Mr. WILLE. Well, the charge-off actually is a supervisory requirement in the case of loss categories and if this charge off results in a reduction in capital accounts where the bank is in jeopardy, every effort is made by the regulatory authorities to secure more capital for the bank. In fact, that was a stage that was reached in the Sharpstown State Bank where the supervisory authorities were looking for a significant increase in capital in order to ride out this financial condition. Mr. ARCHER. According to the information that you do have at your disposal, do you not know as a fact that some of these loans were charged off as uncollectible? Mr. WILLE. As I say, I would have to check my records if you are talking about political loans Mr. ARCHER. Yes. Mr. WILLE. That were charged off in the bank. Mr. ARCHER. Don't you know that some of these were charged off as uncollectible? Mr. WILLE. No, I don't know that right now. Mr. ARCHER. Would you submit a report to us on that to the extent of your capability along the tenor of this? Mr. WILLE. I will tell you, but the information I give you will be anonymous as to who the borrower was. Mr. ARCHER. I am not interested in names. I am interested in the types of transactions that were going on at this time. Mr. WILLE. Yes, sir. (The information requested follows:) Our records indicate that four loans of the type we were discussing, aggregating slightly more than $600,000, were classified "Loss" by our examiners during the FDIC examination of the bank which commenced November 3, 1970, and that they were charged off as uncollectible during the course of that examination. This examination, as I indicated in my testimony, had not been completed by the time the bank closed on January 25, 1971. No other loans to Texas political figures were required to be charged off during the period from June 1969 to the date of closing. Mr. ARCHER. Now, if it is true, which I understand it to be true, that this occurred, what if anything can the FDIC do and what, if anything, can you do under the circumstances to try to protect the depositors of the bank? Mr. WILLE. Well, I have indicated that we had been working out, or attempting to work out, with the Texas State Banking Commissioner and with the bank's board of directors a corrective program for the bank, which included a number of different items, not merely additional capital. We were very much concerned about the management situation in the bank, as I have indicated. We did require as a condition for not starting an action to terminate the insurance of the bank that a new and experienced chief executive officer be brought into the bank, which was done in March of 1970. We did require that loans be further collateralized to the extent it was possible. We did require that charge-offs be made, which had the effect of reducing capital and leading us to a request for increased capital. I have already indicated, I think, in answer to other questions, that this will be documented in a more complete answer to the committee. Mr. ARCHER. Did you ever give any consideration to the termination of insurance during this period of time? Mr. WILLE. Yes, sir, we did. Had the bank not changed its executive officer in March 1970, I think we would have brought an action to terminate insurance. In fact, the bank's board of directors in March 1970 agreed in writing with the Corporation not only to retain a qualified chief executive officer of sound banking principles but also to initiate a number of other corrective measures that we were seeking. Our follow-up examination to see what sort of compliance that order and that agreement had produced began in November of 1970, an examination which was not actually concluded until the bank had closed, Mr. ARCHER. Well, do you have recommendations to this committee as to any changes in legislation or powers that might be conferred upon you to permit you to get this more rapidly, and we are talking about a pattern of activity beginning in June of 1969, with many earmarks and many tabs of things that didn't look just exactly right, namely, these loans to political officials on the same kind of a transaction? Now, is there anything that we can do or you can do to enable more rapid control over the circumstances which obviously did not come until the bank closed its doors in February of this year? Mr. ST GERMAIN. Excuse me, Mr. Archer. We are going on to 1:30, and this poor gentleman has been sitting here. If we could sort of wind this up Mr. ARCHER. This is my last question. Mr. WILLE. I just want to state to Congressman Archer that I have made in the course of this testimony this morning several recommendations for legislation, one on brokered funds and one on the ceaseand-desist authority which is available to the Corporation. That will appear in the record and you will have further hearings, presumably on specific legislative proposals. I would say that, again, the regulatory authorities were making efforts to correct the Sharpstown State Bank situation throughout the period from June 1969 to the date the bank closed. As can be seen, they were not successful and there are a number of reasons why the remedial programs could not really be carried out toward the end of that period, one of which was the SEC action and one of which was this problem of maturing deposits in significant amounts of brokered funds. Mr. ARCHER. Thank you, Mr. Wille. Mr. ST GERMAIN. The Chair would like to compliment the witness, not only for the excellent manner in which he has answered all of the questions, and some of it has been repetitious, I realize, but I think it is because of a deep interest in the subject at hand. I must also compliment him on being in such