1993 Thrift Resolutions: RTC's Resolution Process Generally Adequate to
Determine Least Costly Resolutions (Letter Report, 05/15/95,
GAO/GGD-95-119).

Pursuant to a legislative requirement, GAO reviewed the Resolution Trust
Corporation's (RTC) compliance with a statutory requirement to: (1)
resolve failed thrifts in the least costly manner; and (2) calculate and
document its evaluation of alternative resolutions of failed thrifts.

GAO found that: (1) RTC has improved its resolution process and
curtailed its practice to sell performing loans during conservatorship
in order to comply with the least cost requirement; (2) RTC policy to
extend a preference to minority bidders when making resolution decisions
appears consistent with the least cost requirement; (3) for the three
resolutions it reviewed, RTC chose the resolution alternative it
determined to be the least costly and, in response to GAO
recommendations, adequately documented its marketing strategies and the
bases for its resolution decisions; (4) where relevant, RTC has
implemented changes to its corporate policies regarding the treatment of
uninsured depositors and the timing of asset sales during
conservatorships, which brought RTC into compliance with other statutory
requirements as well as the least cost requirement; (5) RTC has changed
the timing of its liquidation cost estimates so that it makes its
initial estimate when a failed thrift is placed in conservatorship; (6)
among other things, RTC initial liquidation cost estimates determine the
amount of estimated losses uninsured depositors must absorb; and (7) RTC
efforts to resolve failing thrifts through its accelerated resolution
program have brought RTC into better conformance with the least-cost
statutory requirement.

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

 REPORTNUM:  GGD-95-119
     TITLE:  1993 Thrift Resolutions: RTC's Resolution Process Generally 
             Adequate to Determine Least Costly Resolutions
      DATE:  05/15/95
   SUBJECT:  Bank failures
             Savings and loan associations
             Documentation
             Cost control
             Property disposal
             Banking law
             Compliance
             Assets
             Real estate sales
             Insured commercial banks
IDENTIFIER:  RTC Accelerated Resolution Program
             
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Cover
================================================================ COVER


Report to the Senate Committee on Banking, Housing, and Urban Affairs
and the House Committee on Banking and Financial Services

May 1995

1993 THRIFT RESOLUTIONS - RTC'S
RESOLUTION PROCESS GENERALLY
ADEQUATE TO DETERMINE LEAST COSTLY
RESOLUTIONS

GAO/GGD-95-119

Resolution of Failed Thrifts


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

  ARP - accelerated resolution program
  FDICIA - Federal Deposit Insurance Corporation Act
  OTS - Office of Thrift Supervision
  PMN - predominantly minority neighborhood
  RTC - Resolution Trust Corporation

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


B-260642

May 15, 1995

The Honorable Alfonse M.  D'Amato
Chairman
The Honorable Paul S.  Sarbanes
Ranking Minority Member
Committee on Banking, Housing,
 and Urban Affairs
United States Senate

The Honorable James A.  Leach
Chairman
The Honorable Henry B.  Gonzalez
Ranking Minority Member
Committee on Banking and Financial Services
House of Representatives

This report presents the results of our second annual review of the
Resolution Trust Corporation's (RTC) compliance with Section 13(c)(4)
of the Federal Deposit Insurance Act, as amended by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).  This
section of the act requires RTC to (1) choose the alternative for
resolving a failed thrift that results in the least possible cost to
RTC and (2) calculate and document its evaluation of the costs of
alternatives for resolving a troubled thrift.  The act also requires
us to annually audit RTC's compliance with the least-cost
requirements. 

We reviewed three judgmentally selected resolutions of failed thrifts
completed between January 1, 1993, and June 30, 1994, to determine
RTC's compliance with the least-cost requirements. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

RTC has made improvements to its resolution process that enable it to
better comply with FDICIA's least-cost requirements.  We found that
RTC selected the resolution alternative it determined to be least
costly for the three resolutions and adequately documented the bases
for those decisions.  We also found that, where relevant, RTC
effectively implemented changes to its corporate policies regarding
the treatment of uninsured depositors and the timing of when it sold
the assets of thrifts in conservatorship.  These changes brought RTC
into compliance with the act's uninsured depositor requirements and
better provided for RTC's conformance with FDICIA's requirement that
it evaluate other resolution methods before selling assets. 

