Contents
Contents
General Overview
Managing the Crisis: The FDIC and RTC Experience examines the challenges faced by
the FDIC and the RTC in resolving troubled banks and thrifts during the financial crisis
of the 1980s and early 1990s. This study reviews the resolution and asset disposition
strategies developed and implemented by the FDIC and the RTC in response to the cri-
sis and describes the evolution of the methods used. It also reflects on the effectiveness of
these methods, as well as the lessons learned. This study does not discuss the reasons for
the upsurge in the number of bank and thrift failures during this period, nor does it
explore how the crisis could have been prevented. Those issues are addressed in History
of the Eighties—Lessons for the Future: An Examination of the Banking Crises of the
1980s and Early 1990s, a study that was complied and published by the FDIC in
December 1997.
Copywrite Information
Forward
Acknowledgements
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M A N A G I N G T H E C R I S I S
Part I
Chapter 1. Executive Summary
The Executive Summary provides an overview of the entire Managing the Crisis study.
Chapter 2. Overview of the Resolution Process
This chapter provides an overview of the specific steps undertaken by the FDIC and the
RTC to complete a resolution of a failing or failed institution.
Chapter 3. Evolution of the FDIC’s Resolution Practices
The FDIC employed various approaches to address the successive waves of bank insol-
vencies resulting from high interest rates in the late 1970s and early 1980s, energy and
agriculture sector problems in the mid-1980s, and collapsing real estate markets at the
end of the 1980s and early 1990s. This chapter describes those approaches and traces
the expansion of resolution alternatives from traditional deposit payoffs and purchase
and assumption transactions to later variations of those methods.
Chapter 4. Evolution of the RTC’s Resolution Practices
On August 9, 1989, the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) abolished the Federal Savings and Loan Insurance Corporation
(FSLIC) and the Federal Home Loan Bank Board (FHLBB) and created the RTC. This
chapter focuses on an important part of the RTC’s overall activity: the evolution of its
resolution practices.
Chapter 5. Open Bank Assistance
Open bank assistance occurs when a distressed financial institution remains open with
government financial assistance. To prevent an insured depository institution from clos-
ing, the FDIC provided open bank assistance in the form of loans, contributions, depos-
its, asset purchases, or the assumption of liabilities. This chapter provides the history of
the open bank assistance transaction.
Chapter 6. Bridge Banks
A bridge bank is a temporary national bank chartered by the Office of the Comptroller
of the Currency and organized by the FDIC to take over and maintain banking services
for the customers of a failed bank. It is designed to “bridge” the gap between the failure
of a bank and the time when the FDIC can implement a satisfactory acquisition by a
third party. This chapter discusses the formation of Bridge Banks.
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Chapter 7. Loss Sharing
Loss sharing is a feature that the FDIC first introduced into selected purchase and
assumption transactions in 1991. The original goals of loss sharing were to (1) sell as
many assets as possible to the acquiring bank and (2) have the nonperforming assets
managed and collected by the acquiring bank in a manner that aligned the interests and
incentives of the acquiring bank and the FDIC. This chapter discusses various aspects of
the Loss Sharing transaction.
Chapter 8. The FDIC’s Role as Receiver
The FDIC has three main responsibilities: (1) to act as an insurer, (2) to act as a supervi-
sor, and (3) to act as a receiver. The roles of insurer and receiver require that the FDIC
play an active role in resolving failing and failed FDIC insured institutions. The FDIC’s
role as receiver is discussed in this chapter.
Chapter 9. The Closing Process and the Payment of Insured Depositors
Before federal deposit insurance, depositors typically would recover 50 percent to 60
percent of their money from a failed bank’s receivership and depositors often were not
able to obtain those funds for several years. Consequently, public confidence in the
banking system wavered, and depositor runs became more frequent, thus triggering
more bank closings. This chapter discusses that federal deposit insurance was designed
to provide greater protection to depositors, thereby enhancing public confidence and
leading to greater financial stability.
Chapter 10.Treatment of Uninsured Depositors and Other Receivership Creditors
A failed bank or thrift receivership has a statutory obligation to identify creditors and
distribute proceeds of the liquidation of assets to these creditors commensurate with
applicable statutes and regulations. This chapter discusses the evolution of the claims
process from 1980 to 1994 into a uniform system now codified in federal law.
