Financial Audit: Resolution Trust Corporation's 1995 and 1994 Financial Statements
Published: 1996-07-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a legislative requirement, GAO audited the Resolution Trust Corporation's (RTC) financial statements for the years ended December 31, 1995 and 1994. GAO also reviewed: (1) RTC internal control weaknesses; (2) RTC mission and its completion; (3) RTC costs and funding; and (4) the cost of resolving the savings and loan crisis.
section_title: What GAO Found
paragraphs: GAO found that: (1) RTC financial statements were reliable in all material aspects; (2) although RTC internal controls need improvement, they were effective in safeguarding assets, ensured that transactions were in accordance with management authority and material laws and regulations, and ensured that there were no material misstatements; and (3) there was no material noncompliance with applicable laws and regulations. GAO also found that: (1) RTC essentially accomplished its mission of closing insolvent institutions, liquidating institution assets, insuring depositor accounts, and bringing many thrift violators to justice; (2) the estimated cost of RTC activities totalled $87.9 billion; (3) RTC contractor control weaknesses and performance problems could adversely affect receivership recoveries; (4) all of the $160.1 billion in estimated direct and indirect costs of RTC and Federal Savings and Loan Insurance Corporation activities have been provided for as of December 31, 1995; (5) the cost of present and future litigation resulting from the savings and loan crisis is unknown; (6) the annual interest expense on the $38.2 billion in Financing Corporation and Resolution Funding Corporation bonds will continue to significantly impact taxpayers and the savings and loan industry; and (7) because the Savings Association Insurance Fund has not been fully capitalized, thus deposit insurance premiums have remained high.

section_title: Letter
paragraphs: This report presents our opinions on the financial statements of the Resolution Trust Corporation (RTC) for the years ended December 31, 1995 and 1994. This report also presents our opinion on RTC management’s assertions regarding the effectiveness of its system of internal controls on December 31, 1995, and our evaluation of compliance with laws and regulations. We conducted our audits pursuant to the provisions of section 21A(k)(1) of the Federal Home Loan Bank Act (12 U.S.C. 1441a(k)(1)) and in accordance with generally accepted government auditing standards.
The report also discusses (1) an internal control weakness we identified, (2) the savings and loan crisis and the creation of RTC, (3) the completion of RTC’s mission, (4) RTC’s costs and funding, (5) RTC’s contracting, (6) the cost of resolving the savings and loan crisis, and (7) remaining fiscal implications of the crisis.
We are sending copies of this report to the Chairman and members of the Thrift Depositor Protection Oversight Board; the Chairman of the Board of Directors of the Federal Deposit Insurance Corporation; the Director of the Office of Management and Budget; the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, the Senate Committee on Banking, Housing and Urban Affairs, and the House Committee on Banking and Financial Services; and other interested parties.
This report was prepared under the direction of Robert W. Gramling, Director, Corporate Audits and Standards, who may be reached at (202) 512-9406 if you or your staff have any questions. Major contributors to this report are listed in appendix IV.
Charles A. Bowsher Comptroller General of the United States United States General Accounting Office Washington, D.C. 20548 Comptroller General of the United States To the Thrift Depositor Protection Oversight Board We have audited the Resolution Trust Corporation’s (RTC) statements of financial position as of December 31, 1995 and 1994, and the related statements of revenues, expenses, accumulated deficit, and cash flows for the years then ended as reported by the Federal Deposit Insurance Corporation (FDIC). We found:
RTC’s financial statements referred to above were reliable in all material respects.
Although internal controls should be improved, RTC management fairly stated that internal controls in place on December 31, 1995, were effective in safeguarding assets from material loss, assuring material compliance with relevant laws and regulations, and assuring that there were no material misstatements in the financial statements.
No reportable noncompliance with laws and regulations we tested.
The following section discusses each of the above conclusions in more detail. In addition, with the termination of RTC on December 31, 1995, an important phase of the savings and loan crisis has ended. Accordingly, the report also presents an historical perspective on the savings and loan crisis and RTC, the costs of the crisis, and remaining fiscal implications of the crisis.
