Federal Deposit
Insurance Corporation

The FIRREA was enacted to reform, recapitalize, and consolidate the federal deposit insurance system. In addition to the FRF, FIRREA created the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). It also designated the Federal Deposit Insurance Corporation (FDIC) as the administrator of these funds. All three funds are maintained separately to carry out their respective mandates.

The FIRREA also created the RTC to manage and resolve all thrifts previously insured by the FSLIC for which a conservator or receiver was appointed during the period January 1, 1989, through August 8, 1992. The FIRREA established the Resolution Funding Corporation (REFCORP) to provide part of the initial funds used by the RTC for thrift resolutions. Additionally, funds were appropriated for RTC resolutions pursuant to FIRREA, the RTC Funding Act of 1991, the RTC Refinancing, Restructuring and Improvement Act of 1991, and the RTC Completion Act of 1993.

The RTC’s resolution responsibility was extended through subsequent legislation from the original termination date of August 8, 1992. Resolution responsibility transferred from the RTC to the SAIF on July 1, 1995.

The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC as of December 31, 1995. All remaining assets and liabilities of the RTC were transferred to the FRF on January 1, 1996. Today, the FRF consists of two distinct pools of assets and liabilities: one composed of the assets and liabilities of the FSLIC transferred to the FRF upon the dissolution of the FSLIC on August 9, 1989 (FRF-FSLIC), and the other composed of the RTC assets and liabilities transferred to the FRF on January 1, 1996 (FRF-RTC). The assets of one pool are not available to satisfy obligations of the other.

The RTC Completion Act also made available approximately $18 billion worth of additional funding to the RTC, of which the RTC actually drew down $4.6 billion. The RTC Completion Act requires the FDIC to return to the U.S. Treasury any funds that were transferred to the RTC pursuant to the RTC Completion Act but not needed by the RTC. During 1999 and 2000, the FRF-RTC returned $4.2 billion and $391 million, respectively, to fully repay this appropriation.

The FDIC must transfer to the REFCORP the net proceeds from the FRF’s sale of RTC assets, after providing for all outstanding RTC liabilities. Any such funds transferred to the REFCORP pay the interest on the REFCORP bonds issued to fund the early RTC resolutions. Any such payments benefit the U.S. Treasury, which would otherwise be obligated to pay the interest on the bonds. During 2000, the FRF-RTC paid $1.4 billion to the REFCORP.

The FRF has been primarily funded from the following sources: 1) U.S. Treasury appropriations; 2) amounts borrowed by the RTC from the Federal Financing Bank (FFB); 3) amounts received from the issuance of capital certificates to REFCORP; 4) funds received from the management and disposition of assets of the FRF; 5) the FRF’s portion of liquidating dividends paid by FRF receiverships; and 6) interest earned on Special U.S. Treasury Certificates purchased with proceeds of 4) and 5). If these sources are insufficient to satisfy the liabilities of the FRF, payments will be made from the U.S. Treasury in amounts necessary, as appropriated by Congress, to carry out the objectives of the FRF.

Public Law 103-327 provided $827 million in funding to be available until expended to facilitate efforts to wind up the resolution activity of the FRF-FSLIC. The FRF received $165 million under this appropriation on November 2, 1995. In addition, Public Law 104-208 and Public Law 105-61 authorized the use by the U.S. Department of Justice (DOJ) of $26.1 million and $33.7 million, respectively, from the original $827 million in funding, thus reducing the amount available to be expended to $602.2 million. The funding made available to DOJ covers the reimbursement of reasonable expenses of litigation incurred in the defense of claims against the United States arising from the goodwill litigation cases.

Additional goodwill litigation expenses incurred by DOJ are paid directly from the FRF-FSLIC based on a Memorandum of Understanding (MOU) dated October 2, 1998, between the FDIC and DOJ. Under the terms of the MOU, the FRF-FSLIC paid $96.9 million and $79.1 million to DOJ for fiscal years 2001 and 2000, respectively. Subsequently, DOJ returns any unused fiscal year funding to the FRF-FSLIC. Separate funding for goodwill judgments and settlements is available through Public Law 106-113 (see Note 8).

In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities; a replacement of SFAS No. 125." This statement applies to securitization transactions where the transferor has continuing involvement with the transferred assets or the transferee. SFAS No. 140 is effective for transfers occurring after March 31, 2001. However, disclosure requirements for existing securitizations are effective for fiscal years ending after December 15, 2000. FRF’s disclosures for its securitization transactions, which conform to the SFAS No. 140 requirements, are discussed in Note 4.

Other recent accounting pronouncements were evaluated and deemed to be not applicable to the financial statements.

The nature of related parties and a description of related party transactions are discussed in Footnote 1 and disclosed throughout the financial statements and footnotes.

Additionally, corrections were made to the "Contingent liability for assistance agreements" to reverse amounts that were erroneously calculated. The impact of this restatement on the January 1, 1999 accumulated deficit is a reduction of $4.4 million.

The thrift resolution process took different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that failed were made to cover obligations to insured depositors and represent claims by the FRF against the receiverships' assets. Payments to prevent a failure were made to operating institutions when cost and other criteria were met.

