B-233063, Oct 11, 1988, 68 Comp.Gen. 14

B-233063, Oct 11, 1988, 68 Comp.Gen. 14

Miscellaneous Topics - Finance Industry - Financial institutions - Government corporations - Authority - Government securities 1. Comptroller General letter concludes that the Federal Home Loan Bank Board, in operating the Federal Savings and Loan Insurance Corporation (FSLIC), has the statutory authority to issue promissory notes and assistance guarantees as part of restructuring failed savings and loan institutions. Statutory authority is derived from legislation governing FSLIC, sections 402 and 406 of the National Housing Acts, as amended, 12 U.S.C. Secs. 1725, 1729. Miscellaneous Topics - Finance Industry - Financial institutions - Government corporations - Government-insured loans - Government liability 2. Comptroller General letter concludes that FSLIC obligations are obligations of the United States backed by its full faith and credit since no general liability of the United States has been statutorily disclaimed. Conclusion is based on analysis that FSLIC is an instrumentality of the United States, has been designated by Congress to carry out a program of insurance and regulation, and issues notes and guarantees under statutory authority. Analysis used is based on series of Attorney General opinions.

The Honorable Toby Roth:

House of Representatives

By letter dated September 13, 1988, you asked several questions concerning the Federal Home Loan Bank Board's (FHLBB) use of promissory notes and assistance guarantees to restructure failed savings and loan institutions insured by the Federal Savings and Loan Insurance Corporation (FSLIC). As agreed with your staff, we have undertaken to answer on an expedited basis two of your questions and will separately address your remaining questions at a later date. In connection with the analysis of these two questions, we have not undertaken any review of the details of specific mergers, acquisitions, or other restructuring arrangements involving FSLIC assistance, such as the actions taken under the so-called Southwest Plan or the proposed acquisition of American Savings and Loan Association, a unit of Financial Corporation of America. We are currently reviewing information on these arrangements and will report on the results of this review later.

You first ask whether the FHLBB, in operating FSLIC, has the statutory authority to issue promissory notes and assistance guarantees as part of its "resolution" of failed institutions. For the reasons discussed in the enclosed analysis, we think the FHLBB, in operating FSLIC, has the requisite authority to issue promissory notes and assistance guarantees as part of its resolution of failed or failing institutions.

Your second question asks whether the promissory notes and assistance guarantees issued by FSLIC are backed by the full faith and credit of the United States. Applying the criteria contained in a long line of Attorney General opinions, we are of the opinion that FSLIC's promissory notes and assistance guarantees are obligations of the United States, backed by its full faith and credit. A detailed analysis of this issue also is enclosed.

I trust this responds to your questions and will assist the Congress in addressing the problems presently confronting the savings and loan industry. As we advised your staff, we will make copies of this opinion publicly available.

ENCLOSURE

LEGAL ANALYSIS OF FSLIC NOTES AND GUARANTEES

Authority to Issue Notes and Guarantees

Congress in title IV of the National Housing Act (Act), as amended, created FSLIC to insure the accounts of eligible institutions, to liquidate failed institutions, and to provide assistance to failed or failing institutions. 12 U.S.C. Secs. 1725, 1728, 1729. Congress specifically provided in section 402(a) of the Act that FSLIC shall be under the direction of the FHLBB and operated by it under such bylaws, rules and regulations as the FHLBB shall prescribe. 12 U.S.C. Sec. 1725(a).

To discharge its obligations to depositors and to address the problems posed by failed and failing institutions, FSLIC has adopted a strategy to maximize its financial resources in order to act on seriously troubled institutions, particularly those in the Southwest. FSLIC's strategy emphasizes the use of acquisitions or mergers rather than liquidations. To the extent possible, FSLIC provides assistance in the form of notes and guarantees rather than cash. Between January 1 and September 30 of this year, FSLIC acted on the problems of 126 savings and loan institutions: 106 institutions were merged with and/or acquired by other institutions in 52 transactions, and 20 institutions were liquidated. In carrying out these transactions, FSLIC issued a total of 28 notes, with combined principal amounts of $8.2 billion. The terms of the notes vary, ranging from 6 months to 15 years, and, for the most part, carry variable interest rates.

In addition, in merger-type transactions, FSLIC often agrees to compensate acquirers of failed institutions for future losses. Assistance agreements can take a variety of forms but typically provide for guarantees covering net capital losses due to writedowns or sale of problem assets, yield subsidies on nonperforming assets to ensure a specified rate of return on assets, indemnification against undisclosed liabilities or litigation, and purchase of certain impaired assets from the failed thrift.

