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The billion dollar S&L resolution man.

The Billion Dollar S&L Resolution Man

Responding to the lingering problem of savings and loan insolvencies across the country, Congress created the Resolution Trust Corporation (RTC) to find buyers for failed thrift institutions and their assets.

The RTC has one of the most challenging and important missions of any agency in the federal government - yet it's an organization almost unknown to the general public, and one whose inner-workings still remain a mystery to many mortgage bankers. As executive director of the RTC, David Cooke plays a major role in shaping the agency's policies and putting them into action on a daily basis. In an interview with Mortgage Banking, Cooke candidly discusses the challenges confronting him and the RTC and provides some personal insights.

At 44, Cooke is a career government employee and 21-year veteran of the Federal Deposit Insurance Corporation (FDIC). Now among the most powerful federal banking regulators in the country, Cooke started his government career as a bank examiner, rising to chief of analysis and monitoring at the FDIC's division of bank supervision in 1981. In 1987, he was appointed deputy to FDIC Chairman L. William Seidman. A CPA, Cooke has an MBA from George Washington University and is a graduate of Rutgers University Stonier School of Banking. MB: The Resolution Trust Corporation is a relatively new organization that many outside Washington aren't entirely familiar with. Just what is the RTC, and what has Congress empowered it to do? Cooke: The RTC was created by Congress in response to the savings and loan crisis. Our mission is essentially to find buyers for insolvent S&Ls, liquidate the thrifts we can't sell, then dispose of any remaining assets. MB: Just how many S&Ls are we talking about? Cooke: As of the middle of January, there were 293 institutions in the RTC's conservatorship program. Along with them, we inherited 35,000 related law suits that we're also trying to resolve. MB: Is this the extent of your workload, or do you expect more S&Ls will become insolvent? Cooke: There are still a fair number of thrifts operating on the verge of, but not quite, insolvency. With the new federal capital requirements going into effect, however, there's been a lot of speculation about how many of these will be pushed into insolvency and will have to be turned over to us for resolution. MB: Do you have any idea of how many more S&Ls are likely to become bankrupt in the near future? Cooke: Based on our estimates, we figure the number will be around 300. In turn, before the RTC's job is finished, we expect to have handled the sale of at least 600 S&Ls with combined assets of more than $300 billion based on their current book value. MB: Are you under any kind of deadline to sell these S&Ls and their assets? Cooke: Our mandate is to dispose of the thrifts in our portfolio during the next three years. However, the RTC stays in business until 1997 because Congress recognized even if we sold all these S&Ls by then, there would still be leftover problem assets the new owners didn't want to buy. In fact, out of these $300 billion in assets, we estimate as much as $180 billion will have to be liquidated separately. Plus, who knows what the future could bring. On the last day of the third year, another 100 S&Ls could go broke and be added to our list. MB: Do you think you can really meet this three-year deadline? Cooke: I hope so. We've been moving at a pretty good pace considering the RTC only officially opened for business last August. Those first few weeks we were negotiating contracts to dispose of S&Ls while still ironing out internal procedures for transfering our appropriated funds into RTC accounts, deciding what kind of documents needed to be drawn up, and so forth.