Appendix I presents RTC’s financial statements. Appendix II presents RTC management’s report on internal controls. FDIC’s written comments on a draft of this report are included in appendix III. Major contributors to this report are included in appendix IV.
subsections: section_title: Opinion on Financial Statements
paragraphs: The financial statements including the accompanying notes present fairly, in all material respects, in accordance with generally accepted accounting principles, the Resolution Trust Corporation’s assets, liabilities, and equity; revenues, expenses, and accumulated deficit; and cash flows.
However, misstatements may nevertheless occur in other RTC-related financial information as a result of the internal control weakness described below.
section_title: Opinion on RTC Management’s Assertion About the Effectiveness of Internal Controls
paragraphs: We evaluated RTC management’s assertion about the effectiveness of its internal controls designed to safeguard assets against loss from unauthorized acquisition, use, or assure the execution of transactions in accordance with management’s authority and with laws and regulations that have a direct and material effect on the financial statements; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements and to maintain accountability for assets.
RTC management fairly stated that those controls in place on December 31, 1995, provided reasonable assurance that losses, noncompliance, or misstatements material in relation to the financial statements would be prevented or detected on a timely basis. RTC management made this assertion, which is included in appendix II, based upon criteria established under the Federal Managers’ Financial Integrity Act of 1982 (FMFIA). RTC management, in making its assertion, recognized the need to improve internal controls. Our work also identified the need to improve internal controls, as described in the following section. The weakness in internal controls, although not considered a material weakness, represents a significant deficiency in the design or operation of internal controls which could have adversely affected RTC’s ability to fully meet the internal control objectives listed above.
section_title: Reportable Condition
paragraphs: RTC acted during 1995 to resolve the reportable condition related to the weaknesses in general controls over some computerized information systems identified in our audit of its 1994 financial statements. However, as reported by RTC, many of those corrective actions were not completed until late in 1995. In addition, our audit of RTC’s 1995 financial statements identified additional weaknesses related to general controls over its computerized systems such that this reportable condition continued to exist.
Because RTC relied on its computerized information systems extensively, both in its daily operations and in processing and reporting financial information, the effectiveness of general controls is a significant factor in ensuring the integrity and reliability of financial data. Because corrective actions for many of the general control weaknesses identified in our 1995 and 1994 audits were not implemented until late 1995 and early 1996, our audit found that general controls still did not provide adequate assurance that some of RTC data files and computer programs were fully protected from unauthorized access and modification.
In response to the weaknesses we identified, RTC and FDIC developed action plans to address the weaknesses. Prior to the completion of our audit work on June 7, 1996, FDIC reported that most of the corrective actions had been implemented, with those remaining scheduled for implementation by September 30, 1996. We plan to evaluate the effectiveness of the corrective actions as part of our 1996 audit of FDIC.
During 1995, RTC performed accounting and control procedures, such as reconciliations and manual comparisons, which would have detected material data integrity problems resulting from inadequate general controls. Without these procedures, weaknesses in the general controls would raise significant concern over the integrity of the information obtained from the affected systems.
Other less significant matters involving the internal control structure and its operation noted during our audit will be communicated separately to FDIC’s management, which assumed responsibility for RTC’s remaining assets and liabilities since RTC’s termination on December 31, 1995.
section_title: Compliance With Laws and Regulations
paragraphs: Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that would be reportable under generally accepted government auditing standards. However, the objective of our audit was not to provide an opinion on the overall compliance with laws and regulations. Accordingly, we do not express such an opinion.
section_title: The Savings and Loan Crisis: Historical Perspective and Fiscal Implications
paragraphs: With the termination of RTC’s operations on December 31, 1995, a significant phase of the savings and loan crisis has ended. The following sections present an historical perspective on the savings and loan crisis and RTC’s role in resolving the crisis. Specifically, the information describes (1) background on the savings and loan crisis and the creation of RTC, (2) the completion of RTC’s mission, (3) RTC’s estimated costs and funding, (4) RTC’s controls over contracting, (5) the cost of resolving the savings and loan crisis, and (6) remaining fiscal implications of the crisis.
