IV. Financial Statements and Notes
Notes to the Financial Statements FSLIC Resolution Fund December 31, 2010 and 2009
1. Legislative History and Operations/Dissolution of the FSLIC Resolution Fund
Legislative History
The Federal Deposit Insurance Corporation
(FDIC) is the independent deposit insurance
agency created by Congress in 1933 to maintain
stability and public confidence in the nation’s
banking system. Provisions that govern the
operations of the FDIC are generally found in
the Federal Deposit Insurance (FDI) Act, as
amended (12 U.S.C. 1811, et seq). In carrying
out the purposes of the FDI Act, as amended, the
FDIC insures the deposits of banks and savings
associations, and in cooperation with other
federal and state agencies promotes the safety and
soundness of insured depository institutions by
identifying, monitoring and addressing risks to
the deposit insurance fund established in the FDI
Act, as amended. In addition, FDIC is charged
with responsibility for the sale of remaining
assets and satisfaction of liabilities associated with
the former Federal Savings and Loan Insurance
Corporation (FSLIC) and the former Resolution
Trust Corporation (RTC).
The U.S. Congress created the FSLIC through the
enactment of the National Housing Act of 1934.
The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) abolished the
insolvent FSLIC, created the FSLIC Resolution
Fund (FRF), and transferred the assets and
liabilities of the FSLIC to the FRF-except those
assets and liabilities transferred to the RTC-effective
on August 9, 1989. Further, the FIRREA
established the Resolution Funding Corporation
(REFCORP) to provide part of the initial funds
used by the RTC for thrift resolutions.
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 (FRF-FSLIC), and the other composed
of the RTC assets and liabilities (FRF-RTC).
The assets of one pool are not available to satisfy
obligations of the other.
The FDIC is the
administrator of the FRF and
the Deposit Insurance Fund. These funds are
maintained separately to carry out their respective
mandates.
Operations/Dissolution of the FRF
The FRF will continue operations until all of
its assets are sold or otherwise liquidated and all
of its liabilities are satisfied. Any funds remaining
in the FRF-FSLIC will be paid to the U.S.
Treasury. Any remaining funds of the FRF-RTC
will be distributed to the REFCORP to pay the
interest on the REFCORP bonds. In addition,
the FRF-FSLIC has available until expended $602
million in appropriations to facilitate, if required,
efforts to wind up the resolution activity of the
FRF-FSLIC.
The FDIC has
conducted an extensive review and
cataloging of FRF’s remaining assets and liabilities.
Some of the issues and items that remain open in
FRF are: 1) criminal restitution orders (generally
have from 3 to 13 years remaining to enforce);
2) collections of settlements and judgments
obtained against officers and directors and
other professionals responsible for causing or
contributing to thrift losses (generally have from
one to 10 years remaining to enforce, unless
the judgments are renewed, which will result in
significantly longer periods for collection for some
judgments); 3) numerous assistance agreements
entered into by the former FSLIC (FRF could
continue to receive tax benefits sharing through
the year 2012); 4) goodwill litigation (no final
date for resolution has been established; see
Note 4); and 5) affordable housing program
monitoring (requirements can exceed 25 years).
The FRF could potentially realize recoveries from
tax benefits sharing of up to approximately $52
million; however, any associated recoveries are notreflected in FRF’s
financial statements given the
significant uncertainties surrounding the ultimate
outcome.
Receivership Operations
The FDIC is responsible for managing and
disposing of the assets of failed institutions in an
orderly and efficient manner. The assets held by
receivership entities, and the claims against them,
are accounted for separately from FRF assets and
liabilities to ensure that receivership proceeds are
distributed in accordance with applicable laws
and regulations. Also, the income and expenses
attributable to receiverships are accounted for as
transactions of those receiverships. Receiverships
are billed by the FDIC for services provided on
their behalf.
2. Summary of Significant
Accounting Policies
General
These financial statements pertain to the financial
position, results of operations, and cash flows of
the FRF and are presented in accordance with
U.S. generally accepted accounting principles
GAAP). As permitted by the Federal Accounting
Standards Advisory Board’s Statement of Federal
Financial Accounting Standards 34, The Hierarchy
of Generally Accepted Accounting Principles,
Including the Application of Standards Issued by
the Financial Accounting Standards Board, the
FDIC prepares financial statements in conformity
with standards promulgated by the Financial
Accounting Standards Board (FASB). These
statements do not include reporting for assets and
liabilities of receivership entities because these
entities are legally separate and distinct, and the
FRF does not have any ownership interests in
them. Periodic and final accountability reports
of receivership entities are furnished to courts,
supervisory authorities, and others upon request.
