Report No.: GAO/HR-93-4 Date: December 1992
____________________________________________________________________________
___
Author: United States General Accounting Office
Addressee: High-Risk Series
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Overview
- The Problem
- The Causes
- GAO's Suggestions for Improvement
RTC: an Organization With a Monumental Mission in a Difficult Environment
- The Mission
- The Environment
Resolution and Certain Financial Asset Sales Tasks Executed Fairly Well
Some Real Estate Disposition Practices Poorly Planned and Executed
- Auctions and Portfolio Sales Frequently Used but Untested
Contracting System Not Adequate
- Poor Contract Planning
- Contractor Oversight Needs Improvement
Information Systems Are Critical to the Management and Sale of Thrift Assets
Financial Management and Accountability Must Be a Priority
Future Uncertainties Affect Resolution Activities
Conclusions and Action Needed
Related GAO Products
High-Risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
Figures
=======
Figure 1: RTC Financial Assets Inventory, Sales, and Collections as of
September 30, 1992
Figure 2: RTC Real Estate Assets Inventory And Sales, as of
September 30, 1992
Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
and Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over the thrift
cleanup, which is mostly under the control of the Resolution Trust Corporati
on
(RTC). This report focuses primarily on the risks that RTC can minimize
through better management of its asset disposition and contracting activitie
s
and by strengthening its information systems. The report also discusses
opportunities to reduce the overall cost of the thrift cleanup to the
taxpayers by providing adequate funding to RTC to carry out its thrift
resolution responsibilities.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
the Office of Management and Budget, the President and Chief Executive Offic
er
of the Resolution Trust Corporation, and the Chairman of the Thrift Deposito
r
Protection Oversight Board.
In August 1989, Congress established the Resolution Trust Corporation (RTC)
to
resolve hundreds of failed savings and loan institutions and dispose of thei
r
assets. As of September 1992, RTC had disposed of assets totaling $287
billion, and RTC's remaining inventory was valued at approximately $107
billion. Through November 30, 1992, RTC had used nearly $87 billion of
taxpayer funds to cover losses emanating from thrift resolutions, and it
estimated that $25 billion in additional loss funds are needed to resolve
institutions that were expected to fail through September 30, 1993. Billions
more may be needed to resolve thrifts that fail after that date. However,
because of uncertainties involving the economy, interest rates, and asset sa
le
recoveries, it is difficult to estimate precisely the ultimate cost of the
cleanup.
RTC relies extensively on private sector contractors to manage and dispose o
f
assets and fulfill other needs. By September 30, 1992, RTC had awarded over
95,000 contracts with estimated fees totaling about $2.8 billion.
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THE PROBLEM
RTC has discharged some of its resolution and asset sales responsibilities
fairly well. But poor planning and execution of real estate disposition
strategies, problems with the contracting system, and inadequate information
systems have hampered RTC's overall performance. Deficiencies in these areas
reduce the amount of money RTC recovers through asset disposition and increa
se
the likelihood that taxpayers will need to cover additional costs.
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THE CAUSES
Of the several factors contributing to the risks at RTC, two are outside RTC
's
control. First is the sheer amount of taxpayer funds involved in the program
due to the inherent losses associated with failed thrifts. Estimates of the
eventual cost to taxpayers of the savings and loan cleanup exceed $300
billion. Second is the difficult economic environment. During the past 3
years, the demand for whole thrifts has been limited, real estate markets ha
ve
declined, the availability of credit to finance asset purchases has been
uncertain, and the economy as a whole has been in recession. Further, RTC's
asset inventory for both financial and real estate assets is becoming
increasingly concentrated in hard-to-sell categories. As a result, the final
cost of the cleanup will depend not just on how well thrift regulators and R
TC
discharge their responsibilities, but on the state of the economy at large.
Other factors such as disposition approaches, the contracting system, and
asset information systems are within RTC's control. RTC has used a variety o
f
techniques to dispose of its real estate assets, including individual sales,
auctions, and portfolio sales. But RTC's disposition approaches have sometim
es
been inefficient, and it has failed to adequately plan its sales approaches.