In addition, RTC changed the timing of its liquidation cost
estimates.  Its current practice is to make an initial liquidation
cost estimate at the time a failed thrift is placed in
conservatorship to, among other things, determine the amount of
estimated losses to be absorbed by uninsured depositors.  This
practice, along with RTC's intention to resolve any further failing
thrifts through its accelerated resolution program, will better
provide for RTC's conformance with FDICIA. 


   BACKGROUND
------------------------------------------------------------ Letter :2


      OUR FIRST REVIEW IDENTIFIED
      COMPLIANCE PROBLEMS
---------------------------------------------------------- Letter :2.1

We reviewed RTC's 1992 resolutions process to determine if it
provided for compliance with the FDICIA least-cost requirements.  We
reported that three of RTC's corporate policies raised compliance
issues.\1 These policies did not (1) ensure that uninsured depositors
would absorb their shares of thrift losses if necessary to achieve
least costly resolutions; (2) require RTC to evaluate other available
resolution methods prior to selling the assets of thrifts in
conservatorship; or (3) require RTC to estimate the cost of
liquidating thrifts in conservatorship as of the earliest of three
dates specified by the act, which is usually the date when RTC passes
the failed thrift through a receivership and is appointed
conservator. 

We also found numerous documentation shortcomings from our review of
a sample of 1992 resolutions.  For instance, RTC did not always fully
document the bases of the evaluations of the resolution alternatives
considered, including the consideration given to all nonconforming
bids received from potential acquirers, as its procedures required. 
Further, RTC generally did not document the rationale for the
marketing strategy it selected. 

We recommended that RTC evaluate the resolution methods that are
potentially available before selling the assets of a failed thrift
and make liquidation cost estimates at the earliest of the three
dates specified by FDICIA.  We also recommended that RTC document the
consideration given all nonconforming bids and the rationale for the
agency's preferred marketing strategy for resolving a failed thrift. 
We made no recommendation concerning uninsured depositors, because
RTC changed its policy in September 1993 to better ensure that
uninsured depositors would absorb their shares of thrift losses if
necessary to achieve the least costly resolution. 

RTC agreed to initiate actions to improve its documentation, but it
maintained that its policies on asset sales during conservatorship
and on the timing of its liquidation cost estimates were consistent
with FDICIA.  We said that unless RTC changed its policies in these
areas, neither we nor RTC could assure Congress that RTC was fully
complying with FDICIA's least-cost requirements. 


--------------------
\1 1992 Thrift Resolutions:  RTC Policies and Practices Did Not Fully
Comply With Least-Cost Provisions (GAO/GGD-94-110, June 17, 1994). 


      FEW THRIFT FAILURES SINCE
      JANUARY 1, 1993
---------------------------------------------------------- Letter :2.2

Although over 1,300 savings associations failed from 1980 through
1992, failures since the beginning of 1993 have declined
dramatically.  Also, the December 17, 1993, passage of the RTC
Completion Act (Public Law 103-204, 107 Stat.  2369)--which provided
RTC the funds needed to resolve failed thrifts--has enabled RTC to
resolve all but one of its backlog of thrifts in conservatorship as
of December 31, l994. 

When a thrift fails, the Office of Thrift Supervision (OTS) or the
thrift's state chartering authority usually appoints RTC as
conservator or receiver.  As conservator, RTC operates a failed
thrift pending its final resolution, and as receiver, it administers
the closing of an insolvent thrift and liquidates all assets not
disposed of in conservatorship or at resolution.  However, some
failing thrifts are resolved prior to being placed into
conservatorship through the accelerated resolution program (ARP),
which OTS operates jointly with RTC.  This program enables OTS to
place a thrift it considers to be in serious financial difficulty
into ARP for the purpose of selling the troubled thrift's assets,
deposits, and other liabilities to a healthy institution before the
thrift fails. 

