80

FSLIC Resolution Fund

December 31,2005 and 2004

Financial Statements and Notes
FRF

FSLIC Resolution Fund

81

Federal Deposit Insurance Corporation

FSLIC Resolution Fund Balance Sheet at December 31

Dollars in Thousands 

2005 2004

Assets

Cash and cash equivalents $ 3,602,703 $ 3,501,384

Receivables from thrift resolutions and other assets, net (Note 3) 38,746 82,275

Total Assets $ 3,641,449 $ 3,583,659

Liabilities 

Accounts payable and other liabilities $ 7,799 $ 5,603

Contingent liabilities for litigation losses and other (Note 4) 257,503 410

Total Liabilities 265,302 6,013

Resolution Equity (Note 6)

Contributed capital 127,007,441 126,382,877

Accumulated deficit (123,631,294) (122,805,158)

Unrealized loss on available-for-sale securities, net 0 (73)

Accumulated deficit, net (123,631,294) (122,805,231)

Total Resolution Equity 3,376,147 3,577,646

Total Liabilities and Resolution Equity $ 3,641,449 $ 3,583,659

The accompanying notes are an integral part of these financial statements.
82

Federal Deposit Insurance Corporation

FSLIC Resolution Fund Statement of Income and Accumulated Deficit for the Years Ended December 31

Dollars in Thousands 

2005 2004

Revenue

Interest on U.S. Treasury obligations $ 98,260 $ 40,076

Realized gain on investment in securitization-related assets acquired 

from receiverships (Note 3) 0 66,708

Other revenue 24,176 21,114

Total Revenue 122,436 127,898

Expenses and Losses

Operating expenses 24,626 22,928

Provision for losses (Note 5) 241,065 (13,206)

Expenses for goodwill settlements and litigation (Note 4) 718,494 31,632

Recovery of tax benefits (45,946) (82,937)

Other expenses 10,333 11,703

Total Expenses and Losses 948,572 (29,880)

Net (Loss)/Income (826,136) 157,778

Unrealized gain/(loss) on available-for-sale securities, net (Note 3) 73 (41,572)

Comprehensive (Loss)/Income (826,063) 116,206

Accumulated Deficit - Beginning (122,805,231) (122,921,437)

Accumulated Deficit - Ending $ (123,631,294) $ (122,805,231)

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

FSLIC Resolution Fund

83

Federal Deposit Insurance Corporation

FSLIC Resolution Fund Statement of Cash Flows for the Years Ended December 31

Dollars in Thousands 

2005 2004

Operating Activities

Net (Loss)/Income: $ (826,136) $ 157,778

Adjustments to reconcile net (loss)/income to net cash (used by) 

provided by operating activities:

Provision for losses 241,065 (13,206)

Change in Assets and Liabilities:

Decrease/(Increase) in receivables from thrift resolutions and other assets 59,459 (28,943)

Increase/(Decrease) in accounts payable and other liabilities 2,196 (13,778)

Net Cash (Used by) Provided by Operating Activities (523,416) 101,851

Investing Activities

Investment in securitization-related assets acquired from receiverships 171 115,975

Net Cash Provided by Investing Activities 171 115,975

Financing Activities

Provided by:

U.S.Treasury payments for goodwill settlements 624,564 5,026

Net Cash Provided by Financing Activities 624,564 5,026

Net Increase in Cash and Cash Equivalents 101,319 222,852

Cash and Cash Equivalents - Beginning 3,501,384 3,278,532

Cash and Cash Equivalents - Ending $ 3,602,703 $ 3,501,384

The accompanying notes are an integral part of these financial statements.
1

84

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 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 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.

FSLIC Resolution Fund

Notes to the Financial Statements December 31,2005 and 2004

Financial Statements and Notes
2

FRF

FSLIC Resolution Fund

85

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 FRFRTC 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 five to ten

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 five to ten 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.

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 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.
86

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 shortterm, 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.

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

FRF

FSLIC Resolution Fund

87

Reclassifications

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.

Gross receivables from thrift resolutions and the investment in securitizationrelated assets subject the FRF to credit risk. An allowance for loss of $16.1 billion,

or 99.9 percent of the gross receivable, was recorded as of December 31, 2005.

Of the remaining 0.1 percent of the gross receivable, 71 percent is expected to

be repaid from receivership cash and investments. 

88

Receivables From Thrift Resolutions and Other Assets, Net at December 31

Dollars in Thousands 

2005 2004

Receivables from closed thrifts $ 16,080,789 $ 19,952,501

Allowance for losses (16,065,703) (19,894,023)

Receivables from Thrift Resolutions, Net 15,086 58,478

Investment in securitization-related assets acquired from receiverships $ 16,721 $ 15,643

Other assets 6,939 8,154

Total $ 38,746 $ 82,275
44. Contingent Liabilities for:

Litigation Losses

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.

Additional Contingency 

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. 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. 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, 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

FSLIC Resolution Fund

FRF

89
90

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 million.

Guarini Litigation

Paralleling the Goodwill cases are similar cases alleging that the government

breached agreements regarding tax benefits associated with certain FSLICassisted 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. 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 cost

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.
5

FRF

FSLIC Resolution Fund

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. 

91
92

6

Resolution Equity at December 31, 2005

Dollars in Thousands 

FRF

FRF-FSLIC FRF-RTC Consolidated

Contributed capital - beginning $ 44,183,540 $ 82,199,337 $ 126,382,877

Add: U.S. Treasury payments for goodwill settlements 624,564 0 624,564

Contributed capital - ending 44,808,104 82,199,337 127,007,441

Accumulated deficit (41,985,539) (81,645,755) (123,631,294)

Add: Unrealized loss on available-for-sale securities 0 0 0

Accumulated deficit, net (41,985,539) (81,645,755) (123,631,294)

Total $ 2,822,565 $ 553,582 $ 3,376,147

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.

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, 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.

Accumulated Deficit

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 

dissolution dates.
FRF

7

FSLIC Resolution Fund

93

7. Employee Benefits

Pension 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 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.