This might be a good point at which to also say something about the nature of the proceeding. It's very unusual, at least in my experience of almost 20 years with regulatory agencies, in one proceeding or another for an informal rulemaking to result in a record which is so airtight that it's beyond all reasonable doubt.

This is not a judicial proceeding where the case has to be proved beyond a reasonable doubt in a criminal case or on a preponderance of evidence in a civil case. This is an informal rulemaking, and the test is whether there is a reasonable basis for the action of the Board based on the record as a whole.

As Bill has pointed out, and others have pointed out here, we on the staff believe that this is a very strong record; that it makes a very strong case for what the chairman has repeatedly characterized as a prudential limited rule, and it does not seem to me--there's certainly no doubt in my mind, that based on the record which is before the Board today, the Board could extend this rather mild, limited rule, including a threshold of supervisory review with firm confidence that it would survive any challenge on review.

MR. WHITE: Okay. I understand that, but also I am not only one of three Board Members running an insurance company, but also, in general, regulating the savings and loan industry and I've got to think about, well, maintaining my concern about the insurance least cost way of achieving the desired goals, least social cost way of achieving our important insurance goal.

MR. QUILLIAN: We certainly share that orientation.

MR. GRAY:

Let me make a slight comparison with another regulation that was adopted by the Board the same day, January 31st of 1985. That was the regulation having to do with growth in deposits in the industry, and hence, growth in assets.

We, of course, knew at the time what the rate of growth was, but we could not have known the effect of that regulation. There would have been no way to predict it. The actual effect of the regulation enabled us to reduce the rate of growth in the industry as a whole down to the rough equivalent of the commercial banks.

In 1984, it was 20 percent; much, much higher in many institutions. That was a prudential action on our part, and it yielded very good results from the FSLIC's point of view.

And I haven't heard anything thus far today that would indicate that the Direct Investment Regulation--maybe, Mr. Henkel you would have some comments on this--that the Direct Investment Regulation has impaired the ability of strong institutions to go into direct investments at higher levels than 10 percent.

I haven't heard any damages thus far which have resulted from this Direct Investment Regulation on any party. Maybe I can hear some damages that have occurred as a result of this.

MR. WHITE: Following up on what Ed just said, I mean, this issue of the 30-day rule that a number of the commentators said, 30 days, that's a lifetime, I'm paraphrasing--that's a lifetime when it comes to these kinds of investments. You've got to hit the bid when it's there, and you wait 30 days, and it's just not going to be there.

MR. GRAY: I don't believe that. That's baloney. I'll tell you why I think it's baloney. I think that if an institution, an insured institution, wants to make an investment or do a loan, the idea of doing it summarily and instantaneously is the very reason why we have all the problems we have today.

MR. HENKEL: But what we're talking about you asked the question, Mr. Chairman, about what the damage out there is, if any. I don't really know, but I know this, from having been out there in that world and knocking around in business, if you're talking about a lot of deals and you're faced with, number one, the cost of preparing the thousands of dollars to prepare your business plan or whatever you've got to get together; that takes time, and then you've got 30 more days to wait. There's going to be a lot of deals that are going to be gone before you get there, and that's just a fact. And you're doing this, most importantly, on a principle basis. We've got state law that we're overriding and before we override state law, we do that cautiously and we do it carefully.

MR. GRAY: Yeah, but what State treasury picks up one penny of any loss? Not one penny, any treasury in this country ever pays for it. You know who pays for it? The FSLIC.

MR. HENKEL: Mr. Chairman, I didn't design this system. We've got a state system and we've got a federal system, and sobeit, but we've got to operate within it.

Mr. GRAY: But on the other hand, we have to insure those deposits that those institutions operate their businesses on, here, in Washington.

MR. BLACK: With respect, I think this debate is about a regulatory provision that doesn't exist. The regulatory provision, in response to the comments back in December of '84 about precisely this point that we can't go investment-by-investment; we need more generalized authority in advance on the basis of a business plan. The staff considered those views, thought they were rational, brought a proposal to the Board to allow precisely that. The Board adopted that proposal. That is the rule. I don't think anybody at least I haven't heard anybody object to the concept that you ought to do a business plan in advance of exceeding what is, after all, a very high threshold.

