Each depositor insured to at least $250,000 per insured bank

Seven banks failed on May 31, 1985, the largest number of insured banks ever to close in one day (up to that date). L. William Seidman was appointed chairman of the FDIC on October 21, 1985. Prior to his appointment to the FDIC, Mr. Seidman had an extensive career in the financial arena in both the private and public sectors.

Economic/Banking Conditions

In 1985, the Gross Domestic Product growth of 3.7 percent was not as strong as the previous year’s 6.8 percent growth.^8-1 Employment growth also slowed a bit, with a 3.9 percent increase.^8-2 The unemployment rate and inflation held steady at 7.2 percent and 3.6 percent, respectively.^8-3 Interest rates fell after the slight increases in 1984, to a discount rate of 7.7 percent and a 30-year mortgage rate of 12.4 percent.^8-4 Home sales were up 10.2 percent while the number of housing starts held steady. The office vacancy rate continued to increase to 16.5 percent with the expansion of commercial real estate markets around the country.^8-5

Economic conditions continued to get worse for the Southwest and its banking industry. A recession began in the agricultural industry. Southwest bank failures more than doubled to 29 for the year. Agricultural bank failures peaked at 62 for the year. Those failures were primarily concentrated in Midwestern states with agriculturally dependent economies that had experienced farmland price declines of as much as 49 percent in some areas. Midwest bank failures hit a peak, nearly doubling the 1984 total, to 56 for the year.

Despite the number of agricultural bank failures, losses to the deposit insurance fund were relatively low since those institutions were relatively small. Deposit insurance fund losses in 1985 were the lowest for the period 1982-1990, totaling approximately $1 billion, an average of just $8.4 million per bank.

Late in the year, oil prices dropped sharply, to $25 a barrel.^8-6 As a result, the oil industry in the Southwest continued to experience hardships. Conversely, construction in the real estate market was still booming. In Austin, Texas, the value of new permits for 1985 to 1987 was nearly double the value only a few years earlier. However, demand for real estate was not keeping up with the supply, as office vacancy rates in the region’s major cities continued to increase steadily.^8-7 There was an increase in total real estate loans for the region, reaching the national median. There continued to be drastic increases in commercial real estate loans to 8.3 percent of assets, well above the national median of 5.2 percent of assets. The year 1985 marked the beginning of a steady decline in Commercial and Industrial (C&I) loans for the region after the upsurge during the early 1980s.

In the Northeast, housing prices continued to rise, including home prices in Boston, Massachusetts, which rose 34 percent over the preceding year.^8-8 Lending also increased, with a concentration in real estate loans, both commercial and residential. C&I loans fell to 7.8 percent of assets after holding steady for four years at around 9.3 percent. The national median was 10.4 percent of assets during that period.

California also experienced an upward trend in real estate lending, with commercial real estate loans increasing to around 13 percent of assets and C&I loans increasing to 21.9 percent of assets, both well above the national medians of 5.2 percent and 10.4 percent of assets, respectively. The banking market was also experiencing an upward trend; over the preceding five years there were 272 newly chartered banks in California alone.

The number of new bank charters dropped to 344 from 402 in 1984. The FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve set a common capital requirement that covered all banks. Agricultural banks continued a downward slide that had become quite marked during the latter part of 1984. Although comprising only 27 percent of all FDIC insured institutions, agricultural banks accounted for 53.5 percent (62 of 116) of commercial bank failures, and by the end of 1985, accounted for approximately 37 percent of the banks on the FDIC’s problem bank list. The number of problem banks rose to 1,140 from 848 in 1984.

Table 8-2 shows the number and total assets of FDIC insured institutions, as well as their profitability as of the end of 1985.

By the end of the year, 116 banks had failed. There were also two open bank assistance agreements and two assisted mergers of mutual savings banks. Total deposits from all failed banks (including assisted mergers) amounted to $8.5 billion in 1985, compared with only $2.7 billion in 1984, exclusive of Continental Illinois National Bank and Trust Company (Continental). The states with the most failures were Kansas, Oklahoma, and Nebraska, each with 13; Texas and Iowa followed with 12 and 11, respectively.
Purchase and assumption (P&A) transactions were used in 87 of the bank failures of 1985. The FDIC performed insured deposit transfers (IDTs) in seven of the failed banks; in one of those, the FDIC made an advance dividend payment of 50 percent to uninsured depositors and other creditors. The FDIC conducted payoffs for 22 bank failures. In four of the payoffs, the FDIC made advance dividend payments ranging from 45 percent to 50 percent of claims to uninsured depositors and other creditors.

