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APPENDIX B List of Abbreviations and Glossary of Terms This list of abbreviations and glossary of terms is compiled from terminology that is used in this publication. An entry with an asterisk in the list of abbreviations is defined in the glossary of terms. The definitions in the glossary are not intended to be comprehensive and complete. The reader can often obtain more information about specific terms by referring to appropriate chapters in the book. The index at the back of the book includes most of the terms that appear in the glossary. Abbreviations ABA American Bankers Association ADC acquisition, development, and construction AGS Automated Grouping System AHAB Affordable Housing Advisory Board AHDP Affordable Housing Disposition Program AHPAffordable Housing Program ALA Asset Liquidation Agreement AMDA Asset Management and Disposition Agreement AMDM Asset Management and Disposition Manual AMDP Asset Management and Disposition Plan AMRESCO Asset Management and Real Estate Sales Company AMVaffordable market value APP Accelerated Payment Program 754 MANAGING THE CRISIS APS Automated Payout System ARM adjustable rate mortgage ARP Accelerated Resolution Program AVR asset valuation review BEYbond equivalent yield BIF Bank Insurance Fund BONHAM Banc One New Hampshire Asset Management, Inc. BONNET Bonnet Resources Corporation, Inc. CAP corrective action plan CARC Consolidated Asset Recovery Corporation CBI Act Coastal Barrier Improvement Act of 1990 CD certificate of deposit CEBA Competitive Equality Banking Act of 1987 CEO chief executive officer CMBS commercial mortgage-backed securities CMO collateralized mortgage obligation CMS Case Management System COMB Contractor Oversight and Monitoring Branch CPPM Contract Policies and Procedures Manual CRA Community Reinvestment Act of 1977 CSP Conservator’s Strategic Plan DAS Division of Depositor and Asset Services, a former FDIC organizational unit DIDMCA Depository Institutions Deregulation and Monetary Control Act of 1980 DINB Deposit Insurance National Bank DIRM Division of Information Resource Management, FDIC DIV derived investment value DOF Division of Finance, FDIC DOL Division of Liquidation, a former FDIC organizational unit DOR Division of Resolutions, a former FDIC and RTC organizational unit DOS Division of Supervision, FDICLIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 755 DRR Division of Resolutions and Receiverships, FDIC DRS Division of Research and Statistics, FDIC ECR estimated cash recovery ERISA Employee Retirement Income Security Act of 1974 ERV estimated recovery value FADA Federal Asset Disposition Association Fannie Mae Federal National Mortgage Association FASB Financial Accounting Standards Board FDI Act Federal Deposit Insurance Act of 1950 FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FF&E furniture, fixtures, and equipment FFA Federal Financial Assistance FFB Federal Financing Bank FHA Federal Housing Administration FHLB Federal Home Loan Bank FHLBB Federal Home Loan Bank Board FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 FIS Financial Institution System FmHA Farmers Home Administration FOIA/PA Freedom of Information Act (1967) and Privacy Act (1974) Freddie Mac Federal Home Loan Mortgage Corporation FRB Federal Reserve Bank FRFFSLIC Resolution Fund FSLIC Federal Savings and Loan Insurance Corporation GAAP generally accepted accounting principles GAO General Accounting Office GCR gross cash recovery GG general grade federal employee Ginnie Mae Government National Mortgage Association GL general ledger756 MANAGING THE CRISIS GSA General Services Administration HUD U.S. Department of Housing and Urban Development IBSGC Industrial Bank Savings Guaranty Corporation ICA interim capital assistance ICC income capital certificate ICR internal control review IDT insured deposit transfer IG inspector general IMA Income Maintenance Agreement IRR internal rate of return ITCV initial targeted cash value JDC judgments, deficiencies, and charge-offs JERNE J. E. Robert, Inc. KKR Kohlberg, Kravis Roberts & Co. LAMIS Liquidation Asset Management Information System LDIMS Legal Division Information Management System LG liquidation grade federal employee LIBOR London InterBank Offered Rate LOC Letter of Credit LSA Legal Services Agreement LSI Legal Services Invoice (System) LSO Legal Services Office LURA Land Use Restriction Agreement MA managing agent MAST Multi-Asset Sales Transaction MBS mortgage-backed security(ies) MCR management control review MIFMultiple Investor FundLIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 757 MIS management information system MSB mutual savings bank MWOB minority- or women-owned business MWOP minority- or women-owned program N.A. National Association NOW negotiable order of withdrawal NPV net present value NTEU National Treasury Employees Union NWC Net Worth Certificate OBA open bank assistance OCATS Outside Counsel Application Tracking System OCC Office of the Comptroller of the Currency OCIS Outside Counsel Information System OIG Office of Inspector General, FDIC and RTC ORE owned real estate OTS Office of Thrift Supervision P&A purchase and assumption PBGC Pension Benefit Guaranty Corporation PCA prompt corrective action PLS Professional Liability Section, FDIC PMN predominantly minority neighborhood QFC qualified financial contract RALA Regional Asset Liquidation Agreement RAP regulatory accounting principles RECOLL RECOLL Management Corporation REFCORP Resolution Funding Corporation REIT real estate investment trust REMIC Real Estate Mortgage Investment Conduit REO real estate owned 758 MANAGING THE CRISIS REOMS Real Estate Owned Management System RFC Reconstruction Finance Corporation RICO Racketeer Influenced and Corrupt Organization RLIS RTC Legal Information System RTC Resolution Trust Corporation RTCCA Resolution Trust Corporation Completion Act of 1993 (Completion Act) RTCRRIA RTC Refinancing, Restructuring, and Improvement Act of 1991 S&L savings and loan SAIF Savings Association Insurance Fund SAMA Standard Asset Management Amendment SAMDA Standard Asset Management And Disposition Agreement SBA Small