1. Legislative History and Operations of the FSLIC Resolution Fund
The U.S. Congress created the Federal Savings and Loan Insurance Corporation (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 Resolution Trust Corporation (RTC)), effective on August 9, 1989. The
FRF is responsible for winding up the affairs of the former FSLIC.
FIRREA was enacted to reform, recapitalize, and consolidate the federal deposit
insurance system. In addition to the FRF, FIRREA created the RTC, the Bank Insurance Fund
(BIF), and the Savings Association Insurance Fund (SAIF). FIRREA also designated the
Federal Deposit Insurance Corporation (FDIC) as the administrator of these three funds.
All three funds are maintained separately to carry out their respective mandates.
The RTC was created 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. In order to provide funds to the RTC for use in thrift
resolutions, FIRREA established the Resolution Funding Corporation (REFCORP).
The RTCs 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 RTC Completion Act requires the FDIC to deposit in the general fund of the Treasury
any funds transferred to the RTC pursuant to the Completion Act but not needed by the RTC.
The RTC Completion Act made available approximately $18 billion worth of additional
funding. The RTC actually drew down approximately $4.55 billion.
The FDIC must transfer to the REFCORP the net proceeds from the FRFs 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.
Operations of the FRF
The FRF will continue until all of its assets are sold or otherwise liquidated and all of
its liabilities are satisfied. Upon the dissolution of the FRF, any funds remaining (after
repayments of RTC Completion Act appropriations and payments to REFCORP, if any, from the
proceeds of the FRF-RTC) will be paid to the U.S. Treasury.
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)
funds received from the management and disposition of assets of the FRF; 4) the FRFs
portion of liquidating dividends paid by FRF receiverships; and 5) interest earned on
one-day U.S. Treasury investments purchased with proceeds of 3) and 4). 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 are appropriated by Congress, to carry out the
objectives of the FRF.
To facilitate efforts to wind up the resolution activity of the FRF, Public Law 103-327
provides $827 million in funding to be available until expended. 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 Department of Justice of $26.1 million and
$33.7 million, respectively, of the original $827 million in funding, thus reducing the
amount available to be expended to $602.2 million.
Effective on August 9, 1989, FIRREA established an Inspector General for the RTC and
authorized appropriations necessary for the operation of the RTC Office of Inspector
General (OIG). The RTCs OIG received $152.3 million of appropriated funds from the
U.S. Treasury since it was established. The RTC OIGs final appropriation expired on
September 30, 1996. The VA, HUD and Independent Agencies Appropriations Act, 1998, Public
Law 105-65 appropriated $34 million for fiscal year 1998 (October 1, 1997, through
September 30, 1998) for operating expenses incurred by the OIG. The Act mandates that the
funds are to be derived from the FRF, the BIF, and the SAIF.
2. Summary of Significant Accounting Policies
These financial statements pertain to the financial position, results of operations, and
cash flows of the FRF and are presented in accordance with generally accepted accounting
principles (GAAP). These statements do not include reporting for assets and liabilities of
closed insured thrift institutions for which the FDIC acts as receiver or liquidating
agent. Periodic and final accountability reports of the FDICs activities as receiver
or liquidating agent are furnished to courts, supervisory authorities, and others as
Use of Estimates
FDIC 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 FRF considers cash equivalents to be short-term, highly liquid investments with
original maturities of three months or less.
Allowance for Losses on Receivables From Thrift Resolutions
Acquired From Assisted Thrifts and Terminated Receiverships
The FRF records as a receivable the amounts advanced and/or obligations incurred for
resolving troubled and failed thrifts. The FRF also records as an asset the amounts paid
for assets acquired from assisted thrifts and terminated receiverships. Any related
allowance for loss represents the difference between the funds advanced and/or obligations
incurred and the expected repayment. The latter is based on estimates of discounted cash
recoveries from the assets of assisted or failed thrift institutions, net of all estimated
liquidation costs. Estimated cash recoveries also include dividends and gains on sales
from equity instruments acquired in resolution transactions.
