Financial Audit: Federal Deposit Insurance Corporation's 1995 and 1994
Financial Statements (Letter Report, 07/15/96, GAO/AIMD-96-89).

GAO audited the 1995 and 1994 financial statements for three funds
administered by the Federal Deposit Insurance Corporation (FDIC), the
Bank Insurance Fund (BIF), the Savings Association Insurance Fund
(SAIF), and the Federal Savings and Loan Insurance Corporation (FSLIC)
Resolution Fund. GAO found that the financial statements of each fund,
taken as a whole, were reliable in all material respects. Although some
internal controls should be improved, FDIC management fairly stated that
its internal controls effectively safeguarded assets from material loss,
ensured compliance with laws and regulations, and ensured that there
were no material misstatements in the financial statements of the three
funds. There was no reportable noncompliance with laws and regulations.
FDIC has addressed several internal control weaknesses GAO identified in
its 1994 audits. However, FDIC has not fully addressed GAO's concerns
regarding weaknesses in documentation maintained to support asset
recovery estimates. GAO's 1995 audits found continued weaknesses in (1)
controls over FDIC's process for estimating recoveries from failed
institution assets, (2) FDIC's time and attendance reporting process,
and (3) FDIC's electronic data processing controls. This report also
discusses the recent development of a significant premium rate
differential between insured institutions of BIF and SAIF as a result of
BIF attaining its designated capitalization level. GAO discusses the
impact this premium rate differential may have on the thrift industry's
ability to finance obligations arising from the thrift crisis of the
1980s and on future deposit insurance premium rates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-89
     TITLE:  Financial Audit: Federal Deposit Insurance Corporation's 
             1995 and 1994 Financial Statements
      DATE:  07/15/96
   SUBJECT:  Bank management
             Funds management
             Financial statement audits
             Federal corporations
             Internal controls
             Financial records
             Accounting procedures
             Reporting requirements
             Corporate audits
IDENTIFIER:  BIF
             SAIF
             Bank Insurance Fund
             Savings Association Insurance Fund
             FSLIC Resolution Fund
             
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Cover
================================================================ COVER


Report to the Congress

July 1996

FINANCIAL AUDIT - FEDERAL DEPOSIT
INSURANCE CORPORATION'S 1995 AND
1994 FINANCIAL STATEMENTS

GAO/AIMD-96-89

FDIC's 1995 and 1994 Financial Statements

(917705)


Abbreviations
=============================================================== ABBREV

  ADM - Asset Disposition Manual
  BIF - Bank Insurance Fund
  CAOG - Contractor Accounting Oversight Group
  CFO - Chief Financial Officers Act
  COMB - Contractor Oversight and Monitoring Branch
  DAS - Division of Depositor and Asset Services
  FDIC - Federal Deposit Insurance Corporation
  FDICIA - Federal Deposit Insurance Corporation Improvement Act
  FICO - Financing Corporation
  FIRREA - Financial Institutions Reform, Recovery, and Enforcement
     Act
  FRF - FSLIC Resolution Fund
  FSLIC - Federal Savings and Loan Insurance Corporation
  RTC - Resolution Trust Corporation
  SAIF - Savings Association Insurance Fund

Letter
=============================================================== LETTER


B-262039

July 15, 1996

To the President of the Senate and the
Speaker of the House of Representatives

This report presents our opinions on the financial statements of the
Bank Insurance Fund, the Savings Association Insurance Fund, and the
Federal Savings and Loan Insurance Corporation (FSLIC) Resolution
Fund for the years ended December 31, 1995 and 1994.  These financial
statements are the responsibility of the Federal Deposit Insurance
Corporation (FDIC), the administrator of the three funds.  This
report also presents (1) our opinion on FDIC management's assertions
regarding the effectiveness of its system of internal controls as of
December 31, 1995, and (2) our evaluation of FDIC's compliance with
laws and regulations during 1995.  In addition, it discusses FDIC's
progress in correcting internal control weaknesses and presents our
recommendations for further improvement.  The report also highlights
the recent development of a significant premium rate differential
between the insured institutions of the Bank Insurance Fund and the
Savings Association Insurance Fund as a result of the Bank Insurance
Fund attaining its designated capitalization level.  We discuss our
observations concerning the impact this premium rate differential may
have on the thrift industry's ability to finance certain obligations
arising from the thrift crisis of the 1980s and on future deposit
insurance premium rates. 

We conducted our audits pursuant to the provisions of section 17(d)
of the Federal Deposit Insurance Act, as amended (12 U.S.C. 
1827(d)), and in accordance with generally accepted government
auditing standards. 

We are sending copies of this report to the Chairman of the Board of
Directors of the Federal Deposit Insurance Corporation; the Chairman
of the Board of Governors of the Federal Reserve System; the
Comptroller of the Currency; the Acting Director of the Office of
Thrift Supervision; the Chairmen and Ranking Minority Members of the
Senate Committee on Banking, Housing and Urban Affairs and the House
Committee on Banking and Financial Services; the Secretary of the
Treasury; the Director of the Office of Management and Budget; and
other interested parties. 

This report was prepared under the direction of Robert W.  Gramling,
Director, Corporate Audits and Standards.  Other major contributors
to this report are listed in appendix II. 

Charles A.  Bowsher
Comptroller General
of the United States


Letter
=============================================================== LETTER


B-262039

To the Board of Directors
Federal Deposit Insurance Corporation

We have audited the statements of financial position as of December
31, 1995 and 1994, of the three funds administered by the Federal
Deposit Insurance Corporation (FDIC), the related statements of
income and fund balance (accumulated deficit), and statements of cash
flows for the years then ended.  In our audits of the Bank Insurance
Fund (BIF), the Savings Association Insurance Fund (SAIF), and the
Federal Savings and Loan Insurance Corporation (FSLIC) Resolution
Fund (FRF), we found

  -- the financial statements of each fund, taken as a whole, were
     reliable in all material respects;

  -- although certain internal controls should be improved, FDIC
     management fairly stated that internal controls in place on
     December 31, 1995, were effective in safeguarding assets from
     material loss, assuring compliance with relevant laws and
     regulations, and assuring that there were no material
     misstatements in the financial statements of the three funds
     administered by FDIC; and

  -- no reportable noncompliance with laws and regulations we tested. 

