Resolution Trust Corporation: Efforts Under Way to Address Management
Weaknesses (Letter Report, 05/12/95, GAO/GGD-95-109).

GAO reviewed the Resolution Trust Corporation's (RTC) efforts to address
its management weaknesses, focusing on the: (1) long-term viability of
the thrift insurance fund; and (2) disposition of RTC operations and
workload.

GAO found that: (1) RTC has improved its marketing and disposition
methods by implementing two congressionally mandated management reforms,
but it still has not implemented a valid sales methodology to identify
which RTC sales methods the Federal Deposit Insurance Corporation (FDIC)
should adopt; (2) RTC has improved its contracting processes, but it is
not closing out contracts in a timely manner; (3) RTC has improved
internal accounting controls over receiverships' transactions,
accounting operations, and its information systems, but significant
contract performance problems continue to exist; (4) the Savings
Association Insurance Fund is thinly capitalized and its high premiums
could place the thrift industry at a competitive disadvantage when the
Bank Insurance Fund's premiums are lowered; (5) to ensure a successful
transition of thrift resolutions from RTC to FDIC, the two agencies will
require diligent planning and close coordination and sufficient controls
over assets to be sold or retained; and (6) FDIC will need to continue
to improve the data in its information systems.

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

 REPORTNUM:  GGD-95-109
     TITLE:  Resolution Trust Corporation: Efforts Under Way to Address 
             Management Weaknesses
      DATE:  05/12/95
   SUBJECT:  Federal agency reorganization
             Bank failures
             Savings and loan associations
             Sunset legislation
             Internal controls
             Management information systems
             Accounting procedures
             Property disposal
             Risk management
             Financial management
IDENTIFIER:  Bank Insurance Fund
             Savings Association Insurance Fund
             BIF
             SAIF
             
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Cover
================================================================ COVER


Report to the Deputy and Acting Chief Executive Officer, Resolution
Trust Corporation

May 1995

RESOLUTION TRUST CORPORATION -
EFFORTS UNDER WAY TO ADDRESS
MANAGEMENT WEAKNESSES

GAO/GGD-95-109

Cleanup of the Thrift Industry


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

  BIF - Bank Insurance Fund
  FDIC - Federal Deposit Insurance Corporation
  FIRREA - Financial Institutions Reform, Recovery, and Enforcement
     Act of 1989
  FSLIC - Federal Savings and Loan Insurance Corporation
  RTC - Resolution Trust Corporation
  SAIF - Savings Association Insurance Fund

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


B-259341.3

May 12, 1995

Mr.  John E.  Ryan
Deputy and Acting
Chief Executive Officer
Resolution Trust Corporation

Dear Mr.  Ryan: 

In 1992, we issued a report on risks related to the cleanup of the
thrift industry that the Resolution Trust Corporation (RTC) could
minimize through management improvements.\1 This was part of our
special effort to review and report on federal government program
areas that we considered "high risk." This report presents the
results of our analysis of RTC's efforts to address the weaknesses
that we identified in 1992 and during subsequent reviews.  RTC
efforts reflect a significant commitment to implementing the needed
management improvements, and, coupled with intervening legislation,
they have addressed many of the identified deficiencies.  Therefore,
we have removed the high-risk designation.\2

Despite this progress, however, some remaining risks related to the
cleanup of the thrift industry need further attention.  Chief among
these remaining risks are (1) the long-term viability of the thrift
insurance fund and (2) the winding down of RTC and the disposition of
its remaining operations and workload. 


--------------------
\1 High-Risk Series:  Resolution Trust Corporation (GAO/HR-93-4, Dec. 
1992). 

\2 High-Risk Series:  An Overview (GAO/HR-95-1, Feb.  1995). 


   BACKGROUND
------------------------------------------------------------ Letter :1

In our earlier report, we described risks related to RTC's (1) asset
disposition practices, (2) contracting activities, (3) information
systems, and (4) financial management and accountability.  We also
recognized the effect of future uncertainties on RTC's resolution
activities, and we pointed to opportunities to reduce the overall
cost of the thrift cleanup if RTC were given adequate funding.  In
addition, we warned that the thrift cleanup would not be completed by
the time RTC sunsets, and the total cost of the cleanup would depend,
in part, on how effectively the Federal Deposit Insurance Corporation
(FDIC) applies RTC's investment in both processes and skilled
personnel to manage the remaining responsibilities. 

Since then Congress, RTC, and FDIC have taken actions that address
many of our concerns.  Congress has given RTC the additional funding
it needs to accomplish its work, mandated that RTC implement specific
management reforms, and required the establishment of an interagency
transition task force with specific responsibilities to help transfer
RTC's assets, personnel, and operations to FDIC.  RTC has fully
carried out most of these reforms, and RTC and FDIC have established
a task force that has begun work for a smooth and efficient
transition.  In addition, RTC has dramatically reduced its
inventories of thrifts waiting to be resolved and assets available
for sale, further diminishing the remaining risk. 


