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2008 Annual Report



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IV. Financial Statements and Notes

FSLIC Resolution Fund (FRF)

FSLIC Resolution Fund Balance Sheet at December 31
Dollars in Thousands
  2008 2007
Assets
Cash and cash equivalents $3,467,227 $3,617,133
Receivables from thrift resolutions and other assets, net (Note 3) 34,952 34,812
Receivables from U.S. Treasury for goodwill judgments (Note 4) 142,305 35,350
Total Assets $3,644,484 $3,687,295
Liabilities
Accounts payable and other liabilities $8,066 $4,276
Contingent liabilities for litigation losses and other (Note 4) 142,305 35,350
Total Liabilities 150,371 39,626
Resolution Equity (Note 5)
Contributed capital 127,442,179 127,417,582
Accumulated deficit (123,948,066) (123,769,913)
Total Resolution Equity 3,494,113 3,647,669
Total Liabilities and Resolution Equity $3,644,484 $3,687,295
The accompanying notes are an integral part of these financial statements.

 

FSLIC Resolution Fund Statement of Income and Accumulated Deficit for the Years Ended December 31
Dollars in Thousands
  2008 2007
Revenue
Interest on U.S. Treasury obligations $56,128 $156,034
Other revenue 7,040 31,558
Total Revenue 63,168 187,592
Expenses and Losses
Operating expenses 3,188 3,364
Provision for losses (891) (10,135)
Goodwill/Guarini litigation expenses (Note 4) 254,247 195,939
Recovery of tax benefits (26,846) (68,217)
Other expenses 11,623 2,757
Total Expenses and Losses 241,321 123,708
Net (Loss)/Income (178,153) 63,884
Accumulated Deficit - Beginning (123,769,913) (123,833,797)
Accumulated Deficit - Ending $(123,948,066) $(123,769,913)
The accompanying notes are an integral part of these financial statements.

 

FSLIC Resolution Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands
  2008 2007
Operating Activities
Net (Loss)/Income $(178,153) $63,884
Adjustments to reconcile net (loss)/income to net cash
used by operating activities:
   
Provision for losses (891) (10,135)
Change in Operating Assets and Liabilities
Decrease in receivables from thrift resolutions and other assets 751 12,053
Increase/(Decrease) in accounts payable and other liabilities 3,791 (1,221)
Increase/(Decrease) in contingent liabilities for litigation losses and other 106,954 (243,977)
Net Cash Used by Operating Activities (67,548) (179,396)
Financing Activities
Provided by:    
U.S. Treasury payments for goodwill litigation (Note 4) 142,642 405,063
Used by:    
Payments to Resolution Funding Corporation (Note 5) (225,000) (225,000)
Net Cash (Used)/Provided by Financing Activities (82,358) 180,063
Net (Decrease)/Increase in Cash and Cash Equivalents (149,906) 667
Cash and Cash Equivalents - Beginning 3,617,133 3,616,466
Cash and Cash Equivalents - Ending $3,467,227 $3,617,133
The accompanying notes are an integral part of these financial statements.

1. Legislative History and Operations/Dissolution of the FSLIC Resolution Fund
Legislative History
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation’s banking system. Provisions that govern the operations of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI Act, as amended, the FDIC insures the deposits of banks and savings associations, and in cooperation with other federal and state agencies promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the deposit insurance fund established in the FDI Act, as amended. In addition, FDIC is charged with responsibility for the sale of remaining assets and satisfaction of liabilities associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation (RTC).

The U.S. Congress created the 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 RTC-effective on August 9, 1989. Further, the FIRREA established the Resolution Funding Corporation (REFCORP) to provide part of the initial funds used by the RTC for thrift resolutions.

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 (FRF-FSLIC), and the other composed of the RTC assets and liabilities (FRF-RTC). The assets of one pool are not available to satisfy obligations of the other.

The FDIC is the administrator of the FRF and the Deposit Insurance Fund. These funds are maintained separately to carry out their respective mandates.

Operations/Dissolution 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 REFCORP to pay the interest on
the REFCORP bonds. In addition, the FRF-FSLIC has available until expended $602.2 million in appropriations to facilitate, if required, efforts to wind up the resolution activity of the FRF-FSLIC.