subsections: section_title: The Savings and Loan Crisis and RTC
paragraphs: During the 1980s, the savings and loan industry experienced severe financial losses because extremely high interest rates caused institutions to pay high rates on deposits and other funds while earning low yields on their long-term loan portfolios. During this period, regulators reduced capital standards and allowed the use of alternative accounting procedures to increase reported capital levels. While these conditions were occurring, institutions were allowed to diversify their investments into potentially more profitable, but risky, activities. The profitability of many of these activities depended heavily on continued inflation in real estate values to make them economically viable. In many cases, diversification was accompanied by inadequate internal controls and noncompliance with laws and regulations, thus further increasing the risk of these activities.
As a result of these factors, many institutions experienced substantial losses on their loans and investments, a condition that was made worse by an economic downturn. Faced with increasing losses, the industry’s insurance fund, the Federal Savings and Loan Insurance Corporation (FSLIC), began incurring losses in 1984. By the end of 1987, 505 savings and loan institutions were insolvent. The industry’s deteriorating financial condition overwhelmed the insurance fund which only 7 years earlier reported insurance reserves of $6.5 billion. In 1987, the Congress responded by creating the Financing Corporation (FICO) to provide financing to the FSLIC through the issuance of bonds. Through August 8, 1989, FICO provided $7.5 billion in financing to the FSLIC; however, the insurance fund required far greater funding to deal with the industry’s problems.
In response to the worsening savings and loan crisis, the Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) on August 9, 1989. FIRREA abolished FSLIC and transferred its assets, liabilities, and operations to the newly-created FSLIC Resolution Fund (FRF) to be administered by the FDIC. In addition, FIRREA created a new insurance fund, the Savings Association Insurance Fund (SAIF).
FIRREA also created the RTC to resolve all troubled institutions placed into conservatorship or receivership from January 1, 1989, through June 30, 1995. RTC’s overall responsibilities included managing and disposing of receivership assets and recovering taxpayer funds. In 1993, the Resolution Trust Corporation Completion Act required RTC to cease its operations on or before December 31, 1995, and transfer any remaining assets and liabilities to the FSLIC Resolution Fund.
FIRREA provided RTC with a total of $50 billion in funding to resolve failed institutions and pay related expenses. FIRREA also established the Resolution Funding Corporation (REFCORP) to provide RTC with $30 billion of the $50 billion in funding through the issuance of bonds. However, funding provided to RTC by FIRREA was not sufficient and the Congress enacted subsequent legislation resulting in a total of $105 billion being made available to RTC to cover losses associated with resolutions.
section_title: RTC’s Mission Substantially Completed
paragraphs: RTC closed 747 institutions with $402 billion in book value of assets when they entered the conservatorship phase. During conservatorship, assets were reduced by $162 billion to $240 billion through sales, collections, and other adjustments. In the receivership phase, assets were further reduced by $232 billion. Thus, at December 31, 1995, RTC assets in liquidation totaled approximately $8 billion. The remaining assets were transferred to the FSLIC Resolution Fund effective January 1, 1996.
RTC also fulfilled the government’s pledge to insured depositors by protecting 25 million depositor accounts. Of the $277 billion in liabilities at resolution, approximately $221 billion represented liabilities to depositors. At resolution, RTC generally transferred the deposit liabilities, along with the required funding, to one or more healthy acquiring institutions. During the receivership phase, RTC used asset recoveries to pay the remaining creditors, and to recover a portion of the amount it advanced to cover deposit liabilities.
