oversight

Failed Thrifts: FDIC Oversight of 1988 Deals Needs Improvement

Published by the Government Accountability Office on 1990-07-19.

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

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                                              Ikport to the Cklairman, Cornrnit,tt,~tWI
GAO                                           hnking, Housing, and Ilrban Af’f’airs,
                                              1J.S.Senate, and the Chairman,
                                              C.I:ornrnittecon Ranking, Finance and
                                              I Jrban Af’f’airs, House of’ Representatives
J lily   l!)!)O
                                              FAILED THRIFTS
                                              FDIC Oversight of
                                              1988 Deals Needs
                                              Improvement
United States
General Accounting Office
Washington, D.C. 2064.8

General     Government       Division

B-238474

July 19,199O

The Honorable Donald W. Riegle, Jr.
Chairman, Committee on Banking,
  Housing, and Urban Affairs
United States Senate

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

This report is in response to the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) requirement that GAO
examine and monitor all insolvent institutions resolved by the Federal
Savings and Loan Insurance Corporation (FSLIC) from January 1,1988,
through the date of its enactment, on August 9,1989. Altogether, 181
insolvent thrifts were resolved by selling them to 91 acquirers during
this period. All but three were resolved by FSLIC during 1988. These 91
transactions were consummated with assistance agreements that speci-
fied responsibilities of ISLE and the 91 assisted thrifts. FSLIC estimated
that $49 billion in assistance would be provided to these assisted thrifts.

In these assisted transactions, FSLICgave the assisted thrifts cash or a
promissory note for the difference between the assumed assets and lia-
bilities. Because FSLICestimated that about $50 billion in covered assets
transferred were not worth their book value, FSLIC assistance also
included capital loss coverage and a yield guarantee.’

We testified on several occasions in 1989 that the terms of the agree-
ments did not include incentives to help ensure that the assisted thrifts
would maximize net recovery in disposing of covered assets and thus
limit the government’s cost and risk exposure. (See p. 36.) We empha-
sized that managing these agreements would be a huge job but that they
did have reporting requirement provisions to help protect the govern-
ment’s interests.




‘Acquired assets for which book value (capital loss coverage) and yield guarantees (yield mainte-
nance) are provided for in the assistance agreements are referred to as covered assets. Covered assets
include loans, real estate owned, and mortgage-backed securities with market values below their book
vahle!3.



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             The Federal Deposit Insurance Corporation (FDIC)is now responsible for
             managing these agreements.2 It can use the reporting provisions to
             approve or disapprove the assisted thrifts’ management and disposition
             of the covered assets. This helps ensure the orderly disposition of these
             assets at a minimum cost while maximizing asset value.

             Because the assisted thrifts’ plans for disposition of these assets were
             not due, with few exceptions, until late 1989 or early 1990, we focused
             our initial work on FLHC’Smanagement of these assistance agreements.
             We also obtained data on the extent to which the assisted thrifts have
             submitted the reports as required in the agreements and the extent to
             which they have complied with the terms of forbearances from enforce-
             ment of regulations granted at the time of the transactions. Our follow-
             on work will focus on FDIC’S oversight of the assisted thrifts’ asset man-
             agement and disposition plans.

             We are reporting separately on our review of FbIc’s cost estimates for all
             1988 and 1989 assistance transactions, as is also required by FIRRRA.


             To help protect the government’s interest, the assistance agreements
Background   included various reporting requirements designed to enable FDIC to
             oversee the assisted thrifts’ disposition of covered assets. (See app. I.)
             Under the terms of the agreements, FDICapproves or disapproves
             various plans, schedules, summaries, and budgets submitted by the
             assisted thrifts. These reports also allow FDIC to monitor the assisted
             thrifts’ covered asset management performance and to ensure compli-
             ance with the terms, conditions, and standards of the agreements. These
             reports are generally to be submitted on an annual or quarterly basis.

             The assisted thrifts are responsible for managing the covered assets and
             liabilities assumed from the failed thrifts “. . . by employing the higher
             of the standard of prudent business practice used by the acquiring asso-
             ciation in administering its assets and liabilities not acquired from an
             acquired association or the standard employed in the savings and loan
             industry generally in administering similar assets and liabilities.”

             2FIRREA abolished the Federal Home Loan Bank Board and its component FSLIC, the entities origl-
             nally responsible for regulating and insuring thrifts. FIRRRA transferred to FDIC the insurance
             responsibility of FSLIC along with the responsibility for any FSLIC assistance agreements. FDIC’s
             Division of FSLIC Operations is responsible for the assistance agreements. Also, FIRREA transferred
             the supervisory and enforcement responsibilities of the Federal Home Loan Bank Board to the Office
             of Thrift Supervision (UTS). In addition, FIRRSA established the Resolution Trust Corporation (RTC)
             to manage and resolve all savings and loan associations that are placed in conservatorship or receiv-
             ership between January 1,1989, and August 9,lQQZ.



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                   The assistance agreements usually require FDIC to complete an audit,
                   referred to as an initial inventory audit, to account for all of the assets
                   and liabilities of the failed thrifts at the acquisition date. In total, audits
                   of 160 failed thrifts are required by the assistance agreements. These
                   audits are to be completed 180 days after the effective date of the trans-
                   actions and are to be used to determine the assisted thrifts’ negative net
                   worth assistance and the universe of covered assets. These audits are
                   being done under contract and are to be considered completed after
                   being reviewed and approved by FDIC.

                   In conjunction with-but    separate from-the assistance agreements,
                   the Federal Home Loan Bank Board granted various forbearances from
                   regulatory enforcement in 80 of the 91 transactions at the time of the
                   resolutions. CYRis responsible for assuring that the assisted thrifts
                   comply with the terms of these forbearances.

                   We testified on March 11, 1989, that most agreements contained provi-
                   sions allowing FDIC to pay off promissory notes that had been issued to
                   the assisted thrifts for negative net worth assistance and to buy back
                   the covered assets or require that they be written down or sold. We
                   urged Congress to require that a study be made that would examine
                   each transaction to identify opportunities to use these provisions to
                   reduce transaction costs, assuming that funds for this purpose are avail-
                   able. Congress in FIRREA required the RTC to undertake this study and
                   report to it and the RTC Oversight Board on any options to reduce costs.


                   To help ensure that assisted thrifts maximize financial returns on the
Results in Brief   disposition of the estimated $50 billion in covered assets and corre-
                   spondingly limit the government’s cost, the assistance agreements pro-
                   vide the government the authority to approve or disapprove the thrifts’
                   asset disposition plans and oversee adherence to those plans. We found
                   that FDIC had not, however, given sufficient attention to its responsibili-
                   ties for overseeing the disposition of the covered assets and managing
                   the FSLIC assistance agreements.

                   We identified three areas in ,which FDIC had not taken the actions needed
                   to help protect the government’s interest and discussed these weak-
                   nesses in testimony before the House Banking Committee on January 25,
                   1990. Specifically, we said that FDIC had not developed an overall
                   strategy for dealing with covered asset dispositions nor adopted criteria
                   for approving or disapproving various asset disposition plans submitted



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                        by assisted thrifts. Moreover, FDIC had not established monitoring sys-
                        tems for ensuring the orderly disposition of covered assets by tracking
                        the assisted thrifts’ compliance with disposition plans. Also, FDIC had
                        not completed the initial inventory audits.

                        Without adequate strategies, policies, and procedures to govern its
                        approval of the assisted thrifts’ covered asset disposition plans and
                        without adequate tracking systems to monitor both the inventory of
                        such assets and their actual disposition, FDIC cannot assure that the
                        costs of these transactions are being minimized. Furthermore, the
                        absence of guidance and monitoring systems exposes the government to
                        potential fraud and abuse in the disposition of these assets-whose $60
                        billion value FDIC has guaranteed.

