Managing the Crisis: The FDIC and
RTC Experience Chronological Overview: Chapter Twelve—1989
savings and loan industry’s worst year was 1989, with losses totaling
more than $19 billion. The FDIC’s insurance fund was under severe
pressure as well. In the FDIC’s 1989 Annual Report, Chairman L. William
Seidman described 1989 as “the most demanding year in the 56-year
history of the FDIC and a likely harbinger of more tough times ahead.”
as a Percent of Insured Deposits
for all resolutions occurring in this calendar year have been updated
through 12/31/03. The loss amounts are routinely adjusted with
updated information from new appraisals and asset sales, which
ultimately affect projected recoveries. Back
Annual Report and Reports from FDIC Division of Finance
and Division of Research and Statistics.
On February 6, 1989, President George
H. W. Bush announced proposed legislation to address the thrift
crisis, including a program to place troubled institutions
into conservatorship under an interagency effort led by the
FDIC. The resulting landmark Financial Institutions Reform,
Recovery, and Enforcement Act (FIRREA) of 1989 was passed on
August 9, 1989. That legislation abolished the Federal Home
Loan Bank Board (FHLBB) as regulator of savings and loan institutions,
and dissolved the insurer, the Federal Savings and Loan Insurance
Corporation (FSLIC). The Act also created the Resolution Trust
Corporation (RTC) to clean up the savings and loan crisis and
to take over the management of conservatorships on August 9,
1989. The RTC’s mission was to merge or to liquidate
savings associations declared insolvent during the period from
January 1, 1989, through (initially) August 8, 1992 (later
extended through September 30, 1993 and then to June 30, 1995.)
In the beginning, the FDIC was to be the manager of the RTC,
handling day-to-day operations.
FIRREA also created
Association Insurance Fund (SAIF)—established to insure
deposits in savings associations and was to be directed and administered
by the FDIC separately from the Bank Insurance Fund (formerly
the Deposit Insurance Fund). SAIF replaced the former FSLIC insurance
Resolution Fund (FRF)—established under the FDIC’s
management to handle most of the assets and liabilities of the
Funding Corporation—established to fund the activities
of the RTC, primarily through bond sales.
of Thrift Supervision—established to take over the duties
of examining and supervising thrifts and their holding companies.
That function was formerly performed by the FHLBB, which was
abolished by FIRREA.
Upon the signing
of FIRREA, the FDIC also assumed liabilities of FRF and the administrative
responsibilities for 219 thrift assistance agreements entered into
by the former FHLBB. In addition, the FDIC also assumed responsibility
for overseeing other contracts and financial operations of the
former FSLIC, including management of the 98 thrift receiverships
with about $13 billion in assets that were closed before August
Gross Domestic Product growth continued
steadily at 3.4 percent, and the unemployment rate continued
to fall.12-1 Employment
growth was at 2.2 percent, and the unemployment rate was 5.3
discount rate increased to 6.9 percent while the 30-year mortgage
rate held constant at 10.3 percent.12-3 Inflation
rose for the third year in a row to 4.2 percent.12-4 As
the office vacancy rate rose slightly to 17.6 percent, commercial
real estate loans continued to steadily increase. Residential
real estate activity was slowing, however, with home sales
down 4.6 percent and housing starts down 7.5 percent.12-5
continued to experience a high percentage of the country’s
bank resolutions, 167 failures (80.7 percent), with resolution
costs totaling $5 billion. A year after having the first and third
costliest bank resolutions, Texas had the second and fourth costliest
bank resolutions to date with the failures of the bank subsidiaries
of MCorp ($2.8 billion estimated loss) and Texas American Bancshares
($1.1 billion estimated loss).12-6 There
were large increases in problem real estate loans among the region’s
banks. Smaller banks were getting healthier as their earnings increased
and their numbers of problem assets decreased.
banks were beginning to be negatively affected. During the year,
nonperforming real estate loans in the region increased from $3.6
billion to $9.1 billion, and mortgage foreclosures also increased.12-7 Total
real estate loans peaked at 51 percent of total assets as did commercial
real estate loans, at 14 percent of assets. Both were well above
the national medians of 23 percent and 7 percent, respectively.