Use of Estimates
Management makes estimates and assumptions
that affect the amounts reported in the financial
statements and accompanying notes. Actual results
could differ from these estimates. Where it is reasonably possible that
changes in estimates will
cause a material change in the financial statements
in the near term, the nature and extent of such
changes in estimates have been disclosed. The
more significant estimates include allowance for
losses on receivables from thrift resolutions and
the estimated losses for litigation.
Cash Equivalents
Cash equivalents are short-term, highly liquid
investments consisting primarily of U.S. Treasury
Overnight Certificates.
Provision for Losses
The provision for losses represents the change
in the valuation of the receivables from thrift
resolutions and other assets.
Disclosure about Recent Relevant Accounting Pronouncements
- ASU No. 2010-06, Fair Value Measurements
and Disclosures (Topic 820) – Improving
Disclosures about Fair Value Measurements,
requires enhanced disclosures for significant
transfers into and out of Level 1 (measured
using quoted prices in active markets) and
Level 2 (measured using other observable
inputs) of the fair value measurement
hierarchy. These disclosures are effective
for interim and annual reporting periods
beginning after December 15, 2009, but
did not impact the FRF in 2010. Separate
disclosure of the gross purchases, sales,
issuances, and settlements activity for Level
3 (measured using unobservable inputs) fair
value measurements will become effective
for fiscal years beginning after December 15,
2010. Currently, the additional disclosures are
not expected to impact the FRF.
Other recent
accounting
pronouncements have
been deemed to be not applicable or material to
the financial statements as presented.
Related Parties
The nature of related parties and a description of
related party transactions are discussed in Note 1
and disclosed throughout the financial statements
and footnotes.
3. Receivables From Thrift Resolutions and Other Assets, Net
Receivables From Thrift Resolutions
The receivables from thrift resolutions include
payments made by the FRF to cover obligations
to insured depositors, advances to receiverships for
working capital, and administrative expenses paid
on behalf of receiverships. Any related allowance
for loss represents the difference between the
funds advanced and/or obligations incurred and
the expected repayment. Assets held by the FDIC
in its receivership capacity for the former RTC
are a significant source of repayment of the FRF’s
receivables from thrift resolutions. As of December
31, 2010, eight of the 850 FRF receiverships
remain active. Half of these receiverships are
expected to complete their liquidation efforts
during 2011. The remaining four receiverships
will remain active until their goodwill litigation or
liability-related impediments are resolved.
The FRF receiverships held assets with a book
value of $18 million and $20 million as of
December 31, 2010 and 2009, respectively
(which primarily consist of cash, investments,
and miscellaneous receivables). At December 31,
2010, $13 million of the $18 million in assets in
the FRF receiverships was cash held for non-FRF,
third party creditors.
Other Assets
Other assets primarily include credit enhancement
reserves valued at $17 million and $21 million
as of December 31, 2010 and 2009, respectively.
The credit enhancement reserves resulted from
swap transactions where the former RTC received
mortgage-backed securities in exchange for single-family mortgage
loans. The RTC supplied credit
enhancement reserves for the mortgage loans in
the form of cash collateral to cover future credit
losses over the remaining life of the loans. These
cash reserves, which may cover future credit losses
through 2020, are valued by estimating credit
losses on the underlying loan portfolio and then
discounting cash flow projections using market-based
rates.
Receivables From Thrift Resolutions and Other Assets, Net at December 31 |
Dollars in Thousands |
|
2010 |
2009 |
Receivables from closed thrifts |
$5,763,949 |
$5,744,509 |
Allowance for losses |
(5,762,186) |
(5,736,737) |
Receivables from Thrift Resolutions, Net |
1,763 |
7,772 |
Other assets |
21,645 |
24,566 |
Total |
$23,408 |
$32,338 |
4. Contingent Liabilities for:
Goodwill Litigation
In United States v. Winstar Corp., 518 U.S. 839
(1996), the Supreme Court held that when it
became impossible following the enactment of
FIRREA in 1989 for the federal government to
perform certain agreements to count goodwill
toward regulatory capital, the plaintiffs were
entitled to recover damages from the United
States. Six remaining cases are pending against
the United States based on alleged breaches of
these agreements.
On July 22, 1998, the Department of Justice’s
(DOJ’s) Office of Legal Counsel (OLC)
concluded that the FRF is legally available to
satisfy all judgments and settlements in the
goodwill litigation involving supervisory action
or assistance agreements. OLC determined that nonperformance of these
agreements was a
contingent liability that was transferred to the
FRF on August 9, 1989, upon the dissolution of
the FSLIC.
On July 23, 1998, the U.S. Treasury
determined, based on OLC’s opinion, that
the FRF is the appropriate source of funds for
payments of any such judgments and settlements.