Business Administration SIMAN Subsidiary Information Management Network SWAT Settlement/Workout Assistance Team TAA technical assistance advisor TDPOB Thrift Depositor Protection Oversight Board (the RTC’s Oversight Board, starting in 1991) UDAA Unclaimed Deposits Amendment Act of 1993 VA Veterans’ Administration WAC weighted average coupon (rate) Abbreviations with an asterisk are defined in the following glossary.LIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 759 1 Glossary of Terms absolute auction: An open, outcry sale in which assets are sold to the highest bidder regardless of price, with no reserve price and no minimum bid. accelerated dividend: A dividend paid to proven creditors of the receivership based on a projection of future funds available. Accelerated dividends are calculated based on esti- mates of asset collections, less projections of administrative expenses, other liabilities, and contingent liabilities. Accelerated Resolution Program (ARP): A means of resolving a failed thrift institution in which there is an expedited transfer of the insolvent thrift’s assets and deposit liabilities to a healthy institution, without first placing the failed thrift in conservatorship. This approach, initiated jointly by the OTS and the RTC in 1990, was similar to FDIC reso- lutions at the time. The program was designed to allow thrifts that were below FIRREA- mandated capital levels, but that otherwise were perceived as having substantial fran- chise value, to continue to operate throughout the resolution process. acquiring institution: A healthy bank or thrift institution that purchases some or all of the assets and assumes some or all of the liabilities of a failed institution in a purchase and assumption transaction. The acquiring institution is also referred to as the assuming institution. (Also see assuming institution.) ad valorem real property taxes: Taxes imposed on real property based on its value. adjustable rate mortgage (ARM): A type of mortgage in which the interest rate is reset at regular intervals, typically at a spread over a stated short-term interest rate index. The most frequently used indexes have been the one-year U.S. Treasury constant maturity yield and the Eleventh District Cost of Funds Index. Because the interest rate paid by the borrower fluctuates with the general level of interest rates in the marketplace, ARMs shift most of the interest rate risk from the lender to the borrower. advance dividend: A payment made to an uninsured depositor or creditor after a bank or thrift failure. The amount of the advance dividend represents the FDIC’s conservative estimate of the ultimate value of the receivership. Cash dividends equivalent to the board-approved advance dividend percentage (of total outstanding deposit claims) are paid to uninsured depositors, thereby giving them an immediate return of a portion of their uninsured deposit. adverse domination: A legal doctrine advanced by the FDIC and the RTC in profes- sional liability suits against the officers and directors of a failed institution. Under the doctrine of adverse domination, in a lawsuit against corporate wrongdoers, the statute of 1. Many of the RTC-related definitions were obtained from the glossary of A History of the Resolution Trust Cor- poration’s Asset and Real Estate Management and Disposition Program, by FDIC’s Brian D. Lamm and James E. Heath, published August 28, 1995.760 MANAGING THE CRISIS limitations does not run during the period when the defendants were in control of the board of directors of the failed institution. Affordable Housing Program (AHP): An FDIC program that increases the stock of affordable housing through disposition of eligible residential properties to low- and moderate-income families. The RTC program was known as the Affordable Housing Disposition Program (AHDP). The affordable housing created comes from the agency’s inventory of owned real estate. affordable market value (AMV): A valuation model used to determine the sales price of multi-family residential property sold in the FDIC AHP. The affordable market value was determined by subtracting the cost to cure physical deficiencies and operating defi- cits from the maximum supportable loan amount, which was determined by applying a debt service coverage factor to the projected net operating income of the property. agency swap program: A method of securitization in which single family residential mortgages conforming to agency underwriting guidelines are swapped for mortgage- backed securities issued by Fannie Mae or Freddie Mac. agricultural bank: Banks of the Farm Credit System and certain other farm-oriented commercial banks, typically located in the farm belt states, that specialize in providing credit to the farming industry. (Also see Loan Loss Amortization Program.) appraised equity capital: A regulatory capital item established by the former FHLBB that allowed a savings association to count as part of its regulatory capital the difference between the book value and the fair market value (appraised value) of fixed assets, including owner-occupied real estate. Asset Liquidation Agreement (ALA): An asset management contract between the FDIC and a bank affiliate or private-sector contractor for the management and disposition of distressed assets of all types. The ALA contract was designed for asset pools with an aggregate book value in excess of 1 billion. asset management contract: A contract with a private-sector asset management con- tractor for managing and disposing of distressed assets. Asset Management and Disposition Agreement (AMDA): A partnership agreement between the FDIC as manager of the FSLIC Resolution Fund (FRF) and the acquirers of certain failed savings and loan institutions, created as a result of the RTC’s review and renegotiation of the FSLIC’s 1988 and 1989 assistance agreements. Assets with a book value of 3.7 billion were assigned to two partnerships under AMDA contracts. asset manager: A term often used to describe an asset management contractor who manages and disposes of assets (for example, an ALA or SAMDA contractor). The term “asset manager” may also be used in a broad, generic