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1999 Annual Report

FSLIC Resolution Fund

Federal Deposit Insurance Corporation

FSLIC Resolution Fund Statements of Financial Position at December 31

Dollars in Thousands

1999

1998

Assets

Cash and cash equivalents

$

2,948,138

$

4,631,379

Receivables from thrift resolutions, net (Note 3)

1,366,344

1,516,565

Investment in securitization related
assets acquired from receiverships (Note 4)

2,675,374

4,424,237

Assets acquired from assisted thrifts
and terminated
receiverships, net (Note 5)

34,407

64,101

Other assets, net (Note 6)

7,159

40,721

Total Assets

$

7,031,422

$

10,677,003

Liabilities

Accounts payable and other liabilities

$

73,620

$

40,396

Liabilities from thrift resolutions (Note 7)

296,817

202,836

Contingent liabilities for: (Note 8)

Assistance agreements

4,751

4,852

Litigation losses

1,445

18,340

Total Liabilities

376,633

266,424

Commitments and concentration of credit risk (Note 13 and Note 14)

Resolution Equity (Note 10)

Contributed capital

131,328,499

135,490,742

Accumulated deficit

(124,913,461)

(125,320,868)

Unrealized gain on available-for-sale securities, net
(Note 4)

239,751

240,705

Accumulated deficit, net

(124,673,710)

(125,080,163)

Total Resolution Equity

6,613,789

10,410,579

Total Liabilities and Resolution Equity

$

7,031,422

$

10,677,003

The accompanying notes are an integral part of these financial statements.

Federal Deposit Insurance Corporation

FSLIC Resolution Fund Statements of Income and Accumulated Deficit for the Years Ended
December 31

Dollars in Thousands

1999

1998

Revenue

Interest on securitization related assets acquired from receiverships

$

104,232

$

262,962

Interest on U.S. Treasury obligations

108,001

109,045

Interest on advances and subrogated claims

19,033

212,645

Gain on conversion of benefit plan (Note 12)

0

39,297

Revenue from assets acquired from assisted thrifts
and terminated receiverships

25,476

40,124

Limited partnership equity interests and other revenue

23,787 28,879

Realized gain on investment in securitization related assets acquired from receiverships (Note 4)

93,113

49,642

Total Revenue

373,642

742,594

Expenses and Losses

Operating expenses

83,317

56,336

Provision for losses (Note 9)

(278,267)

(1,176,165)

Expenses for goodwill settlements and litigation

80,921

154,492

Expenses for assets acquired from assisted thrifts and terminated receiverships

15,664

19,613

Interest expense on Federal Financing Bank debt and other notes payable

2,240

22,413

Other expenses

4,410

3,834

Realized loss on investment in securitization related assets acquired from receiverships (Note 4)

57,950

4,239

Total Expenses and Losses

(33,765)

(915,199)

Net Income

407,407

1,657,793

Unrealized (loss)/gain on available-for-sale securities, net (Note 4)

(954)

199,692

Comprehensive Income

406,453

1,857,485

Accumulated Deficit - Beginning

(125,080,163)

(126,937,648)

Accumulated Deficit - Ending

$

(124,673,710)

$

(125,080,163)

The accompanying notes are an integral part of these financial statements.

Federal Deposit Insurance Corporation

FSLIC Resolution Fund Statements of Cash Flows for the Years Ended December 31

Dollars in Thousands

1999

1998

Cash Flows From Operating Activities

Cash provided by:

Interest on U.S. Treasury obligations

$

108,001

$

109,045

Interest on securitization related assets acquired from receiverships

111,159

243,134

Recoveries from thrift resolutions

592,198

890,566

Recoveries from limited partnership equity interests

80,046

188,801

Recoveries from assets acquired from assisted thrifts and terminated receiverships

103,699

48,580

Recoveries on conversion of benefit plan

28,332

0

Miscellaneous receipts

8,166

1,383

Cash used by:

Operating expenses

(97,299)

(78,526)

Interest paid on notes payable

0

(29,997)

Disbursements for thrift resolutions

(82,069)

(177,365)

Disbursements for goodwill settlements and litigation expenses

(80,921)

(154,492)