Home prices in New York City fell 5 percent during the year.12-8
unemployment rate was at 5 percent, its lowest rate in 20 years.12-9 The
economy started to slow as the Gross State Product growth rate
fell back to the national level.12-10 Median
home prices peaked for the state as a whole. Los Angeles and San
Francisco in particular were cities where housing was believed
to be overvalued.12-11 The
banking industry in California had a record income of $3.7 billion,
and the number of identified problem banks in the state fell to
36. The “Big Four” continued to outperform the national
average with a return on assets of 1.3 percent compared to the
national level of 0.7 percent.
banks’ total reserves were almost 50 percent of outstanding
lesser developed country’s loans and had increased $13 billion
since the previous year. Return on equity bounced back for all
banks to 4.8 percent from 1.6 percent in 1988 and -1.9 percent
in 1987, but net charge-offs continued to increase for large banks,
to 1.02 percent of total loans.
performance looked bleak in 1989. Some of the unfavorable trends
were as follows:
ended 1989 in worse condition than it started;
for loan losses were more than $13 billion higher than in 1988,
as banks prepared for future charge-offs on both domestic and
charge-offs were the highest in the 42 years that the industry
had reported them and were still insufficient to reduce the industry’s
inventory of troubled assets; and
increased and equity capital declined as a proportion of total
There were, however,
encouraging signs in other bank performance indicators for 1989:
in the Southwest were doing better; they reported increased earnings,
fewer full year losses, and a decline in problem assets;
the midwest and west enjoyed improved profitability;
of commercial banks on the FDIC’s problem bank list declined
for the second straight year, to the lowest level since 1985;
of banks that failed or required assistance to avert failure
was 15 fewer than 1988’s combined total; and
asset size of failed or assisted banks in 1989 was roughly half
that of 1988.
Many large institutions
in the Southwest continued to struggle with weak local real estate
markets and nonperforming assets from earlier economic troubles.
Of the 207 banks that failed or required assistance during 1989,
167 were in the Southwest. Agricultural bank failures as a percentage
of all bank failures fell for the first time to below 1980 levels,
to 8.2 percent.
The number of
insured commercial banks fell for the fifth straight year from
13,123 at the end of 1988 to 12,709 at the end of 1989. New bank
charters declined to the lowest level since 1978. The number of
banks on the FDIC’s problem bank list declined from 1,406
in 1988 to 1,109 at the end of 1989.
Table 12-2 shows
the number and total assets of FDIC insured institutions, as well
as their profitability as of the end of 1989.
Financial Institutions Insured by FDIC
($ in Billions)
Commercial Banks - FDIC Regulated
Savings Banks – FDIC Regulated
Savings Associations – FHLBB/OTS Regulated
is not provided if either the latest period or the year-ago period
contains a negative number.
Reports from FDIC Division of Research and Statistics.
Failures and Assistance to Open Banks
the FDIC resolved 207 FDIC insured commercial banks (including
one assistance agreement), surpassing the record of 200 bank
closings in 1988. The failed banks had total assets of almost
$29 billion. Approximately 75 percent of the total assets brought
under the FDIC’s control in 1989 were from three failures:
(1) the 20 subsidiary banks of MCorp, Dallas, Texas, with assets
totaling $15.6 billion; (2) the 24 subsidiary banks of Texas
American Bancshares, Inc., Fort Worth, Texas, with assets totaling
$4.7 billion; and (3) First American Bank and Trust, North
Palm Beach, Florida, with nearly $1.4 billion in assets.
Under the authority
provided by the Competitive Equality Banking Act in 1987, the FDIC
established bridge banks in connection with the three largest failures
of 1989: MCorp, Texas American Bancshares, and First American Bank
and Trust. That bridge bank authority had been used only three
times previously, twice with the failure of the bank subsidiaries
of First RepublicBank Corporation, Dallas, Texas and once for Capital
Bank & Trust, Baton Rouge, Louisiana.
In 1989, the
largest bank in the state of Alaska failed. The 1988 FDIC assisted
merger of the two banks that created Alliance Bank, Anchorage,
Alaska, crumbled in April 1989. At the time of the closing, Alliance
Bank had $779 million in assets. From 1986 to 1989, eight banks,
or 40 percent of all banks in Alaska, failed.
assumption (P&A) transactions resolved 174 of the bank failures
in 1989. Premiums totaling more than $40 million were paid by acquiring
institutions, resulting in an estimated savings compared to the
cost of payoffs of about $100 million. Of the 174 P&A transactions,
42 were whole bank transactions. Insured deposit transfers (IDTs)
accounted for 23 failed bank resolutions, and payoffs occurred
in 9 cases. Only one open bank assistance (OBA) transaction took
place in 1989, Metropolitan National Bank, San Antonio, Texas.
