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Flashbacks
This year marks American Banker's 175th anniversary. To commemorate the milestone, we've dug into our archives to bring readers highlights from our coverage of pivotal moments in U.S. banking history. In addition to this series, look for our special 175th anniversary edition this fall.
1980
The Chrysler Saga, Act IV: Dom Perignon, Excedrin
NEW YORK, Nov. 10 — On Wednesday afternoon, last April 15, Steve Miller boarded a plane in Washington headed for Detroit. Depressed and exhausted, he faced a meeting the next morning with 400 bankers, where he was supposed to outline an agreement for restructuring the debt of Chrysler Corp. and Chrysler Financial Corp.
Miller, Chrysler's assistant treasurer, had just left an all-day session with the U.S Treasury staff in which the government had raised objections that appeared to scuttle his proposal. He could feel the carefully negotiated agreement collapsing. In just two weeks he had taken the outline of a settlement with the American banks, arranged concessions that won the support of Chrysler's insurance company and foreign bank lenders, worked with the U.S. banks to restructure Chrysler Financial's $3 billion of debt and then, over a long weekend, translated those agreements into a basic legal document.
Now the Federal government was demanding that the bankers take an equity position in Chrysler and loan more money to Chrysler Financial.
"The government requests should have made anyone at the company happy," says Miller. "The proposals were to our benefit." But the trip to Detroit seemed the longest in his life. "I did not see how we could sell the Treasury's proposal to 400 lenders."
In the flurry of activity that preceded his trip to Washington Miller's spirits had soared. But now he was more despondent than he had been in the dismal days of March prior to a summit meeting with his lenders that produced a dramatic breakthrough in the loan negotiations.
In mid-March, Miller had taken an agreement in principle with the U.S. revolving-credit banks to the foreign banks and the insurance companies. Their responses ranged from skeptical to hostile, dimming hopes for an agreement on a debt restructuring.
Faced with this resistance, Miller arranged a meeting with representatives of the four major creditor groups at Chrysler's offices in the Pan Am building in New York. For the first time, the U.S. insurance companies and banks from Canada, Europe and America would meet in the same room.
The session opened on Thursday, March 27, four days before the company's target date for completing the debt restructuring. Congress and the Treasury expected a settlement on the target date and the Senate banking committee was preparing to hold hearings. The company and the banks concurred that without an agreement those hearings would turn into a public flaying of the banks and the company.
Additional pressure was coming from Chrysler's deteriorating finances. In April, over $100 million of trade credit arranged in January was coming due, adding to the company's cash burden. Chrysler was seeking a loan from the State of Michigan, but to get the loan it had to pledge the Trenton Engine Plant. To pledge the plant the company needed waivers from the lenders, but they were refusing to act until an agreement was reached on the restructuring.
For two days, the 27th and the 28th of March, the lenders and Chrysler haggled. "All the emotions came out," said one participant; but at the end of the second day of talks no agreement had been reached.
Who Will Go First?
The lender groups appeared very close to a compromise, but none of the groups was willing to take the step that would bring it about. It was obvious that if any two of the lender groups could resolve their differences, the other lenders could be coaxed into an agreement. But in the tense, formal atmosphere of the Pan Am meeting, with 35 to 40 people present, no one felt comfortable making concessions.
Miller doubted at the end of the meetings on the 28th that a compromise could ever be reached, and he cautioned the lenders that time was running out.
The talks broke for the weekend, with the next session scheduled for Tuesday, April 1.
On March 31, the evening before that scheduled meeting, representatives of the European and American banks met for dinner at the Waldorf-Astoria, in an unauthorized effort to push the talks ahead.
The dinner meeting carried high risks. While it offered the chance for a compromise, it could also lead, as the participants knew, to a devastating stalemate. Throughout the talks, decisions by one or two parties had been viewed with suspicion, and if the representatives at the dinner had agreed to terms that the other European and American banks could not accept, the failure might have created so much suspicion that prospects for an accord among the creditors would have been doomed.
Dinner at the Waldorf
Only a small party of lenders was present at the Waldorf. The Europeans were represented by five officers, two each from Barclays Bank and Algemene Bank Nederlande and one from National Westminster Bank.
