oversight

Financial Audit: Federal Deposit Insurance Corporation Funds' 2011 and 2010 Financial Statements

Published by the Government Accountability Office on 2012-04-19.

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

             United States Government Accountability Office

GAO          Report to Congressional Committees




April 2012
             FINANCIAL AUDIT
             Federal Deposit
             Insurance Corporation
             Funds’ 2011 and 2010
             Financial Statements




GAO-12-416
             A
                                                April 2012

                                                FINANCIAL AUDIT
                                                Federal Deposit Insurance Corporation Funds’ 2011
                                                and 2010 Financial Statements
Highlights of GAO-12-416, a report to
congressional committees




Why GAO Did This Study                          What GAO Found
Created in 1933 to insure bank                  In GAO’s opinion, the Federal Deposit Insurance Corporation (FDIC) fairly
deposits and promote sound banking              presented, in all material respects, the 2011 and 2010 financial statements for
practices, FDIC plays an important role         the two funds it administers—the Deposit Insurance Fund (DIF) and the Federal
in maintaining public confidence in the         Savings and Loan Insurance Corporation (FSLIC) Resolution Fund (FRF). Also,
nation’s financial system. FDIC                 in GAO’s opinion, although certain internal controls related to the DIF should be
administers the DIF, which protects             improved, FDIC maintained, in all material respects, effective internal control
bank and savings deposits, and the              over financial reporting. Further, GAO did not find any reportable instances of
FRF, which was created to close out             noncompliance with provisions of the laws and regulations it tested.
the business of the former FSLIC.
                                                The banking industry continued to recover in 2011 from the effects of the
Section 17 of the Federal Deposit
                                                financial crisis and the recession of 2007-09. During 2011, 92 insured banks with
Insurance Act, as amended, and the
Government Corporation Control Act
                                                combined assets of $36.6 billion failed. However, the losses to the DIF from
require GAO to annually audit the               failures that occurred in 2011 fell short of the amount reserved at the end of
financial statements of the DIF and the         2010. The aggregate number and size of institution failures in 2011—and their
FRF. GAO is responsible for obtaining           estimated cost to the DIF—were less than anticipated. As discussed in note 17 to
reasonable assurance about whether              the DIF’s financial statements, through April 11, 2012, 16 institutions have failed
FDIC’s financial statements for the DIF         during 2012.
and the FRF are presented fairly in all         As of December 31, 2011, the DIF had a fund balance of $11.8 billion, and its
material respects, in conformity with
                                                ratio of reserves to estimated insured deposits was 0.17 percent. In contrast, at
U.S. generally accepted accounting
                                                December 31, 2010, the DIF had a negative fund balance of $7.4 billion, and its
principles, and whether FDIC
maintained effective internal control           ratio of reserves to estimated insured deposits was a negative 0.12 percent. The
over financial reporting, and for testing       improvement was primarily attributable to assessment revenue earned in 2011,
FDIC’s compliance with selected laws            lower losses from bank failures in 2011 than projected at December 31, 2010,
and regulations.                                and a reduction in estimated losses from anticipated failures at December 31,
                                                2011.
What GAO Recommends
                                                During 2011, FDIC continued its implementation of the Dodd-Frank Wall Street
GAO is not making recommendations               Reform and Consumer Protection Act. The act set a statutory minimum
in this report, but will be reporting           designated reserve ratio for the DIF of not less than 1.35 percent of estimated
separately on matters identified during         insured deposits, and requires that FDIC take such steps as necessary to
its audit, along with recommendations           achieve this reserve ratio by September 30, 2020. FDIC adopted a new
for strengthening the corporation’s             restoration plan for the DIF in October 2010 in response to the act’s
internal controls. In commenting on a           requirements, and in December 2011 adopted a final rule to maintain the
draft of this report, FDIC stated that it       designated reserve ratio at 2 percent.
recognizes the important role a strong
internal control program plays in               During the 2011 audit, GAO identified deficiencies in controls over FDIC’s
achieving the agency’s mission, and its         process for deriving and reporting estimates of losses to the DIF from resolution
dedication to sound financial                   transactions involving shared loss agreements. These deficiencies resulted in
management has been and will remain             errors in the draft 2011 DIF financial statements provided to GAO that went
a top priority.                                 undetected by FDIC and that necessitated adjustments in finalizing the financial
                                                statements. While these deficiencies, individually and collectively, do not
                                                constitute a material weakness in internal control over financial reporting, they
                                                nevertheless increase the risk of additional undetected errors or irregularities in
                                                the DIF’s financial statements. Consequently, GAO believes they collectively
                                                represent a significant deficiency in FDIC’s internal control over financial
                                                reporting for the DIF. Additionally, GAO identified other less significant matters
View GAO-12-416. For more information,
contact Steven J. Sebastian at (202) 512-3406   involving FDIC’s internal control over financial reporting that merit management’s
or sebastians@gao.gov.                          attention.

                                                                                        United States Government Accountability Office
Contents



Transmittal Letter                                                                                        1


Auditor’s Report                                                                                          3
                             Opinion on the DIF’s Financial Statements                                    3
                             Opinion on the FRF’s Financial Statements                                    5
                             Opinion on Internal Control                                                  5
                             Compliance with Laws and Regulations                                         8
                             Objectives, Scope, and Methodology                                           9
                             FDIC Comments                                                               11


Deposit Insurance                                                                                        12
                             Balance Sheet                                                               12
Fund’s Financial             Statement of Income and Fund Balance                                        13
Statements                   Statement of Cash Flows                                                     14
                             Notes to the Financial Statements                                           15


FSLIC Resolution                                                                                         40
                             Balance Sheet                                                               40
Fund’s Financial             Statement of Income and Accumulated Deficit                                 41
Statements                   Statement of Cash Flows                                                     42
                             Notes to the Financial Statements                                           43


Appendix
               Appendix I:   Comments from the Federal Deposit Insurance 
                             Corporation                                                                 50

                             Abbreviations

                             CFO              Chief Financial Officer
                             DIF              Deposit Insurance Fund
                             FDIC             Federal Deposit Insurance Corporation
                             FMFIA            Federal Managers' Financial Integrity Act of 1982
                             FRF              FSLIC Resolution Fund
                             FSLIC            Federal Savings and Loan Insurance Corporation
                             TLGP             Temporary Liquidity Guarantee Program




                             Page i                         GAO-12-416 FDIC Funds’ Financial Statement Audit
Contents




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Page ii                                GAO-12-416 FDIC Funds’ Financial Statement Audit
A
United States Government Accountability Office
Washington, D.C. 20548



                                    April 19, 2012                                                                     T
                                                                                                                       ransmL
                                                                                                                            ta
                                                                                                                             ileter




                                    The Honorable Tim Johnson
                                    Chairman
                                    The Honorable Richard C. Shelby
                                    Ranking Member
                                    Committee on Banking, Housing, and Urban Affairs
                                    United States Senate

                                    The Honorable Spencer Bachus
                                    Chairman
                                    The Honorable Barney Frank
                                    Ranking Member
                                    Committee on Financial Services 
                                    House of Representatives

                                    This report presents the results of our audits of the financial statements of
                                    the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund (FRF)
                                    as of, and for the years ending December 31, 2011, and 2010. These
                                    financial statements are the responsibility of the Federal Deposit
                                    Insurance Corporation (FDIC), the administrator of the two funds.

                                    This report contains our (1) unqualified opinions on the DIF’s and the
                                    FRF’s financial statements; (2) opinion that FDIC maintained, in all
                                    material respects, effective internal control over financial reporting as of 
                                    December 31, 2011; and (3) conclusion that we found no reportable
                                    compliance issues during 2011 with provisions of laws and regulations we
                                    tested. The report also discusses that while FDIC maintained effective
                                    internal control in all material respects, we identified deficiencies in
                                    controls over FDIC’s process for deriving and reporting estimates of losses
                                    to the DIF from resolution transactions involving shared loss agreements.
                                    The report discusses our conclusion that these deficiencies collectively
                                    represent a significant deficiency in internal control over financial reporting
                                    with respect to the DIF.

                                    We are sending copies of this report to the Chairman of the Board of
                                    Directors of FDIC, the Chairman of the FDIC Audit Committee, the
                                    Chairman of the Board of Governors of the Federal Reserve System, the
                                    Comptroller of the Currency, the Secretary of the Treasury, the Director of
                                    the Office of Management and Budget; and other interested parties. In
                                    addition, this report will be available at no charge on the GAO website at
                                    http://www.gao.gov.



                                    Page 1                              GAO-12-416 FDIC Funds’ Financial Statement Audit
If you have any questions concerning this report, please contact me at
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report.




Steven J. Sebastian
Managing Director
Financial Management and Assurance




Page 2                           GAO-12-416 FDIC Funds’ Financial Statement Audit
A
United States Government Accountability Office
Washington, D.C. 20548



                                    To the Board of Directors
                                    The Federal Deposit Insurance Corporation                                                Aud
                                                                                                                               to
                                                                                                                                R
                                                                                                                                sir’eport




                                    In accordance with section 17 of the Federal Deposit Insurance Act, as
                                    amended, and the Government Corporation Control Act, we are
                                    responsible for conducting audits of the financial statements of the funds
                                    administered by the Federal Deposit Insurance Corporation (FDIC). In our
                                    audits of the Deposit Insurance Fund’s (DIF) and the FSLIC Resolution
                                    Fund’s (FRF) financial statements1 for 2011 and 2010, we found

                                    • the financial statements as of and for the years ended December 31,
                                      2011, and 2010, are presented fairly, in all material respects, in
                                      conformity with U.S. generally accepted accounting principles;

                                    • although certain internal controls should be improved, FDIC
                                      maintained, in all material respects, effective internal control over
                                      financial reporting as of December 31, 2011; and

                                    • no reportable noncompliance with provisions of laws and regulations
                                      we tested.

                                    The following sections discuss in more detail (1) these conclusions; (2) our
                                    audit objectives, scope, and methodology; and (3) agency comments.



Opinion on the DIF’s                The financial statements, including the accompanying notes, present fairly,
                                    in all material respects, in conformity with U.S. generally accepted
Financial Statements                accounting principles, the DIF’s assets, liabilities, and fund balance as of
                                    December 31, 2011, and 2010, and its income and fund balance and its
                                    cash flows for the years then ended.

                                    As discussed in note 8 to the DIF’s financial statements, the banking
                                    industry continued to recover in 2011 from the effects of the financial crisis
                                    and the recession of 2007-09. During 2011, 92 insured banks with
                                    combined assets of $36.6 billion failed. However, the losses to the DIF
                                    from failures that occurred in 2011 fell short of the amount reserved at the


                                    1
                                     A third fund managed by FDIC, the Orderly Liquidation Fund, established by section 210
                                    of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
                                    124 Stat. 1376, 1506 (July 21, 2010), is unfunded and did not have any transactions during
                                    2010 and 2011.




                                    Page 3                                   GAO-12-416 FDIC Funds’ Financial Statement Audit
end of 2010, as the aggregate number and size of institution failures in
2011—and their estimated cost to the DIF—were less than anticipated.
The DIF’s contingent liability for anticipated failures declined from 
$17.7 billion at December 31, 2010, to $6.5 billion at December 31, 2011.
As discussed in note 17 to the DIF’s financial statements, through April 11,
2012, 16 institutions have failed during 2012.

As of December 31, 2011, the DIF had a fund balance of $11.8 billion, and
its ratio of reserves to estimated insured deposits was 0.17 percent. In
contrast, at December 31, 2010, the DIF had a negative fund balance of
$7.4 billion, and its ratio of reserves to estimated insured deposits was a
negative 0.12 percent. The improvement was primarily attributable to
assessment revenue earned in 2011, lower losses from bank failures in
2011 than projected at December 31, 2010, and a reduction in estimated
losses from anticipated failures at December 31, 2011.

During 2011, FDIC continued its implementation of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,2 which included significant
provisions related to the capitalization of the DIF. The act set a statutory
minimum designated reserve ratio for the DIF of not less than 1.35 percent
of estimated insured deposits and requires that FDIC take such steps as
may be necessary to achieve this reserve ratio by September 30, 2020.
FDIC adopted a new DIF restoration plan in October 2010 in response to
the act’s requirements. As discussed in note 9 to the DIF’s financial
statements, in December 2011, the FDIC adopted a final rule to maintain
the DIF’s designated reserve ratio at 2 percent, based on its view that this
level would enable it to withstand substantial losses consistent with FDIC’s
comprehensive long-term management plan. In addition, the act provides
for a permanent increase in the standard deposit insurance coverage
amount from $100,000 to $250,000 (retroactive to January 1, 2008), and
unlimited deposit insurance coverage for non-interest-bearing transaction
accounts through the end of 2012. The act also authorizes FDIC to
undertake enforcement actions against depository institution holding
companies if their conduct, or threatened conduct, poses a risk of loss to
the DIF.

The DIF also continues to face some exposure as a result of actions taken
pursuant to the systemic risk determination made in 2008. As discussed in
note 16 to DIF’s financial statements, pursuant to this systemic risk


2
    Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010).




Page 4                                      GAO-12-416 FDIC Funds’ Financial Statement Audit
                         determination, FDIC established the Temporary Liquidity Guarantee
                         Program (TLGP) in 2008. The only component of the TLGP remaining is
                         the Debt Guarantee Program, under which FDIC guaranteed newly issued
                         senior unsecured debt up to prescribed limits issued by insured institutions
                         and certain holding companies. FDIC charged fees to participants that are
                         to be used to cover any losses under the Debt Guarantee Program. The
                         guarantees covered each participating debt to the earliest of the related
                         date of maturity, or December 31, 2012. As of December 31, 2011, the
                         amount of debt guaranteed by FDIC under the Debt Guarantee Program
                         was $167.4 billion.



Opinion on the FRF’s     The financial statements, including the accompanying notes, present fairly,
                         in all material respects, in conformity with U.S. generally accepted
Financial Statements     accounting principles, the FRF’s assets, liabilities, and resolution equity as
                         of December 31, 2011, and 2010, and its income and accumulated deficit
                         and its cash flows for the years then ended.



Opinion on Internal      Although certain internal controls associated with the DIF’s financial
                         reporting should be improved, FDIC maintained, in all material respects,
Control                  effective internal control over financial reporting as of December 31, 2011.
                         FDIC’s internal control provided reasonable assurance that
                         misstatements, losses, or noncompliance material in relation to the DIF
                         financial statements and the FRF financial statements would be prevented
                         or detected and corrected on a timely basis. Our opinion is based on
                         criteria established under 31 U.S.C. §3512 (c), (d), commonly known as
                         the Federal Managers’ Financial Integrity Act of 1982 (FMFIA).