Disbursements for assets acquired from assisted thrifts and
terminated receiverships

(40,690)

(26,952)

Miscellaneous disbursements

(6)

(220)

Net Cash Provided by Operating Activities (Note 16)

730,616

1,013,957

Cash Flows From Investing Activities

Cash provided by:

Investment in securitization related assets acquired from receiverships, available-for-sale

1,752,917

2,408,667

Cash used for:

Purchase of investment in securitization related assets acquired from receiverships, available-for-sale

0

(25,425)

Net Cash Provided by Investing Activities

1,752,917

2,383,242

Cash Flows From Financing Activities

Cash provided by:

U.S. Treasury payments for goodwill settlements

1,000

0

Cash used for:

Return of U.S. Treasury payments (Note 10)

(4,167,774)

(3,020)

Repayments of Federal Financing Bank borrowings

0

(838,412)

Repayments of indebtedness from thrift resolutions

0

(31,559)

Net Cash Used by Financing Activities

(4,166,774)

(872,991)

Net (Decrease) Increase in Cash and Cash Equivalents

(1,683,241)

2,524,208

Cash and Cash Equivalents - Beginning

4,631,379

2,107,171

Cash and Cash Equivalents - Ending

$

2,948,138

$

4,631,379

The accompanying notes are an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999 and 1998


1. Legislative History and Operations of the FSLIC Resolution Fund
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Legislative History

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 of 1993.

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

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

The RTC Completion Act 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 $4.6 billion. During 1999, the FRF-RTC returned $4.2 billion to the U.S. Treasury.

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 10).

 

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 received from the issuance of capital certificates to REFCORP; 4) funds received from the management and disposition of assets of the FRF; 5) the FRF’s portion of liquidating dividends paid by FRF receiverships; and 6) interest earned on Special U.S. Treasury Certificates purchased with proceeds of 4) and 5). If these sources are insufficient to satisfy the liabilities of the FRF, payments will be made from the U.S. Treasury in amounts necessary, as appropriated by Congress, to carry out the objectives of the FRF.

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

Additional goodwill litigation expenses incurred by DOJ are paid directly from the FRF-FSLIC based on a Memorandum of Understanding (MOU) dated October 2, 1998, between the FDIC and DOJ. Under the terms of the MOU, the FRF-FSLIC paid $79.1 million and $51.2 million to DOJ for fiscal years 1999 and 1998, respectively. Separate funding for goodwill judgments and settlements is available through Public Law 106-113 (see Note 8).

 

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 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.

 

2. Summary of Significant Accounting Policiesline.gif (1086 bytes)

General

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

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 Related Assets Acquired from Receiverships

The investment in securitization related assets acquired from receiverships 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 related assets acquired from receiverships is classified as available-for-sale and is shown at fair value with unrealized gains and losses included in Resolution Equity. Realized gains and losses are included in the Statements of Income and Accumulated Deficit as components of Net Income. 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 applicable estimated liquidation costs. Estimated cash recoveries also include dividends and gains on sales from equity instruments acquired in resolution transactions.

 

Cost Allocations Among Funds

Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC using workload-based-allocation percentages. These 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 is presented in FRF’s Statements of Financial Position.

 

Disclosure About Recent Accounting Standard Pronouncements

In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers’ Disclosures about Pensions 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.

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. The investment in the FADA is accounted for using the equity method and is included in the "Other assets, net" line item (see Note 6). Final judgment on the remaining litigation was made on December 16, 1998. FADA was terminated with a final liquidating dividend by December 31, 1999.

 

Related Parties

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. The majority of the limited partnership equity interests have been 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 throughout the financial statements and footnotes.

 

Reclassifications

Reclassifications have been made in the 1998 financial statements to conform to the presentation used in 1999.

 

Restatement

The credit enhancement escrow accounts included in the "Investment in securitization related assets acquired from receiverships" have been restated to conform with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and to reflect the related impact on each primary financial statement. The change is due to interpretations in the FASB’s recently issued special report, "A Guide to Implementation of Statement 125 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and to recognize the investment characteristics of the credit enhancement escrow accounts.