The FDIC has conducted an extensive review and cataloging of FRF’s remaining assets and liabilities and is continuing to explore approaches for concluding FRF’s activities. Some of the issues and items that remain open in FRF are: 1) criminal restitution orders (generally have from 4 to 9 years remaining to enforce); 2) collections of settlements and judgments obtained against officers and directors and other professionals responsible for causing or contributing to thrift losses (generally have up to 11 years remaining to enforce); 3) numerous assistance agreements entered into by the former FSLIC (FRF could continue to receive tax-sharing benefits through year 2013); 4) goodwill litigation (no final date for resolution has been established; see Note 4); and 5) affordable housing program monitoring (requirements can exceed 25 years). The FRF could potentially realize substantial recoveries from the tax-sharing benefits of up to $320 million; however, any associated recoveries are not reflected in FRF’s financial statements given the significant uncertainties surrounding the ultimate outcome.

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 receivership 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. Receiverships are billed by the FDIC for services provided on their behalf.

2. Summary of Significant Accounting Policies
General
These financial statements pertain to the financial position, results of operations, and cash flows of
the FRF and are presented in conformity with U.S. 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. Periodic and final accountability reports of the FDIC’s activities as receiver are furnished to courts, supervisory authorities, and others as required.

Use of Estimates
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. The more significant estimates include allowance for losses on receivables from thrift resolutions and the estimated losses for litigation.

Provision for Losses
The provision for losses represents the change in the valuation of the receivables from thrift resolutions and other assets.

Disclosure about Recent Accounting Pronouncements
1) The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, in September 2006. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.

2) In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. SFAS No. 159 creates a fair value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities with changes in fair value recognized in earnings as they occur. Management has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP.

Related Parties
The nature of related parties and a description of related party transactions are discussed in Note 1 and disclosed throughout the financial statements and footnotes.

3. Receivables From Thrift Resolutions and Other Assets, Net
Receivables From Thrift Resolutions
The receivables from thrift resolutions include payments made by the FRF to cover obligations to insured depositors, advances to receiverships for working capital, and administrative expenses paid on behalf of receiverships. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. Assets held by the FDIC in its receivership capacity for the former RTC are a significant source of repayment of the FRF’s receivables from thrift resolutions. As of December 31, 2008, 8 of the 850 FRF receiverships remain active primarily due to unresolved litigation, including goodwill matters.

As of December 31, 2008 and 2007, FRF receiverships held assets with a book value of $20 million and $22 million, respectively (including cash, investments, and miscellaneous receivables of $17 million and $18 million at December 31, 2008 and 2007, respectively). The estimated cash recoveries from the management and disposition of these assets are used to derive the allowance for losses. The FRF receivership assets are valued by discounting projected cash flows, net of liquidation costs using current market-based risk factors applicable to a given asset’s type and quality. These estimated asset recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic and market conditions. Such uncertainties could cause the FRF’s actual recoveries to vary from current estimates.

Other Assets
Other assets primarily include credit enhancement reserves valued at $21.2 million and $20.2 million as of December 31, 2008 and 2007, respectively. The credit enhancement reserves resulted from swap transactions where the former RTC received mortgage-backed securities in exchange for single-family mortgage loans. The RTC supplied credit enhancement reserves for the mortgage loans in the form of cash collateral to cover future credit losses over the remaining life of the loans. These reserves may cover future credit losses through 2020.

Receivables From Thrift Resolutions and Other Assets, Net at December 31
Dollars in Thousands
  2008 2007
Receivables from closed thrifts $5,725,450 $8,367,078
Allowance for losses (5,717,740) (8,359,347)
Receivables from
Thrift Resolutions, Net
7,710 7,731
Other assets 27,242 27,081
Total $34,952 $34,812

4. Contingent Liabilities for:
Litigation Losses
The FRF records an estimated loss for unresolved legal cases to the extent those losses are considered probable and reasonably estimable. As of December 31, 2008 and 2007, respectively, $142.3 million and $35.4 million were recorded as probable losses. Additionally, at December 31, 2008, the FDIC has determined that there are no losses from unresolved legal cases considered to be reasonably possible.