Another important part of RTC’s activities included ensuring that as many thrift violators as possible were brought to justice and that funds were recovered on behalf of taxpayers. RTC investigated, initiated civil litigation, and made criminal referrals in cases involving former officers, directors, professionals, and others who played a role in the demise of failed institutions. Approximately $2.4 billion was recovered from professional liability claims, and $26 million was collected in criminal restitution.
section_title: RTC’s Estimated Costs and Funding
paragraphs: As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion. These costs represent the difference between recoveries from receivership assets and the amounts advanced to pay depositors and other creditors of failed institutions plus the expenses associated with resolving institutions. As shown in table 1, $81.3 billion, or 92 percent, of RTC’s total estimated costs have already been realized through December 31, 1995, and therefore, are known. The estimated $6.6 billion remaining at December 31, 1995, represents expected future losses on remaining receivership and corporate assets. The ultimate recoveries on those assets are subject to uncertainties.
Losses of $72.2 billion were realized while institutions were in receivership and after termination. Receivership losses were realized when amounts realized from asset sales were not sufficient to repay the amounts advanced by RTC. For those institutions that were terminated, RTC realized further losses if it later sold assets for less than the price it paid when it purchased the assets from the receiverships at termination.
RTC borrowed working capital funds from the Federal Financing Bank (FFB) to provide funding for insured deposits and to replace high-cost borrowing of the failed institutions. In general, these funds were expected to be repaid with the proceeds from receivership asset sales, with any shortfall being covered by loss funding. Through December 31, 1995, RTC incurred $10.2 billion in interest expense on amounts borrowed from the FFB for working capital.
RTC’s administrative expenses represent overhead expenses not otherwise charged or billed back to receiverships. The portion of expenses billed back to receiverships is not included in RTC’s administrative expense total, but is included in the loss from receiverships. In addition, receiverships pay many other expenses directly which are also included in the losses from receiverships. The estimated $6.6 billion of future costs include expected losses from receiverships and terminations as well as estimated future administrative expenses.
In total, the Congress provided funding to cover $105 billion of losses and expenses associated with RTC’s resolution of failed institutions. As shown in table 2, after reducing the $105 billion available for RTC’s estimated losses of $87.9 billion, an estimated $17.1 billion in unused loss funds will remain.
The final amount of unused loss funds will not be known with certainty until all remaining assets and liabilities are liquidated. Loss funds not used for RTC resolution activity are available until December 31, 1997, for losses incurred by the SAIF, if the conditions set forth in the Resolution Trust Corporation Completion Act are met. Also, according to the act, unused loss funds will be returned to the general fund of the Treasury.
section_title: Controls Over Contracting May Have Affected Receivership Recoveries
paragraphs: RTC used thousands of private contractors to manage and dispose of assets from failed thrifts, including activities such as collecting income and paying expenses. The estimated recoveries from receiverships included in RTC’s financial statements include the receipts collected and disbursements made by contractors that perform services for receiverships. As we previously reported, weak operating controls over contract issuance and contractor oversight may have affected the amounts RTC ultimately recovered from its receiverships. While we assess, as part of our financial statement audit, internal accounting controls over receivership receipts and disbursements, RTC’s operating controls over contract issuance and contractor oversight are not part of the scope of our audit. These operating controls were reviewed by RTC’s Inspector General and Office of Contract Oversight and Surveillance, as well as by GAO in other reviews.
RTC took various actions to improve the process of contract issuance and contractor oversight, and had placed increased emphasis on the process of closing out contracts to ensure that contractors have fulfilled all contractual responsibilities. However, results of audits conducted by RTC’s Inspector General and Office of Contract Oversight and Surveillance demonstrated that despite RTC’s actions to correct contracting problems, the effects of early neglect of contracting operations remained. These audits identified internal control problems with RTC’s auction contracts and with RTC’s general oversight of contractors. These audits also identified significant performance problems with contracts that were issued before many contracting reforms and improvements were implemented by RTC.
