Crisis Resolution in the Thrift Industry: A Mid America Institute Report

114 Pages·1990·7.783 MB·English

by  Roger C. Kormendi, Victor L. Bernard, S. Craig Pirrong, Edward A. Snyder (auth.)

Crisis Resolution in the
Thrift Industry
Innovations in Financial Markets
and Institutions
Editors:
Robert A. Eisenbeis and Richard W. McEnally
University of North Carolina at Chapel Hill
Chapel Hill, North Carolina, U.S.A.
Previously published books in the series:
1. England, C. and Huertas, T.:
THE FINANCIAL SERVICES REVOLUTION
2. Gup, B.:
BANK MERGERS: CURRENT ISSUES AND PERSPECTIVES
Crisis Resolution in the
Thrift Industry
A Mid America Institute Report
by
Roger C. Kormendi
Victor L. Bernard
S. Craig Pirrong
Edward A. Snyder
University of Michigan
Kluwer Academic Publishers
Boston/Dordrecht/London
Distributors for North America:
Kluwer Academic Publishers
101 Philip Drive
Assinippi Park
Norwell, Massachusetts 02061 USA
Distributors for all other countries:
Kluwer Academic Publishers Group
Distribution Centre
Post Office Box 322
3300 AH Dordrecht. THE NETHERLANDS
Ubrary of Congress Cataloging-in-Publication Data
Crisis resolution in the thrift industry: a Mid America Institute
report / by Roger C. Kormendi ... (et aJ.].
p. em. - (lnnovalions in financial markets and institutions)
Includes bibliographical references (p. ).
ISBN-I3: 978-94-010-6815-4 e-ISBN-I3: 978-94-009-0735-5
001: 10.1007/978-94-009-0735-5
1. Savings and loan associations-Government policy-United
States. 2. Federal Savings and Loan Insurance Corporation.
I. Kormendi, Roger C. 11. Mid America Institute for Public Policy
Research. 1II. Series.
HG2152.C76 1990
332.3 '2 '0973-dc20 89-28734
CIP
Copyright © 1989 by Kluwer Academic Publishers
Softcover reprint of the hardcover 1st edition 1989
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system or transmitted in any form or by any means,
mechanical, photocopying, recording. or otherwise, without the prior
written permission of the publisher, Kluwer Academic Publishers, tol
Philip Drive, Assinippi Park, Norwell, Massachusetts 02061.
THE TASK FORCE
This book is a revised version of the Report of the Mid America Institute
Task Force on the Thrift Crisis, issued March 3,1989.
The Task Force was composed of a Core Staff and a Resource Panel. The
Task Force Report was written by the Core Staff based on extensive
interaction with the Resource Panel.
The Authors of this book constituted the Core Staff of the Task Force.
The Resource Panel included:
William H. Beaver
Stanford University
Michael H. Bradley
University of Michigan
Robert S. Merton
Harvard University
Merton H. Miller
University of Chicago
Katherine Schipper
University of Chicago
Myron S. Scholes
Stanford University
Roman L. Weil
University of Chicago
Mark A. Wolfson
Stanford University
ACKNOWLEDGEMENTS
We would like to acknowledge the help of significant contributors to
the success of this report: Robert Kamphuis (Executive Director of Mid
America Institute) for his overall efforts to coordinate Task Force
operations from inception through conclusion; Philip Meguire (University
of Michigan), Ida Walters (Mid America Institute), and Harry Watson
(Mid America Institute) for their contributions to both substantive content
and exposition; Philip Meguire, for his assistance in organizing the dataset
and performing the calculations; Dick Jobes and Tom Lechner (both from
the University of Michigan) for research assistance; Bernadine Gibson
(Mid America Institute) and Mary Hardy (University of Michigan) for their
efforts to facilitate Task Force operations; Margaret Oberle (University of
Michigan) for typing the original drafts faster than we could produce it;
and Amy McDonald for preparing the document for publication.
CONTENTS
List of Tables xi
Preface xiii
EXECUTNE SUMMARY 1
CHAPTER 1. INIRODUCTION AND OVERVIEW 9
Background 9
Causes of the Insolvency Crisis 13
Key Issues and the Structure of this Report 16
CHAPTER 2. THE TIMELINESS OF REGULATORY
ACTION 19
Introduction 19
The Sources of Growth in the Net Deficit 20
Methods to Control the Present Value of
FSLIC Liabilities 22
An Analysis of Regulatory Oversight of
