Four government bodies - the Thrift Depositor Protection Oversight Board, the Office of Thrift Supervision, the Resolution Trust Corp., and the Federal Deposit Insurance Corp. - have been trying to decide whether to use the RTC's limited resources for early resolutions of troubled thrifts.

The concept is sound and should be seriously considered, to save costs and to attract capital to the industry.

There are, however, a number of practical issues that government must address.

Who's In Charge?

The first, which I might term regulatory risk, arises from the involvement of four agencies in the decision-making process.

The multiplicity of agencies discourages all but the most ardent potential acquirers, including investor groups. It creates an appearance of undue complexity and can prevent a timely decision on a particular transaction.

The solution is:

* A single agency should be designated to lead the early resolution process. A senior official chosen by that agency would lead a team of representatives from the four agencies. Each member should have authority from his or her agency to make binding decisions on its behalf with regard to early resolutions.

The FDIC should be the lead agency. The RTC would be an inappropriate choice, given its limited life, its limited authority (only where a conservatorship or receivership has been imposed), and the fact that the FDIC-administered Savings Association Insurance Fund will eventually be responsible for funding all such transactions.

* The lead agency should be given clear authority to approve a transaction. The other three agencies should agree in advance to defer to that decision.

* The oversight board should decide at the beginning of the bidding process whether to fund an acceptable early resolution deal. This would limit the possibility of a transaction being approved but not funded.

Speeding Up Consent

In addition to regulatory risk, potential acquirers of open thrifts face operational risk arising from the need for consent from a thrift's directors, shareholders, and holders of outstanding debt.

Two approaches could make that consent easier to get. I call them the carrot-and-stick approach, made possible by last year's banking law, and the prepackaged Chapter 11 approach.

* The Carrot-and-Stick Approach. The idea here is to force the acquiescence of stakeholders using the enhanced powers given to the banking agencies under the FDIC Improvement Act of 1991 as well as the protections it affords to directors.

These provisions, which will take effect Dec. 19, include:

1. Protections for directors in consenting to the appointment of a receiver or to any merger with or acquisition by a healthy bank or thrift or its holding company.

2. Broader grounds for the imposition of a receivership, particularly with respect to undercapitalized thrifts that fail to comply with their capital plans.

3. A panoply of prompt corrective actions that the regulatory agencies may bring to bear on thrifts categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized.

The new powers raise the possibility of hastening a failing thrift's demise by creating a marketplace perception that the regulators have, in effect, taken control.

Taken together, the new powers and the new protections create a strong incentive for stakeholders to make substantial concessions before an institution is closed outright.

* The Prepackaged Chapter 11 Approach. Here, a thrift holding company seeks consent of the various classes of claimants to a reorganization plan that would subsequently be consummated under the auspices of a bankruptcy court.

The main advantage of this approach is that it provides for each class of debtholders to vote separately, in a vote binding upon the whole class. (Outside the bankruptcy context, debt-holders are protected by the terms of indentures that typically provide that material changes cannot be made unless each holder agrees.)

The prepackaged Chapter 11 approach also has a number of drawbacks. One is that agreement is needed from holders of at least two-thirds the amount of indebtedness and from more than half the debtholders voting. As a result, this approach may be feasible only in limited cases - for example, where the holding company holds all of the stock and debt issued by the thrift.

Though the Bankruptcy Code does not apply to insured financial institutions, the analogy of the prepackaged plan is perhaps the best way to obtain consent from all stakeholders of the thrift and its holding company.

If the regulators made clear their determination to close the thrift unless a plan were hammered out, the odds of acceptance would improve dramatically. If grounds for closing existed, the regulators could then facilitate resolution by an agreed-upon receivership pursuant to a reorganization plan.

Requiring competitive negotiation may be significantly more burdensome in the context of an early resolution than in the general context of RTC or FDIC resolutions.

Some ways the government might ease these extra difficulties include:

* Allow for bidding procedures that permit negotiated transactions rather than completely standardized structures. This could be accomplished by standardizing indemnities, puts, or asset guarantees in the assistance package while allowing for creativity in such areas as equity participation, servicing of problem assets, and treatment of shareholders and debtholders.

* Shop the thrift, not the deal. Assuming that potential acquirers are permitted to be creative in structuring their bids, it is imperative that proprietary aspects of their proposals not be shared with competing bidders.

* Promote competition among bidders by compensating the first bidder to the table for the reasonable costs of due diligence out of the difference between the first bid and the winning bid. (Alternatively, some part of the due-diligence costs could be paid directly by the government, with the fruits made available to all bidders.)

A Valuable Tool

The bidding costs and the regulatory and operational risks suggest that early resolution may be limited to large thrifts with significant franchise value.

Nevertheless, early resolution is a valuable regulatory tool and merits further exploration.

In the proper circumstances - where, for example, a potential acquirer seeks a competitive advantage over other bidders by coming to the table before the standardized RTC resolution process is used - an early resolution may have great appeal.

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