Statement of Administration Policy: H.R. 1278 - Financial Institutions Reform, Recovery and Enforcement Act of 1989

(House)
(Gonzalez (D) Texas and 31 others)

As the President stated in his letter of May 22nd to the House leadership, each day of delay in enacting this essential legislation adds more than $10 million to the cost of resolving this enormous problem. Accordingly, the Administration supports House passage of H.R. 1278 and urges the House to make significant progress toward resolving the Administration's most serious concerns. Two items are of special concern:

• Capital requirements. Inadequate capital requirements and distorted accounting practices were principal causes of the thrift catastrophe and the resulting losses for the American public. The Administration urges the House not to weaken the capital and accounting standards reported by the Banking Committee. In addition, the House should not establish procedural restrictions that would have the effect of limiting or delaying the ability of the supervisory agencies to enforce capital or other supervisory requirements. Such restrictions would materially increase the risk of future thrift losses that the taxpayers would be forced to absorb. The bill should also preclude insured institutions from including in capital loans to, or investments in, separate subsidiaries, unless such subsidiaries are engaged solely in mortgage banking or activities permissible for national banks.
  
  
• Financing. The financing plan, proposed by the Administration and adopted by both the House and Senate Banking Committees, as well as the full Senate, maintains the fiscal discipline of Gramm-Rudman-Hollings, locks in the thrift industry's contribution, and should prove less costly than other alternatives proposed. Reformulation of this financing program can only delay passage of the legislation and could have undesirable economic consequences.

The President's senior advisers will recommend a veto of this legislation unless it addresses substantially and adequately the concerns outlined above.

Other issues of strong concern are:

• Housing provisions. Although housing affordability and ownership are established priorities of the Administration, the President urges the deletion of housing subsidies to be provided by the Federal Horae Loan Banks or the Resolution Trust Corporation. Any such programs should be fully considered on their merits in separate legislation, so as to avoid delaying this critical legislation. The Administration strongly urges the House not to grant preferential rights to purchase assets of failed thrifts to any group. Preferential purchase or financing arrangements will reduce the values that can be obtained from such assets, thereby increasing taxpayer costs.
  
  
• Cap on Resolution Trust Fund (RTC) Obligations. The Administration urges Congress to retain sufficient flexibility for the RTC to issue notes and guarantees for working capital purposes, especially prior to receipt of cash from REFCORP. If a limitation is added, the Administration would prefer to permit such obligations to be incurred against the full amount of the resources authorized to be available to the RTC, including cash proceeds received from REFCORP and assets acquired in the resolution of insolvent thrifts. Because tangible assets will back up RTC obligations, taxpayers will not be exposed to excessive risk. Too restrictive a cap would create incentives to dump assets from thrift resolutions, as well as minimize the opportunity to liquidate institutions where necessary.
  
  
• FDIC accountability. The accountability of the FDIC should be enhanced in two ways. First, the FDIC's quarterly reports should be made both to Treasury and OMB, to ensure prudent and timely financial planning within the Executive branch. These reports should include not only financial operating plans and forecasts, but information on financial commitments, guarantees, and other contingent liabilities, as well. Second, the bill should make explicit that the FDIC Chairman serves as Chairman at the pleasure of the President.
  
  
• Composition of the Federal Housing Finance Board. All members of the Federal Housing Finance Board should be appointed by the President, in order to ensure compliance with the Appointments Clause of the Constitution.
  
  
• Federal Home Loan Bank contributions. To ensure that the industry pays its fair share of the costs incurred, H.R. 1278 should require a minimum annual contribution of $300 million from the Federal Home Loan Banks to the funding package.
  
  
• Primary supervisor for State thrifts. To better insure future safety and soundness, chartering and supervisory functions should be separated from the operation of deposit insurance programs. H.R. 1278 should therefore make the Director of the proposed Office of Thrift Supervision (OTS) the primary supervisor of both State and Federal thrifts, to preserve the deposit insurer's ability to exercise independent judgment regarding supervisory issues. This would reduce substantially the risk of disruption of effective examination capabilities that would result from transferring State thrift supervisory authority to the FDIC.
  
  
• Qualified thrift lender (QTL). H.R. 1278 should require that a thrift that fails to meet the QTL test convert to a bank charter. At the same time, satisfaction of the QTL test should be a requirement for eligibility by other types of institutions for Federal Home Loan Bank membership or advances. The Administration does not believe that the current 60 percent QTL threshold should be raised.
  
  
• Civil monetary penalties (CMP's). H.R. 1278 should provide for maximum CMP's of $1 million per day against individuals, in order to encourage compliance with the financial institutions laws. The bill should also require that CMP's be deposited in the general fund of the Treasury, consistent with sound budgetary practice.
  
  
• Compensation of employees of the Office of the Comptroller of the Currency (OCC) and OTS. The authority of the Comptroller of the Currency and the Director of OTS to fix the compensation of OCC and OTS employees should be made subject to the approval of the Secretary of the Treasury, their immediate supervisor. The Board of the National Credit Union Administration (NCUA) should be prohibited from fixing the pay of NCUA employees at levels in excess of those established for employees of OCC and OTS.
  
  
• Approval of employment of senior financial institution officials by the regulatory agencies. H.R. 1278 would require regulatory agencies to approve members of the boards and other senior officials of new or troubled financial institutions or institutions that have undergone a change in control. This function cannot be performed adequately by the agencies and is not an appropriate governmental activity.
  
  
• FHLMC/FNMA. To minimize the financial risk to the Federal Government, the bill should authorize the Secretary of Housing and Urban Development to establish binding risk-based capital standards for the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA), pending the outcome of the authorized study.

The Administration will continue to work with Congress on an urgent basis to present to the President legislation that will resolve the current crisis and ensure that it is never repeated.