Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
702509
label
Savings and Loan Industry (1989) [1]
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
702509
sourceUrl
contentType
document
title
Savings and Loan Industry (1989) [1]
citationUrl
identifierLocal
29170-006
collections
Records of the White House Office of the Chief of Staff to the President (George H. W. Bush Administration)
John Sununu Issues Files
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
702509
levelOfDescription
fileUnit
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
0fb63714b5350de9
ocrText
Originally Processed With FOIA(s):
FOIA Number:
1998-0004-F[1]
S
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin: Chief of Staff, White House Office of
Series:
Sununu, John, Files
Subseries:
Issues Files
OA/ID Number:
29170
Folder ID Number:
29170-006
Folder Title:
Savings and Loan Industry (1989) [1]
Stack:
Row:
Section:
Shelf:
Position:
G
15
25
4
1
THE WHITE HOUSE
WASHINGTON
January 31, 1989
MEMORANDUM FOR CHUCK HOBBS
FROM:
John H. Sununu
Chief of Staff
SUBJECT:
S&L Bailout
Thanks for your note. I will try and get some of your
recommendations to the right people.
See you soon.
Withdrawal/Redaction Sheet
(George Bush Library)
Document No.
Subject/Title of Document
Date
Restriction
Class.
and Type
01. Memo
From Charles D. Hobbs to John Sununu
1/27/89
P/5
Re: S&L Bailout w/Tax-Free Bonds (1 pp.)
Collection:
Record Group:
Bush Presidential Records
Office:
Chief of Staff, White House Office of
Open on Expiration of PRA
Series:
Sununu, John, Files
(Document Follows)
Subseries:
Issues Files
WHORM Cat.:
By If (NLGB) on 5/12/05
File Location:
Savings and Loan Industry (1989) [1]
Date Closed:
12/3/2004
OA/ID Number:
29170-006
FOIA/SYS Case #:
1998-0004-F[1]
Appeal Case #:
Re-review Case #:
2005-0426-S
Appeal Disposition:
P-2/P-5 Review Case #:
Disposition Date:
AR Case #:
MR Case #:
AR Disposition:
MR Disposition:
AR Disposition Date:
MR Disposition Date:
RESTRICTION CODES
Presidential Records Act - [44 U.S.C. 2204(a)]
Freedom of Information Act - [5 U.S.C. 552(b)]
P-1 National Security Classified Information [(a)(1) of the PRA]
(b)(1) National security classified information [(b)(1) of the FOIA]
P-2 Relating to the appointment to Federal office [(a)(2) of the PRA]
(b)(2) Release would disclose internal personnel rules and practices of an
P-3 Release would violate a Federal statute [(a)(3) of the PRA]
agency [(b)(2) of the FOIA]
P-4 Release would disclose trade secrets or confidential commercial or
(b)(3) Release would violate a Federal statute [(b)(3) of the FOIA]
financial information [(a)(4) of the PRA]
(b)(4) Release would disclose trade secrets or confidential or financial
P-5 Release would disclose confidential advice between the President
information [(b)(4) of the FOIA]
and his advisors, or between such advisors [a)(5) of the PRA]
(b)(6) Release would constitute a clearly unwarranted invasion of
P-6 Release would constitute a clearly unwarranted invasion of
personal privacy [(b)(6) of the FOIA]
personal privacy [(a)(6) of the PRA]
(b)(7) Release would disclose information compiled for law enforcement
purposes [(b)(7) of the FOIA]
C. Closed in accordance with restrictions contained in donor's deed of
(b)(8) Release would disclose information concerning the regulation of
gift.
financial institutions [(b)(8) of the FOIA]
(b)(9) Release would disclose geological or geophysical information
PRM. Removed as a personal record misfile.
THE WHITE HOUSE
WASHINGTON
January 27, 1989
MEMORANDUM FOR GOVERNOR SUNUNU
FROM:
CHARLES D. HOBBS CH
SUBJECT:
S & L BAILOUT WITH TAX-FREE BONDS
Deposit insurance fees would not be a "tax" if they were
voluntary (each depositor buys insurance if he wants it), which
is a good idea that probably can't be sold. Political opponents
will charge that such fees would remove existing protection for
the "little guy" who can't afford the fees; budget watchers will
complain that revenues would be unpredictable; economists will
foresee reduced savings.
As an alternative to a "tax"-fee bailout and an even more
onerous general revenue bailout, how about asking Congress to
authorize Treasury to issue tax-free bonds for the specific
purpose of beefing up the FSLIC account. Tie any actual bond
issuance to a "due diligence" process through which FSLIC and the
S & L industry would decide on payback methods and rates, and
thus be forced as an industry to come to terms with high-risk
loan practices. Establish the bond authorization as the federal
government's first "capital" account, removing bond principal
from the Gramm-Rudman limits, carrying the bonds in the operating
budget as a wash between debt service and revenues dedicated to
debt service payoff, and thus avoiding increases in the deficit
because of unfunded future interest obligations.
Bank
FOCUS
*14 POLITICAL GOLD IN S&Ls?
It's the new political hot button -- going after the S&L
crooks. Once Royko pointed out that the people probably would be
willing to pay a few billion more to put someone behind bars (see
HOTLINE 5/29), politicians in both parties have been getting into
the act. ITEM: VA Gov. Doug Wilder (in NH) proposed a national
commission to investigate the scandal (see HOTLINE 6/7).
(Wilder's "political guru" Paul Goldman "believes that an easily
understood issue, preferably with a populist strain, is the way
to voters' hearts" Donald Baker, WASHINGTON POST 6/11). ITEM:
Senator John Kerry (D-MA) proposed a major Justice Deparment
effort to go after international money laundering of S&L funds,
done much the way illegal drug money is laundered (NY TIMES 6/1,
BOSTON HERALD 6/2). ITEM: Last week 118 House members, 2/3 GOP,
jumped on the bill of Rep. Peter Smith (R-VT) to create an
independent counsel to "investigate the involvement of government
officials" in the S&L scandal (Jerry Knight, WASHINGTON POST
6/9). ITEM: 35 House Dems, led by Rep. Stephen Neal (D-NC),
moved to force the Department of Justice to devote more
time/effort to go after S&L fraud. (6/9). ITEM: Sen. Tim Wirth
(D-CO), Paul Simon (D-IL), Alan Dixon (D-IL), and Bob Graham (D-
FL) have proposed legislation to create a new division at Justice
to investigate and prosecute S&L crime. ITEM: Wirth also
introduced a bill "calling on the Bush administration to request
and spend the full $75 million Congress has authroized for
investigation and prosecution of S&L crime in both fiscal years
1991 and 1992" (John Brinkley, ROCKY MOUNTAIN NEWS 6/8). ITEM:
A group of Houston attorneys have asked Sen. Phil Gramm (R-TX),
who will nominate a candidate for US Attorney by 6/15, to pick
someone "who will make bank and thrift fraud prosecutions the
office's No. 1 priority." (HOUSTON CHRONICLE 6/7). ITEM: Over
the weekend Rep. Carlos Lucero made the S&L's a featured part of
his stirring convention address that earned him enough delegate
votes to challenge frontrunner Josie Heath in the CO Dem Senate
primary to succeed retiring GOP Sen. Wm. Armstrong (see CO
Senate).
EDITORIAL AND COLUMN OPINION remains biting. Editorial in
the (Attorney General's home state) PHILADELPHIA INQUIRER:
"Right now, more than 1,000 cases each involving at least
$100,000 in waylaid funds are going uninvestigated. That's
intolerable it is unconscionable for the government to ensure
failure by employing too few people to pursue the slimeballs."
(6/6). Dave Barry in the MIAMI HERALD: "I don't want to hear
any more nitpicking from you taxpayers. I don't want to hear any
absurd proposals, such as that we round up all the people
involved in the S&L mess, and for every million tax dollars they
cost us, we sentence them to 100 hours of public service inside a
closed packing crate with a 375-pound federal regulator named
Bruno, whose hobbies are yodeling, intestinal malfunction and
full-body massage. That would be grossly inappropriate. Fifty
hours is plenty" (6/10).
jistz
LONG, ALDRIDGE & NORMAN
ATTORNEYS AT LAW
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
1500 MARQUIS TWO TOWER
285 PEACHTREE CENTER AVENUE
NORTHSIDE OFFICE
ATLANTA, GEORGIA 30303-1257
TWO CONCOURSE PARKWAY
TELEPHONE 404 527-4000
SUITE 750
TELECOPIER 404 5274198
ATLANTA GEORGIA 30328 5347
TELEX 154183
TELECOPIER 404 527.8398
THE CHIEF seen of STAFF
WRITER'S DIRECT DIAL NUMBER
September 28, 1989
has
404 527-4030
Mr. John E. Robson
Deputy Secretary of the Treasury
Department of Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear Deputy Secretary Robson:
I am writing this letter at the request of Tom Healey of
Goldman Sachs and for the purpose of sharing my thoughts regarding
certain issues currently being discussed by the RTC. Tom has
asked me to limit the length of this letter and, accordingly, I
will not bore you with my background. Suffice it to say that I am
a specialist who has worked with troubled financial institutions
and their assets for sixteen of my twenty-one years in the
practice. I was involved at the outset of both FSLIC's and the
FADA's attempts to deal with this problem and am intimately
familiar with the nature and results of those efforts.
Because of the necessarily general nature of this
letter, I have taken the liberty of enclosing for your review and
information a copy of a paper which I prepared for Richard Breeden
earlier this year. Many of the issues with which you are now
dealing at the RTC are discussed in much greater detail in this
paper, and I believe that you will find it to be helpful as you
proceed with this most formidable task. I will, however,
appreciate your not copying or distributing this paper without my
permission.
In response to Tom's request, please consider the
following points which I believe to be of utmost importance as the
RTC formulates its policies and structures for the national
resolution effort:
1. Nature of Problem. First and foremost, it is
critical that the RTC understand the nature of the problem with
which it is faced. This is not a banking problem, and it is only
in small part a commercial real estate problem, although it will
increasingly become so over the next five years. Today, the bulk
of the problem is one involving problem commercial loans backed by
Mr. John Robson
September 28, 1989
Page 2
real estate. Given this fact, the primary task of the RTC at the
outset of the resolution effort will be to cause these problem
loans to be converted to marketable earning loans or to marketable
owned real estate as quickly and efficiently as possible. In the
past, those responsible for the resolution effort made the
mistake, initially, of equating loans backed by real estate with
real estate itself. If this mistake is perpetuated as resolution
mechanisms are designed by the RTC, the result will the retention
of marginally useful "experts" and the creation of mechanisms,
structures and approval processes that will be virtually useless
for three to five years.
2. Expertise. Given the nature of the problem, at the
outset of the resolution effort, the primary expertise needed by
the RTC will be that of experienced creditors' rights and workout
specialists. In the past, the nature of the expertise needed was
not recognized and, even today, the RTC and the FDIC are staffing
with retired bankers and are retaining and relying on those with a
commercial real estate or commercial real estate finance
background. Although pure real estate expertise and capital
markets expertise will be necessary components of the national
effort over time, these areas of specialty will be only marginally
useful until these loans are converted to earning loans or to
owned real estate.
3. Approval Processes. It is critical to the success
of the resolution effort that workable approval processes be
established by the RTC. With respect to sales, reasonable time
periods for approvals can be tolerated. However, workouts of
problem loans through adversarial negotiation demand quick and
decisive decision making, often at the negotiating table. In the
past, major workouts which would have saved the system millions of
dollars, have fallen through because of the inability to obtain
quick approval from Washington. Mechanisms must be put in place
that permit workout approvals to be obtained within a twenty-four
to forty-eight hour period if major workouts of problem loans are
to be accomplished on behalf of the RTC.
4.
National Workout Philosophy. The RTC must
establish a national philosophy weighted away from the utilization
of the courts and judicial processes as the primary loan
resolution mechanism. Experience has proven that a negotiated,
voluntary settlement, without litigation and without bankruptcy,
is the most effective and efficient means of dealing with problem
loan assets. For this reason, the "workout"--whether it be a true
economic workout or a collateral recovery or "liquidation"
Mr. John Robson
September 28, 1989
Page 3
workout--generally should be the major objective of the workout
specialist representing the RTC nationwide. This philosophy must
be established and maintained nationally by the RTC if the
resolution effort is to be successful.
5. Legal Network. The RTC must identify and utilize
experienced creditors' rights and workout specialists, with proven
track records, in connection with problem loan assets. Workout
specialists must be distinguished from bankruptcy lawyers,
commercial litigators and commercial real estate lawyers, with
each being utilized only in their area of specialization. Chosen
firms and specialists should follow a consistent, national workout
philosophy, should be administered by a knowledgeable general
counsel's staff in Washington, should meet at least quarterly for
coordination purposes and should be linked by computer systems
with the general counsel's office in Washington and with each
other. In short, specialists must be used and carefully managed
in accordance with an established resolution philosophy. Contrary
to the popular belief, lawyers are not fungible in the creditors'
rights and workout area. Any lawyers and law firms used solely
because of their "political connections" should be used only in
the more routine areas of real estate closings, title matters,
etc.