                        FDIC  agreed with our concerns and testified before the House Banking
                        Committee on April 2, 1990, that it had initiated specific corrective
                        actions. At that time, FDIC had not set appropriate milestones to help
                        management assure that the corrective actions were completed as expe-
                        ditiously as possible. Our draft report suggested that FDIC establish date-
                        specific milestones and insure that they were met.

                        On June 12,1990, after FDIC commented on a draft of this report, the
                        FDIC Board of Directors approved a comprehensive strategic plan for the
                        administration of the FSLIC assistance agreements, together with imple-
                        menting actions and target completion dates. FDIC’S actions have been
                        responsive to our concerns related to asset disposition strategy and poli-
                        cies, monitoring systems, and the initial inventory audits.


                        To carry out our mandate under the act, we (1) examined FDIC’S manage-
Objectives, Scope,and   ment of the 91 assistance agreements; (2) obtained information on the
Methodology             extent to which the assisted thrifts have complied with the reporting
                        requirements specified in the assistance agreements; and (3) obtained
                        information on errs’ monitoring of the assisted thrifts’ compliance with
                        the terms of any forbearances granted.3



                        “In addition to these 91 transactions, there were five consolidations involving 18 insolvent thrifts for
                        which there were no acquirers. FSLIC entered into assistance agreements with the resulting entities,
                        which were organized as federal mutual savings and loan associations. Because these consolida-
                        tions-referred to as stabilizations-do not constitute final resolutions, they were not included
                        within the scope of this review. However, they will be included in our review of FDIc’s cost esti-
                        mates. (See p. 2.)



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                       We asked FDIC and 0~s to give us their assessment of the 91 assisted
                       thrifts’ compliance with reporting requirements in their assistance
                       agreements and any forbearances granted, respectively. For five of the
                       largest FsLIc-assisted thrifts we followed up on FDIC'S and ens’ determina-
                       tions of compliance by examining the agencies’ documentation on com-
                       pliance.4 These five transactions accounted for about $17 billion of the
                       $49 billion FsLrc-estimated cost of the 91 assistance transactions. How-
                       ever, the results of our follow-up are not generalizable to the universe.
                       We also interviewed FDIC officials responsible for managing these five
                       agreements in Washington DC.; San Francisco, Irvine, and Stockton, Cal-
                       ifornia; and in Dallas and Houston, Texas, To find out how the forbear-
                       ances were monitored, we interviewed responsible officials in 0~s’ San
                       Francisco and Dallas district offices as well as in Washington, DC. We
                       also reviewed various supporting documentation and the policies and
                       procedures manuals of FDIC and 0~s.

                       We interviewed FDIC headquarters officials to discuss FDIC'S overall man-
                       agement of assistance agreements, including the development of policies
                       and procedures for approving the assisted thrifts’ plans for the disposi-
                       tion of the covered assets, the establishment of asset tracking systems,
                       and the completion of the initial inventory audits. We provided copies of
                       a draft of this report to FDIC and ors for their review. The major points
                       in their comment letters and our response are summarized on page 14.
                       Each letter and our full response are presented in appendixes II and III.

                       We did our review from September 1989 through March 1990, in accor-
                       dance with generally accepted government auditing standards.


                             had no overall written strategy expressing its principles and goals
FDIC Lacked an         FDIC
                       for covered asset disposition, nor was there any guidance on the criteria
Overall Asset          to be used for approving or disapproving various asset plans submitted
Disposition Strategy   by assisted thrifts. The assisted thrifts are responsible for the disposi-
                       tion of covered assets, estimated by FDIC to have a book value of $3 1
                       billion, as of December 31, 1989.

                       Because FDIC is required to guarantee the book value of the covered
                       assets (referred to as capital loss coverage assistance) at disposition or

                       4The five transactions were: American Savings Federal Savings and Loan Association, New West Fed-
                       eral Savings and Loan Association; Columbia Savings, a Federal Savings and Loan, Pathway Finan-
                       cial, a Federal Association, and Cardinal Federal Savings Bank; First Gibraltar Bank, Federal Savings
                       Bank; Pacific Southwest Savings Bank, Federal Savings Bank; and United Savings Association of
                       Texas, Federal Savings Bank.



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B.339474




when such assets are written down and to pay yield maintenance, it is
crucial that the assisted thrifts act to maximize the net return on these
assets and thus limit FDIC'S payment. FDIC has the right under the agree-
ments to approve or disapprove asset management and disposition plans
proposed by the assisted thrifts. However, it has not issued guidance
outlining the basis for approvals to those FDIC officials responsible for
reviewing the plans.

FDIC  officials responsible for approving the asset plans submitted by the
five assisted thrifts we focused on said that, because there was no
formal policy guidance, they relied on FDIC staff and the experience and
knowledge of real estate and asset management contractors that FDIC
uses to help review the asset plans. The official responsible for three of
the five assisted thrifts we studied said FDIC headquarters had not pro-
vided his office with an overall strategy for disposing of the covered
assets nor had he directed that a strategy be developed for his region.
The official said that policies covering such areas as underwriting,
appraisals, foreclosures, and marketing could be beneficial. Although
FDIChas recommended a specific format for each report submission, one
official emphasized that FDIC had no written criteria for evaluating the
adequacy of the assisted thrifts’ proposed asset disposition plans. Fur-
ther, FDIC’S format only ensures that pertinent elements are covered. Its
format is not a substitute for criteria.

In many areas of asset management and disposal, policy is needed to
limit FDIC’S cost. For example, an assisted thrift could propose self-
financed sales of covered assets. Under the terms of its agreement, the
newly financed asset would become a covered asset and the assisted
thrift would therefore continue to receive the guaranteed yield, as well
as capital loss coverage, on the asset’s new book value. While the agree-
ment with the assisted thrift allows for the possibility of such transac-
tions, there was no FDIC guidance on the conditions under which such
transactions should be approved or disapproved. Other examples where
policy guidance is needed to limit the government’s cost include the con-
ditions under which (1) nonmarketable assets should be written down,
(2) discounted payoffs or reductions in the interest rates for loans are
appropriate, and (3) assets should be held in expectation of future
increases in value.

We discussed these problems with the interim director of FDIC’SDivision
of FSLIC Operations during March 1990, and he subsequently testified on
April 2, 1990, that a strategic plan had been drafted, policies and proce-
dures were being developed, and that a set of 3-year goals and objectives


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                      would be presented for action by FDIC’SBoard of Directors in May 1990.
                      However, FDIChad not established an implementation plan, including
                      appropriate milestones, for proceeding after the Board’s approval.

                      On May 24,1990, FDICofficials submitted to the FDIC Board of Directors
                      for consideration a draft strategic plan together with a statement of 3-
                      year goals and objectives to support the strategic plan. The latter estab-
                      lished a goal of managing “the acquirers’ disposal of covered assets
                      within the terms of the assistance agreements to ensure orderly disposi-
                      tions at minimum cost to the FSLIC Resolution Fund while maximizing
                      asset values.” It then identified a series of eight key asset disposition
                      issues for which policy statements are needed, such as hold versus sell
                      decisions, and set out a completion target date for each policy statement.
                      On June 12,1990, the Board approved the plan.


