Failed Thrifts: Better Controls Needed Over Furniture, Fixtures, and Equipment

Published by the Government Accountability Office on 1990-05-25.

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

May 1Y!N)
            FAILED THRIFTS
            Better Controls
            Needed Over
            Furniture, Fixtures,
            and Equipment

United States
General Accounting  Office
Washington, D.C. 20648

General    Government        Division


May 26,199O

The Honorable David Pryor
Chairman, Subcommittee on
  Federal Services,
  Post Office, and Civil Service
Committee on Governmental Affairs
United States Senate

Dear Mr. Chairman:

In June 1989, we reported to you on improprieties in the areas of con-
tracting and property disposition at the Federal Savings and Loan Insur-
ance Corporation’s (FSLIC)FirstSouth Receivership in Little Rock,
Arkansas.’ Subsequently, you asked us to determine whether problems
that we found at FirstSouth were commonplace and existed at other
receiverships. Recognizing changes that were occurring in receivership
operations, we agreed with the Subcommittee to assess FSLIC’S disposi-
tion of furniture, fixtures, and equipment (FF&E) for thrift receiverships
in the Southwest Plan” and additional receiverships’ FF&E taken by FSLIC
to furnish its Central Region in Dallas, Texas.

Our primary objective was to determine whether FSLIC disposed of FF&E
in the most efficient and effective manner. However, as requested we
limited our work primarily to FSLIC’S Central Region. Appendix I con-
tains more detailed information concerning our objectives, scope, and

Since we reported on FirstSouth, FSLIC reorganized its regional opera-
tions, including moving the freestanding receiverships, which had been
operating at the sites of the failed institutions, into the FSLIC regional
offices and assigning receivership responsibilities on a functional basis,
i.e., employees were no longer assigned exclusively to one receivership
but rather performed the same function across receiverships.

Subsequently, Congress enacted the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), which abolished FSLIC
and created the Resolution Trust Corporation (RTC) to handle the thrift
failures from January 1, 1989, through August 9, 1992. Failures before

‘Failed Thrifts: Allegations at FirstSouth Receivership in Little Rock, Arkansas (GAO/GGD-89-98,
June 16,1989).
‘Specific program developed by the Federal Home I&an Bank Board to deal with the high concentra-
tion of insolvent thrifts in Texas and four neighboring states.

Page 1                                      GAO/GGD-9087      Furniture,   Fitures,   and Equipment

                   January 1989 became the responsibility of the Federal Deposit Insur-
                   ance Corporation (FDIC).

                   E’SIX was, and now FDIC and RTC are, dealing with billions of dollars in
Results in Brief   assets from hundreds of failed thrifts, and there is much work to be
                   done in managing and liquidating these failed institutions. All parts of
                   the process to liquidate the thrifts, regardless of their magnitude, should
                   be done well. One of those parts is disposing of FF&E, which represents a
                   relatively small proportion of the failed thrifts’ total assets.

                   While ~LIC had many responsibilities in managing and liquidating the
                   assets of the failed thrifts, it had not fulfilled its responsibility for the
                   management and liquidation of FF&E. Planning for the disposal of FF&E
                   from the Southwest Plan valued at about $4 million was not done until a
                   year after acquisition of the assets had begun, and the planning that
                   was done was incomplete. And contrary to applicable procedures, WIJC
                   contracted noncompetitively for several services related to the FF&E.
                   After deducting expenses, FSLIC received about $57,000 on the sale of
                   Southwest Plan FF&E appraised at about $3.3 million, suggesting that it
                   may not. have maximized revenue or minimized expenses. Further, FSIJC
                   did not have adequate internal controls over its W&E inventory and did
                   not pay receiverships for F'F&E taken to furnish its regional offices. FDIC
                   has almost completed compensating the receiverships, but neither FDIC
                   nor RTC have documented specific organizationwide guidance for dispos-
                   ing of FF&E.

                   Congress enacted FIHREA on August 9,1989, to deal with the savings and
Background         loan crisis and reform regulation of the industry. The act abolished the
                   Federal Home Loan Bank Board (FHLBB), the thrifts’ regulator, and
                   placed its regulatory functions in the newly created Office of Thrift
                   Supervision. The act created a new agency, RTC, to resolve institutions
                   placed into receivership or conservatorship between January 1, 1989,
                   and August 9, 1992. It also created a new insurance fund to resolve
                   problem institutions after 1992. The assets, liabilities, and obligations of
                   E‘SLICwere transferred to a new fund, called the FSLIC Resolution Fund.
                   That fund is administered by FDIC.