The individuals were the nucleus of the group that had represented the interests of all the European banks. Michael Rayfield, a flamboyant and engaging lender from Barclays had played a dominant role in organizing the Europeans, while Ed Lord, his colleague at the bank, was one of the workhorses of the European committee. David Deegan and Andre Boysen from ABN were both active as representatives of the bank that hosted most of the major meetings of European lenders in Amsterdam. And Patrick Lacey from National Westminster was an early and active participant in the work of the European committee. (The other member of that core group of European bankers was Fred Harri of Swiss Bank Corp., who was not present at the dinner. Two other banks, Dresdner Bank AG and European-American Bank filled out the European committee of six lenders.)
The Americans were represented by Ronald O. Drake of Irving Trust Co., Scott Taylor of Chase Manhattan Bank and William Langley of Manufacturers Hanover Trust Co.
These individuals were not authorized to bargain on behalf of the 150 lenders they represented. However, it appeared simple enough for them to work out some numbers which they could discuss in preparation for the final day of the Pan Am meetings. If the other creditor groups accepted their ideas at the Pan Am talks, a formal agreement could be shaped and taken back to other banks.
Stout and Heinecken [sic]
Over rounds of English stout and Heinecken, the basis of an agreement took form. The motivations of both negotiating teams were simple — each wanted a favorable agreement. After months of negotiations they were committed to avoiding Chrysler's collapse. The Americans wanted to retain their carefully constructed agreement, the Europeans needed concessions. The U.S. plan would shift $169 million of lender assistance to the foreign banks. To make that palatable to their head offices, the European representatives needed some trophies to carry home, concessions that would prove to management that they had bargained hard.
The solution, immediately dubbed the Waldorf Agreement, was at once ingenious and simple. The U.S. plan called for all lenders to defer and concede similar amounts of interest. The concessions, one-shot gifts to Chrysler, were considered the harshest form of aid by the banks, since the money could never be recovered. The most palatable form of aid was probably the deferral of interest that was due on the late interest payments. (This traditional banking calculation — interest on interest — was considered a gimmick by some government officials, who, unfamiliar with banking, considered the proposal an effort to swell aid totals.)
The Waldorf Agreement modified the formula for European concessions and reduced the deferral of interest on interest for them. The Europeans proposed to defer a larger amount of interest than the Americans and make fewer concessions, a shift of about $30 million. The Europeans also would collect in cash two-thirds of their interest on interest, speeding their access to several million dollars of interest.
$200 Dom Perignon
The arrangement appeared satisfactory, and there was something reassuringly unofficial about watching Ed Lord carefully calculate the effects of these multimillion dollar proposals on a handheld calculator.
As the dinner ended there was a sense that a workable compromise had been shaped. Rayfield, in a burst of optimism, signaled the maitre d' for a magnum of Dom Perignon '54, "the kind that James Bond drinks." The Americans looked at each other and started to protest. "We haven't agreed on anything," they said. But the cork was already out, and, with a round of $200 a bottle champagne, they celebrated an agreement — with the Americans still nervously wondering whether it could ever be sold to the other lenders.
At 9 a.m. the next morning the bankers arrived at the Pan Am building for the final day of talks with other lenders, certain that the session would be decisive.
The first thing they saw was an uncharacteristically quiet Steve Miller, who, without telling the bankers, had decided to open the last day with a pleasantry — a joke that turned out to be distinctly unfunny, but that nevertheless had a point. The management of Chrysler, he said, looking somber, had met for hours yesterday. The examined and re-examined the data on the economy and auto sales. Finally, regretfully, they had conceded that Chrysler could not survive in such a dismal environment.
It's April Fools
Late Monday night, management had assembled a quorum of directors for a special meeting. They had concurred with management. At 8 a.m. this morning, Miller told the lenders, Chrysler Corp. had filed for bankruptcy. He said he wanted to thank them all for their work in attempting to restructure the company's debt.
The lenders sat in stunned silence.
Miller, realizing that his macabre stab at humor had missed the target, tried to extricate himself. "It's April Fools Day," he told them, "It's a joke."
Said one of the bankers, "It wasn't very damned funny — we believed him."
The attempt at humor had made a point, reminding the lenders just how close the company was to bankruptcy. Perhaps spurred by this reminder, they fashioned a compromise that was to serve as the centerpiece of the Chrysler debt restructuring.