   RESULTS
------------------------------------------------------------ Letter :2

In the area of real estate disposition, our earlier report
highlighted the risk that RTC might not be maximizing revenues due to
its lack of reliable information on the best disposition methods for
the various types of properties.  RTC has not undertaken the
comprehensive sales method comparison study we recommended to remedy
this situation, but it has implemented two congressionally mandated
management reforms related to RTC's marketing and disposition methods
that should help RTC to obtain maximum revenues.  In addition, RTC
established a process for gathering some information that may be
useful for evaluating sales techniques used for multiasset
dispositions.  Despite this progress, we are concerned that the lack
of a valid sales method comparison will hamper transition team
efforts to identify which RTC sales methods FDIC should adopt. 

Regarding the contracting function at RTC, our earlier report found
that RTC's contract issuance process was poor, and its oversight of
contractor performance needed improvement.  Several of the mandated
management reforms address contracting activities, and RTC has
improved its processes for issuing contracts.  As discussed in
appendix I, at this time, RTC is vulnerable to risks associated with
not closing out contracts in a timely manner. 

RTC also has improved internal accounting controls over its
receiverships' transactions, accounting operations, and systems.  In
particular, RTC has established internal control policies, finalized
field accounting procedures, and established controls over
receivership receipts and payments.  In addition, RTC has implemented
several new systems that contribute to improved accountability and
reporting.  However, audit results continue to identify significant
performance problems related to contracts issued before improvements
were made in response to the mandated management reforms.  As a
result, RTC cannot ensure that it recovers all that it should. 

Two additional aspects of the thrift cleanup that are sources of
continuing concern have implications that extend beyond RTC's
operations.  One involves the long-term viability of the Savings
Association Insurance Fund (SAIF), which insures thrift institutions
and will have full responsibility for the cost of resolving thrift
failures after RTC's responsibility ends.  Currently, SAIF is thinly
capitalized, and its high premium rates are expected to continue. 
This may place the thrift industry at a competitive disadvantage when
compared with the anticipated lower premium rates of the Bank
Insurance Fund.  In a recent report\3 we analyzed issues related to
possible premium rate disparities that could occur between banks and
thrifts, and we presented various policy options to avoid or mitigate
problems that a premium rate differential may create. 

Another source of continuing concern stems from this being the final
year of RTC's existence, after which FDIC will absorb any remaining
operations and workload.  Winding down a large and complex
organization with thousands of personnel and billions of dollars of
assets, while minimizing the adverse consequences, is very difficult. 
For a successful transition, RTC and FDIC will need to ensure that
sufficient controls are in place over the assets that will be sold
during the final year of RTC's existence, as well as over the assets
that will be transferred to FDIC.  In addition, as discussed in app. 
I, RTC will have to continue to improve the quality of data in its
information systems.  The benefits of better data should help FDIC
when it assumes responsibility for those assets that remain to be
sold after RTC's termination. 


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


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

In doing our analysis, we met with responsible RTC officials to
identify RTC's efforts to address each of the management weaknesses. 
We reviewed documents provided by the officials, as well as
applicable statutes, to determine the status and appropriateness of
the corrective actions RTC has taken.  (See app.  I for a detailed
discussion of our analysis of the management weaknesses, including
the actions RTC has taken and future actions to be taken.)

On February 21, 1995, we discussed the results of our analysis with
you and your Chief Financial Officer.  In addition, we provided a
draft of this report on March 31, 1995, to your Audit Review Policy
Coordinator who acts as liaison for RTC's agency comments on GAO
reports.  The coordinator shared our draft with other key RTC
officials and then met with us on April 6, 1995, to discuss the
officials' comments on the draft.  The officials suggested technical
changes to the report, which we made where appropriate. 


---------------------------------------------------------- Letter :3.1

We are sending copies of this report to interested congressional
Members and committees, the Chairman of the Thrift Depositor
Protection Oversight Board, and the Chairman of FDIC.  We will also
provide copies to others upon request. 

Major contributors to this report are listed in appendix II.  If you
need any additional information or have any further questions, please
contact me on (202) 736-0479. 

Sincerely yours,

Gaston L.  Gianni, Jr.
Associate Director, Government
 Business Operations Issues


ANALYSIS OF RTC'S EFFORTS TO
ADDRESS PAST MANAGEMENT ISSUES
=========================================================== Appendix I


   BACKGROUND
--------------------------------------------------------- Appendix I:1

In August 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) was enacted, in part, to resolve hundreds of
financial institutions (thrifts) that were insolvent or in imminent
danger of becoming insolvent and that were insured by the Federal
Savings and Loan Insurance Corporation (FSLIC).  FIRREA abolished
FSLIC, which had run out of money, and established RTC as a temporary
agency to carry out the enormous task of resolving insolvent thrifts. 
FIRREA provided RTC with $50 billion and about 7-1/2 years to clean
up the thrift industry. 

Subsequent legislation gave RTC additional funds, increased its
responsibilities, but further limited its life span.  To date, RTC
has been authorized $105 billion to be used for resolving thrifts
that fail between January 1, 1989, and July 1, 1995.\1 RTC is
scheduled to cease operations on December 31, 1995.  Any remaining
RTC workload and operations are to be transferred to FDIC, which also
is to inherit resolution responsibility for any thrifts that fail
after RTC's responsibility ends. 

