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taking some very risky business opportunities that help endanger that fund.

Is risk-related insurance the way to go? How do you resolve that difference? Both of you are here advocating leave us alone. When you've got that Federal insurance, how are we going to protect that fund and leave you alone at the same time?

14. On August 12, 1985, I wrote to the President of the U.S. League of Savings Institutions:

I believe that the Federal Home Loan Bank Board under Chairman Gray has also been mindful of its responsibility to protect the FSLIC and has carried out its duties courageously. You point out the extraordinary atmosphere in which your industry and the Bank Board have had to operate these past few years, and I could not agree more that this environment has presented major challenges to everyone.

I have not agreed with each and every action of the board; I doubt that any member of Congress could say that he endorses any Federal agency 100 per cent. But I have been as aware as any Congressional observer of the operations of the Board, and overall I rate its performance as superior. (Exhibit 4).

15. On December 16, 1986 I wrote to Ed Gray and the other members of the Bank Board. I urged them to extend the direct investment regulation: The letter stated:

I strongly recommend that the Bank Board extend the direct investment regulation for at least one year, making only those modifications, if any, that it believes are currently justifiable. (Exhibit 5).

16. During the Bank Board's meeting in December 1986, my letter was cited by Ed Gray in support of extending the direct investment regulation. (Exhibit 6 at 2).

17. In 1986, I introduced comprehensive legislation to recapitalize FSLIC with $15 billion of industry funds, to provide for an overall modernization of our financial services laws, and to give the Bank Board new enforcement and supervisory powers, including the power to institute risk-based insurance assessments. One provision in particular was designed to clear up any ambiguity with respect to the legal authority of the Bank Board to promulgate its direct investment regulation. Section 507 of the bill I introduced stated

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"Issue such rules, regulations, and orders as it deems necessary or appropriate to define any terms used in any section of this Act and administer and carry out its purposes, including without limitation regulation of risk-taking and prevention of unsafe or unsound practices by insured institutions; and to require compliance therewith and prevent evasions thereof."

18. Unfortunately, it soon became clear that the Congress would not pass a comprehensive bill. In an effort to save the FSLIC recapitalization provisions, I announced on August 7, 1986 that I would proceed with a limited bill containing only recapitalization and provisions dealing with the regulators' authority to arrange emergency interstate requisitions.

19. On October 18, 1986 I explained the urgent need for Congress to recapitalize FSLIC in a statement in the Congressional Record:

Mr. President, FSLIC recapitalization is urgently needed. FSLIC must now keep insolvent thrifts open because it does not have the funds to close them. This risks far larger losses to the fund in the future and unfairly permits insolvent institutions to compete for deposits with healthy thrifts and banks. GAO estimated that the minimum cost of delaying case resolution will be $1.4 billion over the next 2 years--if interest rates remain the same. If they rise, the costs will be far, far greater. Furthermore, these estimates do not take into account credit risk, deteriorating asset quality, or deposit losses of competing institutions, all of which could make the overall losses even worse.

There is no questions in anyone's mind--including all the financial regulators--that FSLIC recap is necessary. The real question is whether it's necessary this month, next month, or in 6 months, and the answer is that we should not tempt the hand of fate by doing nothing now. The consequences of that kind of inaction are bleak: potentially devastating losses to the FSLIC fund, the possibility of a merger of the FSLIC fund, and even the possibility of direct Federal appropriations.

20. Although the recapitalization plan passed the Senate, despite my best efforts it was not enacted into law in 1986.

21. In 1987 the Administration again requested a $15 billion recapitalization for FSLIC. However the House of Representatives only passed a $6 billion plan, and the Senate Banking Committee under a new chairman, proposed a $7.5 billion plan. At the beginning of the Banking Committee's consideration of this legislation on March 10, 1987, I expressed my frustration at the process as follows:

It just seems to me that it is time to forget all the special interest groups, yet everyone who has been lobbying for one part or another of

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this bill, for powers, against powers, for money market mutual funds, whatever it is, and I've been in the middle of that battle with you for 12 years.

To be blunt about them, tell 'em all to go to hell today and simply do what is responsible for safety and soundness and pass a clean FSLIC bill, and I will do everything I could to help you as I have proven for a long, long time to get some comprehensive legislation in this field.

22. On the floor of the Senate I argued that $5 or even $7.5 billion was inadequate. On May 14, I stated:

Mr. President, the one thing we do agree on here today is that $5
billion is inadequate. I would also submit that $7.5 billion is
inadequate. I submit that my amendment in the committee that
was defeated on a nine to nine tie vote with the chairman's
support was inadequate. This body passed a $15 billion FSLIC
recap out of the committee last year by unanimous consent and by
voice vote in this body. I am amazed that when that took place
we had no debate, that nothing was controversial, that 8 months
later we are talking about $5 or $7.5 billion when the crisis has
doubled. I have already stated that I do not disagree that the
nonbank bank loophole should be closed. That is not at issue.
What is at issue is whether we address immediately and as rapidly
as possible the crisis in FSLIC.

Mr. President, the problem is absolutely crystal clear.

At this very moment the FSLIC is bankrupt. Both the Federal Home Loan Bank Board and the General Accounting Office agree on this point. Moreover, the fund must resolve problems in over 200 GAAP insolvent institutions. According to conservative estimates this will cost the FSLIC as much a $25 billion. It must deal with these institutions soon. Every day that Congress waits to resolve the problem, another $10 million is lost. The total cost of delay, this year alone, is over a billion dollars.

Someone will have to pay this bill, and if the savings and loan industry is not willing to absorb the cost, it may well be the American taxpayer.

23. The Senate-passed bill only provided for $7.5 billion in funding. It wasn't until the House-Senate Conference met, and after the Administration extended considerable pressure on the conferees, that a $10.8 billion funding plan was passed, of which only $10 billion went to FSLIC and $800 million

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I am writing you in regard to the Board's consideration

of the direct investment regulation.

I am well aware of the controversy surrounding the issue and the possibility of a short extension to accommodate hearings. Some well-capitalized and well-run institutions may have valid concerns which, after careful scrutiny, might lead the FHLBB to modify the rule by granting more flexibility for such institutions. On the other hand, the 10%-of-assets test might prove to be too generous for some institutions. Without question, continued analysis of a direct investment regulation is necessary.

However, it is my considered judgment that a clear majority of the Members of Congress are in favor of extending the limitation on direct investments. As a general rule, if the Congress acts on an issue, it becomes a more permanent decision. Such a result would limit the flexibility of the FHLBB to implement modifications to the rule now and/or in the future.

Therefore, I strongly recommend that the Bank Board extend the direct investment regulation for at least one year, making only those modifications, if any, that it believes are currently justifiable.

Sincerely,

Jake Gara

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