FDIC Law, Regulations, Related Acts
5500 - General Counsel's Opinions
GENERAL COUNSEL'S OPINION NO. 9FICO FUNDING SOURCES
FICO is a mixed-ownership government corporation created in 1987 to recapitalize the Federal Savings and Loan Insurance Corporation (FSLIC) by issuing bonds to purchase capital stock or capital certificates issued by the FSLIC.1 FICO was created in 1987 pursuant to the Competitive Equality Banking Act (CEBA), Pub. L. 100-86, as a way to augument the resources of the FSLIC, which had effectively been declared insolvent by the Federal Home Loan Bank Board (FHLBB) earlier that year. FICO is managed by a three-member directorate composed of the Director of the Office of Finance of the Federal Home Loan Banks and the presidents of two Federal Home Loan Banks (FHLBs).2 FICO was authorized to issue bonds in an amount of up to $10.825 billion with an annual net borrowing limit of $3.75 billion.3 FICO issued 30-year noncallable bonds in a principal amount of approximately $8.1 billion that mature in 2017 through 2019. FICO's authority to issue bonds ended on December 12, 1991.4 Under the terms of FICO's contracts with its bondholders, FICO's bonds are not redeemable before maturity.5 The FHLBs were [The page following this is 5543] required to invest in nonvoting capital stock to capitalize FICO.6 FICO was required to invest in and hold in a segregated account noninterest bearing (zero coupon) securities having a total principal payable at maturity approximately equal to the aggregate amount of principal due at the maturity of the FICO bonds.7 The FICO bonds bear interest at a fixed rate of 8.60% or higher depending on the series and date of issue.8
The FHLBs pay the administrative expenses of FICO according to a statutory formula and the term administrative expenses is defined to exclude interest, issuance costs and custodian fees.9 FICO has limited sources of funding available to pay its interest and principal obligations because the obligations of the FICO and the interest payable on such obligations are not obligations of, or guaranteed as to principal or interest by the FHLBs, the United States, or the FSLIC Resolution Fund (FRF).10 The FICO statute, as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), establishes the following as sources of funding for the interest, issuance costs and custodian fees on the FICO oblgiations:
(1) FICO assessments made prior to FIRREA;11
(2) FICO assessments on SAIF member Savings associations with the approval of the FDIC;12
(3) Liquidating dividends and payments made on claims received by FRF (as established under section 11A of the Federal Deposit Insurance Act) from receiverships, subject to the priority claim of the Resolution Funding Corporation (REFCORP) for the Funding Corporation Principal Fund (Principal Fund);13
(4) Exit fees paid on "conversion transactions" in which the resulting or surviving institution is not a SAIF member.14
The statute clearly provides that funds from a higher priority source are to be used to the extent available before moving to the next lower priority source.15
Priority of Claims to Liquidating Dividends and Payments
Today, the FRF consists of two distinct pools of assets and liabilities:16 one composed of the assets and most of the 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 assets and liabilities of the RTC transferred to the FRF upon the dissolution of the RTC on December 31, 1995 (FRF-RTC). The assets transferred from the RTC consist chiefly of the subrogated depositors' claims that the RTC acquired as it resolved the institutions within its jurisdiction, that is, thrifts that failed on or after January 1, 1989 through June 30, 1995.
The Legal Division interprets the language in section 21(f)(3) of the Federal Home Loan Bank Act ("FHLB Act") concerning FICO's access to "liquidating dividends and payments made on claims received by the FSLIC Resolution Fund (established under section 11A of the Federal Deposit Insurance Act) from receiverships" [emphasis added] to encompass only the FRF-FSLIC. Although a facial reading of section 21(f)(3) of the FHLB Act does not explicitly distinguish between FRF-FSLIC and FRF-RTC, it is the Legal Division's view that the italicized language should be read as defining the FRF as established at the date of FIRREA's passage, which did not include any assets or liabilities of RTC. This reading fits squarely with the general statutory design established by FIRREA to resolve the thrift crisis by assigning responsibilities for failed and failing thrift institutions (pre-FIRREA and post-FIRREA) to each of two entities, RTC and FRF.