During our audits of the 1994 financial statements of the three
funds,\1 we identified weaknesses in FDIC's internal controls which,
while not material, affected its ability to ensure that internal
control objectives were achieved.  We made a number of
recommendations to address each of the weaknesses identified in our
1994 audits. 

In conducting our 1995 audits, we found that FDIC made progress in
addressing several internal control weaknesses identified in our 1994
audits.  FDIC's actions during 1995 fully resolved weaknesses we
identified in controls over safeguarding of assets and proper
reporting of asset management and disposition activity by contracted
asset servicing entities.  Also, FDIC made some progress in improving
controls over its asset valuation process.  However, additional
improvements are needed, as FDIC has not fully addressed our concerns
regarding weaknesses in documentation maintained to support asset
recovery estimates.  Our 1995 audits continued to find weaknesses,
though not material, in controls over FDIC's process for estimating
recoveries from failed institution assets.  In our 1995 audits, we
also continued to find weaknesses in FDIC's time and attendance
reporting process.  FDIC has initiatives underway to streamline its
time and attendance process which it believes will address the
internal control weaknesses we identified.  In addition, during 1995,
we found a weakness in FDIC's electronic data processing controls
which, due to its sensitive nature, is being communicated separately
to FDIC. 

The condition of the nation's banks and savings associations
continued to improve.  The improved condition of the banking
industry, and the higher premiums BIF-insured institutions have paid
in the last several years, resulted in BIF reaching its designated
capitalization level in 1995.  Consequently, FDIC lowered premium
rates charged to BIF-insured institutions.  While the improved
condition of the nation's thrifts and higher premiums have helped
improve SAIF's condition, a significant premium rate differential
developed between BIF and SAIF during 1995 and, absent legislative
action, will likely remain for a number of years.  This significant
premium rate differential could adversely affect the thrift
industry's ability to finance certain obligations arising from the
thrift crisis of the 1980s and could eventually lead to higher
deposit insurance premium rates. 

The following sections discuss our conclusions in more detail and
discuss (1) the scope of our audits, (2) significant matters related
to the condition and outlook of the banking and thrift industries and
the insurance funds, and what progress the Corporation has made in
addressing internal control weaknesses identified in prior audits,
(3) reportable conditions\2 identified in our 1995 audits, (4)
recommendations from our 1995 audits, and (5) the Corporation's
comments on a draft of this report and our evaluation. 


--------------------
\1 Financial Audit:  Federal Deposit Insurance Corporation's 1994 and
1993 Financial Statements (GAO/AIMD-95-102, March 31, 1995). 

\2 Reportable conditions involve matters coming to the auditor's
attention relating to significant deficiencies in the design or
operation of internal controls that, in the auditor's judgment, could
adversely affect an entity's ability to (1) safeguard assets against
loss from unauthorized acquisition, use, or disposition, (2) ensure
the execution of transactions in accordance with management's
authority and in accordance with laws and regulations, and (3)
properly record, process, and summarize transactions to permit the
preparation of financial statements and to maintain accountability
for assets.  A material weakness is a reportable condition in which
the design or operation of the internal controls does not reduce to a
relatively low level the risk that losses, noncompliance, or
misstatements in amounts that would be material in relation to the
financial statements may occur and not be detected within a timely
period by employees in the normal course of their assigned duties. 


   OPINION ON FINANCIAL STATEMENTS
------------------------------------------------------------ Letter :1


      BANK INSURANCE FUND
---------------------------------------------------------- Letter :1.1

In our opinion, the financial statements and accompanying notes
present fairly, in all material respects, in conformity with
generally accepted accounting principles, the Bank Insurance Fund's
financial position as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for the years then ended. 

However, misstatements may nevertheless occur in other FDIC-reported
financial information on BIF as a result of the internal control
weaknesses summarized above and discussed in detail in a later
section of this report. 


      SAVINGS ASSOCIATION
      INSURANCE FUND
---------------------------------------------------------- Letter :1.2

In our opinion, the financial statements and accompanying notes
present fairly, in all material respects, in conformity with
generally accepted accounting principles, the Savings Association
Insurance Fund's financial position as of December 31, 1995 and 1994,
and the results of its operations and its cash flows for the years
then ended. 

However, misstatements may nevertheless occur in other FDIC-reported
financial information on SAIF as a result of the internal control
weaknesses summarized above and discussed in detail in a later
section of this report. 


      FSLIC RESOLUTION FUND
---------------------------------------------------------- Letter :1.3

In our opinion, the financial statements and accompanying notes
present fairly, in all material respects, in conformity with
generally accepted accounting principles, the FSLIC Resolution Fund's
financial position as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for the years then ended. 

However, misstatements may nevertheless occur in other FDIC-reported
financial information on FRF as a result of the internal control
weaknesses summarized above and discussed in detail in a later
section of this report. 

On January 1, 1996, FRF assumed responsibility for liquidating the
assets and satisfying the obligations of the Resolution Trust
Corporation (RTC).\3 As discussed in note 1 of FRF's financial
statements,\4 proceeds from the management and disposition of RTC's
assets will be used to satisfy the transferred obligations.  Any
additional proceeds after satisfaction of RTC's obligations will be
transferred to the Resolution Funding Corporation.\5

As discussed in note 8 of FRF's financial statements, there are
approximately 120 pending lawsuits which stem from legislation that
resulted in the elimination of supervisory goodwill and other
forbearances from regulatory capital.  These lawsuits assert various
legal claims including breach of contract or an uncompensated taking
of property resulting from the FIRREA provisions regarding minimum
capital requirements for thrifts and limitations as to the use of
supervisory goodwill to meet minimum capital requirements.  One case
has resulted in a final judgment of $6 million against FDIC, which
was paid by FRF. 