                   Before the new law, the FHLBB, governed by a chairman and two mem-
                   bers, handled thrift failures through FSLIC, a government corporation
                   headed by an executive director. When a thrift became insolvent, the
                   FIILBB would pass a resolution declaring the thrift insolvent, take it over,

                   Page 2                            GAO/GGD-SO-87   Jk-uiture,   Fixtures,   and Equipment
*   B-239171

    form a receivership, and appoint FSLIC as receiver. FSLICwould then try
    to sell all or part of the failed thrift. Assets and liabilities not trans-
    ferred to an acquirer were generally liquidated by FSLIC as receiver for
    the failed thrift. Receiverships, separate and distinct legal entities, were
    supervised through FSLIC'S Operations and Liquidations Division and,
    subsequently, FDIC'S Division of Liquidation.

    Under general principles of law applicable to receivers, FSLIC was
    required to act in a fiduciary capacity by managing and liquidating the
    receivership assets in an orderly manner and maximizing the return on
    their sale. Proceeds from the sale of receivership assets would be used to
    pay the claims of the institution’s creditors. The FSLIC Insurance Fund
    would be one of these creditors, but it generally would have no absolute
    priority over the others.

    According to FSLIC'S Receivership Operation Manual, its Operations and
    Liquidations Division’s primary role was to maximize the recovery of
    funds for the benefit of depositors and creditors of failed institutions.
    Maximizing recovery was achieved through asset management, restruc-
    turing of troubled loans within the institution, and subsequent liquida-
    tion of assets.

    Although the bulk of a receivership’s assets are loans and real estate,
    other assets, including FF&E, must be disposed. According to the Receiv-
    ership Manual, FSLIC had the duty not only to maximize the return on
    their sale, but to dispose of them in a timely and efficient manner.

    Throughout most of the 198Os, FSLIC usually operated its receiverships
    as separate entities, often on the premises of the failed thrifts. Receiver-
    ships were staffed by nonfederal employees-a managing officer and
    support staff from the defaulted institution selected by FSLIC. In early
    1989, FSLIC began consolidating the receiverships into its regional offices
    and eliminating the freestanding receiverships.

    Separate and distinct, the FHLBB implemented the Southwest Plan and
    placed 101 thrifts into receivership. FHLBB completed the transactions
    involving the thrifts between May and December 1988. The acquirers
    purchased approximately $18 million of FFLE from these institutions,
    with the remainder (approximately $4 million) becoming the responsi-
    bility of FSLIC as receiver.

    Page 3                            GAO/GGD-90437   Furniture,   Fixtures,   and Equipment
                       B259171                                                                                          ,

                       Before FSLIC’S Central Region was taken over by FDIC in August 1989, it
                       was responsible for 20 non-Southwest Plan receiverships with $3.1 bil-
                       lion in total assets. As of April 12, 1990, according to FDIC and RTC offi-
                       cials, nationwide FDIC had 99 FSLIC receiverships with $10.4 billion in
                       total assets, and RTC had 62 receiverships with $12.1 billion in total
                       assets. We were unable to obtain the total amount of FF&E controlled by
                       FDIC and RTC because, according to an official responsible for reporting
                       statistics for the two agencies, those agencies do not separate FF&E from
                       “other assets”:’ at the national level. However, it is clear that FF&E repre-
                       sents a relatively small portion of the receiverships’ total assets.

                       As of August 9,1989, FDIC absorbed the responsibilities for the manage-
                       ment of FSLIC’S receiverships. Throughout this report, we will refer to
                       individuals in their capacity as FSLIC employees when their actions
                       occurred before FSLIC was abolished, even though we obtained the infor-
                       mation after some of them became FDIC employees.

                       WIJC did not adequately plan in a timely fashion for the disposition of
FSLIC Did Not Take     Southwest Plan FF&E. As a result, FSLIC may not have maximized revenue
Appropriate Steps to   or minimized costs for the receiverships. It was unclear who was respon-
Minimize Costs or      sible for the FF&E, headquarters or the Central Region. Planning for the
                       disposition of FF&E was not done until 1 year after the first thrift was
Maximize Revenue on    closed, and the planning that was done did not compare the cost of keep-
Southwest Plan FF&E    ing the inventories with expected revenue. Also, the plan did not con-
                       sider alternatives to maximize revenue. Selection of contractors on a
                       noncompetitive basis did not insure that services were acquired at the
                       lowest cost. And FSLIC Central Region officials failed to maintain ade-
                       quate separation of duties for FF&E inventory control, raising questions
                       as to whether F'F&E was adequately safeguarded.

Minimal Proceedson     Through sales to FSLIC, direct sales to the public, and auctions, FSLIC’S
Southwest Plan FF&E    Central Region earned $2,471,483 in revenue from the sale of Southwest
                       Plan FF&E. The FF&E was initially appraised at $3.3 million.4 However, as
                       table 1 illustrates, expenses almost equaled revenue.