Insolvent Thrifts 23
CHAPTER 3. RESOLUTION OF INSOLVENT THRIFTS:
FUNDAMENTAL ISSUES 27
Desirable Characteristics of a Resolution Process 27
Resolution Under Resource Constraints 30
CHAPTER 4. FSLIC'S ACQUISITION PROCESS 33
The Marketing and Negotiation Process 34
The Terms of Assistance Agr~ments 36
Analysis of the Contractual Terms of the
Assistance Agreements 37
Approaches for Ownership and Management
clAs~ ~
Assistance Packages: "Clean Assistance Agreements" 44
ix
x CRISIS RESOLUTION IN THE THRIFT INDUSTRY
CHAPTER 5. ANALYSIS OF FSLIC'S :ME1HODOLOGY
FOR EVALUATING BIDS 49
A. The Structure of FSLIC's Evaluation Methodology 50
B. Adjustments to Improve Cost Evaluation 51
C. Issues in Discounting Risky Cash Flows 55
D. Summary of the Adjustment Effects 58
E. The Potential Magnitude of Adjustments to the
FSLIC Methodology: An Examination of
the Impact on 84 Acquisitions During 1988 59
F. The Potential Magnitude of Adjustments to the
FSLIC Methodology: An Examination
of the American Federal Savings Acquisition 63
G. Summary and Conclusions 67
CHAPTER 6. EMPIRICAL EVIDENCE ON FSLIC'S
COST OF SOLUTION 71
The Questions 72
Data, Methods, and Results 74
Conclusions and Directions for Further Research 83
CHAPTER 7. CONCLUSIONS 87
The Fundamental Problem 87
FSLIC Estimates of the Cost of Solution
Through Assisted Acquisition 87
Empirical Analysis of the Cost of Assisted
Acquisitions in 1988 88
A Key Recommendation: The "Clean
Assistance Package" 88
ABOUT THE TASK FORCE :MEMBERS 89
BIDLIOGRAPHY 93
INDEX 103
LIST OF TABLES
Table 1-1: Total and Average Values of Cost of Solution,
Tangible Net Worth and Tax Benefits Accruing
to Acquirer: 1988 FSLIC Assisted Acquisitions 11
Table 1-2: Ten Highest 1988 FSLIC Resolutions Ranked by
Estimated Present Value of Cost of Solution 12
Table 5-1: Sensitivity of Estimated Total Cost from Assisted
Acquisitions in 1988: Extent of Cases in which
Cost Savings are Negative 62
Table 5-2: Summary Evaluation of Bass Group Bid for
American Savings and Loan 65
Addendum to Table 5-2 66
Table 6-1: Variables Used in the Empirical Analysis 75
Table 6-2: Percentage Cost Savings: December vs. Non-December
and SWP vs. Non-SWP 76
Table 6-3: Percentage Cost Savings (Tax-adjusted) December
vs. Non-December and SWP vs. Non-SWP 77
Table 6-4: Regression Model to Answer Six Basic Questions
Concerning 1988 Assisted Acquisitions 79
Table 6-5: Linear Regression Estimates for Cost of
Solution: 1988 FSLIC Resolutions 80
xi
PREFACE
On February 6, 1989, the Federal Home Loan Bank Board contacted Mid
America Institute to inquire whether it would undertake an independent,
academically oriented analysis of the insolvency resolution crisis in the
thrift industry. The Senate Banking Committee, during the course of
hearings on the thrift crisis, had suggested to the Bank Board tile
desirability of an independent assessment of Bank: Board and FSLIC
resolution methodology, specifically as it related to the controversy
surrounding the December deals, the Southwest Plan, and the possibility
that tax considerations were driving certain deals.
The Bank Board had already initiated studies from industry-oriented
perspectives. Therefore, it felt that an academic perspective would provide
both a valuable addition to the process, and by the nature of academia,
perhaps the best prospect of a credible and independent viewpoint.
The Bank Board was prepared to give an appropriately structured Task
Force virtually unlimited access to all personnel, documents and resources
that the Task Force felt necessary to come to an uncompromising
assessment. The only significant constraint imposed was that a report had
to be available prior to the start of the next round of Senate Banking
Committee hearings on March 1, 1989. The Task Force would be given
complete discretion as to the scope and coverage of the report, but it was
requested that the topic of the December deals, particularly the associated
tax considerations, be a significant part of the report.
On February 7, 1989 Mid America Institute started the process of
putting together a team capable of undertaking the demanding task of
xiii