RTC's contracting system--the means through which RTC pursues its mission--i
s
troubled by poor planning and oversight. RTC does not adequately define what
services are needed, the scope of work, and the types of contracts that woul
d
best accomplish these ends. Moreover, RTC has difficulty overseeing the tens
of thousands of contractors who manage and dispose of billions of dollars in
assets on its behalf.
RTC's asset information systems are inadequate. In March 1992, we reported
that RTC had not adequately defined its business strategies for managing and
selling assets; matched information needs with these strategies; or develope
d
systems to provide the timely, accurate, and complete information needed to
manage and evaluate disposition programs and oversee contractors. Since then
,
RTC has taken steps to correct these problems, but much work remains.
In addition to these concerns, RTC's efforts have been hampered by repeated
funding disruptions. RTC has run out of funds and has had to stop resolving
thrifts three times since it was established. Most recently, RTC had to retu
rn
$18.3 billion to the Treasury because it did not obligate the funds before t
he
April 1, 1992, deadline. Certain RTC operations have not been funded since
that date. As a result, thrifts under RTC's control have continued to post
losses that will contribute to the overall cost of the cleanup.
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GAO'S SUGGESTIONS FOR IMPROVEMENT
We have made recommendations to RTC for improving its asset disposition and
contracting activities and its information systems. RTC is implementing many
of these recommendations, but additional actions are needed.
We continue to believe that RTC should be given the additional funds needed
to
pursue its resolution activities. Any further delay merely increases the
eventual cost of the savings and loan cleanup.
Finally, we have pointed out the need to prepare for the challenges that are
likely to endure beyond 1993, when RTC relinquishes its resolution
responsibilities, and 1996, when RTC is scheduled to close.
RTC: An Organization With a Monumental Mission in a Difficult Environment
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In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA) was enacted in response to a major financial crisis. FIRREA abolish
ed
the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance
Corporation (FSLIC) and established RTC to resolve hundreds of failed saving
s
and loan institutions. RTC is scheduled to stop taking in failed thrifts on
September 30, 1993. Subsequent thrift failures will be handled by the Saving
s
Association Insurance Fund (SAIF), which will be managed by the Federal
Deposit Insurance Corporation (FDIC). RTC will continue to manage and dispos
e
of its remaining inventory of thrifts and assets until its scheduled closing
on December 31, 1996. At that time, any remaining assets and liabilities wil
l
be passed on to the FSLIC Resolutions Fund, which will be managed by FDIC.
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THE MISSION
RTC resolves failed thrifts formerly insured by FSLIC before the enactment o
f
FIRREA and for which a conservator or receiver is appointed before October 1
,
1993. RTC will dispose of the assets of failed thrifts until it closes in
1996. RTC is required by FIRREA to carry out sometimes competing objectives,
such as minimizing losses incurred in resolving cases, maximizing recoveries
on the sale of institutions and their assets, minimizing the impact of its
activities on local markets, and maximizing preservation of affordable
housing. In addition, FIRREA authorizes RTC to use private sector contractor
s
to the extent practical and efficient. Clearly, RTC's most difficult role is
the management and disposition of the billions of dollars in assets from
hundreds of failed thrifts. RTC's ability to dispose of these assets
effectively will have an impact on the final cost of the thrift cleanup.
RTC has been provided $105 billion [ Footnote 1: Of the $105 billion, RTC
returned $18.3 billion to the Treasury as a result of the April 1, 1992,
deadline on obligation of its December 1991 appropriation. ] to cover loss
es
from thrift resolutions. Additionally, as of November 1992, RTC had borrowed
about $41 billion from the Federal Financing Bank to be repaid from the
proceeds of asset sales. Each of RTC's key functions directly affects the
total cost of the thrift cleanup. Every dollar that RTC fails to recover on
the resolution of thrifts or sale of assets or wastes through inefficient
operations is one more dollar added to the cost of the cleanup.