From its inception through December 31, 1994, RTC accepted
responsibility for 745 failed thrifts with aggregate assets totaling
about $464 billion.  RTC has completed the depositor protection phase
of its work for all of the 745 thrifts, and no depositor has suffered
any loss on insured deposits.  RTC also has disposed of more than 94
percent of the $464 billion of assets.  However, much work remains
before the thrift cleanup is complete.  As shown in figure 1, RTC had
about $25 billion in assets remaining on December 31, 1994, most of
which it considers to be hard to sell. 

   Figure 1:  Dollar Value of RTC
   Assets Remaining on December
   31, 1994

   (See figure in printed
   edition.)

Total assets = $25 billion. 

Note 1:  Total assets exceeds sum of dollar values for asset types
due to rounding. 

Note 2:  Sum of percentages exceeds 100% due to rounding. 

Source:  RTC. 

In December 1992, we reported on several aspects of RTC's operations
that led us to classify RTC as a high-risk area, including its asset
disposition practices, contracting activities, information systems,
and financial management and accountability.  In March 1993, the
Chairman of the Thrift Depositor Protection Oversight Board announced
a plan containing management reforms that would be implemented by
RTC.  Several of the planned reforms addressed the aspects of RTC
operations that we had reported as entailing the most risk. 

In December 1993, the RTC Completion Act required RTC to implement 21
separate management reforms, several of which were very similar to
those contained in the March 1993 plan.  We reported in March 1995 on
the status of RTC's implementation of the management reforms mandated
by the RTC Completion Act.  Our report\2 showed that RTC had fully
implemented most of the reforms. 


--------------------
\1 The RTC Completion Act specifies that RTC's resolution
responsibilities for newly failed thrifts will end on such date as is
determined by the Chairperson of the Thrift Depositor Protection
Oversight Board, but not earlier than January 1, 1995, and not later
than July 1, 1995.  The Chairperson has since set July 1, 1995, as
the date. 

\2 Resolution Trust Corporation:  Implementation of the Management
Reforms in the RTC Completion Act (GAO/GGD-95-67, Mar.  9, 1995). 


   DISPOSITION PRACTICES HAVE
   IMPROVED, BUT RECOVERIES MAY
   NOT BE MAXIMIZED
--------------------------------------------------------- Appendix I:2

Since its inception in August 1989 through December 31, 1994, RTC has
made substantial asset disposition progress, disposing of about $439
billion of financial, real estate, and other assets.  The significant
decrease in RTC's asset inventory lessens the magnitude of remaining
risks associated with the savings and loan cleanup.  However, a
substantial portion of the $25 billion of remaining assets is likely
to consist of the least marketable assets.  Further, RTC estimates
that about $8 billion in assets will remain unsold at the end of 1995
and will be transferred to FDIC.  Thus, it remains important that RTC
use the sales strategies that are most effective for the types of
assets left in its inventory.  At the same time, RTC must continue
its efforts to implement mandated management reforms and must seek to
ensure adequate control and oversight when using sales techniques
that result in RTC's retaining a residual ownership in the assets for
a period of time. 

RTC developed a Business Plan in December 1993 that stresses the
importance of selecting a disposition strategy for each asset type
with the goal of maximizing recoveries.  However, RTC has not
developed a comprehensive management strategy for the sale of assets
because it has not determined which sales methods work best for each
of the various asset types.  Instead, RTC continues to try a variety
of marketing and disposition strategies for liquidating its asset
inventory.  The costs and expected return to RTC of disposing of
various types of assets are likely to be different for each of these
strategies, but RTC has not made a reliable comparison of them. 

In December 1992, RTC attempted to analyze its sales strategies, but,
in our view, the results were inconclusive because of data
limitations.  RTC acknowledged that important financial data, such as
property management expenses, operating income and expenses, and
litigation and foreclosure expenses, were not available on an
asset-by-asset basis for assets sold through portfolio and auction
sales.  In a February 1994 report,\3 we found this continued to be a
problem for RTC. 

RTC officials have decided, however, that it would no longer be
cost-effective to do a sales method comparison study.  They pointed
out that such a study would likely be done under a contract, which
would probably cost more than $50,000 and could take up to 130 days
to award.  Since RTC is scheduled to terminate by December 31, 1995,
and RTC's asset inventory continues to decline, RTC officials
concluded that a study at this time would not be cost-effective. 
While RTC's arguments have some validity regarding its continued
operations, we note that as part of the planning process for the
transition to FDIC, RTC is to identify its best practices that then
should be considered for adoption by FDIC.  However, without complete
historic information to perform a valid sales method comparison, RTC
will have to develop alternative criteria for identifying which
practices are best for maximizing recoveries. 

RTC has recently taken some action to gather additional information
on some sales methods.  In August 1994, RTC issued a directive to
establish procedures for tracking expenses for all multiasset sales
transactions.  The directive explains that documentation of estimated
and actual sales expenses for each multiasset sales transaction could
be useful, in some cases, for determining the effectiveness of
different sales methods. 

In addition, mandated reforms contained in the RTC Completion Act
affect RTC's sales strategies.  One reform requires RTC to market any
undivided or controlling interest in real property assets\4 on an
individual basis for at least 120 days before making these assets
available for sale or other disposition on a portfolio basis or
otherwise including them in a multiasset sales initiative. 