                      We have reported that the assisted thrifts lack incentives to most effec-
Integrated            tively manage and liquidate the covered assets6 Nevertheless, the gov-
Management            ernment must pay for any losses incurred on the disposition of these
Information Systems   assets and maintain their yield at specified levels until they are disposed
                      of. Because of this, FDIC needs to be vigilant in managing these agree-
Needed for Asset      ments to limit the government’s cost. However, in carrying out its
Management and        responsibilities for covered asset dispositions, FDIC has no integrated
Disposition           systems for tracking (1) the number and book value of covered assets in
                      the assisted thrifts, (2) the assisted thrifts’ progress in accomplishing
                      the goals set out in their various asset management plans, and (3) the
                      assisted thrifts’ compliance in meeting the reporting requirements out-
                      lined in their assistance agreements.

                      FDICneeds a system to track its inventory (both the number and book
                      value) of the covered assets managed by the individual assisted thrifts.
                      FSLIC had estimated that the book value of 216,000 covered assets was
                      $60 billion at year-end 1988. FDIC estimated that the 91 assisted thrifts
                      had about $31 billion in covered assets as of December 31, 1989; how-
                      ever, FSLIC’Soriginal estimate of the number of covered assets was not
                      updated until we asked for current data. It took FDIC about a week to
                      provide an estimate that the thrifts had 219,000 covered assets. FDIC
                      could not provide information on the value and the type of asset disposi-
                      tions that comprised the overall $19 billion net decrease and the 4,000
                      net increase in the number of covered assets between the time of the
                      resolutions and December 31, 1989.

                      “Failed Thrifts: GAO’s Analysis of Bank Board 1988 Deals (GAO/T-GGD-89-11, Mar. 14,1989).



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FDIC needs to be able to systematically monitor the assisted thrifts’ pro-
gress in accomplishing their goals for covered asset disposition.
Although this information has been maintained manually on an asset
disposition plan-by-plan basis, FDIC does not have a system to monitor
the assisted thrifts’ implementation of all disposition plans. Because FDIC
is responsible for over 200,000 covered assets, a system is needed to
provide comprehensive information so that FDIC can promptly identify
instances where plans are not being followed and to initiate corrective
actions.

FDIC also needs to track assisted thrifts’ compliance with the reporting
requirements so that it can be assured that the assisted thrifts are in
compliance. There are an extensive number of required reports, but FDIC
cannot now, on an aggregated basis, monitor the assisted thrifts’ compli-
ance with those requirements. (See app. I.) FDIC cannot, therefore, on a
routine basis, promptly identify noncompliance so that it can require
corrective action.

FDIC’SDivision of I%LIC Operations staff said they plan to implement in
June 1990 a tracking system for covered assets in the 18 assisted thrifts
located within the Dallas region. They said that the system, referred to
as the Covered Asset Management System, will allow them to track on
an ongoing basis the amount of covered assets in the assisted thrifts, the
submissions of required reports, and the progress these thrifts have
made in meeting the goals outlined in their various asset management
plans, They also said another system, being developed for major covered
assets, was being tested for two of the assisted thrifts located in the
region.”

The interim director of FDIC’S Division of FSLIC Operations advised us in
March 1990, and subsequently testified on April 2, 1990, that a task
force was being established to work on the development of integrated
management information systems for asset management and disposition.
According to this official, integrated systems should provide, on an
ongoing basis, information on the status of all covered assets as well as
assisted thrifts’ compliance with approved asset disposition plans and
with reporting requirements. FDIC had not, however, set milestones to

“A major covered asset is one that generally has a book value of $6 million or more, or an anticipated
liquidation loss of $1 million or more. The two other classes of covered assets are “significant” and
“other. ” “Significant” covered assets generally have book values of between $1 million and $6 million
or anticipated liquidation losses of between $300,000 and $1 million. A covered asset classified as
“other” is one with a book value of less than $1 million and an anticipated liquidation loss of less
than $300,000.




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                    govern the task force’s work and assure implementation of the systems
                    as expeditiously as possible.

                    The strategic plan and the goals and objectives statement submitted to
                    the FDIC Board for consideration on May 24 and approved on June 12,
                     1990, (see p. 7) established a goal of developing and implementing “an
                    enhanced management information system that will be an effective
                    resource in the management decision making process, especially covered
                    asset tracking.” It set out various implementing actions and target com-
                    pletion dates for these tasks. FDICofficials have advised us that the
                    target implementation date is March 31, 199 1.


                    FDIChas not yet completed the initial inventory audits. These audits
Initial Inventory   were to have been completed between August 1988 and August 1989. As
Audits Not Yet      of March 31, 1990, only 17 of the 150 required audits had been finished.
Completed           The average time spent in each phase of the initial audit process for
                    those audits completed or in progress is shown in figure 1.




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Figure 1: Average Time Spent in Initial
Inventory Audit Phases
                                          300    Days


                                          250




                                                 Contmct Phase         Audit Work           Rovlew Phase
                                                                       Phaw
                                                 Phases of the lnltirl Audit Process

                                                          FDlCwablished    timeframe for phase
                                                          Average time spent on phase as of 3i31190


                                          Note: Average time spent includes audits in progress or completed
                                          Source: GAO Analysis of F.DIC-Provided Information.


                                          IJntil the audits are completed by FDIC, the quarterly payments to the
                                          assisted thrifts for yield maintenance on covered assets and for interest
                                          on negative net worth promissory notes will continue to be based on
                                          estimates that may prove incorrect. If the estimates are incorrect, FDIC
                                          and the assisted thrifts will have to reconcile past payments with the
                                          new adjusted amounts.

                                          Divided responsibility for the audits within the Federal Home Loan
                                          Bank Board and then within FDIC until November 1, 1989, contributed
                                          significantly to past delays. Since early November 1989, FDIC'S Division
                                          of FSLIC Operations has had responsibility for the audits, Continued
                                          delays in finalizing the audits have been attributed by officials in FDIC'S
                                          Division of FSLIC Operations to a lack of resources-both staff and com-
                                          puter resources.

                                          The interim director of FDIC'S Division of FSLIC Operations, in a March 8,
                                          1990, memorandum, however, stated that additional resources would be


                                          Page 10                                                             GAO/GGD9@93 Failed Thrifts
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                        provided. He set a goal to complete all of the audits by May 31, 1990.
                        This goal was cited in FDIC testimony on April 2, 1990. In commenting on
                        a draft of this report, FDIC advised us that all but six of the audits would
                        be completed by June 30. We were subsequently told by FDIC officials
                        that this goal had been met and that the six remaining audits would be
                        completed by December 31, 1990.

                        FDIC officials advised us that the results of 24 of the 144 completed
                        audits, which cannot be generalized, show that the negative net worth of
                        these acquired thrifts was about $32.8 million (2.7 percent) higher than
                        the $1.2 billion estimated at the time FSLIC entered into the agreements.
                        An increase of about $33.3 million in negative net worth assistance
                        occurred in 14 cases, a decrease of about $0.5 million occurred in 1 case,
                        and in 9 cases there was no change. An FDIC official also advised us that
                        the adjustments based on the other 120 completed audits should be done
                        by August 31,199O.


                        Our analysis of FIX-provided data shows that from April 1, 1988,
Most Assisted Thrifts   through September 30, 1989, on average, the assisted thrifts submitted
Were in Compliance      their required reports 90 percent of the time. FDIC officials said that they
With Reporting          had asked any noncomplying assisted thrifts to submit their reports, but
                        these officials could not readily tell us whether these reports were sub-
Requirements            sequently submitted.

                        Our analyses of FDIC'S documentation for our five cases showed that
                        with minor exceptions, the assisted thrifts had submitted the required
                        reports. In a few cases, FDIC had granted extensions of report due dates
                        and/or returned reports to the assisted thrifts for resubmission.