6. Conflicts of Interest. If forced to make a
decision today, many of the major law firms having expertise in
these areas of specialty, many of the major investment banking
firms, and many of the national asset management companies, would
opt not to represent the RTC in the resolution effort. The
initial drafts of the conflict of interest rules were so all-
encompassing, that many law firms would have been disqualified
merely by reason of their general counsel status for commercial
banks or thrift institutions. If these rules are not narrowed
appropriately to allow firms to represent the RTC with respect to
one institution or problem asset portfolio, while at the same time
representing an unrelated institution or an acquirer of an
unrelated institution or unrelated portfolio, I believe that the
RTC will run the risk of having to rely on second tier, non-
specialty expertise in the resolution effort. I do not believe,
however, that any firm representing the RTC in any matter should
be allowed to maintain an adversarial position against the RTC in
any other matter. Although these comments constitute a vast
oversimplification of the problem, it clearly will be necessary to
maintain some flexibility with respect to technical conflicts, if
the RTC is to have available to it the services of the top firms,
both legal and otherwise.
Mr. John Robson
September 28, 1989
Page 4
7. Title Matters. The RTC will be a major purchaser
or placer of the services and protections available from the title
insurance industry nationally. The title services required by the
RTC will fall into two primary categories. First, the need for
fast, current and accurate updates of the title status of assets
and, second, the issuance of new title policies on the sale of
owned real estate or the rework or sale of loans. Because title
delays can have an adverse impact on both the liquidation and the
rework of assets, the RTC must analyze its alternatives
immediately regarding retention of necessary title services.
Prior analysis of this issue during the start-up phase of the FADA
indicated that the formation by the RTC of a wholly-owned title
agency, qualified to do business with the major national title
insurance companies, should be seriously considered as a means of
minimizing the costs of necessary title services and maximizing
competition for the business of the RTC. As I remember,
preliminary business plans were prepared for such an agency, but
there was no follow-through by the management of the FADA.
8. Grading and Sorting of Assets. Because of the
nature, size and diversity of the problem portfolio of the RTC, an
essential first step in the resolution process will be to "grade
and sort" the assets by size and value, by asset type, by project
type, by geographical market area, by earning VS. non-earning
assets, and by degree of recovery difficulty for loan assets.
Without a comprehensive, national classification program of this
nature, the prospects for creative "pooling" of assets for sale
and for dealing with the problem on a basis other than asset by
asset will be greatly diminished.
9.
Resolution Alternatives--RTC Assets.
A. Cash Sales. It is absolute nonsense to
believe that massive cash sales of the type of assets which will
be held by the RTC can be accomplished quickly. Despite the
untenability of a general quick cash sale philosophy, however,
certain specific classifications of assets will lend themselves to
a cash sale approach in the initial stages of the resolution
process. Candidates for this approach will be smaller asset
classifications, particularly those with respect to which recovery
cost bears an unreasonable ratio to asset size. Also, "odd-lot"
classifications should be considered as candidates for auction or
quick cash sale even at deep discounts. Second generation motels,
putt-putt golf courses, and out-of-the-way convenience stores are
a few examples of odd-lot properties that will be held by the RTC.
Assets of this nature should be classified, grouped and sold at
Mr. John Robson
September 28, 1989
Page 5
the front end of the resolution process to stop the unnecessary
hemorrhaging caused by these assets, the unreasonable staffing
which would be required to handle these assets, and to create
early results which will help buy time, politically, to deal
creatively and effectively with the bulk of the portfolio.
B. Leveraged Sales. Because of the political and
economic problems incident to any broad-based program for
expedited cash sales, utilization by the RTC of highly leveraged
sales of asset pools, containing a blend of asset classifications,
will be essential to a successful resolution program over the
coming years. Leveraged sales, if structured properly, can
encompass most, if not all, of the elements of the optimum
resolution structure- expertise, shared value enhancement
over time, quick return of capital to the system through credit
enhancement of purchase money paper, and finally, shifting of the
hemorrhage factor to the purchasing entity. Unfortunately,
leveraged sales structures with participating features can be
complex, especially in the context of pooled loans and real estate
which are troubled. Many structures exist which will permit the
RTC to share in upside value enhancement of the underlying real
estate in the context of a leveraged sale of a pool of assets.
The question is not whether such mechanisms are available, but
whether complex structures of this nature can be put into place
successfully in a highly politicized and bureaucratic environment.
C. Asset Management. Because of the sheer
massiveness of the portfolio to be handled by the RTC, asset
management contracts with private enterprise asset management
companies must be an integral part of the overall resolution
effort. However, contracted asset management, as well as internal
asset management by RTC staff, will be only as effective as the
company or individual is experienced in the handling of troubled
assets. Here, as with attorneys, experience and a proven track
record will be the elements critical to the successful use of
contracted asset managers. In addition, asset management
contracts must be structured with sufficient incentive for the
asset management companies in order to ensure proper focus and
attention to quick resolution and sale of the assets by those
companies. In the latter stages of the resolution effort by FSLIC
and the FADA, contracted asset management became a very close
economic call for many asset management companies, and the results
obtained by those companies eventually reflected the lack of
proper incentive under their contracts.
Mr. John Robson
September 28, 1989
Page 6
10. Resolution Alternatives--Assets in Troubled but
"Solvent" Thrifts. The RTC must not only create mechanisms to
"privatize" RTC assets as quickly as possible, but also must,
whenever feasible, stop the flow of additional assets into the
system from liquidated institutions. Thus, a premium must be
placed on dealing with potential acquirers which are willing to
deal with a whole institution and not just the "good-bank" side of
an institution. In addition, in troubled, but "solvent" thrifts,
every effort must be made to develop techniques, short of actual
liquidation, to clean up troubled thrifts, either by creating a
more favorable quasi-private enterprise environment in which to
accomplish resolution, or by creatively excising problem
portfolios by permitting leveraged, bulk sale of these portfolios
by these thrifts to preapproved purchasers with requisite capital
and expertise. In short, mechanisms to stem the flow of assets
into the RTC, should be thoroughly explored early on by the RTC.
Mr. Robson, the above thoughts and comments are, by
necessity, very general in nature. However, if you wish to
discuss any of these matters in more detail, I will be happy to
arrange to stop by when I am next in the Washington area. I made
many of these same comments and suggestions to the FADA when it
was being formed in 1985, but it was very difficult to get anyone
to stop long enough to listen and understand the nature of the
problem with which they were dealing. The FADA and FSLIC
experience can be invaluable to the RTC as it sets up resolution
mechanisms, and I sincerely hope that you and others involved with
the RTC will look closely at what has happened over the past four
years and will listen to those who have long-term experience in
dealing with troubled assets in financial institutions.
By the way, as I was writing this letter, I received a
call from our mutual friend, Mack Taylor. Mack asked that I send
his best regards to you and his condolences with respect to the
burden which you have assumed at RTC!
If I can be of any further assistance to you, please do
not hesitate to call.
Mr. John Robson
September 28, 1989
Page 7
Best regards.
Sincerely yours,
John G. Aldridge
JGA/hh
Enclosure
LONG, ALDRIDGE & NORMAN
ATTORNEYS AT LAW
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
1500 MARQUIS TWO TOWER
285 PEACHTREE CENTER AVENUE
NORTHSIDE OFFICE
ATLANTA, GEORGIA 30303-1257
TELEPHONE 404 527.4000
TWO CONCOURSE PARKWAY
SUITE 750
TELECOPIER 404 527.4198
ATLANTA. GEORGIA 30328-5347
TELEX 154183
TELECOPIER 404 527.8398
WRITER'S DIRECT DIAL NUMBER
January 10, 1990
404 527-4030
CONFIDENTIAL
Mr. Daniel Kearney
President and Chief Executive Officer
Oversight Board for the RTC
1825 Connecticut Avenue, N.W.
9th Floor
Washington, D.C. 20232
Dear Dan:
I enjoyed meeting and talking with you in Washington
last week and hope that our discussions were helpful to you. I
have reflected on the various matters which we discussed and
believe that there are a number which merit your further
consideration. Each of these matters, even though preparatory in
nature, could be critical to the effective management and
oversight of the national resolution effort.
1.
Education of Key Government Players. First, and I
believe most important, were our discussions regarding the
necessity to educate Congress in general, and key members of
Congress and the Administration in particular, with respect to the
nature of the task before the RTC and the realities of dealing
with defaulted commercial loans. Both you and I know that, under
the best of circumstances, the resolution effort will span many
years, will cost billions of dollars to implement, will produce a
perception of little progress in the initial stages, and will
culminate in a bottom-line loss in the hundreds of billions of
dollars. Given this reality, we must create, at the inception of
the resolution effort, realistic expectations on the part of
Congress, the Administration and, to the greatest extent possible,
on the part of the public in general.
You will remember that, after an initial honeymoon
period, the FADA was attacked on all fronts for its failure to
sell assets more quickly. In fact, the vast majority of assets
held by the FADA were defaulted loans which could not be sold at
Mr. Daniel Kearney
January 10, 1990
Page 2
any price. Generally speaking, the same will be true of the RTC,
and it is critical not only to the national resolution effort, but
also to the very survival of the RTC, that a well-designed program
for education of the key players in the resolution effort be
undertaken immediately and continued throughout the resolution
process. If this is not done successfully, most likely nothing
else will matter because the RTC will never be allowed to complete
its task.
Because the workout process generally is not well
understood, and because of the political pressures arising out of
the thrift industry collapse, education will not be easily
accomplished. At the very least, it must entail systematic and
well-planned briefings of key players and general education of the
press on the realities of the effort undertaken by the RTC. The
successful implementation of this education program is so
important to the overall resolution effort that I would recommend
to you the immediate establishment of a staff component charged
only with the design and implementation of such a program.
2. Market Perception. We discussed the perception by
private enterprise that it will be very difficult to consummate
any deal with the RTC on realistic terms during the early stages
of the resolution effort. Because of this perception, a number of
major national players in the investment banking, real estate and
asset management communities have made the preliminary decision to
sit on the sidelines and allow "market forces to take effect". In
short, they believe that resources should not be wasted in an
attempt to make deals on unrealistic terms in a highly
politicized, bureaucratic environment, when by spring or summer of
1991, the RTC will be forced, by a perceived lack of progress and
hemorrhaging costs, to move assets into private enterprise upon
the best terms available.
Because of this perception, I believe it is extremely
important that a major transaction be successfully closed by the
RTC no later than the summer of 1990. In my opinion, the optimum
transaction would be a leveraged sale of a blended pool of owned
real estate and loans in the range of $250 million, but in no
event less than $100 million. If the RTC can show the markets
that a deal of this nature can be done, the harmful perception
discussed above will be countered by the reality of a major
transaction, with the result that other major players may be
enticed from the sidelines.
Mr. Daniel Kearney
January 10, 1990
Page 3
You mentioned during our meeting that the RTC will be in
a position to show early progress through the sale of servicing
portfolios, government securities and other marketable thrift
assets held by the RTC. I agree with your statement and believe
that sales of this nature will be important, especially to
Congress, which probably will not distinguish between the types of
assets sold by the RTC. However, I do believe that private
enterprise markets will make this distinction and, therefore, an
early leveraged sale of a blended pool of real estate and loan
assets is a worthy goal for the RTC to pursue.
3. Education of RTC Workout Personnel. We discussed
the fact that one of the most critical, if not the most critical,
element of a successful resolution effort will be the efficiency,
from a time and cost standpoint, of converting defaulted loans
into salable loans or owned real estate. Although the utilization
of experienced workout and creditors' rights professionals will be
essential to this conversion process, equally important will be
the manner in which these loan assets are handled, on a day-to-day
basis, by the RTC workout personnel in the regional offices.
Generally speaking, these people are not experienced in the area
of loan workouts and have had little or no training in the basics
of dealing with borrower tactics, adversarial negotiations,
workout strategies, lender liability, etc.
Of course, as we all recognized at our meeting, it is
not possible to train these people to be workout specialists. It
is possible, however, to raise their level of awareness of basic
workout strategies and techniques and to instill in them a
fundamental understanding of workout "do's and don'ts". Because
these people will occupy a critical position in the process of
converting defaulted loans into salable loans and owned real
estate, I strongly recommend that this basic education process be
commenced immediately in each of the RTC regions and that this
process continue throughout the resolution effort. For your
information and by way of example, I have enclosed copies of
outlines of substantive presentations of the type which I believe
will be helpful to RTC personnel.
4. The "Magic Pill". Although the national resolution
effort must be oriented to nonjudicial workouts if it is to be
successful, even the most experienced workout specialist will lose
up to thirty percent of workout efforts to the judicial system.
Mr. Daniel Kearney
January 10, 1990
Page 4
Because of the inexperience of the RTC workout personnel and
because of the large number of defaulted loans in the RTC, we can
expect this percentage to be much higher in the RTC workout
effort--at the very least, fifty percent.