The FDIC General Counsel concluded that, as
liabilities transferred on August 9, 1989, these
contingent liabilities for future nonperformance
of prior agreements with respect to supervisory
goodwill were transferred to the FRF-FSLIC,
which is that portion of the FRF encompassing
the obligations of the former FSLIC. The FRF-
RTC, which encompasses the obligations of
the former RTC and was created upon the
termination of the RTC on December 31, 1995, is
not available to pay any settlements or judgments
arising out of the goodwill litigation.
The FRF can draw from an appropriation
provided by Section 110 of the Department
of Justice Appropriations Act, 2000 (Public
Law 106-113, Appendix A, Title I, 113 Stat.
1501A-3, 1501A-20) such sums as may be
necessary for the payment of judgments and
compromise settlements in the goodwill litigation.
This appropriation is to remain available until
expended. Because an appropriation is available
to pay such judgments and settlements, any
estimated liability for goodwill litigation should
have a corresponding receivable from the U.S.
Treasury and therefore have no net impact on the
financial condition of the FRF-FSLIC.
For the year ended
December 31, 2010, the FRF
paid $27 million as a result of judgments and
settlements in four goodwill cases compared to
$142 million for four goodwill cases for the year
ended December 31, 2009. Of the four goodwill
cases paid during 2010, only one was active at
December 31, 2009 due to ongoing litigation.
The FRF received appropriations from the U.S.
Treasury to fund these payments.
The contingent
liability
and offsetting receivable
from the U.S. Treasury as of December 31, 2010
was $323 million for one case compared with
$405 million for six cases as of December 31, 2009. No new cases were
accrued during 2010.
The one case comprising the contingent liability
and offsetting receivable at December 31, 2010
was accrued prior to 2010 following an appellate
decision for a specific monetary amount.
This case is currently before the lower court
pending on remand following appeal and is still
considered active.
Based on
representations
from the DOJ, the entity
that defends these lawsuits against the United
States, the FDIC is unable to estimate a range
of loss to the FRF-FSLIC for the remaining five
goodwill cases considered active as of December
31, 2010. Three of these cases were not accrued
because court decisions are still pending. In the
other two cases the appellate courts decided to
award nothing, but the cases are still active due to
continued legal proceedings.
Six goodwill cases
were
active as of December
31, 2010 compared with eight active cases as of
December 31, 2009. Of the cases considered
active at year end 2009, one was fully adjudicated
with no award and one was settled and paid
during 2010.
In addition, the FRF-FSLIC pays the goodwill
litigation expenses incurred by the DOJ based on
a Memorandum of Understanding (MOU) dated
October 2, 1998, between the FDIC and the DOJ.
Under the terms of the MOU, the FRF-FSLIC
paid $2 million and $4 million to the DOJ for
fiscal years (FY) 2011 and 2010, respectively. As
in prior years, the DOJ carried over and applied
all unused funds toward current FY charges. At
December 31, 2010, the DOJ had an additional
$3 million in unused FY 2010 funds that were
applied against FY 2011 charges of $5 million.
Guarini Litigation
Paralleling the goodwill cases were similar cases
alleging that the government breached agreements
regarding tax benefits associated with certain
FSLIC-assisted acquisitions. These agreements
allegedly contained the promise of tax deductions
for losses incurred on the sale of certain thrift
assets purchased by plaintiffs from the FSLIC,
even though the FSLIC provided the plaintiffswith tax-exempt
reimbursement. A provision in
the Omnibus Budget Reconciliation Act of 1993
(popularly referred to as the “Guarini legislation”)
eliminated the tax deductions for these losses.
All eight of the
original Guarini cases have been
settled. However, a case settled in 2006 further
obligates the FRF-FSLIC as a guarantor for all tax
liabilities in the event the settlement amount is
determined by tax authorities to be taxable. The
maximum potential exposure under this guarantee
is approximately $81 million. However, the FDIC
believes that it is very unlikely the settlement will
be subject to taxation. More definitive information
may be available during 2011, after the Internal
Revenue Service (IRS) completes its Large Case
Program audit on the affected Corporation’s 2006
returns; this audit is currently underway. The FRF
is not expected to fund any payment under this
guarantee and no liability has been recorded.
Representations and Warranties
As part of the RTC’s efforts to maximize
the return from the sale of assets from thrift
resolutions, representations and warranties, and
guarantees were offered on certain loan sales.
The majority of loans subject to these agreements
have been paid off, refinanced, or the period for
filing claims has expired. The FDIC’s estimate of
maximum potential exposure to the FRF is zero.