sense to describe a person or entity responsible for the management of an asset or a portfolio of assets. asset pool: A portfolio of assets, often composed of assets with similar characteristics.LIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 761 asset specialist: An FDIC or RTC employee with responsibility for the management and disposition of assets, or for the oversight of asset managers employed under asset management contracts. asset valuation review (AVR): A review of a failing institution’s assets to estimate the liq- uidation value of the assets. An AVR estimate is used in the least cost analysis that is required by FDICIA. assistance agreement: An agreement pertaining to a failing institution under which a deposit insurer, such as the FDIC, provides financial assistance to the failing institution or to an acquiring institution. The assistance agreement includes the terms of the pur- chase of assets and assumption of liabilities of the failing institution by the assuming institution; it may also include provisions regarding a reorganization of the failing insti- tution under new management or a merger of the failing institution into a healthy insti- tution. assisted merger: A failing institution is absorbed into an acquiring institution that receives FDIC assistance. In 1950, the FDIC was authorized by section 13(e) of the FDI Act to implement assisted mergers. In 1982, when the FDI Act was amended, the merger authority, as amended, was written into section 13(c) of the FDI Act. Such transactions allow the FDIC to take direct action to reduce or avert a loss to the deposit insurance fund and to arrange the merger of a troubled institution with a healthy FDIC insured institution without closing the failing institution. Assisted merger was the FSLIC’s preferred resolution method. (Also see Federal Deposit Insurance Act.) assuming institution: A healthy bank or thrift that purchases some or all of the assets and assumes some or all of the deposits and other liabilities of a failed institution in a purchase and assumption transaction. The assuming institution is also referred to as the acquiring institution. (Also see acquiring institution.) auction: An asset sales strategy in which assets are sold either individually or in pools to the highest bidder in an open-outcry auction. Bank Insurance Fund (BIF): One of the two federal deposit insurance funds created by Congress in 1989 and placed under the FDIC’s administrative control. The BIF insures deposits in most commercial banks and many savings banks. The FDIC’s “permanent insurance fund,” which had been in existence since 1934, was dissolved when the BIF was established. The money for a deposit insurance fund comes from the assessments contributed by member banks and also from investment income earned by the fund. (Also see Savings Association Insurance Fund.) bond equivalent yield (BEY): A bond, Treasury bill, or other discount instrument’s yield over its life, assuming it is purchased at the asked price and the return is annualized using a simple interest approach. The bond equivalent yield is equal to a bill’s discount,762 MANAGING THE CRISIS expressed as a fraction of the purchase price multiplied by 365 divided by the number of days to maturity. BEY = (discount/purchase price) x (365/days to maturity) book value: The dollar amount shown on the institution’s accounting records or related financial statements. The “gross book value” of an asset is the value without consider- ation for adjustments such as valuation allowances. The “net book value” is the book value net of such adjustments. The FDIC restates amounts on the books of a failed insti- tution to conform to the FDIC’s liquidation accounting practices. Therefore, in the FDIC accounting environment, book value generally refers to the unpaid balance of loans or accounts receivable, or the recorded amount of other types of assets (for exam- ple, ORE or securities). book value reduction: The decrease in book value of all types of assets resulting from activities such as the collection of loan principal, the sale of an asset, the forgiveness of a debt, and the write-off or donation of an asset. branch banking: Multi-office banking. Branch banking occurs when a single bank con- ducts its business at a number of different offices located in the same or different cities, states, or countries. The ability to operate branches is controlled by state law; most states permit branches within city limits and a few states permit statewide banking. Federal law ties the ability of a national bank to establish and operate branches to the scope of the branching powers granted by state law to the state banks located in the state in which the national bank is situated. branch breakup: A resolution strategy that provides bidders with the choice of bidding on the entire franchise or on individual or groups of branches of the failing institution. Marketing failing institutions on both a whole franchise and a branch breakup basis can expand the universe of potential buyers and may result in better bids in the aggregate. In branch breakup transactions, prospective acquirers are required to submit bids on both the “all deposits” and “insured deposits” options except for bids on the entire franchise. The branch breakup resolution strategy was developed by the RTC to allow smaller institutions to participate in the resolution process and to increase competition among the bidders. (Also see core branch P&A and limited branch P&A.) bridge bank: A temporary national bank established and operated by the FDIC on an interim basis to acquire the assets and assume the liabilities of a failed institution until final resolution can be accomplished. The use of bridge banks generally is limited to sit- uations in which more time is needed to permit the least costly resolution of a large or complex institution. (Also see Competitive Equality Banking Act.) bulk sale: The sale of a large number of assets to one purchaser in a single transaction. Also known as a “portfolio sale.”LIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 763 capital forbearance: The temporary permission for a bank or thrift to operate