Significant Deficiency   During our 2011 audit, we identified deficiencies in controls over FDIC’s
                         process for deriving and reporting estimates of losses to the DIF from
                         resolution transactions involving shared loss agreements. These
                         deficiencies resulted in errors in the draft 2011 DIF financial statements
                         that FDIC did not detect and that necessitated FDIC adjustments in
                         finalizing the financial statements. While these deficiencies, individually
                         and collectively, do not constitute a material weakness in internal control




                         Page 5                             GAO-12-416 FDIC Funds’ Financial Statement Audit
over financial reporting,3 they nevertheless increase the risk of additional
undetected errors or irregularities in the DIF’s financial statements.
Consequently, we believe they collectively represent a significant
deficiency in FDIC’s internal control over financial reporting for the DIF.4

Since 2009, FDIC has used purchase and assumption agreements with
accompanying shared loss agreements as the primary means of resolving
failed financial institutions. Under such agreements, FDIC sells a failed
institution to an acquirer with an agreement that FDIC, through the DIF, will
share in any losses the acquirer experiences in servicing and disposing of
assets purchased and covered under the shared loss agreement.
Typically, these shared loss agreements are structured such that FDIC
assumes 80 percent of any such losses.

For financial reporting purposes, FDIC developed a process to calculate
an estimate of losses under these shared loss agreements. The estimate
was $42.8 billion (46 percent) of the total DIF allowance for losses related
to the Receivables from resolutions, net line item on the DIF’s balance
sheet at December 31, 2011. As an integral part of this shared loss
estimation process, FDIC developed a series of computerized programs
that are commonly referred to as the shared loss model.

As part of our audit, we reviewed the process by which FDIC derived its
estimates of losses to the DIF from shared loss agreements. We identified
deficiencies in internal control over this process that allowed significant
errors in the shared loss estimate to occur and not be detected or
corrected. During prior financial audits, we identified and reported on
control deficiencies in FDIC’s process for estimating losses from shared




3
  A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of
the entity’s financial statements will not be prevented or detected and corrected on a timely
basis. A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect and correct misstatements on a timely basis.
4
  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness, yet important enough to merit the attention of
those charged with governance.




Page 6                                      GAO-12-416 FDIC Funds’ Financial Statement Audit
loss agreements.5 Although FDIC has taken steps intended to address the
deficiencies that we previously identified, the controls put in place were not
sufficient to prevent, detect, and correct errors in the shared loss model.
During our 2011 audit, the following three control deficiencies were
identified that adversely affected FDIC’s shared loss estimation process:

1. FDIC lacked effective controls over testing and verifying the shared
   loss model. FDIC’s tests were not designed to consistently verify that
   the model’s logic and test results were consistent with the objectives of
   the model. Further, the tests did not evaluate all portions of the model’s
   loss calculation. As a result, FDIC’s tests did not detect three separate
   programming errors in the model, such as double counting of some
   losses that led to errors in the shared loss estimate in the draft DIF
   financial statements. The lack of effective controls resulted in
   undetected gross errors in the draft DIF financial statements’ overall
   allowance for losses of $578 million and a $184 million net reduction in
   the loss estimate. FDIC subsequently corrected this error in finalizing
   the DIF’s 2011 financial statements.

2. FDIC lacked effective controls over the integrity of source data used by
   the shared loss model in deriving the shared loss estimates. FDIC’s
   controls did not fully provide reasonable assurance that the source
   data used by the model were accurate. FDIC recognized that the
   model depended on accurate source data. However, in testing the
   model, FDIC did not develop steps to verify either the model’s input or
   results with original source documents. As a result, we identified
   errors, not only in the source data but also in the model itself that
   FDIC’s testing had not previously identified. This control deficiency
   resulted in undetected gross errors in the draft DIF financial
   statements’ overall allowance for losses of $191 million and a 
   $90 million net reduction in the loss estimate. FDIC subsequently
   corrected this error in finalizing the DIF’s 2011 financial statements.

3. FDIC lacked effective documentation for key aspects of its shared loss
   estimation process that hindered an adequate review of both the


5
 GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2009 and 2008
Financial Statements, GAO-10-705 (Washington, D.C.: June 25, 2010); Management
Report: Opportunities for Improvements in FDIC’s Internal Controls and Accounting
Procedures, GAO-11-23R (Washington, D.C.: Nov. 30, 2010); and Management Report:
Opportunities for Improvements in FDIC’s Internal Controls and Accounting Procedures,
GAO-11-687R (Washington, D.C.: Aug. 5, 2011).




Page 7                                  GAO-12-416 FDIC Funds’ Financial Statement Audit
                             process and the shared loss model and, ultimately, the loss estimates
                             derived from the model. As a result, FDIC’s multiple reviews and
                             approvals did not identify programming errors that existed within the
                             model. We reported in 2009 and again in 2010 that FDIC did not have
                             clear and comprehensive documentation over this process to allow for
                             such a review.6 FDIC attempted to address this continuing issue by
                             strengthening its internal controls over the entire shared loss
                             estimation process in 2011 through documenting flow charts, data
                             dictionaries, and high-level descriptions of the process. However, FDIC
                             did not adequately document how the model should perform
                             calculations or how the calculations link to its estimation methodology.
                             As a result, FDIC’s review of the model was not fully effective at
                             identifying errors.

                       As a direct result of these deficiencies in internal control over the shared
                       loss model, FDIC did not detect errors in the calculation of the shared loss
                       estimate in preparing the draft 2011 DIF financial statements. Given the
                       significance of this process and its impact on the DIF’s financial
                       statements, it is critical that FDIC design and implement effective controls
                       and ensure that all steps in the shared loss model are fully documented to
                       allow for appropriate review of key steps in the process. We will be making
                       recommendations to FDIC to address the issues that make up this
                       significant deficiency in a separate report.

                       We identified other less significant matters concerning FDIC’s internal
                       control that we will report separately, along with recommended corrective
                       actions for these matters.



Compliance with Laws   Our tests for compliance with selected provisions of laws and regulations
                       disclosed no instances of noncompliance that would be reportable under
and Regulations        U.S. generally accepted government auditing standards. However, the
                       objective of our audits was not to provide an opinion on overall compliance
                       with laws and regulations. Accordingly, we do not express such an opinion.




                       6
                           GAO-10-705, GAO-11-23R, and GAO-11-687R.




                       Page 8                               GAO-12-416 FDIC Funds’ Financial Statement Audit
Objectives, Scope, and   FDIC management is responsible for (1) preparing the annual financial
                         statements in conformity with U.S. generally accepted accounting
Methodology              principles, (2) establishing and maintaining effective internal control over
                         financial reporting and evaluating its effectiveness, and (3) complying with
                         applicable laws and regulations. Management evaluated the effectiveness
                         of FDIC’s internal control over financial reporting as of December 31,
                         2011, based on criteria established under FMFIA. FDIC management
                         provided an assertion concerning the effectiveness of its internal control
                         over financial reporting (see app. I).

                         We are responsible for planning and performing the audit to obtain
                         reasonable assurance and provide our opinion about whether (1) the
                         financial statements are presented fairly, in all material respects, in
                         conformity with U.S. generally accepted accounting principles, and 
                         (2) FDIC management maintained, in all material respects, effective
                         internal control over financial reporting as of December 31, 2011. We are
                         also responsible for testing compliance with selected provisions of laws
                         and regulations that have a direct and material effect on the financial
                         statements.

                         In order to fulfill these responsibilities, we

                         • examined, on a test basis, evidence supporting the amounts and
                           disclosures in the financial statements;

                         • assessed the accounting principles used and significant estimates
                           made by FDIC management;

                         • evaluated the overall presentation of the financial statements;

                         • obtained an understanding of FDIC and its operations, including its
                           internal control over financial reporting;

                         • considered FDIC’s process for evaluating and reporting on internal
                           control over financial reporting based on criteria established under
                           FMFIA;

                         • assessed the risk that a material misstatement exists in the financial
                           statements and the risk that a material weakness exists in internal
                           control over financial reporting;




                         Page 9                               GAO-12-416 FDIC Funds’ Financial Statement Audit
• tested relevant internal control over financial reporting;

• evaluated the design and operating effectiveness of internal control
  over financial reporting based on the assessed risk;

• tested compliance with certain laws and regulations, including selected
  provisions of the Federal Deposit Insurance Act, as amended; and

• performed such other procedures as we considered necessary in the
  circumstances.

An entity’s internal control over financial reporting is a process effected by
those charged with governance, management, and other personnel, the
objectives of which are to provide reasonable assurance that 
(1) transactions are properly recorded, processed, and summarized to
permit the preparation of financial statements in conformity with U.S.
generally accepted accounting principles, and assets are safeguarded
against loss from unauthorized acquisition, use, or disposition and 
(2) transactions are executed in accordance with laws and regulations that
could have a direct and material effect on the financial statements.

We did not evaluate all internal controls relevant to operating objectives as
broadly defined by FMFIA, such as controls relevant to preparing statistical
reports and ensuring efficient operations. We limited our internal control
testing to controls over financial reporting. Because of inherent limitations
in internal control, internal control may not prevent or detect and correct
misstatements caused by error or fraud, losses, or noncompliance. We
also caution that projecting any evaluation of effectiveness to future
periods is subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
policies and procedures may deteriorate.

We did not test compliance with all laws and regulations applicable to
FDIC. We limited our tests of compliance to those laws and regulations
that have a direct and material effect on the financial statements for the
year ended December 31, 2011. We caution that noncompliance may
occur and not be detected by these tests and that such testing may not be
sufficient for other purposes.

We performed our audits in accordance with U.S. generally accepted
government auditing standards. We believe our audits provide a
reasonable basis for our opinions and other conclusions.



Page 10                            GAO-12-416 FDIC Funds’ Financial Statement Audit
FDIC Comments   In commenting on a draft of this report, the FDIC’s Chief Financial Officer
                (CFO) noted that the agency was pleased to receive unqualified opinions
                on the DIF and FRF financial statements and that we reported that it had
                effective internal control over financial reporting and compliance with laws
                and regulations for each fund.

                FDIC’s CFO also stated that during the audit year, FDIC management and
                staff continued to take steps to strengthen and improve controls over the
                shared loss estimation process and will continue to focus on this area in
                the coming audit year. The CFO added that FDIC recognizes the important
                role a strong internal control program plays in an agency achieving its
                mission, and that FDIC’s dedication to sound financial management has
                been and will remain a top priority.




                Steven J. Sebastian
                Managing Director
                Financial Management and Assurance

                April 11, 2012




                Page 11                            GAO-12-416 FDIC Funds’ Financial Statement Audit
Deposit Insurance Fund’s Financial
Statements

Balance Sheet


                Deposit Insurance Fund


                Federal Deposit Insurance Corporation

                Deposit Insurance Fund Balance Sheet at December 31
                Dollars in Thousands
                                                                                                    2011              2010
                Assets
                 Cash and cash equivalents                                                    $       3,277,839   $   27,076,606
                 Cash and investments - restricted - systemic risk (Note 16)
                 (Includes cash/cash equivalents of $1,627,073 at December 31, 2011                   4,827,319        6,646,968
                 and $5,030,369 at December 31, 2010)
                 Investment in U.S. Treasury obligations, net (Note 3)                               33,863,245       12,371,268
                 Trust preferred securities (Note 5)                                                  2,213,231        2,297,818
                 Assessments receivable, net (Note 9)                                                   282,247          217,893
                 Receivables and other assets - systemic risk (Note 16)                               1,948,151        2,269,422
                 Interest receivable on investments and other assets, net                               488,179          259,683
                 Receivables from resolutions, net (Note 4)                                          28,548,396       29,532,545
                 Property and equipment, net (Note 6)                                                   401,915          416,065
                Total Assets                                                                  $      75,850,522   $   81,088,268

                Liabilities
                 Accounts payable and other liabilities                                       $         374,164   $      514,287
                 Unearned revenue - prepaid assessments (Note 9)                                     17,399,828       30,057,033
                 Liabilities due to resolutions (Note 7)                                             32,790,512       30,511,877
                 Debt Guarantee Program liabilities - systemic risk (Note 16)                           117,027           29,334
                 Deferred revenue - systemic risk (Note 16)                                           6,639,954        9,054,541
                 Postretirement benefit liability (Note 13)                                             187,968          165,874
                 Contingent liabilities for:
                    Anticipated failure of insured institutions (Note 8)                              6,511,321       17,687,569
                    Systemic risk (Note 16)                                                               2,216          119,993
                    Litigation losses (Note 8)                                                            1,000          300,000
                Total Liabilities                                                                    64,023,990       88,440,508
                 Commitments and off-balance-sheet exposure (Note 14)
                Fund Balance
                 Accumulated Net Income (Loss)                                                       11,560,990       (7,696,428)

                Accumulated Other Comprehensive Income
                 Unrealized gain on U.S. Treasury investments, net (Note 3)                             47,697           26,698
                 Unrealized postretirement benefit loss (Note 13)                                      (33,562)         (18,503)
                 Unrealized gain on trust preferred securities (Note 5)                                251,407          335,993
                Total Accumulated Other Comprehensive Income                                           265,542          344,188

                Total Fund Balance                                                                   11,826,532       (7,352,240)

                Total Liabilities and Fund Balance                                            $      75,850,522   $   81,088,268

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




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Statement of Income and Fund Balance



                    Deposit Insurance Fund


                    Federal Deposit Insurance Corporation

                    Deposit Insurance Fund Statement of Income and Fund Balance for the Years Ended December 31
                    Dollars in Thousands
                                                                                                              2011                  2010
                    Revenue
                     Assessments (Note 9)                                                           $             13,498,587 $      13,610,436
                     Interest on U.S. Treasury obligations                                                           127,621           204,871
                     Systemic risk revenue (Note 16)                                                                (131,141)         (672,818)
                     Other revenue (Note 10)                                                                       2,846,929           237,425
                    Total Revenue                                                                                 16,341,996        13,379,914

                    Expenses and Losses
                     Operating expenses (Note 11)                                                                  1,625,351         1,592,641
                     Systemic risk expenses (Note 16)                                                               (131,141)         (672,818)
                     Provision for insurance losses (Note 12)                                                     (4,413,629)         (847,843)
                     Insurance and other expenses                                                                      3,996             3,050
                    Total Expenses and Losses                                                                     (2,915,423)           75,030

                    Net Income                                                                                    19,257,419        13,304,884

                    Other Comprehensive Income
                     Unrealized gain (loss) on U.S. Treasury investments, net                                         20,999          (115,429)
                     Unrealized postretirement benefit loss (Note 13)                                                (15,059)          (15,891)
                     Unrealized (loss) gain on trust preferred securities (Note 5)                                   (84,587)          335,993
                    Total Other Comprehensive (Loss) Income                                                          (78,647)          204,673

