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the Crisis: The FDIC and RTC Experience
Managing the Crisis: The FDIC and RTC Experience
Chronological Overview: Chapter Twelve1989
The 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.”
*Losses 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 to table
Source: FDIC, 1989 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 the following:
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 9, 1989.
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 percent.12-2 The 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
The Southwest 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.
Northeastern 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
California’s 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.
Money center banks’ total reserves were almost 50 percent of outstanding lesser developed country’s loans and had increased $13 billion since the previous year. Return on equity bounced back for all banks to 4.8 percent from 1.6 percent in 1988 and -1.9 percent in 1987, but net charge-offs continued to increase for large banks, to 1.02 percent of total loans.
Commercial bank performance looked bleak in 1989. Some of the unfavorable trends were as follows:
There were, however, encouraging signs in other bank performance indicators for 1989:
Many large institutions in the Southwest continued to struggle with weak local real estate markets and nonperforming assets from earlier economic troubles. Of the 207 banks that failed or required assistance during 1989, 167 were in the Southwest. Agricultural bank failures as a percentage of all bank failures fell for the first time to below 1980 levels, to 8.2 percent.
The number of insured commercial banks fell for the fifth straight year from 13,123 at the end of 1988 to 12,709 at the end of 1989. New bank charters declined to the lowest level since 1978. The number of banks on the FDIC’s problem bank list declined from 1,406 in 1988 to 1,109 at the end of 1989.
Table 12-2 shows
the number and total assets of FDIC insured institutions, as well
as their profitability as of the end of 1989.
Open Financial Institutions Insured by FDIC ($ in Billions)
Percent change is not provided if either the latest period or the year-ago period contains a negative number.
Source: Reports from FDIC Division of Research and Statistics.
Bank Failures and Assistance to Open Banks
In 1989, 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.
Purchase and 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.
Payments 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 in 1989.
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.
Total disbursements 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 $22.4 billion.
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.
The FDIC’s 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.
**For estimated value only, Commercial Loans includes Other Loans and Other Assets includes Judgments. Back to table
Source: Reports from FDIC Division of Finance.
1989 FDIC End of Year Asset Mix
Source: RTC, 1994