with cap- ital levels below regulatory standards if the bank or thrift has adequate plans to restore capital. For example, banks suffering because of the energy and agricultural crises in the mid-1980s were permitted to operate with capital levels below regulatory standards if they had adequate plans to restore capital. A joint policy statement issued in March 1986 by the FDIC, the OCC, and the Federal Reserve Board encouraged a capital for- bearance program for agricultural banks. capital loss coverage: A form of aid in assistance transactions that provided for a pay- ment equal to the difference between an asset’s original value (book value) and the pro- ceeds received when the asset was sold. charge-off: A book value amount that was expensed as a loss before receivership and that continues to be a legal obligation of the borrower to the institution. A charge-off is tech- nically an off-book memorandum accounting item that represents the book value of an asset that the bank or thrift previously wrote off. chartering authority: A state or federal agency that grants charters to new depository institutions. For state chartered institutions, the chartering authority is usually the state banking department; for national banks, it is the OCC; and for federal savings institu- tions, it is the OTS. cherry-pick: The tendency of an asset manager to dispose of the assets in a portfolio that are relatively easy to sell before disposing of the hard-to-sell assets; a P&A variation in which no loans are transferred as of closing but the acquiring institution has an option to acquire loans from the FDIC for a designated time period. claim: An assertion of the indebtedness of a failed institution to a depositor, general creditor, subordinated debt holder, or shareholder. classified asset: An asset that is designated as substandard, doubtful, or subject to loss. An asset becomes classified when it is so designated by the appropriate regulatory agency. clean bank P&A: A purchase and assumption transaction in which the acquiring institu- tion assumes the deposit liabilities and the cash and cash equivalent assets of the failed institution. In addition, the assuming bank purchases the “good” loans of the failed institution or receives an exclusive call option to purchase designated fixed assets and assume certain contracts of the failed institution. Coastal Barrier Improvement Act (CBI Act): Legislation enacted in 1990 that placed limita- tions on property transfers and required special disposition procedures for certain environ- mentally significant properties located in coastal areas or located adjacent to publicly managed conservation areas. The act imposed a waiting period of up to six months on FDIC and RTC sales of environmentally sensitive property located in coastal areas or adja- cent to publicly managed conservation areas.764 MANAGING THE CRISIS collateralized mortgage obligation (CMO): A corporate bond backed by a pool of mort- gages in which the cash flows of the pool are channeled into two or more series of bonds. Interest payments generally are made to the purchasers of such securities. Competitive Equality Banking Act (CEBA): Legislation enacted in 1987 that permitted qualifying agricultural banks to amortize losses over a seven-year period for agricultural loans, rather than having to deduct losses from capital as soon as the loss was incurred. CEBA also created the Financing Corporation, which was chartered by the FHLBB, to borrow up to 10.8 billion over three years to finance the closure of failed S&Ls or to subsidize their takeover by healthy S&Ls. In addition, CEBA encouraged the supervi- sory forbearance of well-managed but undercapitalized institutions. CEBA also expanded the FDIC’s authority to permit out-of-state bank holding companies to acquire stock institutions and mutual savings banks before failure, provid- ing those companies met certain conditions. In addition, CEBA provided the FDIC with authority to establish a bridge bank, a new national bank that was created to purchase the assets and assume the liabilities of a failing bank until resolution could be accomplished. Under CEBA a bridge bank could be established if— • The cost of establishing the bridge bank did not exceed the cost of liquidating the failing bank; • The continued operation of the uninsured bank was essential to provide adequate banking services in the community; or • The continued operation of the institution was in the best interest of its deposi- tors and the public. confidentiality agreement: An agreement between the FDIC and a potential acquiring financial institution that acknowledges the confidentiality of the information package pertaining to the failing institution and other documents, including the financial trans- action agreements. To receive the information package and perform on-site due dili- gence at the institution before failure, potential acquirers must sign a confidentiality agreement. conservator: A person or entity, including a government agency, appointed by a regula- tory authority to operate a troubled financial institution in an effort to conserve, man- age, and protect the troubled institution’s assets until the institution has stabilized or has been closed by the chartering authority. Conservator’s Strategic Plan (CSP): A plan prepared by the managing agent of an RTC- controlled institution within 60 days of the start of the conservatorship. The CSP describes the plan of operation for the failed institution during the conservatorship stage. The CSP formerly was known as the “Conservator’s Operating Plan.” (Also see managing agent.) conservatorship: The legal procedure provided by statute for the interim management of financial institutions used by the FDIC and RTC. Under the pass-through receiver- ship method, after the failure of a savings institution, a new institution is chartered andLIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 765 placed under agency conservatorship; the new institution assumes certain liabilities and purchases certain assets from the receiver of the failed institution. Under a straight con- servatorship, the FDIC or RTC may be appointed conservator