Sections 402 and 406 of the Act amply authorize the issuance of such notes and assistance guarantees. In this regard, section 402(d) provides that "for the purposes of title IV of the Act," FSLIC is empowered "to issue notes, bonds, debentures or other such obligations upon such terms and conditions as the FHLBB may determine." 12 U.S.C. Sec. 1725(d).

Section 406(f) of the Act authorizes FSLIC to provide various forms of assistance to insured institutions when the institution is in default, or, in FSLIC's judgment, is in danger of default. Section 406(f)(1) of the Act permits FSLIC to provide assistance directly to an insured institution to prevent the institution's default or to restore the institution to normal operation. In such cases, FSLIC is authorized, in its sole discretion and upon such terms and conditions as it prescribes, to make loans to, to make deposits in, to purchase the assets or securities of, to assume the liabilities of, or to make contributions to, the institution. 12 U.S.C. Sec. 1729(f)(1) (1982).

Under section 406(f)(2) of the Act, FSLIC may provide assistance to facilitate a merger or consolidation of a troubled institution, or a sale of assets and assumption of liabilities of the troubled institution to another insured institution. In such cases, FSLIC is authorized, in its sole discretion and upon such terms and conditions as it prescribes, to purchase assets or assume liabilities of the troubled institution, to make loans or contributions to, or purchase the securities of, the other institution, to guarantee the other institution against loss from its merging and consolidating with, or purchasing assets and assuming liabilities of, the troubled institution, or to take any combination of the actions described above. 12 U.S.C. Sec. 1729(f)(2) (1982). /1/

Accordingly, in view of the explicit authority provided FSLIC in section 402(d) of the Act to issue notes and other obligations, the broad discretion provided FSLIC in section 406(f) to assume liabilities and make contributions in its sole discretion and upon such terms and conditions as it prescribes, the absence of any statutory provision prohibiting or limiting the use of FSLIC notes as part of a section 406(f) assistance plan, and the explicit authority in section 406(f)(2) to guarantee an institution against loss from its merging or consolidating with, or assuming the liabilities and purchasing the assets of, a troubled institution, we conclude that FSLIC has the requisite authority to issue notes and guarantees as part of its resolution of failed or failing institutions.

Full Faith And Credit

A series of Attorney General opinions dating back to 1953 provides an analytical framework for addressing whether the full faith and credit of the United States attaches to the notes and assistance guarantees issued by FSLIC. The early Attorney General opinions concerned statutes containing various types of pledges of the credit or faith of the United States. In 41 Op. A.G. 138 (1953), the Attorney General addressed the liability of the United States for paying annual contributions under contracts between the Public Housing Administration (PHA) and local public housing agencies. Many local agencies issued bonds to finance their housing projects and pledged the PHA annual contributions as security for the payment of the principal and interest on the bonds. The applicable statute provided that the faith of the United States was pledged to the payment of annual contributions under the PHA contracts. Reasoning that Congress' constitutional authority to pay the debts of the United States encompasses the power to incur debts and to do so through the agencies Congress creates, the Attorney General concluded that the PHA contracts to pay annual contributions are binding obligations of the United States.

The Attorney General applied essentially the same analysis in 41 Op. A.G. 363 (1958) concerning insurance contracts entered into by the Secretary of Commerce under the Merchant Marine Act of 1936, as amended. This opinion is noteworthy for several reasons. First, it concluded that insuring loans and mortgages through a contract or commitment of insurance by the Secretary of Commerce creates a legal obligation binding on the United States just like any other contract of the United States. Id. at 366-67. Second, after explaining that there is no distinction between a pledge of the faith of the United States, a pledge of its credit, and a pledge of its faith and credit, the Attorney General concluded that the expression of such pledges merely recognizes the obligation of the United States. The Attorney General emphasized that in the absence of congressional action disclaiming the liability of the United States, there is no legal distinction between valid obligations of the United States accompanied by a pledge of faith or credit over those not so accompanied. Id. at 369. In so concluding, the Attorney General opined that Congress expressly pledged the faith of the United States in the Merchant Marine Act to negate any implication that obligations under the Act would be limited to amounts in the applicable insurance fund. Finally, the Attorney General pointed out that the need for future appropriations to pay obligations created under the insurance contracts does not lessen or affect the validity of the obligation of the United States. Id. at 370.