For this reason, we discussed the feasibility of
legislation which would create a common forum for the adjudication
of the thousands of claims which will be filed in the course of
the national resolution effort. of course, efforts to find a
"magic pill" to simplify the recovery effort are not new. The
Hudspeth doctrine was the centerpiece of the FSLIC recovery effort
and was used to force borrowers to litigate their claims before a
FHLBB administrative tribunal before resort to the judicial
system. As you know, Hudspeth was recently deemed unconstitu-
tional by the United States Supreme Court. Similarly, there is a
"Hudspeth-like" claim process under FIRREA which has yet to be
tested. Finally, other so-called "remedy shields", such as the
D'Oench Duhme doctrine, are regularly utilized by the FDIC/RTC to
expedite recovery and thwart borrower claims and defenses.
To date, none of these efforts to expedite the recovery
effort through the use of special forums and remedy shields have
materially reduced the success of borrowers delaying recovery by
using the judicial process. Accordingly, as suggested by Larry
Cherkis at our meeting, I do believe that efforts should be under-
taken immediately to determine the feasibility of creating,
through legislation or otherwise, special forums and other special
remedy shields which could expedite the national recovery effort.
Dan, in addition to the four matters discussed above, I
believe that there are other points touched on that need further
discussion. In particular, it will be critical that the RTC
create a workable approval mechanism in the workout area. Steps
in the right direction have been taken by decentralizing the
approval process, but there is still a long way to go. Also, the
early identification of the largest defaulted loans and the
placing of these loans in the hands of our top workout specialists
was another thought that we should pursue further.
In any event, although our meeting was rather freewheel-
ing, I thought that progress was made, and I look forward to
continuing these discussions in the future.
Mr. Daniel Kearney
January 10, 1990
Page 5
Best regards.
Sincerely yours,
1st
John G. Aldridge
JGA/hh
Enclosures
CC: Mr. Thomas J. Healey
Lawrence Cherkis, Esquire
Mr. Mark Kantor
Mr. Michael Jungman
bcc: C. Boyden Gray, Esquire
THRIFT INDUSTRY ASSET RESOLUTION
- DEALING WITH THE TUMOR
John G. Aldridge
Long, Aldridge & Norman
Two Concourse Parkway
Suite 750
Atlanta, Georgia 30328-5347
(404) 527-4000
TABLE OF CONTENTS
I. INTRODUCTION
1
II. NATURE OF THE PROBLEM
2
III. ELEMENTS OF THE SOLUTION
8
IV. AVAILABLE ALTERNATIVES - ASSETS IN THE SYSTEM
14
A. Expedited Sales for Cash
16
B. Leveraged Sales
18
C. Orderly Liquidation by the System
23
V. AVAILABLE ALTERNATIVES - ASSETS IN TROUBLED, BUT
"SOLVENT" INSTITUTIONS
29
A. Pre-Liquidation Mechanisms
30
B. System Approved, Troubled Portfolio Sales by
Solvent Institutions
33
VI. CONCLUSION
36
I. INTRODUCTION
To date, the Bush Administration necessarily has directed
its time and energy to the process of enacting the "Financial
Institutions Reform, Recovery and Enforcement Act of 1989"
("FIRREA"), an Act designed to improve the regulatory and
deposit insurance structure affecting the thrift industry, to
provide through the Resolution Funding Corporation ("Refcorp"),
a vehicle to raise the capital necessary for continued thrift
resolution, and to create through the Resolution Trust
Corporation ("RTC"), a vehicle within the government to manage
resolution of insolvent thrifts and their assets. Once enacted,
this legislation will represent an important first step toward
insuring that a financial institutions crisis of the nature and
scope of the current thrift industry crisis will not occur
again. Unfortunately, with the press of the legislative
process, little time has been available to deal with the most
immediate problem, a problem which is growing larger by the day,
and a problem which, if not dealt with quickly and creatively,
has the potential politically to become "Bush's problem" within
the next twelve to twenty-four months. The problem referred to
is massive in size and scope and is composed primarily of non-
performing commercial loans backed by real estate and,
secondarily, of owned commercial real estate projects which are
troubled. This problem, euphemistically referred to in this
paper as the "tumor", exists in thrifts which are solvent (at
least from a regulatory standpoint,) in thrifts which are
insolvent, in FSLIC/FDIC receiverships and conservatorships and
in corporate FSLIC/FDIC, and will in the future exist in the RTC
(FSLIC/FDIC receiverships and conservatorships, corporate FSLIC/
FDIC and the RTC will sometimes hereinafter be referred to
collectively as the "System"). Because of the nature and size
of the tumor, it must be excised quickly, efficiently and
effectively. The real question is not how, because viable
alternatives do exist, but instead whether it is realistic to
expect that any of the more creative and effective alternatives
can be implemented in such a highly politicized environment.
II. NATURE OF THE PROBLEM
Before outlining alternative solutions to this problem, it
is imperative that the nature and scope of the problem be fully
understood. Over the past two years, the severity of this
problem has been consistently and repeatedly underestimated,
primarily because of the widespread lack of understanding of the
nature of the assets involved.
First, this is not a banking problem, and it will not be
solved by bankers. Neither is it a regulatory problem, and it
will not be solved by regulators. And today, only a small
portion of the problem can be accurately characterized as a
commercial real estate problem. Instead, approximately 70% to
80% of the problem lies in the area of nonperforming loans -
-2-
debts owed primarily by U.S. citizens and entities, backed by
commercial real estate throughout the United States, but
concentrated in overbuilt and troubled markets. Thus, the
problem today can only be accurately characterized as involving
for the most part creditors' rights or "workouts". The
remainder (20%-30%) of the problem involves the more mundane
issues of valuing and selling owned real estate. As this high
percentage of loan assets is converted, over the next five
years, to commercial real estate through the collateral recovery
and workout process, the nature of the problem ultimately will,
of course, change to one involving primarily owned commercial
real estate. But today, only a portion of these troubled assets
consists of owned real estate, and therefore, it would be a
mistake to look to the commercial real estate industry alone to
solve the problem. Top real estate expertise will be of limited
use until these loan assets are converted to hard real estate.
Moving forward, it is absolutely essential that the Bush
Administration avoid perpetuating the potentially disastrous
mistake of equating loans backed by real estate with real estate
itself. If this mistake is perpetuated as resolution mechanisms
are designed, the result will be the retention of marginally
useful "experts" and the creation of mechanisms, structures and
approval processes that will be virtually useless for three to
five years.
Second, the tumor is enormous. Estimates of the gross
dollar amount of troubled loans and owned real estate presently
-3-
in troubled thrifts and the System vary widely, but it is a safe
bet that the number substantially exceeds $200 billion. Equally
important in any resolution analysis is the actual number of
individual assets, both loans and owned real estate. Here
again, estimates vary widely, but the number could easily exceed
100,000 individual assets, excluding those consisting of
residential real estate and loans backed by residential real
estate. The sheer size of the problem has profound
implications, both from a resolution standpoint and a market
standpoint. Workout and collateral recovery processes are
extremely time and cost intensive. It is not at all unusual to
find that a single loan asset resolution will consume twelve to
twenty-four months and hundreds of thousands of dollars in
business and legal workout costs. All too often, especially in
cases handled in the System, litigation and bankruptcy delay
loan asset resolution for years, increasing resolution costs and
reducing net recovery value. It is simply easier for a
government asset manager to allow an asset to be "handled"
through bankruptcy or litigation, than to risk a negotiated
workout which, through 20/20 hindsight, may reflect poorly on
the asset manager. In 1988 alone, FSLIC spent well in excess of
$100 million on attorneys' fees in connection with its
resolution efforts, and much of this undoubtedly was spent in
connection with litigated matters and bankruptcy cases resulting
from a "foreclose first and ask questions later" mentality. In
addition to high resolution costs, loan asset resolution is
-4-
enormously time consuming, demanding hands-on attention from
asset management personnel. As evidenced by the FDIC experience
with the Butcher bank failures, one sizeable portfolio can
consume the time of hundreds of people for years, not to mention
the time of outside professionals and consultants. Given the
size and complexity of the current crisis, there is simply no
chance that the FSLIC or the FDIC can productively and
efficiently staff up to handle these assets nationwide.
Thirdly, the tumor is causing massive hemorrhaging.
Commercial real estate is an active, not a passive asset,
demanding constant and substantial "protective" advances of
capital to preserve and maintain value. Advances of this nature
are necessary whether the asset is in loan form or in the form
of owned real estate. Ad valorem taxes, insurance, maintenance,
security, management, legal, and other expenses must be funded
merely to maintain the status quo. Estimates range as high as
$100 million per day industry-wide for costs and expenses
pertaining to troubled loans and real estate assets. In
addition, in the so-called solvent but troubled institutions,
additional monies are often advanced to borrowers simply to
delay the day of reckoning and to preserve the fiction of
solvency. In the vast majority of troubled institutions in the
U.S. today, the tumor is growing unchecked, not because the
institution is making new troubled loans, but because the
institution is actively increasing the size of existing
problems, both through unnecessary new advances to delay loss
-5-
recognition and through necessary protective advances to
preserve existing collateral value. Obviously, any solution to
this crisis must minimize the impact of this hemorrhaging both
on the government and on the industry itself.
Fourth, the resolution of troubled real estate loans
through the "workout" or negotiated settlement process, as
opposed to costly and time-consuming litigation and bankruptcy,
demands quick, decisive, creative and experienced management.
Experience over the past four years with the FSLIC and FADA
resolution process has led to one unassailable conclusion - this
resolution process, which will increase at least twentyfold from
its current level, cannot be handled effectively and efficiently
in a bureaucratic environment. In the recent past, major
workouts of large problem loans have failed, simply because of
cumbersome and time-consuming approval processes within the
government. By the time the requisite governmental approvals
are obtained, the facts and assumptions underlying a negotiated
workout have often changed, not to mention the inclination of an
adversarial borrower to settle voluntarily. Even with owned
real estate, sales to qualified purchasers have fallen through
while thousands of bid packages, demanded by Congressmen for
their real estate industry constituents, were prepared and sent
nationwide. While the massive bureaucratic machinery slowly
grinds on, the hemorrhaging continues unchecked. Thus, the
cumbersome nature of the governmental resolution process itself
has, over the past few years, increased the size and severity of
-6-
the problem, as has the highly politicized environment in which
resolution must take place. Again, any solution must minimize
bureaucratic involvement to the greatest extent possible.
Fifth, up-front, pre-resolution valuation is very
difficult, if not impossible in many cases. Experienced
creditors' rights and workout professionals are essential in any
loan valuation process, and even then, the margin of error can
be great. The task of accurately valuing a $10 million
defaulted loan - secured by a 35% occupied office building in
south Florida, "appraised" at $8 million, owned by a single-
purpose, bankruptcy-prone partnership with thirty-five investor
limited partners, guaranteed by an individual promoter of
questionable worth and character who is asserting various
defenses and lender liability claims, having substantial
unsecured payables, needing infusions of substantial capital for
tenant improvements before occupancy can be increased, and
needing additional capital infusions to remedy deferred
maintenance items - is not an easy task. As evidenced by the
FSLIC's experience with the sale of troubled institutions,
front-end valuation either results in windfalls for the private
enterprise purchasers, or broad-based government subsidies
through FSLIC notes, yield-maintenance guaranties and other
guaranties designed to "cover" problem loans, or both. Many of
these pre-Bush Administration deals cut by the Federal Home Loan
Bank Board were "lose/lose" propositions for the System, with no
substantial upside even if the assets should in the future be
-7-
effectively restructured and liquidated by the purchasers.
Ideally, therefore, any solution must contain a realistic
recovery element for the System and the taxpayers if real estate
values recover sufficiently to allow recoupment of all or a
substantial portion of losses incurred on these assets.
Sixth, and finally, experience has shown that the net
recovery value realized through effective, creative and
efficient handling of these assets by experienced workout
professionals can be expected to exceed, by up to 30%, the net
recovery value realized through methods which simply allow
recovery processes, bureaucratic or judicial, to run their
normal course. Assuming that the "tumor" will equal or exceed
$200 billion, the resolution mechanisms created through the RTC,
or otherwise, potentially could save $60 billion or more over
the period of asset resolution. Any solution must create
mechanisms which enhance the possibility of effective and
efficient resolution or must place the assets in an environment
in which such resolution is most likely, or both.
III. ELEMENTS OF THE SOLUTION
Given the nature and size of the tumor, it will be
essential for any proposed solution to achieve as many of the
following objectives as possible:
First, the resolution of the problem must be entrusted to
those individuals and entities which have demonstrable and
-8-
unquestioned expertise in three substantive areas of endeavor -
workouts, commercial real estate and capital markets.
Most important over the resolution period will be the use
of creditors' rights and workout specialists - people who have
hands-on experience in resolving problem loans and who are
familiar with the techniques and structures which can be
utilized to expedite the recovery process. It is absolutely
essential to expedite the process of converting these problem
loans to earning loans or to owned real estate. Unfortunately,
the number of true specialists in the workout area, both
business and legal, is not great, although the sky is black with
those circling the "tumor". If the Bush Administration is to be
successful in dealing with this problem, it must successfully
identify and utilize those specialists who understand and have a
demonstrable track record in dealing with the tumor from a
creditors' rights and workout standpoint.