As authorized by FIRREA, RTC has used private sector contractors extensively
to manage and dispose of assets as well as to fulfill other needs. From its
inception through September 1992, RTC awarded over 95,000 contracts with
estimated fees of about $2.8 billion. Since RTC is not subject to the same
contracting laws and regulations that federal agencies must follow, it
developed its own contracting system. Because RTC achieves its mission throu
gh
the use of contractors, one of its most important tasks has been to oversee
the performance of thousands of contractors.
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THE ENVIRONMENT
RTC's task has been complicated by the difficult environment in which it has
had to operate. During the last 3 years, there has been limited demand for
whole thrifts, declining real estate markets, increasing numbers of troubled
assets, uncertain availability of credit to finance asset purchases, and the
recession. These factors are outside RTC's control.
While RTC has achieved good results in the sale of some types of assets, its
progress in disposing of other assets has been slower. Also, its remaining
assets are increasingly the hard-to-sell variety. This situation, in additio
n
to the difficult environment, means that disposal of these hard-to-sell
assets, while maximizing returns, will continue to be RTC's most difficult
challenge. Also, the expected failure of more thrifts could give RTC
additional inventories of assets to dispose of in the future.
Resolution and Certain Financial Asset Sales Tasks Executed Fairly Well
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RTC's effectiveness in resolving failed thrifts directly affects the final
cost of the savings and loan cleanup. RTC has executed its resolution tasks
fairly well, resolving 653 thrifts as of November 1992. Initially, RTC's
resolution strategy emphasized whole thrift sales over branch sales and
liquidations. In 1991, however, RTC adapted its strategies to respond more t
o
the market by offering branch sales as an initial option for acquirers, rath
er
than waiting until attempts to sell whole thrifts failed. It also began
offering assets for sale separately from deposits.
During the past 3 years, RTC executed certain financial asset sales tasks
fairly well. For example, it established and implemented successful programs
for securities sales and the securitization of performing loans.
As shown in figure 1, RTC has made progress in selling its financial assets.
From inception through September 1992, RTC disposed of almost $120 billion i
n
cash and securities, about $84 billion in 1-4 family residential mortgages,
almost $36 billion in other mortgages, and almost $23 billion in other loans
Figure 1 also shows RTC's remaining inventory of financial assets. Overall,
RTC has recovered about 95 percent of book value on financial assets it has
sold. There remains, however, some risk of future claims that could reduce
this recovery rate.
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Figure 1: RTC Financial Assets Inventory, Sales, and Collections as of
September 30, 1992
The following table represents the data for this chart in the printed versio
n
of the report. The actual figure appears in the printed report.
RTC's securities sales included about $8 billion (face value) of junk bonds,
and the junk bond inventory has been reduced to $211 million (face value). T
he
total remaining inventory of cash and securities was about $13 billion as of
September 30, 1992.
RTC's success in selling a large volume of securities is attributable, in
part, to its diligent efforts to hire people with the right skills and to
develop strategies responsive to market demands. In addition, generally
favorable market conditions for securities have helped RTC during the past 2
years.
RTC's securitization program has also produced significant results. Agency
swap transactions aggregating almost $4 billion have been competitively
awarded through July 31, 1992. In addition, 52 issues of RTC residential,
multifamily, commercial, and other mortgage-backed securities with a total
face value of about $28 billion had been successfully brought to market as o
f
September 30, 1992.
However, RTC's financial assets inventory is becoming increasingly
concentrated in hard-to-sell categories such as highly leveraged transaction
s,
limited partnership interests, equity investments, and nonperforming loans.
Hence, RTC faces the risk of lower recoveries as it sells these assets.
RTC faces two other types of risk in its financial assets activities. One of
these is the contingent liability remaining from assets that have already be
en
sold, including claims on representations and warranties in loan sales
transactions, and losses charged to reserve funds on securitization deals. T
he
other is the risk associated with the potential mismanagement of assets by R
TC
contractors, which could result in forgone revenues, additional expenses, an
d
deteriorating asset values.