RTC was to resolve thrifts that failed after January 1, 1989, using $31.2 billion in off-budget funding provided to the RTC by the REFCORP and $18.8 billion from appropriations.17 Congress created REFCORP in 1989 to provide funding for the RTC as a part of FIRREA.18 RTC acquired no assets of the FSLIC and assumed liability only for certain guarantees of FHLBs' advances issued by the FSLIC, relating to thrifts that had not failed as of the date of passage of FIRREA.19 RTC never had access to any funds provided by FICO to resolve the institutions within RTC's jurisdiction.20 However, to the extent all other funding sources are insufficient to cover the amount of interest payments on its obligations, REFCORP is authorized to obtain the additional amount needed from the Secretary of the Treasury, which authorization was NOT granted to FICO.21
By comparison, FIRREA provided that all other liabilities of the FSLIC and all of the assets of the FSLIC were tranferred to the FRF.22 The FDIC succeeded the FSLIC as receiver or conservator for any thrift taken over by the government before January 1, 1989.23 The liabilities to which the FRF succeeded consisted chiefly of the FSLIC's obligations under transactions resolving thrifts that failed prior to January 1, 1989, and the FSLIC's direct liability to depositors in thrifts that failed before that date. A further divergence in the treatment of the two fRF pools is illustrated by the fact that the FRF- FSLIC was given access to any funds borrowed by FICO beginning with the date of the enactment of FIRREA.24
If section 21(f)(3) of the FHLB Act were read to encompass liquidating dividends and payments on claims from RTC receiverships, the result would contradict the remaining statutory design. Under that interpretation, RTC assets would be used to pay for that portion of the thrift crisis that was expressly excluded from the RTC's jurisdiction. This view seems inconsistent with a Congressional intent that RTC's assets would not be used to pay for the portion the thrift crisis that Congress expressly excluded from the RTC's jurisdiction. Likewise, it would be inconsistent with Congressional intent to impose liability to pay the interest on the FICO obligations on the RTC assets, since the RTC received no FICO funding.
The Legal Division's view that payment of FICO's interest, issuance costs and custodian fees is limited to liquidating dividends from former FSLIC receiverships is consistent with the language in section 21B(f)(2)(D) of the FHLB Act, which contains the language that Congress used when it intended to have the FRF-RTC assets flow directly to REFCORP. This subsection states as follows;
(D) Proceeds from sale of assets. To the extent the amounts available pursuant to subparagraphs (A), (B), and (C) are insufficient to cover the amount of interest payments, the FSLIC Resolution Fund shall transfer to the Funding Corporation any net proceeds from the sale of assets received from the Resolution Trust Corporation, which shall be used by the Funding Corporation to pay such interest.25
This subsection shows that Congress intended to separate the FRF-FSLIC from the FRF-RTC and that Congress identified the FRF-RTC as proceeds from the sale of a separate pool of assets intended to be used for different purposes than the FRF-FSLIC assets. Thus, although the assets and the liabilities of the RTC were transferred to the FRF when the RTC terminated, the RTC dissolution provisions require that after all outstanding liabilities of the RTC have been paid, the FRF is to transfer the net proceeds from the sale of the RTC assets to the REFCORP,26 which provided $31.2 billion in initial funding to the RTC.27 In addition, on a periodic basis, the net proceeds of former RTC asset sales are available to service REFCORP periodic interest obligations.28 These provisions are consistent with the statutory pattern whereby the RTC received its primary funding from REFCORP, to which net proceeds of any excess RTC assets are to return.
