquidation   costs took several
     forms (Notes 4 through 12). The estimated allowance for loss
     represents       the purchase price of the assets of an institution                less the
     estimated      recovery value, including          all disposition    costs.     These
     allowances were reviewed at least annually and adjusted to reflect
     changes in projected           interest    rates, recent appraisals,      historical
     experience,       etc.

     The Allowance for Loss on Unresolved Cases              was the estimated cost to
     FSLIC of all unresolved,     troubled institutions             (Note 13). This
     allowance represented    the estimated present           value cost to the
     Government to resolve financially       troubled        thrift     institution cases
     that were probable and could be reasonably              estimated as of August 8,
     1989, and was not a projection       of the cost        to resolve all future
     problems in the savings     and loan industry.

e)   Furniture,      Fixtures,   and Equipment (FFLE) - PSLIC’s FFhE cost as of
     August    8, 1989 and December 31, 1988 was zero.         In 1987, it was
     decided that all FFLE of the FSLIC should be expensed rather than
     capitalized.        Eovever, the FPSE of FAUA was capitalized     and stated at
     cost less accumulated depreciation,        with depreciation    computed on a
     straight     line basis over the estimated useful lives of the assets.
     The net FADA FPbB balance is nominal and was included in other assets.




                       Page 22                       GAO/APMD-W-79 Federal Savings and Loan Insuranrr ( q~ryl,“tion
                       Financial Statements




     f)   Statement of Cash Plovs - In November 1987, the Financial           Accounting
          Standards Board issued Statement No. 95, Statement of Cash Flow (SFAS
          95).     Pursuant to SPAS 95, the FSLIC elected    the indirect     method of
          reporting     cash flows from operations.  For the purposes of the
          Statement of Cash Plows, all highly liquid      investments     vith original
          maturities     of three months or less were considered    to be cash
          equivalents.

2.   Related Parties - The Federal Savings and Loan Insurance Corporation,        a
     government agency created by the National      Bousing Act of 1934, vas
     governed by the Federal Borne Loan Bank Board.       Bank Board expenses vere
     met through assessments to the FSLIC and the Federal BorneLoan Banks
     (Pi&Banks).     The FSLIC’s share of the Bank Board assessment vas charged to
     operating   expenses of the Corporation   during the year in vhich the
     assessment vas levied.      In addition to the Bank Board, the FSLIC
     interacted   vith FIlLBanks, FADA and the Financing Corporation    which were
     also under the Bank Board’s direction.

     FIlLBanks - The FSLIC, as part of its default      prevention   activities,
     guaranteed repayment of FELBank advances that had been made to certain
     insured institutions.      These guarantees generally     cover advances that are
     secured.      As of August 8, 1989, the FSLIC had guaranteed commitments of
     $9.3 billion,     of which $1.1 billion   had been advanced to member
     associations.      By comparison, as of December 31, 1988, guaranteed
     commitments totaled $4.5 billion,       of which $1.6 billion   had been advanced.
     In the event that FSLIC had been called upon to honor these guarantees,
     they vould have been recorded as an asset on FSLIC’s books with a FSLIC
     claim against any assets pledged as collateral        to secure such advances.

     The PI&Banks are also authorized,   as directed  by the Bank Board, to make
     loans to the FSLIC. All such loans must be in accordance with the
     provisions  of section 402(d) of the National   Housing Act.    Loans froa
     FfiLBanks have been passed through to member institutions     as Collateralized
     Loans (Note 6). These loans totaled $800 million       as of August 8, 1989,
     and $830 million   as of December 31, 1988.

     FADA - In November 1985, the Bank Board approved the formation of the
     Federal Asset Disposition        Association  (FADA). The FADA, vhich was a
     wholly owned subsidiary       of the FSLIC, managed and disposed of certain
     assets received by the FSLIC in case resolution        actions.  As of December
     31, 1986, the PSLIC had purchased 25,000 shares of PADA common stock for
     $25 million.       As of July 31, 1989, FADA reported assets of $20.8 million,
     liabilities     of $1.7 million,    net income of $1.4 million, a retained
     deficit     of $5.9 million,   and total stockholder’s  equity of $19.1 million.