On July 1, 1996, the United States Supreme Court concluded that the
government is liable for damages in three other cases, consolidated
for appeal to the Supreme Court, in which the changes in regulatory
treatment required by FIRREA led the government to not honor its
contractual obligations.  However, because the lower courts had not
determined the appropriate measure or amount of damages, the Supreme
Court returned the cases to the Court of Federal Claims for further
proceedings.  Until the amount of damages are determined by the
court, the amount of additional costs from these three cases is
uncertain.  Further, with respect to the other pending cases, the
outcome of each case and the amount of any possible damages will
depend on the facts and circumstances, including the wording of
agreements between thrift regulators and acquirers of troubled
savings and loan institutions.  Estimates of possible damages suggest
that the additional costs associated with these claims may be in the
billions.  The Congressional Budget Office's December 1995 update of
its baseline budget projections increased its projection of future
outlays for fiscal years 1997 through 2002 by $9 billion for possible
payments of such claims. 

As mentioned above, the final judgment of $6 million in one case
against FDIC was paid by FRF.  However, as discussed in note 8 of
FRF's financial statements, FDIC believes that judgments in such
cases are properly paid from the Judgment Fund.\6 The extent to which
FRF will be the source of paying other judgments in such cases is
uncertain. 


--------------------
\3 The Resolution Trust Corporation was created by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
to manage and resolve all troubled savings institutions that were
previously insured by FSLIC and for which a conservator or receiver
was appointed during the period January 1, 1989, through August 8,
1992.  This period was extended to September 30, 1993, by the
Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991 and was further extended on December 17,
1993, to a date not earlier than January 1, 1995, nor later than July
1, 1995, by the Resolution Trust Corporation Completion Act of 1993
(RTC Completion Act).  The RTC Completion Act stated that the final
date would be determined by the Chairperson of the Thrift Depositor
Protection Oversight Board.  On December 5, 1994, the Chairperson
made the determination that RTC would continue to resolve failed
thrift institutions through June 30, 1995.  Finally, the RTC
Completion Act required RTC to terminate its operations no later than
December 31, 1995. 

\4 The notes to FRF's financial statements do not present amounts
associated with the assets and obligations transferred from RTC as
FDIC management is currently considering the future form of the
reporting entity (that is, FRF and RTC). 

\5 The Resolution Funding Corporation was established by FIRREA to
provide funding for RTC through issuance of long-term debt
securities.  Any proceeds transferred to the Resolution Funding
Corporation will be used to make interest payments on the long-term
debt securities. 

\6 The Judgment Fund is a permanent, indefinite appropriation
established by 31 U.S.C.  Sec.  1304. 


   OPINION ON FDIC MANAGEMENT'S
   ASSERTIONS ABOUT THE
   EFFECTIVENESS OF FDIC'S
   INTERNAL CONTROLS
------------------------------------------------------------ Letter :2

For the three funds administered by FDIC, we evaluated FDIC
management's assertions about the effectiveness of its internal
controls designed to

  -- safeguard assets against unauthorized acquisition, use, or
     disposition;

  -- assure the execution of transactions in accordance with
     management's authority and with provisions of selected laws and
     regulations that have a direct and material effect on the
     financial statements of the three funds; and

  -- properly record, process, and summarize transactions to permit
     the preparation of financial statements in accordance with
     generally accepted accounting principles. 

FDIC management fairly stated that those controls in place on
December 31, 1995, provided reasonable assurance that losses,
noncompliance, or misstatements material in relation to the financial
statements of each of the three funds would be prevented or detected
on a timely basis.  Management made this assertion based on criteria
in GAO's Standards for Internal Controls in the Federal Government
and consistent with the requirements of the Federal Managers'
Financial Integrity Act of 1982.  However, our work identified the
need to improve certain internal controls, which were previously
summarized and are described in detail in a later section of this
report.  These weaknesses in internal controls, although not
considered to be material weaknesses, represent significant
deficiencies in the design or operation of internal controls which
could adversely affect FDIC's ability to meet the internal control
objectives listed above. 


   COMPLIANCE WITH LAWS AND
   REGULATIONS
------------------------------------------------------------ Letter :3

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


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :4

FDIC management is responsible for

  -- preparing the annual financial statements of BIF, SAIF, and FRF
     in conformity with generally accepted accounting principles;

  -- establishing, maintaining, and assessing the Corporation's
     internal control structure to provide reasonable assurance that
     internal control objectives as described in GAO's Standards for
     Internal Controls in the Federal Government are met; and

  -- complying with applicable laws and regulations. 

We are responsible for obtaining reasonable assurance about whether
(1) the financial statements of each of the three funds are free of
material misstatement and are presented fairly, in all material
respects, in conformity with generally accepted accounting principles
and (2) FDIC management's assertion about the effectiveness of
internal controls is fairly stated, in all material respects, based
upon the control criteria used by FDIC management in making its
assertion.  We are also responsible for testing compliance with
selected provisions of laws and regulations and for performing
limited procedures with respect to certain other information in
FDIC's annual financial report. 

In order to fulfill our responsibilities as auditor of record for the
Federal Deposit Insurance Corporation, we

  -- examined, on a test basis, evidence supporting the amounts and
     disclosures in the financial statements of each of the three
     funds;

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

  -- evaluated the overall presentation of the financial statements
     for each of the three funds;

  -- obtained an understanding of the internal control structure
     related to safeguarding assets, compliance with laws and
     regulations, including the execution of transactions in
     accordance with management's authority, and financial reporting;

  -- tested relevant internal controls over safeguarding, compliance,
     and financial reporting and evaluated management's assertion
     about the effectiveness of internal controls; and

  -- tested compliance with selected provisions of the Federal
     Deposit Insurance Act, as amended; the Chief Financial Officers
     Act; and the Federal Home Loan Bank Act, as amended. 