This interpretation is supported by FICO's own post-FIRREA disclosure document in conjunction with the sale of its bonds, which does not mention RTC assets as a potential source of funds to pay interest. The disclosure states that "the FDIC will transfer to FICO from the liquidating dividends and payments made on claims received by the FSLIC Resolution Fund (if any), the amount necessary for FICO to make interest payments, but only to the extent such funds are not required * * * by REFCORP."29 When defining the FSLIC Resolution Fund, FICO disclosed the following information:
The FSLIC Resolution Fund was established by FIRREA and has assumed all the assets and liabilities of FSLIC as of the date of enactment of FIRREA except for those expressly transferred to or assumed by RTC. These assets and liabilities primarily relate to FSLIC's case resolution activity prior to 1989, while RTC is responsible for the management and resolution of all cases involving the appointment of a conservator or receiver for an Insured Institution after January 1, 1989 and prior to August 9, 1992. To meet its obligations, the FSLIC Resolution Fund may use its assets, returns from receiverships, amounts borrowed by FICO, and insurance assessments on SAIF-Insured Institutions to the extent that they are not required for interest on Obligations of FICO and not required by REFCORP for defeasance of REFCORP's obligations. FIRREA authorizes the future appropriation from the U.S. Treasury of funds needed by the FSLIC Resolution Fund to satisfy its obligations. The FSLIC Resolution Fund will be managed by the FDIC as a separate fund and will terminate when its debts are paid and its assets are sold.30
FICO's disclosure document does not mention RTC assts transferred to FRF upon RTC dissolution as a source of funding for FICO.
Additional indications that proceeds from FRF-RTC receiverships were never intended to be a source of funding for FICO are found in subsection section 21A(i) of the FHLB Act as added by the Resolution Trust Corporation Completion Act in 1993 when Congress provided the final appropriation authority to the RTC. This subsection provides in part that "if the aggregate amount of funds transferred to the [RTC] pursuant to this subsection exceeds the amount needed [for RTC and certain SAIF purposes,] such excess amount shall be deposited in the general fund of the Treasury."
In the legislative history from the House Report showing the section-by-section analysis of section 21A(i) of the FHLB Act, Congress showed a clear intent that the money so provided be used for limited purposes. This report states as follows:
Such funding can only be used to protect insured depositors or for the administrative expenses of the RTC. Shareholders of insured institutions in default may not benefit in any manner from such funding. In addition, any funds transferred to the RTC that are not needed for such purposes or for the Savings Association Insurance Fund ("SAIF") must be deposited in the general fund of the Treasury.31
Finally, we note that in preparation for the transition when the RTC would cease to be a separate entity, the RTC and FDIC prepared a memorandum dated October 12, 1995 to the Thrift Depositor Protection Oversight Board (Oversight Board) addressing the future funding needs of the FDIC when it would succeed to the RTC's responsibilities.32 In this memorandum, the FDIC and the RTC recognized that Congress had limited the uses of the money appropriated to the RTC. When the Oversight Board acceded to the request of the FDIC and RTC by its Resolution dated and effective October 18, 1995, the Oversight Board inter alia relied on the representations of the FDIC and RTC that there would be "separate accounting with respect to the former FSLIC and former RTC portions of the FRF, the results for both of which would be contained in the FDIC's public quarterly financial statements, commencing in 1996" and that "the FDIC intends to return to the Treasury on an ongoing basis cash receipts that are over and beyond cash receipts that are over and beyond cash that is needed for operating purposes or cash that might be needed in the future to complete remaining disposition responsibilities." Neither FDIC nor RTC identified any possibility that any of these funds could be subject to a claim by FICO for its interest payments. The Oversight Board acceded to the request of the FDIC and RTC and in its Resolution relied on these representations. The FDIC has acted and continues to act in accordance with these representations.
"goodwill cases" (none of which arise out of former FSLIC receiverships) would not be available to FICO.
FRF Monies Subject to FICO Call
Next the meaning of the language, "liquidating dividends and payments made on claims received by [FRF] * * * from receiverships," needs to be examined. This phrase on its face refers to the money that is distributed to the holders of claims against receiverships when the assets of the receiverships are sold, turned into cash proceeds and dividends are declared or payments are otherwise made to creditors.33 For the reasons discussed above, FICO will have access only to liquidating dividends paid by former FSLIC receiverships to FRF-FSLIC.
