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.

MR. WHITE: Where's the beef? Well, let us be frank. There is an institution that is generating by paper volume, certainly, a big bulk of what's going on, and they are very adept at hitting the political buttons and they have spent a great deal of money hiring very reputable academics with very prestigious names and producing a great volume of information.

It is very important to them and they are fighting it and have spent, clearly, millions of dollars on the subject. But when you look at the numbers who follow the regular public comment procedures where somebody else can respond to them, their views it's minimal.

MR. QUILLIAN: I think that's a good point. If you look back, this, of course, Board Member White, is your first rulemaking as a Board Member. I'm sure you recall your experience at the FTC with rulemaking there.

MR. QUILLIAN: Yes. It's always possible that in any rulemaking you will misstate the comments that you do get as kind of an avalanche or a flood. We've had rulemakings here in years gone by, for example, the rulemaking as to whether there should be a requirement of payment of interest on escrow accounts, which generated hundreds, maybe even thousands, of comments, and a lot of them scribbled on the backs of postcards saying, "Of course, I should get interest paid on my escrow account."

The relatively mild filings in this docket in this rulemaking, in my experience, at least, is not exactly an avalanche. I've participated in rulemakings which were a good deal more controversial than this, but that's not to say this is not a controversial rulemaking.

MR. GRAY: Well, it is controversial on the part of some. I seem to recall that back in 19 -- the original comment period for this rule, there were something in the nature of 200, 250 comments; something like that, as I recall.

This is rather remarkable that on the proposed extension correct me if I'm wrong, but you had three objections from insured institutions?

MS. GATTUSO: Let me clarify that. Out of the 83

MR. GRAY: To the rule itself.

MS. GATTUSO: Okay. Out of the 83 comments that we received, 19 opposed the proposal, 6 supported it, three supported it with modifications, but out of those 83 comments, approximately 68 were either requesting extension of the comment period or requesting hearings.

MR. GRAY: A11 right, and some of them might have certainly registered their opposition to the regulation.

MR. SAHADI: Well, I think another factor here is that if you go back to 1984 when this was first discussed that the industry was just licking its wounds from an interest rate beating that it had taken in the early 1980s. Deregulation was quite new. Many in the industry looked upon this as a way of, you know, gaining some profits to offset some of the obvious losses from their mortgage operations. The FSLIC at that time wasn't quite as impaired as it is today.

In a sense, the Bank Board was maybe ahead of its time, seeing the problems at the supervisory level. Proposing this seemed to fly in the face of what was then pretty much of a consensus in the industry towards deregulation.

And I think even a lot of, you know, reputable operators in the business complained at that time because they either didn't see the problem or they saw this as an option that they might want to exercise at some time, and this option was not costing them anything and it was, in effect, being taken away.

I think what we see now is a few years have gone down the pike. We've seen much more evidence of what's happening. I think the good operators and I think there is an equity issue here, in your judgment are looking at paying the cost of people having the right to exercise unlimited direct investment powers; and they're paying for it in the special assessment, even though their portfolios may be made up of single-family mortgages that, by and large, have a one-percent foreclosure rate and they get 80 percent recovery on those REOS.

So I think this is something that has just started out hot and it's remained hot.

MR. BLACK: Back in '84, what, 200, over 200 Members of Congress signed a resolution asking the Bank Board to delay the direct investment rule, consideration of the final rule by-

MR. GRAY: There was more than half of the House of Representatives.

MR. BLACK: You mean it was a huge political football. That's what started some of the genesis of my comments that---when we started in front of the House Committee it was quite hostile to the idea of the direct investment rule.

MR. GRAY: I think it's also curious, to me, here we have in California the most liberal law in the United States for state-chartered thrifts and at the same time I received, I believe, it was last week, a

letter from the president of the organization saying that the board of directors of the California League of Savings Institutions had voted unanimously, all 17 of them, to strongly urge that we adopt the direct investment regulation as written. I don't know Can we add 17 to that in favor?

I also have a letter from the president of the U.S. League of Savings Institutions which, I gather, represents about 96 percent of the associations in this country, and I certainly wouldn't add all of them, but the point is they also strongly urged that we adopt the extension of the direct investment regulation as written.

I'm trying to find the controversy, too.

MR. QUILLIAN: Well, at least defined it in the record, I suppose. These figures have been read before, but I think that to round off that thought they perhaps should be read again; that is, the Board received 83 public comments in response to the proposal. Six supported the proposal. Three supported the proposal with modifications, 19 opposed the proposal, 28 requested an extension of the comment period and 32 members of the Bank System petitioned for a hearing. That's not exactly an uprising on the record in response to this proposal.

MR. NEUBERGER: There is generally a comment bias, too. Usually if you like a reg or can live with it, you're not going to take the effort to write. So it's definitely a bias when you make comments for being opposed to something. A lot of the comments also have been made relative to the fact the fund is undercapitalized, industry is very thinly capitalized. Implicitly in all this we've been saying that the industry is significantly under-managed, and I think there's no doubt that direct investments -- ADC loans involved -- vary -- instant management.

A study we did internally about a year-and-a-half ago which has not been referred to, we were considering the feasibility of doing a risk-based premium-

right?

MR. GRAY: That was a FSLIC internal study, not an OPER study,

MR. NEUBERGER:

That is correct. This is FSLIC internal study.

MR. GRAY: All Right.

MR. HENKEL: Now that we're getting into statistics, as I recall, Mr. Chairman, I got 86 phone calls on Wednesday--(Laughter)--I didn't keep any tally how many for or against, but I think that was the doubt.

MR. GRAY: Well, I guess they wanted to register their comments in a different way.

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MR. NEUBERGER: If I can just to complete this comment, if we were to look at feasibility of a risk-based premium plan, and so we did what I call an autopsy report of all institutions that were in FSLIC's caseload from 1982 to early 1985 where the examining force identified the major cause was that of bad excluded assets, and not because of spread.

But then we looked at the results of those cases either closed or through a sister transaction over that next three-year period, and we looked at about 20 different categories of failure, had examiners go back and looked really at the autopsy reports of those exams and see where the evidence of failure was.

Two areas that came out far ahead of everyone else was again direct investments and ADC loans. And again, as commented before, some of the ADC loans have been misclassified, but those are autopsy reports.

MR. QUILLIAN: There's a remedy for those phone calls, which I don't necessarily advocate, and that is the institution of a regulatory system such as exists at the Federal Communications Commission where, after a rulemaking has been sunshined for a meeting, presentations to decision making personnel are prohibited.

That cuts off the phone calls a day or two before the meeting.

MR. HENKEL: I was kidding. [Laughter.] It was only 36. MR. GRAY: Are there any other questions, as this board meeting, as I suspected, would be long, and it is.

MR. WHITE: Sorry, Mr. Chairman. There is one set of studies which really haven't been discussed yet, except indirectly, because they didn't have a cover on them. (Laughter.) And that's the issue of studies which look at the likelihoods of institutions failing, and try to explain, try to find variables that will explain whether an institution will fail or not, and those studies, including the one without the cover by Barth, et. al., appear to show that direct investment does not significantly affect the likelihood of an institution failing.

What I find a litle puzzling, and have not been able to resolve the puzzle in my mind, is the apparent inconsistency in the implications between those set of studies, direct investment doesn't appear to affect the likelihood of an institution failing, and the second Barth, et. al., study, the one with the cover on it, which indicates that once an institution has failed the extent of direct investment will significantly and positively affect the extent of business losses.

There seems to be conflicting implications from