of an open, troubled institution. In each case, the conservator assumes responsibility for operating the institu- tion on an interim basis in accordance with the applicable laws of the federal or state authority that chartered the new institution. Under a conservatorship, the institution’s asset base is conserved pending the resolution of the conservatorship. contractor: An individual or other legal entity that directly or indirectly submits offers for or receives a government contract for goods or services. Contractor Oversight and Monitoring Branch (COMB): An organizational unit located in Dallas, Texas, within the FDIC’s former Division of Liquidation and responsible for overseeing the FDIC’s asset management contractors. This contractor oversight group has since been renamed but is still situated in Dallas. core branch P&A: A component in a purchase and assumption (P&A) transaction in an RTC branch breakup resolution. Under the terms of the core branch P&A agreement, the acquiring institution assumes all of the deposit liabilities directly attributable to the failed institution’s headquarters branch and other acquired branches, and certain other liabilities. In addition, the acquirer purchases the assets directly attributable to the head- quarters and other acquired branches as well as assets that are not branch-specific such as the trust or credit card business. The core branch P&A incorporates the terms of the standard P&A as the standard terms and conditions of the transaction. Generally, the core branch P&A was used in branch breakup transactions for the sale of the headquar- ters branch or core branch clusters while individual branch offices were sold under the limited branch P&A. (Also see branch breakup, limited branch P&A, and standard P&A.) core deposits: That portion of a bank’s deposits that is relatively stable and has a predict- able cost. Deposits fluctuate seasonally and cyclically, but even in adverse circumstances, deposits normally do not fall below some minimum level. corrective action plan (CAP): A plan for correcting organizational or operational weak- nesses. As defined in the FDIC Internal Control Review program, a CAP states the defi- ciency, the corrective action required to cure the deficiency, the person or persons responsible for the action, and actual or expected completion dates for the required actions. cost-plus: The practice of establishing the selling price for a product or service by adding a fixed amount or percentage to costs. For example, the FDIC’s ALA contractors received a cost-plus compensation package. cost test: The statutory requirement before enactment of FDICIA that a P&A transac- tion be less costly to the relevant insurance fund than a payoff and liquidation. The “cost test” was introduced in 1982 by the Garn–St Germain Depository Institutions Act, which enhanced the power of the FDIC and FSLIC to provide aid to troubled institu- tions and imposed the condition that the assistance provided must be less costly than the cost of liquidation.766 MANAGING THE CRISIS critically undercapitalized: One of the five capital categories of financial condition estab- lished by FDICIA and codified in section 38 of the FDI Act. The five categories are well- capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Section 38 requires banking supervisors to impose con- straints on insured depository institutions that are determined to be in any of the latter three categories. An insured depository institution is “critically undercapitalized” if its ratio of tangible capital to total assets is equal to or less than 2 percent. cross guarantee: A provision of the FDI Act added by FIRREA that allows the FDIC to recover part of its costs of liquidating or assisting a troubled insured institution by assessing those costs to the remaining solvent insured institutions which are commonly controlled as defined in the statute. When the FDIC acts to protect its interests under this provision, the assessment can result in a liquidity strain or, in some cases, the imme- diate insolvency of an affiliated bank. deficiency: The dollar amount that is owed to a lender after foreclosure or repossession has occurred. The deficiency is normally the sum of principal debt outstanding, unpaid interest, and late charges remaining as a legal obligation, minus the net value of the fore- closed or repossessed asset. de novo judicial review: A court’s independent review of the facts and the law with no deference to the agency’s original determination. The court makes its determination based on the facts of the case, independent of any prior decision by the agency. Deposit Insurance National Bank (DINB): The Banking Act of 1933 authorized the FDIC to establish a “new” bank called a DINB to assume the insured deposits of a failed bank. Passage of the act permitted the FDIC to pay the depositors of a failed FDIC insured institution through a DINB, a national bank that was chartered with limited life and powers. Depositors of a DINB were given up to two years to move their insured accounts to other institutions. A DINB allowed a failed bank to be liquidated in an orderly fashion, minimizing disruption to local communities and financial markets. deposit payoff: A resolution method for failed FDIC insured institutions that is used when liquidation of the institution is determined to be the least costly resolution or when no assuming institution can be found. Deposit payoffs generally have two forms: (1) a straight deposit payoff, in which the FDIC directly pays the insured amount of each depositor, and (2) an insured deposit transfer, in which a healthy institution is paid by the FDIC to act as its agent and pay the insured deposits to customers of the failed institution. A deposit payoff is sometimes called a payoff. (Also see payoff and insured deposit transfer.) depositor discipline: One aspect of “market discipline.” The concern of depositors for the safety of their deposits is theorized to control the riskiness of a bank’s investment and lending portfolios. (Also see market discipline.)LIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 767 depository: A bank or other entity