In December 2008, FDIC concluded a 13 1⁄2 year old legal case (FDIC v. Hurwitz) arising from the December 30, 1988 failure of United Savings Association of Texas. In August 2005, the District Court ordered sanctions against the FDIC in the amount of $72 million. However, in August 2008, the Fifth Circuit Court of Appeals reversed $57 million of the sanctions, but remanded the remaining $15 million to the District Court to determine what portion should be paid. Subsequently, in November 2008, an agreement was reached between the parties, whereas the FDIC would pay $10 million to settle the case. On December 17, 2008, the settlement agreement was fully executed and the settlement funds were paid. The $10 million payment is recognized in the “Other expenses” line item.

Additional Contingency
Goodwill Litigation
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 government to perform certain agreements to count goodwill toward regulatory capital, the plaintiffs were entitled to recover damages from the United States. Approximately 13 remaining cases are pending against the United States based on alleged breaches of these agreements.

On July 22, 1998, the Department of Justice’s (DOJ’s) Office of Legal Counsel (OLC) concluded that the FRF is legally available to satisfy all judgments and settlements in the goodwill litigation involving supervisory action or assistance agreements. OLC determined that nonperformance of these agreements was a contingent liability that was transferred to the FRF on August 9, 1989, upon the dissolution of the FSLIC. On July 23, 1998, the U.S. Treasury determined, based on OLC’s opinion, that the FRF is the appropriate source of funds for payments of any such judgments and settlements. The FDIC General Counsel concluded that, 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 goodwill lawsuits are against the United States and as such are defended by the DOJ. On December 16, 2008, the DOJ again informed the FDIC that it is “unable at this time to provide a reasonable estimate of the likely aggregate contingent liability resulting from the Winstar-related cases.” 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. Based on representations from the DOJ, the FDIC is unable to estimate a range of loss to the FRF-FSLIC from the goodwill litigation. However, the FRF can draw from an appropriation provided by Section 110 of the Department of Justice Appropriations Act, 2000 (Public Law 106-113, Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) such sums as may be necessary for the payment of judgments and compromise settlements in the goodwill litigation. This appropriation is to remain available until expended. Because an appropriation is available to pay such judgments and settlements, any liability for goodwill litigation should have a corresponding receivable from the U.S. Treasury and therefore have no net impact on the financial condition of the FRF-FSLIC.

The FRF paid $142.6 million as a result of judgments and settlements in four goodwill cases for the year ended December 31, 2008, compared to $405.1 million for six goodwill cases for the year ended December 31, 2007. As described above, the FRF received appropriations from the U.S. Treasury to fund these payments. At December 31, 2008, the FRF accrued a $142.3 million contingent liability and offsetting receivable from the U.S. Treasury for judgments in three additional cases that were fully adjudicated as of year end.

In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by DOJ 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 $4.3 million and $11.4 million to DOJ for fiscal years (FY) 2009 and 2008, respectively. As in prior years, DOJ carried over and applied all unused funds toward current FY charges. At September 30, 2008, DOJ had an additional $5.3 million in unused FY 2008 funds that were applied against FY 2009 charges of $9.6 million.

Guarini Litigation
Paralleling the goodwill cases are similar cases alleging that the government breached agreements regarding tax benefits associated with certain FSLIC-assisted acquisitions. These agreements allegedly contained the promise of tax deductions for losses incurred on the sale of certain thrift assets purchased by plaintiffs from the FSLIC, even though the FSLIC provided the plaintiffs with tax-exempt reimbursement. A provision in the Omnibus Budget Reconciliation Act of 1993 (popularly referred to as the “Guarini legislation”) eliminated the tax deductions for these losses.

The last of the original eight Guarini cases concluded in 2007 with a settlement of $23 million being paid. Additionally, a case settled in 2006 further obligates the FRF-FSLIC as a guarantor for all tax liabilities in the event the settlement amount is determined by tax authorities to be taxable. The maximum potential exposure under this guarantee is approximately $81 million. However, the FDIC believes that it is very unlikely the settlement will be subject to taxation. More definitive information may be available during late 2009 or early 2010, after the IRS completes its Large Case Program audit on the institution’s 2006 returns. Therefore, the FRF is not expected to fund any payment under this guarantee and no liability has been recorded.