We did not evaluate all internal controls relevant to operating
objectives, such as controls relevant to preparing statistical
reports and ensuring efficient operations.  We limited our internal
control testing to those controls necessary to achieve the objectives
outlined in our opinion on management's assertion about the
effectiveness of internal controls.  Because of inherent limitations
in any internal control structure, losses, noncompliance, or
misstatements may nevertheless occur and not be detected.  We also
caution that projecting our evaluation to future periods is subject
to the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with controls may
deteriorate. 

We conducted our audits from July 5, 1995, through May 2, 1996.  Our
audits were conducted in accordance with generally accepted
government auditing standards. 

FDIC provided comments on a draft of this report.  FDIC's comments
are discussed and evaluated in a later section of this report and are
included in appendix I. 


   SIGNIFICANT MATTERS
------------------------------------------------------------ Letter :5

The following section is provided to highlight the condition and
outlook of the banking and thrift industries and the insurance funds. 
In addition, we discuss FDIC's progress in addressing internal
control weaknesses identified during our previous audits. 


      CONDITION OF FDIC-INSURED
      INSTITUTIONS SHOWED
      CONTINUED IMPROVEMENT IN
      1995
---------------------------------------------------------- Letter :5.1

During 1995, the banking and thrift industries continued their strong
performances.\7 Commercial banks reported record profits of $48.8
billion in 1995, marking the fourth consecutive year of record
earnings.  The main source of earnings in 1995 was higher net
interest income.  The increase in net interest income was
attributable to growth in interest-bearing assets, even though net
interest margins declined for a second consecutive year.  During
1995, commercial banks' return on assets was 1.17 percent, the third
consecutive year that the industry return on assets has exceeded 1
percent. 

The strong performance of banks was also reflected in the continued
reduction in the number of banks identified as problem institutions. 
As of December 31, 1995, 144 commercial banks with total assets of
$17 billion were identified by FDIC as problem institutions.  This
represented an improvement over 1994, when 247 commercial banks with
total assets of $33 billion were identified as problem institutions. 
Six commercial banks failed in 1995, the fewest number of failures in
any year since 1977. 

Savings institutions reported record earnings of $7.6 billion in
1995, up from the $6.4 billion earned in 1994.  Thrifts experienced
an increase in net interest margins in the fourth quarter 1995, the
first such increase since 1993.  In addition, the thrift industry's
annual return on assets rose to 0.78 percent, the highest since 1962. 
The industry's improved performance was also reflected in the
reduction in the number of troubled institutions.  As of December 31,
1995, regulators identified 49 savings institutions with total assets
of $14 billion as problem institutions.  This was a significant
improvement over 1994, when 71 institutions with total assets of $39
billion were identified as problem institutions.  In 1995, only two
savings institutions failed. 


--------------------
\7 The information in this section of the report was obtained from
The FDIC Quarterly Banking Profile, Fourth Quarter 1995, compiled by
FDIC's Division of Research and Statistics from quarterly financial
reports submitted by federally insured depository institutions. 
Thus, we did not audit this information; however, we believe it is
consistent with other audited information. 


      A SIGNIFICANT PREMIUM RATE
      DIFFERENTIAL BETWEEN BANKS
      AND THRIFTS DEVELOPED IN
      1995
---------------------------------------------------------- Letter :5.2

The strengthened condition of the banking industry, coupled with the
relatively high insurance premiums that banks paid between 1991 and
1995, resulted in an accelerated rebuilding of BIF's reserves.  BIF
reached its designated reserve ratio of 1.25 percent of estimated
insured deposits in May 1995.  Consequently, FDIC's Board of
Directors significantly reduced the risk-based premium rates charged
to BIF-insured institutions, and, in September 1995, refunded
assessment overpayments from the month following the month BIF
recapitalized, or from June 1995 through September 1995, after FDIC
confirmed that BIF had achieved its designated reserve ratio.  At
December 31, 1995, BIF's ratio of reserves to insured deposits
equaled 1.30 percent. 

Although the thrift industry also experienced significant
improvements over the past few years, SAIF has not experienced a
similar increase in its ratio of reserves to insured deposits.  As of
December 31, 1995, SAIF's ratio of reserves to insured deposits
equaled 0.47 percent, which is still substantially below its
designated reserve ratio of 1.25 percent.  SAIF's capitalization has
been slowed because its members' premiums have and continue to be
used to pay for certain obligations of the thrift crisis, including
interest on 30-year bonds issued by the Financing Corporation
(FICO).\8 FDIC estimates that, absent the statutory requirement to
use premiums for these other obligations, SAIF would have been fully
capitalized in 1994.  Under current law, FICO has authority to assess
SAIF-member savings associations to cover its annual interest
expense, which will continue until the 30-year bonds mature in the
years 2017 through 2019.  In 1995, FICO's assessment totaled $718
million, or approximately 42 percent of SAIF's assessment revenue.\9

As a result of the annual FICO interest payments, the need to
capitalize SAIF to its designated reserve ratio, and a reduction in
premium rates for BIF-insured institutions, a significant
differential in premium rates charged by BIF and SAIF developed in
1995 and, absent legislative action, will likely remain for many
years.\10 For example, during 1996, institutions with deposits
insured by BIF are paying an average of less than one cent per $100
of assessable deposits for deposit insurance (0.3 cents).  In
contrast, institutions with deposits insured by SAIF are paying an
average of 23.4 cents per $100 of assessable deposits for similar
deposit insurance.  Thus, a premium differential of about 23 basis
points\11

currently exists. 


--------------------
\8 FICO was established in 1987 to recapitalize the Federal Savings
and Loan Insurance Fund, the former insurance fund for thrifts.  FICO
was funded mainly through the issuance of public debt offerings which
were initially limited to $10.8 billion but were later effectively
capped at $8.2 billion by the RTC Refinancing, Restructuring, and
Improvement Act of 1991.  Neither FICO's bond obligations or the
interest on these obligations are obligations of the United States
nor are they guaranteed by the United States. 