No claims in connection with representations and
warranties have been asserted since 1998 on the
remaining open agreements. Because of the age of
the remaining portfolio and lack of claim activity,
the FDIC does not expect new claims to be
asserted in the future. Consequently, the financial
statements at December 31, 2010 and 2009, do
not include a liability for these agreements.
5. Resolution Equity
As stated in the Legislative History section of
Note 1, the FRF is comprised of two distinct
pools: the FRF-FSLIC and the FRF-RTC. The
FRF-FSLIC consists of the assets and liabilities of
the former FSLIC. The FRF-RTC consists of the
assets and liabilities of the former RTC. Pursuant
to legal restrictions, the two pools are maintained
separately and the assets of one pool are not
available to satisfy obligations of the other.
The following table shows the contributed capital,
accumulated deficit, and resulting resolution
equity for each pool.
Resolution Equity at December 31,2010 |
Dollars in Thousands |
|
FRF-FSLIC |
FRF-RTC |
FRF Consolidated |
Contributed capital–beginning |
$46,098,359 |
$81,749,337 |
$127,847,696 |
Contributed capital–ending |
46,043,359 |
81,749,337 |
127,792,696 |
Accumulated deficit |
(42,643,726) |
(81,580,645) |
(124,224,371) |
Total |
$3,399,633 |
$168,692 |
$3,568,325 |
Contributed Capital
The FRF-FSLIC and the former RTC received
$43.5 billion and $60.1 billion from the U.S.
Treasury, respectively, to fund losses from thrift
resolutions prior to July 1, 1995. Additionally,
the FRF-FSLIC issued $670 million in capital
certificates to the Financing Corporation (a
mixed-ownership government corporation
established to function solely as a financing vehicle
for the FSLIC) and the RTC issued $31.3 billion
of these instruments to the REFCORP. FIRREA
prohibited the payment of dividends on any of
these capital certificates.
Through December 31, 2010, the FRF-RTC has
returned $4.6 billion to the U.S. Treasury and
made payments of $5.0 billion to the REFCORP.
These actions serve to reduce contributed capital.
The most recent payment to the REFCORP was
in January of 2008 for $225 million.
FRF-FSLIC received $27 million in U.S. Treasury
payments for goodwill litigation in 2010.
Furthermore, $323 million and $405 million were
accrued for as receivables at December 31, 2010
and 2009, respectively.
Accumulated Deficit
The accumulated deficit represents the cumulative
excess of expenses and losses over revenue for
activity related to the FRF-FSLIC and the FRF-RTC. Approximately $29.8 billion and $87.9
billion were brought forward from the former
FSLIC and the former RTC on August 9, 1989,
and January 1, 1996, respectively. The FRF-
FSLIC accumulated deficit has increased by $12.8
billion, whereas the FRF-RTC accumulated
deficit has decreased by $6.3 billion, since their
dissolution dates.
6. Disclosures About the Fair Value of Financial Instruments
The financial assets recognized and measured at
fair value on a recurring basis at each reporting
date are cash equivalents and credit enhancement
reserves. The following table presents the FRF’s
financial assets measured at fair value as of
December 31, 2010 and 2009.
Assets Measured at Fair Value at December 31, 2010 |
Dollars in Thousands |
Fair Value Measurements Using |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Assets at Fair Value |
Assets |
Cash and cash equivalents (Special U.S. Treasuries)¹ |
$3,547,907 |
|
|
$3,547,907 |
Credit enhancement reserves² |
|
$17,378 |
|
17,378 |
Total Assets |
$3,547,907 |
$17,378 |
|
$3,565,285 |
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. Bureau of Public Debt.
(2) Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).
Assets Measured at Fair Value at December 31, 2009 |
Dollars in Thousands |
Fair Value Measurements Using |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Assets at Fair Value |
Assets |
Cash equivalents (Special U.S. Treasuries)¹ |
$3,470,125 |
|
|
$3,470,125 |
Credit enhancement reserves² |
|
$21,278 |
|
21,278 |
Total Assets |
$3,470,125 |
$21,278 |
|
$3,491,403 |
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. Bureau of Public Debt.
(2) Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).
Some of the FRF’s financial assets and liabilities
are not recognized at fair value but are recorded at
amounts that approximate fair value due to their
short maturities and/or comparability with current
interest rates. Such items include other short-term
receivables and accounts payable and other liabilities.
The net receivable from
thrift resolutions is
influenced by the underlying valuation of
receivership assets. This corporate receivable
is unique and the estimate presented is not
necessarily indicative of the amount that could
be realized in a sale to the private sector. Such a
sale would require indeterminate, but substantial,
discounts for an interested party to profit from
these assets because of credit and other risks.
Consequently, it is not practicable to estimate its
fair value.
|