These two opinions formed the basis for the Attorney General's conclusion in 41 Op. A.G. 403 (1959) that guarantees issued by the Interstate Commerce Commission were obligations of the United States even though Congress did not pledge the faith or credit of the United States. The Attorney General reasoned that it "is enough to create an obligation of the United States if an agency or officer is validly authorized to incur such obligation on its behalf and validly exercises that power." Id. at 405. The Attorney General reached an identical conclusion in 41 Op. A.G. 424 (1959) with respect to loan guarantees issued by the Secretary of Defense under the Armed Services housing mortgage insurance program.

These opinions were followed by two opinions involving entities, like FSLIC, subject to the Government Corporation Control Act. In 42 Op. A.G. 21 (1961), the Attorney General addressed loan guarantees made by the Development Loan Fund under the Mutual Security Act of 1954. The Fund was an agency of the United States, corporate in form, and subject to the Government Corporation Control Act. After restating the general principles noted above, the Attorney General addressed whether the conclusion that the Fund's obligations were obligations of the United States under these general principles should be upset due to the 1958 transformation of the Fund from an organization within an executive branch agency to a government corporation. The Attorney General concluded that Congress' choice of a corporate form to facilitate the Fund's operations did not alter the Fund's obligations as those of the United States. The Attorney General reached an identical conclusion with respect to the guarantees of the Export Import Bank, another government corporation, in 42 Op. A.G. 327 (1966).

Application of the principles enunciated in these Attorney General opinions leads us to conclude that the promissory notes and assistance guarantees issued by FSLIC to carry out the purposes of title IV of the Act are obligations of the United States. Clearly Congress may create or use such agencies or instrumentalities as it deems appropriate to execute laws Congress enacts pursuant to the legislative powers conferred on it by the Constitution. Here Congress has designated the FHLBB, an independent agency in the executive branch, 12 U.S.C. Sec. 1473(b), which directs and operates FSLIC, a corporate instrumentality of the United States, 12 U.S.C. Sec. 1725(c), to stabilize and regulate the savings and loan industry through a program of deposit insurance and regulation. In order to carry out its assigned functions, Congress has authorized the Board, through FSLIC, to incur obligations through issuance of notes or assistance guarantees. In our opinion, unless Congress has disclaimed liability, any such obligations incurred as a result of FSLIC's valid exercise of delegated powers constitute obligations of the United States. In contrast to the obligations of the Financing Corporation that was created to recapitalize FSLIC and whose obligations are expressly declared not to be obligations of the United States, 12 U.S.C. Sec. 1441(e)(7), no statutory provision governing the FHLBB or FSLIC contains such a disclaimer.

One additional issue merits discussion, however. The report by the House Committee on Banking and Currency on its version of the bill that ultimately became the National Housing Act, states that the debentures and other obligations FSLIC issues "are not insured or guaranteed by the United States." H.R. Rep. No. 1922, 73d Cong., 2d Sess. 4 (1934). In our opinion, this remark should not be viewed as controlling. Where, as here, the meaning of a statute viewed in light of well established legal principles is clear, it is assumed that the clear meaning and effect of the statute was intended absent compelling and convincing reasons to the contrary. Significantly, we find nothing in the language of the Act, the most authoritative source of congressional intent, that makes manifest an intent to disclaim liability. Further, when Congress so desires, it has expressly stated that the obligations of congressionally authorized instrumentalities are not obligations of the United States. See, e.g., 12 U.S.C. Sec. 1721(b) (requiring Government National Mortgage Association to state in its obligations that they are not debts of the United States) and 12 U.S.C. Sec. 1441(e)(7) (obligations of Financing Corporation, a corporation chartered by the FHLBB and classified as a mixed-ownership government corporation, are not obligations of the United States). This fact plus the clear meaning of the statute obtained by application of the Attorney General opinions argues against reading into the Act a limitation on FSLIC's obligations as obligations of the United States on the basis of one remark in the Act's legislative history.

In summary, we agree with the criteria and analysis expressed in the Attorney General opinions for determining when obligations of government instrumentalities are obligations of the United States. We believe the statutory scheme governing the FHLBB and FSLIC and the obligations they issue are similar to those instances in which the Attorney General has concluded that an obligation of the United States exists. Accordingly, we conclude that FSLIC obligations are obligations of the United States.

/1/ FSLIC may not provide assistance to an institution if the amount of the assistance exceeds the cost of liquidation, unless FSLIC determines that the continued operation of an institution is essential to provide adequate savings or home financing services in its community. 12 U.S.C. Sec. 1729(f)(4)(A) (1982).