\9 The annual FICO interest obligation, on average, equals
approximately $780 million.  Because FICO had available cash reserves
in 1995, its draw on SAIF's assessments was slightly less than the
amount needed to fully fund the 1995 interest payments. 

\10 Deposit Insurance Funds:  Analysis of Insurance Premium Disparity
Between Banks and Thrifts (GAO/AIMD-95-84, March 3, 1995) and Deposit
Insurance Funds:  Analysis of Insurance Premium Disparity Between
Banks and Thrifts (GAO/T-AIMD-95-111, March 23, 1995). 

\11 One hundred basis points are equivalent to one percentage point. 
In this context, the 23 basis points would translate into a 23-cent
premium differential for every $100 in assessable deposits. 


      THE PREMIUM RATE
      DIFFERENTIAL COULD AFFECT
      FUNDING FOR FICO'S INTEREST
      OBLIGATION AND FUTURE
      DEPOSIT INSURANCE PREMIUM
      RATES
---------------------------------------------------------- Letter :5.3

Only a portion of SAIF's assessment base is available to fund the
annual FICO interest obligation.\12 This portion of SAIF's assessment
base has declined on average 11 percent each year since SAIF's
inception in 1989.  At December 31, 1995, only $459 billion of SAIF's
total assessment base of $734 billion, or about 62 percent, was
available to fund the annual FICO interest obligation.  At SAIF's
current premium rates, the portion of SAIF's assessment base needed
to fund FICO cannot decline below $333 billion in order to avoid a
default on the FICO interest payments. 

Absent a legislative solution, the premium rate differential between
BIF and SAIF provides incentive for SAIF-member institutions to
reduce their SAIF-insured deposits to avoid paying higher premiums. 
Such reductions would further decrease SAIF's assessment base and
increase the potential for a default on the FICO bond interest
obligation. 

When the same product exists in the market place--in this case,
deposit insurance--but at two substantially different prices, market
forces can provide a strong incentive to avoid the higher price in
favor of the lower.  Institutions seeking to avoid higher SAIF
premiums could do so in a number of ways:  (1) reduce the
institution's total assets, which, in turn, would reduce its need for
deposits, (2) obtain funding from sources such as Federal Home Loan
Bank advances or repurchase agreements, which are not subject to
insurance premiums, (3) accept BIF-insured deposits as agents for
BIF-member affiliates, or (4) pay lower interest rates on deposits,
which would encourage deposits to migrate from SAIF to BIF by letting
BIF-member affiliates draw away business with deposit rates
reflecting their lower deposit insurance costs. 

Federal regulators have already observed that some institutions are
beginning to use these strategies to decrease their SAIF-insured
deposits and, thus, to avoid the higher SAIF premiums.  Recently, one
large thrift shifted $2.6 billion in deposits to a BIF affiliate. 
Currently, about 150 SAIF members, with deposits totaling $165
billion, have BIF-member affiliates or are actively pursuing
affiliates.  The banking regulators have stated that, under existing
law, they have limited ability to stop such deposit migration. 

As noted above, a continual shrinkage of SAIF's assessment base could
have implications not only for debt servicing of the FICO interest
obligation, but also for SAIF and BIF premium rates.  If SAIF's
assessment base shrinks to the point that current SAIF premium rates
can no longer provide for sufficient revenue to fund the annual FICO
interest payments, a default on the FICO interest obligation could
result absent an increase in SAIF's premium rates.  Increasing
premium rates to compensate for the shrinkage in SAIF's assessment
base could lead to even further shrinkage as the higher premiums
force more institutions to seek relief by reducing their dependence
on SAIF-insured deposits.  This, in turn, would increase the
potential for a default on the FICO interest obligation.  Also, if
SAIF deposits continue to shrink, the fund will become smaller and
less able to diversify risk, as it is likely that the stronger SAIF
member institutions will shift their deposits to BIF, leaving the
weaker institutions to SAIF.  Finally, if deposits migrate from SAIF
to BIF, BIF's reserve ratio could be adversely affected because the
transferred deposits do not bring with them any reserves.  This could
ultimately result in higher future premium rates for BIF members in
order for the fund to maintain its designated reserve ratio. 

On March 19, 1996, the House Committee on Banking and Financial
Services held hearings on the condition of SAIF.  At these hearings,
the FDIC Chairman, the Acting Director of the Office of Thrift
Supervision, and the Under Secretary for Domestic Finance of the
United States Treasury, urged the Congress to pass comprehensive
legislation to provide a solution to the problems associated with
capitalizing SAIF, funding FICO, and eliminating the premium rate
differential.  We have, and continue, to support the need to address
the significant risks associated with the premium rate
differential.\13


--------------------
\12 Thrift deposits acquired by BIF members, referred to as ï¿½Oakarï¿½
deposits, retain SAIF insurance coverage, and the acquiring
institution pays insurance premiums to SAIF for these deposits at
SAIF's premium rates.  However, because the institution acquiring
these deposits is not a savings association and remains a BIF member
as opposed to a SAIF member, the insurance premiums it pays to SAIF,
while available to capitalize SAIF, are not available to service the
FICO interest obligation.  Similarly, premiums paid by SAIF-member
savings associations that have converted to bank charters, referred
to as ï¿½Sasserï¿½ institutions, are unavailable to fund the FICO
interest obligation since the institutions are banks as opposed to
savings associations. 

\13 Deposit Insurance Funds:  Analysis of Insurance Premium Disparity
Between Banks and Thrifts (GAO/T-AIMD-95-223, August 2, 1995). 


      1995 ACTIONS ADDRESS SOME
      WEAKNESSES IDENTIFIED IN
      PREVIOUS AUDITS
---------------------------------------------------------- Letter :5.4

In our 1994 financial statement audit report on the three funds
administered by FDIC, we identified reportable conditions which
affected FDIC's ability to ensure that internal control objectives
were achieved.  These weaknesses related to FDIC's internal controls
designed to ensure that (1) estimated recoveries for failed
institution assets were determined using sound methodologies and were
adequately documented, (2) third party entities properly safeguarded
assets and reported asset activity to FDIC, and (3) time and
attendance reporting procedures were effective.  During 1995, FDIC
and third party asset servicing entities' actions addressed, or
partially addressed, some of the weaknesses identified in our 1994
audit report. 

