WASHINGTON -- The General Accounting Office charged last week that the Federal Deposit Insurance Corp.'s takeover of Crossland Savings violated the law.

The FDIC neglected to adequately document that its decision to seize and operate Crossland was the least costly method of rescuing the New York thrift, the Congressional watchdog agency contended. Detailed documentation is required by the banking law passed last December.

The GAO also faulted the FDIC's calculations of the rescue's price tag and said the agency may not have chosen the least costly alternative.

Taylor Denies Charge

The FDIC's chairman, William Taylor, rejected the GAO's conclusions.

In a letter to the agency, Mr. Taylor wrote that the FDIC "believes that the process which resulted in the decision to pursue interim ownership of Crossland Savings represented full compliance" the 1991 law, called the FDIC Improvement Act.

The FDIC would face no fine or formal punishment if it violated the law. But the agency is likely to suffer other repercussions, such as greater scrutiny from Congress. Much to regulators' dismay, lawmakers in the last banking bill gave detailed directions on how banks should be supervised. The GAO's finding could provoke more of the same.

Angry Staff

Indeed, aides to lawmakers who sit on the House and Senate banking committees expressed anger at the GAO's findings.

"If we can't depend on the regulators to carry out the law in good faith, we've got a real problem on our hands," said a Senate aide.

"They've always had a mindset of proceeding on an intuitive basis," said a House staffer. "I think this is a really strong wakeup call for the FDIC."

What's more, the findings provide ammunition for critics who contend that the FDIC weighs a number of considerations -- including political ones -- in deciding how to rescue big failing banks and then constructs cost estimates to justify its decision.

The FDIC considered three ways of rescuing the $7.4 billion-asset Crossland, which was seized in January.

The cheapest option, it said, was to pump in $1..2 billion in capital, install its own managers, and the sell bank in a couple of years. The FDIC estimated that strategy would cost $763 million.

The second choice -- a so-called deposit transfer -- was selling the institution's deposits to two bidders. Chase Manhattan Corp. and Republic New York Corp. The projected cost: $1.28 billion.

The last alternative was paying off the depositors at an estimated cost of $1.297 billion.

Assumptions Criticized

But GAO said the assumptions FDIC made in arriving at these cost figures were either not explained or justified.

The FDIC assumed that Crossland's $4.4 billion in troubled assets would be worth 10% more if worked out in the institution rather than stripped from the bank and collected by FDIC liquidators. Neither of the private-sector bidders wanted Crossland's assets.

"This 10% assumption explains the single biggest difference between the expected cost of a deposit payoff or insured deposit transfer and that of interim FDIC control," GAO said.

Without the assumptions, a deposit payoff would be only $94 million more expensive than the FDIC alternative and a deposit transfer just $77 million more -- small sums considering the risk FDIC is taking in running CrossLand and hoping for a real estate rebound in the Northeast.

The GAO said the FDIC provided no evidence to support this key assertion. In fact, only the FDIC's division of resolutions supported the 10% figure. The FDIC liquidation division, according to the GAO, said any difference in cost between the two ways of handling the assets is "small if it existed at all."

Board Members Disagreed

The GAO revealed that the FDIC's board members also disagreed with this key assumption. That the board accepted the resolutions division's recommendation to seize and operate Crossland without also accepting its assumptions troubled the GAO.

"Because the board did not adopt DOR's assumptions and estimates or quantify the extent of its departures from DOR's assumptions and cost estimates, the record did not show the board's projected cost for each resolution alternative," the GAO said. And that violates the new banking law, the watchdog agency noted.

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