During 1993, eight thrifts failed and were placed in RTC
conservatorships, and one failing thrift was resolved through ARP. 
In 1994, no thrifts failed and two failing thrifts were resolved
through ARP.  Further, due primarily to funding provided by the RTC
Completion Act, 80 of the 81 thrifts in RTC conservatorships as of
December 31, 1992, as well as the 8 thrifts placed in
conservatorships in 1993, were all resolved by the end of 1994. 

RTC officials told us they intend to resolve any further troubled
thrifts via ARP or ARP-like transactions by selling the thrift's
assets, deposits, and other liabilities to a healthy institution
prior to the thrift's failure.  They also said they expect few--if
any--additional thrift failures through June 30, 1995, at which time
RTC's responsibility for resolving failed and failing thrifts ends. 
The Federal Deposit Insurance Corporation assumes responsibility for
resolving troubled thrifts as of July 1, 1995. 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The primary objective of this, our second, annual review was to
determine the extent to which RTC's resolution process enabled it to
comply with FDICIA requirements to select the least costly
alternatives for resolving failed institutions. 

To address the objective, we judgmentally selected and reviewed three
thrifts that were resolved between January 1, 1993, and June 30,
l994.  In each of these resolutions, RTC applied at least one of the
three new resolution policies it established since January 1, 1993. 
The new policies involve (1) pro rata sharing of resolution losses by
uninsured depositors when necessary to achieve the least costly
resolution, (2) discontinuing the sale of performing loans during
conservatorship, and (3) extending preference to minority bidders in
making resolution decisions.  We reviewed the three resolutions to
determine whether RTC's resolution process, as modified by these
policy changes, provided for compliance with FDICIA's least-cost
requirements. 

We selected one of the three resolutions we reviewed because it was
the only failed thrift that was affected by the September 1993
uninsured depositor policy change.  It was also 1 of 14 failed
thrifts in which RTC discontinued the sale of performing loans.  We
chose the other two resolutions because they involved preferences
extended to minority bidders.  In addition, one of the two failed
thrifts was a major resolution with assets in excess of $1 billion. 

To address our objective, we analyzed the three resolutions, reviewed
pertinent policies and procedures, and interviewed RTC officials and
staff.  We modified and used the data collection instrument we
developed in our first review to document and evaluate the
information from our three resolution cases, paying particular
attention to the effect the three new policies had on the least-cost
determinations.  As in our first review, we collected data from the
inception of resolution activity through the final resolution
decision.  We then compared the results of the three case studies
with the results of our first-year case studies to identify any
improvements or additional shortcomings in RTC's resolution process. 

During our assessment of the three resolutions, we reviewed the
accuracy of the financial calculations RTC used to estimate the cost
of available resolution alternatives.  However, due to the
subjectivity inherent in the valuation of assets and in the
estimation of future asset recoveries, we assessed the adequacy of
RTC's resolution process to select the least costly alternative.  We
did not determine whether, in fact, the least costly resolution
alternative was selected, because the ultimate cost of a resolution
cannot be identified until all remaining assets are sold and
liabilities are paid by RTC as receiver, which generally takes
several years.  Further, the results of our review of the three
resolutions are not generalizable to all of the resolutions done by
RTC since January 1, 1993. 

RTC provided written comments on a draft of this report.  The
comments are summarized on page 8 and reprinted in appendix I. 

We did our work between June and October 1994 at RTC headquarters in
Washington, D.C.  Our work was done in accordance with generally
accepted government auditing standards. 