Commercial real estate expertise will also be necessary
from the beginning of the resolution process, and the need for
pure real estate assistance will increase as the workout process
matures and loans are converted to hard real estate assets.
Given the fact that many of the major metropolitan areas in the
United States are presently overbuilt and that the thrift
industry crisis has had an adverse impact on many major real
estate markets, there should be no shortage of quality real
estate talent available to assist in the resolution of these
assets over the next five to ten years.
-9-
Finally, capital markets expertise must be utilized as a
part of the overall resolution process. Given the size of the
problem and the number of assets involved, the "spreading" of
the burden of funding the problem through pooling of asset
mechanisms in the public markets will be essential, as will the
creative underwriting of major asset sales by solvent, but
troubled institutions. Again, we are blessed with an abundance
of expertise in these areas through the quality Wall Street
firms and are awash with capital availability, both domestic and
foreign. These sources can be tapped, however, only if
structures and mechanisms are developed which will permit this
enormous pool of assets to be accessed in an economically
feasible manner.
Second, in order to minimize loss to the greatest extent
possible, proposed structures and alternative solutions must
"buy time" to allow for reasonable recovery of real estate
values, especially with respect to the upper tier or "Grade A"
problem assets, and must incorporate mechanisms which will allow
the System or, in the case of in-life institutions, the
institution, to participate in this long-term value enhancement.
Although, admittedly, the grade and quality of both borrowers
and commercial real estate is lower in the thrift industry
crisis than it was in the real estate crisis in the early and
middle 1970's, it is still reasonable to expect substantial
value recovery over time. Given the nature and size of the
problem, the Bush Administration should expect that the
-10-
resolution process will extend over a period of approximately
10 years, and resolution mechanisms should be structured with
this time-frame firmly in mind.
Third, capital must be returned to the System as soon as
possible, whether the system is the FSLIC/FDIC or solvent,
troubled institutions. To accomplish this in the least
burdensome and most politically palatable manner, creative
credit enhancement mechanisms should be considered as a part of
the overall solution in order to access public finance markets
and broaden the array of debt and equity structures which can be
used to buy time and spread the problem and risk over a more
widely dispersed capital base. Mechanisms of this nature, which
are discussed below in more detail, may prove politically
preferable to the direct assistance approach which has been
prevalent thus far in the resolution process. Realistically,
however, it is a virtual certainty that direct assistance will
continue to be necessary as a part of the resolution process,
but indirect assistance mechanisms, such as credit enhancement,
may reduce the amount of direct assistance needed and,
therefore, some of the political fallout incident to the direct
assistance approach.
Fourth, because of the high cost of holding and resolving
these problem assets, the so-called hemorrhage factor must be
minimized and, whenever possible, shifted entirely from the
System or the troubled institution. Because these costs will
continue to be carried within the System as long as the System
-11-
owns the assets, creative sales structures must be explored, not
only with respect to owned real estate, but also with respect to
problem loans. As to the latter, it will be difficult, if not
impossible, to achieve meaningful, front-end sales, except
through "blended" pools which achieve acceptable diversification
between earning and non-earning loans and owned real estate, and
unless the Bush Administration is willing to consider
sufficiently highly leveraged sales, on an exculpated basis, to
lure the front-end cash, capital and expertise required for
meaningful resolution. As will be discussed below, such
leveraged sales structures, when combined with indirect
government assistance through credit enhancement, potentially
could provide a significant part of the overall resolution
mosaic. Suffice it to say at this point, however, that shifting
of ownership will obviously be necessary to shift the huge
burden of holding and resolving these problems in a government
context. The most prevalent resolution mechanism utilized to
date has been contracting in private enterprise for "asset
management" services. Although third party, private enterprise
asset management will clearly continue to be a significant part
of the overall resolution process, it must be recognized that
this method can achieve only one of the elements of the optimum
resolution structure - expertise. Contracted asset management
does not shift the "hemorrhaging", nor does it buy time, return
-12-
immediate capital to the system or spread the ultimate risk over
a broad base, other than the U.S. taxpayers.
Because of the size of the tumor and its high concentration
of problem loans, many different structures and alternatives
will ultimately be utilized in order to maximize the net value
realized from this massive loan and real estate portfolio. No
one structure, sales structure or otherwise, in private
enterprise or in the government, will be a panacea, and few
structures, if any, will contain all of the elements outlined
above. Undoubtedly, traditional government-contracted asset
management, creative leveraged sales mechanisms "indirectly"
assisted by the government, and direct government assistance
will all be utilized in the national resolution program. But
the more of the elements outlined above that a resolution
alternative possesses, the better that alternative will be from
a resolution standpoint. With this background in mind, an
overview of available alternatives is now in order -
alternatives available both to stem the flow of these assets
into the System, and to deal with those assets which are now
held by, and those assets which will in the future be held by,
the System.
-13-
IV. AVAILABLE ALTERNATIVES - ASSETS IN THE SYSTEM
The obvious goal with respect to any asset held in the
System, be it loan or real estate, will be to liquidate the
asset through sale as quickly as possible with minimum adverse
impact on net recovery value. To say that this is easier said
than done is the height of understatement. As noted above, it
is very difficult to market loan assets, particularly those
embroiled in adversarial recovery proceedings. Thus, in the
early stages of the resolution process, 70% to 80% of the
overall System portfolio will be extremely difficult to market
under the best of circumstances - a conclusion supported by the
recent experiences of the FADA. In addition, certain
geographical areas of the country have a disproportionate share
of troubled loans and troubled real estate, particularly the
southwestern United States, Colorado, the Gulf States and
southern Florida. In these saturated market areas, massive
sales obviously would inflict further serious damage on the real
estate market or, potentially, collapse the market entirely.
Finally, the FSLIC and FADA experience thus far has shown that
sales are very difficult in a highly politicized environment.
Qualified cash purchasers have walked away in frustration while
FSLIC or the FADA complied with regulations requiring a "level
playing field" for purchasers nationwide. Thousands of
brochures have been prepared and sent nationwide to vocal
constituents on assets which could have been sold in less time
-14-
than it took to prepare the brochures and to respond to "tire
kicking" respondents.
It is because of these problems and because of the nature
and diversity of the portfolio that an essential first step in
the resolution process will be to "grade and sort" the assets
held within the System. Both loans and real estate must be
sorted on a national basis (i) by size and value - e.g.
$1 million and below, $1 million to $2.5 million, $2.5 million
to $5 million, $5 million to $10 million, and so on; (ii) by
asset type - loan or real estate; (iii) by project type - e.g.
office, multifamily, retail, residential, etc.; (iv) by
geographical market area; (v) by earning vs. non-earning assets;
and (vi) by degree of recovery difficulty for loan assets. This
sorting process will be essential to any meaningful resolution
program and should be the first order of business for the RTC
and its consultants. The creation of categories and programs
must be accomplished through consultation with workout and
creditors' rights experts who are intimately familiar with the
nature of problem loan assets and recovery prospects in
different areas of the country. Without a comprehensive
classification program of this nature, the prospects for
creative "pooling" of assets for sale and for dealing with the
problem on a basis other than asset-by-asset will be greatly
diminished. Once this classification system is created and
functioning, three primary resolution alternatives will be
available for dealing with the various asset classifications,
-15-
and utilization of all of these approaches will be necessary in
the overall resolution process:
A. Expedited Sales for Cash.
Currently the FDIC is "staffing up" to handle the tumor,
issuing six-month cash sale guidelines and, basically, following
in the footsteps of the FADA when the FADA was gearing up in
1985. The FDIC, as the FSLIC and the FADA before them, is in
for a major dose of reality over the next twelve to twenty-four
months. Again, the majority of System assets will be loans,
most of which cannot be converted to real estate in six months,
much less sold for cash in six months. Similarly, weak real
estate markets and market concentrations will in many cases make
the prices obtainable for owned real estate in quick cash sales
so low that such sales will be both economically and politically
infeasible. Some say that the inevitable result of attempting
to deal with the tumor in a bureaucratic structure will be
massive government giveaways and fire sales, but whether this is
true or not, it is absolute nonsense to believe that massive
cash sales of this type of asset can be accomplished quickly.
Those that are endorsing this viewpoint simply do not understand
the nature of the tumor. However, despite the untenability of a
general quick cash sale philosophy, certain specific
classifications of assets will lend themselves to a cash sale
approach in the initial stages of the resolution process.
First, and most obvious, will be owned commercial real
estate with clean title and with reasonable economic prospects -
-16-
the so-called "plums" of the national portfolio. However, an
important threshold policy decision will be required with
respect to this particular asset classification. Because these
assets are the most marketable, they represent the best
opportunity to show results, and the political pressure for
results will mount dramatically as the Bush Administration's
honeymoon with the tumor winds down over the next year or so.
On the other hand, these more marketable assets are needed to
balance and make more attractive and marketable "pools" of
assets which, many believe, must be assembled and marketed given
the vast size of the tumor. To effectively reduce the number of
assets held by the government within a reasonable timeframe,
these pools must, in other words, be "blended", with each
containing a diversified mix of asset classifications including
the "plum" classification. Therefore, decisions must be made
early on regarding the sale of the more marketable
classifications, and the Bush Administration should expect an
increasing tension between the political expediency of quick
sales of the more marketable assets, and the potentially adverse
impact of "cherry picking" on the overall, longer term
resolution process, particularly with respect to pooling
mechanisms.
Second, there will be other classifications of assets, both
loans and real estate, that should be considered for quick cash
sale, perhaps even through public auctions similar to that
conducted in Chicago in 1988 by the FSLIC. Candidates for this
-17-
approach will be smaller asset classifications, particularly
those with respect to which recovery cost bears an unreasonable
ratio to asset size. Also, the "odd lot" classifications should
be considered as candidates for auction or quick cash sale even
at deep discounts. Second generation motels (a favorite of the
thrift industry), putt-putt golf courses, and out-of-the-way
convenience stores are a few examples of odd lot properties.
Purely and simply, given the fact that the government must deal
with up to 100,000 assets before the tumor is excised, it will
not be feasible from a cost or time standpoint to handle odd lot
assets and smaller assets on a "hands-on" basis. Assets of this
nature should be classified, grouped and sold at the front end
of the resolution process to stop the unnecessary hemorrhaging
caused by these assets, the unreasonable staffing which would be
required to handle these assets, and to create early results
which will help buy time, politically, to deal creatively and
effectively with the bulk of the tumor. Early sales of these
particular asset classifications through auctions or similar
"level playing field" mechanisms will also help create early on
a sense of fairness and equity with respect to the overall
resolution process.
B. Leveraged Sales.
Although leveraged sale mechanisms were suggested to the
FSLIC and the FADA as early as 1985 as a means of moving large
pools of troubled assets into the private sector, only recently
have such mechanisms been given even passing consideration.
-18-
Because of the political and economic problems incident to any
broad-based program for expedited cash sales, utilization by the
Bush Administration of highly leveraged sales of asset pools,
containing a blend of asset classifications, will be essential
to a successful resolution program over the coming years.
Leveraged sales, if structured properly, could encompass most,
if not all, of the elements of the optimum resolution structure
- i.e. expertise, shared value enhancement over time, quick
return of capital to the system through credit enhancement of
purchase money paper, and finally, shifting of the hemorrhage
factor to the purchasing entity. Unfortunately, leveraged sales
structures with participating features can be complex,
especially in the context of pooled loans and real estate which
are troubled. In addition, it is questionable, given the high
cost of due diligence with respect to assets of this nature,
that public and private syndicate purchasers would subject
themselves to the relative uncertainty of the "level playing
field" bidding process which has so characterized government
sales procedures to date. Indeed, many observers, especially
those who truly understand the nature of the tumor, are of the
opinion that leveraged sales of large asset pools in a
bureaucratic structure and highly politicized environment cannot
and will not occur and, therefore, for private enterprise to
attempt to structure and negotiate such sales will result in an
enormous waste of time and resources. Instead, say these
skeptics, private enterprise should wait for the inevitable fire
-19-
sale or giveaway program which will occur when the losses and
costs caused by the tumor become politically and economically
unbearable and the System either gridlocks or collapses under
the sheer massiveness of the portfolio.
Despite this skepticism, which is certainly understandable
given experiences to date with the governmental resolution
process, the Bush Administration must make a concerted and
focused effort to devise a workable leveraged sales structure
for blended pools of assets in the range of $250 million to
$1 billion per pool. Only in this way will it be possible to
achieve asset prices other than fire sale prices, potentially to
share in long-range value enhancement of the real estate, and to
reduce meaningfully carrying and resolution costs incident to
these assets. If leveraged sales structures are then coupled
with "indirect" government assistance through credit enhancement
or through similar mechanisms, then a large part of the financed
portion of the purchase price could be realized immediately
through the sale of purchase money paper in the public markets.