The Canadian banks were represented at the Pan Am talks, but they did not truly participate. They had asserted for months that the Canadian loans, almost all of which were to Canadian subsidiaries of Chrysler, would require a Canadian solution. They sent an observer to the Pan Am meetings and he confirmed that the Canadians were working on a settlement that paralleled that of the other lenders.
The Canadians' Plan
The Canadians planned to make huge interest-rate concessions and to defer principal payments coming due before 1983. They accepted the 15% fixed interest rate in the American bank plan and proposed to forgive half of that rate, collecting the remained in cash.
But that arrangement was conditioned on a favorable ruling from Canadian tax authorities. The banks expected the 7.5% cash payments from Chrysler to be tax free, giving them an after-tax income almost equal to their taxable 15% return.
On paper the Canadians appeared to be making a generous concession, but it would have cost them almost nothing. (The tax ruling never came. Later the Canadians accepted a package of aid similar to the American plan, but with much better terms on repayment and security.)
The insurance companies entered the Pan Am meetings with two concerns. They wanted their interest rates to be raised to 15%, and they wanted stock warrants. The insurers had loaned money to Chrysler at fixed rates of about 9%, so a jump to 15% would have been next to perfect. But, they realized quickly, such a proposal would never sell in Washington.
So they pushed for warrants. They had sought these stockrights before without success. Chrysler had declined to consider them. "It was something we would not discuss," says Miller. But, as the talks seemed to stall, Chrysler reconsidered. It was better to issue warrants than to let the deal collapse.
They Issue Warrants
The company agreed to issue warrants for 12 million shares of stock, with the insurance companies getting a large share of the total. The rights were exercisable at $13 per share, well above the $5.50 low at which the stock was settling, so the warrants had little value, but they did promise some compensation for the insurance companies if Chrysler revived.
The insurance companies also received a limited preference as senior creditors in the restructuring; for a few claims, they were senior to the other lenders, although still junior to the Federal government.
With the Waldorf Agreement and the warrants, the Pan Am talks were complete. But there were still problems. The solution only vaguely resembled numbers in the Loan Guarantee Act. The U.S. banks had reduced their credit exposure by $159 million and the Canadian banks had clipped theirs by $60 million, even though the government had asked for new loans from the banks. Much of the financing plan depended on Chrysler's ability to sell its assets, including 51% of Chrysler Financial, even though prospective buyers were scarce.
And, of course, the other lenders, including the whole of the 15-member U.S. bank committee, had to ratify the complete package. (The committee met in the Pit at Manufacturers Hanover Trust Co. immediately after the Pan Am talks ended and voted to approve the agreement over the vociferous objections of at least one bank. The vote was actually taken while that banker was in the other room on the phone to senior management.)
No Sale
The enthusiasm generated by the Pan Am talks lasted two days. On April 3, at a meeting in the offices of Shearman & Sterling, a law firm active in negotiations on Chrysler Financial, the bank learned that attempts to sell 51% of the finance company had failed.
Hurriedly they called meetings, but by late the next day it was clear that the banks — the last possible purchasers for the stock — would not buy it. Without a sale, Chrysler Financial's debt would have to be restructured. And the finance company's 240 U.S. banks and 60 foreign lenders suddenly found themselves a part of Chrysler Corp.'s restructuring.
For months, many of these banks have been blissfully able to ignore Chrysler's troubles, secure in the belief that the finance company would be sold.
Chrysler Financial had actually been for sale before the company's first crisis in August, 1979. Gordon Areen, the president of the finance company, says that Chrysler had been pleased by several joint ventures overseas, and had decided several years earlier to sell part of the finance company. This would have permitted the finance company to diversify its activities and also would have reduced Chrysler's equity investment, freeing up desperately needed funds for use elsewhere.
In August the banks had begun pushing for the sale of at least 51% of the finance company. Between them the lenders had $3 billion in loans to it, almost double their loans to Chrysler. If the finance company were sold, the bankers reasoned, its assets would be less vulnerable in bankruptcy proceedings against Chrysler.
The Search that Failed
Quickly the company found that Household Finance Corp. was interested, but it did not want 51%. Chrysler started looking for a partner for HFC.
Months later, on February 11, several U.S. bankers met with HFC and Chrysler, only to find that the auto company was still searching. Chrysler had identified several prospective buyers, it said, but it suggested that one or more of the U.S. banks should consider buying a share in the finance company.