                        Page 23                  GAO/AFMD-W-79 Federal Savings and Loan Insuranw ( ~wp~wacwn
                             Financial Statements




      As required by FIRRRA, the FADA ceased operations        on February 2, 1990.
      tlovever, due to outstanding    litigation   actions,  a final liquidating
      dividend   to FADA’s sole stockholder,     the FRF, vi11 not be made until       such
      time as FADA’s litigation    liability,    if any, is definitively    established.

      Under a contract   vith the Federal       Home Loan Bank of Topeka, the FSLIC
      guaranteed repayment of up to $50         million    in Bank advances to the FADA.
      As of August 8, 1989 and December         31, 1988, the FADA had no outstanding
      borrovings  against this open line        of credit.     FADA’s July 31, 1989
      statements are unaudited.

      Financing Corporation       - Title   III,   Section 302 of CEBA established     a nevly
      created Financing Corporation.            The Financing Corporation   (FICO) is funded
      by the FELBanks investment and its issuance of public debt offerings               which
      are limited  to $10.8 billion.          The net proceeds of obligations     issued by
      the Financing Corporation         are required    to be used to purchase Capital
      Stock or Capital    Certificates      issued by the FSLIC (Note 17). Through
      August 8, 1989, the FICO has purchased $7.5 billion            in FSLIC Capital    Stock
      and Capital Certificates.

3.    Cash and Investments   - All cash received by the Corporation        vhich vas not
      used to defray operating    expenses or for outlays related       to assistance to
      insured institutions   and liquidation    activities,   vas invested in U.S.
      Treasury securities.     Other investments    vere mostly SLL stock and CNRAs
      issued by Federal Government Agencies other than the U.S. Treasury which
      vere obtained through the Corporation’s        default prevention   activities.

      Investment securities        were stated at cost , adjusted for amortization        of
      premiums and accretion        of discounts.      Such amortization  and accretion    vere
      computed by the interest         method at rates based upon the maturity       dates of
      the related   securities.        Both amortization    and accretion  are recognized as
      an adjustment     to interest     on investments.     Through August 8, 1989, the
      Corporation   earned an average rate of return of 9.61% on all investments,
      excluding   preferred     stock.

      As of August 8, 1989 and December 31, 1988, the Corporation’s                 cash and
      investment  portfolio consisted of the following:

                                               B/B/89                                     12/31/88

                                    Book Value    Harket        Value       Book Value          Market Value
                                        (in thousands)                            (in     thousands)
Cash and Cash Equivalents:
    Cash                            $      57,207       $      57,207        $          77,301       $      77,301
    U.S Treasury
      Overnight  Funds                  1,869,309           1,869,309            3,004,775               3,004,775
    FADA Honey Harket Funds                  4,418               4,418                8,700                   8,700
     Total Cash and Cash
       Bquivalents:                     1,930,934           1,930,934            3,090,776               3,090,776
                                        ia====i==           i==zxP===            =~~.~I~IP               =*==11mmm




                             Page 24                         GAO/APMD-W-79 Federal Savings and Loan Insurance corporation
                                                                                                                          -
                               Financial Statements




                                                                                                                   -
                                              8/8/89                                          12/31/88
                                    Book Value flarket       Value             Book Value    Market Value
                                        (in thousands)                             (in thousands)

Investments:
      Ifaturities up to
         One Year                               0                     0                          0             0
      lfaturities Over
         One Year                           2,010              1,958                      3,011            2,853

     Total   Securities:                    2,010              1,958                      3,011            2,853


     Preferred    Stock                  572,216            572,216                    570,991           570,991

     Total   Investments:           $    574.226       S    574.174                -574.002

4.     Subrogated Accounts - As required by statute,      an institution     was closed
       unless there vas a default     prevention measure that would have been less
       costly thmn liquidation.     In the case of liquidation,      the FSLIC settled
       insurance claims either    by cash payout of insured accounts or by
       transferring   insured accounts to another insured institution.          The FSLIC’s
       subrogated account claim against the receivership        of the liquidated
       institution  vas   equal to the amount of the insured accounts transferred        or
       paid out.