By way of illustration only, a general outline of a
prototype, leveraged, participating debt structure is set forth
on Addendum A to this paper. Although this particular structure
is a debt structure with participating, "equity-like" features,
pure equity structures can likewise be utilized to effect sales
of large asset pools. As a general proposition, however, debt
structures will most probably become the favored structure in
leveraged sales, both because of protections available under the
-20-
traditional debtor-creditor relationship to the creditor-holder
of the purchase money paper, and because credit enhancement
mechanisms may be simpler to structure with respect to debt
transactions. In any event, whatever the structure, the
objective will be to move large pools of assets to well-
capitalized, private enterprise purchasers with workout
expertise, while retaining some long-term participatory interest
which would be realized by the System if, as and when the assets
are resolved and real estate markets strengthen.
As noted above, an essential element of any resolution
mechanism will be the return of capital to the System as soon as
possible. Thus, in any leveraged sales transaction, the
purchase money paper representing the financed portion of the
purchase price, whether it be debt or equity, must be structured
in a manner conducive to credit enhancement and subsequent sale
in public and private markets. Only in this way can the System
quickly liquidate these purchase money positions and return
massive amounts of capital to the System. It is true that such
credit enhancement will represent continuing exposure to the
System with respect to the assets sold, but the level of
ultimate risk should be substantially reduced by placing these
assets in the hands of well-capitalized experts in private
enterprise which will have substantial incentive to maximize
recovery. In a very real sense, leveraged sales structures are
merely refinancings over time of the System's existing liability
for the loss inherent in the assets sold, thus maximizing the
-21-
opportunity for reducing or, perhaps in some cases, eliminating
the ultimate bottom line loss. At least with respect to certain
classifications of assets, the immediate return of substantial
capital to the System through leveraged sales with indirect
assistance through credit enhancement and, therefore, continuing
risk of loss, will be substantially preferable, both politically
and economically, to the immediate direct assistance which will
be required by quick cash sales at rock bottom prices. Even if
the System had the owned real estate to sell, which it does not,
the tumor is simply too massive to follow a quick cash sale
approach in order to "take our lumps now and get this problem
behind us."
In addition to credit enhancement by the System, it may
also be possible to devise a structure which will utilize the
existing deposit insurance system to provide the credit
enhancement necessary to refinance the existing liability over
time and to spread the risk of loss over a base other than the
U.S. taxpayer. Suppose, for example, that the System sells
blended assets to qualified purchasers - i.e. purchasers with
requisite capital and workout and real estate expertise - in a
participating transaction similar to that described on
Addendum A. Suppose also that the Bush Administration has
caused the "Resolution Savings Bank" ("RSB") to be chartered as
a special, federal savings bank for the sole purpose of
assisting in the resolution process by purchasing purchase money
paper obtained by the System in connection with leveraged sales
-22-
of assets. RSB would attract federally insured deposits through
the issuance of "Resolution Certificates of Deposit"
("Resolution CD's") which, perhaps, could have attached a
"Recovery Security", representing a pass-through interest in the
"upside" participatory interests purchased by RSB as a part of
the purchase money debt acquired from the System. These
federally insured Resolution CD's would pay market interest
rates for similar deposits and would carry the upside "trailer"
security as an additional bonus. Perhaps this Recovery Security
would permit slightly lower than market rates to be paid on the
Resolution CD's, perhaps not. But whatever the case, purchasers
of these Resolutions CD's would be (i) buying a safe, federally
insured investment with a market return, (ii) obtaining a stake
in the recovery effort as a bonus, and (iii) helping their
country by providing the funds necessary to finance a portion of
the thrift industry loss over a period of time adequate to
provide an opportunity for underlying real estate values to
recover. Not insignificantly, the credit enhancement mechanism
for this Resolution Bank structure is already in place through
the current federal deposit insurance system. For illustration
purposes, a diagram of the Resolution Bank structure is set
forth on Addendum B to this paper.
C. Orderly Liquidation by the System.
Given the nature and size of the tumor and the experience
of the FSLIC and the FADA over the past four years, it is safe
to conclude that the resolution process cannot be handled
-23-
effectively and efficiently in a bureaucratic environment. This
is especially true with respect to real estate loans which, by
their nature, demand quick, decisive and creative management -
the very antithesis of the bureaucratic process in a highly
politicized environment. Repeated delays, decision gridlock,
self preservation and endless political interference have
characterized the System's handling of what some call the
"ultimate second guess business" - the workout of problem loan
assets. Even with respect to owned real estate, seemingly
endless government-imposed requirements designed to insure a
level playing field for one and all, coupled with a layered and
time-consuming approval process, have dramatically impeded the
overall liquidation process for owned real estate. Purely and
simply, in a highly politicized bureaucratic structure there is
almost no incentive to take the risks inherent in the more
creative, cutting-edge liquidation mechanisms. Indeed, such
mechanisms may represent a "lose-lose" scenario for many
bureaucrats - i.e. if they succeed they dramatically expedite
the liquidation process and, if they fail, they reflect poorly
on those involved. Both of these results hasten the date of
joblessness and thus would run counter to the basic bureaucratic
instinct of self preservation. But whatever the relative degree
of success or failure thus far in the System's resolution and
liquidation efforts, most observers would agree that the
government does not present an environment conducive to the
effective and efficient excising of the tumor. Indeed, if the
-24-
FDIC follows its historic pattern of heavy reliance on internal
staff for resolution and liquidation, or if the RTC evolves into
a separate, giant bureaucracy seeking to handle the hundreds of
billions of dollars of troubled loans and real estate, the
result will ultimately be massive gridlock, enormous resolution
costs, continuing hemorrhaging and, ultimately, when public and
political pressure inevitably becomes unbearable, massive
government giveaways.
Despite the bleak prospect for the success of any "hands-
on" resolution or liquidation effort by the System, clearly
there is an essential and necessary role to be played by the
System in the overall process - that of capable and expert
leadership. The System must play the lead role in the bringing
of true expertise to bear on the problem; the creation of a
national resolution philosophy, especially with respect to loan
assets; the creation of a workable approval process that will
enhance, rather than hamper, the national resolution effort; the
creation of bulk sale liquidation mechanisms that will expedite
the overall process; the coordination and administration of the
national resolution effort; the creation of the all-important
"grading and sorting" process for assets; and the establishment
of accountability and a result orientation for those, both
within and without the System, who are responsible for the
hands-on implementation of the processes utilized in excising
the tumor. In short, what the nation needs is a lean, mean and
expert leadership for the resolution process. What the nation
-25-
does not need is an obese, timid and ordinary effort by the
System to resolve the problem internally. Thus, it is the
provision of leadership that should be the primary focus of the
System.
At the writing of this paper, the debate continues
regarding the proper roles of, and interrelationship between the
RTC and the FDIC in the overall resolution process. Although
there are arguments on both sides of this issue, the writer
strongly believes that the all-important role of "chief
executive officer" of the resolution effort should be given to a
newly created, leanly staffed RTC. The RTC, as CEO, should then
utilize the capacities of the FDIC with respect to those types
of assets and with respect to those types of matters that lend
themselves to the areas of particular expertise of the FDIC,
just as the RTC will utilize the capacities of private sector
asset managers and workout experts with respect to assets and
matters that lend themselves to the particular expertise of
these outside consultants. Both the FDIC and the FSLIC have
experience and capacity that, properly utilized, can play a
vital and necessary role in dealing with the tumor. But neither
should be asked to do more than it is capable of handling, and
neither should be asked to lead or administer the overall
effort. Most importantly, the FDIC and the FSLIC should work,
under contract, for the RTC and not vice versa. The FADA,
though similar in concept to the RTC, was doomed to failure from
the outset for many reasons - not the least of which was that
-26-
the FADA was owned and controlled by the FSLIC which was
intensely jealous of, and which deeply resented the FADA. Many
say that the FADA was strangled by its own incompetence, but
those involved in the resolution process over the past four
years know that one of the hands on the FADA throat was that of
the FSLIC. It is essential that the Bush Administration learn
from the FADA experience as it structures the RTC/FDIC
relationship. The RTC must be the CEO of the national effort,
especially if, like the FADA, a private enterprise-like salary
structure is to be utilized to attract reasonably capable people
to the RTC.
Ideally, the RTC, if it is to be an effective CEO, should
be a fairly small organization - perhaps with a staff of no more
than one hundred, composed of experienced individuals from each
of the necessary substantive areas of expertise - i.e. workouts
and creditors' rights, commercial real estate and capital
markets. Though probably not possible, an effort should be made
to keep the RTC free of political cronies and favored
constituents and, equally important, a pay scale competitive
with private enterprise should be established in order to
attract capable and experienced individuals to the RTC.
Unfortunately, these objectives, though necessary and
appropriate, are probably too reminiscent of the FADA to be
politically feasible, but every effort should nevertheless be
made to attract to the RTC quality people with the necessary
substantive experience.
-27-
In order to avoid the failures of the past, the RTC should
focus itself, at the outset, on three major goals. First, it
should be staffed and structured to provide imaginative, capable
and experienced leadership and administration, NOT to provide
hands-on asset management. Second, it must establish and
maintain a workable approval process, one that can respond
immediately to proposed negotiated workouts and proposed sales.
Third, it must establish a national philosophy weighted away
from the utilization of the courts and the remedy processes as
the primary loan resolution mechanism. Voluntary, negotiated
settlements without litigation and without bankruptcy should be
pursued wherever possible. The "foreclose first and ask
questions later" mentality has created a booming business for
the legal profession, but has resulted thus far in a very
expensive, very time-consuming resolution mechanism for problem
loans. The tumor is simply too big to excise through the
courts.
In summary, cash sales for particular types of assets,
leveraged sales of asset pools and individual assets, and an
orderly liquidation through RTC contracts with the FDIC and
FSLIC and with private enterprise asset managers, will all be
necessary resolution mechanisms. The critical element to
success will be, after grading and sorting the assets, to match
resolution opportunities with workable resolution mechanisms.
Above all, the RTC, as the leader of the national effort, must
-28-
create an environment conducive to creativity and bottom-line
results. To accomplish this, the RTC must be given broad power
and authority over the resolution process and must be staffed
with people who not only understand the tumor, but also have had
hands-on experience in dealing with problem real estate loans
and problem real estate assets. Purely and simply, we do not
have the time for on-the-job training of the CEO of a $200-
$300 billion resolution effort!
V. AVAILABLE ALTERNATIVES - ASSETS IN TROUBLED, BUT "SOLVENT"
INSTITUTIONS
Because of the massive size of the tumor, we must not only
create mechanisms to move assets now in the System out of the
System and into private enterprise, but also we must, whenever
feasible, stop the flow of assets into the System from
liquidated institutions. As the FSLIC experience over the past
four years will attest, the closing and liquidation of
institutions is an extremely costly and time-consuming process.
Because of this fact, every effort should be made to develop
techniques, short of actual liquidation, to "clean up" troubled
thrifts, either by creating a more favorable quasi-private
enterprise environment in which to accomplish resolution, or by
creatively excising the tumor by permitting the leveraged, bulk
sale of troubled portfolios by solvent but troubled institutions
to pre-approved purchasers with the requisite capital and
expertise. Both of these mechanisms to stem the flow of assets
-29-
into the System, which are discussed briefly below, should be
thoroughly explored by the Bush Administration.
A. Pre-Liquidation Mechanisms.
In the mid-1980's, the Federal Home Loan Bank Board (the
"FHLBB") created the Management Consignment Program (the "MCP")
to deal with failing thrifts without resorting to the drastic
measure of liquidation. The concept actually encompassed three
major forms of transactions, each of which shared the common
objective of providing new, and supposedly improved, management
for financially troubled thrifts. The goal was to avoid further
losses and imprudent transactions while providing the
institution the opportunity to "clean up" the troubled portfolio
in a quasi-private enterprise environment and while allowing the
FSLIC to better assess the strengths and weaknesses of the
institution so that a proper resolution strategy could be
developed. The MCP program came to be widely criticized as a
resolution mechanism primarily because of two factors. First,
although the major objective of the MCP program was to provide
better management for a troubled institution, rarely did the
newly installed management have any expertise in dealing with a
troubled real estate loan portfolio. By and large, the FHLBB
installed bankers to solve this non-banking problem, with
predictably little success. Most often, the newly installed
management was borrowed from a healthy thrift which, by
definition, was healthy because it did not have the type of
assets which it was being asked to deal with in the troubled
-30-
institution. In short, the requisite expertise generally was
not provided through the MCP program. Secondly, shortly after
the new management was put in place under the MCP program with
respect to a particular institution, losses mounted dramatically
and many observers wrongly attributed this to the failure of the
MCP program. In fact, these losses were merely the result of
new management realistically reflecting the value of the
existing problem loan portfolio which had not been recognized by
prior management.
In any event, the MCP program is no longer utilized today
as a resolution mechanism. Supposedly, similar goals are now
achieved by placing troubled institutions into a FSLIC
conservatorship with the FDIC providing management pursuant to a
master contract with FSLIC. Thus, just as in the MCP program,
old management is displaced and new management is inserted in
its stead, while the institution remains open and operating.