                    Comprehensive Income                                                                          19,178,772        13,509,557

                    Fund Balance - Beginning                                                                      (7,352,240)       (20,861,797)

                    Fund Balance - Ending                                                           $             11,826,532    $    (7,352,240)

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




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Statement of Cash Flows



                   Deposit Insurance Fund

                   Federal Deposit Insurance Corporation

                   Deposit Insurance Fund Statement of Cash Flows for the Years Ended December 31
                   Dollars in Thousands
                                                                                                      2011               2010
                   Operating Activities
                   Net Income:                                                                   $    19,257,419     $   13,304,884
                    Adjustments to reconcile net income to net cash (used by)
                     operating activities:
                    Amortization of U.S. Treasury obligations                                             388,895            (5,149)
                    Treasury Inflation-Protected Securities inflation adjustment                          (25,307)          (23,051)
                    Depreciation on property and equipment                                                 77,720            68,790
                    Loss on retirement of property and equipment                                            1,326               620
                    Provision for insurance losses                                                     (4,413,629)         (847,843)
                    Unrealized Loss on postretirement benefits                                            (15,059)          (15,891)

                   Change in Operating Assets and Liabilities:
                     (Increase) Decrease in assessments receivable, net                                   (64,354)            62,617
                     (Increase) in interest receivable and other assets                                  (227,962)           (34,194)
                     (Increase) in receivables from resolutions                                        (5,802,003)       (16,607,671)
                     Decrease in receivables - systemic risk                                              321,271          1,029,397
                     (Decrease) Increase in accounts payable and other liabilities                       (140,123)           240,949
                    Increase in postretirement benefit liability                                           22,094             20,922
                    (Decrease) in contingent liabilities - systemic risk                                 (117,777)        (1,289,957)
                    (Decrease) in contingent liabilities - litigation losses                             (276,000)                 0
                    Increase (Decrease) in liabilities due to resolutions                               2,278,635         (4,199,849)
                    Increase in Debt Guarantee Program liabilities - systemic risk                         87,693             27,318
                    (Decrease) in unearned revenue - prepaid assessments                              (12,657,206)       (12,670,068)
                    (Decrease) Increase in deferred revenue - systemic risk                            (2,399,644)         1,203,936
                   Net Cash (Used by) Operating Activities                                             (3,704,011)       (19,734,240)

                   Investing Activities
                    Provided by:
                     Maturity of U.S. Treasury obligations                                            12,976,273         21,558,000
                    Used by:
                     Purchase of property and equipment                                                   (64,896)           (96,659)
                     Purchase of U.S. Treasury obligations                                            (36,409,429)       (30,143,138)
                   Net Cash (Used by) Investing Activities                                            (23,498,052)        (8,681,797)

                   Net (Decrease) in Cash and Cash Equivalents                                        (27,202,063)       (28,416,037)
                   Cash and Cash Equivalents - Beginning                                               32,106,975         60,523,012
                    Unrestricted Cash and Cash Equivalents - Ending                                     3,277,839         27,076,606
                    Restricted Cash and Cash Equivalents - Ending                                       1,627,073          5,030,369
                   Cash and Cash Equivalents - Ending                                            $      4,904,912 $       32,106,975

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




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Notes to the Financial Statements

                      Notes to the Financial Statements
                      Deposit Insurance Fund
                      December 31, 2011 and 2010

                      1. Legislation and Operations of the Deposit Insurance Fund

                      Overview
                      The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance agency
                      created by Congress in 1933 to maintain stability and public confidence in the nation’s banking
                      system. Provisions that govern the operations of the FDIC are generally found in the Federal
                      Deposit Insurance (FDI) Act, as amended (12 U.S.C. 1811, et seq). In carrying out the purposes
                      of the FDI Act, the FDIC, as administrator of the Deposit Insurance Fund (DIF), insures the
                      deposits of banks and savings associations (insured depository institutions). In cooperation with
                      other federal and state agencies, the FDIC promotes the safety and soundness of insured
                      depository institutions by identifying, monitoring and addressing risks to the DIF. Commercial
                      banks, savings banks and savings associations (known as “thrifts”) are supervised by either the
                      FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board.

                      The FDIC, through administration of the DIF, is responsible for protecting insured bank and
                      thrift depositors from loss due to institution failures. The FDIC is required by section 13 of the
                      FDI Act to resolve troubled institutions in a manner that will result in the least possible cost to
                      the DIF. This section permits an exception if a systemic risk determination demonstrates that
                      compliance with the least-cost test would have serious adverse effects on economic conditions or
                      financial stability and that any action or assistance pursued under the systemic risk determination
                      would avoid or mitigate such adverse effects. A systemic risk determination under this statutory
                      provision can only be triggered by the Secretary of the Treasury, in consultation with the
                      President, and upon the written recommendation of two-thirds of both the FDIC Board of
                      Directors and the Board of Governors of the Federal Reserve System. Until passage of the
                      Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on July 21,
                      2010 (see “Recent Legislation” below), a systemic risk determination would have permitted open
                      bank assistance to an individual insured depository institution (IDI). As explained below, such
                      open bank assistance is no longer available. The systemic risk provision requires the FDIC to
                      recover any related losses to the DIF through one or more special assessments from all IDIs and,
                      with the concurrence of the Secretary of the Treasury, depository institution holding companies
                      (see Note 16).

                      The FDIC is also the administrator of the FSLIC Resolution Fund (FRF). The FRF is a
                      resolution fund responsible for the sale of remaining assets and satisfaction of liabilities
                      associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the
                      former Resolution Trust Corporation. The DIF and the FRF are maintained separately by the
                      FDIC to support their respective functions.

                      Pursuant to the enactment of the Dodd-Frank Act, the FDIC is the manager of the Orderly
                      Liquidation Fund (OLF). Established as a separate fund in the U.S. Treasury (Treasury), the
                      OLF is inactive and unfunded until the FDIC is appointed as receiver for a covered financial
                      company (a failing financial company, such as a bank holding company or nonbank financial
                      company for which a systemic risk determination has been made as set forth in section 203 of the
                      Dodd-Frank Act). At the commencement of an orderly liquidation of a covered financial
                      company, the FDIC may borrow funds required by the receivership from the Treasury, up to the
                      Maximum Obligation Limitation for each covered financial company and in accordance with an
                      Orderly Liquidation and Repayment Plan. Borrowings will be repaid to the Treasury with the



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proceeds of asset sales. If such proceeds are insufficient, any remaining shortfall must be
recovered from assessments imposed on financial companies as specified in the Dodd-Frank Act.

Recent Legislation
The Dodd-Frank Act (Public Law 111-203) provides comprehensive reform of the supervision
and regulation of the financial services industry. Under this legislation, the FDIC’s
responsibilities include 1) liquidating failing systemically important financial firms in an orderly
manner as manager of the newly created OLF; 2) issuing regulations, jointly with the Federal
Reserve Board (FRB), requiring that nonbank financial companies supervised by the FRB and
bank holding companies with assets equal to or exceeding $50 billion provide the FRB, the
FDIC, and the Financial Stability Oversight Council (FSOC) a plan for their rapid and orderly
resolution in the event of material financial distress or failure; 3) serving as a voting member of
the FSOC; 4) undertaking backup examination authority for nonbank financial companies
supervised by the FRB and bank holding companies with at least $50 billion in assets; 5)
bringing backup enforcement actions against depository institution holding companies if their
conduct or threatened conduct poses a risk of loss to the DIF; and 6) providing federal oversight
of state-chartered thrifts, beginning upon the transfer of such authority from the Office of Thrift
Supervision (which occurred on July 21, 2011).

The Dodd-Frank Act limits the systemic risk determination authority under section 13 of the FDI
Act to IDIs for which the FDIC has been appointed receiver. As amended by the Dodd-Frank
Act, the FDI Act now requires that any action taken or assistance provided pursuant to a
systemic risk determination must be for the purpose of winding up the IDI in receivership.
Under Title XI of the Dodd-Frank Act, the FDIC is granted new authority to establish a widely
available program to guarantee obligations of solvent IDIs or solvent depository institution
holding companies (including affiliates) upon the systemic determination of a liquidity event
during times of severe economic distress. This program would not be funded by the DIF but
rather by fees and assessments paid by all participants in the program. If fees are insufficient to
cover losses or expenses, the FDIC must impose a special assessment on participants as
necessary to cover the shortfall. Any excess funds at the end of the liquidity event program
would be deposited in the General Fund of the Treasury.

The Dodd-Frank Act also made changes related to the FDIC’s deposit insurance mandate. These
changes include a permanent increase in the standard deposit insurance amount to $250,000
(retroactive to January 1, 2008) and unlimited deposit insurance coverage for noninterest-bearing
transaction accounts for two years, from December 31, 2010, to the end of 2012. Additionally,
the legislation changed the assessment base from a deposits-based formula to one based on assets
and established new reserve ratio requirements (see Note 9).

Operations of the DIF
The primary purposes of the DIF are to 1) insure the deposits and protect the depositors of IDIs
and 2) resolve failed IDIs upon appointment of the FDIC as receiver, in a manner that will result
in the least possible cost to the DIF (unless a systemic risk determination is made).

The DIF is primarily funded from deposit insurance assessments. Other available funding
sources, if necessary, are borrowings from the Treasury, the Federal Financing Bank (FFB),
Federal Home Loan Banks, and IDIs. The FDIC has borrowing authority of $100 billion from



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the Treasury and a Note Purchase Agreement with the FFB, not to exceed $100 billion, to
enhance the DIF’s ability to fund both deposit insurance and Temporary Liquidity Guarantee
Program (TLGP) obligations.

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits the amount of
obligations the DIF can incur to the sum of its cash, 90 percent of the fair market value of other
assets, and the amount authorized to be borrowed from the Treasury. The MOL for the DIF was
$114.4 billion and $106.3 billion as of December 31, 2011 and 2010, respectively.

Operations of Resolution Entities
The FDIC is responsible for managing and disposing of the assets of failed institutions in an
orderly and efficient manner. The assets held by receiverships, pass-through conservatorships,
and bridge institutions (collectively, resolution entities), and the claims against them, are
accounted for separately from DIF assets and liabilities to ensure that proceeds from these
entities are distributed in accordance with applicable laws and regulations. Accordingly, income
and expenses attributable to resolution entities are accounted for as transactions of those entities.
Resolution entities are billed by the FDIC for services provided on their behalf.

2. Summary of Significant Accounting Policies

General
These financial statements pertain to the financial position, results of operations, and cash flows
of the DIF and are presented in conformity with U.S. generally accepted accounting principles
(GAAP). As permitted by the Federal Accounting Standards Advisory Board’s Statement of
Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted Accounting
Principles, Including the Application of Standards Issued by the Financial Accounting Standards
Board, the FDIC prepares financial statements in conformity with standards promulgated by the
Financial Accounting Standards Board (FASB). These statements do not include reporting for
assets and liabilities of resolution entities because these entities are legally separate and distinct,
and the DIF does not have any ownership interests in them. Periodic and final accountability
reports of resolution entities are furnished to courts, supervisory authorities, and others upon
request.

Use of Estimates
Management makes estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these estimates. Where it
is reasonably possible that changes in estimates will cause a material change in the financial
statements in the near term, the nature and extent of such potential changes in estimates have
been disclosed. The more significant estimates include the assessments receivable and
associated revenue; the allowance for loss on receivables from resolutions (including shared-loss
agreements); liabilities due to resolutions; the estimated losses for anticipated failures, litigation,
and representations and warranties; guarantee obligations for the TLGP and structured
transactions; the valuation of trust preferred securities; and the postretirement benefit obligation.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments consisting primarily of U.S. Treasury
Overnight Certificates.



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Investment in U.S. Treasury Obligations
DIF funds are required to be invested in obligations of the United States or in obligations
guaranteed as to principal and interest by the United States. The Secretary of the Treasury must
approve all such investments in excess of $100,000 and has granted the FDIC approval to invest
DIF funds only in U.S. Treasury obligations that are purchased or sold exclusively through the
Bureau of the Public Debt’s Government Account Series program.

The DIF’s investments in U.S. Treasury obligations are classified as available-for-sale.
Securities designated as available-for-sale are shown at fair value. Unrealized gains and losses
are reported as other comprehensive income. Realized gains and losses are included in the
Statement of Income and Fund Balance as components of net income. Income on securities is
calculated and recorded on a daily basis using the effective interest or straight-line method
depending on the maturity of the security.

Revenue Recognition for Assessments
Assessment revenue is recognized for the quarterly period of insurance coverage based on an
estimate. The estimate is derived from an institution’s risk-based assessment rate and assessment
base for the prior quarter adjusted for the current quarter’s available assessment credits, certain
changes in supervisory examination ratings for larger institutions, and a modest assessment base
growth factor. At the subsequent quarter-end, the estimated revenue amounts are adjusted when
actual assessments for the covered period are determined for each institution (see Note 9).

Capital Assets and Depreciation
The FDIC buildings are depreciated on a straight-line basis over a 35- to 50-year estimated life.
Leasehold improvements are capitalized and depreciated over the lesser of the remaining life of
the lease or the estimated useful life of the improvements, if determined to be material. Capital
assets depreciated on a straight-line basis over a five-year estimated useful life include
mainframe equipment; furniture, fixtures, and general equipment; and internal-use software.
Personal computer equipment is depreciated on a straight-line basis over a three-year estimated
useful life.

Reporting on Variable Interest Entities
FDIC receiverships engaged in structured transactions, some of which resulted in the issuance of
note obligations that were guaranteed by the FDIC in its corporate capacity (see Note 8,
Contingent Liabilities for: FDIC Guaranteed Debt of Structured Transactions). As the guarantor
of note obligations for several structured transactions, the FDIC in its corporate capacity is the
holder of a variable interest in a number of variable interest entities (VIEs). The FDIC conducts
a qualitative assessment of its relationship with each VIE as required by Accounting Standards
Codification (ASC) Topic 810, Consolidation, modified by Accounting Standards Update (ASU)
No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. These assessments are conducted to determine if the FDIC in its corporate
capacity has 1) power to direct the activities that most significantly impact the economic
performance of the VIE and 2) an obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could potentially be significant to the VIE. When a variable interest
holder has met both of these characteristics, the enterprise is considered the primary beneficiary
and must consolidate the VIE. In accordance with the provisions of ASC 810, an assessment of
the terms of the legal agreement for each VIE was conducted to determine whether any of the



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terms had been activated or modified in a manner which would cause the FDIC in its corporate
capacity to be characterized as a primary beneficiary. In making that determination,
consideration was given to which, if any, activities were significant to each VIE. Often, the right
to service collateral, to liquidate collateral, or to unilaterally dissolve the limited liability
company (LLC) or trust was determined to be the most significant activity. In other cases, it was
determined that the structured transactions did not include such significant activities and that the
design of the entity was the best indicator of which party was the primary beneficiary. The
results of each analysis identified a party other than the FDIC in its corporate capacity as the
primary beneficiary.

