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.
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.
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 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. The RTC Completion Act made available
approximately $18 billion worth of additional funding. The RTC actually drew down $4.556 billion.
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 (see Note 12).
Operations 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 U.S. Treasury to repay RTC Completion Act
appropriations and to the REFCORP to pay the interest on the REFCORP bonds.
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 recorded 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 are appropriated by Congress, to carry out the
objectives of the FRF.
Public Law 103-327 provides $827 million in funding to be available until expended to facilitate efforts to
wind up the resolution activity of the FRF. 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 (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 U.S. arising
from the goodwill litigation cases.
Additional goodwill litigation expenses incurred by DOJ will be paid directly from the FRF-FSLIC based on a
Memorandum of Understanding (MOU) dated October 2, 1998, between FDIC and DOJ. Under the terms of the MOU,
the FRF-FSLIC paid $51.2 million to DOJ during 1998. Separate funding for goodwill judgements and settlements
is available through Public Law 105-277 (see Note 10).
The VA, HUD and Independent Agencies Appropriations Acts of 1999 and 1998 appropriated $34.7 million for fiscal
year 1999 (October 1, 1998, through September 30, 1999) and $34 million for fiscal year 1998 (October 1, 1997,
through September 30, 1998), respectively, for operating expenses incurred by the Office of Inspector General (OIG).
These Acts mandate 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 thrift institutions for which the FDIC acts as receiver or
liquidating agent. Periodic and final accountability reports of the FDIC's activities as receiver or
liquidating agent are furnished to courts, supervisory authorities, and others as required.
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.
Cash equivalents are short-term, highly liquid investments with original maturities of three months or less.
Cash equivalents primarily consist of Special U.S. Treasury Certificates.
Investment in Securitization Residual Certificates
The Investment in Securitization Residual Certificates is recorded pursuant to the provisions of the
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 requires that securities be classified in one of three categories:
held-to-maturity, available-for-sale, or trading. The Investment in Securitization Residual Certificates
is classified as available-for-sale and is shown at fair value with unrealized gains and losses included in
Resolution Equity. Realized gains are included in the "Limited partnership equity interests and other revenue"
line item with realized losses included in the "Provision for losses" line item when applicable. The FRF does not
have any securities classified as held-to-maturity or trading.
Allowance for Losses on Receivables From Thrift
Resolutions and Assets Acquired From Assisted
Thrifts and Terminated Receiverships
The FRF records a receivable for 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 receiverships.
Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC.
Workload-based-allocation percentages are developed during the annual corporate planning process and through
supplemental functional analyses.
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 FRF's unfunded net postretirement benefits liability for the plan is presented
in FRF's Statements of Financial Position.
Disclosure About Recent Financial Accounting Standard Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." The Statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent practicable. Although changes in the
FRF's disclosures for postretirement benefits have been made, the impact is not material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." The FDIC adopted SFAS No.
130 effective on January 1, 1997. Comprehensive income includes net income as well as certain types of
unrealized gain or loss. The only component of SFAS No. 130 that impacts the FRF is unrealized gain or loss
on the securitization residual certificates that are classified as available-for-sale, which is presented in the
FRF's Statements of Financial Position and the Statements of Income and Accumulated Deficit.
Other recent pronouncements are not applicable to the financial statements.
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. Final judgement on the remaining litigation was made on December 16, 1998.
However, a final liquidating dividend to the FRF was still pending at year-end. This liquidating dividend will be
disbursed during 1999. The investment in the FADA is accounted for using the equity method and is included in the
"Other assets, net" line item (see Note 7).
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. These assets are presented in "Assets acquired from assisted thrifts and terminated receiverships,
net" line item in the FRF's Statements of Financial Position.
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.
Over the past two years, the majority of the limited partnership equity interests were transferred from the
receiverships to the FRF. These assets are included in the "Receivables from thrift resolutions, net" line item in
the FRF's Statements of Financial Position.
The nature of related parties and a description of related party transactions are disclosed thoughout the
financial statements and footnotes.
Reclassifications have been made in the 1997 financial statements to conform to the presentation used in 1998.