Metropolitan was a very small bank with assets totaling $4.4 million.
The transaction resulted in an estimated savings of $410,000 over
the estimated cost of a deposit payoff.
By the end of
1989, outstanding net worth certificates were reduced by $63.4
million through contractually required payments and $25.1 million
in other payments, and only three savings banks had certificates
outstanding for a total of $233.5 million.
The Capital Forbearance
Program expired December 31, 1989. During its existence, the FDIC
received 352 applications for forbearance and admitted 204 banks
into the program. Of the 204 banks, 112 were still in the program
at the end of 1989. The other 92 banks left the program for reasons
that included merging or increasing capital to satisfactory levels.
Applications of 96 banks were denied. In 34 cases, the application
was withdrawn or not processed. At the end of 1989, 18 applications
were still being processed.
A recent estimate
of losses per transaction type is shown in Table 12-3.
1989 Estimated Losses by FDIC Transaction Type ($ in Millions)
for all resolutions occurring in this calendar year have
been updated through 12/31/03. The loss amounts are routinely
adjusted with updated information from new appraisals and
asset sales, which ultimately affect projected recoveries. Back
Reports from FDIC Division of Research and Statistics.
to Depositors and Other Creditors
Of the 207
banks that failed or were assisted in 1989, deposits totaled
$24.2 billion in over 822,800 deposit accounts.12-12 There
was one assistance agreement with a bank that had total deposits
of $6.4 million. Payoffs accounted for nine transactions with
32,700 deposit accounts with total deposits of $502.1 million.
Dividends paid on all active receiverships totaled $3.1 billion
Of the 1,644
insured bank resolutions12-13 since
the FDIC began operations in 1934, P&A transactions totaled
914 cases, with 130 additional transactions involving whole bank
deals. There were 532 deposit payoffs (including 133 IDTs). Additionally,
there have been 68 OBA transactions since 1981.
by the FDIC since January 1, 1934, amounted to $51.5 billion. Of
that amount, the FDIC recovered $29.1 billion, for a net loss of
At the beginning of 1989, the FDIC
held $9.3 billion in failed bank assets. By the end of 1989,
the FDIC was managing the disposition of $25.9 billion in assets
from failed institutions, a substantial increase over 1988.
That increase was primarily due to the FDIC’s assumption
of responsibility for the administration and oversight of the
FRF in addition to its responsibility for the Bank Insurance
Fund (BIF). That resulted in an immediate addition of $11 billion
in FRF assets plus $3.5 billion during the remainder of the
year. Additionally, the FDIC acquired $5.6 billion in assets
from failing institutions. Total assets acquired in 1989 for
both BIF and FRF were $20.1 billion. Principal collections
for BIF assets were $1.7 billion, and principal collections
for FRF were $139 million, for a total of $1.8 billion. At
the end of the year, assets from BIF insured failed banks represented
$11.5 billion of the total. The remaining $14.4 billion of
assets were in liquidation for FRF.
account officers collected nearly $1.8 billion in assets from banks
and thrifts. Through bulk sales efforts, the Division of Liquidation
sold more than 28,000 loans with a book value of $493 million.
While 1989’s bulk sales efforts represented a small percentage
of the total asset portfolio in terms of dollars, the numbers of
loans sold was significant because it reduced the volume of small
loans requiring servicing.
In 1989, the
FDIC developed a specialized program to negotiate contracts with
third-party loan servicers for the disposition of asset pools arising
from major transactions nationwide and to monitor and oversee those
servicing agreements. Establishing contracts was a major effort
for the FDIC to use more private-sector resources. That program
was largely patterned after the contracts arising from the 1986
resolution of First National Bank and Trust Company of Oklahoma
City, and the 1988 resolution of First RepublicBank Corporation.
The FDIC held
its first public nationwide auction of large real estate holdings
in March 1989. The auction was conducted by Cushman & Wakefield
at Christie’s in New York City. Fourteen properties were
sold for $40.7 million, a significant 99.4 percent of their appraised
value. Table 12-4 shows the FDIC’s assets liquidation and
Chart 12-1 shows the asset mix.
1989 FDIC End of the Year Assets in Liquidation ($ in Billions*)
In 1989, the FDIC’s
insurance fund lost money for the second straight year.