       As assets vere liquidated        by the receivership,      the FSLIC and other
       creditors   received periodic      liquidating   dividends    in payment of their
       claims against     the receiver.      In most cases, a receivership     does not have
       sufficient   assets to pay all claims.         The FSLIC estimated    the amount of
       its recovery over the life of the receivership            and recorded the difference
       as an allowance for loss against the claim.

       The changes in Subrogated  Accounts       for   the periods        ended August 8, 1989
       and December 31, 1988 are:
                                                           8/E/89                 12/31/88
                                                                    (in   thousands)

        Balance: Beginning of Period                  $16,232,992              $10,847,248
        Additions     During the Period                     534,198              5,394,620
        Receiverships       Closed During the Period               0                    (8,478)
        Losses Realized During the Period                          0                      (398)
        Gross Subrogated Accounts                       16,767,190                 16,232,992
        Less:     Liquidating     Dividends from Open
                  Receiverships                          2,260,363                  1,712,612
        Less:     Allowance for Loss for Open
                  Receiverships                          9,315,447                  9,320,ooo
            Net:     End of Period                    s                        s




                               Page 26                      GAO/AFMD-90-79 Federal Savings and Loan Insurance ( ‘oryc~mt 10n
                          Financial Statements




5.   Collateralized     Advances Due from Receivers and Loans to Receivers - At
     times, the FSLIC guaranteed repayment of advances made by FRLBanks to
     insured institutions.        If, subsequently,    such an institution      was closed by
     the FSLIC, the FSLIC may have been required by the FHLBank to repay the
     advance.      The FSLIC repayment of the advance resulted          in a claim against
     the receivership      for the insured institution     and establishment      of a FSLIC
     asset, Collateralized      Advances Due from Receivers.         These Collateralized
     Advances are recovered from the receivership’s           liquidation    of assets.

     The FSLIC also made loans to meet the administrative      and operating  expense
     requirements    of certain  receiverships.   These loans are to be repaid from
     the liquidation    of assets of the receivership.
     The changes in Collateralized Advances Due from Receivers and Loans to
     Receivers for the periods ended August 8, 1989 and December 31, 1988 are:

                                                   Collateralized                        LOMS
                                                       Advances                     to Receivers

                                               818189         12/31/88          8/8/89    12/31/88
                                                 (in    thousands)              (in thousands)

     Balance : Beginning of Period          $731,791         $990,827       $161,612      $137,798
     Net Increase (Decrease)
                 End of Period
     Less : Allovance   for Loss
       Net:   Bnd of Period                 s483.536s558.791s1o9.1oos128.612

6.   Other Loans to Insured Institutions             - The FSLIC made both collateralized
     and other types of loans in assistance              cases.    The collateralized         loans
     were funded by pass-through           loans from FIlLBanks.       In these transactions,
     FSLIC issued a note payable to the FliLBank and loaned the proceeds to an
     insured institution.           The FSLIC had tvo loans of this type, one for $600
     million  and one for $200 million,           totaling     $800 million.       Interest     rates
     on the $200 million         loan and the corresponding        note to the FHLBank are the
     sane and averaged        9.4% in 1989. The interest          rate on the remaining $600
     million   loan receivable         is based on the monthly weighted-average             cost of
     funds charged to members of the FBLBank in which the institution                       is
     located and ranged from 8.0% to 8.9% in 1989. Interest                     on the
     corresponding      note payable to the FHLBank is based on the cost of FBLBank
     funds plus 20 basis points.             This rate varied between 9.0% and 10.0%
     during 1989. Principal            payments on the $600 million         collateralized        loan
     began in 1988 and end in 1995, while principal                 payments on the $200
     million   collateralized        loan begin August 15, 1989 and end in 1995. The
     $198.8 million       in Other Loans to Insured Institutions             is shown net of a
     $103.4 million       allowance.      The interest     rate on these loans varies vith
     each note.