Assets held by the FDIC in its receivership capacity for the former FSLIC and SAIF-insured institutions are the main source of repayment of the FRF’s receivables from thrift resolutions. As of December 31, 2000 and 1999, FRF receiverships held assets with a book value of $712 million and $2.1 billion, respectively (including cash and miscellaneous receivables of $493 million and $1.5 billion at December 31, 2000 and 1999, respectively). The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based in part on a statistical sampling of receivership assets. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. These factors could cause the FRF’s and other claimants’ actual recoveries to vary from the level currently estimated.

The FRF includes estimates of corporate losses related to the receiverships’ representations and warranties as part of the FRF’s allowance for loss valuation. The allowance for these estimated losses was $1.6 million and $30 million as of December 31, 2000 and 1999, respectively. The contingent liability for representations and warranties associated with loan sales that involved assets acquired from assisted thrifts and terminated receiverships is included in "Accounts payable and other liabilities" ($1.5 million and $4 million for 2000 and 1999, respectively). Based on recent evaluations of the payment history associated with these obligations and the number of contract expirations anticipated in the near future, the estimate of the allowance indicated above, should be sufficient to cover future exposure from these obligations.

Through 1995, the RTC sold, through its mortgage-backed securities securitization program, $42.4 billion of receivership, conservatorship, and corporate loans. These loans were secured by various types of real estate including residential homes, multi-family dwellings and commercial properties. Each securitization transaction was accomplished through the creation of a trust which purchased these loans and issued regular pass-through certificates to the public through licensed brokerage houses. The receiverships retained residual pass-through certificates that were entitled to any remaining cash flows from the trusts after satisfying the expenses of the trusts and the obligations to regular pass-through holders.

To increase the likelihood of full and timely distributions of principal and interest to regular certificate holders and increase the marketability of the certificates, the various rating agencies required the RTC to place a portion of the proceeds from the sale of the regular certificates in credit enhancement reserve or escrow accounts to cover future losses from the loans underlying the regular certificates. Additional protection for the regular certificate holders from these losses was provided by a clause included in certain Pooling and Servicing Agreements (PSA) stipulating that losses experienced by the credit enhancement reserve over the life of the transactions would be reimbursed from proceeds expected from the residual certificates. At the end of 2000, 15 deals that were structured with PSA clauses stipulating reimbursement from the proceeds of the residual certificates.

In 1996 and 1998, the escrow accounts and residual certificates were transferred from the receiverships to the FRF for $5.7 billion and $1.4 billion, respectively. Both transfers were offset by amounts owed by the receiverships to the FRF. During 2000, the FRF received $413 million in proceeds from terminated securitization deals and $910 million during 1999. Interest income earned on investments in securitization related assets during 2000 was $85.5 million and $104.2 million during 1999.

Realized gains and losses are recorded based upon the difference between the proceeds at termination of the deal and the cost basis of the investment. This calculation is performed for both the residual certificates and the credit enhancement reserves. Additionally, realized losses are recognized on the credit enhancement reserve for a decline in fair value that is judged to be an other-than-temporary impairment. Unrealized gains and losses are computed quarterly using a cash flow model that projects the estimated fair values for each transaction based on a forecast of the projected termination of each deal. This model is updated with current data supplied by the trustees, which includes prepayment speed, delinquency rates, and market pricing.

The FRF's assets acquired from assisted thrifts and terminated receiverships include: 1) assets the former FSLIC and the former RTC purchased from failing or failed thrifts and 2) assets the FRF acquired from receiverships and purchased under assistance agreements. The methodology to estimate cash recoveries from these assets, which is used to derive the related allowance for losses, is similar to that for receivables from thrift resolutions (see Note 3). The estimated cash recoveries are based upon a statistical sampling of the assets but only include expenses for the disposition of the assets to represent liquidating value.

The FRF recognizes revenue and expenses on these acquired assets. Revenue consists primarily of proceeds from interest earned on assets in liquidation, professional liability claims, proceeds and/or settlements from conflicts and criminal restitutions, and other liquidation income. Expenses are recognized for the disposition and administration of these assets.

Liabilities from thrift resolutions decreased by $223.5 million as a result of eliminating the reserve estimated for the future costs associated with liquidating the assets of failed thrifts. In prior years, this reserve was appropriate because of large amounts of assets held in liquidation and funding concerns faced by the former RTC in the mid and latter 1990s. Because of the rapid wind-down of the FRF-RTC activity over the past years, funding concerns have diminished. The net effect in 2000 of this change in estimate is a decrease to the accumulated deficit of $223.5 million.

The provision for losses was a negative $439 million and a negative $278 million for 2000 and 1999, respectively. In 2000, the negative provision was primarily due to: 1) the elimination of the reserve for the estimated future costs associated with liquidating the assets of failed thrifts of $223.5 million (see Note 7) and 2) cash recoveries from assistance agreements of $86 million for net tax benefits sharing collections and $36 million for the redemption of stock warrants. The negative provision in 1999 resulted primarily from decreased losses expected for assets in liquidation. The following chart lists the major components of the negative provision for losses.