Another reform establishes various requirements for the disposition
of real property with a book value of more than $400,000 and the
disposition of nonperforming real estate loan assets with a book
value of more than $1 million.\5

Specifically, before selling such assets, RTC must assign the
responsibility for the management and disposition of such assets to a
qualified person or entity to (1) analyze each asset and consider
alternative disposition strategies, (2) develop a written management
and disposition plan for the asset, and (3) implement this plan for a
reasonable period of time. 

Finally, RTC's use of sales techniques by which it retains some
interest in the properties being sold can be an important disposition
strategy for RTC's least marketable real estate assets.  However,
RTC's use of these disposition techniques also requires diligent
monitoring and administration in order to protect RTC's long-term
interests.  Further, if this type of asset remains at RTC's
termination, FDIC will need to be prepared to undertake these
oversight and monitoring responsibilities. 


--------------------
\3 Resolution Trust Corporation:  Analysis of Selected Asset Sales
and Financial Data (GAO/GGD-94-37, Feb.  1, 1994). 

\4 An exclusion from this requirement applies to real property assets
transferred in purchase-and-assumption transactions and to real
property assets transferred to a new thrift organized by RTC under
section 11(d)(2)(F) of the Federal Deposit Insurance Act. 

\5 The exclusions in footnote 4 also apply to this requirement.  In
addition, an asset can be exempted from the reform's requirements if
RTC determines in writing that other disposition methods would bring
RTC a greater return. 


   CONTRACT ISSUANCE HAS IMPROVED,
   BUT RTC IS VULNERABLE TO RISKS
   ASSOCIATED WITH CONTRACT
   CLOSINGS
--------------------------------------------------------- Appendix I:3

Generally, RTC has used contractors to manage and dispose of assets
from failed thrifts.  These contracted activities, in addition to the
collection of asset sales proceeds, usually include the collection of
income, such as rents, and the making of disbursements, such as for
the payment of utility bills.  RTC's total proceeds from asset sales
and collections through December 1994 were about $385 billion; much
of this amount was managed or collected by thousands of private
contractors.  Given that such a large amount of money can flow
through the private sector contractors acting on behalf of RTC, it
has been critical that a comprehensive system of contracting controls
and contract oversight be in place to reduce the inherent
vulnerabilities of operating in this manner. 

However, as described in our previous high-risk report, RTC initially
viewed contracting as an administrative activity rather than a key
function.  Downplaying the significance of contracting activities in
its early years led RTC to make a series of strategic decisions in
developing and implementing its contracting system that have
increased RTC's vulnerability to mismanagement and waste.  RTC has
since made improvements to its contracting system, but the risk
associated with private sector contractors' managing large amounts of
its assets remains a key vulnerability in RTC's operations. 

After internal and external audits of RTC's contracting activities
and of specific RTC contracts identified shortcomings associated with
contract issuance and oversight, some actions were taken to improve
these processes.  In March 1993, the Chairman of the Thrift Depositor
Protection Oversight Board presented a 10-point program of reforms
for RTC to implement immediately.  One of these reforms included 28
initiatives designed to improve contracting and contract oversight. 
For example, the initiatives included reorganizing RTC's contracting
staff to place emphasis on contract administration and authorizing
214 additional positions related to contracts and contract oversight. 
In addition, the RTC Completion Act included several provisions to
further strengthen contracting and contract oversight, such as
limiting execution authority for all contracts to warranted
contracting officers\6 and requiring documentation of cost estimates
for RTC contracts and contract modifications in excess of $100,000. 

As RTC approaches the conclusion of its mission, the issuance of
contracts and the management of assets by contractors are
diminishing, reducing the levels of funds associated with those
activities.  As shown in figure 2, RTC issued 11,248 new contracts
during the first 6 months of 1994, a 51-percent decrease from the
23,132 new contracts RTC issued during the first 6 months of 1991. 
This decrease in the rate of new contract issuance was accompanied by
a 76-percent decrease in assets managed by contractors that occurred
during that same period.  (See fig.  3.)

   Figure 2:  New RTC Contracts
   Issued During 6-Month Periods
   in 1991 and 1994

   (See figure in printed
   edition.)

Source:  GAO analysis of data provided by RTC. 

   Figure 3:  Dollar Value of RTC
   Assets Being Managed by Private
   Sector Managers Under Contracts

   (See figure in printed
   edition.)

Source:  GAO analysis of data provided by RTC. 

Since 1992, RTC has focused on the process of contract issuance and
has initiated actions to improve its oversight of contracts.  Also,
RTC officials have recently increased emphasis on the process of
closing out\7 contracts to ensure that contractors have fulfilled all
contractual responsibilities.  However, RTC is vulnerable to the
risks associated with not closing out contracts in a timely manner. 
According to RTC estimates at the time of our review, at least 12,000
prime contracts issued before December 31, 1992, with estimated fees
of about $2.8 billion needed to be closed.  RTC officials project
that this backlog will be eliminated by the end of 1995.  However,
the earlier contracts now in the backlog may subject RTC to a greater
than normal amount of risk because they were issued before the
initiation of contracting reforms in the RTC Completion Act and the
10-point program. 

