oversight

Resolution Trust Corporation: Status of Selected Management Issues

Published by the Government Accountability Office on 1990-12-06.

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

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                                   Testimony
    I        GAO
                                                                                    143163


             For Release           Resolution       Trust   Corporation:
             on Delivery           Status     of   Selected   Management      Issues
             Expected    at
             9:30 a.m. EST
             Thursday
             December    6, 1990




                                   Statement     of
                                   Charles     A. Bowsher
                                   Comptroller      General    of   the   United    States


                                   Before    the
                                   Committee     on Banking, Finance          and Urban      Affairs
                                   U.S. House of Representatives




                         P




             GAO/T-GGD-91-'04
Mr. Chairman             and Members of the Committee:



We are pleased              to be here            today         to discuss        the        status      of
selected          management         issues            at the Resolution               Trust         Corporation
(RTC).         From RTC's           inception,            we have been concerned                       about            its
vulnerability             to fraud,           waste,           and mismanagement               for     several
reasons:           the    large      dollar            value      of the      assets         under     its        control,
the      heavy     reliance         to be placed                on private        sector         contractors,
which       requires        proper        RTC oversight               and the         need for         strong
management            information            systems.            For these        reasons,            I identified
RTC, earlier             this     year,       as 1 of 14 federal                  programs            most
vulnerable            to potential            financial            loss      to the Government                    because
of     internal        control       problems            or mismanagement.                    These programs
are now receiving                 priority         audit         attention.


ASSESSMENT OF RTC'S FIRST YEAR PERFORMANCE


The magnitude             of RTC's operation                     makes it        absolutely            critical
that      the Congress            have an adequate                  assessment          of whether                the
approach          and processes              RTC is using             will     effectively             and
efficiently            resolve       the      thrift           industry's        problems.             When
dealing        with      an issue         of this         magnitude,           we can not             adopt        a
"business          as usual"         approach.             The government               must continually
strive        to secure          the public's             confidence           that     it     can more
effectively           manage the work out                       of the       S&L crisis         than         it    did
the      regulatory        processes           that       led      to the      S&L disaster.
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To assist           the Congress              in making                 the     critical        assessment         of
whether           RTC is     on the        right       track,             we are committed                to report            to
you early           in the         next    session           on our assessment                     of RTC’s overall
performance.                I can not             emphasize              strongly           enough how important
it       is to have a continuing,                      constructive                    dialogue         between      the
Administration              and the Congress                       regarding               RTC’s operations.
Government            in general           will      lose          if     all        affected      parties        can not
openly           and honestly         discuss          all         issues            and reach      a consensus               on
how to critically                   resolve         outstanding                     problems     and issues.             It
is up to those               involved             in the      largest                work out      in the history                  of
the United           States         to demonstrate                      to the public            that     they     are
competent           and capable            of adequately                      fulfilling         their       expectation
that       they     do it     well.


Our assessment              will      address          five             key questions            about       RTC’s
performance:
           (1)      How well         did     it     establish                 its     organization?
           (2)      How effectively                 does      it        manage conservatorships?
           (3)      Has RTC resolved                 failed              thrifts           in a cost-efficient
                    manner?
           (4)      How well         has it         performed                 in selling         financial        assets?
           (5)      Has RTC done a good job                              in managing            and disposing            of
                    real    estate?

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Establishing               Its     Organization


RTC has grown                 rapidly         into      a large,            decentralized             operation           with
more than             5,000       employees.                To be managed efficiently,                        an
organization               of this         size       requires         effective            strategies            for
setting         agencywide              direction            and good communication                      policies.
Therefore,             our       assessment           will      address            the    following         key
questions:
          --    How effective                 is RTC’s planning                     process?
          --    Is     there       adequate           control         over         decentralized            operations?
          --    How well           did    RTC meet its                staffing            needs?      and
          --    Are there            good strategies                  for     managing         information               and
                for     contracting?