                        ors officials said that the 80 assisted thrifts with forbearances, with few
Assisted Thrifts in     exceptions, were in compliance with the terms of their forbearances as
Most CasesHad           of September 30, 1989, the most current data available at the time of
Complied With the       our review. These officials also stated that regulatory actions had been
                        taken to resolve the few instances of noncompliance.
Terms of Forbearances
                        (~rsofficials said that they relied primarily on analysis of the assisted
                        thrifts’ quarterly financial reports to determine compliance. According
                        to ors, 72 of the 80 assisted thrifts with forbearances were in compli-
                        ante as of September 30, 1989, with the terms of the forbearances
                        granted at the time of the resolutions. ors officials also stated that they



                        Page 11                                             GAO/GGJMO-93 Failed Thrifts
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had taken regulatory actions to bring the other eight assisted thrifts into
compliance.

Compliance with the terms of certain forbearances, such as those
relating to transactions with affiliates, cannot be determined from the
financial reports but must be assessed at the thrift. According to ors
officials, they assess forbearance compliance as part of the ongoing
supervisory process, which includes on-site examinations. Seventy-five
of the 91 assisted thrifts had been examined as of December 31,1989,
and five examinations were in process as of February 28, 1990. The
other 11 examinations had not been started as of that date.

We found, through discussions with ors officials and analyses of agency
documentation, that the assisted thrifts in our five case studies were in
compliance with their forbearances as of September 30, 1989. Four of
these five assisted thrifts had been examined in 1989. One transaction
had not been scheduled for an exam, as of March 31,199O.

The passage of FIRREA brought the status of certain forbearances
granted in conjunction with the agreements, most significantly the cap-
ital forbearances, into question by some savings associations. Capital
forbearances had been granted to 79 assisted thrifts. Accordingly, OTS,
on January 9, 1990, issued a thrift bulletin stating that the new, more
stringent, capital standards “. . . apply to all savings associations,
including those associations that have been operating under previously
granted capital and accounting forbearances.“7

ars determined that 64 of the 91 assisted thrifts met the new capital
standards as of December 31,1989. Twenty-one of the 27 thrifts that
were unable to meet the new capital standards as of December 7, 1989,
submitted capital plans to their errs district directors as of January 8,
1990, outlining how they planned to achieve compliance with the new
capital requirements by December 3 1, 1994. Using their discretion, 0~s
officials did not require five thrifts to submit a plan, and the remaining
thrift was in the process of being placed into conservatorship/receiver-
ship. Subsequently, according to ors, the five thrifts that were not
required to submit a plan came into compliance as of December 3 1,
1989.


7oTs Thrift Bulletin TB-38-2, January 9, 1990, Capital Adequacy: Guidance on the Status of Capital
and Accounting Forbearances and Capital Instruments Held by a Deposit Insurance Fund. The impact
of FIRREAls capital requirements and CYlV actions on previously granted capital forbearances is cur-
rently the subject of several lawsuits filed by savings associations.



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                  The impact of FIRREA on the remaining forbearances granted assisted
                  thrifts was being studied by urs as of March 1990. Until a decision is
                  made, 0~s advised us that these forbearances will remain in effect. In the
                  interim, CYISadvised us that capital plans are not accepted which are
                  dependent upon the continuation of these forbearances.


                  FDIC officials agreed with us that they needed (1) an overall strategy and
Conclusions       policies and procedures for approving assisted thrifts’ covered asset dis-
                  position plans, (2) integrated management information systems for asset
                  management and disposition, and (3) expedited completion of the initial
                  inventory audits. During April 1990, FDIC testified on their planned cor-
                  rective actions.

                  While these planned corrective actions were a good start, the plans did
                  not establish realistic, date-specific milestones to enable FDIC manage-
                  ment to better oversee implementation of the plans and, if needed, inter-
                  cede with appropriate actions to expeditiously bring about the needed
                  changes. For example, regarding the establishment of policies and proce-
                  dures, FDIC has established an interim milestone-the presentation of a
                  decision document-but      neither a plan nor milestone for implementation
                  should the document be approved. For the information systems, FDIC has
                  established a task force, but no milestones were set to govern the task
                  force’s work. With regard to the plan for completing the initial audits,
                  the completion milestone did not seem realistic.

                  Given the enormity of the dollars involved-the      covered asset value
                  guaranteed by FDIC is about $50 billion-and     the government’s related
                  exposure to unnecessary costs and potential fraud and abuse, our draft
                  report stressed that it was essential that FDIC ensure that the corrective
                  actions are made as quickly as possible. Accordingly, in our draft report
                  we suggested that FDIC establish date-specific milestones, and take
                  interim actions as appropriate to ensure that the milestones are met, for
                  expeditiously

              . issuing an overall strategy for covered asset management and disposi-
                tion and related policy guidance,
              l establishing integrated management information systems to track cov-
                ered asset management and disposition, and
              l completing the initial inventory audits.

                  On May 24, 1990, after commenting on a draft of this report, FDIC offi-
                  cials submitted to the FDIC Board of Directors for consideration a draft


                  Page 13                                            GAO/GGD9693FaUedTMfta
                                                                                        ,

                                                                                            I




                      B-228474




                      strategic plan for the administration of the assistance agreements,
                      together with a statement of goals and objectives. The Board approved
                      the plan and statement on June 12, 1990. These documents set forth
                      target completion dates for issuing asset disposition policies, estab-
                      lishing the needed management information systems, and expediting
                      completion of the initial inventory audits.

                      FDIC has been responsive to our concerns. The actions described, if fully
                      implemented, will satisfy the thrust of the suggestions in our draft
                      report. Accordingly, we are not making recommendations in this report.


                            in its May 18, 1990, letter, expressed concern that the report
Agency Comments and   FDIC,
                      reflected a misunderstanding of certain facts and failed to recognize the
Our Evaluation        short-term versus long-term objectives of its management of the assisted
                      transactions. However, FDIC also noted that a draft strategic plan and a
                      statement of goals and objectives would be presented to the FDIC Board
                      of Directors for consideration in May. As discussed above, these docu-
                      ments were submitted on May 24 and approved on June 12,199O. The
                      actions taken, as noted above, have satisfactorily addressed the con-
                      cerns expressed in the draft report. A more detailed discussion of mm
                      specific comments is provided in appendix II.

                      u’m provided a number of editorial and technical comments in its letter,
                      which is enclosed and discussed in appendix III.


                      We are providing copies of the report to other interested members of
                      Congress, appropriate congressional committees, FDIC, errs, and other
                      interested parties.

                      Major contributors are listed in appendix IV. If you have any questions
                      about this report, please call me on 275-8678.




                      Craig A. Simmons
                      Director, Financial Institutions
                        and Markets Issues




                      Page 14                                           GAO/GGD-90-93 Failed Thrlfta
Page 16   GAO/QGD4)0.93Failed Thrlfta
Contents


Letter                                                                                                  1

Appendix I                                                                                             18
Assistance Agreement Covered    AssetReports                                                           18
                     ,Quarterly Assistance Payment         Report                                      18
Reporting             Three Year Business Plan                                                         18
Requirements          Litigation Reports                                                               18

Appendix II                                                                                            19
Comments From the          GAO Comments                                                                26
Federal Deposit
Insurance Corporation
Appendix III
Comments From the          GAO Comments
Office of Thrift
Supervision
Appendix IV                                                                                            35
Major Contributors to      General Government Division Washington, D.C.
                           Dallas Regional Office
                                                                                                       35
                                                                                                       35
This Report                San Francisco Regional Office                                               35

Related GAO Products                                                                                   36

Figure                     Figure 1: Average Time Spent in Initial Inventory Audit                     10
                                Phases


                           Abbreviations

                           FDIC        Federal Deposit Insurance Corporation
                           FIRREA      Financial Institutions Reform, Recovery, and Enforcement Act
                                           of 1989
                           FSLIC       Federal Savings and Loan Insurance Corporation
                           as          Office of Thrift Supervision
                           RTC         Resolution Trust Corporation


                           Page 16                                           GAO/GGD-96-93 Failed Thrifta
Y




    Page 17   GAO/GGD-99-93 Failed Thrifts
                                                                                                               *
Appendix I

AssistanceAgreement Reporting Rec@remer&


3
                       2. Covered asset summary schedule
                       3. Covered asset budget summary
                       4. Subsidiary business plan
                       5. Collection plan
                       6. Property plan


                       1. Special reserve accounts I & II
Quarterly Assistance
Payment Report

Three Year Business
Plan 1

                       1. Litigation    schedule
Litigation Reports2    2. Litigation    analysis
                       3. Litigation    plan & budget
                       4. Litigation    summary

                       Note: Specific reports required vary in accordance with the assistance
                       agreement requirements and the type of covered asset.