3. Receivables From Thrift Resolutions, Net
The thrift resolution process took 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, 1998 and 1997, the FDIC, in its receivership capacity for the former FSLIC and SAIF insured
institutions, held assets with a book value of $2.6 billion and $3.6 billion, respectively (including cash and
miscellaneous receivables of $1.7 billion and $1.4 billion at December 31, 1998 and 1997, respectively). These
assets represent a significant source of repayment of the FRF's 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 cause the FRF's and other claimants'
actual recoveries to vary from the level currently estimated.
Representations and Warranties
The FRF estimated corporate losses related to the receiverships' representations and warranties as part of the
FRF's allowance for loss valuation. The allowance for these losses was $81 million and $90 million as of
December 31, 1998 and 1997, respectively. There are additional amounts of representation and warranty claims that
are considered reasonably possible. As of December 31, 1998, the amount is estimated at $330 million.
The RTC provided guarantees, representations, and warranties on approximately $115 billion in unpaid principal balance of
loans sold and approximately $141 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
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"
($5 million and $18 million for 1998 and 1997, respectively).
4. Securitization Funds Held by Trustee, 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. A portion of the
proceeds from the sale of the certificates was placed in credit enhancement escrow accounts (escrow accounts) to
cover future credit losses with respect to the loans underlying the certificates. In addition, the escrow accounts
were established to increase the likelihood of full and timely distributions of interest and principal to the
certificate holders and thus increase the marketability of the certificates. FRF's exposure from credit losses on
loans sold through the program is limited to the balance of the escrow accounts. The escrow account balance is
reduced for claims paid and when the trustee releases the funds at the termination of a securitization deal. Funds
are also released if the trustee deems the escrow account balance to be excessive.
Through December 1998, the amount of claims paid was approximately 19 percent of the initial escrow accounts.
At December 31, 1998 and 1997, escrow accounts totaled $2.9 billion and $5.2 billion, respectively.
At December 31, 1998 and 1997, the allowance for estimated future losses which would be paid from the escrow accounts
totaled $0.1 billion and $0.3 billion, respectively.
The FRF earned interest income from the securitization funds held by trustee of $263 million during 1998 and
$300 million during 1997.
5. Investment in Securitization Residual Certificates
As part of the securitization transactions described in Note 4, receivership and conservatorship loans were sold
to various trusts. In return, the receiverships received a participation in the residual pass-through certificates
(residual certificates) issued through its mortgage-backed securities program. The residual certificates entitle the
holder to any cash flow from the sale of collateral remaining in the trust after the regular pass-through certificates
and actual termination expenses are paid.
In October 1998, the residual certificates were transferred from the receiverships to the FRF. The $1.8
billion transferred to the FRF was offset by amounts owed by the receiverships to the FRF. The residual
certificates were adjusted to fair market value for this transaction and as a result, FRF's provision for losses
decreased by $0.5 billion and FRF's resolution equity increased by $0.5 billion.
Realized gains and losses are recorded based on the difference between the proceeds at termination and the cost
of the original investment. In 1998, the FDIC received $241.3 million in proceeds from deals terminated by
December 31, 1998. Additionally, at termination, $48.8 million was deposited into the securitization funds
held by trustee. The realized gains are included in "Limited partnership equity interests and other revenue"
line item and the realized losses are included in the "Provision for losses" line item. At December 31, 1998,
realized gains were $2.7 million and realized losses were $47.1 million.
6. Assets Acquired From Assisted Thrifts and Terminated Receiverships, Net
The FRF's assets acquired from assisted thrifts and terminated receiverships includes: 1) assets the former FSLIC
and the former RTC purchased from troubled 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 are
used to derive the related allowance for losses, is the same as that for receivables from thrift resolutions
(see Note 3).
The FRF recognizes revenue and expenses on these acquired assets. Revenue consists primarily of interest
earned on mortgage loans and proceeds from professional liability claims. Expenses are recognized for the
management and liquidation of these assets.
7. Other Assets, Net
8. 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 RTC's high-cost funds replacement and emergency liquidity programs. The outstanding note was
due to mature on January 1, 2010; however, the entire principal and interest amounts were paid on August 10, 1998.