Additionally, corrections were made for immaterial offsetting errors relating to the purchase price of the credit enhancement escrow accounts and the residual certificates and to the associated gain or loss calculations. The impact of these restatements on the January 1, 1998 accumulated deficit is a reduction of $35.3 million.

 

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

As of December 31, 1999 and 1998, the FDIC, in its receivership capacity for the former FSLIC and SAIF-insured institutions, held assets with a book value of $2.1 billion and $2.6 billion, respectively (including cash and miscellaneous receivables of $1.5 billion and $1.6 billion at December 31, 1999 and 1998, 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.

 

Receivables from Thrift Resolutions, Net at December 31

Dollars in Thousands

1999

1998

Assets from open thrift assistance

$

437,265

$

529,123

Allowance for losses

(385,537)

(386,935)

Net Assets From Open Thrift Assistance

51,728

142,188

Receivables from closed thrifts

51,720,279

72,874,857

Allowance for losses

(50,405,663)

(71,500,480)

Net Receivables From Closed Thrifts

1,314,616

1,374,377

Total

$

1,366,344

$

1,516,565

Representations and Warranties

The RTC provided guarantees, representations, and warranties on approximately $107 billion in unpaid principal balance of loans sold and approximately $132 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 FRF includes estimates of corporate losses related to the receiverships’ representations and warranties as part of the FRF’s allowance for loss valuation. The allowance for these estimated losses was $30 million and $81 million as of December 31, 1999 and 1998, respectively. There are additional amounts of representation and warranty claims that are considered reasonably possible. As of December 31, 1999, the amount is estimated at $339 million. The contingent 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" ($4 million and $5 million for 1999 and 1998, respectively).

 

 

4. Investment in Securitization Related Assets Acquired from Receiverships line.gif (1086 bytes)

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. The FRF’s exposure from credit losses on loans sold through the program is limited to the balance of the escrow accounts. The FRF is entitled to any proceeds remaining in the escrow accounts at termination of the securitization transactions. The FRF also receives periodic returns of portions of the escrow account balances during the life of the transactions, if the trustee deems the funds held to be excessive.

As part of the securitization transactions, 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.

The escrow accounts were transferred from the receiverships to the FRF for $5.7 billion. This transfer was offset by amounts owed by the receiverships to the FRF. The residual certificates were transferred from the receiverships to the FRF for $1.4 billion. This transfer was also offset by amounts owed by the receiverships to the FRF.

The FRF received $910 million in proceeds from terminations during 1999 and $1.2 billion during 1998. Realized gains and losses are recorded based upon the difference between the proceeds at termination of the deal and the cost of the original investment. Realized gains and losses are calculated on both the escrow account and the related residual certificate. Unrealized gains and losses are computed on a quarterly basis using a cash flow model that calculates the estimated fair value of the assets at termination. This model is updated with current data supplied by the trustees, which includes prepayment speed, delinquency rates, and market pricing. Additionally, the FRF earned interest income on the investment in securitization related assets acquired from receiverships of $104.2 million during 1999 and $263 million during 1998.

 

Investment in Securitization Related Assets Acquired from Receiverships at December 31, 1999

Dollars in Thousands

Cost

Unrealized
Holding
Gains

Unrealized
Holding
Losses

Fair
Value

Credit enhancement escrow accounts

$

1,563,722

$

249,185

$

(121,251)

$

1,691,656

Residual certificates

871,901

111,817

0

983,718

Total

$

2,435,623

$

361,002

$

(121,251)

$

2,675,374

Investment in Securitization Related Assets Acquired from Receiverships at December 31, 1998

Dollars in Thousands

Cost

Unrealized
Holding
Gains

Unrealized
Holding
Losses

Fair
Value

Credit enhancement escrow accounts

$

2,996,584

$

278,179

$

(115,183)

$

3,159,580

Residual certificates

1,186,948

80,887

(3,178)

1,264,657

Total

$

4,183,532

$

359,066

$

(118,361)

$

4,424,237

5. Assets Acquired from Assisted Thrifts and Terminated Receiverships, Netline.gif (1086 bytes)

The FRF’s assets acquired from assisted thrifts and terminated receiverships include:

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

The FRF recognizes revenue and expenses on these acquired assets. Revenue consists primarily of proceeds from professional liability claims, interest earned on loans, gain on the sale of owned assets, and other liquidation income. Expenses are recognized for the management and liquidation of these assets.