SOME REAL ESTATE DISPOSITION PRACTICES POORLY PLANNED AND EXECUTED
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RTC has used a variety of techniques to dispose of its real estate assets,
including individual sales, auctions, and portfolio sales. However, RTC's re
al
estate disposition approaches have sometimes been inefficient, and RTC has
failed to adequately plan its sales approaches. Specifically, RTC disposed o
f
real estate assets for 3 years before studying its principal sales strategie
s
to determine which were most effective for which type of asset. RTC's
Inspector General has also examined several of RTC's real estate sales event
s
and found deficiencies in their planning.
RTC has disposed of billions of dollars in real estate assets but still face
s
a challenge in reducing its land and commercial real estate inventories.
Figure 2 shows that as of September 30, 1992, RTC disposed of about $9.6
billion in real estate while just over $13 billion in real estate remained t
o
be sold. RTC has had great success in reducing its single-family real estate
inventory; reducing land and commercial real estate inventories has been mor
e
difficult. Land and commercial real estate comprise about 80 percent of RTC'
s
real estate inventory. Overall, RTC estimated that it has recovered about 63
percent of book value on real estate assets it has sold. However, much of th
e
remaining land and commercial real estate are considered hard-to-sell assets
,
and RTC expects recoveries on these assets to be lower overall.
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___
Figure 2: RTC Real Estate Assets Inventory And Sales, as of September 30,
1992
The following table represents the data for this chart in the printed versio
n
of the report. The actual figure appears in the printed report.
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===
AUCTIONS AND PORTFOLIO SALES FREQUENTLY USED BUT UNTESTED
Beginning in late 1991, RTC increased its emphasis on disposing of real esta
te
assets in bulk through auctions and portfolio sales. This increased emphasis
was due, in part, to specific disposition goals that focus on reducing book
value dollar amounts within specific time frames. We pointed out RTC asset
disposition planning problems in our October 1991 report assessing RTC's
auction program. Additionally, it was not until its third year of operation
that RTC began to study its sales strategies to determine which methods were
most effective for which type of asset. It is imperative that RTC carefully
evaluate its past disposition results to better plan its future disposition
strategies and ensure that recoveries are maximized.
RTC has not appropriately planned its real estate disposition activities nor
executed them well. Policies and procedures governing the implementation of
the disposition methods are not consistently followed. RTC developed manuals
and policy statements on auctions designed to minimize costly mistakes and
pass on lessons learned. However, because of the decentralized nature of the
organization coupled with weak internal controls and inaccurate information,
guidance is not always followed.
For example, the _Auction Handbook_ suggests marketing campaign time frames.
For residential auctions, a 4-week campaign is suggested, and for commercial
properties valued above $500,000, a 60-day campaign. Our work on the
Washington, D.C., area auction, which included residential, commercial, and
land assets, revealed that the brochure and buyers' packages were available
about 3 weeks before the scheduled auction. Furthermore, the buyers' package
s
did not always contain adequate or accurate information. Inadequate
information and insufficient time to perform asset reviews increase buyer
risk, narrow the investor market, and can reduce recovery values.
RTC's National Sales Center had completed several major portfolio sales and,
as a result, a variety of real estate assets with a book value of about $900
million were sold or under contact as of June 1992. RTC continues to conduct
major portfolio sales without the benefit of comparing this method to other
disposition strategies. Further, RTC, in some cases, is providing long-term
financing for these sales and for other assets. RTC must ensure that these
loans are properly monitored to minimize potential future losses. This
monitoring is especially important for cash-flow participating mortgages tha
t
have been used for portfolio sales. These transactions, because of their
complicated nature, demand rigorous oversight to protect the taxpayers'
interests.