                       ‘For some assisted thrifts, short, medium, and long-term business plans were required. Subsequently,
                       FDIC decided that the OTS3-year business plan requirement would satisfy these reporting
                       requirements.
                       “These reports are required for any litigation to which any of the acquired associations was a party
                       immediately before the effective date or with respect to a liability assumed by the acquiring
                       association pursuant to the acquisition agreement.
                       Source: FDIC data



                       Page 18                                                              GAO/GGD-9993 Failed Thrifts
            .
Appendix     II

CdmmentsFrom the Federal Deposit
InsuranceCorporation
                                                              .
Note: GAO comments
supplementing those In the
report text appear at the
end of this appendix.
                             FDIC
                             Federal Deposit lnsuranon Corporation
                             Washmglm   DC 20429



                                                                           May 18,   1990

                                Mr. Richard L. Fogel
                                Assistant  Comptroller General
                                General Accounting Office
                                Washington, D.C. 20548
                                Dear Mr. Fogel:
See comment 1.                         This is in response to your request for comments on the
                                draft   report entitled   Failed Thrifts. . Ovdaht      of 1988 De-
                                Heeda-                  We are concerned the draft reflected
                                misunderstanding     of certain  fact6 and failed to recognize the
                                short-term    versus long-term objectives    of FDIC's management of
                                the very complex assisted transactions       approved by the former
                                Federal Home Loan Bank Board.        We hope our meeting of May 15th
                                with Ms. Kern and Mr. Ford was helpful       towards correcting  the
                                record.    Our comments are presented below and are organized
                                by major findings.
                                        I.     wecfv        wment             Process
                                            The draft report implies that there is not a management
See comment 2.                 process or an overall       strategy    for dealing with these
                               transactions.       The report seems to suggest that there is only
                               one way to manage this process that being a strategic           plan
                               checklist     approach with accomplishment of goals and objectives
                               tracked against specific        milestones.    We believe this is a
                               classic    textbook over-simplification       of a complex problem.
See comment 3.                            The FDIC*s approach is comprehensive and designed to
                               factor in the enormous complexity     presented by over 200
                               individual   negotiated  contracts,  each of which has unique
                               provisions   which must be considered when directing   the
                               acquirers’   efforts.   Key elements of the FDIC's management
                               approach include:
                                               0   Controls - Specific     delegations     of authority-to
                                                   control approval of expense are in place.              A
                                                   committee structure      is used to review transactions
                                                   above certain dollar thresholds.           Staffing    levels
                                                   have been increased significantly          to improve
                                                   management of these transactions.           We are further
                                                   reviewing our approach to delegations            with the
                                                   objective   of streamlining     transaction      processing.




                                             Page19                                                GAO/GGD-SO-93
                                                                                                             FailedThrifts
                       Append&n
                       Comment-sFromthe FederalDeposit
                       InsuranceCorporation




                                                      -2-
See comment 4.             0    Policy and procedures for both staff and for
                                management of assisted institutions.          Note that
                                policy has been developed in order to recognize the
                                contractual    obligations    between FDIC and acquirers.
                                The complexity of the transactions        and of the
                                covered   assets dictate     guidance rather than a
                                checklist    approach.     Very detailed  procedures for
                                both staff and acquirers       have been in place for a
                                considerable    period of time and those manuals were
                                made available     to your staff.
See comment 2              o    Development of strategy        and goals with monitoring      of
                                accomplishment against targets.          FDIC uses this
                                element in its management approach.             However, as we
                                discussed at our Xarch 23rd meeting, it is critical
                                to recognize that longer term strategy may be
                                substantially      affected by recommendations made as a
                                result of the FIRREA mandated RTC review.             An
                                immediate objective        is assisting    in this review to
                                identify    potential     cost saving measures. With
                                respect to an asset disposition          strategy,   FDIC has
                                established     well-defined    goals.    Development of such
                                a strategy is significantly          more complex and
See comment 4.                  involved than is implied in GAO’s comments. Again,
                                acquirers have long been guided by policy manuals
                                provided GAO staff.
See comment 5.          The concept of the Assistance Agreements presumes that the
                 Acquiring   Institution     possesses expertise     in the management and
                 disposition    of troubled assets, and that these institutions         have
                 entered into a contract with us to do this at minimum cost to
                 the FSLIC Resolution Fund. The agreements provide a general
                 plan for the liquidation        of Covered Assetcr.    The assistance
                 agreements include requirements        for developing asset plans which
                 contain disposition      strategies   and for complying with management
                 standards contained in agreements.         Failure    to comply can lead
                 to 106s of assirrtance payments.
See comment 6          Development of a comprehensive strategy        for disposing of
                 assets requires detailed analysis of the asset portfolio,             the
                 volume and types of assets, their marketability         and the costs
                 associated    with targeting   specific assets or categories of
                 assets for disposition.       Without such analysis,    decisions can be
                 made that could pose serious economic consequences in future
                        . For example, it may be more cost-effective         to
                 ~~~~$hasize      the marketing and disposition    of income producing
                 asset8 (e.g., apartment complexes) since they "carry" themselves
                 at least when written down to their market value.           This approach
                 would concentrate     on development of disposition     strategies      for
                 assets:    for which a viable market does not currently         exist




                       Page20                                                 GAO/GGD99-93
                                                                                         FailedThrifts
              c

          ,

      .
                              AppenaixIl
                              Comments FrumtheFederdDequsit
                              IneuranceCwporatIon




                                                             -3-
                       (e.g.,     raw, unimproved land); those that for various reasons are
                       not currently      marketable due to title   problems, environmental
                       problems, etc.; and those that are not currently          in default
                       (e.g., performing commercial loans) but absent intensive
                       collection     efforts will most likely    go into default.
                             A thorough understanding    of the limitations       and
                       consequences of gain sharing, tax sharing and other cost
                       considerations   in the Assistance Agreement is reguired prior to
                       development of an overall disposition         strategy.    Additionally,
                       comprehensive asset disposition      strategy could be altered at the
                       time the Office of Thrift    Supervision      opines on whether it will
                       waive certain constraints    on seller     financing    imposed by
                       FIRREA.
See comment       7.         PDIC has concluded that the appropriate       strategy   is to
                       manage the process rather than focus on thousands of individual
                       asset transactions.    Implementation    of this approach requires
                       that the associations*   internal   controls   and review processes
                       meet or exceed certain minimum standards.         To properly evaluate
                       performance and compliance with the terms of the Assistance
                       Agreements, FDIC must have reporting       and evaluation    mechanisms
                       in place.   FDIC is taking the following      steps in development of
                       that process:
                              We are reviewing the Associations'      business plans to
                       evaluate the strategies      concerning future growth, capital
                       reguirements,     and most importantly,    its approach to marketing
                       and disposing of Covered Assets.        This will help identify   those
                       Associations    that have sound strategies     for eliminating  covered
                       assets and that are currently       successful   in meeting the
                       objectives    of the assistance    agreements.
See comment 8.                  Preliminary    data on covered assets and reporting
                       requirements       through automated systems is being gathered.
                       Completion of the Covered Asset Management System (CARS), an
                       asset tracking        system, is scheduled for June 30, 1990. The
                       system will collect         information   on the inventory     (including    the
                       number and dollar amount) of Hajor (WA) and Significant                   Covered
                       Assets (SCA) on an individual           basis and track    all submissions
                       requiring       FDIC approval, including     those for Other Covered
                       Assets      (OCA). Eventually,     CARS will assist in the monitoring of
                       critical      milestones contained in asset plans required for MCAs,
                       SCAs and selected OCAs. Integration             of this preliminary       system
                       into FDIC mainframe is underway.
See comment 9.               The Management Reporting/Performance     Monitoring system was
                       implemented in January 1990. This system provides aggregate
                       information  to measure institutions'    performance under, and
                       compliance with, the term8 of the Assistance Agreement monitored