Although similar in concept, unfortunately, the FDIC-managed
conservatorships have thus far been primarily a "babysitting"
service to maintain the status quo pending enactment of FIRREA,
while under the old MCP program, new management teams, at least
in some cases, attempted to clean up portfolios through active,
aggressive resolution techniques.
Whatever the mechanism, the Bush Administration should
attempt to create new devices, short of liquidation, which will
permit troubled portfolio resolution and sale in a less
politicized, more private enterprise-like environment. For all
-31-
of their shortcomings, creative workouts of problem loan assets
were more feasible under the MCP program than they were with
respect to assets actually in the System. Primarily, this was
attributable to the simple fact that the MCP banks could act and
make decisions and give approvals and provide flexibility far
better and far more quickly than could the FSLIC and the FADA.
In essence, the MCP program created a more private enterprise-
like environment and, thus, was much more conducive to creative,
result-oriented techniques and mechanisms. Given this
experience, it is imperative that some sort of similar structure
be provided as part of the overall resolution effort, whether it
be the FDIC-managed conservatorships or otherwise. Such
structures could result in the turnaround of some of the less
troubled institutions and ready them for sale at prices far
greater than those which could be obtained through liquidation.
The key here, as with the entire resolution effort, will be
the expertise brought to bear on the troubled portfolios of
these salvageable institutions. To date, most of the "experts"
placed in management positions by the FSLIC and the FDIC are
bankers and others with little or no workout, creditors' rights
or commercial real estate expertise. Unless this misguided
practice is stopped, FDIC conservatorships will not (and should
not) be more than babysitting services, and other pre-
liquidation salvage mechanisms developed in the future will meet
with little more success than did the MCP program.
-32-
B.
System Approved Troubled Portfolio Sales by Solvent
Institutions.
Just as there must be developed leveraged, bulk sale
mechanisms to move large pools of assets out of the System into
private enterprise, there must also be developed programs which
will encourage solvent, but troubled thrifts to bulk sale their
life-threatening troubled portfolios to System-approved, well-
capitalized purchasers with the requisite expertise to maximize
the net recovery value of the purchased portfolio. Generally
speaking, the track record of thrifts attempting to deal with
troubled loans has been horrendous. In most cases, more effort
is spent by thrifts in not dealing with the problem, because
dealing with the problem would force recognition of losses
unacceptable to thrift management. In most troubled thrifts
today, continuing losses are not being caused by the making of
new troubled loans, but rather by the making of old troubled
loans worse. The advancing of new money to prop up a troubled
project is often much more palatable to management than is the
taking of an additional loss, even though there is little or no
chance that the additional monies will ever be recovered. This
inherent propensity not to recognize losses and not to solve
problems, when coupled with the hemorrhaging caused both in time
and money with problem portfolios, has resulted in most troubled
institutions moving, slowly and surely, toward certain failure
and, ultimately, liquidation by the System. The lifeblood of
these institutions is sucked dry while generally well-
intentioned management, incapable of excising the tumor, buys
-33-
time and seemingly, hope, with dollars that will never be
returned.
Recently, frustrated regulators have even seized
institutions while those institutions were technically solvent,
obviously hoping that removal of management will cure, or at
least stop the growth of the tumor. This is a very high risk
pre-liquidation technique that, like the old MCP program, will
only be as effective as the new, government-installed management
is talented and experienced in dealing with the tumor. Changing
management is not a panacea, as experience over the past four
years has indisputably shown. And removing management before
actual insolvency may engender stockholder and bondholder unjust
seizure lawsuits for new management to deal with, in addition to
the tumor. There must be better ways to deal with the solvent,
but troubled institutions which are still salvageable.
Given the fact that the source of most troubled
institutions' problems lies in their troubled loan and real
estate portfolios, and given the fact that the vast majority of
troubled thrifts cannot (both from lack of management capability
and a book solvency standpoint) deal effectively with their
troubled portfolios, the Bush Administration should encourage
these salvageable thrifts to rid themselves of their tumor
through leveraged sales to System-approved private enterprise
purchasers with the capital and expertise necessary to maximize
the net recovery value of the purchased portfolio. In one
sense, this might be viewed as a form of "private" receivership
-34-
or conservatorship, without the risks, costs and delay of a
seizure by the System. Balance sheets would be cleaned up, some
liquidity would be restored to the selling thrift, the tumor
would be placed in the hands of a specialist with appropriate
incentives to maximize recovery, the hemorrhaging would be
stopped, and the thrift could return to the business of banking
subject, of course, to appropriate restrictions and limitations
on banking practices until full recovery is achieved.
How could this be accomplished? Both participating,
leveraged debt structures similar to that outlined in
Addendum A, and equity structures (utilizing preferred stock in
the purchasing entity to evidence the leveraged portion of the
purchase price and common stock to evidence the participating
"upside" interest) could be designed to effect portfolio sales
by these solvent, but troubled thrifts. Structure is not the
problem, nor is capital, nor is the availability of private
enterprise expertise. The problem lies in the current
accounting treatment of transactions of this nature. To effect
the sale of a troubled portfolio and, therefore, to excise the
tumor, a thrift would have to be permitted to carry the financed
portion of the purchase price, whether it be debt or equity, on
its books at a level at or about the level at which it carried
the assets prior to sale. If approved mechanisms were developed
to allow such bulk sales to System-approved purchasers, without
requiring immediate, life-threatening write-downs, many troubled
institutions would have a realistic chance to return over a
-35-
period of time to profitability and to avoid seizure and
liquidation by the System. Such mechanisms could appropriately
incorporate staged write-down requirements over time, perhaps
five to ten years, unless the sold portfolio (and, therefore,
the purchase money paper held by the thrift) recovered in value
sufficiently to override the required write-down requirement.
Obviously, staged write-downs over time is not a novel concept,
and has been permitted by regulators many times in the past to
give salvageable institutions the opportunity to earn their way
out of trouble. Of course, the thrift management, the portfolio
purchaser, and the sales structure would have to be approved by
the System before the institution could qualify for this type of
pre-liquidation resolution mechanism, but hopefully,
standardization and streamlined approval processes would be a
part of any such program created by the RTC. For every one
institution salvaged, millions will be saved by the U.S.
taxpayers and millions of dollars of assets will never flow
into, or have to be dealt with, by the already overburdened
System.
VI. CONCLUSION
As this paper is being completed, every indication from
Washington is that the System, especially the FDIC, is staffing
up to "handle" the tumor internally and in a hands-on manner.
Hundreds of young and mostly inexperienced attorneys are being
-36-
sought by the inside FDIC legal department and thousands of
staff personnel are being interviewed nationwide for positions
with the FDIC. If this direction is continued, a massive new
bureaucracy will be created and in place within twelve to
twenty-four months, about the time that the tumor officially
becomes "Bush's Problem". The skeptics say that this approach
by the System is inevitable - that the System is incapable of
learning from the experiences of the past four years, that the
lure of more government bureaucracy will be too powerful to
overcome, that the tumor will again be underestimated and poorly
understood, and that ultimately the newly designed national
resolution program will gridlock, the political pressure will
become unbearable, and massive government giveaways will be the
final, inescapable consequence of the government attempting to
excise the tumor in a highly politicized, bureaucratic
environment. If the skeptics are correct, the final, bottom-
line cost of the thrift industry crisis will be unimaginable,
and the national effort to resolve the largest and most serious
economic crisis since the Great Depression will have failed
miserably.
Hopefully, somewhere in Washington, someone will listen and
learn from those who have actually dealt with the tumor. If
nothing else, in designing the national resolution effort, the
Bush Administration should remember, above all, that this
problem will not be solved by bankers and it will not be solved
by regulators. William Seidman is, without a doubt, one of the
-37-
most intelligent, most capable men in government today. But if
William Seidman thinks that the FDIC can staff up to handle the
tumor in a hands-on manner, he understands neither the nature
nor the size of the task at hand. And if the hands-on handling
of problem assets by the System becomes a major part of the
national resolution effort, the skeptics will be proven correct
on all counts.
OUR NATION NEEDS EXPERT LEADERSHIP IN RESOLVING THE ASSET
SIDE OF THE THRIFT INDUSTRY CRISIS, IT DOES NOT NEED MORE
BUREAUCRACY.
Respectfully submitted,
John G. Aldridge
-38-
ADDENDUM A
PROTOTYPE LEVERAGED SALES STRUCTURE
Before setting out a prototype leveraged sales structure,
there are a number of fundamental observations that should be made
with respect to this type of structure. First, many of the
variables in the transaction will of necessity be driven by the
nature, quality and condition of the assets to be contained in the
pool. Obviously, the nature of some of the loan assets and the
condition of the markets in which these assets are located are
such that the assets would be impossible to dispose of in an
acceptable time frame at pricès which would even remotely approach
the actual investment of the System in the assets. For this
reason it will be necessary to price these asset pools
realistically, giving the purchaser of the pools a significant
economic incentive to invest its own resources, while retaining
for the System a portion of the upside potential if the assets are
successfully resolved and liquidated. By way of illustration
only, the general parameters of a prototype leveraged sales
structure are set forth below.
A.
Terms of Sales.
1. Price. Acquisition prices for blended pools of
assets will obviously be driven by the particular blend of asset
classifications in the pool. However, as a starting point,
acquisition prices would equal current fair market value of the
A-1
pooled assets, as determined by appraisal, or a relatively small
discount from that appraised value.
2. Down Payment. Again, the amount of up-front cash
would be determined by the blend of assets in a pool, particularly
the percentage of owned real estate in a pool. Higher leverage
will be required with respect to any pool containing a larger
percentage of loan assets, particularly those with a greater
recovery difficulty. Generally, in recognition of the fact that
any pool of these assets, even a blended pool, will by definition
contain troubled loans and troubled real estate, cash down
payments larger than 10% to 20% of the total purchase price should
not be expected. Because of the nature of these assets, the
primary source of cash resulting from pooled sales will,
realistically, be from credit enhancement of the purchase money
paper resulting from these sales, and not from the cash down
payment portion of the purchase price. At best, these are high
risk assets, and high leverage will be essential to attract the
expertise and capital necessary to effect sales of large pools of
these assets.
3. Financing. The balance of the purchase price would
be evidenced by a purchase money note, secured by first-in-
priority, perfected mortgages or deeds of trust with respect to
owned real estate, and by first-in-priority, perfected collateral
assignments with respect to loan assets (collectively, the
"Security Instruments"). The purchase money note (the "Note")
would bear interest at a negotiated rate, reflecting perhaps
A-2
treasury bill rates having maturities comparable to the term of
the loan and reflecting the cash flow, if any, presently being
earned by the pool of assets being sold. Depending on the
particular blend of the portfolio, a portion of this interest
could be paid currently with the balance being accrued and paid on
a priority basis to be negotiated. The Note would provide for
payment, as additional interest, of a portion of the capital
proceeds generated by the refinancing or disposition of the assets
conveyed, on terms to be detailed in a master loan agreement,
containing, among other things, the participating interest feature
and creditor-type controls to be retained by the seller of the
assets.
4. Term. The term of the loan would be in the range of
five to ten years. In some cases, a longer term may be dictated
by the properties in the pool or may be warranted if satisfactory
minimum principal reductions during the latter years of the term
are required.
B. Operating and Capital Reserves. The purchaser would be
required to establish separate operating and capital reserves to
provide funds for foreseeable operating and capital expenditures.
The amount of each of these reserves would be dictated by the
nature, quality and condition of the assets in the pool, but a
reasonable operating, debt service and capital reserve most
probably would not be less than 10% of the gross purchase price.
It would be reasonable to require that some portion of the
operating reserve be deposited in cash into a money market or
A-3
other demand deposit account which would be pledged to the seller
as additional security for the purchase money loan. The balance
of these reserves could be established in the form of letters of
credit or other reasonably acceptable instruments to be held by
the seller, and also pledged as additional security, to be drawn
upon, subject to creditor-type controls, as needed in connection
with the operation, resolution and liquidation of assets within
the pool.
C. Release Prices; Approval of Sales. Under a debt
structure of this nature, the Security Instruments and loan
agreement would provide for release mechanisms keyed to individual
asset release prices in an amount equal to the greater of a
negotiated dollar amount, or total net sales proceeds, less agreed
priority distributions. Any sales of assets by the purchaser of
the pool for less than the agreed release price would, of course,
be subject to prior approval of the seller, or other holder of the
purchase money indebtedness and security interest. Admittedly,
agreed release prices may, in certain situations, become
unworkable for any number of reasons and, therefore, in some
cases, it may be necessary to provide an option on the part of the
purchaser to require that the seller or purchase money debt holder
either approve a sale for a reduced release price, or be required
to repurchase a particular asset by canceling that portion of the
remaining indebtedness originally allocated to that asset. It may
also be necessary to create some sort of "put/call" mechanism, to
be utilized in a limited number of situations with respect to
A-4
particular assets, either as a "fail-safe" device to be
implemented upon the occurrence of serious unanticipated problems
with respect to a particular troubled asset (especially loans), or
to give the System the ability to deal with certain sensitive
matters affecting the System's operations, such as an
unanticipated precedent-setting lawsuit which the System would
need to control. Such a structure could also contain a mechanism
pursuant to which the System could make substitutions for
particular properties in certain designated situations.