It might be argued that the phrase "payments made on claims received by the [FRF] from receiverships" should also include, e.g., proceeds from the sale of assets acquired by the FRF-FSLIC through corporate purchase under assistance agreements or other amounts recovered by the FRF-FSLIC in connection with assistance transactions, such as upon the disposition of a warrant position in an assisted entity. This argument is flawed because the FRF did not receive the assets or amounts in question from a receivership but from the assisted entity, often long after the time that the assisted transaction commenced (at the time of appointment of the receiver) and even after the receivership may have been terminated. Accordingly, it is our view that the phrase is meant to encompass only payments in the nature of liquidating dividends. Further, assets, such as stock warrants, that were owned by the FSLIC in its corporate capacity passed to the FRF, not any individual receivership, by operation of law under Section 11A. The proceeds from these assets will not be available to FICO because they do not derive from "liquidating dividends and payments made on claims received by [FRF] * * * from receiverships." (emphasis added).
Current Payment Stream
The Legal Division views the language of section 21(f)(3) of the FHLB Act as only referring at any given time to the current payment stream from receiverships as collected by the FRF-FSLIC34 and does not require that all proceeds from receiverships be accumulated for the contingent claim of REFCORP and FICO whenever either might need this source of funding. Several reasons support this reading of the provision. First, the contingent nature of FICO's claim to this source of funding as contrasted with FRF's primary need for this source of money to pay the immediate and ongoing liabilities of the FSLIC is inconsistent with a Congressional intent that the payment stream be held or escrowed for the contingent future needs of FICO. The legislative history seems to show that Congress intended that FRF spend the receivership proceeds to pay the liabilities of FSLIC.35 Second, FRF has lawfully spent money from this source since its inception and its financial results have been regularly reported to Congress and audited by General Accounting Office (GAO) without any questions being raised. The money received by FRF from this source has been spent to pay operating expenses, assistance agreement liabilities, insured deposit claims, judgements, such amounts as were need by SAIF for administrative and supervisory expenses from August 9, 1989 through September 30, 1992,36 and any other liabilities to which FRF succeeded. Third, FRF is intended to dissolve when its assets are sold and liabilities paid.37 FRF has no statutory requirement to continue to exist for speculative requirements to REFCORP or FICO. This factor seems to indicate that FRF had no duty to hold money for the requirements of REFCORP or FICO. Fourth, FRF is not directly liable for the FICO obligations, and the general assetes of FRF are not available to FICO.38 Section 21(f)(3) of the FHLB Act does not grant FICO a general claim to the assets of FRF.
The time relevant to the analysis in this instance is the date FICOs assessment revenues become insufficient to cover interest payments, issuance costs and custodial fees. Therefore, FICO only has access to the future payment stream from liquidating dividends of former FSLIC receiverships beginning on the date that FICO's assessments become insufficient to cover interest payments, issuance costs, and custodial fees. Accordingly, liquidating dividends paid to the FRF before the "shortfall date" could not generally be reached by FICO.
The determination of available funding sources for FICO cannot be made purely by reviewing the statutory provisions, rather the language must be interpreted in light of the entire statutory structure established to resolve the thrift crisis. The statutory scheme formed two separate entities--RTC and FRF. Later when the RTC terminated, two pools of assets and liabilities managed by the same entity remained--FRF-FSLIC and FRF-FRTC. The results of the arrangement Congress created shows the Congressional intent to separate the RTC and the FRF-FSLIC. Congress could have used only one agency and one fund but chose not to do so. Accordingly, we conclude that only the FRF-FSLIC is available to FICO under section 21(f)(3) of the FHLB Act. In addition, the phrase "liquidating dividends and payments made on claims received by FRF" includes only dividends paid to FRF from former FSLIC receiverships and not proceeds from the sale of assets acquired by FRE-FSLIC through corporate purchase or other amounts recovered by the FLSIC-FRF in connection with assistance transactions. Further, the quoted language only refers to the current payment stream from receiverhsips as collected by the FRF-FSLIC and there is no requirements to escrow those payments in anticipation of a need for them by FICO.