Managing          Conservatorships


As of September                   30,    1990,        RTC managed 206 conservatorships                                   with
assets         totalling           $91 billion.                 When an institution                    is    in
conservatorship,                   RTC gets           its     first         real     chance        to understand                the
assets         and liabilities                     of the     organization,                begin      dealing           with
its   problems,              and get          it     ready      for    resolution.                 In assessing                its
performance             in this          area,        we will         address            key questions            about         the
way RTC selects                   and monitors               managing          agents,        develops        and uses
business          plans,          provides           guidance         for     conservatorship                operations,
an$ identifies                   strategies           for     downsizing             institutions.



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Resolving               Failed       Thrifts


Since          its      inception            in August         1989 through              September             1990,         RTC
has resolved                   287 thrifts.              It    controlled             receiverships                  with     $51
billion              in assets            as a result          of   its      resolution              activities
through              September            30,   1990.         The resolution                 process          is Vital
because              how well        it      is done influences                     the ultimate              cost      to the
government               as well           as the       taxpayers.             Key questions                  to be
addressed               here      will      be:
          --         How well        does RTC schedule                    thrifts        for     resolution?
          --         Has its       solicitation               process        been open and fair                       to
                     bidders?
          --         Are the       resolution            methods          selected           the most cost
                     effective            available?


Selling              Financial            Assets


As of September                    30,      1990,      RTC had responsibility                          for     managing         and
disposing               of $142 billion                 in total          assets,        of which             approximately
$113 billion,                    or 80 percent,               were financial                 assets,          such as
cash,      securities,                   mortgages,           and other             loans.       Selling             these
assets          will       require          putting       together           packages          that          are attractive
to the          investment               community        and effectively                    marketing           them to get
the     best          dollar       return.            RTC has begun to dispose                          of these             assets
and our work will                        address       key questions                 about     its      sales
activities,                including:

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          --     Does RTC accurately                      value      and track             financial               assets?
          --     How good is decision                      making         for         what and when to sell?
          --     How accurate,              complete,             and timely              is        information
                 provided          to potential             purchasers?
          --     IS RTC effective                 in completing                      transactions?


Managing          And Selling              Real    Estate


Real estate              assets      under        RTC’s control                  totalled             approximately
$17 billion              as of September                30,       1990.          While         not     the        largest           in
dollar         value,      this      category           of assets               is     the most visible,                     will
likely         be the most           difficult             to dispose                 of because           many were the
product         of poor       investment               decisions,           and will                have to be sold                      in
local      markets,         many of which                  are depressed.                      It     is   important              that
RTC have an effective                       strategy           for    marketing                these       assets           and
ensuring          that     their      value        will        be maintained.                       Key questions                 in
this      area     will     address          how well           RTC determines                      market         values,

preserves          asset      values,         and prevents                market           disruption.


We expect          to complete              the work for              the performance                      assessment
early      next     year      and be ready                 to testify                on our         results         before
your      committee         in February                1991.


Because         we are still            in the midst                 of our work that                      will       provide
the      foundation         for      our     initial          report        card         on RTC, I would                     like

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to highlight                 the    results        of some of our previous                               work on RTC's
asset       management practices,                         controls              over      contracting,
information                 policies,          and funding               levels.


RTC'S ASSET MANAGEMENTSTRATEGY IS EVOLVING


During         its      first       year       of operation,               RTC required               acquiring
institutions                 to service          the      assets          that      RTC retained.                  At the
same time,             RTC was developing                      a Standard              Asset       Management and
Disposition                 Agreement          (SAMDA).               Released         in June 1990,               the
agreement             will       generally         be used to award contracts                               for      the
management             of a pool              of similar              assets       in a defined             geographic
location.              The agreement               requires             contractors               to prepare          business
plans       for       the        management and disposition                               of assets,             provide
asset     management                services,          and ultimately                     sell     the     assets.