   PRINCIPAL FINDINGS
------------------------------------------------------------ Letter :4


      RTC HAS IMPROVED ITS
      RESOLUTION PROCESS
---------------------------------------------------------- Letter :4.1

RTC changed its corporate policies to require that uninsured
depositors share in thrift losses if necessary to achieve least
costly resolutions and to curtail its practice of selling performing
assets during conservatorship operations.  These changes brought RTC
into compliance with FDICIA's uninsured depositor requirements and
enabled RTC to better conform with the act's requirement that it
evaluate other resolution methods before selling assets.  In
addition, RTC's implementation of a policy to extend a preference to
minority bidders when making resolution decisions appeared consistent
with FDICIA's least-cost requirements. 

Also, for the three resolutions we reviewed, RTC continued to select
the resolution method it determined to be the least costly and took
several actions in response to recommendations resulting from our
first review that have enhanced its resolution process. 
Specifically, it improved the documentation of its marketing
strategies, the consideration given to bids that did not conform to
its preferred marketing strategies, and the bases for its resolution
decisions.  It also changed the timing of its liquidation cost
estimates. 

Our review of the one resolution that involved the uninsured
depositor policy change showed that consistent with FDICIA
requirements, RTC paid uninsured depositors only that portion of
their uninsured deposits equal to the expected pro rata share of the
estimated proceeds from the resolution of the failed institution. 
RTC initially paid the uninsured depositors a 50-percent advance
dividend, which was calculated by multiplying the book value of the
assets by a percentage based on RTC's historical asset recovery
rates, and then RTC reduced that amount by an arbitrarily determined
18 percent to provide a conservative cushion.  About 6 months later,
RTC was able to pay an additional 24 percent on the basis of actual
asset recoveries. 

This resolution also involved the policy change concerning the timing
of asset sales during conservatorships.  Prior to the change, RTC
generally sold high-quality assets, such as marketable securities,
investments, and performing loans, from thrifts in conservatorship
through a process called "downsizing." RTC believed this approach
maximized returns on asset disposition and, as a general proposition,
resulted in least-cost resolutions.  However, we were critical of
RTC's downsizing policy in our report on 1992 resolutions,\2 because
the policy was at variance with FDICIA's requirement that RTC
evaluate other available methods of thrift resolution prior to
selling assets. 

RTC's March 1993 policy change generally required that high-quality
assets be retained in conservatorships, although--except for certain
performing assets such as one-to-four family mortgages--they could be
sold within 45 days of the announced resolution date of a thrift. 
Thus, performing assets could be sold at or around the time the
thrift was to be marketed, providing RTC greater opportunity to
assess available resolution methods prior to commencing asset sales. 
RTC changed the policy primarily because it found that retaining
high-quality assets provided conservatorships a better return than
selling the assets and investing the proceeds in lower yielding
securities.  In our view, this policy change made good economic sense
and enabled RTC to better conform with the FDICIA requirement that it
evaluate available resolution methods before selling high-quality
assets.  Our review of the resolution case file showed that
consistent with the revised policy, RTC retained high-quality assets
in the conservatorship until close to the resolution date before
selling them.  We also found that RTC explored market interest in the
thrift, selected the resolution alternative it determined to be the
least costly, and adequately documented its marketing rationale and
the bases for its resolution decision. 

RTC also made an initial liquidation cost estimate as of the date the
thrift was placed in conservatorship to estimate the expected
proceeds from resolution, which was necessary to determine the
advance dividend to be paid to uninsured depositors.  In addition,
RTC made a second liquidation cost estimate, valuing assets based on
its asset valuation review process, for purposes of determining the
least costly resolution alternative.  RTC officials told us they will
follow this practice with future failed thrifts that are placed in
conservatorship, but their intent is to resolve any further failing
thrifts through ARP or ARP-like transactions.  Either the new
practice or ARP or ARP-like transactions will better provide for
RTC's conformance with FDICIA. 

We also noted improvements in RTC's resolution process during our
review of the case files of the two other thrift resolutions we
selected.  We found, for example, that RTC adequately documented the
marketing rationale, the bases for its resolution decisions, and the
consideration given to bids that did not conform to its preferred
marketing strategy.  It also selected the resolution alternative it
determined to be the least costly. 