Representations and Warranties
As part of the RTC’s efforts to maximize the return from the sale of assets from thrift resolutions, representations and warranties, and guarantees were offered on certain loan sales. The majority of loans subject to these agreements have been paid off, refinanced, or the period for filing claims has expired. The FDIC’s estimate of maximum potential exposure to the FRF is $18.7 million. No claims in connection with representations and warranties have been asserted since 1998 on the remaining open agreements. Because of the age of the remaining portfolio and lack of claim activity, the FDIC does not expect new claims to be asserted in the future. Consequently, the financial statements at December 31, 2008 and 2007, do not include a liability for these agreements.

5. Resolution Equity
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, 2008
Dollars in Thousands
  FRF-FSLIC FRF-RTC FRF Consolidated
Contributed capital - beginning $45,443,245 $81,974,337 $127,417,582
Add: U.S. Treasury payments/receivable for goodwill litigation 249,597 0 249,597
Less: REFCORP payments 0 (225,000) (225,000)
Contributed capital - ending 45,692,842 81,749,337 127,442,179
Accumulated deficit (42,367,645) (81,580,421) (123,948,066)
Total $3,325,197 $168,916 $3,494,113

Contributed Capital
The FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion from the U.S. Treasury, respectively, to fund losses from thrift resolutions prior to July 1, 1995. Additionally, the FRF-FSLIC issued $670 million in capital certificates to the Financing Corporation (a mixed-ownership government corporation established to function solely as a financing vehicle for the FSLIC) 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. Through December 31, 2008, the FRF-RTC has returned $4.556 billion to the U.S. Treasury and made payments of $5.022 billion to the REFCORP. These actions serve to reduce contributed capital.

FRF-FSLIC received $142.6 million in U.S. Treasury payments for goodwill litigation in 2008. Furthermore, $142.3 million and $35.4 million were accrued for as receivables at year-end 2008 and 2007, respectively. The effect of this activity was an increase in contributed capital of $249.6 million in 2008.

Accumulated Deficit
The accumulated deficit represents the cumulative excess of expenses over revenue for activity
related to the FRF-FSLIC and the FRF-RTC. Approximately $29.8 billion and $87.9 billion
were brought forward from the former FSLIC and the former RTC on August 9, 1989, and January 1, 1996, respectively. The FRF-FSLIC accumulated deficit has increased by $12.5 billion, whereas the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their dissolution dates.

6. Employee Benefits
Pension Benefits
Eligible FDIC employees (permanent and term employees with appointments exceeding one year) are covered by the federal government retirement plans, either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). 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. The FRF’s pension-related expenses were $169 thousand and $252 thousand for 2008 and 2007, respectively.

Postretirement Benefits Other Than Pensions
The FRF no longer records a liability for the postretirement benefits of life and dental insurance (a long-term liability), due to the expected dissolution of the FRF. The liability is recorded by the DIF. However, the FRF does continue to pay its proportionate share of the yearly claim expenses associated with these benefits.

7. Disclosures About the Fair Value of Financial Instruments
The financial asset recognized and measured at fair value on a recurring basis at each reporting date is cash equivalents. The following table presents the FRF’s financial asset measured at fair value as of December 31, 2008.

Some of the FRF’s financial assets and liabilities are not recognized at fair value but are recorded at amounts that approximate fair value due to their short maturities and/or comparability with current interest rates. Such items include other short-term receivables and accounts payable and other liabilities.

The net receivable from thrift resolutions is influenced by the underlying valuation of receivership assets. This corporate receivable is unique and the estimate presented is not necessarily indicative of the amount that could be realized in a sale to the private sector. Such a sale would require indeterminate, but substantial, discounts for an interested party to profit from these assets because of credit and other risks. Consequently, it is not practicable to estimate its fair value.

Other assets primarily consist of credit enhancement reserves, which are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).

Assets Measured at Fair Value at December 31, 2008
Dollars in Thousands
  Fair Value Measurement Using
  Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Assets at Fair Value
Assets
Cash equivalents (Special U.S. Treasuries)1 $ 3,467,227 $ 0 $ 0 $ 3,467,227
(1) Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. Bureau of Public Debt.

 


Last Updated 08/8/2009 communications@fdic.gov