Furthermore, although FIRREA mandated that RTC maximize recoveries on the
sales of its assets, RTC has not set goals tied to maximizing recoveries. In
addition, RTC has not given adequate consideration to the overall net return
of the various real estate asset disposition strategies used. Instead, RTC's
real estate asset disposition efforts seem to be driven by its book value
reduction goals and are not balanced by goals related to maximizing
recoveries.
CONTRACTING SYSTEM NOT ADEQUATE
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Contractors working for RTC are primarily responsible for the management and
disposition of assets from insolvent thrifts. These activities generally
include such tasks as collecting income and making disbursements for the
maintenance of the assets. RTC's total asset sales and collections from its
inception through September 1992 were about $287 billion; much of this was
managed or collected by thousands of private sector contractors. Given that
such a large amount of money is flowing through private sector contractors
acting on behalf of RTC, it is critical that a comprehensive system of
oversight is established to reduce the inherent vulnerabilities in such a
system.
In the past 3 years, RTC has made some improvements to its contracting syste
m,
but RTC's contracting system remains a key weakness in its operations. We ha
ve
identified weaknesses that have added millions of dollars to the cost of the
government's cleanup efforts, but we have no way of estimating the extent th
at
losses may be occurring. When RTC was first established, it had a mindset th
at
essentially viewed contracting as an administrative activity rather than a k
ey
function. Downplaying the significance of contracting activities has led RTC
to make a series of strategic decisions in developing and implementing its
contracting system that have increased RTC's vulnerability to mismanagement
and waste.
Contract planning is the first critical step in effectively developing a
contract. RTC must determine what services are needed, how the scope of work
is to be defined, and the most efficient type of contract to achieve these
goals. RTC has not performed this step well. Several recent examples have
shown that RTC has issued contracts that did not describe the services neede
d
and inadequately defined the scope of work.
RTC's handling of the Western Storm project, which was initiated by its
Western Region in April 1991, illustrates poor contract planning. RTC paid
about $24 million under an improperly issued, sole-source contract for the
reconciliation of assets from 92 failed institutions to RTC financial
management records. RTC hired an independent auditor to review the project
after the problems came to light. The contractor found that three of the
project's five goals were either (1) so poorly documented that they were
unable to determine the propriety of the work done or (2) not accomplished.
Further, they found that RTC's management practices and procedures were
inadequate to ensure that payments to the contractor of about $24 million we
re
proper. Accordingly, poor planning, poor internal controls, and inappropriat
e
contracting techniques hampered RTC's ability to monitor contractor
performance and control costs and diminished the value of one of RTC's large
st
contracts.
Another step critical to effective project planning is having accurate
information regarding the type of assets to be placed under contract. Becaus
e
of inadequate information and poor compliance with policies, RTC has paid or
is contractually liable for $4.5 million in management and disposition fees
to
standard asset management and disposition agreement (SAMDA) contractors for
work that was done entirely or primarily by staff at failed thrifts.
Also, RTC often structured SAMDA portfolios with real estate and loan assets
in widely dispersed geographic locations, increasing contracting costs and
risks. One-third of 98 SAMDA contract portfolios we analyzed included assets
located in as many as 27 states. For example, 58 portfolios had assets locat
ed
in Dallas/Fort Worth, but 40 of these portfolios were managed from states
other than Texas. In these situations, the risk of mismanagement and waste w
as
higher because there were greater numbers of subcontractors performing
services and relatively wider spans of control for RTC managers and SAMDA
contractors who were charged with contract oversight.
RTC's job does not stop once a contract has been awarded. RTC must ensure th
at
the money spent is for appropriate and timely contractor services. However,
inadequate information places RTC at a disadvantage in attempting to oversee
the activities of tens of thousands of contractors working on many types of
assets. Contractor oversight still needs improvement, as shown by the
following examples related to loan servicers and subcontractors.