The FFB borrowing authority ceased upon the termination of the RTC.
The note payable carried a floating rate of interest that was adjusted quarterly. The FFB established the
interest rate and during 1998 these rates ranged between 5.487 percent and 5.228 percent.
9. Liabilities 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. Pursuant to FIRREA, the FRF assumed these obligations.
Notes payable and obligations for assistance agreements are presented in the "Liabilities from thrift resolutions"
line item. Estimated future assistance payments are included in the "Estimated liabilities for: Assistance
agreements" line item (see Note 10).
10. Estimated Liabilities for:
The estimated liabilities for assistance agreements are $5 million and $6 million at December 31, 1998 and
1997, respectively. The liability represents an estimate of future assistance payments to acquirers of
troubled thrift institutions. The balances for both years were not discounted because the remaining assistance
agreements will terminate within the next two years, and the discount adjustment was deemed to be immaterial.
There were 33 assistance agreements outstanding as of December 31, 1998 and 1997. 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. In addition to the amount recorded as probable, the FDIC's Legal Division has
determined that losses from unresolved legal cases totaling $144 million are reasonably possible.
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 Home Loan Bank Board to perform certain
agreements to count goodwill toward regulatory capital, the plaintiffs were entitled to recover damages from the
United States. To date, approximately 120 lawsuits have been filed against the United States based on alleged
breaches of these agreements (Goodwill Litigation).
On July 23, 1998, the U.S. Treasury determined, based on an opinion of the DOJ's Office of Legal Counsel (OLC)
dated July 22, 1998, that the FRF is legally available to satisfy all judgments and settlements in the Goodwill
Litigation involving supervisory action or assistance agreements. The U.S. Treasury further determined that
the FRF is the appropriate source of funds for payment of any such judgments and settlements.
The OLC opinion concluded that the nonperformance of these agreements was a contingent liability that was
transferred to the FRF on August 9, 1989, upon the dissolution of the FSLIC. Under the analysis set forth
in the OLC opinion, 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. On July 31, 1998, the FDIC
Board of Directors authorized the payment of four settlements in the Goodwill Litigation aggregating $103.3 million.
This payment was made from the FRF-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
and judgments arising out of the Goodwill Litigation.
The lawsuits comprising the Goodwill Litigation are against the United States and as such are defended by the
DOJ. On March 19, 1999, DOJ informed the FDIC that, "as a practical matter, there are likely to be substantial
recoveries against the government as these matters proceed to resolution." DOJ also advised that "variations
among the ... cases [are] so great, including [the government's] possible recovery of fraud related damages and
penalties against various plaintiffs, ... [that] it is simply impossible to predict what the overall outcome is
likely to be."
The FDIC believes that it is probable that additional amounts, possibly substantial, may be paid from the
FRF-FSLIC as a result of future judgments and settlements in the Goodwill Litigation. However, based on the
response from the DOJ, the FDIC is unable to estimate a range of loss to the FRF-FSLIC from the Goodwill Litigation
or determine whether any such loss would have a material effect on the financial condition of the FRF-FSLIC.
Section 130 of the Department of Justice Appropriations Act, 1999 (Section 130), as amended, provides to the
FRF-FSLIC such sums as may be necessary for the payment of judgments and settlements in the Goodwill Litigation,
to remain available until expended. In the Budget for Fiscal Year 2000, the President has requested a
permanent appropriation to the FRF-FSLIC of such sums as may be necessary for the payment of judgments and
settlements in the Goodwill Litigation, to remain available until expended. It is anticipated that such an
appropriation for the Goodwill Litigation judgments and settlements will be adopted. As a consequence, the
FDIC believes that even if the Goodwill Litigation judgments and settlements were to exceed other available
resources of the FRF-FSLIC, an appropriation is currently available and, it is anticipated,
will be available in the future to pay such judgments and settlements. In these circumstances any liabilities
for the Goodwill Litigation should have no material impact on the financial condition of the FRF-FSLIC. If an
appropriation to the FRF-FSLIC were not available to pay the Goodwill Litigation judgments and settlements, the
liabilities of the FRF-FSLIC in respect of the Goodwill Litigation would be material and adversely affect the
financial condition of the FRF-FSLIC.