The FDIC is responsible for managing and disposing of the assets of failed institutions in
an orderly and efficient manner. The assets, and the claims against them, are accounted
for separately to ensure that liquidation 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. Liquidation
expenses incurred by the FRF on behalf of the receiverships are recovered from those
Cost Allocations Among Funds
Certain operating expenses (including personnel, administrative, and other indirect
expenses) not directly charged to each fund under the FDICs management are allocated
based on percentages developed during the business planning process. The cost of
furniture, fixtures, and equipment purchased by the FDIC on behalf of the three funds
under its administration is allocated among these funds on a similar basis. The FRF
expenses its share of these allocated costs at the time of acquisition because of their
immaterial amounts. The FDIC includes the cost of buildings used in operations in the
BIFs financial statements. The BIF charges the FRF a rental fee representing an
allocated share of its annual depreciation.
Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of
postretirement benefits on behalf of the FRF, the BIF, and the SAIF. Each fund pays its
liabilities for these benefits directly to the entity. The FRFs remaining net
postretirement benefits liability for the plan is recognized in FRFs Statement of
Disclosure About Recent Financial Accounting
Standards Board Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income includes net income as well as certain types of unrealized gain or
loss. The FRF does not have any items of unrealized gain or loss and, therefore, SFAS No.
130 is not applicable.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The FDIC intends to adopt SFAS No. 131 effective
on January 1, 1998; however, management anticipates that the FRF, as a non-publicly held
enterprise, will not be affected by SFAS No. 131.
Other recent pronouncements issued by the FASB are not applicable to the financial
Wholly Owned Subsidiary
The Federal Asset Disposition Association (FADA) is a wholly owned subsidiary of the FRF.
The FADA was placed in receivership on February 5, 1990. However, due to outstanding
litigation, a final liquidating dividend to the FRF will not be made until the FADAs
litigation is settled or dismissed. The investment in the FADA is accounted for using the
equity method and is included in "Other assets, net" (Note 6).
National Judgments, Deficiencies, and Charge-offs Joint Venture Program. The
former RTC purchased assets from receiverships, conservatorships, and their subsidiaries
to facilitate the sale and/or transfer of selected assets to several joint ventures in
which the former RTC retained a financial interest.
Limited Partnership Equity Interests. Former RTC receiverships were holders of
limited partnership equity interests as a result of various RTC sales programs that
included the National Land Fund, Multiple Investor Fund, N-Series, and S-Series programs.
In 1997, the majority of the limited partnership equity interests were transferred from
the receiverships to the FRF.
The nature of related parties and a description of related party transactions are
disclosed throughout the financial statements and footnotes.
Reclassifications have been made in the 1996 financial statements to conform to the
presentation used in 1997.
3. Receivables From Thrift Resolutions, Net
The FDIC resolution process takes different forms depending on the unique facts and
circumstances surrounding each failing or failed institution. Payments to prevent a
failure were made to operating institutions when cost and other criteria were met. These
payments resulted in acquiring "Assets from open thrift assistance," which are
various types of financial instruments from the assisted institutions.
As of December 31, 1997 and 1996, the FDIC, in its receivership capacity for
FSLIC-insured institutions, held assets with a book value of $3.6 billion and $7.3
billion, respectively (including cash and miscellaneous receivables of $1.4 billion and
$2.9 billion at December 31, 1997 and 1996, respectively). These assets represent a
significant source of repayment of the FRFs receivables from thrift resolutions. 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. The sample was constructed to produce a statistically valid result.
These estimated recoveries are regularly evaluated, but remain subject to uncertainties
because of potential changes in economic conditions. These factors could affect the
FRFs and other claimants actual recoveries from the level currently estimated.