 

Assets Acquired from Assisted Thrifts and Terminated Receiverships, Net at December 31

Dollars in Thousands

1999

1998

Assets acquired from assisted thrifts and terminated receiverships

$

148,584

$

216,006

Allowance for losses

(114,177)

(151,905)

Total

$

34,407

$

64,101

6. Other Assets, Net
line

Other Assets, Net at December 31

Dollars in Thousands

1999

1998

Investment in FADA (Note 2)

$

0

$

15,000

Allowance for loss

0

(11,074)

Investment in FADA, Net

0

3,926

Accounts receivable

7,159

33,200

Due from other government entities

0

3,595

Other Receivables

7,159

36,795

Total

$

7,159

$

40,721

7. Liabilities from Thrift Resolutions
line

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 "Contingent liabilities for: Assistance agreements" line item (see Note 8).

 

Liabilities from Thrift Resolutions at December 31

Dollars in Thousands

1999

1998

Assistance agreement notes payable

$

62,360

$

62,360

Interest payable

4,156

994

Other liabilities to thrift institutions

6,801

10,982

Estimated cost associated with liquidating assets

223,500

128,500

Total

$

296,817

$

202,836

8. Contingent Liabilities for:
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Assistance Agreements

The contingent liabilities for assistance agreements are $4.8 million and $4.9 million at December 31, 1999 and 1998, respectively. The liability represents an estimate of future assistance payments to acquirers of troubled thrift institutions. There were 28 and 33 assistance agreements outstanding as of December 31, 1999 and 1998, respectively. The last agreement is scheduled to expire in July 2000.

 

Litigation Losses

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 has determined that losses from unresolved legal cases totaling $141.3 million are reasonably possible.

 

Additional Contingency

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 payments 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. 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 lawsuits comprising the Goodwill Litigation are against the United States and as such are defended by the DOJ. On January 31, 2000, the DOJ informed the FDIC that, in the approximately 100 remaining cases which are in litigation at the trial court level, "it is too early to predict the extent of any litigation risk." The DOJ notes that this uncertainty arises, in part, from the existence of significant unresolved issues pending at the appellate or trial court level, as well as the unique circumstances of each case.

The FDIC believes that it is probable that additional amounts, possibly substantial, may be paid from the FRF-FSLIC as a result of 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 110 of the Department of Justice Appropriations Act, 2000 (Public Law 106-113, Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) provides to the FRF-FSLIC such sums as may be necessary for the payment of judgments and compromise settlements in the Goodwill Litigation, to remain available until expended. Even if the Goodwill Litigation judgments and compromise settlements were to exceed other available resources of the FRF-FSLIC, an appropriation is available 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.

 

9. Provision for Losses
line

The provision for losses was a negative $278 million and a negative $1.2 billion for 1999 and 1998, 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.

 

Provision for Losses for the Years Ended December 31

Dollars in Thousands

1999

1998

Valuation Adjustments:

Open thrift assistance

$

10,092

$

12,514

Recovery of tax benefits

(110,061)

(115,401)

Closed thrifts

(284,699)

(1,150,567)

Estimated cost associated with liquidating assets

95,000

128,500

Assets acquired from assisted thrifts and terminated receiverships

15,907

(66,709)

Investment in securitization related assets acquired from receiverships

16,357

0

Miscellaneous receivables

0

(42)

Total Valuation Adjustments

(257,404)

(1,191,705)

Contingent Liabilities:

Litigation losses

(20,863)

15,540

Total Contingent Liabilities

(20,863)

15,540

Total

$

(278,267)

$

(1,176,165)

10. Resolution Equity
line

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, 1999

Dollars in Thousands

FRF

FRF-FSLIC

FRF-RTC

Consolidated

Contributed capital - beginning

$

44,156,000

$

91,334,742

$

135,490,742

Miscellaneous payments/adjustments

1,000

4,531

5,531

Less: U.S. Treasury repayments

0

(4,167,774)

(4,167,774)

Contributed capital - ending

44,157,000

87,171,499

131,328,499

Accumulated deficit

(41,929,682)