The level of the fund was $13.2 billion. As a percentage
of insured deposits, that was an all time low to that date,
ending the year with the equivalent of 70 cents for every
$100 of deposits insured by the FDIC. At the end of 1988,
when the deposit insurance fund hit its previous low of
$14.1 billion, the FDIC had 80 cents in reserve for every
$100 of insured deposits.
end of 1989, the FDIC had 10,187 total staff (not including
1,516 RTC employees), compared to 8,060 at the end of 1988,
an increase of 2,127 employees or 26.4 percent. Division
of Liquidation staff increased from 3,371 at the end of 1988
to 4141 at the end of 1989, and Division
of Supervision, formerly Division of Bank Supervision, staff grew
from 2,594 at the end of 1988 to 2,903 at the end of 1989. Total
staffing, including 1,516 RTC employees, equaled 11,703. Chart 12-2
shows the staffing levels for the past five years.
1989: RTC at a Glance ($ in Millions)
Conservatorships at the beginning of the year
for all resolutions occurring in this calendar year have been updated
through 12/31/95. The loss amounts are routinely adjusted with updated
information from new appraisals and asset sales, which ultimately
affect projected recoveries. Back
Source: RTC, 1989
Annual Report and Reports from FDIC Division of Research and
The RTC was created by the passage of FIRREA on August 9, 1989.
That new government corporation became responsible for all management
and sale of savings and loans’ assets in receivership and all savings
and loans in conservatorships since January 1, 1989. In addition, it
assumed responsibility for completing all future resolution activity of
the former FSLIC through August 8, 1992 (later extended to September 30,
1993 and then to June 30, 1995.)
The FDIC, using moneys from
FRF, was to remain responsible for completing the resolution of all thrifts that
failed before January 1, 1989, or which were assisted before August 9, 1989.
The FDIC, using SAIF funds, was to replace the RTC in resolving thrifts beginning on August 9, 1992.
The FDIC was authorized under FIRREA to act as
the RTC’s exclusive manager, subject to approval by the RTC Oversight Board. The FDIC carried out all
the duties and responsibilities of the RTC and was reimbursed for its services by the RTC.
The FDIC Board of Directors served as the RTC Board of Directors, with the FDIC’s Chairman
serving as RTC Chairman. RTC activities were subject to the general oversight of a newly
established Oversight Board, consisting of five members: the secretary of the Treasury;
the chairman of the Federal Reserve Board of Governors; the secretary of Housing and Urban
Development; and two independent members appointed by the president with the advice and consent
of the Senate.
FIRREA also established the Resolution Funding Corporation (REFCORP) to provide
funds to the RTC to carry out its mandate. Subject to the Oversight Board’s
review, REFCORP was granted authority to issue up to $30 billion in long term
debt securities, the net proceeds of which were to purchase capital certificates
issued by the RTC or to refund previously obligations. The RTC had an initial
sunset date of December 31, 1996 (later shortened to December 31, 1995.)
As of the end of 1989, the Treasury had contributed capital of $18.8 billion,
and the RTC had issued capital certificates of $5.7 billion to REFCORP. The
RTC assumed $55.2 billion of liability for estimated losses on unresolved cases
from FSLIC on August 9, 1989, resulting in an accumulated deficit being reported
as of the RTC’s inception.
As directed by FIRREA, with the exception of a final distribution of funds,
the FDIC liquidated the Federal Asset Disposition Association (FADA). Only
the resolution of outstanding litigation claims remained before final distribution
could be made to FRF as the sole shareholder of FADA. In addition, although
the RTC was not created until August 9, 1989, FIRREA directed the RTC to review
all insolvent institution cases resolved by FSLIC between January 1, 1988,
and August 9, 1989.
August 9, 1989, the RTC assumed control of 262 insolvent thrift associations
with total assets of $115.3 billion and which had been in conservatorship.
During the months that remained in 1989, 56 additional thrifts with total
assets of $26.4 billion were placed into the RTC’s conservatorship
program for a total of 318 thrifts. The RTC resolved 37 institutions with
total assets at the time of resolution of $10.8 billion during that period.
A total of 281 thrifts remained in conservatorship at the end of the year.
Those 281 thrifts had a total asset book value of $104.9 billion as of
December 31, 1989.