Chapter 11.Professional Liability Claims
Professional misconduct was a significant factor in the failures of financial institutions
during the 1980s. The Professional Liability Program at the FDIC and the RTC played
an important role in recovering losses from those failures. This chapter describes the
development of professional liability operations at the FDIC and the RTC.
Chapter 12.Evolution of the Asset Disposition Process
This chapter provides an overview of the various asset disposition methods employed by
the FDIC and the RTC in their various capacities. The chapter also describes how the
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M A N A G I N G T H E C R I S I S
FDIC and the RTC adapted their asset disposition methods to meet the enormous chal-
lenges during the 1980 through 1994 period.
Chapter 13.Auctions and Sealed Bids
This chapter reviews the use of auctions and sealed bid marketing strategies by the
FDIC and the RTC. It examines how the FDIC and the RTC marketed loans through
the sealed bid process, how they used auctions to sell loans, and how they used sealed
bid sales and auctions to sell real estate that they held.
Chapter 14.Asset Management Contracting
This chapter reviews the types of asset management and disposition contracts used by
the FDIC and the RTC. The analysis includes a discussion of the evolution, strengths,
and weaknesses of those contracts.
Chapter 15.Affordable Housing Programs
The volume of assets handled within the affordable housing programs of the RTC and
FDIC were relatively minor compared to the total assets sold by both corporations. The
RTC and FDIC viewed the programs as significant, however, because of their mission to
provide low- to moderate-income housing within a larger program designed to mini-
mize costs and maximize overall returns. This chapter discusses both the FDIC’s and the
RTC’s Affordable Housing Programs.
Chapter 16.Securitizations
In October 1990, one year after the RTC was created, a securitization program was
established to facilitate the sale of mortgage loans. This chapter focuses on the creation,
development, and performance of this program.
Chapter 17.Partnership Programs
In the late 1980s and early 1990s, the RTC and the FDIC became custodians of a tre-
mendous and unprecedented number of assets from failed banks and thrifts. The agen-
cies therefore had to develop innovative methods to manage and dispose of the assets.
One of the RTC’s methods, known as the equity partnership, was a joint venture
between the public and private sectors. This chapter discusses aspects of the various
equity partnerships.
Chapter 18.The FDIC’s Use of Outside Counsel
This chapter describes the FDIC’s use of outside counsel from 1980 to 1996. It covers
the increased use of outside counsel from 1989 to 1993 during the peak of the financial
institution crisis, payments to outside counsel during the period, the advent of the
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FDIC’s Minority and Woman Outreach Program, the formation of a section to oversee
the use of outside counsel, the development of uniform policies and procedures govern-
ing the use of outside counsel, the use of information systems, and the various statutory
provisions that relate to the FDIC’s use of outside counsel.
Chapter 19.Internal Controls
Internal controls provide management with reasonable assurance that its programs are
effectively and efficiently executed; waste, fraud, and abuse and misappropriation of
assets are minimized; financial statements are reliable; and compliance with the law is
ensured. This chapter provides an overview of the evolution and implementation of
internal control programs at the FDIC and the RTC.
Part II, Case Studies of Significant Bank Resolutions
Case Studies of Significant Bank Resolutions presents case studies of the 10 most nota-
ble problem banks to illustrate some of the FDIC’s resolution processes. The case studies
also show the effects on the FDIC of changes in banking legislation in the 1980s and
1990s.
Chapter 1: Overview
Chapter 2: First Pennsylvania Bank, N.A.
Chapter 3: Penn Square Bank, N.A.
Chapter 4: Continental Illinois National Bank And Trust Company
Chapter 5: First City Bancorporation of Texas, Inc.
Chapter 6: First RepublicBank Corporation
Chapter 7: MCorp.
Chapter 8: Bank Of New England Corporation
Chapter 9: Southeast Banking Corp.
Chapter 10: Seven Banks in New Hampshire
Chapter 11: CrossLand Savings, FSB
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M A N A G I N G T H E C R I S I S
Chapter 12: Conclusions
Part III, Appendices
A. Legislation Governing FDIC’s Roles as Insurer and Receiver
This appendix focuses on the FDIC from 1980 to 1994. To provide a historical context
for that period, however, the appendix begins with a brief overview of some earlier, sig-
nificant legislation passed by the U.S. Congress.
B. Glossary of Terms/Abbreviations
This list of abbreviations and glossary of terms is compiled from terminology that is
used in this publication.
C. Statistical Data
This appendix provides graphical illustrations of the data presented in the study.
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