                       “Includes FF&E, company automobiles, collateral on loans in default, and repossessed assets.
                       4Additional FF&E valued at $907,915 remained at the failed thrifts to be purchased by organizations
                       that had agreed to pay the appraised value.

                       Page 4                                       GAO/GGD-go-87    Furniture,   Fixtures, and Equipment
 .                                       B-239171

Table 1: Net Proceeds on FSLIC’e
Liquidation of FF&E From the Southwest
                                         Total revenue                                                                                 $2,471,483
                                         Total exDenses                                                                               -2,414,309
                                         Net proceeds                                                                                     $57,174
                                         Source: Southwest Plan FSLIC financial data obtained from the Dallas m&it&Office,            FDIC.

                                         The largest portion of the expenses, $1,350,167, was for warehousing
                                         FF&E from June 1988 to December 31,1989. Warehousing was expensive
                                         because FSLIC, operating without a disposition plan, rented a large
                                         amount of warehouse space to hold the FF&E while it attempted to dis-
                                         pose of it through direct sales to the public. The FF&E began filtering into
                                         the warehouse about 12 months before there was a plan, and an addi-
                                         tional 2 months passed before the first auction took place. Appendix II
                                         includes more detailed information about revenue and expenses related
                                         to the Southwest Plan FF&E.

‘I------“--J -__- Ix
   Jrkimctlv and  --.Jdequate            FSLIC'S Receivership Operations Manual in use during this period
Planning                                 required FSLIC to prepare a plan for the disposition of any asset, includ-
                                         ing FFSZE,as expeditiously as possible. Formal plans had to be approved
                                         as-part of FSLIC'S process authorizing the disposition of assets.

                                         On the basis of interviews with FSLIC officials, it is unclear whether the
                                         Central Region or headquarters was primarily responsible for handling
                                         the disposition of the Southwest Plan FF&E. However, it is clear that,
                                         according to FSLIC policy, the planning was to be done expeditiously.
                                         Also, the planning that was ultimately done did not consider alterna-
                                         tives to maximize revenue.

Confusion About Who Was in               Neither FSLIC headquarters nor Central Region officials could identify a
Charge                                   specific individual who was responsible for handling the Southwest Plan
                                         FF&E. Instructions in FSLIC'S Pre-Takeover Manual show that takeovers
                                         of failed thrifts were normally a coordinated effort between FSLIC head-
                                         quarters’ Operations and Liquidations Division and the regional office
                                         where the takeover occurred.

                                         However, the former Regional Director for the Central Region told us
                                         that Southwest Plan activities were not a normal case and were handled
                                         with a great deal of headquarters direction. He told us that instructions
                                         for handling the Southwest Plan receiverships and their IT&E came from
                                         FSLIC headquarters officials.

                                         Page 6                                        GAO/GGD-90-37      Furniture,   Fixtures,   and Equipment
                     B-239171                                                                              ,.

                     In addition, the former Regional Director said that the Central Region’s
                     Manager for Administrative Services/Miscellaneous Assets, who was
                     responsible for contracting many of the services used for the Southwest
                     Plan FF&E, reported directly to FSLIC headquarters officials on Southwest
                     Plan matters. And the contractor who performed the majority of the ser-
                     vices involving the Southwest Plan FT&E told us that he was initially
                     engaged by an FSLIC headquarters Receivership Representative who
                     coordinated thrift takeovers in the Southwest Plan for FSLIC headquar-
                     ters’ Operations and Liquidations Division.

                     The Receivership Representative said she was not aware of any FSLIC
                     headquarters plan for liquidation of the Southwest Plan FF&E. FSLIC'S
                     Central Region Acting Director and Central Region Deputy Director for
                     Finance said that FSLIC did not have a long-term plan for disposition of
                     Southwest Plan FF&E. Central Region officials said its liquidation service
                     contractor simply began selling the FF&E out of a rented warehouse in

Untimely Planning    The Central Region’s formal plan for the sale of Southwest Plan FF&E,
                     through a series of auctions, was approved in the region by the Central
                     Regional Asset Review Committee on May 10, 1989, and at the national
                     level by the Central National Review Committee on May 23, 1989. Since
                     the first takeover of a thrift in the Southwest Plan occurred on May 13,
                     1988, 1 year had passed before a plan for liquidation was formalized
                     and approved.

InadequatePlanning   The plan for the auctions did not go beyond the mechanics, and there
                     was little attempt to project expenses. For example, the plan did not
                     mention that about 2 months earlier, on March 3, 1989, FSLIC entered
                     into a contract, cancellable on 30 days notice, for warehousing South-
                     west Plan FF&E, with a projected annual budget of $1,363,481. The plan
                     stated that the Central Region had “FF&E valued at approximately
                     $900,000.” At the time of the plan, the projected expenses for ware-
                     housing exceeded the estimated value of the FF&E inventory.