(82,743,074)

(124,672,756)

Less: Unrealized loss on available-for-sale securities

0

(954)

(954)

Accumulated deficit, net

(41,929,682)

(82,744,028)

(124,673,710)

Total

$

2,227,318

$

4,427,471

$

6,613,789

Resolution Equity at December 31, 1998

Dollars in Thousands

FRF

FRF-FSLIC

FRF-RTC

Consolidated

Contributed capital

$

44,156,000

$

91,334,742

$

135,490,742

Accumulated deficit

(42,057,685)

(83,222,170)

(125,279,855)

Less: Unrealized gain on available-for-sale securities

0

199,692

199,692

Accumulated deficit, net

(42,057,685)

(83,022,478)

(125,080,163)

Total

$

2,098,315

$

8,312,264

$

10,410,579

Contributed Capital

To date, the FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion from the U.S. Treasury, respectively. These payments were used to fund losses from thrift resolutions prior to July 1, 1995. Additionally, the FRF-FSLIC issued $670 million in capital certificates to the FICO 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.

The FRF-FSLIC’s contributed capital at December 31, 1999, includes $1 million received from the U.S. Treasury to fund a current year goodwill litigation settlement (see Note 8). The FRF-RTC’s contributed capital at December 31, 1999, includes an adjustment of $4.5 million that relates to prior year appropriations.

 

Accumulated Deficit

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

 

Resolution Equity Restrictions

FRF-RTC: The former RTC drew down $4.6 billion of the approximately $18 billion made available by the RTC Completion Act. The RTC 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 returned $4.2 billion to the U.S. Treasury on behalf of the FRF-RTC, pursuant to the RTC Completion Act, during 1999.

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).

11. Pension Benefits, Savings Plans, and Accrued Annual Leaveline

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

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

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 for 1998.

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 401(k) savings plan with matching contributions. The FRF pays its share of the employer’s portion of all related costs.

The FRF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $6.9 million and $5.4 million at December 31, 1999 and 1998, respectively.

 

Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands

1999

1998

CSRS/FERS Disability Fund

$

0

$

308

Civil Service Retirement System

1,367

1,382

Federal Employees Retirement System (Basic Benefit)

4,687

4,438

FDIC Savings Plan

2,619

2,619

Federal Thrift Savings Plan

1,767

1,675

Total

$

10,440

$

10,422

12. Postretirement Benefits Other Than Pensionsline

On January 2, 1998, the 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 FDIC 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 FDIC 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 FDIC 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.

The OPM’s assumption of the health care obligation constituted both a settlement and a curtailment as defined by SFAS No. 106. This conversion resulted in a gain of $39 million to the FRF in 1998.

 

Postretirement Benefits Other Than Pensions
Dollars in Thousands

1999

1998

Funded Status at December 31

Fair value of plan assets (a)

$

14,994

$

14,337

Less: Benefit obligation

16,130

14,337

Under Funded Status of the Plans

$

1,136

$

0

Accrued benefit liability recognized in the Statements of Financial Position

$

1,136

$

0

Expenses and Cash Flows for the Period Ended December 31

Net periodic benefit cost

$

563

$

(919)

Employer contributions

202

886

Benefits paid

202

886

Weighted-Average Assumptions at December 31

Discount rate

4.50%

4.50%

Expected return on plan assets

4.50%

4.50%

Rate of compensation increase

3.00%

4.00%

(a) Invested in U.S. Treasury obligations.

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

13. Commitments line

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, 1999 and 1998, securities pledged as collateral to honor these letters of credit totaled $7.6 million and $21.4 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 $1.1 million and $6.3 million as of December 31, 1999 and 1998, respectively.

 

Leases

The FRF’s allocated share of the FDIC’s lease commitments totals $22.6 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 $7.2 million and $6.3 million for the years ended December 31, 1999 and 1998, respectively.