During our 1994 audits, we identified weaknesses in FDIC's
documentation of, and methodology for, estimating recoveries from
assets acquired from failed institutions.  To address our concerns,
FDIC developed historical data to support the formula recovery
estimates used for most assets with book values under $250,000. 
Also, FDIC revised its guidance for estimating recoveries from failed
institution assets.  The revised guidance provides more comprehensive
recovery estimation criteria which take into account the asset's most
probable disposition strategy and contains strict documentation
standards to support recovery estimates.  However, while the revised
procedures provide a sound basis for estimating recoveries for failed
institution assets, our 1995 audits found that the revised procedures
were not effectively implemented. 

Our 1994 audits also identified weaknesses in oversight of third
party entities contracted to manage and dispose of failed institution
assets.  During 1995, FDIC and third party servicers acted to address
internal control weaknesses over third party servicers' reporting of
asset management and disposition activity and safeguarding of
collections.  Specifically, the Contractor Accounting Oversight Group
(CAOG) and Contractor Oversight and Monitoring Branch (COMB) of
FDIC's Division of Finance and Division of Depositor and Asset
Services, respectively, fully implemented the requirements of the
Letter of Understanding on Accounting Roles and Responsibilities of
CAOG and COMB.  This letter outlines specific verification
procedures, the timing of those procedures, and the FDIC entity
responsible for performing the procedures at the contracted asset
servicers.  The letter was issued in October 1994, but was not fully
implemented until after December 31, 1994.  However, we found that
during 1995, FDIC verified the accuracy of reported asset activity to
supporting documentation and to servicers' detailed accounting
records. 

Third party servicers also improved daily collection procedures
designed to ensure that collections are properly safeguarded and
completely and accurately reported.  Specifically, one servicer
effectively implemented procedures to verify collections received and
reconcile collections processed and deposited to daily collections. 
Another servicer implemented dual controls over daily collections and
instituted aggressive procedures for collecting delinquent payments. 
In addition, another servicer completed its servicing agreement with
FDIC.  As a result of the actions taken by FDIC regarding
verification of servicer activity reports and actions taken by the
asset servicers regarding safeguarding of collections, we no longer
consider these issues to be a reportable condition as of December 31,
1995. 

While the above actions address some of the internal control
deficiencies identified in our prior year's audits, some
long-standing deficiencies remain.  During 1995, we continued to find
weaknesses in FDIC's adherence to its time and attendance reporting
procedures.  Also, we continued to find weaknesses in documentation
used to support estimated recoveries from failed institution assets. 
Finally, while FDIC revised its procedures for estimating recoveries
for failed institution assets, we found these procedures were not
effectively implemented.  Consequently, as discussed below, we still
consider these weaknesses to be reportable conditions as of December
31, 1995. 


   REPORTABLE CONDITIONS
------------------------------------------------------------ Letter :6

The following reportable conditions represent significant
deficiencies in FDIC's internal controls and should be corrected by
FDIC management. 

1.  Controls to ensure that recovery estimates for assets acquired
from failed financial institutions comply with FDIC's revised asset
recovery estimation methodology are not working effectively. 
Specifically, FDIC's controls do not ensure that recovery estimates
comply with the methodologies specified in FDIC's Asset Disposition
Manual (ADM), or are based on current and complete file
documentation.  Also, FDIC does not have controls in place to ensure
that, in deriving reasonable estimates of recovery for assets in
liquidation, the asset recovery estimation process considers the
impact of events through the period covered by the three funds'
financial statements.  These estimates are used by FDIC to determine
the allowance for losses on receivables from resolution activities
and investment in corporate-owned assets for the funds. 
Consequently, these weaknesses resulted in misstatements to BIF's and
FRF's 1995 financial statements and could result in future
misstatements to each fund's financial statements if corrective
action is not taken by FDIC management. 

In response to recommendations in our 1994 audit report, in August
1995, FDIC completed the ADM and issued it to Division of Depositor
and Asset Services field office staff.  This manual contained
detailed guidance in asset recovery estimation methodologies and
strict requirements for documentation to support such estimates. 
FDIC's intent in issuing this manual was to ensure that reasonable
estimates of recoveries were available to facilitate the calculation
of the December 31, 1995, allowance for losses for the funds
administered by FDIC.  However, we found that the ADM was not
effectively implemented.  Specifically, we found that asset recovery
estimates were not always consistently supported by, and/or
consistent with file documentation or the most probable disposition
strategy.  Also, we found that asset recovery estimates were not
always prepared using the most current information available at the
time the estimate was developed. 

The Asset Disposition Manual requires supervisory review to verify
the accuracy and adequacy of recovery estimates.  However, we found
that the supervisory reviews were generally cursory in nature and
frequently did not identify recovery estimates that were not in
compliance with the ADM.  Consequently, these reviews did not always
identify inaccurate or unsupported asset recovery estimates. 

FDIC uses asset recovery estimates prepared no later than September
30 in calculating the year-end allowance for losses on the
receivables from resolution activities and investments in
corporate-owned assets reflected in the funds' financial statements. 
This creates the potential for significant changes in the estimates
of recoveries on the underlying assets in liquidation in the last 3
months of the year to not be fully reflected in the year-end
financial statements. 

In this regard, we found that significant fluctuations in the
aggregate estimated recovery value of BIF's and FRF's failed
institution asset inventory that occurred during the fourth quarter
of 1995 were not fully reflected in the year-end allowance for losses
on BIF's and FRF's receivables from resolution activities and
investment in corporate-owned assets.  These fluctuations were caused
by a number of factors, such as collections on assets, asset
dispositions, write-offs, and changes in the circumstances affecting
individual assets' recovery potential.  The ADM requires individual
asset recovery estimates to be updated within 30 days following any
significant event or change in disposition strategy that affects the
estimated recovery by 5 percent or more.  However, we found that
recovery estimates were not always updated to reflect these changes. 
Also, when such changes were made, they were not used to update the
year-end allowance for loss calculation. 