responsible for holding assets in safekeeping. Depository Institutions Deregulation and Monetary Control Act (DIDMCA): The 1980 act that began the process of phasing out Regulation Q, the regulation that had placed a ceiling on the rates of interest banks and thrifts could offer their depositors. DIDMCA sought to deregulate banking and promote more competition in the banking industry to benefit customers. It also permitted S&Ls to issue credit cards and offer checking accounts, and it increased FDIC insurance coverage on insured deposits from 40,000 to 100,000. derived investment value (DIV): A valuation model that was developed for the RTC, pri- marily to value portfolios of real estate and nonperforming commercial mortgages. The DIV model discounts expected future cash flows, using many rules that govern holding periods, marketing periods, various discount rates by asset type, and so on. The DIV model has been widely used to value the collateral underlying commercial mortgage- backed securities. discounted payoff: The payoff of a nonperforming loan at a price that is below the book value of the asset; for example, a 15 percent discount would equate to a price that is 85 percent of book value. distressed asset: Owned real estate, nonperforming loan, or other troubled asset. The market value of a distressed asset is almost always less than it was projected to be when the investment was originally made and is often below the asset’s current book value. Division of Resolutions and Receiverships (DRR): An FDIC organizational unit, created in late 1996 by combining the Division of Resolutions (DOR) and the Division of Depositor and Asset Services (DAS). D’Oench Duhme: One of the “superpower” remedies relied on extensively by the FDIC and the RTC in disposing of assets. D’Oench Duhme has existed since the 1940s and essentially states that side agreements that are not recorded on the books or records of a financial institution cannot be enforced. due diligence: A potential purchaser’s on-site inspection of the books and records of a failing institution. Before an institution’s failure, the FDIC invites potential purchasers to the institution to review pertinent files so they can make informed decisions about the value of the failing institution’s assets. All potential purchasers must sign a confiden- tiality agreement. In addition, contractors may be hired to perform due diligence work on assets that are earmarked for multi-asset sales initiatives. By hiring outside firms to provide and certify the due diligence, investors have the assurance that an independent source provides them with reliable investment information. duty of care: One of the principal fiduciary duties of bank directors and trustees. The duty of care requires directors and trustees to make appropriate inquiries and acquaint themselves with all information reasonably available to them before making a business decision, and to act with requisite care after becoming so acquainted. 768 MANAGING THE CRISIS duty of loyalty: The fiduciary obligation of a bank director or trustee to act in the best interest of the institution and its constituents, as opposed to acting for the fiduciary’s own interest or for the benefit of outsiders. energy bank: Commercial banks, often located in the southwest, that provided credit to the energy industry during the period of the study, 1980 through 1994. entrance fee: A fee required by statute to be paid to the Bank Insurance Fund when an insured depository institution participates in a conversion transaction wherein insured deposits are transferred from a Savings Association Insurance Fund member to a Bank Insurance Fund member. The entrance fee assessed in connection with a conversion from SAIF to BIF is the amount derived by multiplying the dollar amount of the depos- its transferred from SAIF to BIF by the BIF reserve ratio. The entrance fee assessed in connection with a SAIF conversion is the amount derived by multiplying the amount of deposits transferred from BIF to SAIF by the SAIF reserve ratio or by .01 percent, whichever is greater. equity partnerships: An RTC asset disposition program in which the RTC transferred a share of the ownership and certain rights and responsibilities regarding specific assets but retained the right to share in future profits. The program was used to dispose of nonper- forming commercial mortgages, nonperforming business loans, land, and other dis- tressed assets. essentiality: Under section 13(c) of the FDI Act as originally enacted, the FDIC was allowed to assist an open bank to prevent its failure if the FDIC Board of Directors determined that the insured bank was in danger of failing and continued operation of such bank was “essential.” Section 13(c) of the FDI Act was revised by the Garn–St Germain Depository Institutions Act; and this essentiality test was replaced by the cost test, except for cases in which the cost of providing open bank assistance was expected to exceed the cost of liquidating the failed institution. (Also see cost test.) estimated cash recovery (ECR): An estimate of the amount and timing of all future cash recoveries, direct expenses, and payment of any prior liens. An ECR is a projection of expected net cash flows and often is used in the process of valuing a nonperforming loan. estimated recovery value (ERV): A mark-to-market valuation of an asset, determined by calculating the net present value of expected net cash flows. The RTC calculated an ERV for each asset that was assigned to the original SAMDA contracts. This method of valu- ation was similar in concept to the FDIC’s “net present value of the estimated cash recovery.” exit fee: A fee required by statute to be paid to the Savings Association Insurance Fund (or the Financing Corporation, as determined by the secretary of the Treasury) when an insured depository institution participates in a conversion transaction wherein insuredLIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 769 deposits are transferred from a SAIF member to a BIF member. The exit fee assessed in connection with a conversion from SAIF to BIF is the amount derived by multiplying the dollar amount of deposits