During 1995, RTC closed many contracts, pursued contract audit resolution, identified contracts necessary to accomplish the remaining workload after RTC’s termination, and processed contract modifications to transfer them to FDIC. However, estimated future recoveries from RTC receiverships remain vulnerable to the risks associated with early weaknesses in contractor oversight and performance. As a result of these operating weaknesses, RTC could not be sure that it has recovered all it should have recovered from its receiverships.
section_title: RTC’s Costs Represent Only a Portion of the Total Cost of the Savings and Loan Crisis
paragraphs: RTC’s costs for its responsibilities in resolving the savings and loan crisis represent only a portion of the total costs of the savings and loan crisis. The cost associated with FSLIC assistance and resolutions represents another sizable direct cost. In addition, the total cost includes indirect costs related to tax benefits granted in FSLIC assistance agreements.
Of the $160.1 billion in total direct and indirect costs, approximately $132.1 billion, or 83 percent was provided from taxpayer funding sources. The remaining $28.0 billion, or 17 percent was provided from industry assessments and other private sources. (See Figure 1.)
section_title: Direct Costs
paragraphs: As shown in table 3, the direct costs associated with resolving the savings and loans crisis include the cost of RTC resolutions, FSLIC activity, and supervisory goodwill claims. All of the funding for the estimated $152.6 billion in estimated costs related to FSLIC and RTC has been provided as of December 31, 1995. However, the cost of the claims is currently uncertain.
subsections: section_title: Resolution Trust Corporation
paragraphs: RTC resolved 747 failed institutions through June 30, 1995, when its authority to close failed thrifts expired. As of December 31, 1995, the total estimated losses associated with RTC’s resolved institutions is $87.9 billion. Taxpayer funding for RTC’s direct costs is estimated to be $81.9 billion, which is made up of $56.6 billion in appropriations and $25.3 billion related to the government’s responsibility attributable to the REFCORP transaction. The private sources of funding for RTC activity totaled $6.0 billion, consisting of $1.2 billion contributed to RTC from the Federal Home Loan Banks, and $4.8 billion from SAIF and the Federal Home Loan Banks to support the REFCORP transaction.
section_title: FSLIC Costs
paragraphs: As of December 31, 1995, the total estimated costs associated with FSLIC activity was $64.7 billion. The estimated cost includes expenses and liabilities arising from FSLIC assistance provided to acquirers of failed or failing savings and loan institutions and FSLIC resolution activity since January 1, 1986. Taxpayer funding for FSLIC’s costs consists of appropriations used by the FSLIC Resolution Fund and totaled $42.7 billion. The private sources of funding for the FSLIC costs include $13.8 billion from FSLIC capital and industry assessments and $8.2 billion provided by FICO.
section_title: Supervisory Goodwill Claims
paragraphs: An additional cost of the savings and loan crisis results from the federal government’s legal exposure related to supervisory goodwill and other forbearances from regulatory capital requirements granted to the acquirers of troubled savings and loan institutions in the 1980s. As of December 31, 1995, there were approximately 120 pending lawsuits which stem from legislation that resulted in the elimination of supervisory goodwill and other forbearances from regulatory capital. These lawsuits assert various legal claims including breach of contract or an uncompensated taking of property resulting from the FIRREA provisions regarding minimum capital requirements for thrifts and limitations as to the use of supervisory goodwill to meet minimum capital requirements. One case has resulted in a final judgment of $6 million against FDIC, which was paid by FRF.
On July 1, 1996, the United States Supreme Court concluded that the government is liable for damages in three other cases in which the changes in regulatory treament required by FIRREA led the government to not honor its contractual obligations. However, because the lower courts had not determined the appropriate measure or amount of damages, the Supreme Court returned the cases to the Court of Federal Claims for further proceedings. Until the amounts of damages are determined by the court, the amount of additional cost from these three cases is uncertain. Further, with respect to the other pending cases, the outcome of each case and the amount of any possible damages will depend on the facts and circumstances, including the wording of agreements between thrift regulators and acquirers of troubled savings and loan institutions. Estimates of possible damages suggest that the additional costs associated with these claims may be in the billions. The Congressional Budget Office’s December 1995 update of its baseline budget projections increased its projection of future federal outlays for fiscal years 1997 through 2002 by $9 billion for possible payments of such claims.
section_title: Indirect Costs
paragraphs: As shown in table 3, the estimated cost of special tax benefits related to FSLIC assistance agreements represents an indirect cost of the savings and loan crisis. The estimated total cost for these tax benefits is $7.5 billion, which will be funded using taxpayer sources.