These two resolved thrifts were subject to RTC's new policy, which
gave a preference to offers from minority bidders for acquiring
thrifts or their branches located in predominantly minority
neighborhoods (PMN).  This PMN policy, mandated by the RTC Completion
Act,\3 essentially required RTC to give a minority bidder the
opportunity to match the high nonminority bid and thus become the
winning bidder.  The program's premise was that the matching minority
bid would result in the least possible resolution cost to RTC, since
it is to be considered only after RTC has determined the least costly
resolution alternative based on its review of all bids received. 

Our review of the two resolutions showed that RTC applied its PMN
policy as designed, which was consistent with the least-cost
provisions of FDICIA.  In one of the resolutions, minority buyers
were successful bidders for two of the five PMN offices of an entire
thrift located in a PMN because their bids, considered with all other
bids, produced the least costly resolution alternative.  In the
second resolution, the otherwise winning minority bidder for the
thrift's two PMN offices did not get the required regulatory
approval, and thus its bids were disallowed.  In both resolutions,
RTC selected the bids that it determined to be the least costly
alternative. 


--------------------
\2 1992 Thrift Resolutions:  RTC Policies and Practices Did Not Fully
Comply With Least-Cost Provisions (GAO/GGD-94-110, June 17, 1994). 

\3 The act required us to study how RTC implemented the PMN and other
reforms required by the act and RTC's progress toward achieving full
compliance with the requirements.  We were required to prepare an
interim report within 6 months of enactment of the act and a final
report not later than 1 year after enactment.  The first report,
Resolution Trust Corporation:  Interim Report on the Management
Reforms in the RTC Completion Act (GAO/GGD-94-114, June 30, 1994),
identified the PMN requirements, noted RTC's definition of
"predominantly minority neighborhood," and described the policies and
procedures RTC implemented to form its minority preference resolution
program.  The final report, Resolution Trust Corporation: 
Implementation of the Management Reforms in the RTC Completion Act
(GAO/GGD-95-67, March 9, 1995), discussed RTC's efforts to comply
with the act's requirements. 


   CONCLUSION
------------------------------------------------------------ Letter :5

RTC has made substantive improvements to its resolution process.  It
changed its treatment of uninsured depositors and now complies with
related FDICIA requirements; it changed the timing of its sales of
high-quality assets from thrifts in conservatorship and the timing of
its liquidation cost estimates, thereby better providing for its
conformance with the act's requirements; and it improved various
aspects of its resolution documentation, as we had recommended.  RTC
also continued to select the resolution alternatives it determined to
be least costly for the three resolutions we reviewed, including the
selection of alternatives for the two resolutions involving RTC's new
PMN program. 

As our review did not disclose significant noncompliance, and unless
thrift failures accelerate by June 30, 1995, we do not plan to issue
further reports on RTC's compliance with the least-cost provisions of
FDICIA. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

RTC, in its written comments on a draft of this report, agreed with
the content and conclusions.  RTC's comments are reprinted in
appendix I. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to RTC's Deputy and Acting Chief
Executive Officer; the Chairman of the Thrift Depositor Protection
Oversight Board; the Chairman, Federal Deposit Insurance Corporation;
and other interested parties. 

This report was prepared under the direction of Mark J.  Gillen,
Assistant Director, Financial Institutions and Markets Issues.  Other
major contributors are listed in appendix II.  If there are any
questions about this report, please contact me on (202) 512-8678. 

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM RTC
============================================================== Letter 


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


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

Stephen J.  Saks, Senior Evaluator
James R.  Black, Senior Evaluator
Joe E.  Hunter, Evaluator
Edwin J.  Lane, Evaluator


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:2

Rosemary Healy, Senior Attorney


   DALLAS REGIONAL OFFICE
-------------------------------------------------------- Appendix II:3

Jeanne Barger, Evaluator-in-Charge