transferred from SAIF to BIF by .90 percent. The exit fee assessed in connection with a conversion from BIF to SAIF is the amount derived by multiplying the dollar amount of the retained deposit base transferred from BIF to SAIF by .01 percent. failure: The closing of a financial institution by its chartering authority, which rescinds the institution’s charter and revokes its ability to conduct business because the institu- tion is insolvent, critically undercapitalized, or unable to meet deposit outflows. Farmers Home Administration (FmHA): A federal agency created in the 1930s in the U.S. Department of Agriculture. Its mission is to support American farmers through commodity programs, farmer operating and emergency loans, conservation, domestic and overseas food assistance, and disaster programs. In a 1994 USDA reorganization, FmHA became the Farm Service Agency (FSA). Federal Asset Disposition Association (FADA): A corporation, chartered as a savings and loan and wholly owned by the FSLIC, created in 1985 by the FHLBB to manage and liquidate assets of failed thrifts. One of the RTC’s duties was to liquidate the FADA within 180 days from the enactment of FIRREA. Federal Deposit Insurance Act (FDI Act): A 1950 act that, among other things, (1) increased the FDIC deposit insurance limit from 5,000 to 10,000 and (2) granted the FDIC the authority to provide open bank assistance through loans or the purchase of assets to prevent the failure of an insured bank. Under the “essentiality doctrine” of the FDI Act, a bank was eligible for open bank assistance only if the FDIC Board of Direc- tors decided that the continued operation of the institution was “essential.” Federal Deposit Insurance Corporation Improvement Act (FDICIA): A comprehensive package of legislation, enacted in 1991, that included (1) a “least cost” test, imposed in the resolution process, that required the FDIC to evaluate all resolution alternatives, including liquidation, and to choose the resolution method least costly to the relevant insurance fund; (2) section 131 of FDICIA, which imposed new capital requirements, effective December 19, 1992, whereby institutions were to be closed before they became insolvent, although banks with tangible capital of less than 2 percent of assets were “crit- ically undercapitalized” and subject to immediate closure; and (3) an extension of the time period for the RTC to accept conservatorship and receivership appointments from August 31, 1992, to October 1, 1993, a date after which the FDIC would assume responsibility for failed thrifts and would pay losses from the SAIF. Federal Financing Bank (FFB): A bank established by the Federal Financing Bank Act of 1973 with a mission to (1) assure coordination between federal borrowing programs and the overall economic and fiscal policies of the federal government and (2) reduce the cost of federal and federally assisted borrowings from the public. The FFB has become770 MANAGING THE CRISIS the vehicle through which most federal agencies finance their programs involving the sale or placement of credit market instruments, including agency securities. The FFB is under the general supervision of the secretary of the Treasury, and it is managed and staffed by Treasury employees. Federal Home Loan Bank(s) (FHLBs): A system of banks created in 1932 by the Federal Home Loan Bank Act, which established 12 regional FHLBs to encourage home loans by local thrifts during the Great Depression that began in 1929. The FHLBB was responsible for overseeing the FHLBs from 1932 to 1989, when FIRREA transferred this function to the Federal Housing Finance Board. Federal Home Loan Bank Board (FHLBB): A five-member board established on July 22, 1932, by the Federal Home Loan Bank Act. The board was authorized to establish Fed- eral Home Loan Banks with the authority to regulate and supervise S&Ls, as well as to lend money to S&Ls, which would in turn finance home loans. The FHLBB retained these basic responsibilities until the passage of FIRREA in August 1989. FIRREA cre- ated the Federal Housing Finance Board to succeed the FHLBB, and some of the FHLBB’s functions were transferred to the FDIC, the RTC, and the OTS. Federal Home Loan Mortgage Corporation (Freddie Mac): A corporate instrumentality of the United States, created by Congress on July 24, 1970. Freddie Mac is owned by its shareholders and accountable to its shareholders and a board of directors. Its primary mission is to increase the availability of money from mortgage lenders to homebuyers and investors in multi-family residential property. As one of the biggest buyers of home mortgages in the United States, Freddie Mac is a secondary market conduit between mortgage lenders and investors. Federal Housing Administration (FHA): A division of the U.S. Department of Housing and Urban Development that insures mortgage loans for a variety of purposes, but pri- marily for those related to residential housing. Congress originally created the FHA in 1934 to make homeownership possible for first-time homebuyers. Today the FHA helps low- to middle-income families to purchase a home without making a large down pay- ment, encourages improvement in housing standards and conditions, and provides a system of government-guaranteed mortgage insurance. Federal National Mortgage Association (Fannie Mae): A tax-paying corporation, owned entirely by private stockholders, established in 1938 to provide additional liquidity to the mortgage market. In 1968, the original Fannie Mae was reorganized into two corpo- rations: the privately-owned Fannie Mae and the government-owned Ginnie Mae. Fannie Mae purchases and sells residential mortgages insured by the Federal Housing Administration or guaranteed by the Veterans’ Administration, as well as conventional home mortgages. Purchases of mortgages are financed by the sale of mortgage-backed securities to private investors. Fannie Mae operates with regulatory oversight from both the U.S. Treasury Department and the U.S. Department of Housing and Urban Development.LIST OF ABBREVIATIONS AND GLOSSARY OF TERMS 771 Federal Reserve Bank (FRB): One of the 12 regional banks in the Federal Reserve