Two mutual savings banks, Bowery Savings Bank (Bowery), New York City, New York with $5 billion in deposits and Home Savings Bank, White Plains, New York, with $405 million in deposits, were assisted under the Voluntary Merger Plan. In the most noteworthy case, Bowery, the FDIC formed a financial assistance package to recapitalize the bank and to facilitate its acquisition by a private investor group. The Bowery assistance package began in 1984 with a competitive, nationwide bidding process, in which FDIC insured institutions and other parties were invited to submit proposals to acquire Bowery. An investor group submitted the winning proposal, which included a $100 million equity contribution by the investors and the installation of a new management team. Bowery was merged into a newly chartered stock savings bank that retained the Bowery name. A payoff of the bank’s insured deposits would have cost the FDIC an estimated $620 million, based on the Bowery’s negative book capital and the market depreciation in its asset portfolio.

The FDIC also provided open bank assistance (OBA) to two commercial banks during 1985 to prevent their failures and facilitate their mergers with sound institutions. The two failing banks were Bank of Oregon, Woodburn, Oregon, and The Commercial Bank, Andalusia, Alabama.

The Net Worth Certificate Program was due to expire on October 15, 1985, but Congress extended the program to July 15, 1986. By the end of 1985, the FDIC’s Net Worth Certificate Program included 21 institutions with aggregate certificates outstanding totaling $705.4 million.

A recent estimate of losses per transaction type is shown in Table 8-3.

At the end of 1985, the fund was $18 billion. The fund’s reserve for losses was increased to $2.3 billion, raising total reserves to $4.5 billion, including a loss allowance of $1.3 billion for the 1984 assistance agreement with Continental. By the end of 1985, the FDIC had 7,125 employees, up 2,049 from 1984, due primarily to the hiring of temporary employees, who represented nearly 46 percent of the FDIC’s staff. Division of Liquidation had 3,318 employees, an increase of 1,160 over 1984, while Division of Bank Supervision staff totaled 2,123, up from 1,800. Chart 8-2 shows the staffing levels for the past five years.

The year 1985 proved to be disastrous for privately insured savings institutions in Ohio and Maryland. Seventy-one state chartered savings and loan institutions, about one fourth of Ohio thrifts, were insured by the Ohio Deposit Guarantee Fund (ODGF), a private insurance cooperative. In March of 1985, the ODGF became insolvent after the following series of events:

• ESM Government Securities, Ft. Lauderdale, Florida, was closed amidst fraud allegations on March 4, 1985.



• Home State Savings Bank (Home State), Cincinnati, Ohio—the largest ODGF member with 19 percent of ODGF insured deposits—lost about $545 million on ESM repurchase agreements.



• Publicity surrounding Home State’s loss, in turn, caused a depositor run that exceeded $150 million by March 8, 1985.



• On March 9, 1985, Home State was declared insolvent, setting off a panic among depositors of other ODGF member thrifts.



• On March 13, 1985, the state legislature established a new deposit insurance fund for ODGF institutions other than Home State. The state provided $50 million for the fund, but continuing heavy deposit outflows caused the Governor of Ohio to declare a bank holiday two days later, closing all ODGF insured thrifts.



• On March 20, 1985, legislation was enacted by the state to require the closed thrifts to obtain federal deposit insurance; only those institutions deemed likely to get insurance from the FDIC or the Federal Savings and Loan Insurance Corporation (FSLIC) were allowed to reopen. Other ODGF institutions were allowed to partially reopen, permitting limited withdrawals of only $750 per month.



• On May 21, 1985, the Ohio state legislature passed a bill providing $135 million to cover ODGF losses.

Ultimately, all ODGF insured depositors did get back their deposits. The 70 ODGF institutions were resolved as follows:

• Thirty-five obtained FSLIC insurance,



• Ten obtained FDIC insurance,



• Thirteen (including Home State) were acquired by healthy banks with federal insurance,



• Eight were merged into other savings and loan institutions with federal insurance,



• Three were merged into banks with FDIC insurance, and



• One was liquidated.^8-10

The FSLIC generally tried to dispose of an entire thrift through a sale or merger, without retaining any assets to manage. As resolutions became more difficult due to deteriorating asset quality, FSLIC became the owner of a huge volume of complex problem assets that acquirers did not want. Unable to increase the size of its staff or to hire personnel with the desired expertise, FSLIC began contracting with private sector firms in 1984 and 1985 to provide the needed expertise and services to manage and dispose of those assets. Also, FSLIC established its own “thrift” to manage and liquidate assets of failed institutions; the thrift was named the Federal Asset Disposition Association (FADA).