Acquiring institutions received various tax benefits associated with FSLIC assistance agreements. For instance, for tax purposes, assistance paid to an acquiring institution was considered nontaxable. In addition, in some cases, acquiring institutions could carry over certain losses and tax attributes of the acquired troubled institutions to reduce their own tax liability. The effect of these special tax benefits was to reduce the amount of FSLIC assistance payments required by an acquiring institution for a given transaction because of the value of tax benefits associated with the transaction. Thus, total assistance received by an acquiring institution consisted of both FSLIC payments and the value of these tax benefits.
Because these tax benefits represented a reduction in general Treasury receipts rather than direct costs to FSLIC, we are presenting tax benefits as indirect costs associated with FSLIC’s assistance transactions. Of the $7.5 billion in estimated tax benefits, $3.1 billion has been realized through December 31, 1995. The remaining $4.4 billion represents an estimate of the future tax benefits that could be realized by acquiring institutions in the future. However, the amount of future tax benefits depends greatly upon the future actions and profitability of the acquirers. For example, reduced or enhanced earnings, institutional acquisitions, and changes in corporate control would all affect acquirers’ taxable income or the amount of tax benefits allowed to offset such taxable income in the future. The current estimate of future tax benefits is based on assumptions which are currently deemed most likely to occur in the future. However, if conditions change, the amount of future estimated tax benefits realized could be substantially higher or lower than the estimated $4.4 billion.
section_title: Remaining Fiscal Implications of the Savings and Loan Crisis
paragraphs: Although most of the direct and indirect costs of the savings and loan crisis had been funded or provided for through December 31, 1995, significant fiscal implications remain as a result of the crisis. Substantial funds were borrowed through bonds specifically designed to provide funding for a portion of the direct costs. Both taxpayers and the industry are paying financing costs on those bonds. In addition, a significant portion of direct costs were paid from appropriations at a time when the federal government was operating with a sizable budget deficit. Therefore, it is arguable that additional borrowing was incurred. In view of these circumstances, we are presenting information on the known and estimated interest expense associated with financing the crisis because the future stream of payments associated with interest will have continuing fiscal implications for taxpayers and the savings and loan industry. An additional fiscal implication is that SAIF is currently undercapitalized and the savings and loan industry continues to pay high insurance premiums to build the fund.
subsections: section_title: FICO and REFCORP Bonds
paragraphs: In 1987, the Congress established FICO, which had the sole purpose of borrowing funds to provide financing to FSLIC. FICO provided funding for FSLIC-related costs by issuing $8.2 billion of noncallable, 30-year bonds to the public. In 1989, the Congress established REFCORP to borrow funds and provide funding to RTC. REFCORP provided funding to the RTC for resolution losses by issuing $30.0 billion of noncallable, 30- and 40-year bonds to the public. The annual interest expense on the $38.2 billion of bonds issued by FICO and REFCORP has and will continue to have a significant impact on taxpayers and the savings and loan industry. The annual FICO bond interest is funded from the industry’s insurance premiums and represents an increasing burden on the savings and loan industry. In addition, the government’s portion of annual interest expense on the REFCORP bonds will continue to require the use of increasingly scarce budgetary resources.
Annual interest on the FICO bonds is $793 million and is currently being paid from industry assessments and interest earnings on FICO’s cash balances. The annual interest obligation on the FICO bonds will continue through the maturity of the bonds in the years 2017 through 2019. The total nominal amount of interest expense over the life of the FICO bonds will be $23.8 billion.