The lack of consistent adherence to the revised asset valuation
methodology, particularly regarding the need for adequate
documentation to support such estimates, combined with the lack of an
effective process for fully considering the impact of events between
the asset valuation date and year-end, resulted in FDIC understating
BIF's and FRF's allowance for losses on their receivables from
resolution activity and investment in corporate-owned assets.  This,
in turn, contributed to FDIC misstating BIF's fund balance and FRF's
accumulated deficit as of December 31, 1995. 

We selected samples of BIF's and FRF's inventories of failed
institution assets.  Using the criteria contained in the ADM, we
reviewed FDIC's compliance with the ADM at September 30, 1995, and we
estimated recoveries for the assets in our samples through the
December 31, 1995, financial statement date.  Based on our work, we
estimate that BIF's fund balance was overstated by about $266 million
and FRF's accumulated deficit was understated by about $183 million. 
However, these amounts were not significant enough to materially
misstate the 1995 financial statements.\14

FDIC is currently making substantial changes to its asset valuation
process.  The new process is intended to provide for uniformity
throughout the organization in estimating amounts to be recovered
from failed financial institution assets and will rely heavily on
statistical sampling procedures as well as economic and market
assumptions.  However, it will also rely heavily on available asset
documentation in determining the appropriate assumptions to be used
to develop recovery estimates.  Consequently, in implementing this
new asset valuation process, FDIC should ensure that the weaknesses
we have identified with respect to the process used during 1995 are
fully addressed. 

2.  FDIC has not strictly enforced adherence to its time and
attendance reporting procedures.  As in previous audits, our 1995
audits continued to identify deficiencies in adherence to required
procedures in preparing time and attendance reports, separation of
duties between timekeeping and data entry functions, and
reconciliation of payroll reports to time cards.  These weaknesses
could adversely affect FDIC's ability to properly allocate expenses
among the three funds. 

In April 1996, FDIC began implementing a new process intended to
streamline and improve time and attendance reporting.  FDIC officials
have indicated that the revised time and attendance process
constitutes the initial steps in developing a fully automated system. 
However, while this revised process may result in some increased
efficiencies, the new process, in and of itself, will not correct the
deficiencies we identified during the past several years.  Further
improvements and ultimately a fully automated system may reduce the
occurrence of weaknesses such as inadequate reconciliations and lack
of separation of duties, but they offer no assurance that existing
problems will be fully resolved.  Given the longstanding nature of
time and attendance reporting deficiencies and the failure of past
efforts to fully satisfy our prior audits' recommendations to correct
these deficiencies, it is critical that FDIC management strictly
enforce adherence to current and future time and attendance reporting
procedures. 

3.  We identified another weakness related to FDIC's electronic data
processing controls during our 1995 audits which, due to its
sensitive nature, is being communicated to FDIC management, along
with our recommendations for corrective action, through separate
correspondence. 

In addition to the weaknesses discussed above, we noted other less
significant matters involving FDIC's system of internal accounting
controls and its operations, which we will be reporting separately to
FDIC. 


--------------------
\14 In making this determination, we considered the needs of the
users of BIF's and FRF's financial statements.  In BIF's case, we
considered the Fund balance to be the most significant component to
the financial statement users, as the Fund balance reflects BIF's
financial health and is a primary consideration in setting premium
rates for insured member institutions.  In FRF's case, we considered
the Accumulated Deficit to be the most significant component to the
financial statement users, as it reflects amounts to be funded from
appropriations to liquidate the assets and contractual obligations of
the defunct FSLIC.  In this context, the misstatements we identified
through our audits represent one-percent of BIF's $25.5 billion fund
balance, and 0.4 percent of FRF's $43.4 billion Accumulated Deficit,
respectively, at December 31, 1995.  We also noted in FRF's case that
the Fund's Resolution Equity at December 31, 1995, is more than
sufficient to cover additional losses even were such losses to exceed
the level of misstatement we identified in FRF's 1995 financial
statements. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To address weaknesses identified in this year's audits in the area of
estimating recoveries for failed institution assets, we recommend
that the Chairman of the Federal Deposit Insurance Corporation direct
heads of the Division of Depositor and Asset Services and Division of
Finance to

  -- ensure that field office personnel maintain complete and current
     documentation in asset files to provide a basis for assumptions
     used to derive asset recovery estimates and that the assumptions
     used are appropriately documented,

  -- ensure that supervisory reviews of asset recovery estimates are
     performed thoroughly and include a review of asset file
     documentation to identify and correct inaccurate or unsupported
     estimates, and

  -- establish and enforce procedures to ensure that recovery
     estimates are updated for information made available between the
     valuation date and the year-end financial statement reporting
     date. 


   CORPORATION COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, FDIC acknowledged that
further improvements could be made to resolve weaknesses in its asset
valuation process and is initiating a new process for estimating
asset recoveries.  FDIC expects this process to be in place for the
1996 annual financial statements.  FDIC believes that this new
process will address concerns regarding asset valuation methodology,
documentation, management review, and timing differences.  We will
review FDIC's new asset valuation process as part of our 1996
financial audits. 

FDIC also stated that it reviewed the assets sampled by us in our
audits.  FDIC noted that its own review found instances of
noncompliance by FDIC personnel with the revised Asset Disposition
Manual guidelines for estimating asset recoveries.  FDIC stated that
its review also found numerous instances in which GAO and FDIC were
in complete or substantial agreement.  FDIC concluded from its review
that the revised asset recovery methodology was generally understood
and that its staff, in general, properly prepared asset recovery
estimates. 

FDIC also stated that it believes its asset recovery estimates, in
the aggregate, are reasonable.  FDIC said that asset valuations often
cannot be determined with precision, and that various reasonableness
tests performed by FDIC staff support the position that both FDIC's
asset recovery estimates as reflected in BIF's and FRF's 1995
financial statements and our estimates of the aggregate recovery
value of the assets are reasonable.  Thus, FDIC believes that there
is no basis for asserting that either set of estimates is more
accurate than the other. 