The conclusion of these analyses was that the FDIC in its corporate capacity has not engaged in
any activity that would cause the FDIC in its corporate capacity to be characterized as a primary
beneficiary to any VIE with which it was involved at December 31, 2011 and 2010. Therefore,
consolidation is not required for the 2011 and 2010 DIF financial statements. In the future, the
FDIC in its corporate capacity may become the primary beneficiary upon the activation of
provisional contract rights that extend to the Corporation if payments are made on guarantee
claims. Ongoing analyses will be required in order to monitor consolidation implications under
ASC 810.

The FDIC’s involvement with VIEs, in its corporate capacity, is fully described in Note 8.

Related Parties
The nature of related parties and a description of related-party transactions are discussed in Note
1 and disclosed throughout the financial statements and footnotes.

Disclosure about Recent Relevant Accounting Pronouncements
Recent accounting pronouncements have been deemed to be not applicable or material to the
financial statements as presented.

Reclassification
Reclassifications have been made in 2010 financial statements to conform to the presentation
used in 2011.

3. Investment in U.S. Treasury Obligations, Net

As of December 31, 2011 and 2010, investments in U.S. Treasury obligations, net, were $33.9
billion and $12.4 billion, respectively. As of December 31, 2011 and 2010, the DIF held $5.0
billion and $2.0 billion, respectively, of Treasury Inflation-Protected Securities (TIPS), which
are indexed to increases or decreases in the Consumer Price Index for All Urban Consumers
(CPI-U).




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Total Investment in U.S. Treasury Obligations, Net at December 31, 2011
Dollars in Thousands
                                                                                       Net            Unrealized            Unrealized
                                          Yield at               Face                 Carrying         Holding               Holding                  Fair
             Maturity                   Purchase (a)             Value                Amount            Gains                 Losses                  Value

U.S. Treasury notes and bonds
            Within 1 year                  0.27%        $    24,500,000 (b) $        24,889,547 $           17,842 $               (93)          $   24,907,296
    After 1 year through 5 years            0.93%              3,900,000              3,923,428             38,778                      0             3,962,206

U.S. Treasury Inflation-Protected Securities
          Within 1 year                    0.51%               1,200,000              1,537,664                659                     (8)            1,538,315
   After 1 year through 5 years            -0.92%              3,050,000              3,464,909                   0            (9,481)                3,455,428
                Total                                   $    32,650,000         $    33,815,548 $           57,279 $           (9,582) (c) $         33,863,245
(a) For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS
    include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 1.8 percent,
    based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2011.
(b) Includes one Treasury note totaling $1.8 billion which matured on Saturday, December 31, 2011. Settlement occurred on the next
    business day, January 3, 2012.
(c) All unrealized losses occurred as a result of temporary changes in market interest rates. These unrealized losses occurred over a
    period of less than a year. Unrealized losses related to the TIPS have converted to unrealized gains by January 31, 2012, and
    unrealized losses related to the U.S. Treasury notes and bonds existed on just one security that matured with no unrealized loss on
    January 31, 2012, and thus the FDIC does not consider these securities to be other than temporarily impaired at December 31, 2011.


Total Investment in U.S. Treasury Obligations, Net at December 31, 2010
Dollars in Thousands
                                                                                      Net             Unrealized           Unrealized
                                          Yield at               Face                Carrying          Holding              Holding                   Fair
             Maturity                   Purchase (a)             Value               Amount             Gains                Losses                   Value

U.S. Treasury notes and bonds
             Within 1 year                  0.73%       $     3,000,000        $     3,052,503 $              2,048 $            (31)        $        3,054,520
U.S. Treasury Inflation-Protected Securities
             Within 1 year                  3.47%             1,375,955              1,375,967                1,391                0                  1,377,358
     After 1 year through 5 years           2.41%               615,840                621,412              22,381                 0                   643,793

       U.S. Treasury bills
             Within 1 year                  0.19%             7,300,000              7,294,688                  909                0                  7,295,597
                Total                                   $    12,291,795        $    12,344,570 $            26,729 $             (31) (b) $          12,371,268
(a) For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS
   include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 1.8 percent,
   based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2010.
(b) All unrealized losses occurred as a result of temporary changes in market interest rates. The unrealized loss on one security occurred
   over a period of less than a year and converted to an unrealized gain by January 31, 2011, and thus the FDIC does not consider the security
   to be other than temporarily impaired at December 31, 2010.




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4. Receivables from Resolutions, Net

Receivables from Resolutions, Net at December 31
Dollars in Thousands
                                                          2011           2010
Receivables from closed banks                      $   121,369,428 $   115,896,763
Allowance for losses                                   (92,821,032)    (86,364,218)
Total                                              $    28,548,396 $    29,532,545

The receivables from resolutions include payments made by the DIF to cover obligations to
insured depositors (subrogated claims), advances to resolution entities for working capital, and
administrative expenses paid on behalf of resolution entities. Any related allowance for loss
represents the difference between the funds advanced and/or obligations incurred and the
expected repayment. Estimated future payments on losses incurred on assets sold to an acquiring
institution under a shared-loss agreement (SLA) are factored into the computation of the
expected repayment. Assets held by DIF resolution entities (including structured transaction-
related assets; see Note 8) are the main source of repayment of the DIF’s receivables from
resolutions.

As of December 31, 2011, there were 426 active receiverships, including 92 established in 2011.
As of December 31, 2011 and 2010, DIF resolution entities held assets with a book value of
$71.4 billion and $80.4 billion, respectively (including $50.5 billion and $53.4 billion,
respectively of cash, investments, receivables due from the DIF, and other receivables). Ninety-
nine percent of the current asset book value of $71.4 billion is held by resolution entities
established since 2008.

Estimated cash recoveries from the management and disposition of assets that are used to
determine the allowance for losses are based on asset recovery rates from several sources
including actual or pending institution-specific asset disposition data, failed institution-specific
asset valuation data, aggregate asset valuation data on several recently failed or troubled
institutions, sampled asset valuation data, and empirical asset recovery data based on failures as
far back as 1990. Methodologies for determining the asset recovery rates incorporate estimating
future cash recoveries, net of applicable liquidation cost estimates, and discounting based on
market-based risk factors applicable to a given asset’s type and quality. The resulting estimated
cash recoveries are then used to derive the allowance for loss on the receivables from these
resolutions.

For failed institutions resolved using a whole bank purchase and assumption transaction with an
accompanying SLA, the projected future shared-loss payments, recoveries, and monitoring costs
on the covered assets sold to the acquiring institution under the agreement are considered in
determining the allowance for loss on the receivables from these resolutions. The shared-loss
cost projections are based on the covered assets’ intrinsic value which is determined using
financial models that consider the quality, condition and type of covered assets, current and
future market conditions, risk factors and estimated asset holding periods. For year-end 2011
financial reporting, the shared-loss cost estimates were updated for the majority (85% or 235) of
the 278 active shared-loss agreements; the remaining 43 were already based on recent loss
estimates. The updated shared-loss cost projections for the larger agreements were primarily



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based on new third-party valuations estimating the cumulative loss of covered assets. The
remaining agreements were stratified by receivership age. A random sample of banks within
each age stratum was selected for new third-party loss estimations, and valuation results from the
sample banks were aggregated and extrapolated to banks within the like age stratum based on
asset type and performance status.

Note that estimated asset recoveries are regularly evaluated during the year, but remain subject to
uncertainties because of potential changes in economic and market conditions. Continuing
economic uncertainties could cause the DIF’s actual recoveries to vary significantly from current
estimates.

Whole Bank Purchase and Assumption Transactions with Shared-Loss Agreements
Since the beginning of 2008, the FDIC resolved 281 failures using whole bank purchase and
assumption resolution transactions with accompanying SLAs on assets purchased by the
financial institution acquirer. The acquirer typically assumes all of the deposits and purchases
essentially all of the assets of a failed institution. The majority of the commercial and residential
loan assets are purchased under an SLA, where the FDIC agrees to share in future losses and
recoveries experienced by the acquirer on those assets covered under the agreement. SLAs are
used by the FDIC to keep assets in the private sector and to minimize disruptions to loan
customers.

Losses on the covered assets are shared between the acquirer and the FDIC in its receivership
capacity of the failed institution when losses occur through the sale, foreclosure, loan
modification, or write-down of loans in accordance with the terms of the SLA. The majority of
the agreements cover a five- to 10-year period with the receiver covering 80 percent of the losses
incurred by the acquirer and the acquiring bank covering 20 percent. Prior to March 26, 2010,
most SLAs included a threshold amount, above which the receiver covered 95 percent of the
losses incurred by the acquirer. As mentioned above, the estimated shared-loss liability is
accounted for by the receiver and is included in the calculation of the DIF’s allowance for loss
against the corporate receivable from the resolution. As shared-loss claims are asserted and
proven, DIF receiverships satisfy these shared-loss payments using available liquidation funds
and/or by drawing on amounts due from the DIF for funding the deposits assumed by the
acquirer (see Note 7).

As of December 31, 2011, 249 receiverships have made shared-loss payments totaling $16.2
billion. In addition, DIF receiverships are estimated to pay an additional amount of $26.6 billion
over the duration of these SLAs on $135.0 billion in total remaining covered assets.

Concentration of Credit Risk
Financial instruments that potentially subject the DIF to concentrations of credit risk are
receivables from resolutions. The repayment of the DIF’s receivables from resolutions is
primarily influenced by recoveries on assets held by DIF receiverships and payments on the
covered assets under SLAs. The majority of the $155.9 billion in remaining assets in liquidation
($20.9 billion) and current shared-loss covered assets ($135.0 billion) are concentrated in
commercial loans ($83.1 billion), residential loans ($52.5 billion), securities ($3.4 billion), and
structured transaction-related assets as described in Note 8 ($14.2 billion). Most of the assets in
these asset types originated from failed institutions located in California ($43.7 billion), Florida



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($18.1 billion), Illinois ($13.2 billion), Puerto Rico ($13.1 billion), Georgia ($12.8 billion) and
Alabama ($12.7 billion).

5. Trust Preferred Securities

Pursuant to a systemic risk determination, the Treasury, the FDIC, and the Federal Reserve Bank
of New York executed terms of a guarantee agreement on January 15, 2009 with Citigroup to
provide loss protection on a pool of approximately $301.0 billion of assets that remained on the
balance sheet of Citigroup. In consideration for its portion of the shared-loss guarantee at
inception, the FDIC received $3.025 billion of Citigroup’s preferred stock. All shares of the
preferred stock were subsequently converted to Citigroup Capital XXXIII trust preferred
securities (TruPs) with a liquidation amount of $1,000 per security and a distribution rate of 8
percent per annum payable quarterly. The principal amount is due in 2039.

On December 23, 2009, Citigroup terminated the guarantee agreement, citing improvements in
its financial condition. The FDIC incurred no loss from the guarantee prior to the termination of
the agreement. In connection with the early termination of the agreement, the FDIC agreed to
reduce its portion of the $3.025 billion in TruPs by $800 million. However, pursuant to an
agreement between the Treasury and the FDIC, the Treasury agreed to return $800 million in
TruPs on behalf of the FDIC from its portion of Citigroup TruPs holdings received as a result of
the shared-loss agreement. The FDIC has retained the $800 million of Citigroup TruPs as
security in the event payments are required to be made by the DIF for guaranteed debt
instruments issued by Citigroup and its affiliates under the TLGP (see Note 16). The FDIC will
transfer an aggregate liquidation amount of $800 million in TruPs to the Treasury, plus any
related interest, less any payments made or required to be made under the TLGP within five days
of the date on which no Citigroup debt remains outstanding under the TLGP. The fair value of
these TruPs and related interest are recorded as systemic risk assets (see Note 16).

The remaining $2.225 billion (liquidation amount) of TruPs held by the FDIC is classified as
available-for-sale debt securities in accordance with FASB ASC Topic 320, Investments – Debt
and Equity Securities. At December 31, 2011, the fair value of the TruPs was $2.213 billion (see
Note 15). An unrealized holding gain of $251 million is included in accumulated other
comprehensive income.

6. Property and Equipment, Net

Property and Equipment, Net at December 31
Dollars in Thousands
                                                                     2011           2010
Land                                                         $        37,352 $        37,352
Buildings (including leasehold improvements)                         316,129         312,173
Application software (includes work-in-process)                      130,718         122,736
Furniture, fixtures, and equipment                                   159,120         144,661
Accumulated depreciation                                            (241,404)       (200,857)
Total                                                        $       401,915 $       416,065

The depreciation expense was $78 million and $69 million for 2011 and 2010, respectively.



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7. Liabilities Due to Resolutions

As of December 31, 2011 and 2010, the DIF recorded liabilities totaling $32.7 billion and $30.4
billion to resolution entities representing the agreed-upon value of assets transferred from the
receiverships, at the time of failure, to the acquirers/bridge institutions for use in funding the
deposits assumed by the acquirers/bridge institutions. Ninety-one percent of these liabilities are
due to failures resolved under whole-bank purchase and assumption transactions, most with an
accompanying SLA. The DIF satisfies these liabilities either by directly sending cash to the
receivership to fund shared-loss and other expenses or by offsetting receivables from resolutions
when the receivership declares a dividend.

In addition, there was $80 million in unpaid deposit claims related to multiple receiverships as of
December 31, 2011 and 2010. The DIF pays these liabilities when the claims are approved.

8. Contingent Liabilities for:

Anticipated Failure of Insured Institutions
The DIF records a contingent liability and a loss provision for DIF-insured institutions that are
likely to fail, absent some favorable event such as obtaining additional capital or merging, when
the liability is probable and reasonably estimable. The contingent liability is derived by applying
expected failure rates and loss rates to institutions based on supervisory ratings, balance sheet
characteristics, and projected capital levels.

The banking industry continued recovering in 2011. The industry recorded total net income of
$119.5 billion for all of 2011, an increase of nearly 40 percent from 2010 net income. The
improvement in industry earnings continued to be driven by declining loan loss provisions, with
full-year provisions at their lowest level in four years. At the same time, the pace of U.S.
economic growth slowed, unemployment remained at historically high levels, and real estate
markets exhibited ongoing weaknesses in many parts of the country. These factors have slowed
the improvement in asset quality and contributed to keeping the number of problem institutions
and failures well above historic norms. Notwithstanding these challenges, the losses to the DIF
from failures that occurred in 2011 fell short of the amount reserved at the end of 2010, as the
aggregate number and size of institution failures in 2011 were less than anticipated. The removal
from the reserve of banks that did fail in 2011, as well as projected favorable trends in bank
supervisory downgrade and failure rates and the smaller size of institutions that remain troubled,
all contributed to a decline by $11.2 billion to $6.5 billion in the contingent liability for
anticipated failures of insured institutions at the end of 2011.