The FRF estimated Corporate losses related to the receiverships representation
and warranties as part of the FRFs allowance for loss valuation. The allowance for
these losses was $90 million and $494 million as of December 31, 1997 and 1996,
respectively. There are additional amounts of representation and warranty claims that are
considered reasonably possible. As of December 31, 1997, the amount is estimated at $298
million. There were no additional amounts deemed reasonably possible as of December 31,
1996. The RTC provided guarantees, representations, and warranties on approximately $114
billion in unpaid principal balance of loans sold and approximately $148 billion in unpaid
principal balance of loans under servicing right contracts that had been sold. In general,
the guarantees, representations and warranties on loans sold related to the completeness
and accuracy of loan documentation, the quality of the underwriting standards used, the
accuracy of the delinquency status when sold, and the conformity of the loans with
characteristics of the pool in which they were sold. The representations and warranties
made in connection with the sale of servicing rights were limited to the responsibilities
of acting as a servicer of the loans. Future losses on representations and warranties
could significantly increase or decrease over the remaining life of the loans that were
sold, which could be as long as 20 years.
The estimated liability for representations and warranties associated with loan sales
that involved assets acquired from assisted thrifts and terminated receiverships are
included in "Accounts payable and other liabilities" ($18 million and $57
million for 1997 and 1996, respectively).
Receivables From Thrift Resolutions, Net at December 31
4. Securitization Reserve Fund, Net
In order to maximize the return from the sale or disposition of assets, the RTC engaged
in numerous securitization transactions. The RTC sold $42.4 billion of receivership,
conservatorship, and corporate loans to various trusts that issued regular pass-through
certificates through its mortgage-backed securities program.
To increase the likelihood of full and timely distributions of interest and principal
to the holders of the regular pass-through certificates, and thus the marketability of
such certificates, a portion of the proceeds from the sale of the certificates was placed
in credit enhancement reserve funds (reserve funds) to cover future credit losses with
respect to the loans underlying the certificates. The reserve funds structure limits
the receivership exposure from credit losses on loans sold through the RTC securitization
program to the balance of the reserve funds. The initial balances of the reserve funds are
reduced for claims paid and recovered reserves.
In October 1996, the reserve funds and related allowance to cover future estimated
losses on the reserve were transferred from the receiverships to FRF. The $5.4 billion
transferred to the FRF was offset by amounts owed by the receiverships to the FRF; thus,
there was no change in the FRFs net assets as a result of this transaction.
Through December 1997, the amount of claims paid was approximately 18 percent of the
initial reserve funds. At December 31, 1997 and 1996, reserve funds related to the RTC
securitization program totaled $5.2 billion and $6.3 billion, respectively. At December
31, 1997 and 1996, the allowance for estimated future losses which would be paid from the
securitization fund totaled $0.3 billion and $0.5 billion, respectively.
The FRF earns and receives interest income from the securitization reserve fund.
5. Assets Acquired From Assisted Thrifts and Terminated Receiverships, Net
The FRFs assets acquired from assisted thrifts and terminated receiverships
includes assets that: 1) the former FSLIC and the former RTC purchased from troubled or
failed thrifts and 2) the FRF acquired from receiverships, and purchased under assistance
agreements. The methodology used to derive the allowance for losses for assets acquired
from assisted thrifts and terminated receiverships is the same as that for receivables
from thrift resolutions.
The FRF recognizes income and expenses on these assets. Income consists primarily of
interest on mortgage loans and proceeds from professional liability claims. Expenses are
recognized for administering the management and liquidation of these assets.