The agreement                   contains        a fee      structure               that      is    intended          to
create       incentives                 for    RTC's contractors                    to maximize             proceeds
from     the         sale       of assets        and to sell               assets          quickly.              Generally,
the contractor's                    compensation               will      consist           of three         components:
(1)     a monthly               management         fee,        (2)      a disposition               fee,         and (3) an
incentive             fee.         The management               fee       is compensation                  for     managing
the     assets.              The disposition               fee         varies       depending            upon how well
the contractor                   either       matches,          exceeds,            or falls          short        of meeting
the'expected                 recovery         value       of    the asset.                 Both     the management
fee and the disposition                          fee are proposed                      by the contractor                   and

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evaluated             during      the    contractor              selection         process.                 The incentive
fee      rewards         the     contractor             for    speed in selling                 the         assets.          In
other         words,      the     sooner         an asset         is sold,         the     higher            the
contractor’s              payment.


While         the     contract       provisions               appear     sound,      there            is no question
that      market        conditions            will       influence         how these            provisions
affect         contractor          behavior             and profitability.                  Therefore,                 as RTC
begins         using      these     new agreements,                    oversight         will         be needed to
ensure         that     the      incentives             encourage        contractor             behavior              that     is
consistent             with      RTC’s goals             and objectives.


Within         the     last      few months,             RTC has begun to place                        assets          under
the new agreement.                      By the          end of December             1990,        it         plans      to have
about         $30 billion          of the $40 billion                    of assets          held            in
receiverships                 as of June 30,              1990,      under     management                   by
contractors.                   As of November 30,                  RTC had placed                $8.2            billion      of
assets,         or 27 percent               of    its     December 1990 goal,                    under            the SAMDA.
It     also     had solicitations                      pending     for     contractors                to manage an
additional             $14.6     billion.               Taken together,             these        two amounts
represent             76 percent         of      its     asset     management            goal         for        the year.




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STRONG INTERNAL CONTROLS IN
CONTRACTING ARE NEEDED


RTC's progress             in implementing               internal         controls           has not      been as
good as we would               like.       To be fully             functional,           RTC's internal
control        system      should       include:           (1)     policies,          procedures,            and
other       directives         to guide         staff      in carrying             out   their      duties;           (2)

separation           of duties         to reduce         the     risk     of fraud;            (3) adequate
supervision           of personnel;             (4) an effective                  contractor        oversight
program;        and (5) adequate                information             so that       managers         can
determine        whether        policies           and procedures              have the desired
effects.         While      RTC has developed                  some essential                controls,        many
have not        been tested            and others         need additional                development.


For example,             one of our key concerns                     is   that      RTC does not have an
effective         contractor           oversight         program.          During        field      visits         we
made late         last     summer, RTC staff                told        us that       more guidance             was
needed to effectively                   oversee         contracts.             Specifically,             they      said
standards        were needed to determine                        when contractor               performance
was unacceptable.


Also,       during       October       1990,       RTC training           staff       told     us it      was
difficult        to develop            effective         training         courses        on contract
administration             without       more specific               guidance         and standards.
Thay felt        they      could       be put       in a position              of establishing               policy



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            through            their          responses            to questions              during          training            sessions               and
            did       not      think          this    was an appropriate                       role       for        them.


            As of           late       November           1990,       RTC completed               a draft                 outlining           a
            program            for       contractor               oversight.            This      program                 includes        a
            directive                to provide            guidance            to RTC’s          field            staff       on some
            aspects           of contractor                  oversight,               such as conducting                        on-site
            visits.                But    this       directive              does not         contain              specific,standards
            for       RTC employees                  to make uniform                   decisions             regarding                contractor
            performance.                      Because        of the           large     dollar           value            of assets           to be
            placed           under        contractor               control,           we believe             it      is essential                  that
            an effective                  system          be put           in place         as quickly               as possible                  to
            assure           proper           contract        management               and oversight,                      and minimize
            RTC’s vulnerability                           to fraud,            waste,        and mismanagement.


            RTC NEEDS TO EFFECTIVELY
            MANAGE INFORMATION RESOURCES


            Information                  is    critical            to good controls.                      Obtaining              timely,
            accurate,                and complete                 financial           and operational                      information                 on
            failed           thrifts           and related                 assets      is    one of RTC’s biggest
            challenges.                   RTC believes,                    and we agree,              that         automation             is
            crucial            in meeting             this         challenge.               However,              as we reported
            earlier           this        year,       RTC needs               to apply         sound         information                resources
            management                 principles            if      its      automation          efforts                 are to be
            successful.