Obviously, the number of circumstances in which any of these
mechanisms would be available would need to be expressly defined
and limited.
D.
Other System Controls. Given the size of the tumor and
the objective of reducing the overall administrative burden on the
System, the purchaser should be given a relatively free hand in
dealing with and liquidating the assets within the pool. At the
same time, the System cannot place these assets completely beyond
its control given the high leverage nature of the structure.
Therefore, it would be anticipated that the seller would insist
upon reasonable "creditor-type" controls under a structure of this
nature. The exact nature and extent of these controls will be
dictated by the final structure of the economics of the deal, that
is, by the level of risk which the seller is asked to retain in a
particular transaction. Nevertheless, the optimum transaction
would be one which creates as much of a traditional debtor/
creditor relationship as is feasible under the circumstances.
A-5
E.
Approval Process. The System would establish a
creditors' committee or similar committee, composed of a small
group of qualified individuals, for the purpose of dealing with
release requests other than those strictly in accordance with the
terms of the loan documentation and other special requests for
required approvals. This creditors' committee would operate as an
oversight committee, with the burden of hands-on, day-to-day
handling of the portfolio having been transferred to the
purchaser.
F. Warranties and Due Diligence. A leveraged pool sale
would be on an "as is, where is" basis, and without
representations of warranties of any kind on the part of the
System. The System would be required, to the extent consistent
with its responsibilities and legal constraints, to provide
serious prospective purchasers full access to the assets and all
information with respect to the assets, so as to permit the
purchaser to make a judgment whether the assets are suitable for
its purposes. The System should be required to make its personnel
available to assist serious prospective purchasers in any
reasonable fashion in connection with the due diligence process.
G. Application of Capital Proceeds. The application of
reserves and the order of priorities among the various claims to
net liquidation proceeds will be fundamental to any leveraged sale
transaction. Preliminary observations as to priorities are as
follows:
A-6
1. Operating costs, day-to-day costs of dealing with
the management and maintenance of the assets, and all other costs
incurred other than for the direct enhancement of the value of the
assets, should be paid by the purchaser from a source other than
funds generated by the assets themselves. This would preclude
replacement of operating reserves from net capital proceeds,
although the seller may be required to permit the distribution on
some basis of a portion of capital proceeds for the replacement of
capital reserves. Any funding of operations from capital proceeds
would be tantamount to direct payment of such costs by the seller,
which is inconsistent with the basic concept of the leveraged sale
transaction. Because of this fact, it will be necessary to
separate operating and capital reserves, and to strictly define
and control the application of funds in each reserve.
2. On the other hand, it may be necessary to devise a
mechanism pursuant to which capital reserves established by the
purchaser could be replaced, on some reasonable basis, from
capital proceeds, on the theory that such costs would inure, by
reason of project value enhancement, to the seller's benefit. Of
course, the seller's position on whether and the extent to which
capital proceeds could be used for this purpose will depend on the
extent of its participation in net proceeds and the nature of
permitted capital improvements.
3. After replacement of capital reserves, some sort of
pro rata sharing of net liquidation proceeds between the seller
and purchaser would be appropriate, based on the size of the
A-7
parties' respective investments in the assets at the time of such
distribution. The size of the purchaser's capital investment
would be reduced, on a pro rata basis, as the principal amount of
the purchase money indebtedness was reduced. It would not be
acceptable for proceeds to be distributed in a manner which would
remove the purchaser's risk from the transaction prior to complete
liquidation, and it is essential that the purchaser's risk at all
times be commensurate with its potential return.
4. After replacement of capital reserves and the return
to the seller and the purchaser of amounts equal to their
respective capital investments, the seller's accrued interest
should be paid, after which a like return would be paid to the
purchaser.
5. After both parties have been made whole and have
received the negotiated returns, the percentages in which the
parties would participate in any remaining net liquidation
proceeds would be determined by the structure of the overall
economics of the transaction. Assuming that the purchaser is
asked to assume a reasonable entrepreneurial risk in a particular
sale of a pool of assets; a 50/50 split of additional proceeds
would seem to be appropriate. Obviously, as the level of risk to
a purchaser in a particular transaction rises or falls, so should
the return to the purchaser.
A-8
ADDENDUM "B"
Sale of Asset Pool
>
The
System-Approved
Purchaser with
System
$ % Cash
Expertise and
<
Captial
$ Y Purchase-Money
Debt (or Equity)
<% + Y = Purchase Price)
is
$ Y Purchase Money Debt
$ Y Resolution CD's
(or Equity)
>
Resolution
Plus Resolution Security
B-1
Savings
Bank
<
$ Y Cash
$ Y Cash
1.
V
FOIC
Public
Insurance
Withdrawal/Redaction Sheet
(George Bush Library)
Document No.
Subject/Title of Document
Date
Restriction
Class.
and Type
02. Memo
From John Robson to John Sununu
6/8/89
P-5
Re: S&L Fraud Initiatives (2 pp.)
Collection:
Record Group:
Bush Presidential Records
Open on Expiration of PRA
Office:
Chief of Staff, White House Office of
(Document Follows)
Series:
Sununu, John, Files
By
(NLGB)
on
5/12/05
Subseries:
Issues Files
WHORM Cat.:
File Location:
Savings and Loan Industry (1989) [1]
Date Closed:
12/3/2004
OA/ID Number:
29170-006
FOIA/SYS Case #:
1998-0004-F[1]
Appeal Case #:
Re-review Case #:
2005-0426-S
Appeal Disposition:
P-2/P-5 Review Case #:
Disposition Date:
AR Case #:
MR Case #:
AR Disposition:
MR Disposition:
AR Disposition Date:
MR Disposition Date:
RESTRICTION CODES
Presidential Records Act - [44 U.S.C. 2204(a)]
Freedom of Information Act - [5 U.S.C. 552(b)]
P-1 National Security Classified Information [(a)(1) of the PRA]
(b)(1) National security classified information [(b)(1) of the FOIA]
P-2 Relating to the appointment to Federal office [(a)(2) of the PRA]
(b)(2) Release would disclose internal personnel rules and practices of an
P-3 Release would violate a Federal statute [(a)(3) of the PRA]
agency [(b)(2) of the FOIA]
P-4 Release would disclose trade secrets or confidential commercial or
(b)(3) Release would violate a Federal statute [(b)(3) of the FOIA]
financial information [(a)(4) of the PRA]
(b)(4) Release would disclose trade secrets or confidential or financial
P-5 Release would disclose confidential advice between the President
information [(b)(4) of the FOIA]
and his advisors, or between such advisors [a)(5) of the PRA]
(b)(6) Release would constitute a clearly unwarranted invasion of
P-6 Release would constitute a clearly unwarranted invasion of
personal privacy [(b)(6) of the FOIA]
personal privacy [(a)(6) of the PRA]
(b)(7) Release would disclose information compiled for law enforcement
purposes [(b)(7) of the FOIA]
C. Closed in accordance with restrictions contained in donor's deed of
(b)(8) Release would disclose information concerning the regulation of
gift.
financial institutions [(b)(8) of the FOIA]
(b)(9) Release would disclose geological or geophysical information
PRM. Removed as a personal record misfile.
THE DEPUTY SECRETARY OF THE TREASURY
Rec'd Cos
WASHINGTON
THE CHIEF of STAFF
JUN 1990
has seen
June 8, 1990
WR
10:00
am
MEMORANDUM FOR CHIEF OF STAFF JOHN SUNUNU
FROM:
John Robson
Deputy Secretary Jel of the Treasury
SUBJECT:
Savings and Loan Fraud Initiatives
Attached is a copy of a legislative package Treasury submitted
today through OMB which has been developed to assist in the
investigation and prosecution of fraud in the Savings and Loan
industry. In addition, we understand that the Justice Department
has been working on related proposals which will be available on
Monday.
Treasury has secured through Republican Leader Dole the
opportunity to offer a Savings and Loan fraud legislative package
as an amendment to S. 1970, the omnibus crime bill, on which the
Senate may resume consideration as soon as the middle of next
week. The Administration's legislation will be folded into a
package now being developed by the Republican Leader and Senator
Heinz. We believe this to be a window of opportunity which we
should not to let slip away.
In the Senate, a coalition of 10-12 Democrats, lead by Senators
Wirth, Graham, Dixon, and now Sasser, have introduced an S and L
fraud legislative proposal and have been steadily hammering the
Justice Department and the Administration for failing to commit
sufficient attention and resources to the investigation and
prosecution of S and L crooks. In addition, Treasury has
received a letter signed by over 170 Members of Congress urging
the Administration to commit more energy and manpower to this
area.
The Democrats have identified one aspect of the Savings and Loan
scandal which they feel can be attributed to this Administration
- the inability to identify and bring to justice those who were
directly involved in profiting from the financial institutions.
Members of both parties are increasingly hearing complaints from
a broad range of voters that not enough is being done in this
regard. It is clear that this has emerged as perhaps one of the
top issues for the balance of this session of Congress and for
the upcoming elections.
On the question of resources, our view is that the Congress will
in the end thrust additional resources upon us and we may as well
take credit for being out front with our own proposals. I have
spoken with Ede Holiday about Treasury's ideas. In view of the
time pressure, it would be important that a meeting be convened
on Monday with the appropriate agencies, their legislative
representatives, and representatives from OMB and the
-2-
White House. I would suggest that the discussion include
reaching an agreement on a legislative package for submission to
the Senate Republican Leader and the identification of other
actions which can be taken by the President. I have reviewed
this initiative with Secretary Brady.
Attachment: TAB A - Summary of Proposals
TAB B - Statutory Language
cc: Secretary Brady
Bill Barr
Ede Holiday
THE TRIASI
DEPARTMENT OF THE TREASURY
WASHINGTON
E
E
1789
June 8, 1990
GENERAL COUNSEL
Dear Ms. Hale:
Please find enclosed the Department of the Treasury's proposed
amendments to S. 1970, the omnibus crime bill now under con-
sideration in the Senate. Also enclosed is a brief description
of each of the proposed amendments.
The Department of the Treasury strongly believes that these
amendments are necessary to enable the Federal Government to
effectively investigate, prosecute and punish persons connected
with the thrift industry who committed fraudulent acts or other-
wise violated the laws of the United States.
In view of the anticipated imminent action on S. 1970 by the
Senate, we request that the Office of Management and Budget
expeditiously review and approve the transmittal of the proposed
amendments to the Congress. Please contact Rick Carro, Associate
General Counsel (566-2558) if you or your staff have any ques-
tions or require additional information.
Sincerely,
Jeanne S. Archibald Archibald
Acting General Counsel
Ms. Janet Hale
Associate Director for
Economics and Government
Office of Management and Budget
Executive Office of the President
Washington, D.C. 20503
Enclosures
DEPARTMENT OF THE TREASURY
SUMMARY OF PROPOSED AMENDMENTS TO S. 1970
TO COMBAT SAVINGS & LOAN FRAUD
1. Expand Secret Service Jurisdiction
This amendment expands the list of crimes that the USSS can
investigate, thereby providing the USSS with concurrent
jurisdiction (e.g., with FBI) to investigate crimes committed
against financial institutions and the Resolution Trust
Corporation. The USSS currently has no jurisdiction to
investigate such crimes.
2. Request for Additional Investigatory Resources
This amendment authorizes appropriations for additional
resources for the investigation of fraud and other violations
of law concerning the thrift industry as follows:
U.S. Secret Service: 350 agents ($38.5 million)
Internal Revenue Service: 160 special and/or revenue
agents ($16.5 million)
3. FDIC/RTC Claims
This amendment-
generally grants priority to FDIC and RTC claims over
those of depositors, shareholders and other creditors in
actions against directors, officers, attorneys, account-
ants and other S&L-related parties responsible for
losses; and
consistent with the interests of justice, directs U.S.
courts to give FDIC and RTC cases expedited consideration
and docket priority.
4. Bank Fraud Crimes as RICO Predicates
This amendment expands the list of RICO predicate crimes to
include crimes related to financial institution fraud and
thereby enables prosecutors to use RICO special provisions
(e.g., sentencing and forfeiture) when prosecuting corrupt
banking officials and others.
5. Bar to Bankruptcy Discharge
This amendment prohibits the bankruptcy discharge of any dam-
ages, penalty, fine, forfeiture, restitution, reimbursement,
indemnification, or guarantee against loss, ordered or
approved by a court, issued by a Federal financial regulatory
agency; or contained in any settlement agreement entered into
by a debtor who committed fraud while acting in a fiduciary
capacity to an insured financial institution.