                          Page 26                         GAO/AFMD-!W79 Federal Savings and Loan Insurance (‘orporation
     -
                               Financial Statements




7.       Real Estate, Mortgage Loans, and Other Assets in Process of Liquidation      -
         At times the FSLIC made direct acauisitions     of troubled assets from
         problem associations     in its attempt to merge a failing  institution. The
         vast majority   of these assets consists of real estate and mortgage loans.
         An allowance for loss has been established     to reduce these assets to their
         net realizable    value.

         The changes in Real Estate,           Rortgage Loans and Other Assets in Process of
         Liquidation for the periods           ended August 8, 1989 and December 31, 1988
         are:
                                                             8/8/89                      12/31/88
                                                                      (in   thousands)

         Balance:       Beginning of Period           $4,043,096                  $      287,919
         Add :          Increase (Decrease)                                           3,755,177
         Balance:       End of Period                                                 4,043,096

         Less :         Allowance   for Loss            2,667,533                     2,687,OOO
                 Net:   End of Period                 $1,286,370                   $ 1,356,096
                                                       *********                     *********

8.       Income Capital Certificates           - Since 1981 the FSLIC had purchased Income
         Capital Certificates         (ICCs) from insured institutions      as part of its
         default     prevention   activities.        The FSLIC usually purchased an ICC by
         issuing a note payable and recorded the ICC at cost (Note 10). The ICCs
         earn annual income payments based on the United States Treasury Bill
         rates.      The annual income payments and principal          are due vhen the issuing
         institution      has profitable      operations   and attains  a specified net worth
         level.
         The changes in the ICCs for           the periods     ended August 8, 1989 and December
         31, 1988 are:
                                                             8/8/89                      12131188
                                                                      (in   thousands)

         Balance : Beginning of Period                 $      415,819              S 1,645,883
         Add:       Net Purchases or
                    (Cancellations)                          (122,666)               (1,230,064)
         Balance 8: End of Period                             293,153                    415,819
         Less:      Allovance    for Loss                     111,001                    158,000
              Net :       Knd of Period                S      182.152              S     757.8u




                                Page 27                      GAO/APMD-9@79        Federal    !3aving~ and Loan Insurance   Cwporation
                          Financial Statements




9.   Net Worth Certificates      - Since 1982, the FSLIC had purchased Net Worth
     Certificates     (NWCs) from insured institutions      as part of its default
     prevention    activities.     The FSLIC purchased an NWCby issuing a note
     payable and recorded the NYC at cost (Note 10). NWs earn annual income
     payments based on the cost of Federal Borne Loan Bank System Obligations
     plus l/4 of one percent.        Annual income and principal      payments are due
     vhen the issuing institution        has profitable   operations   and attains   a
     specified    net vorth level.      The legislation   authorizing    the issuance of
     Net Worth Certificates      expired in October 1986 and vas reinstated         vith the
     passage of the Competitive        Equality   Banking Act of 1987 on August 10,
     1987. The program will expire on October 13, 1991.