In addition to these recorded contingent liabilities, the FDIC has identified risk in the financial
services industry that could result in additional losses to the DIF should potentially vulnerable
insured institutions ultimately fail. As a result of these risks, the FDIC believes that it is
reasonably possible that the DIF could incur additional estimated losses of up to $10.2 billion for
year-end 2011 as compared to $24.5 billion for year-end 2010. The actual losses, if any, will
largely depend on future economic and market conditions and could differ materially from this
estimate.

During 2011, 92 banks failed with combined assets at the date of failure of $36.6 billion.



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Supervisory and market data suggest that while the financial performance of the banking
industry should continue to improve over the coming year, ongoing asset quality problems and
limited opportunities for earnings growth will continue to result in an elevated level of stress for
the industry. The FDIC continues to evaluate the ongoing risks to affected institutions in light of
the existing economic and financial conditions, and the extent to which such risks will continue
to put stress on the resources of the insurance fund.

Litigation Losses
The DIF records an estimated loss for unresolved legal cases to the extent that those losses are
considered probable and reasonably estimable. During 2011, the contingent liability declined by
$299 million to $1 million due primarily to a payment of $276 million for a judgment of one
legal case for which an allowance was previously recorded. As of December 31, 2011 and 2010,
the FDIC has determined that there are no reasonably possible losses from unresolved cases.

Other Contingencies
IndyMac Federal Bank Representation and Indemnification Contingent Liability
On March 19, 2009, the FDIC as receiver of IndyMac Federal Bank (IMFB) and certain
subsidiaries (collectively, sellers) sold substantially all of the assets of IMFB and the respective
subsidiaries, including mortgage loans and mortgage loan servicing rights, to OneWest Bank and
its affiliates. To maximize sale returns, the sellers made certain representations customarily
made by commercial parties regarding the assets and agreed to indemnify the acquirers for losses
incurred as a result of breaches of such representations, losses incurred as a result of the failure
to obtain contractual counterparty consents to the sale, and third party claims arising from pre-
sale acts and omissions of the sellers or the failed bank. Although the representations and
indemnifications were made by or are obligations of the sellers, the FDIC, in its corporate
capacity, guaranteed the receivership’s indemnification obligations under the sale agreements.
The representations relate generally to ownership of and right to sell the assets; compliance with
applicable law in the origination of the loans; accuracy of the servicing records; validity of loan
documents; and servicing of the loans serviced for others. Until the periods for asserting claims
under these arrangements have expired and all indemnification claims quantified and paid, losses
could continue to be incurred by the receivership and, in turn, the DIF, either directly, as a result
of the FDIC corporate guaranty of the receivership’s indemnification obligations, or indirectly,
as a result of a reduction in the receivership’s assets available to pay the DIF’s claims as
subrogee for insured accountholders. The acquirers’ rights to assert claims to recover losses
incurred as a result of breaches of loan seller representations extend out to March 19, 2019 for
the Fannie Mae and Ginnie Mae reverse mortgage servicing portfolios (unpaid principal balance
of $16.7 billion at December 31, 2011 compared to $21.7 billion at December 31, 2010), and
March 19, 2014 for the Fannie Mae, Freddie Mac and Ginnie Mae mortgage servicing portfolios
(unpaid principal balance of $38.5 billion at December 31, 2011 compared to $45.3 billion at
December 31, 2010). The acquirers’ rights to assert claims to recover losses incurred as a result
of other third party claims (including due to pre-March 19, 2009 acts or omissions) and breaches
of servicer representations, including liability with respect to the Fannie Mae, Ginnie Mae and
Freddie Mac portfolios as well as the private mortgage servicing portfolio and whole loans
(unpaid principal balance of $62.0 billion at December 31, 2011 compared to $74.2 billion at
December 31, 2010) expired on March 19, 2011. As of the expiration date of this claim period,
notices relating to potential defects were received, but they require review to determine whether




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a valid defect exists and, if so, the identification and costing of possible cure actions. It is highly
unlikely that all of these potential defects will result in losses.

As of December 31, 2011, the IndyMac receivership has paid $5 million in approved claims and
has accrued an additional $2 million liability for claims asserted but unpaid. Alleged breaches of
origination and servicing representations exist, and review and evaluation is in process for
approximately $275 to $345 million in reasonably possible liabilities. In addition, potential
losses relating to origination and servicing representations, which currently cannot be
determined, may be incurred under other agreements with investors.

The FDIC believes it is likely that additional losses will be incurred, however quantifying the
contingent liability associated with the representations and the indemnification obligations is
subject to a number of uncertainties, including (1) borrower prepayment speeds; (2) the
occurrence of borrower defaults and resulting foreclosures and losses; (3) the assertion by third
party investors of claims with respect to loans serviced for them; (4) the existence and timing of
discovery of breaches and the assertion of claims for indemnification for losses by the acquirer;
(5) the compliance by the acquirer with certain loss mitigation and other conditions to
indemnification; (6) third party sources of loss recovery (such as title companies and insurers);
(7) the ability of the acquirer to refute claims from investors without incurring reimbursable
losses; and (8) the cost to cure breaches and respond to third party claims. Because of these and
other uncertainties that surround the liability associated with indemnifications and the
quantification of possible losses, the FDIC has determined that, while additional losses are
probable, the amount is not estimable.

Purchase and Assumption Indemnification
In connection with purchase and assumption agreements for resolutions, the FDIC in its
receivership capacity generally indemnifies the purchaser of a failed institution’s assets and
liabilities in the event a third party asserts a claim against the purchaser unrelated to the explicit
assets purchased or liabilities assumed at the time of failure. The FDIC in its corporate capacity
is a secondary guarantor if a receivership is unable to pay. These indemnifications generally
extend for a term of six years after the date of institution failure. The FDIC is unable to estimate
the maximum potential liability for these types of guarantees as the agreements do not specify a
maximum amount and any payments are dependent upon the outcome of future contingent
events, the nature and likelihood of which cannot be determined at this time. During 2011 and
2010, the FDIC in its corporate capacity made no indemnification payments under such
agreements, and no amount has been accrued in the accompanying financial statements with
respect to these indemnification guarantees.

FDIC Guaranteed Debt of Structured Transactions
The FDIC as receiver uses three types of structured transactions to dispose of certain performing
and non-performing residential mortgage loans, commercial loans, construction loans, and
mortgage-backed securities held by the receiverships. The three types of structured transactions
are 1) limited liability companies (LLCs), 2) securitizations, and 3) structured sale of guaranteed
notes (SSGNs).




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LLCs
Under the LLC structure, the FDIC in its receivership capacity contributes a pool of assets to a
newly-formed LLC and offers for sale, through a competitive bid process, some of the equity in
the LLC. The day-to-day management of the LLC is transferred to the highest bidder along with
the purchased equity interest. In many instances, the FDIC in its corporate capacity guarantees
notes issued by the LLCs. In exchange for a guarantee, the DIF receives a guarantee fee in either
1) a lump-sum, up-front payment based on the estimated duration of the note or 2) a monthly
payment based on a fixed percentage multiplied by the outstanding note balance. The terms of
these guarantee agreements generally stipulate that all cash flows received from the entity’s
collateral be used to pay, in the following order, 1) operational expenses of the entity, 2) the
FDIC’s contractual guarantee fee, 3) the guaranteed notes (or, if applicable, fund the related
defeasance account for payoff of the notes at maturity), and 4) the equity investors. If the FDIC
is required to perform under these guarantees, it acquires an interest in the cash flows of the LLC
equal to the amount of guarantee payments made plus accrued interest thereon. Once all
expenses have been paid, the guaranteed notes have been satisfied, and the FDIC has been
reimbursed for any guarantee payments, the equity holders receive any remaining cash flows.

Since 2009, private investors purchased a 40- to 50-percent ownership interest in the LLC
structures for $1.6 billion in cash and the LLCs issued notes of $4.4 billion to the receiverships
to partially fund the purchase of the assets. The receiverships hold the remaining 50- to 60-
percent equity interest in the LLCs and, in most cases, the guaranteed notes. The FDIC in its
corporate capacity guarantees the timely payment of principal and interest due on the notes. The
terms of the note guarantees extend until the earlier of 1) payment in full of the notes or 2) two
years following the maturity date of the notes. The note with the longest term matures in 2020.
In the event of note payment default, the FDIC as guarantor is entitled to exercise or cause the
exercise of certain rights and remedies including: 1) accelerating the payment of the unpaid
principal amount of the notes; 2) selling the assets held as collateral; or 3) foreclosing on the
equity interests of the debtor.

Securitizations and SSGNs
Securitizations and SSGNs (collectively, “trusts”) are transactions in which certain assets or
securities from failed institutions are pooled and transferred into a trust structure. The trusts
issue 1) senior and/or subordinated debt instruments and 2) owner trust or residual certificates
collateralized by the underlying mortgage-backed securities or loans.

Since 2010, private investors purchased the senior notes issued by the trusts for $5.3 billion in
cash. The receiverships hold 100 percent of the subordinated debt instruments and owner trust or
residual certificates. The FDIC in its corporate capacity guarantees the timely payment of
principal and interest due on the senior notes, the latest maturity of which is 2050. In exchange
for the guarantee, the DIF receives a monthly payment based on a fixed percentage multiplied by
the outstanding note balance. These guarantee agreements generally stipulate that all cash flows
received from the entity’s collateral be used to pay, in the following order, 1) operational
expenses of the entity, 2) the FDIC’s contractual guarantee fee, 3) interest on the guaranteed
notes, 4) principal of the guaranteed notes, and 5) the holders of the subordinated notes and
owner trust or residual certificates. If the FDIC is required to perform under its guarantees, it
acquires an interest in the cash flows of the trust equal to the amount of guarantee payments
made plus accrued interest thereon. Once all expenses have been paid, the guaranteed notes have



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been satisfied, and the FDIC has been reimbursed for any guarantee payments, the subordinated
note holders and owner trust or residual certificates holders receive the remaining cash flows.

All Structured Transactions with FDIC Guaranteed Debt
Through December 31, 2011, the receiverships have transferred a portfolio of loans with an
unpaid principal balance of $16.4 billion and mortgage-backed securities with a book value of
$7.7 billion to 14 LLCs and 8 trusts. The LLCs and trusts subsequently issued notes guaranteed
by the FDIC in an original principal amount of $9.7 billion. To date, the DIF has collected
guarantee fees totaling $203 million and recorded a receivable for additional guarantee fees of
$106 million, included in the “Interest receivable on investments and other assets, net” line item
on the Balance Sheet. All guarantee fees are recorded as deferred revenue, included in the
“Accounts payable and other liabilities” line item, and recognized as revenue primarily on a
straight-line basis over the term of the notes. At December 31, 2011, the amount of deferred
revenue recorded was $134 million. The DIF records no other structured-transaction-related
assets or liabilities on its balance sheet.

The estimated loss to the DIF from the guarantees is derived from an analysis of the discounted
present value of the expected guarantee payments by the FDIC, reimbursements to the FDIC for
guarantee payments, and guarantee fee collections. Under both a base case and a more stressful
modeling scenario, the cash flows from the LLC or trust assets provide sufficient coverage to
fully pay the debts. Therefore, the estimated loss to the DIF from these guarantees is zero. To
date, the FDIC in its corporate capacity has not provided, and does not intend to provide, any
form of financial or other type of support to a trust or LLC that it was not previously
contractually required to provide.

As of December 31, 2011, the maximum loss exposure is $3.7 billion for LLCs and $3.9 billion
for trusts, representing the sum of all outstanding debt guaranteed by the FDIC in its corporate
capacity. Some transactions have established defeasance accounts to pay off the notes at
maturity. A total of $2.2 billion has been deposited into these accounts.

9. Assessments

The Dodd-Frank Act, enacted on July 21, 2010, provides for significant assessment and
capitalization reforms for the DIF. In response, the FDIC implemented several changes to the
assessment system and developed a comprehensive, long-term fund management plan. The plan
is designed to restore and maintain a positive fund balance for the DIF even during a banking
crisis and achieve moderate, steady assessment rates throughout any economic cycle.
Summarized below are actions taken to implement assessment system changes and provisions of
the comprehensive plan.

New Restoration Plan
In October 2010, the FDIC adopted a new Restoration Plan to ensure that the ratio of the DIF
fund balance to estimated insured deposits (reserve ratio) reaches 1.35 percent by September 30,
2020. The new Plan provides for the following: 1) the period of the Restoration Plan is extended
from the end of 2016 to September 30, 2020; 2) institutions may continue to use assessment
credits without additional restriction during the term of the Restoration Plan; 3) the FDIC will
pursue rulemaking regarding the method that will be used to offset the effect on small



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institutions (less than $10 billion in assets) of requiring that the reserve ratio reach 1.35 percent
by September 30, 2020, rather than 1.15 percent by the end of 2016; and 4) at least semiannually,
the FDIC will update its loss and income projections for the fund and, if needed, increase or
decrease assessment rates, following notice-and-comment rulemaking, if required.

Designated Reserve Ratio
In December 2011, the FDIC adopted a final rule maintaining the designated reserve ratio (DRR)
at 2 percent, effective January 1, 2012. The FDIC views the 2 percent DRR as maintaining the
DIF at a level that can withstand substantial losses, consistent with the FDIC’s comprehensive,
long-term fund management plan.

Calculation of Assessment
In February 2011, the FDIC adopted a final rule, effective on April 1, 2011, amending part 327
of title 12 of the Code of Federal Regulations to 1) redefine the assessment base used for
calculating deposit insurance assessments from adjusted domestic deposits to average
consolidated total assets minus average tangible equity (measured as Tier 1 capital); 2) change
the assessment rate adjustments; 3) lower the initial base rate schedule and the total base rate
schedule for all IDIs to collect approximately the same revenue for the DIF as would have been
collected under the old assessment base; 4) suspend dividends indefinitely, and, in lieu of
dividends, adopt lower assessment rate schedules when the reserve ratio reaches 1.15 percent, 2
percent, and 2.5 percent; and 5) change the risk-based assessment system for large IDIs
(generally, those institutions with at least $10 billion in total assets). Specifically, the final rule
eliminates risk categories and the use of long-term debt issuer ratings for large institutions and
combines CAMELS ratings and certain forward-looking financial measures into two scorecards:
one for most large institutions and another for large institutions that are structurally and
operationally complex or that pose unique challenges and risks in case of failure (highly complex
institutions).

