Resolution Fund Balance Sheet at December 31
Cash and cash
from thrift resolutions and other assets, net (Note 3)
and other liabilities
liabilities for litigation losses and other (Note 4)
Equity (Note 6)
loss on available-for-sale securities, net
Liabilities and Resolution Equity
accompanying notes are an integral part of these financial
FSLIC Resolution Fund
Statement of Income and Accumulated Deficit for the Years Ended
Dollars in Thousands
Interest on U.S. Treasury obligations
Realized gain on investment in securitization-related assets
from receiverships (Note 3)
Expenses and Losses
Provision for losses (Note 5)
Expenses for goodwill settlements and litigation (Note 4)
Recovery of tax benefits
Total Expenses and Losses
Unrealized gain/(loss) on available-for-sale securities, net
Accumulated Deficit - Beginning
Accumulated Deficit - Ending
The accompanying notes are an integral part of
these financial statements.
Resolution Fund Statement of Cash Flows for the Years Ended
to reconcile net (loss)/income to net cash (used by) provided
in Assets and Liabilities:
in receivables from thrift resolutions and other assets
in accounts payable and other liabilities
Cash (Used by) Provided by Operating Activities
in securitization-related assets acquired from receiverships
Cash Provided by Investing Activities
Treasury payments for goodwill settlements
Cash Provided by Financing Activities
Increase in Cash and Cash Equivalents
and Cash Equivalents - Beginning
and Cash Equivalents - Ending
accompanying notes are an integral part of these financial
1. Legislative History and Operations/Dissolution
of the FSLIC Resolution Fund
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 funds 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.
The FIRREA was enacted to reform, recapitalize, and consolidate the federal
deposit insurance system. In addition to the FRF, FIRREA created the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). It
also designated the FDIC as the administrator of these funds. All three funds
are maintained separately to carry out their respective mandates.
The FIRREA created the RTC to manage and resolve all thrifts previously
insured by the FSLIC for which a conservator or receiver was appointed during
the period January 1, 1989, through August 8, 1992. Resolution responsibility
was subsequently extended and ultimately transferred from the RTC to the
SAIF on July 1, 1995. The FIRREA established the Resolution Funding Corporation
(REFCORP) to provide part of the initial funds used by the RTC for thrift
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
$602.2 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. An executive-level Steering Committee was established in
2003 to facilitate the FRF dissolution. Some of the issues and items that
remain open in FRF are: 1) criminal restitution orders (generally have from
5 to 10 years remaining); 2) litigation claims and judgments obtained against
officers and directors and other professionals responsible for causing or
contributing to thrift losses (judgments generally vary from 5 to 10 years);
3) numerous assistance agreements entered into by the former FSLIC (FRF could
continue to receive tax-sharing benefits through year 2008); 4) Goodwill
and Guarini litigation (no final date for resolution has been established;
see Note 4); and 5) environmentally impaired owned real estate assets. The
FDIC is considering whether enabling legislation or other measures may be
needed to accelerate liquidation of the remaining FRF assets and liabilities.
The FRF could realize substantial recoveries from the aforementioned tax-sharing
benefits ranging from $144 million to $224 million; however, any associated
recoveries are not reflected in FRF's financial statements given the
significant uncertainties surrounding the ultimate outcome.
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
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.
Fair Value of Financial Instruments
Cash equivalents, which consist of Special U.S. Treasury Certificates, are
short-term, highly liquid investments with original maturities of three
months or less and are shown at fair value. The carrying amount of short-term
receivables and accounts payable and other liabilities approximates their
fair market value, due to their short maturities.
The investment in securitization-related assets acquired from receiverships
consists of credit enhancement reserves. The credit enhancement reserves,
which resulted from swap transactions, are valued by performing projected
cash flow analyses using market-based assumptions (see Note 3).
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 market value.
Cost Allocations Among Funds
Operating expenses not directly charged to the FRF, the BIF, and the SAIF
are allocated to all funds using workload-based allocation percentages.
These percentages are developed during the annual corporate planning process
and through supplemental functional analyses.
Disclosure about Recent Accounting Pronouncements
Recent accounting pronouncements have been adopted or deemed to be not applicable
to the financial statements as presented.
The nature of related parties and a description of related party transactions
are discussed in Note 1 and disclosed throughout the financial statements
Reclassifications have been made in the 2004 financial statements to conform
to the presentation used in 2005. These reclassifications include the reallocation
of amounts from "Provision for insurance losses" to "Other
expenses" for assets acquired from assisted thrifts and terminated
receiverships. The reclassifications had no impact on the prior year's
net income or resolution equity.
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 FSLIC and
SAIF-insured institutions are a significant source of repayment of the
FRF's receivables from thrift resolutions. As of December 31, 2005,
25 of the 850 FRF receiverships remain active primarily due to unresolved
litigation, including Goodwill matters.