     The changes in the NWCs for          the periods    ended August 8, 1989 and December
     31, 1988 arez
                                                                 8/8/89                      12/31/88
                                                                          (in   thousands)
     Balance:   Beginning     of Period                   S    171,200              S        225,025
     Add :      Net   Purchases     or
              (Cancellations)
         Net: Bnd of Period                               $   i&E?7                 s        RE’
                                                               *******                       *******
10. Notes Payable and Other Liabilities              to Insured Institutions      - The FSLIC
    had outstanding     negotiable     notes to purchase ICCs and promissory notes to
    purchase ICCs and NVCs. Generally,              variable   interest    is paid
    semi-annually    baaed on the cost of Federal Borne Loan Bank System
    Obligations    or the average      auction yield for United States Treasury Notes
    vith maturities     from S-10 years.          In addition    to issuing notes to purchase
    ICCs and NWCs, the FSLIC had also issued notes to insured institutions                    vho
    have acquired the deposits of defaulted               ShLs. The principal      on these
    notes may be paid through the transfer              of cash and/or assets to the
    acquirer.     The interest     on these notes is paid either quarterly            or
    semi-annually    based on various         indices.     The weighted average rate as of
    August 8, 1989 VW 9.56%.           In addition       to thQSQ notes, FSLIC had other
    liabilities    to acquiring     institutions       of $289.0 million.




                          Page 28                       GAO/AFMD-88.79 Federal Savings and Loan Insurance (‘orpwation
                          Flna.nciaI Statements




    The aggregate        amount of the Notes Payable to Insured Institutions                    and
    their maturity        dates as of August 8, 1989 are as follovs:
                         ICC9            talcs            Acquirers     & Other             Total
                                             (in     thousands)

    1989             s         OS                0          $ 2,284,177*               $ 2,284,177
    1990                 58,801                                  475,238                    534,039
    1991                  l,ooO               8                    174,756                  175,756
    1992                 15,000         16,300                     174,756                  206,056
    1993                       0        33,825                   1,980,244                2,014,069
    1994                       0        60,950                     54,636                    115,586
    Later                27,000         51,250                13,606,468                 13,684,718

        Total        $101,801         $162,325              $18,750,275                $19,014,401
                      *******          *******               **********                 **********

    *    Includes    $2,036,478      in renewable       notes.

11. Joint Lending Program - On February 23, 1989, the Bank Board and the
    Federal Reserve Board announced the establishment       of the Joint Lending
    Program, a8 an interim measure, to meet the liquidity        needs of troubled
    savings and loens.    To be eligible    for this cooperative    venture, a thrift
    had to have exhausted its normal sources of liquidity,        including  FHLBank
    advances, brokered deposits,     and funding from rQpUrchQSQ agreements.

    Under the program, funds for these eligible        thrifts  vere shared by wing
    Federal RQSQrVQ      resources (45X), FHLBenk resources (45X), and FSLIC
    resources (10%). The FSLIC resources vere derived from its $750 million
    borroving  authority      vith the U.S. Treasury.    Bad funds from FSLIC’s U.S.
    Treasury borrovings       been exhausted,  the FSLIC’s share of lending to
    individual   thrifts     vould have bQQII shared 50-50 by the PEL8anks and the
    Federal Reserve Ranks.

    As of August 8, 1989, $120.6 aillion             in loans vere outstanding    under the
    program and PSLIC had utilized            $34.8 million    of its U.S. Treasury
    borroving    authority.     All outstanding        loans from the Federal RQsQrVQ   and
    Federal liome L.oan Banka vere guaranteed by FSLIC and have subsequently
    been rewid      by member   institutions.        The $34.8 million    owed to FSLIC
    remains as an accounts receivable,             and its repayment will be used to pay
    an off-setting      accounts payable to the U.S. Treasury in full satisfaction
    of the FSLIC’s borrovings          covered by this program.