RTC had not adequately overseen its inherited loan servicers, who service
approximately $7.5 billion in mortgages and loans. It did not have the
necessary policies and procedures in place to monitor the inherited servicer
s'
loan collection activities. Consequently, RTC cannot ensure that servicers a
re
accurately accounting for and remitting loan payments. In addition, RTC does
not know if its servicers are sound financial institutions capable of
maintaining the value and marketability of RTC's mortgages and loans. For
example, 84 of 298 institutions servicing loans for RTC's receiverships in
Florida were considered ineligible by the Federal National Mortgage
Association (Fannie Mae) to service its mortgages. Furthermore, at the time
of
our review RTC did not have an accurate inventory of its inherited loan
servicers.
Also, neither RTC's field offices nor the SAMDA contractors adequately
monitored SAMDA subcontractors to ensure compliance with RTC's policies and
to
ensure that funds were not vulnerable to loss from unauthorized use. Several
subcontractors told us that they had not been visited and their operating
procedures had not been reviewed by the SAMDA contractor or RTC. Also,
subcontractors were not following appropriate cash management policies and
practices governing the use and control of cash from RTC properties.
Information systems are critical to RTC's efforts to manage and sell failed
thrift assets. Yet, until recently RTC's asset information system developmen
t
efforts were disappointing. Problems include unclear or changing requirement
s,
inaccurate and incomplete data, poor response times, and difficulty of use.
Although RTC has taken steps to better define its business needs and to
strengthen its control over the corporate system development processes, more
improvements need to be made. We remain concerned about the integrity of the
real estate system data and the data in the systems now being used to manage
and sell loan assets. Real estate system data as of January 1992 contained
property records that were incomplete and inconsistent. For example, about 8
0
percent of the unsold properties did not have one or more key data elements,
such as list price, date the property was listed for sale, and identificatio
n
of the broker. Although there have been efforts to improve the data since
then, these efforts have not included verifying important information such a
s
the properties' managers, appraisals, and listings.
In addition, the Real Estate Owned Management System does not contain
sufficient edit checks to prevent incorrect data from being entered into the
system or adequate field office access to an audit trail of system changes f
or
more than a day. As a result, RTC has no way of ensuring the continued
reliability of these data or of knowing who changed them last. Further, RTC
does not have a program to improve the data integrity of the wide variety of
ad hoc field office and contractor systems it relies on to manage and sell i
ts
loan assets. RTC recognizes these issues and by March 1993 plans to have the
corporate oversight programs and system changes in place to ensure the
integrity of its real estate and loan systems data. Although necessary, thes
e
changes come late--after billions of dollars of assets have been placed unde
r
contract or sold.
We also continue to be concerned about the ability of the Asset Manager Syst
em
to track contractors who manage, market, and sell RTC assets. Until needed
modifications are completed and tested, the system will likely continue to
have inadequate interfaces to account for contractors' income and expenses,
insufficient automated controls to ensure that electronic funds transfers ar
e
both timely and reconciled, and difficulty calculating certain management an
d
disposition fees. Until improvements are made in these three areas, RTC has
increased risk of errors and losses in the asset management system.
FINANCIAL MANAGEMENT AND ACCOUNTABILITY MUST BE A PRIORITY
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---
In 1990, we were unable to express an opinion on RTC's financial statements
due to weaknesses in its receivership internal controls, flaws in its
methodology for estimating recoveries from the sale of receivership assets,
and its significant exposure to losses from both real estate and delinquent
eal estate-backed loans for both resolved and unresolved institutions. Durin
g
1991, RTC acted to address the identified control and methodology problems.
In
addition, then-current projections indicated that RTC's universe of likely
resolution candidates had significantly decreased and, therefore, its exposu
re
to real estate-related losses in unresolved institutions was also lower. Giv
en
these factors, we were able to give RTC an unqualified opinion on its balanc
e
sheet and statement of cash flows for 1991.
While cash transactions during 1991 were valid and correctly recorded in the
receiverships' general ledgers, receivership personnel could not supply all
the documents necessary to confirm that transactions were processed in
accordance with all of RTC's policies and standards. Although we could piece
together enough of the year's transactions to ensure ourselves of their
legitimacy, we were unable to assure RTC that all of its internal controls
were in place and working as intended to prevent or detect errors in future
transactions. Lack of accountability and poor internal controls over cash
management in RTC receiverships could increase the cost of resolutions and t
he
amount to be paid by taxpayers and negatively affect future financial
statement opinions.
