Crisis Resolution in the Thrift Industry

On February 6, 1989, the Federal Home Loan Bank Board contacted Mid America Institute to inquire whether it would undertake an independent, academically oriented analysis of the insolvency resolution crisis in the thrift industry. The Senate Banking Committee, during the course of hearings on the thrift crisis, had suggested to the Bank Board tile desirability of an independent assessment of Bank: Board and FSLIC resolution methodology, specifically as it related to the controversy surrounding the December deals, the Southwest Plan, and the possibility that tax considerations were driving certain deals. The Bank Board had already initiated studies from industry-oriented perspectives. Therefore, it felt that an academic perspective would provide both a valuable addition to the process, and by the nature of academia, perhaps the best prospect of a credible and independent viewpoint. The Bank Board was prepared to give an appropriately structured Task Force virtually unlimited access to all personnel, documents and resources that the Task Force felt necessary to come to an uncompromising assessment. The only significant constraint imposed was that a report had to be available prior to the start of the next round of Senate Banking Committee hearings on March 1, 1989. The Task Force would be given complete discretion as to the scope and coverage of the report, but it was requested that the topic of the December deals, particularly the associated tax considerations, be a significant part of the report.

Contenu

Executive Summary.- 1. Introduction and Overview.- Background.- Causes of the Insolvency Crisis.- Key Issues and the Structure of this Report.- 2. The Timeliness of Regulatory Action.- The Sources of Growth in the Net Deficit.- Methods to Control the Present Value of FSLIC Liabilities.- An Analysis of Regulatory Oversight of Insolvent Thrifts.- 3. Resolution of Insolvent Thrifts: Fundamental Issues.- Desirable Characteristics of a Resolution Process.- Resolution Under Resource Constraints.- 4. FSLIC's Acquisition Process.- The Marketing and Negotiation Process.- The Terms of Assistance Agreements.- Analysis of the Contractual Terms of the Assistance Agreements.- Approaches for Ownership and Management of Assets.- Assistance Packages: "Clean Assistance Agreements".- 5. Analysis of FSLIC's Methodology for Evaluating Bids.- A. The Structure of FSLIC's Evaluation Methodology.- B. Adjustments to Improve Cost Evaluation.- C. Issues in Discounting Risky Cash Flows.- D. Summary of the Adjustment Effects.- E. The Potential Magnitude of Adjustments to the FSLIC Methodology: An Examination of the Impact on 84 Acquisitions During 1988.- F. The Potential Magnitude of Adjustments to the FSLIC Methodology: An Examination of the American Federal Savings Acquisition.- G. Summary and Conclusions.- 6. Empirical Evidence on FSLIC's Cost of Solution.- The Questions.- Data, Methods, and Results.- Conclusions and Directions for Further Research.- 7. Conclusions.- The Fundamental Problem.- FSLIC Estimates of the Cost of Solution Through Assisted Acquisition.- Empirical Analysis of the Cost of Assisted Acquisitions in 1988.- A Key Recommendation: The "Clean Assistance Package".- About the Task Force Members.