                     The plan also noted that “The auction process is the only feasible means
                     of liquidating the type of FF&E acquired through Savings and Loan fail-
                     ures.” The plan did not present evidence that auctions were the only
                     feasible means of liquidation and discussed only the failed attempt to
                     sell FF&E out of the rented warehouse in Houston. Sales out of the ware-
                     house between October 1988 and February 1989 totaled $322,198, or
                     about 13 percent of the total sales for Southwest Plan IT&E.

                     Page 6                           GAO/GGD-90-87   Furniture,   Fixtures,   and Equipment

                 The owner of the company that inventoried and appraised the FF&E also
                 mailed brochures to prospective buyers advertising the FFCE for sale out
                 of the Houston warehouse. Also, with FSLIC'S approval, he opened the
                 warehouse to the public daily and attempted to sell the FF&E.

                 The Central Region’s Manager for the Receivership Activities Depart-
                 ment said that the auction process was developed because FSLICofficials
                 knew that FDIC would be assuming FSLIC’Sresponsibilities, and FDIC used
                 auctions to liquidate items. He said Central Region officials wanted to
                 operate similarly to Fmc.

                 It appears to us that at least two alternatives, used by FDIC'S field
                 offices, might have been feasible and should have been given early con-
                 sideration by FSLIC. One possible approach would have been to contract
                 with an auction company to move the FF&E to the company’s storage for
                 liquidation within 60 days. This would have eliminated lengthy storage
                 costs and high expenses for moving FF&E to warehouses rented by FSLIC.
                 Another alternative would have been to allow liquidation companies to
                 bid on the FF&E at each original location. The high bidder would have
                 had the responsibility for the removal of all the FF&E from the premises
                 within a few days. This option could potentially have taken FSLIC out of
                 the FF&E business in a very short time at each location,

Noncompetitive   Contracting procedures used during this period by F'SLIC'SCentral Region
Contracting      required all services not required on an emergency basis to be obtained
                 on a competitive basis. We found that many services related to South-
                 west Plan FF&E were acquired on a noncompetitive basis. And none of
                 the information in the contract files we reviewed revealed that an emer-
                 gency existed or that the contracting was done under emergency

                 ISLE did not issue uniform agencywide contracting procedures for its
                 regions and receiverships until May 1, 1989. Before that time, several
                 regions had developed procedures for awarding contracts. The Central
                 Region had adopted procedures developed by the Western Region.

                 The Central Region’s Contracting Manager pointed out in a memoran-
                 dum to the acting Regional Director, dated December 28, 1988, that FSLIC
                 had paid four firms $1,02 1,127 for communications equipment, inven-
                 tory and appraisal, moving, and warehousing on a noncompetitive basis.
                 These four firms had the same ownership. As of December 31,1989, the

                 Page 7                          GAO/GGD99-97                  Furniture,   Fixtures,   and Equipment

                                                    ;,; ‘jl, i.   .“‘a.‘, ,I                 .

                          Central Region had paid the firms a total of $2,064,177, which included
                          $1,360,157 for warehousing FF&E from the Southwest Plan.

                          The Central Region’s Manager for Administrative Services/Miscellane-
                          ous Assets, who was responsible for acquiring these services, is no
                          longer employed by FSLIC'S successor, FDIC, and we could not locate him.
                          Therefore, we could not determine the circumstances surrounding con-
                          tracting for these services. However, the Central Region’s Manager for
                          the Receivership Activities Department said that the Central Region
                          allowed one of these four firms to provide warehousing in Dallas on a
                          noncompetitive basis because this contractor had previous experience
                          providing warehousing in Houston for the Central Region. The receiver-
                          ship manager also said that no consideration was given to any other

No Separation of Duties   Widely accepted standards for internal controls require the separation
                          of key duties in transactions to minimize the risk of 10~s.~To reduce the
                          risk of error, waste, or wrongful acts and to reduce the risk of such
                          problems going undetected, no one individual or company should control
                          all key aspects of a transaction or event.

                          The Central Region’s Manager for the Receivership Activities Depart-
                          ment and the Senior Accountant who supervised accounting for the
                          Southwest Plan FF&E told us that the four firms discussed above had
                          inventoried, appraised, moved, stored, maintained, and sold items of
                          Southwest Plan FF&E out of the warehouses. Again, the Manager for
                          Administrative Services/Miscellaneous Assets, who was responsible for
                          the concentration of duties in these firms, is no longer employed at the
                          Central Region, and we could not locate him to find out why this
                          arrangement was permitted. Central Region officials told us that the
                          FF&E had been handled without appropriate controls because the Central
                          Region did not have procedures to carry out these activities. Addition-
                          ally, they said a large volume of FF&Ehad to be handled in a short period
                          of time.