Costs attributable to RTC resolutions represent a significant part of the
total for cleaning up the thrift crisis. In 1990, we estimated the total
cleanup cost to be between $335 billion and $370 billion, not including the
interest cost of Treasury borrowing to provide the needed funds. Current
estimates of the number and cost of recent and future resolution actions
support the lower end of the range. This low cost estimate is, in part, due
to
favorable interest rate spreads that have kept some troubled thrift
institutions viable beyond expected resolution dates and reduced operating
losses in institutions that did require RTC resolutions. The low cost estima
te
also assumes that RTC will minimize its losses by exercising proper control
over its asset management and disposition responsibilities and that even
hard-to-sell assets will meet certain minimal recovery rates.
However, funding disruptions have hampered RTC's efforts to resolve failed
thrifts. RTC has run out of loss funds and has had to stop resolving failed
thrifts three times since it was created. Most recently, RTC had to return
$18.3 billion to the Treasury because it did not obligate the funds before t
he
April 1, 1992, legislative deadline. Certain RTC operations have not been
funded since that date. As a result, thrifts under RTC's control continued t
o
post losses that contribute to the overall cost of the cleanup. For example,
the 60 failed thrifts under RTC's control on June 30, 1992, reported net
losses totaling $283 million during the 3-month period ending in June.
In testimony on March 5, 1992, we recommended that the Congress eliminate th
e
April 1992 obligations deadline, ask RTC to estimate its funding needs throu
gh
the spring of 1993, and provide RTC with sufficient funds on a timely basis
to
carry out its responsibilities. Failed thrifts do not improve over time; the
ir
resolutions remain obligations that become more expensive when delayed.
Therefore, we continue to believe that RTC should be provided with the
necessary additional funds because without them the cost of the cleanup simp
ly
increases.
In December 1992, RTC estimated that an additional $25 billion in loss funds
would be needed for it to resolve current thrifts in conservatorship and
thrifts anticipated to fail before September 30, 1993. We must caution that
uncertainties beyond RTC's control related to general economic conditions
present an even greater risk of higher cost to taxpayers. Increased interest
rates or further deterioration in real estate markets could cause marginally
viable thrifts to fail. If additional failures occur, resolution costs will
increase. These increased costs will have to be borne by RTC and after
September 30, 1993, SAIF. Since SAIF is not expected to receive more than $2
billion a year from thrift industry assessments, it will be unable to resolv
e
many failed institutions without itself facing insolvency. If SAIF inherits
a
troubled thrift industry from RTC, the industry may not be able to assume fu
ll
responsibility for its problems. In that case, taxpayers will undoubtedly be
called on to continue funding thrift resolutions.
CONCLUSIONS AND ACTION NEEDED
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---
The total cost to taxpayers of the thrift cleanup depends both on the econom
y
and on how well RTC discharges its responsibilities. RTC's greatest challeng
e
in its remaining years will be to maximize the rate of return on its growing
inventory of hard-to-sell assets and provide adequate contractor oversight.
We
have made several recommendations to RTC to minimize risks that are within i
ts
control. While RTC has acted on many of these, the following further actions
are needed:
-- RTC needs to better plan its real estate disposition activities to ensure
that it maximizes recoveries on asset sales. Specifically, RTC needs to
carefully evaluate its past disposition results to better plan its future
disposition strategies and ensure that recoveries are maximized.
-- Given the large amount of money flowing through private sector contractor
s
acting on behalf of RTC, it is critical that RTC establish a comprehensiv
e
system of contract oversight.
-- RTC needs to continue its efforts to improve the integrity of the Real
Estate Owned Management System data and its Asset Manager System.