From its inception to December 31, 1992, RTC issued 109,862
contracts, or about 73 percent of the total contracts that it issued
through August 31, 1994.  In addition, many of RTC's asset management
contracts were issued during that earlier period before contracting
reforms were implemented.  Accordingly, these contracts may not have
adequately protected the government's interests, and those that are
not closed out may entail continuing risks. 

Recent contract audits by RTC's Inspector General and audits of RTC's
contractors by RTC's Office of Contract Oversight and Surveillance
continue to identify significant performance problems related to
contracts issued before the recent improvements.  For example, a
September 1994 Inspector General report on the November 1990 sale of
a failed thrift's mortgage subsidiary found that employees of the
subsidiary and RTC's contractors disregarded their responsibilities
and neglected to protect RTC's interests. 

Subsequently, the Inspector General estimated that RTC sold the
subsidiary for $18 million less than its fair value and recommended
that RTC recover the questioned costs and cancel RTC's contract with
its financial advisor because of inadequate performance.  This and
other recent audit reports demonstrate that although RTC has taken
action to correct contracting problems, the effects of RTC's early
neglect of contracting operations remain.  RTC will have to continue
to place emphasis on the contract close-out function. 


--------------------
\6 The RTC Completion Act allows managing agents of savings
associations under the conservatorship of RTC to have the same
contracting authority as warranted contracting officers. 

\7 RTC's contracting manual states that a contract closeout includes,
among other things, determination by the contracting officer that (1)
all deliverables, including reports, have been received by RTC and
accepted; (2) final payment has been made; (3) all collections of
funds due to RTC have been completed; (4) all financial documents are
in the file; (5) all RTC property has been returned and accounted
for; and (6) all RTC files have been returned. 


   INFORMATION SYSTEMS ARE
   CRITICAL FOR MANAGING AND
   SELLING ASSETS EFFECTIVELY AND
   EFFICIENTLY
--------------------------------------------------------- Appendix I:4

RTC's information systems remain critical to its efforts to manage
and sell failed thrift assets and to FDIC's task of assuming
responsibility for any remaining RTC operations after December 31,
1995.  In the past, RTC's information system problems included
unclear or changing requirements, poor response time, difficulty of
use, and inaccurate and incomplete data.  Over the last 2 years, RTC
has made many improvements.  Its system requirements are now better
defined, and it has completed all of its system development projects. 
In addition, it has modified its systems to improve response times
and make the systems easier to use. 

Accurate and complete information is still critical to RTC's ability
to efficiently and effectively dispose of assets.  Poor information
can increase the uncertainty investors face and, therefore, may
reduce the prices that they are willing to pay for RTC's assets.  In
June 1994, RTC completed initial data quality action plans for its 17
critical information systems.  RTC uses these 17 systems to manage
unsold assets, support financial transactions, and report on
activities in which congressional oversight committees have had
significant interest.  A major component of RTC's strategy to improve
the quality of data in these systems is the use of computer software
to identify such problems as missing or inconsistent data. 

While RTC is making progress in improving the quality of data in its
systems, as it reduces staffing levels, there may be fewer resources
to research potential data errors.  In addition, diminishing
resources could make it increasingly difficult for RTC to ensure that
data errors are corrected.  To help ensure that these resources are
properly focused on the data most critical to completing its mission,
RTC is reassessing its efforts to improve the quality of data in the
17 major systems.  Its goal is to target critical data elements that,
if not correct, could have a significant negative effect on the
management of assets or the accuracy of information reported to
oversight committees.  This reassessment is expected to be completed
during the first half of 1995. 

We agree with this approach in RTC's final year of existence.  The
ultimate value of RTC's efforts, however, depends on its ability to
complete the implementation of the data quality action plans in time
to affect current operations and on RTC's ability to sustain
improvements in data quality.  By concentrating on the data elements
that are most critical to managing and selling assets, RTC could make
the best use of its efforts.  In addition, the benefits of better
data should also help FDIC when it assumes responsibility for those
assets that remain to be sold after RTC's termination. 


   FINANCIAL MANAGEMENT AND
   ACCOUNTABILITY MUST CONTINUE TO
   BE A PRIORITY
--------------------------------------------------------- Appendix I:5

During our audit of RTC's 1991 financial statements, RTC could not
demonstrate that cash receipts and payments in its receiverships were
processed in accordance with RTC's policies, objectives, and
standards.  Although we were able to assure ourselves through testing
of detailed transactions that the RTC receivership receipts and
payments we tested were valid and correctly entered in the
receiverships' general ledgers, RTC did not have adequate internal
accounting controls to ensure that future transactions would be
properly handled and accurately reported.  Poor internal controls
over cash receipts and payments in RTC receiverships could increase
the cost of resolutions and the cost to taxpayers. 