As of December 31, 2005 and 2004,
FRF receiverships held assets with a book value of $139 million and $175
million, respectively (including cash, investments,
and miscellaneous receivables of $113 million and $142 million at December
31, 2005 and 2004, respectively). The estimated cash recoveries from the
management and disposition of these assets that are used to derive the allowance
for losses are based on a sampling of receivership assets in liquidation.
The sampled assets are generally valued by estimating future cash recoveries,
net of applicable liquidation cost estimates, and then discounting these
net cash recoveries using current market-based risk factors based on a given
asset's type and quality. Resultant recovery estimates are extrapolated
to the non-sampled assets in order to derive the allowance for loss on the
receivable. These estimated 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 the level currently estimated.
Investment in Securitization-Related Assets Acquired from Receiverships
This investment includes credit enhancement reserves valued at $16.7 million
and $15.6 million as of December 31, 2005 and 2004, 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 former 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.
4. Contingent Liabilities for:
The FRF records an estimated loss for unresolved legal cases to the extent
those losses are considered probable and reasonably estimable. In addition
to the amount recorded as probable, the FDIC has determined that losses
from unresolved legal cases totaling $85.4 million are reasonably possible.
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 35 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.
Following the OLC opinion, 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 November 16,
2005, 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 the response 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 of 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 liabilities for the Goodwill Litigation should have no impact
on the financial condition of the FRF-FSLIC.
The FRF paid $624.6 million as a result of judgments and settlements in
seven Goodwill cases during 2005, compared to $5 million for one Goodwill
case for 2004. However, as described above, the FRF received appropriations
from the U.S. Treasury to fund these payments.
In January 2006, the
Department of Justice decided not to appeal the December 30, 2005 U.S.Court
of Federal Claims order that FRF pay a $134 million partial judgment in
another Goodwill litigation case. As in the previous cases, the FRF will
receive an appropriation from the U.S.Treasury to satisfy this
judgment. The December 31, 2005 FRF financial statements do not reflect the
liability to pay the judgment to the plaintiff or the offsetting receivable
for the U.S.Treasury appropriation to fund the judgment.
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
$18.3 million and $30.1 million to DOJ for fiscal years 2006 and 2005, respectively.
DOJ returns any unused fiscal year funding to the FRF unless special circumstances
warrant these funds be carried over and applied against current fiscal year
charges. In April 2005, DOJ returned $3 million of unused fiscal year 2005
funds. At September 30, 2005, DOJ had an additional $10.1 million in unused
fiscal year 2005 funds that were applied against FY 2006 charges of $28.4
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.
Eight "Guarini" cases originally were filed seeking damages.
Four "Guarini" cases have now concluded on the merits. In the
first, no damages were awarded by the trial court and the case was not appealed.
A second case was settled for $20,000. In the third and fourth cases, the
FRF-FSLIC paid damages of $28.1 million and $48.7 million, respectively.
(Certain attorneys' fees and costs issues in these two cases are pending
in the trial court.) In a fifth case, the Federal Circuit recently affirmed
the trial court's decision to award damages of $70 million. The time
has not run yet for the Justice Department to decide whether it will seek
further review of this decision. Two other cases are currently pending on
appeal before the Federal Circuit; in those cases the trial court awarded
plaintiffs damages totaling about $33 million in the aggregate. The eighth
case is pending in trial court; in November, the court granted most of plaintiff's
motion for partial summary judgment, entitling plaintiff to $149.6 million.
However, other issues remain to be resolved before the trial court.
The FDIC has established a loss reserve of approximately $257 million for
the remaining four Guarini cases because these losses are deemed probable
and reasonably estimable. An additional loss of $82.4 million on the Guarini
litigation is considered reasonably possible.
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 most likely been paid off, refinanced, or the period for
filing claims has expired. However, there is no reporting mechanism to determine
the aggregate amount of remaining loans. Therefore, the FDIC is unable to
provide an estimate of maximum exposure to the FRF. Based on the above and
our history of claims processed, the FDIC believes that any future representation
and warranty liability to the FRF will likely be minimal.
5. Provision for Losses
The provision for losses was $241.1 million and a
negative $13.2 million for 2005 and 2004, respectively. The increased provision
in 2005 was primarily
due to the recognition of a probable loss on the unresolved Guarini cases.
6. 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.
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, 2005, the FRF-RTC has returned
$4.556 billion to the U.S. Treasury and made payments of $4.572 billion
to the REFCORP. These actions serve to reduce contributed capital.
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 $12.2 billion, whereas
the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their
7. Employee 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
The FRF's pro rata share
of pension-related expenses was $2.9 million and $2.8 million, as of December
31, 2005 and 2004, respectively.
Postretirement Benefits Other Than Pensions
The FRF no longer records a liability for the postretirement benefits of
life and dental insurance as a result of FDIC's change in funding
policy for these benefits and elimination of the separate entity formerly
used to account for such estimated future costs. In implementing this change,
management decided not to allocate either the plan assets or the revised
net accumulated postretirement benefit obligation (a long-term liability)
to the FRF due to the expected dissolution of the Fund. However, the FRF
does continue to pay its proportionate share of the yearly claim expenses
associated with these benefits.