Assets Acquired From Assisted Thrifts and Terminated Receiverships, Net at
6. Other Assets, Net
Other Assets, Net at December 31
7. Notes Payable - Federal Financing Bank Borrowings
Working capital was made available to the RTC under an agreement with the FFB to fund
the resolution of thrifts and for use in the RTCs high-cost funds replacement and
emergency liquidity programs. The outstanding note matures on January 1, 2010; however,
all or any portion of the outstanding principal amount may be repaid anytime as excess
funds become available. The note payable carries a floating rate of interest that is
adjusted quarterly. The FFB establishes the interest rate and during 1997 these rates
ranged between 5.478 percent and 5.187 percent. As of December 31, 1997 and 1996, there
were $0.8 billion and $4.6 billion, respectively, in borrowings and accrued interest
outstanding. The FFB borrowing authority ceased upon the termination of the RTC.
8. Liabilities Incurred From Thrift Resolutions
The FSLIC issued promissory notes and entered into assistance agreements to prevent the
default and subsequent liquidation of certain insured thrift institutions. These notes and
agreements required the FSLIC to provide financial assistance over time. Under the FIRREA,
the FRF assumed these obligations. Notes payable and obligations for assistance agreement
payments incurred but not yet paid are in "Liabilities incurred from thrift
resolutions." Estimated future assistance payments are included in "Estimated
liabilities for: Assistance agreements" (see Note 9).
Liabilities Incurred From Thrift Resolutions at December 31
The total liablities will mature according to the terms of the assistance agreements on
Septemeber 23, 1998.
9. Estimated Liablities for:
The estimated liabilities for assistance agreements is $6 million and $16 million at
December 31, 1997 and 1996, respectively. The liability represents an estimate of future
assistance payments to acquirers of troubled thrift institutions. Prior to 1997, the
balance was discounted based on U.S. money rates or federal funds. The balance as of
December 31, 1997, was not discounted because the remaining assistance agreements will
terminate within the next three years, and the discount adjustment was deemed to be
immaterial. As of December 31, 1996, the nominal amount was $18 million, using a discount
rate of 5.6 percent.
The number of assistance agreements outstanding as of December 31, 1997 and 1996, were
33 and 36, respectively. The last agreement is scheduled to expire in July 2000.
The FRF records an estimated loss for unresolved legal cases to the extent those losses
are considered probable and reasonably estimable. The estimated liability for litigation
losses is $3 million and $40 million at December 31, 1997 and 1996, respectively. In
addition to the amount recognized as probable, the FDICs Legal Division has
determined that losses from unresolved legal cases totaling $351 million are reasonably
An additional contingency arises from the over 120 lawsuits pending in the United States
Court of Federal Claims against the United States, generically referred to as the
"goodwill" cases, in which certain alleged agreements entered into by the
Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation are
claimed to have been breached when Congress enacted legislation affecting the thrift
industry and that legislation was implemented by the Office of Thrift Supervision. Claims
against the government are generally paid from the Judgement Fund, a permanent, indefinite
appropriation established by 31 U.S.C. 1304, and administered by the Department of
Treasury. However, the Department of Treasury may determine that payment of a judgment is
"otherwise provided for" by another dedicated source of funds.
The FDIC believes that under FIRREA the FRF should not be considered a dedicated source
of funds for payment of goodwill judgments against the United States. However, the
Department of Treasury has not yet determined the source of payment of any goodwill
judgments and therefore whether the FRF will be responsible for the payment of any
goodwill judgments is uncertain.
If it is determined that the FRF can be called upon for payment of possible goodwill
judgments, the amount of additional liabilities of the FRF cannot be reasonably estimated.
The FDIC is not the defendant in any of the goodwill cases and there has been no final
decision in any of them. The Court of Federal Claims has indicated that the dollar damages
sought in the goodwill cases are in the "tens of billions of dollars." Damages
sought by the plaintiff, Glendale Federal Bank, FSB, in the first of the goodwill cases to
be tried in the Court of Federal Claims exceed one billion dollars.
If substantial final judgments were entered against the United States in the goodwill
cases and if the FRF were determined by Treasury to be responsible for payment of those
judgments, the effect on the FRFs financial condition would be material and adverse.