During 1992 and 1993, RTC acted to improve internal accounting
controls over receipts and payments by its receiverships and took
steps to address other control weaknesses identified during our
financial audits.  While we continue to identify some internal
control weaknesses during our financial statement audits, RTC has
been very responsive and has addressed the problems.  In particular,
RTC issued its Internal Control Directive, which assigned management
responsibility for internal controls and addressed specific
operational activities to be performed.  RTC also finalized its Field
Accounting Manual, which set forth uniform policies, procedures, and
controls over receivership cash receipts and disbursements for all
RTC field offices.  Additionally, RTC implemented several new
systems, including the Control Totals Module, which contributed to
improved controls over receivership cash receipts and asset
accountability; and the Financial Management System, which enhanced
RTC's financial reporting capabilities.  Further, RTC continues to be
proactive in monitoring compliance with corporate policies and the
adequacy of internal control objectives and techniques through
internal control and program compliance reviews. 

Although significant progress has been made in improving internal
accounting controls, RTC continues to experience weaknesses in its
operating controls over contractors that perform services for
receiverships.  In our audit report on RTC's 1993 financial
statements,\8 we noted that weaknesses in these operating controls
could negatively affect the estimated recoveries from RTC's
receiverships.  As RTC approaches its statutory sunset of December
31, 1995, it must continue to improve operating controls to ensure
that it recovers all that it should from its receiverships. 


--------------------
\8 Financial Audit:  Resolution Trust Corporation's 1993 and 1992
Financial Statements (GAO/AIMD-94-148, June 27, 1994). 


   RTC HAS BEEN FULLY FUNDED, BUT
   SAIF'S FUTURE REMAINS UNCERTAIN
--------------------------------------------------------- Appendix I:6

By the end of November 1992, RTC had used nearly $87 billion of
taxpayer funds to cover losses associated with its thrift resolution
responsibilities.  RTC estimated at that time that it needed an
additional $25 billion in loss funds to resolve all institutions for
which it would be responsible.  This estimate was subject to a number
of uncertainties regarding general economic conditions, interest
rates, and real estate markets that were beyond RTC's control. 
Additional uncertainties affect the future of SAIF, which was
established to insure thrifts and to be responsible for the cost of
resolving thrifts that fail after RTC's responsibility ends. 

In December 1993, the RTC Completion Act provided RTC with an
additional $18.3 billion in loss funds, bringing to $105 billion the
total made available to RTC to cover its losses associated with
thrift resolutions.  On the basis of the estimates presented in RTC's
1993 financial statements, which continue to be subject to
uncertainties, RTC may need only $5.3 billion of the $18.3 billion
provided, leaving up to $13 billion of unused loss funds after RTC
resolves all institutions for which it is responsible.  Under the RTC
Completion Act, these unused loss funds become available for thrift
insurance losses incurred by SAIF for 2 years provided that certain
requirements of the act are met. 

Under authority provided in the RTC Completion Act, the Chairperson
of the Thrift Depositor Protection Oversight Board determined on
December 5, 1994, that RTC would continue to be responsible for
resolving failed thrift institutions through June 30, 1995.  After
that date, SAIF will assume full responsibility for the cost of
resolving failed thrifts.  SAIF was created in 1989 without any
initial capitalization, and SAIF premiums, paid by insured thrifts,
are not fully available to build the SAIF fund balance because
premiums are subject to prior claims that consume a substantial
portion of SAIF members' insurance premiums.  Beginning in 1993 and
continuing through the present, the interest due on 30-year FSLIC
recapitalization bonds issued by the Financing Corporation has been a
priority claim.  This is a substantial claim that consumed nearly
half of SAIF's total insurance premiums in 1993.  As a result, SAIF
is significantly undercapitalized and its members will continue to
face high assessment rates. 

Congress has taken steps to provide SAIF with additional access to
funds by giving FDIC authority to borrow, on behalf of SAIF or the
Bank Insurance Fund (BIF), up to $30 billion from the U.S.  Treasury
to cover insurance losses.  In addition, Congress authorized up to $8
billion for SAIF insurance losses in fiscal years 1994 through 1998
and provided that any loss funds not used by RTC would become
available to SAIF to cover SAIF insurance losses during the 2-year
period beginning on the date of RTC's termination.  However, the RTC
Completion Act and the FDIC Improvement Act of 1991 contain
requirements and restrictions on SAIF's access to and use of these
funding sources. 

FDIC's projections of SAIF's fund balance indicate that it will not
reach its designated reserve levels until 2002.  Accordingly, SAIF's
premium rates are expected to continue to be significantly higher
than those projected for BIF.  Because of improvements in the banking
industry, FDIC predicts that it will be able to substantially reduce
BIF premium rates long before it can reduce SAIF premium rates. 
Should a substantial difference in premium rates exist, SAIF members
may face a competitive disadvantage with banks in raising sufficient
capital, which may adversely affect the thrift industry and SAIF.  As
a result, continuing attention is needed to SAIF's long-term
viability. 


   RTC AND FDIC MUST DEAL WITH
   SIGNIFICANT CHALLENGES TO MAKE
   A SMOOTH AND EFFICIENT
   TRANSITION
--------------------------------------------------------- Appendix I:7

RTC will cease to exist at the end of 1995, and FDIC will be its
successor.  Effectively managing the transfer of RTC operations,
workload, and staff to FDIC is a challenge for RTC and FDIC that
requires diligent planning and close coordination.  A smooth and
efficient transfer is needed to ensure that (1) before, during, and
after the transfer, adverse consequences on RTC's remaining asset
management and disposition activities are minimized and (2) FDIC's
own continuing asset management and disposition activities benefit
from combining the expertise of these two organizations.  The
difficulty of planning an effective and efficient transition is
compounded by the need to substantially decrease staffing levels to
match the decreasing workloads faced by both agencies while carefully
aligning staff skills and capabilities with remaining organizational
needs. 