Sys- tem. The 12 FRBs and their 25 branches, which are managed by the Board of Gover- nors of the Federal Reserve System, perform a variety of functions, including operating a nationwide payments system, distributing the nation’s currency, supervising and regulat- ing member banks and bank holding companies, and serving as banker for the U.S. Treasury. The FRBs supervise and examine state chartered banks that are members of the Federal Reserve System (state member banks). Federal Reserve System (Fed): The central banking system of the United States, founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, the Fed’s role in banking and the econ- omy has expanded. The Fed administers the nation’s monetary policy using three major tools: open market operations, the reserve requirement, and the discount rate. The Fed also plays a major role in the supervision and regulation of the U.S. banking system. The Board of Governors of the Federal Reserve System (the Federal Reserve Board) is made up of seven members appointed to 14-year terms by the president of the United States and confirmed by the Senate. The chairman and vice chairman of the board, however, serve four-year terms. The Federal Reserve Board’s policies are carried out by the 12 regional Federal Reserve Banks. Federal Savings and Loan Insurance Corporation (FSLIC): The federal corporation char- tered by Congress in 1934 to insure deposits in savings institutions. The FSLIC also served as a conservator or receiver for troubled or failed insured savings associations. Effective April 1, 1980, for insured savings and loan institutions, the FSLIC insured sav- ings accounts up to 100,000. The FSLIC functioned under the direction of the FHLBB, which provided certain administrative services and conducted the examination and supervision of insured S&Ls. In 1989, Congress abolished the FSLIC, transferring its resolution, conservatorship, and receivership functions to the RTC and its responsi- bilities for the deposit insurance fund to the Savings Association Insurance Fund, which is administered by the FDIC. fidelity bonds: Insurance provided to indemnify employees against loss by reason of the dishonesty of employees or as a result of the nonperformance of contracts. In fidelity insurance contracts, the insurance company issues fidelity insurance bonds as a guaran- tee against loss arising from the default or dishonesty of the insured person. Fidelity bonds are issued for three classes of risk: larceny, culpable negligence, and unfaithful discharge of duty. financial advisers: Contractors in the private sector who are hired to help select assets for portfolio sales, manage the due diligence process, provide sellers with an opinion about the market value of the assets, find buyers, and negotiate the final terms and con- ditions of sales contracts. The expertise provided by financial advisors was especially use- ful to the FDIC and the RTC in organizing and executing their mortgage-backed securities programs.772 MANAGING THE CRISIS Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA): Legislation that established the Resolution Trust Corporation and the Oversight Board of the RTC as instrumentalities of the United States. Enacted by Congress on August 9, 1989, it includes section 21A of the Federal Home Loan Bank Act (U.S. Code, volume 12, 1441a), as added by section 501(a) of FIRREA (Public Law No. 101-73, section 501a, 103 Statute 83, 363-393). Resulting from the thrift crisis of the late 1980s, FIR- REA revised the structure of the deposit insurance system creating a new Bank Insur- ance Fund and a Savings Association Insurance Fund, both of which were to be administered by the FDIC. FIRREA abolished the FHLBB and the FSLIC. FIRREA divided the Federal Home Loan Bank System into three parts: the OTS, under the gen- eral oversight of the secretary of the Treasury; the SAIF; and the Federal Housing Finance Board, which was responsible for overseeing the lending activities of the 12 regional Federal Home Loan Banks. A separate FDIC fund, the FSLIC Resolution Fund, was established to assume the assets and liabilities of the FSLIC except for those transferred to the RTC. forbearance: A bank resolution method used by the FDIC in the mid-1980s. Forbear- ance exempted certain distressed institutions that were operating in a safe and sound manner, from minimum capital requirements. The forbearance program was designed for well-managed, economically sound institutions with concentrations of 25 percent or more of their loan portfolios in agricultural or energy loans. Forbearance is also a means of handling a delinquent loan. A “forbearance agreement” is a written agreement provid- ing that a lender will delay exercising its rights (in the case of a mortgage, foreclosure) as long as the borrower performs in accordance with certain agreed-upon terms. FSLIC Resolution Fund (FRF): A federal fund established under FIRREA in 1989 in response to the thrift crisis of the 1980s. Funded by congressional appropriations, the FRF is responsible for the satisfaction of all debts and liabilities and the sale of all assets of the former FSLIC and the former RTC. Garn–St Germain Depository Institutions Act (Garn–St Germain): Legislation enacted in 1982 that gave the thrift industry a great deal more flexibility in managing assets and lia- bilities. It gave the thrift industry the right to (1) invest up to 50 percent of assets in con- struction and development loans; (2) invest up to 30 percent of assets in consumer loans, commercial paper, and corporate debt; (3) own real estate development compa- nies; (4) use land and other noncash assets in the capitalization of new charters, instead of the previously required cash; and (5) offer money market deposit accounts. General Accounting Office (GAO): An investigative arm of the U.S. Congress charged with examining all matters relating to the receipt and disbursement of public funds. Established in 1921 to independently audit federal government agencies, the GAO functions under the direction of the comptroller general of the United States, who is appointed by the president and confirmed by the Senate for a 15-year term.