                          Although we have no evidence nor are we suggesting that any inventory
                          was stolen or that abuse occurred, the arrangement that ~LIC entered
                          into with several companies owned by one individual handling all

                          “Accounting Series: Standards for Internal Controls in the Federal Government, United States General
                          Accounting Office, 1983.

                          Page 8                                      GAO/GGD-90-37     Furniture,   Fixtures,   and Equipment

                       aspects of key transactions was not consistent with good internal con-
                       trol standards. For example, having companies owned by the same per-
                       son inventory, appraise, and move the FF&E, offered an opportunity to
                       simply not include certain items of FF&E in the inventory lists and move
                       that FF&E to the owner’s warehouse. Further, with the same companies
                       inventorying, appraising, moving, and selling the FF&E, the individual
                       could have discounted the value of specific FF&E items included in the
                       inventory by underappraising them and then through “dummy buyers”
                       simply could purchase the discounted items to sell for his/her own use.

                       FSLIC'S Central Regional Office was not compensating receiverships for
FSLIC Has Not F’ully   FF&E taken by FSLIC and had no apparent plans to do so. Without com-
Reimbursed Its         pensation, the value of the W&E could not be included in the proceeds
Receiverships for      available to pay the claims of the thrifts’ creditors. After we brought
                       this matter to the attention of FSLIC regional officials, we later deter-
FF&E                   mined, on the basis of FDIC calculations, that FSLIC should have compen-
                       sated receiverships located in the Central Region $1.9 million for FF&E
                       used to furnish regional offices. FDIC has compensated the receiverships.
                       FSLIC'S other two regional offices had also been using receivership FF&E
                       and not compensating them for its use. FDIC has paid $548,585 to receiv-
                       erships in the Eastern Region and $6,870 to receiverships in the Western
                       Region. FDIC is in the process of completing the compensation to the
                       receiverships in the Western Region.

                       In February 1989, FSLIC revised its Receivership Manual to emphasize
                       that FSLIC policy of maximizing return applied not only to its larger
                       assets, but also to other assets, including FF&E, and to require the dispo-
                       sition of W&E be done in a timely and efficient manner. According to
                       FSLIC policy, a receivership must be compensated for FF&E used by a
                       regional office, but a freestanding receivership could use the FF&E and
                       liquidate it upon termination.

                       In the past, FSLIC'S Central Region was compensating the receiverships
                       for FF&E used in its office but discontinued the practice in 1986 because
                       physical tracking of the furniture was time consuming. The Deputy
                       Director for Finance for the FSLIC Central Region told us that in late 1986
                       regional officials reviewed the administrative cost of tracking the W&E
                       for the purpose of compensation and decided that the practice was not
                       cost effective. He also said, however, that during this period there was
                       no lack of accounting personnel to maintain the records to compensate
                       the receiverships, Regional officials simply decided to halt the practice.

                       Page 9                            GAO/GGD99-87   Purniture,   Fixtures,   and Equipment

After our initial inquiries into the compensation issue the Central
Region’s Senior Accountant for Financial Reporting attempted to deter-
mine the amount of compensation owed to the receiverships, but com-
plete records for each receivership were not available. The Central
Region had not followed procedures to properly account for FF&E once it
left the failed institutions. FDIC later determined that the most reasona-
ble basis on which to compensate the receiverships was to distribute the
proceeds on a percentage basis according to the book value of total FF&E
at each receivership at the time of takeover.

FSLIC initiallyhad contracted for each failed thrift that went into receiv-
ership to be inventoried and appraised. These initial inventories identi-
fied assets, including FF&E, by receivership and noted a value for each
item. However, during movement of the FF&E from FSLIC'S warehouse to
the Central Region’s offices, the moving consultant hired by the Central
Region’s Manager for Administrative Services instructed moving com-
pany personnel to remove inventory identification tags.”

Further, there was no system for maintaining current locations of IT&E
items after the inventory was done. According to Central Region offi-
cials, due to movement of both personnel and items of FF&E within the
regional offices and the failure of Central Region personnel to update
inventories, the Region lost its ability to associate the value of IT&E
items with the correct receiverships.

In November 1989, FDIC headquarters asked its consolidated offices,
which were formerly FSLIC regional offices, to identify for payment FF&E
taken from the receiverships. That same month, FDIC Division of Liqui-
dation’s Dallas Region contracted for a new inventory of IT&E to deter-
mine the total amount and value of receiverships’ FF&E that was being
used. On the basis of this inventory and appraisal, and data from FDIC
Division of Liquidation’s Dallas Region, we found that the receiverships
in FSLIC'S Central Region should be compensated $1.9 million. Non-South-
west Plan FF&E represented $1.3 million of the total, and Southwest Plan
FF&E accounted for $617,975. According to FDIC officials, the receiver-
ships have been compensated.

