FSLIC Resolution Fund Balance Sheet at December 31 Dollars in Thousands
Cash and cash equivalents (Note 2)
Receivables from thrift resolutions and other assets, net (Note 3)
Receivables from U.S. Treasury for goodwill judgments (Note 4)
Accounts payable and other liabilities
Contingent liabilities for litigation losses and other (Note 4)
Resolution Equity (Note 5)
Total Resolution Equity
Total Liabilities and Resolution Equity
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
Interest on U.S. Treasury obligations
Expenses and Losses
Provision for losses
Goodwill/Guarini litigation expenses (Note 4)
Recovery of tax benefits
Total Expenses and Losses
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
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for losses
Change In Operating Assets and Liabilities:
Decrease in receivables from thrift resolutions and other assets
(Decrease)/Increase in accounts payable and other liabilities
Increase in contingent liabilities for litigation losses and other
Net Cash Used by Operating Activities
U.S. Treasury payments for goodwill litigation (Note 4)
Payments to Resolution Funding Corporation (Note 5)
Net Cash Provided/(Used) by Financing Activities
Net Increase/(Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents-Beginning
Cash and Cash Equivalents-Ending
The accompanying notes are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS FSLIC RESOLUTION FUND DECEMBER 31, 2009 AND 2008
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 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. Some of the issues and items that remain open in FRF are: 1) criminal restitution orders (generally have from 3 to 8 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 10 years remaining to enforce); 3) numerous assistance agreements entered into by the former FSLIC (FRF could continue to receive tax benefits sharing 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 benefits sharing of up to approximately $231 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 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 resolution 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 resolution 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 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 Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 105, Generally Accepted Accounting Principles (formerly SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162, issued in June 2009) became effective for financial statements covering periods ending after September 15, 2009. The FDIC follows accounting standards set by the FASB. On July 1, 2009, the FASB ASC was launched and became the sole source of authoritative accounting principles applicable to the FDIC.
All existing standards that were used to create the Codification have become superseded. As a result, references to generally accepted accounting principles in these Notes will consist of the numbers used in the Codification and, if applicable, the former pronouncement number. The Codification's purpose was not to create new accounting or reporting guidance, but to organize and simplify authoritative GAAP literature. Consequently, there will be no change to FRF's financial statements due to the implementation of this Statement.
SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was issued by the FASB in June 2009, and subsequently codified upon issuance of Accounting Standards Update No. 2009-17, Consolidations (ASC 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. SFAS 167, effective for reporting periods beginning after November 15, 2009, modifies the former quantitative approach for determining the primary beneficiary of a variable interest entity (VIE) to a qualitative assessment. An enterprise must determine qualitatively whether it has (1) the power to direct the activities of the VIE that most significantly impact the entity's economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If an enterprise has both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate the VIE. Management is currently reviewing the possible impact, if any, of SFAS 167 (now codified in ASC 810) on FRF's accounting and financial reporting requirements for 2010.
SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140, was issued by the FASB in June 2009. Subsequently, the FASB issued Accounting Standards Update No. 2009-;16, Transfers and Servicing (ASC 860)—Accounting for Transfers of Financial Assets, to formally incorporate the provisions of SFAS No. 166 into the Codification. SFAS 166 removes the concept of a qualifying special-purpose entity from GAAP, changes the requirements for derecognizing financial assets, and requires additional disclosures about a transferor's continuing involvement in transferred financial assets. The FASB's objective is to improve the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets.
The provisions of SFAS 166 (now codified in ASC 860) become effective for the FRF for all transfers of financial assets occurring on or after January 1, 2010.
SFAS No. 165, Subsequent Events, was issued in May 2009 and subsequently codified in FASB ASC 855, Subsequent Events. ASC 855 represents the inclusion of guidance on subsequent events in the accounting literature. Historically, management had relied on auditing literature for guidance on assessing and disclosing subsequent events. ASC 855 now requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. These new provisions, effective for the FRF as of December 31, 2009, do not have a significant impact on the financial statements.
Other recent accounting pronouncements have been 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 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, 2009, 8 of the 850 FRF receiverships remain active primarily due to unresolved litigation, including goodwill matters.
The FRF receiverships held assets with a book value of $20 million as of December 31, 2009 and 2008, (which primarily consist of cash, investments, and miscellaneous receivables). 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 primarily include credit enhancement reserves valued at $21.3 million and $21.2 million as of December 31, 2009 and 2008, 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
Receivables from closed thrifts
Allowance for losses
Receivables from Thrift Resolutions, Net
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. As of December 31, 2009 and 2008, respectively, $405.4 million and $142.3 million were recorded as probable losses. Additionally, at December 31, 2009, the FDIC has determined that there are no losses from unresolved legal cases considered to be reasonably possible.
In December 2008, FDIC concluded a 13½ 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, whereby 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.
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 eight 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 January 26, 2010, 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 $142.4 million as a result of judgments and settlements in four goodwill cases for the year ended December 31, 2009, compared to $142.6 million for four goodwill cases for the year ended December 31, 2008. As described above, the FRF received appropriations from the U.S. Treasury to fund these payments. Based on recent court decisions, the FRF accrued a $405.4 million contingent liability and offsetting receivable from the U.S. Treasury for judgments in six cases. During 2009, four of the six cases were fully adjudicated but not paid 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 $3.5 million and $4.3 million to DOJ for fiscal years (FY) 2010 and 2009, respectively. As in prior years, DOJ carried over and applied all unused funds toward current FY charges. At December 31, 2009, DOJ had an additional $3.3 million in unused FY 2009 funds that were applied against FY 2010 charges of $6.8 million.
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.
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 2010, after the IRS completes its Large Case Program audit on the institution's 2006 returns. 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 $13.2 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, 2009 and 2008, 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, 2009 Dollars in Thousands
Add: U.S. Treasury payments/receivable for goodwill litigation
Less: REFCORP payments
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, 2009, 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 $142.4 million in U.S. Treasury payments for goodwill litigation in 2009. Furthermore, $405.4 million and $142.3 million were accrued for as receivables at year-end 2009 and 2008, respectively. The effect of this activity was an increase in contributed capital of $405.5 million in 2009.
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 $13.0 billion, whereas the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their dissolution dates.
6. 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 Management. The FRF's pension-related expenses were $42 thousand and $169 thousand for 2009 and 2008, 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 tables present the FRF's financial asset measured at fair value as of December 31, 2009 and 2008.
Assets Measured at Fair Value at December 31, 2009 Dollars in Thousands
Fair Value Measurement Using
Quoted Prices in Active Markets for Identical Assets
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.back
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).