Annual interest expense on the REFCORP bonds is $2.6 billion. The Federal Home Loan Banks contribute $300 million annually to the payment of REFCORP interest expense, and the remaining $2.3 billion of annual interest expense is paid through appropriations. Annual interest expense will continue through the maturity of the REFCORP bonds in the years 2019, 2020, 2021, and 2030. The total nominal amount of interest expense over the life of the REFCORP bonds will be $88 billion.
section_title: Estimated Treasury Interest Expense Associated With the Crisis
paragraphs: The largest source of funding to pay the direct costs of the savings and loan crisis was provided by taxpayers as a result of legislation enacted to specifically deal with the crisis. This legislation was enacted during a period in which the federal government was financing—via deficit spending—a sizable portion of its regular, ongoing program activities and operations. Under these circumstances, it is arguable that substantial, incremental Treasury borrowing occurred in order to finance the taxpayer portion of the crisis.
To arrive at an amount for estimated future interest associated with appropriations, we made various simplifying assumptions. For purposes of estimating Treasury interest expense associated with resolving the savings and loan crisis, we assumed that the entire amount of appropriations used to pay direct costs was borrowed. Various other simplifying assumptions were made regarding interest rates and the financing period. We assumed that the $99.3 billion in appropriations for the FSLIC Resolution Fund and the RTC would be financed for 30 years at 7 percent interest,with no future refinancing. Under these assumptions, approximately $209 billion in estimated interest payments would be needed over 30 years to cover the interest expense related to appropriations used to cover the direct costs of the crisis.
Table 4 presents the known and estimated interest expense components associated with the financing mechanisms used to provide funds for the direct costs of the savings and loan crisis.
Significant resources will be needed in the future to pay the known annual interest expense on the FICO and REFCORP bonds as well as the estimated Treasury interest expense related to the crisis. As shown in table 5, $20.4 billion, or 18 percent of the total nominal interest expense on FICO and REFCORP bonds has been paid through December 31, 1995. The remaining $91.4 billion, or 82 percent, will be funded in the future.
Future interest expense of approximately $18 billion remains to be paid to cover the FICO bond interest. Currently, insurance premiums paid by certain SAIF-insured institutions are used to pay annual FICO bond interest expense. In 1995, the FICO interest expense represented about 69 percent of insurance premiums earned on SAIF’s FICO-assessable base. In recent years, the FICO-assessable base has been shrinking, thereby increasing the burden of the FICO interest expense relative to the size of the assessment base, and calling into question the future ability of the FICO-assessable base to cover the annual FICO interest expense.
Future interest expense of approximately $73.4 billion remains to be paid on the REFCORP bonds. The Federal Home Loan Banks will continue to be responsible for paying $300 million each year toward the cost of REFCORP interest expense until the bonds mature. The remaining portion of the REFCORP bond interest expense will be paid with Treasury funds until the bonds mature in the years 2019, 2020, 2021, and 2030.
For purposes of analyzing the timing of estimated Treasury interest expense on funds provided to pay the direct costs, we estimated that approximately $176 billion of the $209 billion in estimated Treasury interest expense, shown in table 5, related to future periods. Under these assumptions, future estimated Treasury interest would represent a significant claim on future federal budgetary resources.
FIRREA created SAIF to insure deposits previously insured by the FSLIC, and set a designated reserve requirement of 1.25 percent of insured deposits. We consider the need to capitalize SAIF a remaining fiscal implication of the crisis because insurance premiums that could have been used to capitalize SAIF were used to pay a portion of the direct costs of the crisis,as well as annual interest expense on the FICO bonds. As a result, SAIF’s capitalization has been delayed, creating ongoing implications in terms of high deposit insurance premiums.
In order to be fully capitalized, SAIF would have needed $8.9 billion in reserves based on the level of insured deposits at December 31, 1995. However, at that date, SAIF had reserves of only $3.4 billion, $5.5 billion below the designated reserve amount of $8.9 billion.
section_title: Objectives, Scope, and Methodology
paragraphs: preparing annual financial statements in conformity with generally establishing, maintaining, and assessing the internal control structure to provide reasonable assurance that the broad control objectives of FMFIA are met; and complying with applicable laws and regulations.