                              Page21
                               Appendix II
                               Comments Prom the Federal Deposit
                               Insurance Corporation




                                                                   -4   -

                        on a portfolio       basis.     This system includes quarterly
                        consolidated      information     on the Covered Asset       Portfolio   by
                        property and asset type, sales activity               and other changes to the
                        portfolio,     the status of required submissions (including              the
                        number of delinquent         reports),    litigation,    assistance payments,
                        consolidation      and basic financial         data on each inetitution.
                        This will     provide PDIC with the ability           to performspeer group
                        analyses concerning performance and compliance.                  It will allow
                        FDIC to target,       oversight     and review.
See comments 4 and 7.          Revised asset plan and budget formats have been developed
                        and training     for FDIC staff,  contractors     and association    asset
                        managers has been conducted.       The new formats are to be
                        implemented on July 1, 1990 and October 1, 1990. Revised asset
                        plans were developed to standardize        formats to allow FDIC to
                        review facts and make decisions efficiently.           The revised plans
                        are designed to provide a complete account of the asset and a
                        detailed    description  of the asset disposition       strategy.    The
                        revised plans emphasize an implementation          plan which requires
                        the asset manager to include specific         steps and actions needed
                        to achieve results.      This will improve staff's       ability  to
                        monitor progress against the plan.
                                These steps are critical      to obtaining  information   needed to
                        complete a comprehensive asset disposition          strategy.    Our
                        Strategic     Plan will also include preliminary       targets in its
                        goals and objectives.        Generally,   these will call for a $15
                        billion     decrease in the covered asset portfolio        by December 31,
                        1992. These disposition        targets were identified      to set basic
                        expectations;      they will be refined with management of assisted
                        institutions.       We still  plan to have these documents to our
                        Board of Directors      by the end of this month.


See comment 10.                     It     is our view that automated systems are a tool not a
                        solution    in     themselves and that development of useful systems
                        requires a       detailed    understanding  of business objectives,
                        Significant        progress has been made meeting both financial    and
                        management       information    needs of the Division   of FSLIC
                        Operations.
See comment 1 I.                   A Task Force has been established  to focus on
                        additional   resources on development of automated systems for
                        DFO. This group has been meeting weekly since mid-March.       The
                        mission of the Task Force is to develop and implement a
                        management information   system that will be an effective  resource
                        in the management decision    making process.  The MIS Task Force
                        has:




                               Page 22                                              GAO/GGD-99-93 Failed Thrifta
                       ‘Appendix II
                        Canmente From the Federal Deposit
                        Insurance Cmporation




                                                            -5 -
                            Reviewed and identified  computer software capabilities
                            available to the FDIC for meeting the needs of the DFO;
                            Prioritized     the computerization          requirements     of the
                            OF0 :

                            Identified previously  developed             systems for conversion
                            to the FDIC mainframe;
                            Identified     staff   resources        for training   and development
                           of DFO needs on available               FDIC computerized systems;
                            and
                           Initiated    the process of defining     the data requirements
                           of the DFO from the perspectives        of both operational
                           needs and management reporting       requirements.    This
                           effort    is well underway.
                      The Strategic   Plan recognizes these efforts    and sets goals
                 and objectives   for completing implementation   tasks.
                        our PC-based system development             has continued     a&is      being
                 supported pending completion of this               HIS project.
                 includes:
See comment 9.        1)   The Management Reporting/Performance              Monitoring     System
                           provides aggregate information            on the portfolios       of
                           covered assets held by assisted institutions,                 covered
                           asset dispositions        and other changes to the portfolios,
                           the status of required submissions under the terms of
                           the assistance agreements, financial              assistance
                           payments, litigation         and consolidation       information,     and
                           basic institution       financial     information.       This system
                           allows the monitoring          of the financial     performance of
                           the acquiring     institutions       and their compliance with
                           the requirements of the assistance agreements,
                           including   the submissions of plans and budgets.
                           Performance measures include:             submission compliance,
                           covered asset management, staffing             levels,    and peer
                           group analysis.       The system was initially           implemented
                           with the agreements administered            by Case Management
                           Section II in February 1990. Since February, OF0 has
                           further refined the data submission schedule and
                           reporting   parameters of this system.
See comment 8.        2)   The covered Asset Management System will provide OF0
                           with information  on the inventory     of covered assets
                           held by assisted institutions,     track approved plans and




                       Page 23                                                      GAO/GGD-90-93 Failed Thrifts
                          Appemk    II
                          CommentaPromtheFederalDeposit
                          InsuranceCorporation




                                                      -6-

                              budgets and any other required submissions.   The target
                              date for implementation of the Covered Assets
                              Management System for Texas and Oklahoma associations
                              is June 30, 1990.
                              It is envisioned that as these two PC-based systems are
                              integrated   into the DFO MIS they will be used by all
                              sections of the Division.    This will allow a uniform
                              approach to the entire portfolio   of cases.
                       It is also important to note that FRF assistance agreements
                 have already been integrated   into the FDIC's Financial
                 Information   System (FIS).  This process automatically  reflects
                 payments in the general ledger for the FRF and is a major
                 accomplishment.
                   III.      Worv                Avdits
See comment 12               The GAO draft    report correctly    identifies     the need to
                 complete the opening inventory audits related to the assistance
                 agreements.     Despite specific     reports to your staff,        however,
                 the draft report ignores results of the special project team
                 since February 1990. Significantly,           of the 94 audits still       to
                 be finished,    all but 9 are past the field work stage.
                 Consequently,    we confidently     expect that all but 6 audits will
                 be completed by June 30, 1990. These remaining 6 include audits
                 which require extensive reconstruction          of accounting records of
                 certain   acquired institutions.       The specified      status of the 94
                 open audits is as follows:
                                                    Cateaor&&&D


                          Field Work
                          Audit Report Draft
                          Audit Revision8
                          Acceptable Draft to Assn.
                          Resolution  of Assn. Comments
                          Audit Report Revieions
                          Final Report Revisions
                          Final Report Review
                              Total                                     94
                            This progress has been achieved through employment of
                 the dedicated project team, increased communication and
                 involvement    with contract audit firms and acquirers, and




                           Page24                                             GAO/GGDgO-93FailedTMfta
        AppendixII
        CommentsFromtheFederalDeposit
        InsuranceCorporation




                                         -7-
effective     streamlining    of the     audit review process      to
incorporate      concurrent   reviews     where possible.
     We look      forward   to working     with   you to provide    assistance
in completing       this report.




bee:   Chairman Seidman
       Gerald Stanton
       tRnnis Pittrnan




        Page25                                                  GAO/GGDSO-93FailedThrifts
               Appendix II
               Comments From the Federal Deposit
               Insurance Corporation




               The following are GAO’Scomments on the Federal Deposit Insurance
               Corporation’s letter dated May 18, 1990.