[Source: 61 Fed. Reg. 45971, August 30, 1996]
1Competitive Equality Bank Act (CEBA), Pub. L. 100-86, Title III, amending § 21 of the Federal Home Loan Bank Act, 12 U.S.C. § 1441. Go back to Text
2Federal Home Loan Bank Act § 21(b), 12 U.S.C. § 1441(b). Go back to Text
3 Federal Home Loan Bank Act § 21(e), 12 U.S.C. § 1441(e). Go back to Text
4Resolution Trust Corporation Refinancing, Restructuring and Improvement Act of 1991, § 104. Go back to Text
5See FICO Information Statement Supplement dated September 19, 1989. Go back to Text
6Federal Home Loan Bank Act § 21(d), 12 U.S.C. § 1441(d). Go back to Text
7Federal Home Loan Bank Act § 21(g), 12 U.S.C. § 1441(g). Go back to Text
8See FICO Information Statement Supplement dated September 19, 1989. Go back to Text
9Federal Home Loan Bank Act § 21(b)(7), 12 U.S.C. § 1441(b)(7). Go back to Text
10Federal Home Loan Bank Act § 21(e)(6), 12 U.S.C. § 1441(e)(6). Go back to Text
11Federal Home Loan Bank Act § 21(f)(1), 12 U.S.C. 1441(f)(1). Under the statute, FICO's intitial source of funds were pre-FIRREA assessments, but those funds are exhausted. Go back to Text
12Federal Home Loan Bank Act § 21(f)(2), 12 U.S.C. § 1441(f)(2). Go back to Text
13Federal Home Loan Bank Act § 21(f)(3), 12 U.S.C.
§ 1441(f)(3) states:
Receivership proceeds to the extent the amounts available pursuant to paragraphs (1) and (2) are insufficient to cover the amount of interest payments, issuance costs, and custodial fees, and if the funds are not required by the Resolution Funding Corporation to provide funds for the Funding Corporation Principal Fund under section 1441b of this title, the Federal Deposit Insurance Corporation shall transfer to the Financing Corporation, from the liquidating dividends and payments made on claims received by the FSLIC Resolution Fund (established under section 1821a of this title) form receiverships, the remaining amount of funds necessary for the Financing Corporation to make interest payments. Go back to Text
15Federal Home Loan Bank Act § 21(f), 12 U.S.C. § 1441(f). Go back to Text
16Separate accounting for each pool is maintained by the FDIC. Go back to Text
17Financial Institution Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. 101-73, §§ 501 and 511. Go back to Text
18FIRREA amending § 21B of the Federal Home Loan Bank Act. 12 U.S.C. § 1441b. In a manner similar to the FICO, the administrative expenses of REFCORP are paid by the Federal Home Loan Banks (FHLBs) according to a statutory formula. 12 U.S.C. § 1441b(c)(7). The Principal Fund is fully funded with zero coupon Treasury bonds purchased by REFCORP through capitalization from the FHLBs' mandatory stock purchases. See 12 U.S.C. § 1441b(e) and the audited financial statements confirming the existence of the zero coupon Treasury bonds. (Section 21B(e)(7) of the FHLB Act also required that SAIF assessment income be used, if necessary, to fund REFCORP's Principal Fund. Id. At 1441b(e)(7). Because REFCORP's Principal Fund is fully funded, assessment income from SAIF member institutions is no longer required for REFCORP purposes.) The statutes provide separate funding for interest payments on the bonds, notes, debentures and similar obligations issued by REFCORP, 12 U.S.C. § 1441b(f). REFCORP collects the funding for interest from its earnings on assets not invested in Principal Fund; certain proceeds from the RTC to the extent available during its existence; from the FHLBs according to a statutory formula; through the net proceeds from the sale of assets transferred to the FRF by the RTC; and to the extent the other sources are insufficient, the Secretary shall pay the additional interest. In addition, when the FRF satisfies all of the liabilities of RTC, then the net proceeds of RTC asset sales are to be returned to REFCORP. Go back to Text
19Federal Home Loan Bank Act § 21A(h), 12 U.S.C. § 1441a(h), as added by § 501 of FIRREA. Go back to Text
20See generally Federal Deposit Insurance Act, § 11A(b)(3), 12 U.S.C. § 1821a(b)(3)) and Federal Home Loan Bank Act, § 21, 12 U.S.C. § 1441. Under section 1441(f)(3) and 1441b(7)(B), the Principal Fund could have received assets from FRF-FSLIC, if its other sources of funding had been insufficient. This appears to have been an isolated instance of "seed money" provided by what remained of the former FSLIC to the entity (RTC) created to resolve formerly FSLIC-insured institutions going forward. In contrast, there are no instances in the FIRREA statutory framework where funding flows from the RTC to the FRF-FSLIC. Go back to Text
21Federal Home Loan Bank Act § 21B(f)(2)(D), 12 U.S.C. § 1441b(f)(2)(D). Go back to Text
23Federal Deposit Insurance Act § 11A(a)(5)(A), 12 U.S.C. § 1821a(a)(5)(A). Go back to Text
25Federal Home Loan Bank Act § 21B(f)(2)(D), 12 U.S.C. § 1441b(f)(2)(D). Go back to Text
26Federal Home Loan Bank Act § 21A(m)(2), 12 U.S.C.