In the event the FRF has insufficient funds to satisfy FRF liabilities, as would likely be
the case were Treasury to make such determination, 12 U.S.C. 1821a(c) provides: "the
Secretary of the Treasury shall pay to the Fund such amounts as may be necessary, as
determined by the [FDIC] and the Secretary, for FSLIC Resolution Fund purposes."
Congress would need to appropriate funds to carry out this provision.
10. Provision for Losses
The provision for losses was a negative $1.7 billion and a negative $2.4 billion for
1997 and 1996, respectively. Reductions to various allowance for losses and estimated
liabilities account for the negative loss provision. The following chart lists the major
components of the reduction in provision for losses.
Provision for Losses
11. Resolution Equity
The former RTC and the FRF-FSLIC received $60.1 billion and $43.5 billion from the U.S.
Treasury, respectively. These payments were used to fund losses from thrift resolutions
prior to July 1, 1995. Additionally, the RTC issued $31.3 billion in capital certificates
to REFCORP and the FRF-FSLIC issued $670 million of these instruments to the FICO. FIRREA
prohibited the payment of dividends on any of these capital certificates.
The accumulated deficit represents the cumulative excess of expenses over revenue for
liquidation activity related to the former FSLIC and the former RTC ($29.7 billion was
brought forward from the FSLIC).
12. Pension Benefits, Savings Plans and Accrued Annual Leave
Eligible FDIC employees (all permanent and temporary employees with appointments
exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or
the Federal Employee 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 Office of
Personnel Management (OPM).
Eligible FDIC employees also may participate in an FDIC-sponsored tax-deferred savings
plan with matching contributions. The FRF pays its share of the employers portion of
all related costs.
The FRFs pro rata share of the Corporations liability to employees for
accrued annual leave is approximately $11.2 million and $13.7 million at December 31, 1997
and 1996, respectively.
Pension Benefits and Savings Plans Expenses
13. Postretirement Benefits Other Than Pensions
The FDIC provides certain health, dental, and life insurance coverage for its eligible
retirees, the retirees beneficiaries and covered dependents. Retirees eligible for
health and/or life insurance coverage are those who have qualified due to: 1) immediate
enrollment upon appointment or five years of participation in the plan and 2) eligibility
for an immediate annuity. Dental coverage is provided to all retirees eligible for an
The FDIC is self-insured for hospital/medical, prescription drug, mental health and
chemical dependency coverage. Additional risk protection was purchased through stop-loss
and fiduciary liability insurance. All claims are administered on an administrative
services only basis with the hospital/medical claims administered by Aetna Life Insurance
Company, the mental health and chemical dependency claims administered by OHS Foundation
Health Psychcare Inc., and the prescription drug claims administered by Caremark.
The life insurance program, underwritten by Metropolitan Life Insurance Company,
provides basic coverage at no cost to retirees and allows converting optional coverages to
direct-pay plans. Dental care is underwritten by Connecticut General Life Insurance
Company and provides coverage at no cost to retirees.
The FRF expensed $1.2 million and $3.1 million for net periodic postretirement benefit
costs for the years ended December 31, 1997 and 1996, respectively. For measurement
purposes for 1997, the FDIC assumed the following: 1) a discount rate of 5.75 percent; 2)
an average long-term rate of return on plan assets of 5.75 percent; 3) an increase in
health costs in 1997 of 9.75 percent (inclusive of general inflation of 2.5 percent),
decreasing to an ultimate rate in the year 2000 and thereafter of 7.75 percent; and 4) an
increase in dental costs for 1997 and thereafter of 4.5 percent (in addition to general
inflation). Both the assumed discount rate and health care cost rate have a significant
effect on the amount of the obligation and periodic cost reported.
If the health care cost rate was increased one percent, the accumulated postretirement
benefit obligation as of December 31, 1997, would have increased by 20.2 percent. The
effect of this change on the aggregate of service and interest cost for 1997 would be an
increase of 23.5 percent.