The next day, February 12, the banks interviewed several investment bankers, and on the 13th they retained Lehman Brothers to assess the value of Chrysler Financial. The banks had received the message that the sale of Chrysler Financial would undoubtedly involve at least one bank, and they wanted an impartial judgement [sic] of the value of the finance company.
In early March, Chrysler formally asked the bankers to consider a stake in Chrysler Financial. With HFC desiring about 30% ownership, the banks would have to acquire 21%.
The bankers responded by establishing a subcommittee to study the sale. The specialists were Benjamin McCleary of Chemical Bank, Richard Flinthoft of Morgan Guaranty and Donald Dietz of Citibank.
Sale of the finance company was considered extremely important, but the banks were leery of buying the stock. As a group, the U.S. banks had well over $1 billion outstanding to Chrysler Financial. Becoming owners would create conflicting loyalties for them, and the banks were especially wary about being squeezed to pump more loan money into the firm if they accepted an equity position.
It was impossible to resolve this tangle of conflicting interests.
One or Two, Not a Host
As a result, no single bank wanted 20% of the finance company. A few appeared willing to buy 5% or less, which they could hold as an investment. But that was not what HFC had in mind. It wanted one or two partners, not a host. By March 12, when 140 banks met in Chicago to discuss Chrysler, the talks over the finance company had deadlocked.
Two days later, on March 14, the Federal Reserve ended the deadlock. With its announcement of a new anti-inflation program, it increased the uncertainty over interest rates and put clamps on HFC's basic business activities. Faced with high, unstable interest rates, HFC could not risk buying Chrysler Financial. But not until after the Pan Am meetings did it make that decision formal.
Because Chrysler Financial owed money to over 300 lenders, the restructuring of its debt presented a formidable task. The U.S. banking committee realized that the agreement had to be as simple as possible or it would never be accepted. On April 3 it began working on a restructuring plan and the effort continued, intensively, over the weekend and through the next week, with a team of lenders and lawyers pushing feverishly to put some solution in place.
The plan they developed was based on two simple propositions. First, they agreed to a four-year moratorium on payments of principal with an accompanying stretch on maturities. Then, to balance the effect of the four-year stretch-out, the lenders switched the loans from unsecured to fully secured and refused to change their interest-rate formulas.
Sweetheart Deal in the Making
The final problem was that the banks still wanted Chrysler to sell Chrysler Financial and Chrysler needed the proceeds from such a sale to qualify for government aid. The banks doubted whether Chrysler truly wanted to sell its subsidiary and demanded a mechanism that empowered them to force the sale of 51% of the finance subsidiary, beginning in 1982.
The solution, completed on about April 10, gives Chrysler one and a half years to find a buyer for 51% or more of the finance company. If Chrysler fails, the banks take over. At the end of 1981 they receive a three-year option to buy 51% of the company's stock at book value or a fair market price, and they can transfer that option to any third party that looks interested in Chrysler Financial.
Compared with the Chrysler package, the Chrysler Financial settlement was a sweetheart deal. An unsecured credit to a risky company was changed to a secured basis and was lengthened four years. "We had to give the store away on Chrysler," said one banker, "but we saved our ass on Chrysler Financial."
In the midst of the work on Chrysler Financial, Steve Miller had flown to Washington. On April 9, a week prior to the fateful April 15 session with Treasury, the Treasury staff was encouraging. On the 9th he handed Treasury a preliminary copy of the agreement reached in the Pan Am meetings, and made a strong pitch for support.
The proposal was not in strict compliance with the Loan Guarantee Act, he admitted, but it was the best the company could do. If the government wanted, he would return to New York and keep negotiating until Chrysler went bankrupt. Otherwise, the board had to show it would interpret the act flexibly. The company was running out of time and money, and one of the most important conditions for the banks, the sale of Chrysler Financial, could not be met.
After some resistance, the staff agreed. The package was not perfect, but they would be supportive.
Park Avenue Marathon
Miller returned to New York with enthusiasm, and joined a marathon drafting session at 299 Park Avenue. Close to 150 lenders, lawyers and company executives camped for more than three days in the offices of Debevoise, Plimpton, Lyons & Gates and Wachtell, Lipton, Rosen & Katz, special counsels to the company and the U.S. bank committee, respectively. In 24-hour work sessions, they fashioned the details of the Chrysler Financial restructuring and prepared a summary of terms on it and the Chrysler restructuring.