Assessment Revenue
Annual assessment rates averaged approximately 17.6 cents per $100 and 17.7 cents per $100 of
the assessment base for the first quarter of 2011 and all of 2010, respectively. Beginning in the
second quarter of 2011, the assessment base changed to average total consolidated assets less
average tangible equity (with certain adjustments for banker’s banks and custodial banks), as
required by the Dodd-Frank Act. The FDIC implemented a new assessment rate schedule at the
same time to conform to the larger assessment base. The annual assessment rate averaged
approximately 11.1 cents per $100 of the assessment base for the last three quarters of 2011.

In December 2009, a majority of IDIs prepaid $45.7 billion of estimated quarterly risk-based
assessments to address the DIF’s liquidity need to pay for projected near-term failures and to
ensure that the deposit insurance system remained industry-funded. The prepaid assessments
cover the insurance period from October 2009 through December 2012. An institution’s
quarterly risk-based deposit insurance assessment thereafter is offset by the amount prepaid until
the amount is exhausted or until June 30, 2013, when any amount remaining is to be returned to
the institution. At December 31, 2011, the remaining prepaid amount of $17.4 billion is included
in the “Unearned revenue - prepaid assessments” line item on the Balance Sheet.




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Prepaid assessments were mandatory for all institutions, but the FDIC exercised its discretion as
supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC
determined that the prepayment would adversely affect the safety and soundness of the
institution.

Reserve Ratio
As of December 31, 2011, the DIF reserve ratio was 0.17 percent of estimated insured deposits.

Assessments Related to FICO
Assessments continue to be levied on institutions for payments of the interest on obligations
issued by the Financing Corporation (FICO). The FICO was established as a mixed-ownership
government corporation to function solely as a financing vehicle for the former FSLIC. The
annual FICO interest obligation of approximately $790 million is paid on a pro rata basis using
the same rate for banks and thrifts. The FICO assessment has no financial impact on the DIF and
is separate from deposit insurance assessments. The FDIC, as administrator of the DIF, acts
solely as a collection agent for the FICO. During 2011 and 2010, approximately $795 million
and $796 million, respectively, was collected and remitted to the FICO.

10. Other Revenue

Other Revenue for the Years Ended December 31
Dollars in Thousands
                                                                      2011         2010
Temporary Liquidity Guarantee Program revenue (Note 16)          $   2,569,579 $         0
Dividends and interest on Citigroup trust preferred securities         178,000     177,675
Guarantee fees for structured transactions                              92,229      44,557
Other                                                                    7,121      15,193
Total                                                            $   2,846,929 $   237,425

Temporary Liquidity Guarantee Program Revenue
Pursuant to a systemic risk determination in October 2008, the FDIC established the TLGP (see
Note 16). In exchange for guarantees issued under the TLGP, the FDIC received fees that were
set aside, as deferred revenue, for potential TLGP losses. As losses occur, the FDIC recognizes
the loss as a systemic risk expense and offsets the loss by recognizing an equivalent portion of
the deferred revenue as systemic risk revenue. This accounting practice isolates systemic risk
activities from the normal operating activities of the DIF.

From inception of the TLGP, it has been FDIC’s policy to recognize revenue to the DIF for any
deferred revenue not absorbed by losses upon expiration of the TLGP guarantee period
(December 31, 2012) or earlier for any portion of guarantee fees determined in excess of
amounts needed to cover potential losses. During 2011, the DIF recognized revenue of $2.6
billion for fees held as deferred revenue (see Note 16). In the unforeseen event a debt default
occurs greater than the remaining amount held as deferred revenue, to the extent needed, any
amount previously recognized as revenue to the DIF will be returned to the TLGP.




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11. Operating Expenses

Operating expenses were $1.6 billion for both 2011 and 2010. The chart below lists the major
components of operating expenses.

Operating Expenses for the Years Ended December 31
Dollars in Thousands
                                                                 2011                    2010
Salaries and benefits                                $             1,320,991 $             1,184,523
Outside services                                                     342,502                 360,880
Travel                                                               115,135                 111,110
Buildings and leased space                                            93,630                  85,137
Software/Hardware maintenance                                         58,981                  50,575
Depreciation of property and equipment                                77,720                  68,790
Other                                                                 46,652                  35,142
Subtotal                                                           2,055,611               1,896,157
Services billed to resolution entities                              (430,260)               (303,516)
Total                                                $             1,625,351 $             1,592,641

12. Provision for Insurance Losses

Provision for insurance losses was negative $4.4 billion for 2011, compared to negative $848
million for 2010. The negative provision for 2011 primarily resulted from a reduction in the
contingent loss reserve due to the improvement in the financial condition of institutions that were
previously identified to fail and a reduction in the estimated losses for institutions that have
failed in prior years. The following chart lists the major components of the provision for
insurance losses.

Provision for Insurance Losses for the Years Ended December 31
Dollars in Thousands
                                                                                  2011             2010
Valuation Adjustments
Closed banks and thrifts                                                  $      6,786,643 $    25,483,252
Other assets                                                                        (1,024)         (4,406)
Total Valuation Adjustments                                                      6,785,619      25,478,846

Contingent Liabilities Adjustments
Anticipated failure of insured institutions                                   (11,176,248)     (26,326,689)
Litigation                                                                        (23,000)               0
Total Contingent Liabilities Adjustments                                      (11,199,248)     (26,326,689)
Total                                                                    $     (4,413,629) $      (847,843)

13. Employee Benefits

Pension Benefits and Savings Plans
Eligible FDIC employees (permanent and term employees with appointments exceeding one
year) are covered by the federal government retirement plans, either the Civil Service Retirement
System (CSRS) or the Federal Employees Retirement System (FERS). Although the DIF
contributes a portion of pension benefits for eligible employees, it does not account for the assets


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of either retirement system. The DIF also does not have actuarial data for accumulated plan
benefits or the unfunded liability relative to eligible employees. These amounts are reported on
and accounted for by the U.S. Office of Personnel Management (OPM).

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401(k) savings
plan with matching contributions up to 5 percent. Under the Federal Thrift Savings Plan (TSP),
the FDIC provides FERS employees with an automatic contribution of 1 percent of pay and an
additional matching contribution up to 4 percent of pay. CSRS employees also can contribute to
the TSP, but they do not receive agency matching contributions.

Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands
                                                                              2011                 2010
Civil Service Retirement System                                   $               6,140 $              6,387
Federal Employees Retirement System (Basic Benefit)                              95,846               78,666
FDIC Savings Plan                                                                36,645               30,825
Federal Thrift Savings Plan                                                      33,910               28,679
Total                                                             $             172,541 $            144,557

Postretirement Benefits Other Than Pensions
The DIF has no postretirement health insurance liability since all eligible retirees are covered by
the Federal Employees Health Benefits (FEHB) program. The FEHB is administered and
accounted for by the OPM. In addition, OPM pays the employer share of the retiree’s health
insurance premiums.

The FDIC provides certain life and dental insurance coverage for its eligible retirees, the retirees’
beneficiaries, and covered dependents. Retirees eligible for life and dental insurance coverage
are those who have qualified due to 1) immediate enrollment upon appointment or five years of
participation in the plan and 2) eligibility for an immediate annuity. The life insurance program
provides basic coverage at no cost to retirees and allows converting optional coverage to direct-
pay plans. For the dental coverage, retirees are responsible for a portion of the dental premium.

The FDIC has elected not to fund the postretirement life and dental benefit liabilities. As a
result, the DIF recognized the underfunded status (the difference between the accumulated
postretirement benefit obligation and the plan assets at fair value) as a liability. Since there are
no plan assets, the plan’s benefit liability is equal to the accumulated postretirement benefit
obligation. At December 31, 2011 and 2010, the liability was $188 million and $166 million,
respectively, which is recognized in the “Postretirement benefit liability” line item on the
Balance Sheet. The cumulative actuarial losses (changes in assumptions and plan experience)
and prior service costs (changes to plan provisions that increase benefits) were $34 million and
$19 million at December 31, 2011 and 2010, respectively. These amounts are reported as
accumulated other comprehensive income in the “Unrealized postretirement benefit loss” line
item on the Balance Sheet.

The DIF’s expenses for postretirement benefits for 2011 and 2010 were $12 million and $9
million, respectively, which are included in the current and prior year’s operating expenses on
the Statement of Income and Fund Balance. The changes in the actuarial losses and prior service
costs for 2011 and 2010 of $15 million and $16 million, respectively, are reported as other


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comprehensive income in the “Unrealized postretirement benefit loss” line item. Key actuarial
assumptions used in the accounting for the plan include the discount rate of 4.5 percent, the rate
of compensation increase of 4.1 percent, and the dental coverage trend rate of 6.0 percent. The
discount rate of 4.5 percent is based upon rates of return on high-quality fixed income
investments whose cash flows match the timing and amount of expected benefit payments.

14. Commitments and Off-Balance-Sheet Exposure

Commitments:
Leased Space
The FDIC’s lease commitments total $199 million for future years. The lease agreements
contain escalation clauses resulting in adjustments, usually on an annual basis. The DIF
recognized leased space expense of $56 million and $45 million for the years ended December
31, 2011 and 2010, respectively.

Leased Space Commitments
Dollars in Thousands
    2012         2013        2014      2015        2016       2017/Thereafter
  $52,773      $44,950     $32,294   $25,807     $22,679         $20,918

Off-Balance-Sheet Exposure:
Deposit Insurance
As of December 31, 2011, estimated insured deposits for the DIF were $7.0 trillion. This
estimate is derived primarily from quarterly financial data submitted by IDIs to the FDIC. This
estimate represents the accounting loss that would be realized if all IDIs were to fail and the
acquired assets provided no recoveries. Included in this estimate was approximately $1.4 trillion
of noninterest-bearing transaction deposits that exceeded the basic coverage limit of $250,000
per account, which received coverage under the Dodd-Frank Act beginning on December 31,
2010 to the end of 2012.

15. Disclosures About the Fair Value of Financial Instruments

Financial assets recognized and measured at fair value on a recurring basis at each reporting date
include cash equivalents (Note 2), the investment in U.S. Treasury obligations (Note 3) and trust
preferred securities (Note 5). The following tables present the DIF’s financial assets measured at
fair value as of December 31, 2011 and 2010.




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Assets Measured at Fair Value at December 31, 2011
Dollars in Thousands
                                                    Fair Value Measurements Using
                                                                                       Significant
                                                             Quoted Prices in             Other            Significant
                                                            Active Markets for         Observable        Unobservable
                                                             Identical Assets            Inputs               Inputs          Total Assets at
                                                                 (Level 1)              (Level 2)           (Level 3)            Fair Value
Assets
  Cash equivalents1                                    $              3,266,631                                            $        3,266,631
Available-for-Sale Debt Securities
  Investment in U.S. Treasury obligations2                          33,863,245                                                     33,863,245
  Trust preferred securities                                                      $       2,213,231                                 2,213,231
  Trust preferred securities held for UST (Note 16)                                         795,769                                   795,769
Total Assets                                           $            37,129,876 $          3,009,000 $                   0 $        40,138,876
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established
   by the U.S. Bureau of Public Debt.
(2) The investment in U.S. Treasury obligations is measured based on prevailing market yields for federal government entities.


In exchange for prior shared-loss guarantee coverage provided to Citigroup, the FDIC and the
Treasury received TruPs (see Note 5). At December 31, 2011, the fair value of the securities in
the amount of $3.009 billion was classified as a Level 2 measurement based on an FDIC-
developed model using observable market data for traded Citigroup securities to determine the
expected present value of future cash flows. Key inputs include market yields on U.S. dollar
interest rate swaps and discount rates for default, call, and liquidity risks that are derived from
traded Citigroup securities and modeled pricing relationships.

Assets Measured at Fair Value at December 31, 2010
Dollars in Thousands
                                                Fair Value Measurements Using
                                                                             Significant
                                                       Quoted Prices in        Other                         Significant
                                                      Active Markets for     Observable                     Unobservable
                                                        Identical Assets       Inputs                          Inputs            Total Assets at
                                                           (Level 1)          (Level 2)                       (Level 3)           Fair Value
Assets
                   1
  Cash equivalents                                      $              27,083,918                                             $         27,083,918
Available-for-Sale Debt Securities
                                          2
  Investment in U.S. Treasury obligations                              12,371,268                                                       12,371,268
  Trust preferred securities                                                         $     2,297,818                                     2,297,818
  Trust preferred securities held for UST (Note 16)                                          826,182                                       826,182
Total Assets                                            $              39,455,186 $        3,124,000 $                     0 $          42,579,186
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established
   by the U.S. Bureau of Public Debt.
(2) The investment in U.S. Treasury obligations is measured based on prevailing market yields for federal government entities.


Some of the DIF’s financial assets and liabilities are not recognized at fair value but are recorded
at amounts that approximate fair value due to their short maturities and/or comparability with
current interest rates. Such items include interest receivable on investments, assessments
receivable, other short-term receivables, accounts payable, and other liabilities.




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The net receivables from resolutions primarily include the DIF’s subrogated claim arising from
obligations to insured depositors. The resolution entity assets that will ultimately be used to pay
the corporate subrogated claim are valued using discount rates that include consideration of
market risk. These discounts ultimately affect the DIF’s allowance for loss against the
receivables from resolutions. Therefore, the corporate subrogated claim indirectly includes the
effect of discounting and should not be viewed as being stated in terms of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation of resolution
entity assets (see Note 4), such valuation is not equivalent to the valuation of the corporate claim.
Since the corporate claim is unique, not intended for sale to the private sector, and has no
established market, it is not practicable to estimate a fair value.

The FDIC believes that a sale to the private sector of the corporate claim would require
indeterminate, but substantial, discounts for an interested party to profit from these assets
because of credit and other risks. In addition, the timing of resolution entity payments to the DIF
on the subrogated claim does not necessarily correspond with the timing of collections on
resolution entity assets. Therefore, the effect of discounting used by resolution entities should
not necessarily be viewed as producing an estimate of fair value for the net receivables from
resolutions.

There is no readily available market for guarantees associated with systemic risk (see Note 16).

16. Systemic Risk Transactions

Pursuant to a systemic risk determination, the FDIC established the TLGP for IDIs, designated
affiliates and certain holding companies on October 14, 2008, in an effort to counter the system-
wide crisis in the nation’s financial sector. The program is codified in part 370 of title 12 of the
Code of Federal Regulations.

The FDIC received fees in exchange for guarantees issued under the TLGP and set aside, as
deferred revenue, all fees for potential TLGP losses. At inception of the guarantees, the DIF
recognized a liability for the non-contingent fair value of the obligation the FDIC assumed over
the term of the guarantees. In accordance with FASB ASC 460, Guarantees, this non-contingent
liability was measured at the amount of consideration received in exchange for issuing the
guarantee. As systemic risk expenses are incurred, the DIF will reduce deferred revenue and
recognize an offsetting amount as systemic risk revenue. Not later than the end of the guarantee
period (December 31, 2012), any deferred revenue not absorbed by losses during the guarantee
period will be recognized as revenue to the DIF.