                1. At the May 15, 1990, meeting referred to, FDICofficials, including the
GAO Comments   interim director of FDIC’SDivision of FSLIC Operations who signed the
               comment letter, told us they felt the report: (1) repeated what we had
               said in earlier testimony; (2) reflected a misunderstanding of FDIC’Spre-
               sent responsibilities, particularly those for managing the covered asset
               provisions, which may be subject to change as a result of an RTCstudy
               on ways to lower assistance agreement costs which will not be com-
               pleted until later this year; and (3) did not reflect the tasks FDICis faced
               with.

               We agreed with the first point. Before this report was completed we had
               brought the matters which concerned us to FDIC’S-and Congress’-
               attention by testifying because we believed corrective actions should be
               initiated as expeditiously as possible. The officials’ second point is dis-
               cussed in comment (2) below. With respect to their third point, the
               report addresses the enormity of tasks facing FDIC.This complexity of
               the challenge is the reason we believe management of the FSLICassis-
               tance agreements should receive FDIC’Sfull attention. See comment (2)
               below, also.

               2. FDIC’Scomment that our report “implies that there is not a manage-
               ment process or an overall strategy for dealing with these transactions”
               is difficult to interpret. Our report clearly states our focus on the
               strategy and policy guidance available to those reviewing the asset dis-
               position plans submitted by the assisted thrifts and the systems needed
               to track covered asset management and disposition. (GAO’Saudit in pro-
               gress of the FSLICResolution Fund’s financial statements will address the
               financial internal control structure.)

               FDICdoes not dispute the need for a strategic plan for covered assets
               and, as reflected in our report and its comments, has developed a draft
               strategic plan that includes principles, goals and guidance in this area.
               The report does not advocate a “strategic plan checklist approach,” as
               described in the comments. It does call for establishment of milestones,
               which FDIChas now included in its draft strategic plan. (See p. 7.)

               On page 2 of its letter, FDICsays that “it is critical to recognize that
               longer term strategy may be substantially affected by recommendations
               made as a result of the FIRREAmandated RTCreview.” We recognize that


               Page 26                                             GAO/GGD-90-93 Failed Thrifts
c


    Appendix u[
    Commenta From the Federal Deposit
    Insurance Corporation




    this RTC study, described on page 3 of our report, may have an impact on
    covered asset disposition issues. We believe, however, that an overall
    asset disposition strategy and guidelines are needed now.

    3. FDIC is correct in saying that it has to manage over 200 individual
    contracts entered into by ISLE. However, most of the covered assets-
    upwards of $50 billion-are      accounted for by the 91 resolution transac-
    tions discussed in this report and 5 stabilizations entered into by FSLIC
    after January 1, 1988. (See pp. 1 and 4.) According to FDIC, there are
    about $700 million in covered assets outside these 96 agreements.

    4. FDIC mentions “policy and procedures for both staff and for manage-
    ment of assisted institutions” that have “been developed in order to rec-
    ognize the contractual obligations between FDIC and acquirers.” The
    manuals referred to lay out the technical requirements of the agree-
    ments and detail the procedural requirements to guide acquirers and
    case managers through the submission and approval process for asset
    business plans and budgets. Neither these manuals nor the formats for
    submitting asset plans provide policy guidance and criteria to be used
    by FDIC officials when reviewing asset management and disposition
    submissions.

    5. While the “concept” of the assistance agreements may “presume”
    that the acquiring institutions possess expertise in the management and
    disposition of troubled assets, we found no explicit statement in agency
    guidance that possession of such expertise was a prerequisite for being
    selected as a thrift acquirer by F-SLIC. FDIC states that the acquiring insti-
    tutions (referred to in this report as the assisted thrifts) have entered
    into contracts to manage and dispose of troubled (covered) assets “at
    minimum cost to the FSLIC Resolution Fund.” We did not find such
    explicit language in any assistance agreements we reviewed.

    The agreement language we saw is more general and is described on
    page 2 of our report. The agreements do, however, require the assisted
    thrifts to submit various covered asset plans and give FDIC the right to
    approve or disapprove these plans, as discussed in the report on page 2.
    Our concern, as expressed in the report, is with the lack of guidance
    containing criteria for approving and disapproving asset disposition
    plans.

    6. We do not disagree with these general comments on the need to assess
    an assisted thrift’s covered asset inventory. We also agree that knowl-
    edge of gain and loss sharing arrangements is indeed important and that


    Page 27                                              GAO/GGD-9083 Failed Thrifb
AppendixII
Comments From the Federal Deposit
Insurance Corporation




strategies can change over time. (The complex details of these arrange-
ments for 12 assisted thrifts are described in our March 14, 1989, testi-
mony, which is listed on page 36.)

7. The statement “FDIC has concluded that the appropriate strategy is to
manage the process rather than focus on thousands of individual asset
transactions” is difficult to interpret. FDIC'S comments set forth in the
preceding two paragraphs and the four paragraphs that follow indicate
that it plans an extensive focus on individual covered assets. For
example, FDIC says in the following paragraphs that it plans to review
the assisted thrifts’ asset disposition plans, gather data on all the cov-
ered assets and reporting requirements, and use a revised asset plan
format that will provide a complete account of the asset and a descrip-
tion of the disposition strategy. We support this asset-based focus as a
means to help manage the process.

8. This system is discussed on page 8 of our report. In response to FDIC'S
comment on pages 3,5 and 6, it is important to note that the system is
now planned for completion on June 30 of this year, not March 30 as
previously planned, and will only be implemented in one region at that
time.

9. We discussed the somewhat conflicting references in the comment
letter to the system referred to as the Management Reporting/ Perform-
ance Monitoring System with FDIC officials. (Page 3 of the comment
letter says that this system had been implemented in January 1990, but
page 5 indicates that it was initially implemented in one region only as
of February 1990 and that refinements are being made.) The officials
advised us that the assistance agreements in one region only have been
placed on this system.

10. FDIC agrees with our position that integrated management informa-
tion systems are needed for asset management and disposition. It adds
that such systems are a tool rather than a solution in themselves; we
agree.

11. This task force is discussed on pages 8 and 9.

12. FDIC agrees that the initial inventory audits need to be completed and
does not disagree that 133 of the 150 audits had yet to be completed as
of March 31, 1990. We are pleased that FDIC added staff and emphasis to
the initial inventory audit work in recent months. FDIC notes also that it
has extended the completion date from May 30, 1990, to June 30, 1990,


Page 28                                              GAO/GGD-90-93 Failed Thrifts
APPWUX    II
Commenta From the Federal Depodt
Insurance Corporation




and expects that all but six of the audits will be completed by then.
(Subsequently, FDIC officials told us that this goal was met. See p. 11.)