I don't want to make it sound like we're simply making things up as we go along. Most of our policies and procedures are based on established FDIC guidelines. But we've had to deal with some new twists no other government agency had faced before. MB: Still, it sounds like the first few months have been hectic. Cooke: Getting organized has been a big challenge. We're working until 8 p.m. or 9 p.m. every day. I figure it will take six months before things really come together from an administrative viewpoint - policy guidelines in place, staff on board, office space lined up, service contracts let. Your basic nuts and bolts. It hasn't been easy, but we're getting there. This is never going to be a 40-hour a week job. But, hopefully, we'll soon be able to work a more balanced day. MB: Speaking of organization, isn't the RTC a rather unusual operation compared to other government agencies? Cooke: Yes, I'd say the RTC is totally unique. MB: How so? Cooke: Under the law, the FDIC is, in effect, the RTC and manages it. I, for instance, am a career FDIC employee, and the rest of the staff works for the FDIC. But there is also a separate RTC Oversight Board - that sets the policy and supervises our activities. The Board's president and CEO is David Kearney, a former partner with Aldrich, Eastman and Waltch in Boston. Other board members include Federal Reserve Chairman Greenspan, Treasury Secretary Brady, HUD Secretary Kemp, plus two other members yet to be named by the President. MB: So who is running the RTC, the FDIC or the Oversight Board? Cooke: Let me put it this way. If the Oversight Board wants, it can not only fire me, or any other RTC employee, for not doing our job, but it can also "fire" the FDIC. Those of us working at the RTC, are under contract to the Oversight Board to handle the corporation's business. As far as I know, this is the first time a separate board has been established to oversee the activities of an government entity that is being managed on an operational basis by another agency. MB: Given the magnitude of your mission, just how much is this exercise going to cost? Cooke: By law, the RTC will receive $50 billion during the next three years; $20 billion in congressionally appropriated funds and $30 billion from the sale of special bonds we're issuing. This represents the amount of money Congress believes has been lost by insolvent S&Ls. MB: Will this $50 billion be enough? Cooke: The RTC is going to need more cash than that for working capital to manage and liquidate these assets. But for now, the law says we get $50 billion.

How much money will ultimately be needed to cover these S&L losses? The only accurate answer to that question is: no one really knows, yet. MB: Assuming there is such a thing, how does a "typical" RTC resolution of a bankrupt S&L work? Cooke: For simplicity sake, let's say we have a thrift with $100 million in deposits and $60 million in assets based on their current fair market value. That leaves a $40 million hole that has to be filled.

Our first priority is to try to find a buyer for this thrift. Generally, however, prospective buyers don't want the S&L's problem assets, so we'll then do what's known as a "clean bank" transaction. We strip out all the foreclosed rel estate, problem, non-performing and high risk loans. Then we put the thrift, its branch network, remaining deposit base and portfolio of good loans on the block. Then try to sell these stripped-out assets separately to interested investors. MB: What if you still can't sell the S&L? Cooke: Then we take $100 million and pay-off depositor claims, and try to collect as much as we can down the road by selling off the $60 million in assets on its books. MB: Is there an overall strategy for determining the order in which institutions are resolved? Cooke: The first thing we look at is how fast an institution is deteriorating. This can be tricky because you have to look beyond simple operating losses and consider other factors, like is it also losing major depositors and key personnel. Investor interest is another consideration. If we have a legitimate bid on a specific entity, then this could move it ahead of other thrifts on the list. MB: Does geographic location play a role? Cooke: Yes. S&Ls in what we call "distressed" states like Texas and Arizona get priority attention. We think people in these states especially need to know we're acting to resolve the problems there and that their deposits are safe. MB: Anthing else? Cooke: The last factor in determining which S&Ls are resolved and how fast we can move is the amount of money we have available and when we can get our hands on it. MB: What if I wanted to buy a bankrupt S&L or just find out which ones are for sale. How do I do that? Cooke: If someone's interested in buying a specific thrift under our control, all they have to do is let us know. If you just want information about which ones are for sale, call or write our communications office and we'll mail you a list. MB: Where do I go for this information? Cooke: The mailing address is: Resolution Trust Corporation, Attention: Marketing List, 550 17th Street, N.W., Washington, D.C. 20429. Telephone: (202) 416-4316. MB: Do you have to possess any special credentials or qualifications to buy an S&L? Cooke: Before getting into serious talks, we'll need some basic financial information to determine if you're sincere. Plus, the appropriate federal and state regulatory agencies have to approve the transaction. We can't just say we like you and it appears you have the money, here's an S&L for you to run. That's not our call. MB: What if I'm only interested in certain assets of a bankrupt thrift, not the entire S&L? Cooke: Then I'd suggest you go and talk directly with the RTC managing agent on the site. However, we're very sensitive to ethical and conflict of interest problems, so don't expect to be able to simply walk in and tell an agent, "this is just between you and me. Let's make a deal. No one will know." That's not going to happen. There are very specific guidelines that must be followed in all RTC transactions. MB: For instance? Cooke: Has the property already been appropriately appraised and advertised? Is the offer within 95 percent of the fair maket value? Factors such as that. Naturally, we're not going to require that a $12,000 townhouse be nationally advertised before considering any unsolicated bids. But we do want to ensure that townhouse is properly marketed and we get fair value for it.