At its inception, the TLGP consisted of two components: 1) the Transaction Account Guarantee
Program (TAG) and 2) the Debt Guarantee Program (DGP). The TAG provided unlimited
coverage for noninterest-bearing transaction accounts held by IDIs on all deposit amounts
exceeding the fully insured limit of $250,000 through December 31, 2010. During its existence,
the FDIC collected TAG fees of $1.2 billion. Total subrogated claims arising from obligations to
depositors with noninterest-bearing transaction accounts were $8.8 billion, with estimated losses
of $2.2 billion.




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The DGP permitted participating entities to issue FDIC-guaranteed senior unsecured debt
through October 31, 2009. The FDIC’s guarantee for all such debt expires on the earliest of the
conversion date for mandatory convertible debt, the stated date of maturity, or December 31,
2012. Through the end of the debt issuance period, the DIF collected $8.3 billion of guarantee
fees and fees of $1.2 billion from participating entities that elected to issue senior unsecured non-
guaranteed debt. The fees are included in the “Cash and investments - restricted - systemic risk”
line item and recognized as “Deferred revenue - systemic risk” on the Balance Sheet.

Additionally, the FDIC holds $800 million (liquidation amount) of Citigroup TruPs on behalf of
the Treasury (and any related interest) as security in the event payments are required to be made
by the DIF for guaranteed debt instruments issued by Citigroup or any of its affiliates under the
TLGP (see Note 5). At December 31, 2011, the fair value of these securities totaled $796
million, and was determined using the valuation methodology described in Note 15 for other
Citigroup TruPs held by the DIF. There is an offsetting liability in the “Deferred revenue -
systemic risk” line item, representing amounts to be transferred to the Treasury or, if necessary,
paid for guaranteed debt instruments issued by Citigroup or its affiliates under the TLGP.
Consequently, there is no impact on the fund balance of the DIF.

The FDIC’s payment obligation under the DGP is triggered by a payment default. In the event
of default, the FDIC will continue to make scheduled principal and interest payments under the
terms of the debt instrument through its maturity, or in the case of mandatory convertible debt,
through the mandatory conversion date. The debtholder or representative must assign to the
FDIC the right to receive any and all distributions on the guaranteed debt from any insolvency
proceeding, including the proceeds of any receivership or bankruptcy estate, to the extent of
payments made under the guarantee.

Since inception of the program, $618.0 billion in total guaranteed debt has been issued. Through
December 31, 2011, the FDIC has paid $35 million in claims for principal and/or interest arising
from the default of guaranteed debt obligations of six debt issuers. Fifty-nine financial entities
(33 IDIs and 26 affiliates and holding companies) had $167.4 billion in guaranteed debt
outstanding at December 31, 2011. This compares to $267.1 billion in guaranteed debt
outstanding at December 31, 2010. Reported outstanding debt is derived from data submitted by
debt issuers.

At December 31, 2011, the DIF recognized a liability of $117 million for debt guarantee
obligations that were paid in early 2012 as scheduled under the terms of the debt instruments.
This liability is presented in the “Debt Guarantee Program liabilities – systemic risk” line item.
The DIF has also recorded a contingent liability of $2 million in the “Contingent liability for
systemic risk” line item for probable additional guaranteed debt obligations. The FDIC believes
that it is also reasonably possible that additional estimated losses of approximately $93 million
could be incurred under the DGP.

The DIF may recognize revenue before the end of the guarantee period for the portion of
guarantee fees that was determined to exceed amounts needed to cover potential losses. During
2011, the DIF recognized revenue of $2.6 billion for a portion of DGP guarantee fees previously
held as systemic risk deferred revenue (see Note 10). The $2.6 billion relates to fees on debt
guarantees that have expired. In addition, the DIF transferred an equal amount of “Cash and



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investments - restricted - systemic risk” to the DIF’s cash and investments. In the unforeseen
event a debt default occurs greater than the remaining amount held as deferred revenue, to the
extent needed, any amount previously recognized as revenue to the DIF will be returned to the
TLGP.

Because of uncertainties surrounding the outlook for the economy and financial markets, there
remains a possibility that the TLGP could incur a loss that would absorb some or all of the
remaining guarantee fees. Therefore, it is appropriate to continue the practice of deferring
revenue recognition for the remaining $5.7 billion of “Deferred revenue - systemic risk” (which
excludes the liability of $925 million to Treasury for the fair value and related interest of the
Citigroup TruPs).




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Systemic Risk Activity at December 31, 2011
Dollars in Thousands
                                Cash and                                         Debt Guarantee
                              investments -    Receivables and     Deferred          Program            Contingent
                               restricted -     other assets -     revenue -       liabilities -         liability -        Revenue/Expenses -
                            systemic risk (1)   systemic risk    systemic risk    systemic risk        systemic risk           systemic risk
Balance at 01-01-11       $        6,646,968 $       2,269,422 $   (9,054,541) $         (29,334) $         (119,993)
TAG fees collected                     41,419          (50,235)         8,816
DGP assessments
collected                                  3                                (3)
Receivable for TAG
fees
Receivable for TAG
accounts at failed
institutions                                          (424,628)
Dividends and
overnight interest on
TruPs held for UST                                     64,029          (64,029)
Fair value adjustment
on TruPs held for
UST                                                    (30,413)         30,413
Estimated losses for
TAG accounts at
failed institutions                                    119,976        (119,976)                                         $            (119,976)
Realized losses not yet
paid                                                                   117,027           (87,693)                                      87,693
Provision for DGP
losses                                                                (147,111)                             117,777                  (117,777)
Guaranteed debt
obligations paid                    (27,433)                            27,433                                                         27,433
Transfer of excess
TLGP funds to the
DIF                               (2,569,579)                        2,569,579
U.S. investment
interest collected                   66,640                            (66,640)
Interest receivable on
U.S. Treasury
obligations                          55,880                            (55,880)
Amortization of U.S.
Treasury obligations                (71,262)                            71,262
Accrued interest
purchased                           (43,983)                            43,983
Unrealized gain on
U.S. Treasury
obligations                             439                               (439)
TLGP operating
expenses                                                                   152                                                         (8,514)
Receipts of
receivership's
dividends                           728,227

Totals                    $       4,827,319 $        1,948,151 $    (6,639,954) $       (117,027) $           (2,216) $              (131,141)
(1) As of December 31, 2011, the fair value of investments in U.S. Treasury obligations held by TLGP was $3.1 billion. An
unrealized gain of $439 thousand is reported in the "Deferred revenue - systemic risk" line item.


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17. Subsequent Events

Subsequent events have been evaluated through April 11, 2012, the date the financial statements
are available to be issued.

2012 Failures through April 11, 2012
Through April 11, 2012, 16 insured institutions failed in 2012 with total losses to the DIF
estimated to be $1.3 billion.




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FSLIC Resolution Fund’s Financial Statements


Balance Sheet



                FSLIC Resolution Fund


                Federal Deposit Insurance Corporation
                FSLIC Resolution Fund Balance Sheet at December 31
                Dollars in Thousands                                                              2011                2010
                Assets
                 Cash and cash equivalents                                                   $      3,533,410    $      3,547,907
                 Receivables from thrift resolutions and other assets, net (Note 3)                    65,163              23,408
                 Receivables from U.S. Treasury for goodwill litigation (Note 4)                      356,455             323,495
                Total Assets                                                                 $      3,955,028    $      3,894,810

                Liabilities
                 Accounts payable and other liabilities                                      $         3,544     $         2,990
                 Contingent liabilities for goodwill litigation (Note 4)                             356,455             323,495
                Total Liabilities                                                                    359,999             326,485
                Resolution Equity (Note 5)
                 Contributed capital                                                              127,875,656         127,792,696
                 Accumulated deficit                                                             (124,280,627)       (124,224,371)
                Total Resolution Equity                                                             3,595,029           3,568,325

                Total Liabilities and Resolution Equity                                      $      3,955,028    $      3,894,810

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




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Statement of Income and Accumulated Deficit




                  FSLIC Resolution Fund


                  Federal Deposit Insurance Corporation
                  FSLIC Resolution Fund Statement of Income and Accumulated Deficit for the Years Ended December 31
                  Dollars in Thousands                                                                          2011                  2010
                  Revenue
                   Interest on U.S. Treasury obligations                                               $               1,361     $         3,876
                   Other revenue                                                                                       3,257               9,393
                  Total Revenue                                                                                        4,618              13,269

                  Expenses and Losses
                   Operating expenses                                                                                   4,660               3,832
                   Provision for losses                                                                                (8,578)               (945)
                   Goodwill litigation expenses (Note 4)                                                               82,960             (53,266)
                   Recovery of tax benefits                                                                           (18,373)            (63,256)
                   Other expenses                                                                                         205               3,070
                  Total Expenses and Losses                                                                            60,874            (110,565)

                  Net (Loss) Income                                                                                   (56,256)           123,834

                  Accumulated Deficit - Beginning                                                             (124,224,371)          (124,348,205)

                  Accumulated Deficit - Ending                                                         $      (124,280,627) $        (124,224,371)

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




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Statement of Cash Flows



                    FSLIC Resolution Fund


                    Federal Deposit Insurance Corporation
                    FSLIC Resolution Fund Statement of Cash Flows for the Years Ended December 31
                    D ll in
                    Dollars i Thousands
                              Th      d                                                                     2011             2010
                    Operating Activities
                    Net (Loss) Income                                                             $            (56,256) $      123,834
                     Adjustments to reconcile net income (loss) to
                       net cash (used) provided by operating activities:
                     Provision for losses                                                                          (8,578)          (945)

                    Change in Operating Assets and Liabilities:
                     (Increase) Decrease in receivables from thrift resolutions and other assets               (33,177)           9,875
                     Increase in accounts payable and other liabilities                                            554               18
                     Increase (Decrease) in contingent liabilities for goodwill litigation                      32,960          (81,917)
                    Net Cash (Used) Provided by Operating Activities                                           (64,497)          50,865

                    Financing Activities
                      Provided by:
                        U.S. Treasury payments for goodwill litigation (Note 4)                                50,000           26,917
                    Net Cash Provided by Financing Activities                                                  50,000           26,917

                    Net (Decrease) Increase in Cash and Cash Equivalents                                       (14,497)          77,782
                    Cash and Cash Equivalents - Beginning                                                    3,547,907        3,470,125
                    Cash and Cash Equivalents - Ending                                             $         3,533,410 $      3,547,907

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




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Notes to the Financial Statements

                      Notes to the Financial Statements
                      FSLIC Resolution Fund
                      December 31, 2011 and 2010

                      1. Legislative History and Operations/Dissolution of the FSLIC Resolution Fund

                      Legislative History
                      The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance
                      agency created by Congress in 1933 to maintain stability and public confidence in the nation’s
                      banking system. Provisions that govern the operations of the FDIC are generally found in the
                      Federal Deposit Insurance (FDI) Act, as amended (12 U.S.C. 1811, et seq). In carrying out the
                      purposes of the FDI Act, the FDIC, as administrator of the Deposit Insurance Fund (DIF),
                      insures the deposits of banks and savings associations (insured depository institutions). In
                      cooperation with other federal and state agencies, the FDIC promotes the safety and soundness
                      of insured depository institutions by identifying, monitoring and addressing risks to the DIF.
                      Commercial banks, savings banks and savings associations (known as “thrifts”) are supervised
                      by either the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve
                      Board. In addition, the FDIC, through administration of the FSLIC Resolution Fund (FRF), is
                      responsible for the sale of remaining assets and satisfaction of liabilities associated with the
                      former Federal Savings and Loan Insurance Corporation (FSLIC) and the former Resolution
                      Trust Corporation (RTC). The DIF and the FRF are maintained separately by the FDIC to
                      support their respective mandates.

                      The U.S. Congress created the FSLIC through the enactment of the National Housing Act of
                      1934. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
                      abolished the insolvent FSLIC, created the FRF, and transferred the assets and liabilities of the
                      FSLIC to the FRF-except those assets and liabilities transferred to the RTC-effective on
                      August 9, 1989. Further, the FIRREA established the Resolution Funding Corporation
                      (REFCORP) to provide part of the initial funds used by the RTC for thrift resolutions.

                      The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC as of December
                      31, 1995. All remaining assets and liabilities of the RTC were transferred to the FRF on
                      January 1, 1996. Today, the FRF consists of two distinct pools of assets and liabilities: one
                      composed of the assets and liabilities of the FSLIC transferred to the FRF upon the dissolution
                      of the FSLIC (FRF-FSLIC), and the other composed of the RTC assets and liabilities (FRF-
                      RTC). The assets of one pool are not available to satisfy obligations of the other.

                      Operations/Dissolution of the FRF
                      The FRF will continue operations until all of its assets are sold or otherwise liquidated and all
                      of its liabilities are satisfied. Any funds remaining in the FRF-FSLIC will be paid to the U.S.
                      Treasury. Any remaining funds of the FRF-RTC will be distributed to the REFCORP to pay
                      the interest on the REFCORP bonds. In addition, the FRF-FSLIC has available until expended
                      $602 million in appropriations to facilitate, if required, efforts to wind up the resolution
                      activity of the FRF-FSLIC.

                      The FDIC has conducted an extensive review and cataloging of FRF's remaining assets and
                      liabilities. Some of the issues and items that remain open in FRF are 1) criminal restitution
                      orders (generally have from 1 to 12 years remaining to enforce); 2) collections of settlements
                      and judgments obtained against officers and directors and other professionals responsible for
                      causing or contributing to thrift losses (generally have from 2 months to 7 years remaining to
                      enforce, unless the judgments are renewed, which will result in significantly longer periods for
                      collection for some judgments); 3) a few assistance agreements entered into by the former

                                                                                                          Page 1 of 7




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FSLIC (FRF could continue to receive or refund overpayments of tax benefits sharing through
2014); 4) goodwill litigation (no final date for resolution has been established; see Note 4); and
5) affordable housing program monitoring (requirements can exceed 25 years). The FRF could
potentially realize recoveries from tax benefits sharing of up to approximately $36 million;
however, any associated recoveries are not reflected in FRF’s financial statements given the
significant uncertainties surrounding the ultimate outcome.

Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in an
orderly and efficient manner. The assets held by receivership entities, and the claims against
them, are accounted for separately from FRF assets and liabilities to ensure that receivership
proceeds are distributed in accordance with applicable laws and regulations. Also, the income
and expenses attributable to receiverships are accounted for as transactions of those
receiverships. Receiverships are billed by the FDIC for services provided on their behalf.