11. Provision for Losses
The provision for losses was a negative $1.3 billion and a negative $1.7 billion for 1998 and 1997,
respectively. In both years, the negative provision resulted primarily from decreased losses expected for
assets in liquidation. The following chart lists the major components of the negative provision for losses.
12. Resolution Equity
As stated in 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
To date, 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 the 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
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 and $87.9 billion were brought forward from the
FSLIC and RTC, respectively).
Resolution Equity Restrictions
The FRF-FSLIC has unrecorded, pending judgments and settlements that are inestimable at this time and
that could substantially reduce or eliminate the FRF-FSLIC Resolution Equity (see Note 10).
The former RTC drew down $4.556 billion of the approximately $18 billion made available by the RTC
Completion Act. The Completion Act requires the FDIC to deposit in the general fund of the U.S. Treasury any
funds transferred to the RTC but not needed by the RTC. The FDIC will return these funds to the U.S. Treasury
pursuant to the RTC Completion Act. In addition, the FDIC must transfer net proceeds from the sale of RTC
assets to pay interest on the REFCORP bonds, after providing for all outstanding RTC liabilities. Any such
payments benefit the U.S. Treasury, which would otherwise be obligated to pay the interest on the bonds (see Note 1).
13. 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.
During 1998, there was an open season that allowed employees to switch from CSRS to FERS. This did not have
a material impact on FRF's operating expenses.
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 (OPM).
Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 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
$5.4 million and $11.2 million at December 31, 1998 and 1997, respectively.
14. Postretirement Benefits Other Than Pensions
On January 2, 1998, FRF's obligation under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," for postretirement health benefits was reduced when over 6,500 employees enrolled in the Federal
Employees Health Benefits (FEHB) Program for their future health insurance coverage. The OPM assumed the FRF's
obligation for postretirement health benefits for these employees at no initial enrollment cost.
In addition, legislation was passed that allowed the remaining 2,600 retirees and near-retirees (employees
within five years of retirement) in the FDIC health plan to also enroll in the FEHB Program for their future
health insurance coverage, beginning January 1, 1999. The OPM assumed the FRF's obligation for postretirement
health benefits for retirees and near-retirees for a fee of $32 million. The OPM is now responsible for
postretirement health benefits for all employees and covered retirees. The FDIC will continue to be obligated
for dental and life insurance coverage for as long as the programs are offered and coverage is extended to retirees.
OPM's assumption of the health care obligation constitutes both a settlement and a curtailment as defined by
SFAS No. 106. This conversion resulted in a gain of $39 million to the FRF.
(a) Invested in U.S. Treasury Obligations.
For measurement purposes, the per capita cost of covered health care benefits was assumed to increase by an
annual rate of 8.75 percent for 1998. Further, the rate was assumed to decrease gradually each year to a rate
of 7.75 percent for the year 2000 and remain at that level thereafter.
15. Commitments and Concentration of Credit Risk
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, 1998 and 1997, securities
pledged as collateral to honor these letters of credit totaled $21.4 million and $51.4 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 $7.6 million and $41.1 million as of December 31, 1998 and 1997,
The FRF's allocated share of the FDIC's lease commitments totals $22.8 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 amount shown below. The FRF recognized leased space expense of $6.3
million and $18.2 million for the years ended December 31, 1998 and 1997, respectively.
Concentration of Credit Risk
As of December 31, 1998, the FRF had gross receivables from thrift resolutions totaling $73.3 billion, gross
assets acquired from assisted thrifts and terminated receiverships totaling $216 million, gross securitization funds
held by trustee totaling $2.9 billion, and an investment in securitization residual certificates totaling $1.5
billion. The allowance for loss against receivables from thrift resolutions totaled $71.9 billion, the
allowance against the assets acquired from assisted thrifts and terminated receiverships totaled $152 million,
and the allowance against the securitization funds held by trustee totaled $0.1 billion.