We agree that estimating potential recoveries on failed institution
assets is subject to some degree of uncertainty.  It is this inherent
uncertainty in the estimation process that makes strict adherence to
a sound methodology critical to ensuring that reasonable estimates
are derived for use in preparing the financial statements.  Our
estimates are based on a strict application of FDIC's revised
methodology and include the impact on asset recovery potential of
events through the financial statement reporting date.  While certain
analytical procedures, as applied by FDIC, may help to provide
additional comfort as to the reasonableness of FDIC's official
estimation process, they are not a substitute for a systematic,
reasonable, and verifiable methodology. 

As we discuss in this report, FDIC took significant steps during 1995
to address the deficiencies in its asset valuation methodology that
we identified in previous audits.  However, the level of compliance
with the revised methodology was significantly deficient.  We found
that in over 41 percent of the assets we sampled, FDIC field office
personnel did not comply with the revised methodology.  This level of
noncompliance coupled with the impact on asset recovery estimates of
events subsequent to FDIC's valuation date but up to the financial
statement reporting date resulted in differences in recovery
estimates in about 89 percent of the assets we reviewed.  FDIC's own
review of the assets we sampled confirmed our audit findings.  As we
noted in this report, we believe the resulting level of misstatements
were not significant enough to materially misstate BIF's and FRF's
1995 financial statements.  However, they do illustrate the impact
that weaknesses in controls over the asset valuation process can have
on the financial statements. 

FDIC also commented on initatives it has underway to address the
deficiencies we identified in its time and attendance reporting and
audit processes.  FDIC believes these initiatives will facilitate the
timely identification and correction of time and attendance related
issues.  In addition, FDIC noted that it is studying its current
expense allocation and recovery methodologies and, as part of this
undertaking, is developing methods that will reduce reliance on time
and attendance reporting in determining expense allocations to funds
and receiverships.  FDIC noted that it is currently addressing
weaknesses we identified in its electronic data processing controls. 

FDIC also discussed other management initiatives it has underway to
improve its operational effectiveness, including enhancements to its
contracting oversight and a more corporatewide monitoring of internal
control issues.  FDIC noted that it has also established an audit
committee to review the adequacy of the Corporation's internal
controls and compliance with laws and regulations, and to review
internal and external audit recommendations. 

The complete text of FDIC's response to our report is included in
appendix I. 

Charles A.  Bowsher
Comptroller General
of the United States

May 2, 1996


BANK INSURANCE FUND'S FINANCIAL
STATEMENTS
============================================================ Chapter 0

   Statements of Financial
   Position

   (See figure in printed
   edition.)

   Statements of Income and the
   Fund Balance

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


SAVINGS ASSOCIATION INSURANCE
FUND'S FINANCIAL STATEMENTS
============================================================ Chapter 1

   Statements of Financial
   Position

   (See figure in printed
   edition.)

   Statements of Income and the
   Fund Balance

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


FSLIC RESOLUTION FUND'S FINANCIAL
STATEMENTS
============================================================ Chapter 2

   Statements of Financial
   Position

   (See figure in printed
   edition.)

   Statements of Income and
   Accumulated Deficit

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



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   edition.)



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   edition.)



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   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)




(See figure in printed edition.)Appendix I
COMMENTS FROM THE FEDERAL DEPOSIT
INSURANCE CORPORATION
============================================================ Chapter 2



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Robert W.  Gramling, Director
Steven J.  Sebastian, Assistant Director
Clayton T.  Clark, Senior Auditor
Paul F.  Foderaro, Senior Auditor
Charles Fox, Senior Auditor
Jeanette M.  Franzel, Senior Auditor
Michael C.  Hrapsky, Senior Auditor
Salim R.  Mawani, Senior Auditor
Christopher M.  Salter, Senior Auditor
Gregory J.  Ziombra, Senior Auditor
Kevin A.  Carey, Auditor
Dennis L.  Clarke, Auditor
John C.  Craig, Auditor
Douglas A.  Delacruz, Auditor
Bonnie L.  Lane, Auditor
Elizabeth Martinez, Auditor
Carol A.  Langelier, EDP Specialist
Wilfred Holloway, Senior Computer Specialist
Sharon O.  Byrd, Computer Specialist

ATLANTA REGIONAL OFFICE

Shawkat Ahmed, Senior Auditor
Suzanne Murphy, Senior Auditor
Cynthia C.  Teddleton, Senior Auditor
Erin Baker, Auditor
Marshall L.  Hamlett, Auditor
Rhonda P.  Rose, Auditor
Lisa M.  Warde, Auditor

CHICAGO REGIONAL OFFICE

Adrienne S.  Friedman, Senior Auditor
Donald J.  Kittler, Senior Auditor
John R.  Richter, Senior Auditor

DALLAS REGIONAL OFFICE

George Jones, Senior Auditor
Norman C.  Poage, Senior Auditor
Miguel A.  Salas, Senior Auditor
Leonard E.  Zapata, Senior Auditor
Gloria Cano, Auditor
Dale W.  Seeley, Auditor
Dorothy M.  Tejada, Computer Specialist

LOS ANGELES REGIONAL OFFICE

Jan M.  Brock, Senior Auditor
Eric Johns, Senior Auditor
Harold D.  Reich, Senior Auditor
Aditi S.  Archer, Auditor
Ted Hu, Auditor
Stacey Osborn, Auditor
Gary R.  Wiggins, Auditor

FDIC OFFICE OF INSPECTOR GENERAL

Arlene Boateng, Auditor
Mary Boyles, Auditor
Jennifer Y.  Colbert, Auditor
Judith H.  Hoyle, Auditor
Mark F.  Mulholland, Auditor
Lisa M.  Pearson, Auditor
Dale Sewell, Auditor


*** End of document. ***