 

Lease Commitments

Dollars in Thousands

2000

2001

2002

2003

2004

2005

$5,738

$5,095

$5,001

$3,439

$2,036

$1,253

14. Concentration of Credit Risk
line

As of December 31, 1999, the FRF had gross receivables from thrift resolutions totaling $52.2 billion, gross assets acquired from assisted thrifts and terminated receiverships totaling $149 million, and an investment in securitization related assets acquired from receiverships totaling $2.7 billion. The allowance for loss against receivables from thrift resolutions totaled $51.0 billion, and the allowance against the assets acquired from assisted thrifts and terminated receiverships totaled $114 million.

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

 

Concentration of Credit Risk at December 31, 1999
Dollars in Millions

Southeast

Southwest

Northeast

Midwest

Central

West

Total

Receivables from thrift resolutions, net

$18

$33

$876

$151

$31

$91

$1,366

Assets acquired from assisted thrifts and terminated receiverships, net

0

33

1

0

0

0

34

Investment in securitization related assets acquired from receiverships

489

313

288

80

67

1,438

2,675

Total

$673

$379

$1,165

$231

$98

$1,529

$4,075

15. Disclosures About the Fair Value of Financial Instrumentsline

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

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

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

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

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

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

 

 

16. Supplementary Information Relating to the Statements of Cash Flowsline
Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31
Dollars in Thousands

1999

1998

Net Income

$

407,407

$

1,657,793

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Income Statement Items:

Interest on Federal Financing Bank borrowings

0

18,068

Provision for losses

(278,267)

(1,176,165)

Gain on conversion of benefit plan

0

(39,297)

Prior year appropriation adjustments

4,531

0

Change in Assets and Liabilities:

Decrease in receivables from thrift resolutions

437,750

2,307,756

Increase in securitization related assets acquired from receiverships

(21,365)

(1,415,155)

Decrease in assets acquired from assisted thrifts and terminated receiverships

13,788

61,928

Decrease (Increase) in other assets

35,680

(389,691)

Increase (Decrease) in accounts payable and other liabilities

34,710

(125,545)

(Decrease) in accrued interest on notes payable

0

(28,950)

(Decrease) Increase in liabilities from thrift resolutions

92,414

130,794

Increase in contingent liabilities for litigation losses

3,968

13,897

(Decrease) in contingent liabilities for assistance agreements

0

(1,476)

Net Cash Provided by Operating Activities

$

730,616

$

1,013,957

Noncash Investing Activity

The FRF acquired securitization residual certificates through a noncash purchase from its receiverships. This noncash transaction valued at $1.4 billion was applied to amounts owed by FRF receiverships which resulted in a reduction to the "Receivables from thrift resolutions, net" line item and an increase in the "Investment in securitization related assets acquired from receiverships" line item (see Note 4).

 

 

17. Year 2000 Issues
line

State of Readiness

The FDIC, as administrator for the FRF, conducted a corporate-wide effort to ensure that all FDIC information systems were Year 2000 compliant. This meant that 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. An oversight committee comprised of FDIC division management directed the Year 2000 effort.

The FDIC’s Division of Information Resources Management (DIRM) led the Year 2000 effort, under the direction of the oversight committee. The internal Year 2000 team used a structured approach and rigorous program management as described in the U.S. General Accounting Office’s (GAO) Year 2000 Computing Crisis: An Assessment Guide. This methodology consisted of five phases under the overall umbrellas of Program and Project Management. The FDIC completed all of the recommended GAO phases: Awareness, Assessment, Renovation, Validation, and Implementation.

As a precautionary measure, the FDIC developed a Year 2000 Rollover Weekend Strategy to monitor the information systems during the transition into the year 2000. Contingency plans were in place for mission-critical application failures and for other systems. No major problems were anticipated due to the extensive planning and validation that occurred (see Note 18).

 

Year 2000 Estimated Costs

Year 2000 compliance expenses for the FRF are estimated at $1.3 million and $2.1 million at December 31, 1999 and 1998, respectively. These expenses are reflected in the "Operating expenses" line of the FRF’s Statements of Income and Accumulated Deficit.

18. Subsequent Events
line

Year 2000 Effect on Internal Systems

On January 1, 2000, all FDIC systems were operating normally as a result of a corporate-wide effort to ensure that all FDIC information systems were Year 2000 compliant prior to December 31, 1999. No internal system failures have occurred and none are anticipated (see Note 17).

 

 


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