                           Page 29                          GAO/AFMIMW79          Federal Savings and LOan Insurance Corpocrhn
                        Financial Statements




12. Allovance   for LOSS - Assistance    Agreements - The FSLIC entered into
    assistance   agreements, vhich vere usually associated          with mergers, to
    prevent the default      of insured institutions.        Under these arrangements,
    the Corporation     agreed to give financial      assistance   over time.   All future
    cash outlays are estimated and discounted          to their present value using
    discount rates of 9.86% and 9.64% for August 8, 1989 and December 31,
    1988, respectively.       The changes in the Allowance for Loss on Assistance
    Agreements for the periods ended August 8, 1989 and December 31, 1988 are:

                                                        8/8/89                      12/31/88
                                                                 (in   thousands)

    Balance: Beginning of Period                $ 22,645,OOO                 $       749,069
    Add :     Provisions                           1,301,980                     35,794,457
    Less :    Assistance Provided                  1,927,985
      Balance: End of Period


13. Allovance      for Loss - Unresolved Cases - The Corporation           established     a
    liability      for future assistance        to, or liquidation   of, troubled
    institutions.         The recorded liability      represented   the present value of
     future Federal assistance           that is probable and can be reasonably estimated
    as of August 8, 1989. Present value discount rates of 8.61% and 9.95%
    vert      used for August 8, 1989 and December 31, 1988, respectively.                The
    liability      vas determined by using Federal Borne Loan Bank Board thrift
     financial     reports and PIlLBank estimates        to adjust the liability      for
    anticipated       asset vrite     downs, interest    rate market adjustments,      and
    projected      resolution     costs.

    A comparison of the August 8, 1989 and December 31, 1988 Allovances               for
    Loss on Unresolved Cases indicates       a $11.7 billion    on-statement    increase
    that is primarily      the result of additional  operating     losses incurred and
    projected    vithin  the savings and loan industry      subsequent to the 1988
    Financial    Statements.   Various uncertainties   could cause this estimate to
    further   increase or decrease.     Changes in the Allowance for Loss on
    Unresolved Cases for the periods ended August 8, 1989 and December 31,
    1988 art:

                                                        8/8/89                      12/31/88
                                                                 (in   thousands)

    Balance:   Beginning of Period              $ 43,550,ooo                 $ 17,400,000
    Add :      Provisions                         11,690,OOO                    26,150,OOO
       Balance: 8nd of Period                   S 55.24O.OOQ                 5-g




                        Page 30                     GAO/AFMD-W-79 Federal &wings and Loan Insuranrr (‘wporation
                        Financial Statements




14. Retirement Plan - Approximately        31% of the FSLIC’s employees are covered
    by the Civil      Service Retirement   System (CSRS), vhich is currently
    two-tiered.       Por employees hired prior to January 1, 1984, the PSLIC
    vithheld     approximately   7 percent of their gross earnings.    This
    contribution      vas then matched by the PSLIC and the sum was transferred     to
    the Civil     Service Retirement    Fund, from which this group will receive
    retirement     benefits.

    For employees hired on or after January 1, 1984, vith more than five years
    of service (not necessarily        continuous),    the PSLIC vithheld,    in addition
    to Social Security vithholdings,          .94 percent of their gross earnings,        but
    matched such vithholdings       with a 7 percent contribution.         At the point
    such earnings exceeded the FICA maximum vages of $48,OOC for 1989,
    employees covered under this tier of CSRS vere required             to have 7.51
    percent of their earnings vithheld,          while the agency expense matched this
    vithheld  amount. This second employee group vi11 receive retirement
    benefits  from the CSRS along vith the Social Security            System, to vhich
    they concurrently   contribute.

    Beginning in January 1987, all employees hired since January 1, 1984,
    either as ntv employees or as having less than 5 years of accumulated
    service (vith a break in service over one year) art included in the nev
    Federal Rmployet Retirement       System (PERS).     For such employees, the PSLIC
    vithhtld     .94 percent  of their gross earnings and matched those
    vithholdings     vith a 12.86 percent contribution.       This group of employees
    vi11 receive benefits      from the FIBS, as vell as the Social Security
    System, to vhich they concurrently       contribute.     The retirement  expenses
    incurred     for all plans during the periods ended August 8, 1989 and
    December 31, 1988 vere $2,025,133 and $2,323,854 respectively.
    Although the FSLk funded a portion of pension benefits               under both of the
    above   Retirement      Systems relating    to its employees and made the necessary
    payroll    vithholdings      from them , the PSLIC did not account for the assets
    of either retirement         plan nor did it have actuarial     data with respect to
    accumulated plan benefits          or the unfunded pension liability      relative to
    its employees.        These amounts are reported by the Office of Personnel
    Htnagtmtnt for both Retirement Systems and art not allocated                to the
    individual      employers.      The Office of Personnel Ranagement accounts for all
    health and lift       insurance programs for retired      federal employees.