wonderful physical condition and having such stamina. Mr. WILLE. I would say, Mr. St Germain, we are getting to be good friends. Mr. ST GERMAIN. The committee will be adjourned, subject to the call of the Chair. (Whereupon, the committee adjourned at 1:30 P.M., subject to the call of the Chair.) APPENDIX (The following additional material with respect to the relationship of the Federal Deposit Insurance Corporation and the Presidential Commission on Financial Structure and Regulation was submitted by Mr. Wille for inclusion in the record:) Hon. WRIGHT PATMAN, FEDERAL DEPOSIT INSURANCE CORPORATION, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: With respect to the relationship of the Federal Deposit Insurance Corporation and the Presidential Commission on Financial Structure and Regulation, I enclose herewith copies of correspondence with the Commission, documentation covering the $50,000 of direct assistance from the Corporation referred to in my testimony on February 24 before the House Committee on Banking and Currency, and also letter-contracts with five academicians which have been entered into by the Corporation on behalf both of the Corporation and the Commission. The letter-contracts cover the preparation of four papers relating to matters within areas of interest both to the Corporation and the Commission. They envisage the payment of $1750 to each of the authors of the four papers, plus certain travel and related expenses. As of this date, the Corporation has paid a total of $1321.95 to the five academicians for such travel and related expenses. In addition, a limited amount of Corporation staff time and materials has been provided the Commission. Our best estimate of an allocation of these internal costs through the month of February suggests an indirect expenditure of approximately $8000.00, a figure which includes the estimated cost of staff time spent in preparing a background paper for the Commission on the mutual savings bank industry. Sincerely, FRANK WILLE, Chairman. THE UNDER SECRETARY OF THE TREASURY, Hon. R. FRANK WILLE, Chairman, Federal Deposit Insurance Corporation, DEAR FRANK: This letter is to invite the participation of the Federal Deposit Insurance Corporation in the funding of the activities of the Presidential Commission on Financial Structure and Regulation. I am extending a similar invitation to the Federal Home Loan Bank Board. As you know, the Chairman of the Commission has been announced, and they expect to begin active operation about June 1, 1970. I regret to say that the Federal Reserve Board of Governors will not be participating in this funding effort. Therefore, I am asking the FDIC to participate to the extent of two-thirds of the cost of Commission activities, with the FHLBB picking up the remaining one-third. As an initial payment to begin operations, I would like to ask your organization to contribute $100,000. This amount will be paid over to the General Services Administration, which will be administering the financial activities of the Commission. If you will indicate to my office your willingness to make this initial contribution, I will be back in touch with you as to the exact details for the method and time of payment. With best regards, Sincerely, UNIVERSTY OF PENNSYLVANIA, Hon. FRANK WILLE, Chairman, Federal Deposit Insurance Corporation, DEAR CHAIRMAN WILLE: The Presidential Commission on Financial Structure and Regulation held its first meeting on Saturday, June 27, 1970. Among other things, the Commission approved the formation of four study groups. I am writing to request that you designate one or more persons from the staff of the Federal Deposit Insurance Corporation to meet with me on July 8, 9 and 10 to discuss the set-up and operation of these groups. The study groups which were approved are to deal with (1) the functional specialization of financial institutions, (2) the regulation of interest rates on deposits, (3) deposit insurance, and (4) problems of the mortgage market and residential construction. The Commission is seeking the cooperation of the Board of Governors, the Federal Home Loan Bank Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation and, especially, in the case of the fourth group enumerated above, the Department of Housing and Urban Development in staffing these groups. Outside experts may also be asked to cooperate. At the meetings of July 8-10, I would like to determine the interests of the agencies in contributing to these areas of the Commission's work. I would like also to define as specifically as possible a set of preliminary papers relative to each group and to set time schedules for their submission to the Commission. Present planning calls for the distribution of papers prior to the third meeting of the Commission on October 29, 1970. The Commission does not yet have facilities in Washington. Could the FDIC provide a meeting room for those days? I am going to be out of the country for the next week-which is the reason for my not signing this letter personally. If possible, I would like to be in touch with you (or with a designate) by telephone on Monday, July 6, to discuss the arrangements. Many thanks. ALMARIN PHILLIPS, Director of Financial Studies, Presidential Commission on Financial Institutions and Regulation. Mr. REED O. HUNT, FEDERAL DEPOSIT INSURANCE CORPORATION, Chairman, Presidential Commission on Financial Structure and Regulation, DEAR MR. HUNT: For your information, I enclose a copy of the opinion recently given to me by the Corporation's General Counsel, Leslie H. Fisher, as to the legal authority of the Board of Directors to obligate the Federal Deposit Insurance Corporation to furnish financial or other assistance