"There were lawyers and bankers in every room, working on one or another detail of the credits," said one banker who was present. Gordon Areen of Chrysler Financial remembers the "incredible effort of the lawyers. They kept it up all night long. At 2 a.m. or 3 a.m. you might see one of them drop off to sleep, but in an hour he would be back at work."
On Monday, April 12, the marathon negotiations ended. A copy of the summary of terms was shipped to Washington, while the bankers and lawyers prepared for a Thursday meeting with 400 lenders. On April 15, Wednesday, Miller took his case to Washington for the unexpected response from Treasury. One banker who attended the disappointing meeting with the loan board staff remembers narrowly missing a collision on his way from the meeting to the airport. "It would have been a fitting conclusion for the day," he says.
On the 16th the bankers and Chrysler presented the proposed restructuring to the lenders in Detroit, explaining that the Treasury staff had a list of objections. The 400 bankers were sufficiently supportive that in the late afternoon Chrysler announced it had reached agreement with its banks on a restructuring.
What it did not announce was that the next day the negotiators would hurry to Washington, where, in two long sessions, the credit agreement would be totally revised.
Editor's Note: American Banker's "Chrysler Saga" series won a 1981 Gerald Loeb Award for Distinguished Business and Financial Journalism
[Back to top]1989
All Eyes Are on Seidman to Move Fast and Smart
DALLAS, Aug. 10 — L. William Seidman, chairman of the Federal Deposit Insurance Corp., had plenty of criticism for thrift regulators when that industry's crisis was spinning out of control. But the tables were turned on Wednesday when the FDIC was given day-to-day responsibility for cleaning up the mess.
Now Mr. Seidman and his agency must perform as never before in an epic task that will largely govern the success of the thrift industry cleanup and either make or break the agency's reputation.
When President Bush signed into law the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FDIC was put in charge of the Resolution Trust Corp., a newly created federal agency that has a crucial mission. The unit will spend at least $50 billion of taxpayers' money as it reworks more than 400 failed thrifts that control almost $250 billion of assets.
"This is a high-stakes mission for the FDIC," said Steve Bartlett, the Texas Republican who is a member of the House Banking Committee. "If the Resolution Trust Corp. does its job right, the workout will go smoothly. If it doesn't, the travails of the nation's savings and loan industry will be prolonged."
Stretching before the FDIC is a challenge of seemingly impossible dimensions. It has only five years before it resolves a caseload of zombie thrifts. A mountain of assets must be sold in a way that does not wreck regional markets. The paperwork will be overwhelming. Public scrutiny will be intense. The agency must devise new techniques and avoid scandal as it delegates work to private contractors.
The historic mission has a bittersweet flavor for the FDIC, which must submit to unaccustomed oversight as it carries out the thrift cleanup.
The agency is fiercely independent. But in matters concerning Resolution Trust, it must heed a five-member board composed of the secretary of the Treasury, the chairman of the Federal Reserve Board, the secretary of Housing and Urban Development, and two members named by the President. Resolution Trust also will have a chairman, who has yet to be named.
For the first time in its 55-year history, the FDIC won't be dictating the terms of rescues and asset sales. The oversight board will define acceptable types of assistance transactions and determine the degree to which Resolution Trust can take ownership positions in rescued institutions. It will govern the incentives Resolution Trust can offer on asset sales and even set standards on who can bid for failed thrifts.
"Our role is that of setting policy, of approving budgets and financial plans, of monitoring, and of being directors, if you will, for the RTC's executor, which is the FDIC," said John Robson, deputy secretary of the Treasury. "We have to protect the interests of the taxpayer."
Despite its diminished autonomy, the FDIC will be under pressure to move quickly, now that the bill has been signed into law. Up to $20 billion of funds are immediately available for case resolutions.
"Let's face it, the legislation has been percolating for six months," said John Murphy, the former FDIC general counsel who now is with the Washington office of Cleary, Gottlieb, Steen & Hamilton, a New York law firm. "Now that it has bubbled to the surface, people will be expecting prompt action."
Much groundwork has already been done. Over the past six months, the FDIC has seized 263 of the 277 thrifts that had negative regulatory capital as of March 31. The agency has allowed potential acquirers to inspect several of the largest thrifts that have attractive franchises.