- 2 -
6. Authority to Freeze Assets and Appoint Receiver
In order to prevent the dissipation or concealment of assets
prior to judgment in court enforcement actions and civil
recovery cases, this amendment--
authorizes the FDIC, RTC and OTS to seek ex parte Federal
court orders to freeze the corporate and personal assets
of defendants in civil money penalty cases and civil
liability cases; and
authorizes Federal courts to appoint receivers to
administer frozen assets.
7. Technical Amendments to Title 18, U.S.C.
These amendments are nonsubstantive technical and conforming
provisions.
SEC.
.
ADDITIONAL AUTHORITY FOR THE SECRET SERVICE
(a) In General. Section 3056(b) (1) of title 18, United
States Code, is amended by--
(1) inserting "financial institutions, and the Resolution
Trust Corporation, and concurrent with the authority of any
other Federal law enforcement agency," after "land bank
associations,"
(2) inserting "215," after "213,";
(3) inserting "656," after "493,";
(4) inserting "1005," after "709,"; and
(5) inserting "1341, 1343, 1344, 1512," after "1014,".
(b) Effect of Amendments. The amendments made by this
section shall not alter the authority of any other Federal law
enforcement agency.
SEC.
.
ADDITIONAL INVESTIGATORY RESOURCES FOR THE SECRET
SERVICE AND THE INTERNAL REVENUE SERVICE
There are hereby authorized to be appropriated
(a) to the United States Secret Service, Department of
the Treasury, to hire 350 agents, to purchase equipment, and
for investigating fraud and other violations of law con-
cerning the thrift industry (other than violations of the
Internal Revenue Code of 1986): $38,500,000; and
(b) to the Internal Revenue Service, Department of the
Treasury, to hire and train 160 special agents and/or revenue
agents, and for investigating violations of the Internal
Revenue Code of 1986 and related statutes concerning the
thrift industry: $18,500,000.
SEC.
.
AMENDMENTS TO THE FEDERAL DEPOSIT INSURANCE ACT
Section 11 of the Federal Deposit Insurance Act (12 U.S.C.
1821) is amended by adding at the end thereof the following:
"(p) PRIORITY OF CERTAIN CLAIMS In any proceeding re-
lated to any claim acquired under section 11 or 13 of this
Act against an insured financial institution's director,
officer, employee, agent, attorney, accountant, appraiser, or
any other party employed by or providing services to an in-
sured financial institution, any suit, claim or cause of
action brought by the Corporation shall have priority over
any other such suit, claim, or cause of action asserted by
depositors, creditors, or shareholders of the insured finan-
cial institution, except for claims of Federal agencies as
provided in section 6321 of the Internal Revenue Code of 1986
and section 3713 of title 31, United States Code. This
priority shall apply to both the prosecution of any suit,
claim, or cause of action, and to the execution of any subse-
quent judgments resulting from such suit.
"(q) EXPEDITED PROCEDURES FOR CERTAIN CLAIMS
"(1) TIME FOR FILING NOTICE OF APPEAL. The notice
of any appeal of any order, whether interlocutory or
final, entered in any case brought by the Corporation
against an insured institution's officers, directors,
employee, attorneys, accountants, or other agents shall
be filed within 10 days of the entry of that order.
Hearing of the appeal shall be within 30 days of filing
of the notice. The appeal shall be decided within 90
days of the notice.
- 2 -
"(2) SCHEDULING. -- Consistent with section 1657 of
title 28, United States Code, the courts of the United
States shall expedite the consideration of any case
brought by the Corporation against an insured institu-
tion's officers, directors, employee, attorneys, account-
ants, or other agents. As far as practicable, the courts
will give such cases priority on their dockets.
"(3) JUDICIAL DISCRETION. Any judge may modify the
schedule and limitations of paragraphs (1) and (2) as
applied to a specific case, based on a specific finding
that the ends of justice served by making such a modifi-
cation outweigh the best interest of the public in having
the case resolved expeditiously. "
SEC. . RACKETEER INFLUENCE AND CORRUPT ORGANIZATIONS.
Section 1961 (1) (B) of title 18, United States Code, is
amended-
(a) by inserting "section 215 (relating to receipt of
commissions or gifts for procuring loans) after "Section
201 (relating to bribery) ";
(b) by inserting "sections 656 and 657 (relating to
financial institution embezzlement) " after "473 (relating to
counterfeiting) "; and
(c) by inserting "sections 1004-1007 and 1014 (relating
to fraud and false statements) " after "891-894 (relating to
extortionate credit transactions) , ". "
SEC. . AMENDMENTS TO TITLE 11, UNITED STATES CODE
Title 11, United States Code, is amended-
(a) in section 523--
(1) by striking out "or" at the end of subsection (a) (9);
(2) by striking out the period at the end of subsection
(a) (10) and inserting in lieu thereof a semicolon;
(3) by adding at the end of subsection (a) the following:
"(11) for restitution that the debtor has been
ordered to pay by any court of the United States or of
any State, in any criminal proceeding arising from any
action that caused loss to any insured depositary insti-
tution or insured credit union; or
"(12) for any damages, penalty, fine, forfeiture,
restitution, reimbursement, indemnification, or guarantee
against loss, provided in any judgment, order, or consent
order or decree entered in any court of the United States
or of any State, issued by a Federal financial regulatory
agency, or contained in any settlement agreement entered
into by the debtor, arising from any act of actual fraud
or defalcation while acting in a fiduciary capacity com-
mitted with respect to any insured depository institution
or insured credit union. "; and
(4) by adding after subsection (d) the following:
"(e) Any individual acting as a director, officer, or
institution-affiliated party (as defined in section 3(u)
of the Federal Deposit Insurance Act (12 U.S.C. 1813 (u))
or section 206 (r) of the Federal Credit Union Act (12
U.S.C. 1786(r)) ) of an insured depository institution or
- 2 -
insured credit union shall be considered to be acting in
a fiduciary capacity with respect to the purposes of
subsections (a)(4). or (12).
"(f) Notwithstanding subsection (a)(2)(B) (iii) of
this section, reliance by a creditor will not be required
to establish an exception to discharge under subsection
(a)(2)(A) or (B) of this section if the creditor is a
financial regulatory agency that is a successor to an
insured depositary institution or insured credit union.
"(g) (1) Notwithstanding any other provision of law, a
complaint objecting to the discharge of any debt owed
to--
"(A) an insured depositary institution or insured
credit union that is closed, is in receivership or
conservatorship, is sold to (or has its assets and
liabilities assumed by) another insured depositary
institution or insured credit union in a transaction
assisted by a financial regulatory agency, or
"(B) a financial regulatory agency,
may be filed on or before the date that is the later of
120 days after the date of the debtor's first meeting of
creditors, as provided under section 341 of this title,
or 120 days after the date of the appointment of a con-
servator or receiver by a financial regulatory agency for
the insured depositary institution or insured credit
union with respect to which the debt arises.
- 3 -
"(2) The provisions of this subsection shall not
extend the period of limitations prescribed by section
11 (d) (4) of the Federal Deposit Insurance Act (12 U.S.C.
1821(d)(4)).
"(h) For purposes of subsections (a) (11), (a)(12), (e),
(f), and (g) of this section--
"(1) the term 'insured depositary institution' shall
have the same meaning as defined in section 3(c)(2) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2));
and
"(2) the term 'insured credit union' shall have the
same meaning as defined in section 101(7) of the Federal
Credit Union Act (12 U.S.C. 1752(7)).";
(b) in section 1328, by amending subsection (a)(2) to read as
follows:
"(2) of a kind specified in--
"(A) section 523 (a) (5) of this title; or
"(B) section 523 (a) (2), (4), (6), (11), or (12) of
this title owed to a financial regulatory agency, or a
conservator or receiver of an insured depositary institu-
tion (as defined in section 3(c)(2) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(c)(2))) or insured credit
union (as defined in section 101(7) of the Federal Credit
Union Act (12 U.S.C. 1752(7)))."; and
(c) in section 522, by amending subsection (c)(1) to read as
follows:
- 4 -
" (1) a debt of a kind specified in--
"(A) section 523 (a) (1), (5), (11), or (12) of this
title; or
"(B) section 523 (a) (2), (4), or (6) of this title
owed to a financial regulatory agency, or a conservator
or receiver of an insured depositary institution (as
defined in section 3(c)(2) of the Federal Deposit Insur-
ance Act (12 U.S.C. 1813(c)(2))) or insured credit union
(as defined in section 101(7) of the Federal Credit Union
Act (12 U.S.C. 1752(7)) ) ; or".
SEC.
.
LIMITATION ON DISPOSITION OF CERTAIN ASSETS
Section 8(i) of the Federal Deposit Insurance Act (12 U.S.C.
1818(i)) is amended by adding at the end thereof the following:
"(4) In any action brought by an appropriate Federal
financial regulatory agency pursuant to paragraph (1), the
court may, upon application of the agency, issue ex parte a
restraining order which prohibits any persons from withdraw-
ing, transferring, removing, dissipating or disposing of any
funds, assets or other property and which appoints a tempor-
ary receiver to administer such restraining order. Upon a
proper showing, a permanent or temporary injunction or
restraining order shall be granted without bond. "
SEC. . TECHNICAL AMENDMENTS TO TITLE 18, UNITED STATES CODE
Title 18, United States Code, is amended--
(a) in section 656--
(1) by inserting "bank or savings and loan holding com-
pany," before "national bank" the first time it appears in
the first sentence; and
(2) by inserting "or company" after "such bank" each time
it occurs in the first paragraph;
(b) in section 657--
(1) by deleting "Home Owner's Loan Corporation," and
inserting in lieu thereof "Office of Thrift Supervision, the
Federal Home Loan Bank System, the Resolution Trust Corpora-
tion,"; and
(2) by deleting "Federal Savings and Loan Corporation"
and inserting in lieu thereof "Federal Deposit Insurance
Corporation";
(c) in section 1005, by inserting "or company" after "such
bank" each time it appears in the first paragraph;
(d) in section 1006--
(1) by deleting "Home Owner's Loan Corporation," and insert-
ing in lieu thereof "Office of Thrift Supervision, the Federal
Home Loan Bank System, the Resolution Trust Corporation," and
(2) by deleting "Federal Savings and Loan Corporation"
and inserting in lieu thereof "Federal Deposit Insurance
Corporation";
(e) in section 1014, by inserting "Office of Thrift Supervision"
after "the Federal Home Loan Bank System,";
(f) in section 1341, by inserting ", credit," after "money"; and
(g) in section 1343, by inserting ", credit," after "money".
S&L
FSLIC and FDIC Outlays in Bush Budget
-
The Bush Administration plan for resolving the thrift
crisis does reduce total 1990 budget outlays for the FSLIC
and the FDIC below both 1989 outlays and the 1990 outlay
estimates for FSLIC and FDIC in the final Reagan budget.
-
This reduction occurs even though FSLIC total 1990 spending
of $31.2 billion to resolve insolvent thrifts is $3.5
billion higher than total 1989 spending and $22.1 billion
above the estimated total FSLIC spending in the 1990 Reagan
budget.
-
The principal reason for this is that the Bush budget obtains
additional non-governmental funds to finance or offset higher
FSLIC spending in 1989 and 1990 primarily from two sources:
a) REFCORP payments, and b) higher bank insurance premiums.
-- The Resolution Funding Corporation (REFCORP) is a newly
created, off-budget subsidiary of the privately
owned Federal Home Loan Banks that will provide FSLIC
$10 billion in 1989, $25 billion in 1990, and $15
billion in 1991 (a total of $50 billion). These
non-governmental REFCORP funds will finance all the
FSLIC spending to close or merge remaining insolvent
thrifts in those years. These REFCORP funds fully
offset the increased FSLIC spending in those years and
thus eliminate the budget outlay that spending would
have caused.
-- higher proposed insurance premiums on commercial
banks starting in 1990 increase 1990 budget receipts by
roughly $.8 billion; these additional receipts
offset higher FSLIC spending even though they are
not used to finance that spending directly.
- Total FSLIC and FDIC budget outlays were projected to
decrease $11.7 billion from 1989 to 1990 under the Reagan
budget estimates:
:
FSLIC budget outlays in the Reagan budget declined
$6.6 billion from 1989 to 1990, because the
excessive use of FSLIC notes to finance additional
spending had adverse budget and program cost
effects, and,
-- FDIC budget outlays decreased $5.1 billion between
1989 and 1990, because FDIC estimated that its
large commercial bank failures would have been
resolved by the end of 1989.
-
The attached chart provides net budget outlay estimates
for 1989 and 1990 for the FSLIC and the FDIC in both the
Reagan and Bush 1990 budgets.
--
The Bush budget includes an additional outlay --
Treasury payments to REFCORP to help fund the
interest costs on the bonds REFCORP issues to
provide the funds for its payments to FSLIC.
3/16/89
Deposit Insurance Fund Outlays
($ in billions)
1989
1990
Reagan
FSLIC
8.7
2.1
FDIC
3.8
-1.3
Total Reagan
12.5
0.8
Bush
FSLIC
10.7
1.4
FDIC
3.8
-2.2
Treasury REFCORP
interest payments
.5
1.4
Total Bush
15.0
0.6