to the Presidential Commission on Financial Structure and Regulation. While the Corporation appears to have broad power to detail Corporation employees, including part-time consultants, to the Commission for work under the Commission's direction "without limitation as to the extent and nature of their duties," other types of financial assistance-for example, a cash contribution to the Commission for payment of part of its expenses, or an advance of funds during the Commission's organizational phase, or the award of FDIC contracts to specific consultants or for specific projects-all require a prior determination by the Corporation's Board that "the Commission's studies and recommendations-because of their relationship to the insurance, examination, or ancillary functions of the Corporation or to the structure and regulation of insured banks as affecting those functions-will be of probably benefit to the Corporation." For certain types of assistance, as indicated in the following excerpt, additional findings or assurances may also be necessary: "In summary, it is the opinion of the General Counsel, after a review of pertinent statutes and established precedent, that (1) experts and professional consultants can be retained by the Corporation for research in connection with so much of the Commission's study as may be assigned to the Corporation if the Board of Directors determines, on the basis of information now available to it, that the study to be conducted will have a relationship to the functions of the Corporation or to the structure and regulation of insured banks as affecting those functions and will consequently be of probable benefit to the Corporation and if the Board obtains assurances from the Commission that that portion of the Commission's study which may be assigned to the Corporation will involve fields of study pertinent to the functions of the Corporation; (2) experts and professional consultants may be retained by the Corporation for detail to the Commission staff without limitation as to the extent and nature of their duties; (3) the Corporation may make cash contributions to the Commission for the payment of a part of its expenses if the Board determines, on the basis of information now available to it, that the Commission's studies and recommendations will be of probable benefit to the Corporation because of their relationship to the functions of the Corporation or to the structure and regulation of insured banks as affecting those functions and makes the contributions specifically for the purpose of helping to defray the expenses of that part of the Commission's study that will relate to the insurance, examination, or ancillary functions of the Corporation or to the structure and regulation of insured banks as affecting those functions; and (4) given a determination by the Board that the Commission's studies and recommendations will be of probable benefit to the Corporation because of their relationship to the Corporation's functions or to the structure and regulation of insured banks as affecting those functions, the Corporation may advance funds to the Commission, if the Corporation receives written assurances from the Commission that the advance contribution will be repaid if the Commission's mandate does not in fact include a requirement for study and appraisal of matters pertinent to the functions of the Corporation. We would hope to be in a position to make the required findings and to have the required assurances from the Commission with respect to one or more of the Commission's intended projects sometime after the next meeting of the full Commission when its areas of activity, I understand, will be more explicitly detailed. In closing, I wish to assure you of the continuing interest of the Federal Deposit Insurance Corporation in the Commission's very important work and its desire to assist the Commission in every way consistent with its statutory responsibilities. Sincerely, FRANK WILLE, Chairman. Memorandum to: Honorable Frank Wille, Chairman. Subject: FDIC contributions to the Presidential Commission on Financial Structure and Regulation. This memorandum responds to your request for an opinion whether the Board of Directors may legally obligate the Corporation to furnish financial or other assistance to the Presidential Commission on Financial Structure and regulation. Specifically, you asked (1) whether the Corporation may employ experts and professional consultants either for research in connection with so much of the Commission's study as may be assigned to the Corporation or for detail to the Commission staff; (2) whether the Corporation may make cash contributions to the Commission for the payment of a part of the expenses of the Commission; and (3) whether the Corporation may advance funds to the Presidential Commission during its organizational phase, subject to repayment out of other funds legally available to the Commission. After a review of pertinent statutes and established precedent, it is the opinion of the General Counsel that the powers of the Corporation include the general power to contribute either the services of its personnel or a portion of its funds to a Presidential commission expected to be charged with responsibility for an examination of needed changes in the Nation's financial institutions and regulatory structure, if the Board of Directors determines, on the basis of information now available to it, that the commission's studies and recommendations-because of their relationship to the insurance, examination, or ancillary functions of the Corporation or to the structure and regulation of insured banks as affecting those functions-will be of probable benefit to the Corporation. |