Net Periodic Postretirement Benefit Cost
As stated in Note 2, the FDIC established an entity to provide accounting and
administration on behalf of the FRF, the BIF, and SAIF. The FRF funds its liability and
these funds are being managed as "plan assets."
Accumulated Postretirement Benefit Obligation and Funded Status at December 31
14. Commitments and Concentration of Credit Risk
Letters of Credit
The RTC had adopted special policies for outstanding conservatorship and
receivership collateralized letters of credit. These policies enabled the RTC to minimize
the impact of its actions on capital markets. In most cases, these letters of credit 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, 1997 and 1996, there were pledged securities as collateral of
$17 million and $84 million, respectively, to honor these letters of credit. The FRF
estimated Corporate losses related to the receiverships letters of credit as part of
the FRFs allowance for loss valuation. The allowance for these losses was $7 million
and $32 million as of December 31, 1997 and 1996, respectively.
The FRFs allocated share of the FDICs lease commitments totals $52.7 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 FDICs
future lease commitments is based upon current relationships of the workloads among the
FRF, the BIF, and the SAIF. Changes in the relative workloads among the three funds in
future years could change the amount of the FDICs lease payments that will be
allocated to the FRF. The FRF recognized leased space expense of $18.2 million and $32.8
million for the years ended December 31, 1997 and 1996, respectively.
Concentration of Credit Risk
As of December 31, 1997, the FRF had $77 billion in gross receivables from
thrift resolutions and $278 million in assets acquired from assisted thrifts and
terminated receiverships. An allowance for loss of $75 billion and $205 million,
respectively, has been recorded against these assets. The liquidating entities
ability to make repayments to FRF is largely influenced by the economy of the area in
which they are located. The FRFs maximum exposure to possible accounting loss for
these assets is shown in the table below.
Concentration of Credit Risk at December 31, 1997
15. Disclosures About the Fair Value of Financial Instruments
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 receivable from thrift resolutions primarily involves the FRFs 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
FRFs allowance for loss against the net receivable 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, 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
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 do 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.
Like the corporate subrogated claim, the securitization credit reserves involve an
asset that is unique, not intended for sale to the private sector, and has no established
market. Therefore, it is not practicable to estimate the fair market value of the
securitization credit reserves. These reserves are carried at net realizable value, which
is the book value of the reserves less the related allowance for loss. (see Note 4.)
The majority of the net assets acquired from assisted thrifts and terminated
receiverships (except real estate) is comprised of various types of financial instruments
(investments, loans, accounts receivable, etc.) acquired from failed thrifts. 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.
16. Supplementary Information Relating to the Statements of Cash Flows
Reconciliation of Net Income to Net Cash Provided by Operating Activities
17. Year 2000 Compliance Expenses
As part of its operations, the FDIC as administrator of the FRF is assessing,
testing, modifying or replacing as necessary its automated systems to ensure that these
systems are Year 2000 compliant.
As of December 31, 1997, the FRF has not incurred, nor does management anticipate that
the FRF will incur, a material charge to earnings to ensure that its systems are Year 2000
18. Subsequent Events
Effective on January 4, 1998, all employees with five or more years until retirement were
converted from the FDIC health plan to the Federal Employees Health Benefits (FEHB)
program. This conversion resulted in a gain to the FRF. Assuming enabling legislation is
passed in the future, this conversion will also affect all retirees and employees within
five years of retirement.
As part of this conversion, the OPM will become responsible for postretirement health
benefits for employees with five or more years until retirement at no cost to the FRF. If
retirees and employees within five years of retirement are also converted in the future,
the OPM will assume the FRFs obligation for postretirement health benefits for those
individuals at a fee to be negotiated between the FDIC and the OPM.
Assuming enabling legislation is passed, management does not expect there will be a
material gain or loss upon disposition of the FRFs postretirement health benefits
obligation for retirees or employees within five years of retirement.