Cash recoveries may be influenced by economic conditions. Similarly, the value of the investment in
securitization residual certificates 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.
16. 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 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.
Like the corporate subrogated claim, the securitization credit enhancement reserves involve an asset that is
unique and is not intended for sale to the private sector. Therefore, it is not practicable to estimate the
fair market value of the securitization credit enhancement 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, including investments, loans and accounts receivables.
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 residual certificates is adjusted to its fair value at each reporting date using
a valuation model which 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.
17. Supplementary Information Relating to the Statements of Cash Flows
Noncash Investing Activity
In October 1998, the FRF acquired securitization residual certificates through a noncash purchase from its
receiverships. This noncash transaction valued at $1.8 billion was applied to amounts owed by FRF
receiverships which resulted in a reduction to the "Receivable from thrift resolutions, net" line item and the
creation of the "Investment in securitization residual certificates" line item (see Note 5).
18. Year 2000 Issues
State of Readiness
The FDIC, as administrator for the FRF, is conducting a corporate-wide effort to ensure that all FDIC
information systems are Year 2000 compliant. This means the systems must accurately process date and time
data in calculations, comparisons, and sequences after December 31, 1999, and be able to correctly deal with
leap-year calculations in 2000. The Year 2000 Oversight Committee is comprised of FDIC division management
that oversees the Year 2000 effort.
The FDIC's Division of Information Resources Management (DIRM) leads the internal Year 2000 effort, under the
direction of the Oversight Committee. DIRM used a five-phase approach for ensuring that all FDIC systems and
software are Year 2000 compliant. The five phases are:
The first phase of compliance focuses on defining the Year 2000 problem and gaining executive-level
support and sponsorship for the effort.
The second phase of compliance focuses on assessing the Year 2000 impact on the Corporation as a whole.
The third phase of compliance focuses on converting, replacing or eliminating selected platforms, applications,
databases, and utilities, while modifying interfaces as appropriate.
Platform is a broad term that encompasses computer hardware (including mainframe computers, servers,
and personal computers) and software (including computer languages and operating systems). Utility programs,
or "utilities," provide file management capabilities, such as sorting, copying, comparing, listing and searching,
as well as diagnostic and measurement routines that check the health and performance of the system.
The fourth phase of compliance focuses on testing, verifying and validating converted or replaced platforms,
applications, databases, and utilities.
The fifth phase of compliance focuses on implementing converted or replaced platforms, applications, databases,
utilities, and interfaces.
The Awareness, Assessment, and Renovation phases are complete. The Validation phase is scheduled to be
completed during January 1999 when all production applications will be validated for Year 2000 readiness.
Implementation of the majority of production applications in Year 2000 ready status will be completed by
March 31, 1999. Validation and implementation of new systems and modifications to existing systems will
continue throughout 1999.
Year 2000 Estimated Costs
Year 2000 compliance expenses for the FRF are estimated at $2.1 million and $201 thousand at December 31, 1998
and 1997, respectively. These expenses are reflected in the "Operating expenses" line item of the FRF's
Statements of Income and Accumulated Deficit. Future expenses are estimated to be $2.6 million. Year
2000 estimated future costs are included in the FDIC's budget.
Risks of Year 2000 Issues
No potential loss with internal system failure has been estimated due to the extensive planning and validation
that has occurred.
DIRM is currently developing a disaster recovery plan and contingency plans specific to each mission-critical
19. Subsequent Events
On April 9, 1999, the United States Court of Federal Claims ruled that the federal government must pay Glendale
Federal Bank $908.9 million for breaching a contract that allowed the thrift to count goodwill toward regulatory
capital. Both the plaintiffs and the DOJ are expected to appeal the decision. Additionally, on
April 16, 1999, in a similar case, another judge of the U.S. Court of Federal Claims, using a different analysis
than the one used by the judge in the Glendale Federal case, awarded California Federal Bank $23 million. The
California Federal Bank was seeking more than $1.0 billion in damages and is expected to appeal the decision. The
analyses of the damage issues in the two cases appear to be irreconcilable. Due to the expected appeals and
the conflicting analyses in the two cases, the final outcome is uncertain.