Executive Director David C. Cooke stated in RTC’s 1989 Annual Report: “The
objectives of a Conservatorship were to establish control and oversight
while promoting customer confidence; to evaluate the condition of the
institution and determine the most cost-effective method of resolution;
and to operate the institution in a safe and sound manner pending resolution.
Shrinking an institution by curtailing new lending activity and selling
assets was a high priority. A Managing Agent and one or more Credit Specialists
oversaw each conservatorship’s operations.”
Of the 37 resolutions,
7 were P&A transactions, with total assets of $8.6 billion. IDTs accounted
for 26 resolutions, with total assets in those institutions of $2 billion.
Four institutions with total assets of $196 million were resolved through payoffs.
The RTC’s initial duty was to determine the
fair market value of the thrifts’ assets and estimate the preliminary loss.
The estimated preliminary total loss from the 318 thrifts for which the RTC assumed control during
1989 was approximately $31.3 billion as of November 30, 1989. At the end of the year, the RTC had
advanced $9.2 billion to 156 thrifts in conservatorship.
Losses by RTC Transaction Type ($ in Millions)
*Losses for all resolutions
occurring in this calendar year have been updated through 12/31/95.
Source: Reports from FDIC Division of Research and Statistics.
Conservatorship at 8/9/89
added in 1989
resolved in 1989 (New Receiverships)
as of 8/9/89
that were previously Conservatorships in 1989
as of 12/31/89
Source: RTC, 1994
Payments to Depositors
and Other Creditors
Of the 37 thrifts that failed in 1989, deposits totaled $10.5 billion in 1,126,043 deposit accounts. Of the four payoffs, total deposits equaled $264.5 million in 25,270 deposit accounts.
The RTC initially acquired assets of $115.3 billion in 262 conservatorships. At the end of 1989, the RTC held $8 billion in assets of savings and loans in receivership and in $104.9 billion in assets of conservatorships, for a total of $112.9 billion in assets.
On December 31, 1989, the RTC compiled and published an inventory of real estate assets. The inventory contained approximately 30,000 real property assets, including commercial, residential properties and land. Table 12-8 shows the RTC’s assets in liquidation and Chart 12-3 shows the asset mix.
1989 RTC End of the Year Assets in Liquidation ($
Total Book Value
Acq'd During the Year
Total Book Value
Memo Item: Assets transferred from conservatorship to receivership. Does
not affect total of assets in liquidation. *Totals
may not foot due to rounding differences. Back
Source: RTC August 1989/September 1995 Statistical Abstract.
the enactment of FIRREA, the RTC began building what Executive Director
David C. Cooke, described as a decentralized organization. Four regional
offices and 14 consolidated field offices were established as operations
centers. The regional offices were in charge of all resolutions and
asset and contracting operations. The consolidated field offices
service centers for the RTC’s asset and real estate management activities.
At the end of 1989, the RTC had a total staff of 1,516 employees,
most of whom were in the consolidated field offices.
tables and charts throughout this book are shown for ease of
comparison. They are formatted
the same way in every chapter. Refer to the Appendix for a guide
that includes definitions of terms used in the tables and charts. Back
12-2 Bureau of Economic Analysis,
Department of Commerce. Back to text
12-3 CB Commercial Torto/Wheaton
Research and Bureau of Labor Statistics, Department of Labor. Back
12-4 Housing Market Statistics,
National Association of Home Builders (June 1996). Back
Agricultural Statistics Service, U.S. Department of Agriculture.
Economic Research Service, U.S. Department of Agriculture. Federal
Reserve System, Board of Governors, Flow of Funds Accounts, Table
L. 102. Gerald H. Anderson, “The Decline in U.S. Agricultural
Exports,” Federal Reserve Bank of Cleveland Economic Commentary
(February 15, 1987), 1. Back to
Energy Review, Department of Energy. Back to
12-11 John F.
Bovenzi and Maureen E. Muldoon, “Failure-Resolution Methods and
Policy Considerations,” FDIC Banking Review 3, no. 1 (fall 1990),
1. Back to
12-12 This figure
does not include open bank assistance transactions. The FDIC did not
begin including assistance agreements with the failures for reporting
purposes until 1981. Five assistance agreements, with total deposits
of $6.8 billion, including First Penn, should be included in the overall
totals. Back to
staff does not include support personnel from other FDIC divisions,
such as the Legal Division and the Division of Accounting and Corporate
Services (later the Division of Finance), who also were working on
liquidation matters. Back to