On the basis of our work in the Central Region, we asked FDIC headquar-
ters officials if the other two former FSLIC regional offices had taken
W&E from the receiverships without compensation. According to an FDIC
official and documents we received, FDIC paid $406,287 to receiverships

“This moving consultant was not associated with the four companies mentioned earlier.

Page 10                                     GAO/GGD-So-97     Furniture,   Fixtures,   and Equipment

                       in the former FSLIC Eastern Region in Atlanta and $142,297 to receiver-
                       ships in the former Region’s area office in Chicago. This latter amount
                       included $74,260 for FF&E retained by FDIC and $68,038 sold at auction.
                       In addition, FDIC paid $6,870 to receiverships for FFLE it kept that was
                       used by FSLIC and, as of May 10, 1990, was in the process of auctioning
                       the remaining FF&E in the former Western Region in Los Angeles.

                       In contrast to the way the FSLIC'S Central Region handled IT&E, the Clos-
                       ings Manager in the FDIC Division of Liquidation’s Dallas Region told us
                       that when it takes over an insolvent bank, FDIC personnel take the inven-
                       tory, and each item of FF&E is tagged with a unique inventory number
                       that is not removed until the item is sold. FDIC does contract for apprais-
                       als. In addition, FDIC'S policy is to not purchase FF&E from failed banks
                       for use in its regional offices.

                       The FDIC Credit Manual and Operations Manual, which are used for
Need for FDIC and      organizationwide policy, do not provide specific guidance for disposing
RTC Policies on FF&E   of IT&E. According to FDIC Division of Liquidation officials who handled
Disposal               the disposition of FF&E at the national level, these manuals are the only
                       source of instructions. FDIC'S Associate Director for Operations in the
                       Division of Liquidation said FDIC'S policy is to handle FF&E similar to the
                       way it disposes of assets in the “Other Assets” category, i.e., convert
                       these assets to cash in the most efficient and effective manner possible.
                       FF&E is categorized as other assets in the Credit Manual,

                       The Supervisory Liquidation Specialist for Property Management in the
                       FDIC Division of Liquidation’s Dallas Region provided us with detailed
                       instructions for disposing of FF&E developed by its Addison Consolidated
                       Office. The Supervisory Liquidation Specialist told us that each consoli-
                       dated office in the Dallas Region has developed similar guidance, but
                       there is no regional level guidance or manual.

                       FDIC regional officials in New York City and San Francisco said that they
                       were not aware of any regional guidance on disposition of FF&E devel-
                       oped in their regions. They told us that the Credit Manual was the only
                       guidance they used. However, we found that New York’s Orlando Con-
                       solidated Office had developed procedures for inventorying and dispos-
                       ing of FF&E similar to those developed in Dallas’ Addison Consolidated

                       Page 11                           GAO/GGD-90-87   Furniture,   Fixtures,   and Equipment

              An RTC headquarters official said that RTC has not yet developed proce-
              dures for handling FF&E. The official said RTC would be using FDIC proce-
              dures in the interim. The Deputy Regional Director for Asset and Real
              Estate Management in RTC'S Dallas Regional Office-one of RTC'S four
              regional offices- said his office would be using the FDIC Credit Manual
              and approach to handling FF&E. Appropriate guidance is especially
              important for RTC because its authorizing legislation mandates that it
              extensively use the private sector, where practicable and efficient, to
              assist in managing and disposing of assets.

              We recognize that FF&E was a relatively small portion of FSLIC'S and will
Conclusions   be a small portion of RTC'S and FDIC'S overall asset management and dis-
              position responsibilities. However, FF&E represents assets that need ade-
              quate controls and management oversight.

              F-SLICdid not carry out its responsibility to insure that the FF&E of the
              receiverships was effectively managed and liquidated. FSLIC headquar-
              ters and regional officials did not follow FSLIC policy on planning; con-
              tracting was not done on a competitive basis; and sound internal control
              standards of separation of duties were not observed. As a result, FSLIC
              may not have fulfilled its responsibility to maximize the recovery of
              funds from the sale of FF&E.

              Furthermore, FSLIC should have promptly compensated the receiverships
              for FF&E when it was taken and placed in the FSLIC offices for its use.
              Adequate headquarters monitoring of regional activities, not only in the
              Central Region but in other regions, appeared to be lacking in this area.
              FDIC is now responsible for the FSLIC receiverships and is in the process
              of completing compensation to the receiverships for the FF&E.