15. Least Commitments - At the beginning of 1989, FSLIC vas leasing office space
    i five Washington D.C. locations.    FSLIC’s rental expenses for the period
    t:ding August 8, 1989 vere $5.2 million.     As a result of FIRMA, FSLIC’s
    lease obligations vere transferred   to various FIRRRA mandated agencies.




                         Page 31                     GAO/AFMB90-79     Federal Savings and Loan Insurance Corporation
                        Financial Statements




16. Litigation     - As of August 8, 1989, FSLIC vas named in numerous legal or
    administrative     actions vhile serving in its corporate,       receivership,     or
    conservator     capacities.   Currently,    it is not possible   to predict    the
    eventual outcome of the various actions.           Hovever, it is management’s
    opinion that these claims will not result in liabilities            to such an extent
    that they will materially       affect   the FSLIC’s financial   position.

17. Reserves - As of August 8, 1989 and December 31, 1988, the Corporation’s
    Primary Reserve consisted of the following:

                                                       8/8/89                  12/31/88
                                                                (in   thousands)
    Balance: Beginning of Period                   $ (74,991,090)       S (13,690,220)
    Net Loss                                          (13,415,354)        (65,950,870)
    Capital  Stock                                         105.500             367.500
    Capital Certificates                                1,544;500
      Balance: End of Period                       asizmla

    Title    III, Section 304 of CEBA authorizes     the FSLIC to issue equity in the
    form of redeemable non-voting      Capital  Stock and non-redeemable Capital
    Certificates.      The non-voting  Capital  Stock is issued in an mount equal to
    the aggregate investment by the PBLBanks in the Financing Corporation.           The
    Financing Corporation      is the sole purchaser of both the Capital Stock and
    Capital Certificates,     and proceeds paid to the FSLIC from that purchase are
    included as part of its Primary Reserve.         The FSLIC was prohibited   from
    paying any dividends     to the Financing Corporation    on the Capital   Stock or
    Certificates.




                       Page 32                    GAO/AFMD-8@79Federal Savinga and Loan Insararw   ! +mwation
                         Financial    Statements




18. Supplementary    Cash Flov Information

                                                                          8/8/89                    12/31/88
                                                                               (in     thousands)

     Noncash Investing       Activities:

          Increase in SLL Stock                                   S       1,225              S       48,000
          Increase in Collateralized    Advances
             due from Receivers                                                                          234
          Decrease in Collaterlized   Loans *                           (30,0000)                   (70,000)
          Increase in Loans to Receivers                                       0                          10
          Increase in Other Loans to Insured
             Institutions                                                                             73,433
          Decrease in Income Capital    Certificates                    (47,49Y)                 (1,227,730)
          Decrease in Net Worth Certificates        *                    (8,875)                     (53,825)
       Total   Noncash    Investing        Activities                   (85,147)                 (1,229,878)

     Noncash Financing       Activities:

          Increase   in Notes Payable                                    50,419                  16,599,901
          Decrease   in Notes Payable             - FBLR *              (30,000)                     (70,000)
       Total   Noncash Financing           Activities                    20,419                  16,529,901

     Total Noncash Investing           and
       Financing Activities                                       S     (64.728)             S 15.300.023
     Cash paid during the year             for:
       Interest Expenses                                          sl.   120.991              s      466.531



     * 1988 presentation        vas revised         to conform vith       GAAP.




                         Page 33                             GAO/AFMD-90.79        Federal    Savings and Loan Insurance   t’wpwation
.




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