MR. WHITE: Let me make sure I understand this. A thrift institution can come in with a business plan, say here's, in general, what we want to do; here's, in general, the levels of a direct investment we're going to be undertaking in general areas, without specifying, specific

MR. GRAY: That's right.

MR. BLACK: That's right. Here are the personnel that have expertise in this kind of investment. Here we have underwriting standards that we follow when we consider investments, as well as loans. As you may know, our regulations don't really cover direct investments very well in terms of underwriting expressly.

Those are the types of things that the Principal Supervisory Agents or their delegees look at in determining whether to approve a generalized grant of authority to exceed ten percent, and they don't have to come back on individual investments.

MR. GRAY: This is why, I mean, I'm always afraid of instant decisions. They sometimes don't work out very well in our experience, but even if you want to make an instant decision because you might lose business if you couldn't, there's nothing in this regulation that says you can't, unless you're over the ultimate threshold that you want. Nothing!

If you want to make that kind of judgment and do a transaction like that and you have that within the amount that you've been approved, the level that you've been approved, then you can do that.

MR. BLACK: This Board, historically, different Board Members, have always taken the position that they had the ability to regulate on safety and soundness grounds, that it wasn't a matter simply of the state said you could do anything in the world and that meant that you could have no federal regulations addressed to safety and soundness.

But this one there really is a question what this sturm and drang is all about. The number of denials of applications are de minimis relative to system size. Of those denials, there is a right to appeal to the Bank Board and, of course, a right after that, to sue.

To my knowledge, there has been one appeal in almost two years of any denial--one, and no court challenge ever. I mean, there is no evidence in our experience with the waiver procedures, no evidence in the comments filed, that there is any problem being imposed by this threshold in application.

MR. QUILLIAN: It certainly would look different, Bill, it seems to me, if, instead of the record, which is about a hundred applications with nearly two-thirds of them approved-- if it were 500 applications and two-thirds of them denied, this kind of argument would make a whole lot more

sense.

You have received an expedited preliminary transcript of a meeting of the Federal Home Loan Bank Board held on Thursday, December 18, 1986. The meeting took up the issue of direct investments. Page 44 of the Board Meeting transcript you received incorrectly attributes four sentences to Board Member Lawrence J. White. The sentences should have been attributed to Bank Board Staff Member William Black.

Attached is a corrected version of page 44 of the transcript.

Attachment

MR. BLACK: Well, again, you have to go back historically. The comments in December '84 were very much in terms of, we don't believe you, with this waiver procedure. We know what you're really going to do; you're going to say no to everything. And the Board tried to make it crystal clear that that was not the rule, yet went out of its way to adopt a presumption of approval in the regulation that the PSA could not turn down the application unless he or she found specific factors, and it was basically the PSA's burden to find those factors. I mean, you have to provide information so that they can make the decision, but all of those changes were made, again, precisely because the Board did pay attention to the comments.

And as far as I can tell from the entire two years of experience afterwards, and from the comments subsequently filed, no one is claiming that that procedure isn't working precisely as if was intended and precisely as it was praised by what started out as a very hostile, frankly, House committee and ended up praising the flexibility of the rule; that it wasn't a regulation of the least common denominator, that it wasn't a fiat prohibidum.

MR. GRAY: Yes. Let me comment on that. The Board, through the institution of the supervisory review threshold concept, has tried very hard not to regulate to the lowest common denominator, and this is the perfect example of that, of not regulating to the lowest common denominator, by establishing a threshold and allowing institutions which are capable of doing so to go above that, if you will, underwriting threshold.

MR. WHITE: I've got to ask. I mean, it is well known that this is a regulation, a proposed rule, that has generated a great deal of controversy. All three of us have been subjected to a great deal of letters flying in from various places. The comment period comments reflect this controversy. What's going on? I mean, if things are really as reasonable as you tell us, what's going on? Why is there so much flack being

-

MR. GRAY: Well, let me see. Well, you had, what was it, 45 institutions that sent in comments?

MS. GATTUSO: Right, and out of those 45, 32 just requested a hearing. So only

MR. GRAY: All right. So how many do you have who were specifically objecting to the rule?

MR. GRAY:

Now, I'm trying to find the controversy, too, here.