We are responsible for obtaining reasonable assurance about whether (1) the financial statements are free of material misstatement and presented fairly, in all material respects, in conformity with generally accepted accounting principles and (2) RTC management’s assertion about the effectiveness of internal controls is fairly stated in all material respects and is based upon the criteria established under FMFIA. We are also responsible for testing compliance with selected provisions of laws and regulations and for performing limited procedures with respect to certain other information appearing in the financial statements.
In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by evaluated the overall presentation of the financial statements; obtained an understanding of the internal control structure related to safeguarding assets, compliance with laws and regulations, including the execution of transactions in accordance with management authority and financial reporting; tested relevant internal controls over safeguarding, compliance, and financial reporting and evaluated management’s assertion about the effectiveness of internal controls; and tested compliance with selected provisions of the following laws and regulations: section 21A of the Federal Home Loan Bank Act (12 U.S.C. 1441a) and
Chief Financial Officers Act of 1990, sections 305 and 306 (Public Law 101-576).
We did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to those controls necessary to achieve the objectives outlined in our opinion on RTC management’s assertion about the effectiveness of internal controls. Because of inherent limitations in any internal control structure, losses, noncompliance, or misstatements may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate.
With the termination of RTC on December 31, 1995, an important phase of the savings and loan crisis ended. To provide an historical perspective on RTC and its role in resolving the crisis, we obtained and reviewed background information and data from RTC and FDIC. In addition, we obtained and analyzed audited financial information from the following entities which had varying roles in resolving the savings and loan crisis: FSLIC, FICO, RTC, REFCORP, FSLIC Resolution Fund, and SAIF.
We conducted our audit from July 7, 1995, through June 7, 1996, in accordance with generally accepted government auditing standards.
section_title: FDIC Comments and Our Evaluation
paragraphs: FDIC provided written comments on a draft of this report because of its responsibility for RTC’s remaining assets and liabilities and its role in preparing RTC’s final financial statements. In FDIC’s comments, provided in appendix III, the Corporation’s Chief Financial Officer acknowledges the weaknesses in general controls over RTC’s computerized information systems and discusses the status of RTC and FDIC actions to correct them. We plan to evaluate the adequacy and effectiveness of those corrective actions as part of our audit of FDIC’s 1996 financial statements. The Chief Financial Officer’s comments also discuss FDIC’s involvement in RTC’s transition and FDIC’s plans in assuming responsibility for closing out RTC’s active and completed contracts.
section_title: RTC’s Financial Statements
paragraphs: Accounting and Information Management Division, Washington, D.C.
subsections: section_title: Atlanta Regional Office
section_title: Dallas Regional Office
section_title: Denver Regional Office
section_title: Kansas City Regional Office
section_title: Related GAO Products
paragraphs: Resolution Trust Corporation: Implementation of the Management Reforms in the RTC Completion Act (GAO/GGD-95-67, March 9, 1995)
Resolution Trust Corporation: Evaluations Needed to Identify the Most Effective Land Sales Methods (GAO/GGD-95-43, April 13, 1995) 1993 Thrift Resolutions: RTC’s Resolution Process Generally Adequate to Determine Least Costly Resolutions (GAO/GGD-95-119, May 15, 1996)
Resolution Trust Corporation: Management Improvements Reduce Risk But Transition Challenges Remain (GAO/T-GGD-95-163, May 16, 1995)
Resolution Trust Corporation: Management Improvements Reduce Risk But Transition Challenges Remain (GAO/T-GGD-95-188, June 20, 1995)
Inspectors General: Mandated Studies to Review Costly Bank and Thrift Failures (GAO/GGD-95-126, July 31, 1995)
Resolution Trust Corporation: Performing Assets Sold to Acquirers of Minority Thrifts (GAO/GGD-96-44, December 22, 1995)
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