              Because of reorganizations and changes in personnel in FSLIC'S receiver-
              ship operations, we could not identify all the individuals who had not
              carried out their responsibilities to the receiverships. However, the
              Executive Director of FSLIC and the Chairman of FHLBB were ultimately

              Even though the FHLBB has been abolished and the functions of FSLIC'S
              Operations and Liquidations Division have been taken over by FDIC and
              RTC, the problems we found in FSLIC'S Central Region can occur in other
              regions without specific policies and procedures addressing the control
              and disposition of FF&E, as well as without vigilance on the part of top
              officials, in the agencies now responsible for taking over failed thrifts.

              Page 12                             GAO/GGD-90-87   Furniture,   Fixtures,   and Equipment

                               F'DIC and RTC, without (1) documented specific organizationwide policies
                               and procedures to handle the disposition of FF&E from failed thrifts and
                               (2) adequate monitoring of adherence to these policies and procedures,
                               could run into problems similar to those FSLIC had with planning, con-
                               trolling, and disposing of FF&E. We believe that these two agencies need
                               to document, as a minimum, specific policies and procedures dealing
                               with planning for disposing of FF&E, alternative ways to dispose of FF&E
                               in the most timely manner to maximize return to the receiverships, con-
                               tracting on a competitive basis when possible to insure minimum cost,
                               and separation of duties in handling FF&E to ensure its adequate safe-
                               guard while in the hands of FDIC and RTC.

                               As RTC prepares to carry out its important responsibilities under FIRREA,
                               it needs to ensure that the problems that FSLIC had managing and dispos-
                               ing of FF&E are not allowed to be repeated in other asset management
                               areas such as real estate and securities, where there is greater risk
                               because of the substantially larger dollar values involved. We believe
                               that the problems that existed at FSLIC in dealing with FF&E illustrate the
                               importance of having specific policies and procedures for managing and                   I
                               disposing of assets in general. Problems can occur without an adequate
                               system of internal controls for ensuring that policies and procedures are
                               in fact implemented.

                               In addition, because the new legislation requires RTC to make extensive
                               use of the private sector to manage and dispose of assets from failed
                               thrifts, RTC will be at even greater risk. Therefore, it becomes extremely
                               important that RTC (1) develop specific policies and procedures for man-
                               aging and disposing of assets, (2) adequately staff and train its field
                               offices, and (3) develop systems that will permit adequate oversight and
                               monitoring of private sector contractors chosen to provide asset man-
                               agement and disposition services.

                               To ensure the most profitable and efficient disposition of FF&E from
Recommendationsto              failed financial institutions, we recommend that the Chairmen of FDIC
the   ChairmenOf   F’DIC       and the RTC Oversight Board
and the RTC Oversight          document specific organizationwide policies and procedures on control
Board                      l

                               and disposition of FF&E covering such areas as planning, contracting, and
                               internal control; and
                           l   monitor the adherence to policies for control and disposition of FF&E,

                               Page 13                          GAO/GGD-90-97   Fumiture,   Fixtures,   and Equipment

               As requested by the Subcommittee, we did not obtain written comments
Agency Views   from FDICand RTC. We did, however, discuss the contents of our report
               with FDIC and RTC officials, who generally agreed with the facts and

               An RTC official stated that RTC, as allowed by FIRREA, will be operating in
               accordance with existing FIX policies and procedures until it amends
               FLHC’Spolicies and procedures and adopts its own set of regulations and
               guidelines in implementing the specific goals of the RTC Oversight
               Board’s strategic plan for RX’S functions and activities. In addition, the
               RTC official said that draft RTC asset disposition manuals are currently in
               the review process, and RTC is well aware of the importance of adequate
               internal controls over FF&E and other assets.

               FDIC officials provided us with documentation that appropriate FDIC
               approvals have been given to pay the receiverships for FF&E taken by
               FSLIC to furnish its offices. According to the FDIC officials, the receiver-
               ships have been or are in the process of being paid. They also said that
               although existing FDIC policies and procedures do not specifically
               address FF&E, it is covered in the “Other Assets” section of the Credit
               Manual and is monitored similarly to other assets. FDIC officials provided
               us with additional views and information, which we have incorporated
               in this report where appropriate.

               As agreed with the Subcommittee, unless you publicly announce its con-
               tents earlier, we plan no further distribution of this report until 30 days
               from the date of this letter. After that time, we will send copies of the
               report to the Chairmen of FDIC and the RTC Oversight Board and to other
               interested parties. We will also make copies available to others upon

               Page 14                            GAO/GGD-90-87   Furniture,   Fixtures,   and Equipment

     Major contributors to this report are listed in appendix III. If you have
     any questions, please telephone me on 276-6074.

