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2012 Annual Report

FSLIC Resolution Fund (FRF)

Federal Deposit Insurance Corporation
FSLIC Resolution Fund Balance Sheet at December 31
Dollars in Thousands

 

2012

2011

Assets

Cash and cash equivalents

$3,594,007

$3,533,410

Receivables from thrift resolutions and other assets, net (Note 3)

5,456

65,163

Receivables from U.S. Treasury for goodwill litigation (Note 4)

356,455

356,455

Total Assets

$3,955,918

$3,955,028

Liabilities

Accounts payable and other liabilities

$2,442

$3,544

Contingent liabilities for goodwill litigation (Note 4)

356,455

356,455

Total Liabilities

358,897

359,999

Resolution Equity (Note 5)

Contributed capital

128,056,656

127,875,656

Accumulated deficit

(124,459,635)

(124,280,627)

Total Resolution Equity

3,597,021

3,595,029

Total Liabilities and Resolution Equity

$3,955,918

$3,955,028

The accompanying notes are an integral part of these financial statements.

Federal Deposit Insurance Corporation
FSLIC Resolution Fund Statement of Income and Accumulated Deficit for the Years Ended December 31
Dollars in Thousands

 

2012

2011

Revenue

Interest on U.S. Treasury obligations

$2,458

$1,361

Other revenue

2,549

3,257

Total Revenue

5,007

4,618

Expenses and Losses

Operating expenses

4,165

4,660

Provision for losses

(1,408)

(8,578)

Goodwill litigation expenses (Note 4)

181,000

82,960

Recovery of tax benefits

0

(18,373)

Other expenses

258

205

Total Expenses and Losses

184,015

60,874

Net Loss

(179,008)

(56,256)

Accumulated Deficit - Beginning

(124,280,627)

(124,224,371)

Accumulated Deficit - Ending

$(124,459,635)

$(124,280,627)

The accompanying notes are an integral part of these financial statements.

Federal Deposit Insurance Corporation
FSLIC Resolution Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands

 

2012

2011

Operating Activities

Net Loss

$(179,008)

$(56,256)

Adjustments to reconcile net loss to net cash (used) by operating activities:

Provision for losses

(1,408)

(8,578)

Change in Operating Assets and Liabilities:

Decrease (Increase) in receivables from thrift resolutions and other assets

61,115

(33,177)

(Decrease) Increase in accounts payable and other liabilities

(1,102)

554

Increase in contingent liabilities for goodwill litigation

0

32,960

Net Cash (Used) by Operating Activities

(120,403)

(64,497)

Financing Activities

Provided by:

U.S. Treasury payments for goodwill litigation (Note 4)

181,000

50,000

Net Cash Provided by Financing Activities

181,000

50,000

Net Increase (Decrease) in Cash and Cash Equivalents

60,597

(14,497)

Cash and Cash Equivalents - Beginning

3,533,410

3,547,907

Cash and Cash Equivalents - Ending

$3,594,007

$3,533,410

 The accompanying notes are an integral part of these financial statements.

Notes to the Financial Statements

FSLIC Resolution Fund
December 31, 2012 and 2011

1. Operations/Dissolution of the FSLIC Resolution Fund

Overview

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, the FDIC, as administrator of the Deposit Insurance Fund (DIF), insures the deposits of banks and savings associations (insured depository institutions). In cooperation with other federal and state agencies, the FDIC promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the DIF. Commercial banks, savings banks and savings associations (known as “thrifts”) are supervised by either the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board. In addition, the FDIC, through administration of the FSLIC Resolution Fund (FRF), is responsible 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 DIF and the FRF are maintained separately by the FDIC to support their respective functions.

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 FRF, and transferred the assets and liabilities of the FSLIC to the FRF-except those assets and liabilities transferred to the newly created 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.

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 1 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 2 to 14 years remaining to enforce, unless the judgments are renewed, which will result in significantly longer periods for collection for some judgments); 3) a few assistance agreements entered into by the former FSLIC (FRF could continue to receive or refund overpayments of tax benefits sharing through 2014); 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 $40 million; however, any associated recoveries are not reflected in FRF’s financial statements given the significant uncertainties surrounding the ultimate outcome. The FDIC will consider returning a portion of the FRF-FSLIC’s remaining funds of $3.4 billion to the U.S. Treasury in 2013.

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 accordance 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 the 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 estimation of the allowance for losses related to the receivables from thrift resolutions and other assets.

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.

Disclosure about Recent Relevant Accounting Pronouncements

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

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, 2012, three of the 850 FRF receiverships remain active until their liability-related impediments are resolved.

The FRF receiverships held assets with a book value of $13 million and $15 million as of December 31, 2012 and 2011, respectively (which primarily consist of cash held for non-FRF, third party creditors).

Other Assets

Other assets decreased by $59 million to $3 million primarily due to the collection of a receivable for tax benefits sharing of $44 million and the release of the credit enhancement reserves of $13 million (see Note 4, Contingent Liabilities for: Guarantees). The tax benefits sharing collection represented the FRF’s share of tax savings by entities that either entered into assistance agreements with the former FSLIC, or have subsequently purchased financial institutions that had prior agreements with the FSLIC.

