Failed Thrifts: GAO's Analysis of Bank Board 1988 Deals

GAO discussed Federal Savings and Loan Insurance Corporation (FSLIC)-assisted sales of failed thrifts. GAO found that: (1) the costs of the sales will exceed FSLIC estimates if guaranteed assets do not have the projected values or if interest rates increase; (2) tax laws granted tax benefits to insolvent thrift acquirers and allowed deduction of presale net operating losses from their future income; (3) the estimated tax benefits for the 86 transactions resolved in 1988 totalled about $8 billion, which was 20 to 40 percent more than FSLIC estimated, since it was not required to consider tax benefits in its liquidation transactions; (4) acquirers lacked incentives to actively manage and liquidate assets in the least costly manner; (5) tax benefits enabled acquirers to recover their capital investments in an average of 3 years; (6) the FSLIC practice of combining less desirable insolvent thrifts in packages with those of more interest reduced the pool of qualified prospective bidders, inhibited its ability to evaluate bid acceptability, and resulted in inefficient use of its limited resources; (7) the new assisted thrifts have some guaranteed income for up to 10 years, regardless of the economy; (8) although thrifts are required to have a regulatory capital to liability ratio of 3 percent, half of the new thrifts had ratios of less than 3 percent; and (9) although FSLIC believed that 9 out of 10 new thrifts would show profits within the first 5 years, it did not subtract the tax benefits they had to return to FSLIC. GAO believes that the government should review the transactions to take advantage of cost reduction provisions.