Big Thrifts to be Sold
Among the giant institutions that probably will be sold sooner rather than later are: $4.2 billion-asset Bright Banc Savings Association, Dallas; $2.6 billion-asset San Antonio Savings Association; $3.2 billion-asset University Federal Savings Association, Houston; $12.1 billion-asset Gibraltar Savings, Beverly Hills; $5.6 billion-asset Western Savings and Loan Association, Phoenix; and $1.6 billion-asset Baltimore Federal Financial.
"Most of the bigger franchises will be sold, and I believe the FDIC will be eager to dispose of them as rapidly as possible," said William Isaac, the former FDIC chairman who is managing director of Secura Group, a Washington-based consulting firm.
Separately, regulators are preparing to close a number of smaller institutions and pay off insured depositors. The FDIC is in control of 57 thrifts that are candidates for liquidation, according to a computer study prepared for the American Banker by Ferguson & Co., a consulting firm in Irving, Tex. The 57 institutions control $10.2 billion of deposits and would be hard to sell because of skimpy branch networks and poor funding, said Robin Fussell, executive vice president of Ferguson.
It will be incumbent upon the FDIC to take quick action on a number of these institutions, experts said. "The agency will have to do some liquidations," said Richard Kneipper, chairman of the financial institutions section of Jones, Day, Reavis & Pogue, a Cleveland-based law firm. He practices in the firm's Dallas office. "Congress and the public are anxious to see the worst of the worst taken out of the system."
Liquidations will be the easiest part of the FDIC's assignment. That is because in many other cases the agency will be selling failed thrifts stuck in dead markets. Of the 263 thrifts now under the FDIC's control, 136 are situated in the states of Arizona, Arkansas, Colorado, Louisiana, New Mexico, Oklahoma and Texas — all depressed lending markets. "In markets that are so uncertain, acquirers will be reluctant to take risks of unknown proportions," said Mr. Isaac.
Flexible Assistance Packages
Thus, the FDIC and the Resolution Trust oversight board will be under pressure to grant flexible assistance packages that increase the government's risk. Assuming the FDIC gets approval from the oversight board, it will model large transactions after the recent Texas bank rescues. In those deals, problem assets were placed into workout units operated at the agency's expense. When it sells small thrifts in deals having caps on assistance, the agency will be pressured to sell at steep discounts.
"You won't see acquirers making deals in unfamiliar markets without significant assistance," said Richard Fitzgerald, the former chief counsel for the Office of the Comptroller of the Currency who now is with Muldoon, Murphy & Faucette, a Washington law firm.
Even more problematic than selling thrifts will be the job of selling their problem real estate assets.
There has been a universal outpouring of concern about how Resolution Trust will dispose of distressed real estate. Many bank, thrift, and real estate executives are fearful that regional markets will be ruined if the regulators suddenly put massive amounts of properties up for sale. "They could create a problem as big as the one they're trying to solve," said Robert Spiller, chairman of Boston Five Cents Savings Bank.
A further concern is the question of who should be allowed to buy the properties. Community leaders believe Resolution Trust has a social obligation to sell residential properties to low-income groups. "If we can work out a way that they can buy houses, I think the country will be better off," said Mayor Jan Coggeshall of Galveston, Tex.
In addressing these and other issues concerning Resolution Trust, Congress has created a paperwork nightmare for the FDIC.
As executor for Resolution Trust, the FDIC must create a national listing of properties for sale. It must supply appraisals for each of the properties and ask permission each time it wants to sell an asset at a deep discount. It must document the terms, fairness, market impact, and housing implications of asset sales. Virtually every action it takes in selling thrifts and assets must be reported to Congress in writing every six months. "There will be lots of information floating around," said Mr. Robson.
Aside from the sheer administrative burden that it poses, the paperwork threatens to handicap the FDIC as it works to move properties. The single greatest impediment in selling government-owned property is the time it takes getting officials to make a decision, said Joseph E. Robert Jr., chairman and chief executive of J.E. Robert Cos. His Alexandria, Va., company manages more than $5 billion of distressed thrift assets for the government.
Speed Is of the Essence
If the FDIC is to expedite asset sales, it somehow must speed up decisions even as the paperwork increases. "If the RTC and FDIC want to expedite the sale of properties, they've got to be able to make decisions in a matter of days, not months," said Mr. Robert.