Additionally, we believe that the new administration needs to work with
Congress to obtain the additional funds RTC needs to pursue its resolution
activities. Any further delay merely increases the eventual cost of the
savings and loan cleanup.
Although RTC has made progress in improving its operations and cleaning up t
he
problems it inherited, many problems are likely to remain after 1996, when R
TC
is scheduled to close. Thus, the total cost of the cleanup also depends on t
he
effectiveness of structures established to deal with thrift losses occurring
after RTC relinquishes its resolution responsibilities in 1993 and all of it
s
other responsibilities in 1996. In large part, the condition of RTC's
accounting and management information systems at the time of turnover will
determine how effectively the FSLIC Resolution Fund will manage the remainin
g
responsibilities.
The Congress and the new administration will need to work together to ensure
that FDIC has the capacity to carry out the resolution and asset disposition
responsibilities it will inherit from RTC and that there is greater certaint
y
that SAIF will remain solvent. Also, consideration should be given to how be
st
to apply RTC's investment in both processes and people skilled in the
management and disposition of financial and real estate assets should a larg
e
number of banks fail in the near future. Such consideration should include
whether it would be beneficial to use RTC to dispose of the assets of all
failed financial institutions as opposed to increasing the capacity of FDIC
to
handle such tasks.
The savings and loan cleanup will remain a highly risky endeavor that bears
close scrutiny. RTC can minimize the risks within its control--namely those
associated with asset disposition, contracting, and information systems.
Congress can help minimize the risks by continuing its oversight activities
and making funds available for resolutions. We will continue to do our part
to
monitor RTC improvements and assist Congress in its oversight.
RELATED GAO PRODUCTS
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_Resolution Trust Corporation: Subcontractor Cash Management Practices Viola
te
Policy and Reduce Income_ (GAO/GGD-93-7, Oct. 20, 1992).
_Resolution Trust Corporation: Asset Pooling and Marketing Practices Add
Millions to Contract Costs_ (GAO/GGD-93-2, Oct. 7, 1992).
_Resolution Trust Corporation: More Actions Needed to Improve Single-Family
Affordable Housing Program_ (GAO/GGD-92-136, Sept. 29, 1992).
_Resolution Trust Corporation: Affordable Multifamily Housing Program Has
Improved but More Can Be Done_ (GAO/GGD-92-137, Sept. 29, 1992).
_Resolution Trust Corporation: Western Storm Investigation and Related
Contracting Deficiencies_ (GAO/T-GGD-92-67, Aug. 6, 1992).
_Insurance Fund: Outlook Affected by Economic, Accounting, and Regulatory
Issues_ (GAO/T-AFMD-92-11, June 30, 1992).
_Financial Audit: Resolution Trust Corporation's 1991 and 1990 Financial
Statements_ (GAO/AFMD-92-74, June 30, 1992).
_Resolution Trust Corporation: Oversight of Certain Loan Servicers Needs
Improvement_ (GAO/GGD-92-76, Apr. 24, 1992).
_Resolution Trust Corporation: Corporate Strategy Needed to Improve
Information Management_ (GAO/IMTEC-92-38, Mar. 5, 1992).
_Resolution Trust Corporation: Further Actions Needed to Implement Contracti
ng
Management Initiatives_ (GAO/GGD-92-47, Mar. 5, 1992).
_Resolution Trust Corporation: Preliminary Results of Western Storm
Investigation and Related Contracting Deficiencies_ (GAO/T-OSI-92-5 and
GAO/T-GGD-92-16, Mar. 3, 1992).
_RTC Asset Management: Contracting Controls Need to Be Strengthened_
(GAO/T-GGD-90-53, Sept. 24, 1990).
_Asset Management: Resolution Trust Corporation Needs to Build a Strong
Foundation to Support its Asset Disposition Efforts _(GAO/T-GGD-90-38, May 4
,
1990).
_Resolving the Savings and Loan Crisis: Billions More and Additional Reforms
Needed_ (GAO/T-AFMD-90-15, Apr. 6, 1990).
