Day of Reckoning Looms for Ailing Thrifts

Aug. 19, 1989, was a fateful day for the thrift industry - the effective date of the Financial Institutions Reform, Recovery, and Enforcement Act.

Another fateful day, though less famous, now looms a year ahead: Aug. 19, 1992, the "drop-dead" day for thrift resolutions.

A bailout-law provision that has been discussed very little, at least until recently, calls for all troubled thrifts to be resolved by Aug. 19 of next year.

Five Resolutions a Week

Perhaps the first time that T. Timothy Ryan, director of the Office of Thrift Supervision, publicly discussed the target date was in the May 17 Wall Street Journal.

Mr. Ryan noted that the agency was resolving - that is, taking over - five thrifts per week, on average.

At this pace, about 240 thrifts could be seized between mid-May 1991 and the drop-dead date next August.

In fact, Mr. Ryan has said he expected all the insolvent thrifts still in private hands to be seized by the end of this fiscal year, which arrives Sept. 30. To meet that target would require about 6.5 thrift seizures each week.

Behind the Rush

One reason the Aug. 19, 1992, date is so crucial is that funding for thrift resolutions before that date will be handled by the Resolution Trust Corp. The Federal Deposit Insurance Corp. need not pay for those resolutions through its fund, which is already severely strained.

The FDIC has taken a very aggressive role in the examination of thrifts. It is obvious that behind closed doors it has pressured or at least strongly encouraged the OTS to take enforcement action - perhaps stronger action than might have been taken otherwise.

One might conclude that the objective is for all potential resolutions to be completed before the August 1992 drop-dead date, so they won't drain the FDIC fund.

Thrift directors and officers ought to be aware of this date, the incentive Congress has given the regulators to "clean out" the thrift industry by then, and the intense pressure that any troubled thrift still operating will feel as the date gets closer.

In fact, for the currently insolvent thrifts - that is, those having no tangible capital - the operative drop-dead date is the end of next month.

Executives in Jeopardy

For a larger group - solvent thrifts that fail to meet some regulatory capital requirements - Aug. 19, 1992, is probably the last they will be allowed to operate.

Apparently, once a thrift is placed in line to be "resolved," nothing can be done to prevent its ultimately being placed into an RTC receivership. It is tied to a conveyor belt headed to the buzz saw.

For executive management of a troubled thrift, the day of reckoning could come even sooner. Thrift and bank regulators are starting to remove executives of troubled institutions for the stated purpose of "sparking improvement" in operations and presumably to improve odds for survival.

Survival Mode

What should directors and officers of troubled thrifts do to preserve at least a chance of surviving the August 1992 cut?

The first hurdle is acknowledging that your institution is in a survival mode. Appropriate survival tactics will not be adopted until all directors and senior officers acknowledge this fact. A business-as-usual approach will not work. Survival strategies must be adopted, communicated, and implemented promptly; there is no time for delay.

Keep in mind that strategies for survival, if reasonably implemented, should also serve to shield directors and officers from liability claims brought by the regulators. (At stock companies, the strategies should protect against suits brought by former shareholders.) The potential under the thrift bailout law for increased civil money penalties makes legal and regulatory compliance even more crucial.

Multiple Constituencies

Officers and directors of financial institutions know they have a fiduciary responsibility to their members - that is, their depositors (or, if the institution is in stock form, to their shareholders). But management also has another constituency - the U.S. government, as the ultimate insurer of deposits.

When things are going well, duties to these constituencies are not hard to fulfill. It's when their interests diverge that the real difficulties arise.

For example, when a stock thrift becomes insolvent or nears insolvency, the fiduciary duty to the U.S. government becomes paramount, since the government bears the ultimate risk of loss. At this point, protecting the interests of shareholders is essentially impossible.

Nevertheless, directors cannot abandon the shareholders. Every effort must be made to preserve shareholder value.

Survival Tactics

Within the overall survival strategy, tactical plans should be promptly adopted in the following areas:

* Capital preservation and enhancement.

* Expense reduction.

* Preparation for examinations.

* Liquidity improvement.

* Documentation of board and committee actions.

* Public disclosure.

* Timely filing of regulatory reports.

* Dealing with regulatory violations.

* Negotiation of enforcement actions.

* Obtaining professional advisers.

Negotiating troubled waters takes the best efforts of thrift directors, officers, and their advisers and employees. Developing a survival strategy will not ensure a successful journey, but it will increase the chance of success and help protect the individuals responsible.

Mr. McCreary is a financial institutions attorney and consultant with the Memphis law firm of Gerrish & McCreary.

He formerly was president of Metropolitan Federal Savings and Loan Association, Nashville, and general counsel and executive vice president of First American National Bank and its parent, First American Corp., also of Nashville.

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