Accumulated Deficit
The accumulated deficit represents the cumulative excess of expenses over revenue for activity related to the former FSLIC and the former RTC ($29.7 billion and $87.9 billion were brought forward from the FSLIC and RTC, respectively).

Eligible FDIC employees (permanent and term employees with appointments exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). The CSRS is a defined benefit plan, which is offset with the Social Security System in certain cases. Plan benefits are determined on the basis of years of creditable service and compensation levels. The CSRS-covered employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP).

The FERS is a three-part plan consisting of a basic defined benefit plan that provides benefits based on years of creditable service and compensation levels, Social Security benefits, and the TSP. Automatic and matching employer contributions to the TSP are provided up to specified amounts under the FERS.

Although the FRF contributes a portion of pension benefits for eligible employees, it does not account for the assets of either retirement system. The FRF also does not have actuarial data for accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are reported on and accounted for by the U.S. Office of Personnel Management.

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401(k) savings plan with matching contributions. The FRF pays its share of the employer's portion of all related costs.

The FRF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $5.2 million and $6.9 million at December 31, 2000 and 1999, respectively.

Total dental coverage trend rates were assumed to be 7% per year, inclusive of general inflation. Dental costs were assumed to be subject to an annual cap of $2,000.

Letters of Credit
The RTC had adopted special policies that included honoring outstanding conservatorship and receivership collateralized letters of credit. This enabled the RTC to minimize the impact of its actions on capital markets. In most cases, these letters of credit were issued by thrifts that later failed and were used to guarantee tax-exempt bonds issued by state and local housing authorities or other public agencies to finance housing projects for low and moderate income individuals or families. As of December 31, 2000 and 1999, securities pledged as collateral to honor these letters of credit totaled $7.5 million and $7.6 million, respectively. The FRF estimated corporate losses related to the receiverships' letters of credit as part of the allowance for loss valuation. The allowance for these losses was $2.3 million and $1.1 million as of December 31, 2000 and 1999, respectively.

Leases
The FRF's allocated share of the FDIC’s lease commitments totals $14.2 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The allocation to the FRF of the FDIC’s future lease commitments is based upon current relationships of the workloads among the FRF, the BIF, and the SAIF. Changes in the relative workloads could cause the amounts allocated to the FRF in the future to vary from the amounts shown below. The FRF recognized leased space expense of $5.0 million and $7.2 million for the years ended December 31, 2000 and 1999, respectively

As of December 31, 2000, the FRF had gross receivables from thrift resolutions totaling $38.3 billion, gross assets acquired from assisted thrifts and terminated receiverships totaling $107.6 million, and an investment in securitization related assets acquired from receiverships totaling $1.8 billion. The allowance for loss against receivables from thrift resolutions totaled $37.8 billion, and the allowance against the assets acquired from assisted thrifts and terminated receiverships totaled $73 million.

Cash recoveries may be influenced by economic conditions. Similarly, the value of the investment in securitization related assets acquired from receiverships can be influenced by the economy of the area relating to the underlying loans and other assets. Accordingly, the FRF’s maximum exposure to possible accounting loss is the recorded (net of allowance) value and is also shown in the table below.

Cash equivalents are short-term, highly liquid investments and are shown at current value. The carrying amount of short-term receivables and accounts payable and other liabilities approximates their fair market value. This is due to their short maturities or comparisons with current interest rates.

The net receivables from thrift resolutions primarily include the FRF’s subrogated claim arising from payments to insured depositors. The receivership assets that will ultimately be used to pay the corporate subrogated claim are valued using discount rates that include consideration of market risk. These discounts ultimately affect the FRF’s allowance for loss against the net receivables from thrift resolutions. Therefore, the corporate subrogated claim indirectly includes the effect of discounting and should not be viewed as being stated in terms of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation of receivership assets (see Note 3), such receivership valuation is not equivalent to the valuation of the corporate claim. Since the corporate claim is unique, not intended for sale to the private sector, and has no established market, it is not practicable to estimate its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would require indeterminate, but substantial, discounts for an interested party to profit from these assets because of credit and other risks. In addition, the timing of receivership payments to the FRF on the subrogated claim does not necessarily correspond with the timing of collections on receivership assets. Therefore, the effect of discounting used by receiverships should not necessarily be viewed as producing an estimate of market value for the net receivables from thrift resolutions.

The majority of the net assets acquired from assisted thrifts and terminated receiverships (except real estate) is comprised of various types of financial instruments, including investments, loans, and accounts receivable. Like receivership assets, assets acquired from assisted thrifts and terminated receiverships are valued using discount rates that include consideration of market risk. However, assets acquired from assisted thrifts and terminated receiverships do not involve the unique aspects of the corporate subrogated claim, and therefore the discounting can be viewed as producing a reasonable estimate of fair market value.

The investment in securitization related assets acquired from receiverships is adjusted to fair value at each reporting date using a valuation model that estimates the present value of estimated expected future cash flows discounted for the various risks involved, including both market and credit risks, as well as other attributes of the underlying assets (see Note 4).