Some actions have been taken to initiate the necessary planning and
coordination.  The RTC Completion Act requires RTC and FDIC to
establish a transition task force to facilitate the transfer of RTC
assets, personnel, and operations to FDIC in a coordinated manner. 
The RTC Completion Act assigned the task force specific duties,
including examining the operations of RTC and FDIC, evaluating the
differences, and recommending which RTC systems should be preserved
for use by FDIC.  The act requires the transfer to FDIC of any
beneficial RTC management, resolution, and asset disposition systems
in a manner that preserves the integrity of the systems.  The act
also requires the task force to evaluate the management enhancement
goals and the management reforms that are applicable to RTC under
section 21A of the Federal Home Loan Bank Act and to recommend which
of the goals and which of the reforms should apply to FDIC. 

On February 22, 1994, RTC and FDIC formally established the task
force.  The task force subsequently established more than a dozen
groups to examine functional and policy issues for transition to
FDIC.  It charged the groups with identifying key policies and
procedures in place at FDIC and RTC, critical policy and procedural
differences, and "best practices" from RTC that should be adopted by
FDIC.  Each group is also to analyze which of the management
enhancement goals and management reforms that are applicable to RTC
should apply to FDIC.  As the task force's work progresses, it plans
to make recommendations to the FDIC Board of Directors about RTC
practices and the management reforms that should be adopted by FDIC. 

The task force has established an information systems review
committee to help the task force make recommendations to the
Secretary of the Treasury on which RTC information systems should be
preserved for use by FDIC.  After considering the task force's
recommendations, the Secretary is to determine which systems have
benefited RTC, and those systems are to be transferred to FDIC. 

The task force has not yet fulfilled the RTC Completion Act
requirements to evaluate the operational differences between RTC and
FDIC and to recommend which RTC systems should be preserved for use
by FDIC.  It also has not determined the specific details of how most
RTC functions will be transferred to FDIC.  On the basis of input
from the groups it established, however, the task force has
determined when some RTC functions and staff will be transferred to
FDIC and where they will fit within FDIC's organizational structure. 
For example, the task force has decided to transfer the asset
management and sales operations of RTC's Kansas City office by June
30, 1995.  The task force has also decided on some fundamental
personnel policies that affect RTC staff who transfer to FDIC. 

While RTC and FDIC have made progress in planning the transition,
challenges remain.  It is critical that RTC and FDIC identify RTC
policies, procedures, and practices that should be adopted by FDIC as
the best practices.  Thorough analysis of best practices is important
because, in the past 5 years, RTC and FDIC have developed differing
methods for accomplishing similar activities.  For example, FDIC uses
its own employees to settle, collect, or otherwise work out
nonperforming loans of more than $250,000.  However, RTC generally
uses asset disposition contractors to perform these activities.  The
task force needs to identify such differences and determine, on the
basis of careful analysis, which practices should apply to FDIC as it
liquidates remaining RTC assets and as it liquidates current and
future FDIC assets. 

It is essential that key decisions about RTC's best practices,
management reforms, and information systems are objective and based
on careful analysis.  It is also crucial that transition plans
thoroughly identify remaining RTC workload and the manner in which it
will be transferred to FDIC.  Failure to make and effectively
implement such plans could result in assets being lost or losing
value because of neglect or mismanagement.  Similarly, RTC and FDIC
will need to continue efforts to identify and implement needed
internal controls to reduce risks associated with the transfer of
assets and operations from RTC to FDIC. 

Transition challenges also are magnified by significant personnel
issues facing RTC and FDIC as a result of declining workloads.  RTC
will have to continue to evaluate its staffing needs as workload
decreases and reduce its staffing levels as appropriate between now
and December 31, 1995.  However, in making decisions about reducing
staffing levels, RTC must consider, in addition to its declining
workload, the adequacy of staffing levels for maintaining effective
internal controls and contract monitoring and for ensuring that RTC
operations continue smoothly.  RTC is further constrained in its
staffing decisions by a provision of law that guarantees to some RTC
employees post-transition employment at FDIC.  About 4,300 of RTC's
5,700 employees do not have this guarantee of employment at FDIC, and
their employment at RTC can be terminated as RTC's staffing
requirements diminish. 

About 1,400 RTC employees who have the guarantee of employment at
FDIC also complicate FDIC's staffing decisions because FDIC is also
reducing its staffing as workload decreases.  In particular, FDIC's
Division of Depositor and Asset Services (formerly the Division of
Liquidation) plans to reduce the number of employees from its present
total of about 3,800 to fewer than 3,000 by December 31, 1995.  FDIC
will need to pay close attention to the mix of staff skills and
experiences available, both from its existing staff and from the RTC
employees who may join FDIC, and ensure they match with those needed
for the remaining and anticipated work.  Also, FDIC needs to
determine the optimum size, staffing, and organization for its asset
disposition function to ensure that sufficient resources will be
available if bank and thrift failures increase, while also ensuring
that excess resources are not wasted during periods of low failure
activity. 