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The first            principle,          which      is an effective                      IRM framework
includes:
         --    strong         leadership          to direct              RTC’s automation                   efforts,
         --    a strategic            IRM plan        that         identifies               the     information
               resources           needed to carry                 out      its      main lines             of
               business,           and
         --    a technology              plan     or systems              architecture                  to ensure          that
               all      individual          systems         will         work together.


The second            principle          consists          of sound management practices                                   for
the development                of each individual                    system,             including:
         --    clearly         articulated           systems             requirements               that        describe
               exactly         what the          system       is supposed                 to do,
         --    an analysis            of the alternatives                         available             to meet these
               requirements,              and
         --    effective           management controls                      over         each system’s
               development           and operation.


We recently             reported         that     because          these          principles             were not
firmly        in place         at RTC, it           runs     the         risk      of acquiring                 and
operating            costly       information         technology                  that     may not meet its
needs,        perform         as desired,           be cost         effective,               or be compatible
with     existing          and future            RTC systems.                   For example,               RTC was
preparing            to award a contract               for         its      real         estate         asset
management            information          system      before             completing              its      overall     IRM
framework.              In response             to our concerns,                   RTC’s top managers

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agreed           to complete           the needed IRM framework                            and then          establish
systems           development           practices.              It     took          an important              first      step
with        the     appointment           of a senior                IRM official              in September                1990.
This       official           is currently            hiring          technical            staff       to help           prepare
a strategic              IRM plan         and a systems                architecture                 before        the real
estate           information           system       contract’s               anticipated             award date             in
early        January.           He plans         to use this                 staff        to prepare            systems
development              practices         by next          spring           which      will        ensure        that      RTC
designs           systems       that     best       meet its           information                 needs.         By taking
these        steps,          RTC is moving            in the          right      direction             to effectively
manage its             automation          efforts.             But,         RTC will          not     have assurance
that       its      information          needs are being                     met until          these          important
management             principles          are      in place           and working.


STATUS OF RTC FUNDING IS UNCERTAIN



RTC is           currently        approaching           a funding               crisis.             Without
sufficient             funds      to absorb           the      losses         and to purchase                   the assets
of failed             institutions,           RTC will           have to slow down its                            resolution
activity.              Sources         may differ           when calculating                    the ultimate                cost
of such a slowdown,                     but   all      agree          that      allowing            failed
institutions              to continue            to    incur          operating            losses       will           increase
resolution             costs.


In*past           testimonies,           we said        that          RTC would           need at least                  $100
billion,           or $50 billion             more than               already          provided         by FIRREA, to

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                 cover       resolution               and administrative                       costs.            To address           the
                 funding          shortfall,                we recommended                  that      RTC’s Oversight                 Board
                 develop          alternative                 funding         proposals.                The administration                      has
                 since      proposed             the        following             general          funding           mechanisms           to
                 address          RTC’s        cash flow               needs:
                            me
                                     a short            term         funding         bill      to keep resolution                     activity
                                     going           into         early     1991;
                            --
                                     funding            to cover            estimated              needs       for      some intermediate
                                     period;           or
                            --       a permanent                   and indefinite                  appropriation                 to complete
                                     the       job     of resolving                  failed         thrifts.


                 Al though         the Administration                        has not          recently               appeared       before           your
                 Committee           to discuss                   funding         options,          on October             10,     1990,        the
                 Secretary           of    the Treasury                    sent     a letter           to Congress                saying        that
                 without          additional                funding,         RTC’s resolution                        activity       would
                 cease      before         the        end of the             calendar              year.        RTC has taken                  some
                 short      term      steps           to address              its     funding          needs          through       early           next
                 year.           However,         quick            action         is needed           to    identify             a long        term
                 solution          that      will           ensure         RTC’s continued                  ability             to respond           to
                 the     nation’s          thrift            crisis.


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                 ThiYs concludes               my prepared                  statement.               I would           be pleased              to
                 respond          to your        questions.

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