§ 1441a(m)(2); and Federal Deposit Insurance Act § 11A(e),
12 U.S.C. § 1821a(e), 12
U.S.C. § 1441a(m)(2) states:
Case resolutions transferred Simultaneous with the termination of the Corporation as provided in paragraph (1), all assets and liabilities of the Corporation shall be transferred to the FSLIC Resolution Fund. Thereafter, if there are no liabilities of the Corporation outstanding, the FSLIC Resolution Fund shall transfer any net proceeds from the sale of assets to the Resolution Funding Corporation. Go back to Text
27Federal Home Loan Bank Act § 21B, 12 U.S.C. § 1441b. Go back to Text
28Federal Home Loan Bank Act § 21B(f), 12 U.S.C. § 1441b(f). Go back to Text
29FICO Information Statement dated September 19, 1989 at page 4. Go back to Text
30Id. at page 13. Go back to Text
31P.L. 103-204, Resolution Trust Corporation Completion Act, H.R. REP. 103-103(I), H.R. Rep. No. 103(I), 103RD Cong., 1ST Sess. 1993, 1993 U.S.C.C.A.N. 3040, 1993 WL 180206 (Leg. Hist.) in the Section-by-Section Analysis. Go back to Text
32Memorandum entitled Revised Funding Request and Recommendations to Dietra L. Ford, Executive Director, Thrift Depositor Protection Oversight Board, from Barry S. Kolatch, Vice President for Planning, Research, and Statistics, RTC, and William A. Longbrake, Deputy to the Chairman for Finance and Chief Financial Officer, FDIC, dated October 12, 1995. Go back to Text
33By statute since August 9, 1989, FRF has received funding from liquidating dividends and similar payments from receiverships. Section 215 of title II of FIRREA, 12 U.S.C. § 1821a(b)(2). FRF is partially funded through liquidating dividends and such payments, except to the extent that these funds are required by REFCORP or FICO pursuant to sections 1441b or 1441, respectively. Neither REFCORP nor FICO have required this money during FRF's existence. Go back to Text
34Federal Home Loan Bank Act § 21(f)(3), 12 U.S.C. § 1441(f)(3). Go back to Text
35See discussion of FSLIC Resolution Fund:
To meet its obligations, this Fund may use its assets, returns from receiverships, amounts borrowed by FICO, and insurance assessments on SAIF members through 1991 that are not required for interest on FICO bonds and not required by REFCORP for defeasance of its bonds. Any additional funds needed will be provided by the Treasury. The Fund will terminate when its debts are paid and its assets are sold. 135 Cong. Rec. H5172 (A&P), 101st Congress, First Session, Arnold & Porter Legislative History: P.L. 101-73 Debate; Congressional Record--House Proceedings and Debates of the 101st Congress, First Session, Conference Report on H.R. 1278 Financial Institutions Reform, Recovery, and Enforcement Act, 1989, August 4, 1989; page 830. Go back to Text
38See Federal Home Loan Bank Act, § 21(e)(6), 12 U.S.C. § 1441(e)(6). Go back to Text