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2010 Annual Report

IV. Financial Statements and Notes

Notes to the Financial Statements FSLIC Resolution Fund December 31, 2010 and 2009

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 former 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 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. Some of the issues and items that remain open in FRF are: 1) criminal restitution orders (generally have from 3 to 13 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 from one to 10 years remaining to enforce, unless the judgments are renewed, which will result in significantly longer periods for collection for some judgments); 3) numerous assistance agreements entered into by the former FSLIC (FRF could continue to receive tax benefits sharing through the year 2012); 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 recoveries from tax benefits sharing of up to approximately $52 million; however, any associated recoveries are notreflected 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 accordance with U.S. generally accepted accounting principles GAAP). As permitted by the Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board, the FDIC prepares financial statements in conformity with standards promulgated by the Financial Accounting Standards Board (FASB). These statements do not include reporting for assets and liabilities of receivership entities because these entities are legally separate and distinct, and the FRF does not have any ownership interests in them. Periodic and final accountability reports of receivership entities are furnished to courts, supervisory authorities, and others upon request.

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.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments consisting primarily of U.S. Treasury Overnight Certificates.

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 Relevant Accounting Pronouncements

  • ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements, requires enhanced disclosures for significant transfers into and out of Level 1 (measured using quoted prices in active markets) and Level 2 (measured using other observable inputs) of the fair value measurement hierarchy. These disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, but did not impact the FRF in 2010. Separate disclosure of the gross purchases, sales, issuances, and settlements activity for Level 3 (measured using unobservable inputs) fair value measurements will become effective for fiscal years beginning after December 15, 2010. Currently, the additional disclosures are not expected to impact the FRF.

Other recent accounting pronouncements have been deemed to be not applicable or material to the financial statements as presented.

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, 2010, eight of the 850 FRF receiverships remain active. Half of these receiverships are expected to complete their liquidation efforts during 2011. The remaining four receiverships will remain active until their goodwill litigation or liability-related impediments are resolved.

The FRF receiverships held assets with a book value of $18 million and $20 million as of December 31, 2010 and 2009, respectively (which primarily consist of cash, investments, and miscellaneous receivables). At December 31, 2010, $13 million of the $18 million in assets in the FRF receiverships was cash held for non-FRF, third party creditors.

Other Assets

Other assets primarily include credit enhancement reserves valued at $17 million and $21 million as of December 31, 2010 and 2009, 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 cash reserves, which may cover future credit losses through 2020, are valued by estimating credit losses on the underlying loan portfolio and then discounting cash flow projections using market-based rates.

Receivables From Thrift Resolutions and Other Assets, Net at December 31
Dollars in Thousands
  2010 2009
Receivables from closed thrifts $5,763,949 $5,744,509
Allowance for losses (5,762,186) (5,736,737)
Receivables from Thrift Resolutions, Net 1,763 7,772
Other assets 21,645 24,566
Total $23,408 $32,338

4. Contingent Liabilities for:

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. Six 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 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 estimated 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.

For the year ended December 31, 2010, the FRF paid $27 million as a result of judgments and settlements in four goodwill cases compared to $142 million for four goodwill cases for the year ended December 31, 2009. Of the four goodwill cases paid during 2010, only one was active at December 31, 2009 due to ongoing litigation. The FRF received appropriations from the U.S. Treasury to fund these payments.

The contingent liability and offsetting receivable from the U.S. Treasury as of December 31, 2010 was $323 million for one case compared with $405 million for six cases as of December 31, 2009. No new cases were accrued during 2010. The one case comprising the contingent liability and offsetting receivable at December 31, 2010 was accrued prior to 2010 following an appellate decision for a specific monetary amount. This case is currently before the lower court pending on remand following appeal and is still considered active.

Based on representations from the DOJ, the entity that defends these lawsuits against the United States, the FDIC is unable to estimate a range of loss to the FRF-FSLIC for the remaining five goodwill cases considered active as of December 31, 2010. Three of these cases were not accrued because court decisions are still pending. In the other two cases the appellate courts decided to award nothing, but the cases are still active due to continued legal proceedings.

Six goodwill cases were active as of December 31, 2010 compared with eight active cases as of December 31, 2009. Of the cases considered active at year end 2009, one was fully adjudicated with no award and one was settled and paid during 2010.

In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by the DOJ based on a Memorandum of Understanding (MOU) dated October 2, 1998, between the FDIC and the DOJ. Under the terms of the MOU, the FRF-FSLIC paid $2 million and $4 million to the DOJ for fiscal years (FY) 2011 and 2010, respectively. As in prior years, the DOJ carried over and applied all unused funds toward current FY charges. At December 31, 2010, the DOJ had an additional $3 million in unused FY 2010 funds that were applied against FY 2011 charges of $5 million.

Guarini Litigation

Paralleling the goodwill cases were 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 plaintiffswith 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.

All eight of the original Guarini cases have been settled. However, 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 2011, after the Internal Revenue Service (IRS) completes its Large Case Program audit on the affected Corporation’s 2006 returns; this audit is currently underway. 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 zero. 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, 2010 and 2009, 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 31,2010
Dollars in Thousands
  FRF-FSLIC FRF-RTC FRF Consolidated
Contributed capital–beginning $46,098,359 $81,749,337 $127,847,696
Contributed capital–ending 46,043,359 81,749,337 127,792,696
Accumulated deficit (42,643,726) (81,580,645) (124,224,371)
Total $3,399,633 $168,692 $3,568,325

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, 2010, the FRF-RTC has returned $4.6 billion to the U.S. Treasury and made payments of $5.0 billion to the REFCORP. These actions serve to reduce contributed capital. The most recent payment to the REFCORP was in January of 2008 for $225 million.

FRF-FSLIC received $27 million in U.S. Treasury payments for goodwill litigation in 2010. Furthermore, $323 million and $405 million were accrued for as receivables at December 31, 2010 and 2009, respectively.

Accumulated Deficit

The accumulated deficit represents the cumulative excess of expenses and losses 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 $12.8 billion, whereas the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their dissolution dates.

6. Disclosures About the Fair Value of Financial Instruments

The financial assets recognized and measured at fair value on a recurring basis at each reporting date are cash equivalents and credit enhancement reserves. The following table presents the FRF’s financial assets measured at fair value as of December 31, 2010 and 2009.

Assets Measured at Fair Value at December 31, 2010
Dollars in Thousands
Fair Value Measurements 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 and cash equivalents (Special U.S. Treasuries)¹ $3,547,907     $3,547,907
Credit enhancement reserves²   $17,378   17,378
Total Assets $3,547,907 $17,378   $3,565,285

(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.

(2) Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).

Assets Measured at Fair Value at December 31, 2009
Dollars in Thousands
Fair Value Measurements 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 $3,470,125     $3,470,125
Credit enhancement reserves²   $21,278   21,278
Total Assets $3,470,125 $21,278   $3,491,403

(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.

(2) Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions (see Note 3).

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.

Last Updated 5/5/2011 communications@fdic.gov