     Sincerely yours,

     Bernard L, Ungar
     Director, Federal Human Resource
        Management Issues

     Page 15                          GAO/GGD-99-97   Furniture,   Fixtures,   and Equipment

Appendix I                                                                                                    18
Objectives, Scope,and
Appendix II                                                                                                   19
FSLIC’s Liquidation of
Southwest Plan
Furniture, Fixtures,
and Equipment
Revenue and Expenses
Appendix III                                                                                                  20
Major Contributors to
This Report
Table                    Table 1: Net Proceeds on FSLIC’s Liquidation of FF&E                                     5
                             From the Southwest Plan


                         FDIC      Federal Deposit Insurance Corporation
                         FHLHB     Federal Home Loan Bank Board
                         FIRREA    Financial Institutions Reform, Recovery, and Enforcement Act
                                      of 1989
                         FSLIC     Federal Savings and Loan Insurance Corporation
                         FF&E      Furniture, fixtures, and equipment
                         RTC       Resolution Trust Corporation

                         Page 16                         GAO/GGD-90-97   Furniture,   Fixtures,   and Equipment

    Page 17   GAO/GGD-90-87   Furniture,   Fixtures,   and Equipment
Appendix I

Objectives, Scope,and Methodology

               Our primary objective was to determine whether FSLIC disposed of FT&E
               in the most efficient and effective manner. Our secondary objectives
               were directed at determining whether FSLIC had employed appropriate
               internal controls in managing FF&E for its receiverships and whether its
               disposition policies and practices maximized the return to the receiver-
               ships. As agreed with the Subcommittee, we focused our review on
               WLIC'S Central Region, now part of FDIC'S Dallas Region.

               We reviewed FSLIC'S Receivership Operations and Contracting Manuals
               to determine what policies, procedures, and internal controls were in
               existence for inventorying, appraising, and disposing of FF&E. Because
               FDIC absorbed FSLIC'S receiverships in August 1989, we reviewed FDIC'S
               Credit and Operations Manuals. We also reviewed policies and proce-
               dures from judgmentally selected regional and consolidated offices to
               determine guidance provided on disposition of and controls for FF&E
               where they were available. We also reviewed and analyzed financial
               data from the Southwest Plan sales and auctions of FF&E to obtain infor-
               mation on revenue and expenses.

               We interviewed FSLIC headquarters and Central Region officials and
               applicable contractors to determine how the inventories, appraisals, and
               disposal of FF&E were conducted. Also, we interviewed FDIC headquarters
               and regional officials in Dallas, New York City, and San Francisco and
               Consolidated Office officials in the New York and San Francisco regions
               to determine FDIC policies and procedures for FF&E, We interviewed RTC
               headquarters and Dallas Regional Office officials to determine whether
               RTC has policies and procedures in place for handling and disposing of
               FF&E. We also interviewed FDIC Inspector General officials and reviewed
               their investigative files that related to receivership activities.

               Because some of the FSLIC regional officials were no longer employed by
               FDIC, we could not always pinpoint responsibilities or determine reasons
               for certain actions taken.

               Our work was done between September 1989 and April 1990 in accor-
               dance with generally accepted government auditing standards.

               Page 18                          GAO/GGD-!I0437   Furniture,   Fixtures,   and Equipment

gpendix II

&XX% Liquidation of Southwest Plan
Fbrniture, FSxtures,and Equipment
Revenue and Ekpenses
              Revenue                                                    Fair market value                      Sales
              Warehouse sales to public                                            $312,262                  $322,196
              Sold to FSLIC entities                                                617,975       -      -.. 617,975
              Houston auction I                                                     853) 52                   733,133
              ballas auction I                            .-__..   ..~              388,512                   404,956
              Ho&ton auction II                ._____..
                                                     -.-_____--___                  846,214                   277,109
              Dallas auction II                                                     292,665 -.___             116,112
                Totals                                                         $3310.780                 $2.471.483
                                                                                                          .,       ,
              Warehouse rent                                                                               $1,350,157
              Inventory and appraisal                                                                         255,579
              Moving and hauling                                                                              596,015
              Auction commissions                                                                             118,637
              Salaries and wages                                                                               81,312
              Travel                                                                                            12,609
                 Toi&. ..                                                                                 $2.414.309
              Net proceeds                                                                                   $57,174
              Source: Southwest Plan FSLIC financial data obtained from the Dallas Consolidated Office, FDIC.

              Page 19                                       GAO/GGD9047       Furniture,   Fixtures,   and Equipment
Appendix III

Major Contributors to This Report

                         Ronald J. Cormier, Assignment Manager
General Government       Robert A. Korinchak, Evaluator
Division,                Gerard S. Burke, Evaluator
Washington, D.C.

                         Christine Jordan, Attorney Adviser
Office of the General
Washington, DC.

Dallas Regional Office   Don Watson, Evaluator-in-Charge
                         Roy G. Buchanan, Evaluator

(WW394)                  Page 20                           GAO/GGD-90-W   Furniture,   Fixtures,   and Equipment
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