Page 29                                            GAO/GGD-9S93 Failed Thrifta
                                                                                                                             ,
Appendix    III

CommentsFrom the Office of
Thrift Supervision

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.                     Office of Thrift Supervision
                                          Department of the Treasury
                                          1700 C; Srrcct. N.W.. W:~hn~rm.   LX:. 20552   l   (202) 906-6000




                                                                   May 16,        1990

                             Mr. Richard   L. Fogel
                             Assistant   Comptroller            General
                             GAO
                             441 G Street       N.W., Suite           3858-C
                             Washington,       DC 20548
                             Dear Mr.    Fogel:
                             Thank you for providing                a copy of the draft report, currently
                             titled  FAILED THRIFTS:                Oversight of 1988 Deals Needs
                             Improvement,  to OTS for               comments.
                             One of the primary          objectives     of this study is to assess the
                             quality       and effectiveness        of OTS’ monitoring     of the assisted
                             institutions’        compliance      with the terms of any forbearances.
                             In this regard,          the GAO concludes       that most institutions
                             complied       with the terms of the forbearances            and observes   that                    in
                             the few cases of noncompliance,               appropriate    supervisory
                             responses       have been initiated.          The report    does not make
                             recommendations          for corrective     actions     by OTS.
                             In addition   to assessing      the OTS’ performance,           this report    also
                             assesses the FDIC’s FSLIC Division’s          management of the 91
                             assistance   agreements    and the assisted       institutions’        compliance
                             with the specified     reporting    requirements.          The GAO has made
                             recommendations    for improvement      to the FDIC.
See comment 1.               As documented in this       report,   the OTS and the FDIC have
                             distinctly    different   roles.     Rather than blend the roles in a
                             way that may lead an outside         observer  to conclude that
                             significant     recommendations     have been made to OTS, a distinction
                             should be made. perhaps the easiest           way would be to issue
                             separate    reports.
                             In addition     to this conceptual   modification,      we have attached  a
                             schedule    that details   suggested  edits.       The purpose of these
                             edits   is to elaborate   upon and to clarify        the effect of FIRREA
                             on OTS policies.




                                     Page 30                                                                  GAO/Gt3MO-S3   Failed Thrifta
          c




                        Appendix UI
                        CommentsFrom the 0fflce of
                        Thrift. Supervision




                                                     -2-



See comment 2.   A6 you know, FIRREA gave the OTS the same statutory         status      aa
                 the other banking agencies   vis-a-vis    the GAO. Although        the OTS
                 did not need the full   30 days to comment on this     report,       it is
                 quite  likely that 30 days will    be required  for larger,      more
                 comprehensive   audits.
                 Assuming that all of our comments and edits         are incorporated
                 into the final   report,     there is no reason to print    them therein.
                 We would appreciate      copies prior  to its  release.




                                                           d nathan    Fiechter
                                                           Principal    Senior    Deputy   Director




                        Page 31                                                   GAO/GGDfMS93Failed Thrifta
                        Appendix Ill
                        Chnmenta From the Office of
                        Thrift Supervision




                        Schedule    A


See comment 3.   p.20         The first     two paragraphs  are repetitive.                    Some
                              consolidation     may be appropriate.
See comment 4.   p.21         Change the       first       sentence         of paragraph    two to read:
                                        “As a result   of FIRREA, capital        and accounting
                                         forbearances   granted     in conjunction    with the
                                         agreements,   were superseded      by the requirements
                                         and specified    exception    and exemption     processes
                                         incorporated   into the new law.”
                               Introduce      the      third     sentence      of paragraph     two with
See comment 5.                 “Accordingly.”
See comment 6.   p.21         Change the       second          sentence      of footnote    seven   to read:
                                        “The impact of FIRREA in eliminating          previously
                                         granted    capital    forbearances   and OTS’ actions
                                          implementing      the new FIRREA requirements      are
                                         currently     subject    to legal  challenge  by several
                                          savings associations.”
See comment 7.   p.22          Last sentence           of the first    paragraph.         Change
                               “receivership”           to “conservatorship/recei.vership.”
See comment 8.   p.22         Add a sentence            to the      first     paragraph    to the effect
                              that:
                                        “In the interim,      capital   plans are not accepted
                                          which are dependent       upon the continuation  of
                                          these forbearances.”
See comment 9    p.22          The five assisted        institutions         referenced     in the last
                               sentence of the first           paragraph      which were not
                               required      to submit capital        plans,     have all come into
                               capital     compliance     as of year-end.           Appropriate
                               modifications       to the statistics           in this paragraph
                               should be made.




                        Page 32                                                             GAO/GGD-90-93 Failed Thrifts
Appendix IIl
Comments F’romthe Office of
Thrift Supervision




                 bee :   Director    Ryan
                         Billy    Wood
                         John Downey
                         Cathern Smith




Page 33                                     GAO/GGlHO-93 Failed Thrifts
                                                                                   ,

               Appendix III
               Comments From the Office of
               Tlulft Supervision




               The following are GAO'S comments on the Office of Thrift Supervision’s
               letter dated May 16, 1990.


               1. We do not agree with ors that a separate report should be issued on its
GAO Comments   oversight of the assisted thrifts just because we were not suggesting any
               improvements in this area. Because the forbearances were granted in.
               conjunction with the assistance agreements, we believe that our review
               of the oversight responsibilities of both ors and FDIC is appropriately
               presented in one report.

               2. ors says that FIRREA gave the agency the same statutory status as the
               other banking agencies vis-a-vis GAO. errs adds that although it did not
               need 30 days to comment on this report, it is quite likely that it will
               require 30 days for larger, more comprehensive audits. This procedural
               issue will be discussed with appropriate ors personnel.

               3. No change needed.

               4. The issue of FIRREA'S impact on previously granted capital forbear-
               ances is currently in litigation (see p. 12, footnote 7). It would therefore
               not be appropriate to adopt ors’ suggested language, which would
               require us to draw a conclusion on this issue.

               5. We agree with 0~s’ suggestion and have inserted the suggested word.

               6. Footnote 7, now on page 13, has been expanded to recognize that the
               effect of FIRREA'S capital requirements on previously granted forbear-
               ances is one issue in litigation.

               7.0~~ had previously supplied documentation stating that this thrift was
               being placed into receivership. We have changed the sentence in accord
               with the new information provided in its comment letter.

               8. We have added a sentence on page 12 saying that ens has advised us
               that capital plans are not accepted which are dependent upon the con-
               tinuation of previously granted forbearances.

               9. We have added a sentence on page 12 stating that 0~s informed us
               that the five thrifts subsequently achieved compliance with the new
               capital requirements.




               Page 34                                              GAO/GGD-90-93 Failed Thrifts
Appendix ;V

Maor Contributors to This Report


                            Alison L. Kern, Assistant Director, Financial Institutions and Markets
General Government             Issues
Division                    Jerrold L. Ford, Assignment Manager
Washington, DC.             Margaret F. Lindsay, Evaluator In Charge


                            Ronald P. Taliancich, Assignment Manager
Da11as   Re@ona1   Office   Joseph M. Raple , Site Senior


                            Kane A. Wong, Assignment Manager
San Francisco               Christine D. Frye, Site Senior
Regional Office




                            Page 36                                           GAO/GGKMM.L93Failed TMfta
                                                                               .:I#


                                                                                      “.‘
RelaM GAO Products


            Thrift Crisis: Strategic Plan for Resolution Trust Corporation and Man-
            agement of FSLIC Deals (GAO/T-GGD-90-14, Jan. 25, 1999).

            Failed Thrifts: GAO'S Analysis of Bank Board 1988 Deals (GAO/T-
            GGD-89-11,Mar. 14, 1989).

            Failed Thrifts: Bank Board’s 1988 Texas Resolutions (GAO/GGD-89-59,
            Mar. 11, 1989).

            Resolving Texas Thrift Problems (GAO/T-~~~-89-10, Mar. 11, 1989).

            Resolving the Savings and Loan Crisis (GAO/T-GGD-89-7, Feb. 22, 1989).

            Troubled Financial Institutions: Solutions to the Thrift Industry Problem
            (GAO/GGD-89-47, Feb. 21, 1989).

            Resolving the Savings and Loan Crisis (GAO/T-GGD-89-4, Feb. 2, 1989).

            Resolving the Savings and Loan Crisis (GAO/T-GGD-89-3, Jan. 26, 1989).




(222264)     Page 36                                          GAO/GGLHJO-93 Failed Thrifts
f




i




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