In addition to slashing red tape, the FDIC must further sharpen its prowess in disposing of assets.
The agency is already laying plans to finance the sale of assets and securitize the notes, said Steven Seelig, acting director of the FDIC's division of liquidation.
The agency also is gearing up for a huge marketing campaign. Mr. Seelig said the FDIC will set up regional property sales and management offices and hire a national marketing staff that will serve several of the nation's financial hubs. The agency will make greater use of liquidators, brokers, sealed bids, and auctions.
Despite these efforts, the FDIC will need substantial help from the private sector.
Because the agency will be liquidating a number of thrifts, substantial amounts of property will come under the direct ownership of the government. The properties will have to be appraised, insured, managed, and maintained. There will be substantial litigation and protracted negotiations with delinquent borrowers.
"No matter how good the FDIC is, it will just get buried on its own," said Mr. Kneipper. "The agency will need the help of tens of thousands of people in managing RTC properties."
The dependence on outside help poses another immense challenge for the FDIC, in that the agency must keep its contractor dealings free of the sorts of abuses that discredited the Federal Asset Disposition Association, which is to be dismantled by the FDIC within six months. FADA was a quasi-government agency created by the Bank Board in 1985 to dispose of assets from failed thrifts. It quickly earned the ire of Congress as tales of exorbitant expenses, inordinate delays, and shady insider dealings surfaced.
Although FADA officials acknowledge that their agency had problems, they said some of their difficulties stemmed from the nature of the job itself. They warned that Resolution Trust could succeed FADA as a lightning rod for criticism.
John Wills, president and chief executive officer of FADA, said private contractors are constantly trying to cut sweet deals at the expense of the government. And he said the public had unrealistic expectations about the speed at which his agency could sell junk thrift assets, which often were entangled in complex loan participations and litigation.
"We probably had the worst publicity of any company in North America," said Mr. Wills. "But everyone wants to pick the pockets of the government, and we were dealing with assets from institutions that had been in chaos for years. I hope Congress and the media develop a better understanding of the RTC, which will face the same challenges."
[Back to top]1980
Fed Says Comply with Credit Curbs — or Else
WASHINGTON, April 1 — The Federal Reserve voluntary credit restraint program is not really voluntary, the vice chairman of the Fed said here Wednesday, and he suggested the Fed appears determined to make life miserable for banks that try to avoid compliance.
Frederick H. Schultz, the Fed official in charge of administering the restraint program, told the 800 bank auditors here for the Bank Administration Institute's auditors conference that the voluntary guidelines which ask banks to keep total loan growth for the year to 6% to 9%, is not really a voluntary program.
"If we find a bank violating the targets," Mr. Schultz said, "then we will have a little consultation." He then warned that if the "little consultation" is not effective, "then I'm going to need more reports."
He explained that under the Credit Control Act of 1969, the Fed can require as much reporting from banks as it deems necessary and, he added, it is a criminal act not to comply.
"These reports might be very long reports," the Fed governor intoned ominously. "They might be weekly or even daily reports."
Mr. Schultz said that some banks have called to complain that they are very near reaching the 6% to 9% target for the year already. He said the Fed is telling these bankers that they are to take care of small businesses, farmers and the other special categories of borrowers and that otherwise nothing can be done.
Some banks complain that this kind of restriction does not apply to them because they are "growth banks," Mr. Schultz said. "We tell them, 'you may not be a growth bank for a little while.'" He also said that some of the states experiencing strong growth "maybe won't be as explosive for a little while."
"We are going to stick to this monetary policy very tightly," Mr. Schultz said, adding that the credit restraint program is a "major thrust of the present anti-inflation plan.
"It is impossible to get out of this inflationary situation without a recession," the Fed vice chairman told the bank auditors. He said that many small businesses, farmers, and small financial institutions are "hemorrhaging" and "we can't let this go on forever." He said it is "vital" that the country cut consumption and increase savings.
Mr. Schultz was less certain about the timing and results of the new program. He said the consumer price index statistics "will be lousy for the next couple of months," but that "it is possible that we will get to a single-digit CPI by the end of this year."
He also told the auditors that it is important Federal Reserve be equally cautious when the economy is recovering. "We will not allow the money supply to get out of control coming out of the next recession," he said. "We have to have a firm monetary policy and help on the fiscal policy besides."
[Back to top]