The same goes for me and the rest of the RTC's staff. We're very aware that the term "deal" can have a certain connotation. We don't make "deals." If you send me or any RTC agent, a proposal for buying an entire S&L or any of its assets, we'll try to work-out a fair arrangement. This will then be reviewed by our staff. If they think it's ok, we'll proceed. MB: Is there a master list of all these assets? Cooke: Yes, as a matter of fact, we just published a complete inventory of all our assets which the public can purchase for $50.00. However, if you're only interested in certain kinds of properties you can order a separate list of our land holdings for $10.00 Commercial real estate also costs $10.00. Our residential inventory costs $30.00, which includes both single and multi-family homes which can also be ordered separately for $15.00 a piece. MB: How do I get a hold of these lists? Cooke: We've established a special toll-free number to handle orders of asset inventory lists. The number is 800-431-0600. And, by the way, we accept both Visa and Mastercharge. MB: It seems like there are some built-in conflicts between getting the best possible price, while also clearing these S&Ls and their assets off your books quickly to meet your three-year deadline? Cooke: In staff meetings, we've joked about starting our own home shopping TV show: "This piece of beautiful real estate originally sold for $100 million. But if you call within the hour, it's yours for the low price of $90 million." That kind of thing. But seriously, you're right. Every time an institution or asset is sold fairly and squarely at a good price, that's one less thing we have to worry about. MB: Given the size of the RTC's task, this must put a lot of pressure on you as the senior staff person responsible for running the agency on a day-to-day basis. Cooke: This a demanding, challenging, unique job. One I believe I am very lucky to have as it's a tremendous opportunity for me to do something different and learn from the experience. But I also have to admit that this is a job that can take something out of you. I don't want to shorten my lifespan too much while I'm here. If I could dispose of our entire inventory of S&Ls and assets within a year, I'd be a happy man. MB: Are you working on any plans to speed up the process of selling these S&Ls and their assets? Cooke: For one thing, we intend to rely on private sector contractors as much as possible. In fact, we hope to contract 80 or 90 percent of the asset work-outs to the private sector and have our people con- centrate on reviewing and approving the asset management plans arranged by these contractors.

Our biggest question is if we can find enough qualified contractors to handle the job. We're now drawing up a list of potential contractors. Therefore, if any particular firms are interested, they should contact us. MB: Some observers have called this S&L situation the single biggest financial crisis the coutnry has ever faced. I know you've only been at the RTC a couple of months, but has this experience taught you anything? Cooke: For one thing, the old adage that 90 percent are going to follow the rules, but there is another 10 percent who won't, still holds true. Plus, you have to remember that those 10 percent aren't going to tell you who they are, so you have to keep a close eye on the cookie jar. Then, when a problem develops you acknowledge, contain and manage it. The earlier you deal with any problem, the less costly it will be to correct it. MB: Meaning? Cooke: It's going to cost the government at least $50 billion - while the overall cost is now estimated at something like $166 billion - to pay off the insured deposits of these insolvent S&Ls. The shame of this is, if the problem had been addressed and handled three or four years ago, it would have been a lot cheaper to cleanup this mess.

A veteran business writer, Larry Reynolds is the Washington columnist for the American Management Association's Management Review magazine and a contributing editor to MoneyMakers magazine, London.
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Title Annotation:interview with David C. Cooke, Resolution Trust Corp.'s executive director
Author:Reynolds, Larry
Publication:Mortgage Banking
Article Type:interview
Date:Feb 1, 1990
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