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

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Michael J.  Koury, Jr., Evaluator-in-Charge
Shirley C.  Bates
Leon H.  Green
Carolyn S.  Ikeda
William M.  Reinsberg

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

Mary Ellen Chervenic
John J.  Reilly, Jr.
Christine A.  Robertson

OFFICE OF GENERAL COUNSEL,
WASHINGTON, D.C. 

Susan S.  Linder





RELATED GAO PRODUCTS
=========================================================== Appendix 0

Resolution Trust Corporation:  Evaluations Needed to Identify the
Most Effective Land Sales Methods (GAO/GGD-95-43, Apr.  13, 1995). 

Resolution Trust Corporation:  Implementation of the Management
Reforms in the RTC Completion Act (GAO/GGD-95-67, Mar.  9, 1995). 

Deposit Insurance Funds:  Analysis of Insurance Premium Disparity
Between Banks and Thrifts (GAO/AIMD-95-84, Mar.  3, 1995). 

Resolution Trust Corporation:  Affordable Housing Disposition Program
Achieving Mixed Results (GAO/GGD-94-202, Sept.  28, 1994). 

Resolution Trust Corporation:  Better Analyses Needed Before
Terminating Asset Management Contracts (GAO/GGD-94-147, July 8,
1994). 

Resolution Trust Corporation:  Interim Report on the Management
Reforms in the RTC Completion Act (GAO/GGD-94-114, June 30, 1994). 

Financial Audit:  Resolution Trust Corporation's 1993 and 1992
Financial Statements (GAO/AIMD-94-148, June 27, 1994). 

1992 Thrift Resolutions:  RTC Policies and Practices Did Not Fully
Comply With Least-Cost Provisions (GAO/GGD-94-110, June 17, 1994). 

FDIC:  Asset Disposition Strategies (GAO/AIMD-94-92R, June 2, 1994). 

Bank and Thrift Regulation:  Better Guidance Is Needed for Real
Estate Evaluations (GAO/GGD-94-144, May 24, 1994). 

Resolution Trust Corporation:  Real Estate Recoveries 1993
(GAO/GGD-94-84FS, Mar.  25, 1994). 

Resolution Trust Corporation:  Analysis of Selected Asset Sales and
Financial Data (GAO/GGD-94-37, Feb.  1, 1994). 

Resolution Trust Corporation:  Ineffective Management of HomeFed Bank
Environmental Services Contracting (GAO/GGD-94-62, Dec.  28, 1993). 

Resolution Trust Corporation:  Better Information Could Enhance
Controls Over Loan Servicing Costs (GAO/GGD-94-41, Dec.  22, 1993). 

Resolution Trust Corporation:  Oversight of SAMDA Property Management
Contractors Needs Improvement (GAO/GGD-94-5, Nov.  30, 1993). 

Minority-Owned Financial Institutions:  Status of Federal Efforts to
Preserve Minority Ownership (GAO/GGD-94-1, Nov.  3, 1993). 

Resolution Trust Corporation:  Status of Management Efforts to
Control Costs (GAO/GGD-94-19, Oct.  28, 1993). 

Executive Bonuses:  Information on FDIC's and RTC's Executive Bonus
Programs (GAO/GGD-94-15, Oct.  1, 1993). 

Resolution Trust Corporation:  Data Limitations Impaired Analysis of
Sales Methods (GAO/GGD-93-139, Sept.  27, 1993). 

Resolution Trust Corporation:  Additional Monitoring of Basic
Ordering Agreements Needed (GAO/GGD-93-107, Sept.  13, 1993). 

Resolution Trust Corporation:  Better Assurance Needed That
Contractors Meet Fitness and Integrity Standards (GAO/GGD-93-127,
July 26, 1993). 

Resolution Trust Corporation:  Loan Portfolio Pricing and Sales
Process Could Be Improved (GAO/GGD-93-116, July 23, 1993). 

Resolution Trust Corporation:  1992 Washington/Baltimore Auctions
Planned and Managed Poorly (GAO/GGD-93-115, July 7, 1993). 

Financial Audit:  Resolution Trust Corporation's 1992 and 1991
Financial Statements (GAO/AIMD-93-6, June 30, 1993). 

Thrift Failures:  Actions Needed to Stabilize RTC's Professional
Liability Program (GAO/GGD-93-105, June 28, 1993). 

Resolution Trust Corporation:  Status of Minority and Women Outreach
and Contracting Program (GAO/GGD-93-106, May 19, 1993). 

Resolution Trust Corporation:  Controls Over Asset Valuations Do Not
Ensure Reasonable Estimates (GAO/GGD-93-80, Apr.  8, 1993). 

Resolution Trust Corporation:  Funding, Organization, and Performance
(GAO/T-GGD-93-13, Mar.  18, 1993). 

Asset Management System:  Liquidation of Failed Bank Assets Not
Adequately Supported by FDIC System (GAO/IMTEC-93-8, Feb.  3, 1993). 

High-Risk Series:  Resolution Trust Corporation (GAO/HR-93-4, Dec. 
1992). 