2. Summary of Significant Accounting Policies

General
These financial statements pertain to the financial position, results of operations, and cash
flows of the FRF and are presented in accordance with U.S. generally accepted accounting
principles (GAAP). As permitted by the Federal Accounting Standards Advisory Board’s
Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted
Accounting Principles, Including the Application of Standards Issued by the Financial
Accounting Standards Board, the FDIC prepares financial statements in conformity with
standards promulgated by the Financial Accounting Standards Board (FASB). These
statements do not include reporting for assets and liabilities of receivership entities because
these entities are legally separate and distinct, and the FRF does not have any ownership
interests in them. Periodic and final accountability reports of receivership entities are
furnished to courts, supervisory authorities, and others upon request.

Use of Estimates
Management makes estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these estimates. Where
it is reasonably possible that changes in estimates will cause a material change in the financial
statements in the near term, the nature and extent of such changes in estimates have been
disclosed. The more significant estimates include the allowance for losses on receivables from
thrift resolutions and the estimated losses for litigation.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments consisting primarily of U.S.
Treasury Overnight Certificates.

Provision for Losses
The provision for losses represents the change in the estimation of the allowance for losses
related to the receivables from thrift resolutions and other assets.

Related Parties
The nature of related parties and a description of related party transactions are discussed in


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                                                             FSLIC Resolution Fund


Note 1 and disclosed throughout the financial statements and footnotes.

Disclosure about Recent Relevant Accounting Pronouncements
Recent accounting pronouncements have been deemed to be not applicable or material to the
financial statements as presented.

3. Receivables From Thrift Resolutions and Other Assets, Net

Receivables From Thrift Resolutions
The receivables from thrift resolutions include payments made by the FRF to cover obligations
to insured depositors, advances to receiverships for working capital, and administrative
expenses paid on behalf of receiverships. Any related allowance for loss represents the
difference between the funds advanced and/or obligations incurred and the expected
repayment. Assets held by the FDIC in its receivership capacity for the former RTC are a
significant source of repayment of the FRF’s receivables from thrift resolutions. As of
December 31, 2011, five of the 850 FRF receiverships remain active until their goodwill
litigation or liability-related impediments are resolved. During 2011, the receivables from
closed thrifts and related allowance for losses decreased by $4.0 billion due to three
receiverships that were terminated during the year.

The FRF receiverships held assets with a book value of $15 million and $18 million as of
December 31, 2011 and 2010, respectively (which primarily consist of cash, investments, and
miscellaneous receivables). At December 31, 2011, $12 million of the $15 million in assets in
the FRF receiverships was cash held for non-FRF, third party creditors.

Other Assets
Other assets include credit enhancement reserves valued at $14 million and $17 million as of
December 31, 2011 and 2010, respectively. The credit enhancement reserves resulted from
swap transactions where the former RTC received mortgage-backed securities in exchange for
single-family mortgage loans. The RTC supplied credit enhancement reserves for the
mortgage loans in the form of cash collateral to cover future credit losses over the remaining
life of the loans. These cash reserves, which may cover future credit losses through 2020, are
valued by estimating credit losses on the underlying loan portfolio and then discounting cash
flow projections using market-based rates.

Most of the remaining amount in other assets is a receivable of $44 million for recoveries from
tax benefit sharing as of December 31, 2011. Recoveries from tax benefit sharing represents
receipts based on the realization of tax savings from entities that either entered into assistance
agreements with the former FSLIC, or have subsequently purchased financial institutions that
had prior agreements with the FSLIC. In 2011, the FRF refunded $26 million in tax benefit
sharing recoveries that were received in a prior year.




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                                                               FSLIC Resolution Fund


Receivables From Thrift Resolutions and Other Assets, Net at December 31
Dollars in Thousands
                                                                             2011             2010
Receivables from closed thrifts                                        $    1,800,417 $      5,763,949
Allowance for losses                                                       (1,797,154)      (5,762,186)
Receivables from Thrift Resolutions, Net                                        3,263            1,763
Other assets                                                                   61,900           21,645
Total                                                                  $       65,163 $         23,408


4. Contingent Liabilities for:

Goodwill Litigation
In United States v. Winstar Corp., 518 U.S. 839 (1996), the Supreme Court held that when it
became impossible following the enactment of FIRREA in 1989 for the federal government to
perform certain agreements to count goodwill toward regulatory capital, the plaintiffs were
entitled to recover damages from the United States.

On July 22, 1998, the Department of Justice’s (DOJ's) Office of Legal Counsel (OLC)
concluded that the FRF is legally available to satisfy all judgments and settlements in the
goodwill litigation involving supervisory action or assistance agreements. OLC determined
that nonperformance of these agreements was a contingent liability that was transferred to the
FRF on August 9, 1989, upon the dissolution of the FSLIC. On July 23, 1998, the U.S.
Treasury determined, based on OLC’s opinion, that the FRF is the appropriate source of funds
for payments of any such judgments and settlements. The FDIC General Counsel concluded
that, as liabilities transferred on August 9, 1989, these contingent liabilities for future
nonperformance of prior agreements with respect to supervisory goodwill were transferred to
the FRF-FSLIC, which is that portion of the FRF encompassing the obligations of the former
FSLIC. The FRF-RTC, which encompasses the obligations of the former RTC and was
created upon the termination of the RTC on December 31, 1995, is not available to pay any
settlements or judgments arising out of the goodwill litigation.

The FRF can draw from an appropriation provided by Section 110 of the Department of Justice
Appropriations Act, 2000 (Public Law 106-113, Appendix A, Title I, 113 Stat. 1501A-3,
1501A-20) such sums as may be necessary for the payment of judgments and compromise
settlements in the goodwill litigation. This appropriation is to remain available until expended.
Because an appropriation is available to pay such judgments and settlements, any estimated
liability for goodwill litigation should have a corresponding receivable from the U.S. Treasury
and therefore have no net impact on the financial condition of the FRF-FSLIC.

For the year ended December 31, 2011, the FRF paid $50 million as a result of a settlement in
one goodwill case compared to $27 million for four goodwill cases in 2010. The FRF received
appropriations from the U.S. Treasury to fund these payments.

As of December 31, 2011, five remaining cases are pending against the United States based on
alleged breaches of the agreements stated above. Of the five remaining cases, a contingent
liability and an offsetting receivable of $356 million and $323 million was recorded for one
case as of December 31, 2011 and 2010, respectively. This case is currently before the lower
court pending remand following appeal and is still considered active.


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                                                             FSLIC Resolution Fund


The FDIC believes that it is reasonably possible that the FRF could incur additional estimated
losses for two of the five remaining cases of up to $268 million. The plaintiff in one case was
awarded $205 million by the Court of Federal Claims, and this case is currently on appeal.
The remaining $63 million is additional damages contended by the plaintiff to the $356 million
contingent liability for the one case mentioned in the previous paragraph. For the three
remaining active cases, the FDIC is unable to estimate a range of loss to the FRF-FSLIC. No
awards were given to the plaintiffs in these three cases by the appellate courts. Two cases are
currently on appeal, and the other case is fully adjudicated but the Court of Federal Claims is
considering awarding litigation costs to the United States.

In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by the DOJ, the
entity that defends these lawsuits against the United States, based on a Memorandum of
Understanding (MOU) dated October 2, 1998, between the FDIC and the DOJ. FRF-FSLIC
pays in advance the estimated goodwill litigation expenses. Any unused funds are carried over
and applied toward the next fiscal year (FY) charges. In 2011, FRF-FSLIC did not provide any
additional funding to the DOJ because the unused funds from FY 2011 were sufficient to cover
estimated FY 2012 expenses of $2.6 million.

Guarini Litigation
Paralleling the goodwill cases were similar cases alleging that the government breached
agreements regarding tax benefits associated with certain FSLIC-assisted acquisitions. These
agreements allegedly contained the promise of tax deductions for losses incurred on the sale of
certain thrift assets purchased by plaintiffs from the FSLIC, even though the FSLIC provided
the plaintiffs with tax-exempt reimbursement. A provision in the Omnibus Budget
Reconciliation Act of 1993 (popularly referred to as the “Guarini legislation”) eliminated the
tax deductions for these losses.

All eight of the original Guarini cases have been settled. However, a case settled in 2006
further obligates the FRF-FSLIC as a guarantor for all tax liabilities in the event the settlement
amount is determined by tax authorities to be taxable. The maximum potential exposure under
this guarantee is approximately $81 million. However, the FDIC believes that it is very
unlikely the settlement will be subject to taxation. More definitive information may be
available during 2012, after the Internal Revenue Service (IRS) completes its Large Case
Program audit on the affected entity’s 2006 returns; this audit remains ongoing. As of
December 31, 2011, no liability has been recorded. The FRF does not expect to fund any
payment under this guarantee.

Representations and Warranties
As part of the RTC’s efforts to maximize the return from the sale of assets from thrift
resolutions, representations and warranties, and guarantees were offered on certain loan sales.
The majority of loans subject to these agreements have been paid off, refinanced, or the period
for filing claims has expired. The FDIC’s estimate of maximum potential exposure to the FRF
is zero. No claims in connection with representations and warranties have been asserted since
1998 on the remaining open agreements. Because of the age of the remaining portfolio and
lack of claim activity, the FDIC does not expect new claims to be asserted in the future.
Consequently, the financial statements at December 31, 2011 and 2010, do not include a
liability for these agreements.



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                                                                     FSLIC Resolution Fund


5. Resolution Equity

As stated in the Legislative History section of Note 1, the FRF is comprised of two distinct
pools: the FRF-FSLIC and the FRF-RTC. The FRF-FSLIC consists of the assets and liabilities
of the former FSLIC. The FRF-RTC consists of the assets and liabilities of the former RTC.
Pursuant to legal restrictions, the two pools are maintained separately and the assets of one
pool are not available to satisfy obligations of the other.

The following table shows the contributed capital, accumulated deficit, and resulting resolution
equity for each pool.

Resolution Equity at December 31, 2011
Dollars in Thousands
                                                                                                            FRF
                                                                     FRF-FSLIC          FRF-RTC         Consolidated
Contributed capital - beginning                                  $     46,043,359 $      81,749,337 $     127,792,696
Add: U.S. Treasury payments/receivable for goodwill litigation             82,960                 0            82,960
Contributed capital - ending                                           46,126,319        81,749,337       127,875,656
Accumulated deficit                                                   (42,702,916)      (81,577,711)     (124,280,627)
Total                                                            $      3,423,403 $         171,626 $        3,595,029

Contributed Capital
The FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion from the U.S.
Treasury, respectively, to fund losses from thrift resolutions prior to July 1, 1995.
Additionally, the FRF-FSLIC issued $670 million in capital certificates to the Financing
Corporation (a mixed-ownership government corporation established to function solely as a
financing vehicle for the FSLIC) and the RTC issued $31.3 billion of these instruments to the
REFCORP. FIRREA prohibited the payment of dividends on any of these capital certificates.

Through December 31, 2011, the FRF-RTC has returned $4.6 billion to the U.S. Treasury and
made payments of $5.0 billion to the REFCORP. These actions serve to reduce contributed
capital. The most recent payment to the REFCORP was in January of 2008 for $225 million.

FRF-FSLIC received $50 million in U.S. Treasury payments for goodwill litigation in 2011.
Furthermore, $356 million and $323 million were accrued for as receivables at year-end 2011
and 2010, respectively. The effect of this activity was an increase in contributed capital of $83
million in 2011.

Accumulated Deficit
The accumulated deficit represents the cumulative excess of expenses and losses over revenue
for activity related to the FRF-FSLIC and the FRF-RTC. Approximately $29.8 billion and
$87.9 billion were brought forward from the former FSLIC and the former RTC on August 9,
1989, and January 1, 1996, respectively. The FRF-FSLIC accumulated deficit has increased
by $12.9 billion, whereas the FRF-RTC accumulated deficit has decreased by $6.3 billion,
since their dissolution dates.




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6. Disclosures About the Fair Value of Financial Instruments

The financial assets recognized and measured at fair value on a recurring basis at each
reporting date are cash equivalents and credit enhancement reserves. The following table
presents the FRF’s financial assets measured at fair value as of December 31, 2011 and 2010.

Assets Measured at Fair Value at December 31, 2011
Dollars in Thousands
                                                     Fair Value Measurements Using
                                                             Quoted Prices in
                                                            Active Markets for        Significant Other           Significant
                                                              Identical Assets       Observable Inputs           Unobservable          Total Assets at
                                                                  (Level 1)               (Level 2)            Inputs (Level 3)          Fair Value
Assets
Cash equivalents1                                        $           3,377,203 $                           $                        $        3,377,203
Credit enhancement reserves2                                                                      14,431                                        14,431
Total Assets                                             $           3,377,203 $                  14,431 $                          $        3,391,634
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the
   U.S. Bureau of Public Debt. Cash equivalents are included in the "Cash and cash equivalents" line item.
(2) Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).


Assets Measured at Fair Value at December 31, 2010
Dollars in Thousands
                                              Fair Value Measurements Using
                                                     Quoted Prices in
                                                    Active Markets for    Significant Other                     Significant
                                                      Identical Assets    Observable Inputs                    Unobservable          Total Assets at
                                                         (Level 1)            (Level 2)                       Inputs (Level 3)        Fair Value
Assets
Cash equivalents1                                     $             3,397,440 $                           $                        $         3,397,440
Credit enhancement reserves2                                                                     17,378                                         17,378
Total Assets                                          $             3,397,440 $                  17,378 $                           $        3,414,818
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S.
   Bureau of Public Debt. Cash equivalents are included in the "Cash and cash equivalents" line item.
(2) Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).


Some of the FRF’s financial assets and liabilities are not recognized at fair value but are
recorded at amounts that approximate fair value due to their short maturities and/or
comparability with current interest rates. Such items include other short-term receivables and
accounts payable and other liabilities.

The net receivable from thrift resolutions is influenced by the underlying valuation of
receivership assets. This corporate receivable is unique and the estimate presented is not
necessarily indicative of the amount that could be realized in a sale to the private sector. Such
a sale would require indeterminate, but substantial, discounts for an interested party to profit
from these assets because of credit and other risks. Consequently, it is not practicable to
estimate its fair value.




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Appendix I

Comments from the Federal Deposit                                        Appendx
                                                                               ies




Insurance Corporation                                                     Append
                                                                               x
                                                                               Ii




              Page 50     GAO-12-416 FDIC Funds’ Financial Statement Audit
           Appendix I
           Comments from the Federal Deposit
           Insurance Corporation




(196243)   Page 51                             GAO-12-416 FDIC Funds’ Financial Statement Audit
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