Receivables from Thrift Resolutions and Other Assets, Net at December 31
Dollars in Thousands

 

2012

2011

Receivables from closed thrifts

$869,917

$1,800,417

Allowance for losses

(867,208)

(1,797,154)

Receivables from Thrift Resolutions, Net

2,709

3,263

Other assets

2,747

61,900

Total

$5,456

$ 65,163

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.

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.

For the year ended December 31, 2012, the FRF paid $181 million as a result of a settlement in one goodwill case compared to $50 million for one goodwill case in 2011. The FRF received appropriations from the U.S. Treasury to fund these payments.

As of December 31, 2012, two remaining cases are active and pending against the United States based on alleged breaches of the agreements stated above. Of these two remaining cases, a contingent liability and an offsetting receivable of $356 million was recorded for one case as of December 31, 2012 and 2011. This case is currently before the lower court pending remand following appeal. It is reasonably possible that for this case the FRF could incur additional estimated losses of $63 million, representing additional damages contended by the plaintiff. For the other remaining active case, no awards were given to the plaintiffs by the appellate court. This case is fully adjudicated but the Court of Federal Claims is considering awarding litigation costs to the United States.

At December 31, 2011, there were five active cases. For three of the cases considered active at year end 2011, one was settled and paid during 2012 and two were fully adjudicated with no award; in one of these two cases the Court of Federal Claims awarded litigation costs of $231 thousand to the United States, which was paid in 2012.

In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by the DOJ, the entity that defends these lawsuits against the United States, based on a Memorandum of Understanding (MOU) dated October 2, 1998, between the FDIC and the DOJ. FRF-FSLIC pays in advance the estimated goodwill litigation expenses. Any unused funds are carried over and applied toward the next fiscal year (FY) charges. In 2012, FRF-FSLIC did not provide any additional funding to the DOJ because the unused funds from prior fiscal years were sufficient to cover estimated FY 2013 expenses.

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 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.

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 2013, after the Internal Revenue Service (IRS) completes its Large Case Program audit on the affected entity’s 2006 returns; this audit remains ongoing. As of December 31, 2012, no liability has been recorded. The FRF does not expect to fund any payment under this guarantee.

Guarantees

On May 21, 2012, the FDIC, in its capacity as manager of the FRF, entered into an agreement with Fannie Mae for the release of $13 million of credit enhancement reserves to the FRF in exchange for indemnifying Fannie Mae for all future losses incurred on 76 multi-family mortgage loans.  The former RTC supplied Fannie Mae with the credit enhancement reserves in the form of cash collateral to cover future losses on these mortgage loans through 2020.  The maximum exposure on this indemnification is the current unpaid principal balance of the remaining 73 multi-family loans totaling $10 million.  Based on a contingent liability assessment of this portfolio, the average loan-to-value ratio is 21%, the majority of the loans are at least 60% amortized, and all are scheduled to mature within three to eight years. Since all of the loans are currently in performing status and no losses have occurred since 2001, future payments on this indemnification are not expected.  As a result, the FRF has not recorded a contingent liability for this indemnification as of December 31, 2012.

5. Resolution Equity

As stated in the Overview 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, 2012
Dollars in Thousands

 

 

FRF-FSLIC

FRF-RTC

FRF
Consolidated

Contributed capital - beginning

$46,126,319

$81,749,337

$127,875,656

Add: U.S. Treasury payment for goodwill litigation

181,000

0

181,000

Contributed capital - ending

46,307,319

81,749,337

128,056,656

Accumulated deficit

(42,882,341)

(81,577,294)

(124,459,635)

Total

$3,424,978

$172,043

$3,597,021

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.

FRF-FSLIC received $181 million in U.S. Treasury payments for goodwill litigation in 2012. Furthermore, $356 million was accrued for as receivables as of December 31, 2012 and 2011. Through December 31, 2012, the FRF has received or established a receivable for a total of $2.2 billion of goodwill appropriations, the effect of which increases contributed capital.

Through December 31, 2012, 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.

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 $13.1 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 following table presents the FRF’s financial assets measured at fair value on a recurring basis as of December 31, 2012 and 2011.

Assets Measured at Fair Value at December 31, 2012
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 equivalents1

$3,425,097

 

 

$3,425,097

Total Assets

$3,425,097

$0

$0

$3,425,097


1Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. Bureau of Public Debt. Cash equivalents are included in the “Cash and cash equivalents” line item.

Assets Measured at Fair Value at December 31, 2011
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 equivalents1

$3,377,203

 

 

$3,377,203

Credit enhancement reserves2

 

$14,431

 

14,431

Total Assets

$3,377,203

$14,431

$0

$3,391,634


1Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. Bureau of Public Debt. Cash equivalents are included in the “Cash and cash equivalents” line item.

2Credit enhancement reserves are valued by performing projected cash flow analyses using market-based assumptions.

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 07/09/2013 communications@fdic.gov