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GGD-94-196R 1 (1994-08-26)

handle is hein.gao/gaobackqm0001 and id is 1 raw text is: GAO United States General Accounting Office Washington, D.C. 20548 General Government Division B-257964 August 26, 1994 Mr. Andrew C. Hove, Jr. Acting Chairman Federal Deposit InsuranCe Corporation Dear Mr. Chairman: In our recent review of the Federal Deposit Insurance Corporation's (FDIC) resolution of CrossLand Federal Savings Bank of Brooklyn, New York, we reported' that FDIC made an equity investment in the institution to facilitate its resolution. Since 1984, FDIC has used equity investments to facilitate the resolution of failing banks. Equity investments can provide a means for FDIC to reduce insurance fund costs and even share in any future profit. However, such investments can also lose money and thereby increase the size of insurance fund costs. Because equity investments can change FDIC's role after the resolution from that of an insurer and regulator of banks to also being an investor, investment strategies need to be carefully structured and implemented. Otherwise, they could create the perception of a bias on FDIC's part, in favor of a bank in which FDIC takes an equity interest, and weaken its credibility as a bank insurer and regulator. We are concerned about the policy implications of FDIC taking equity positions in institutions for which it has oversight and insurance responsibilities as well as how FDIC manages and disposes of such equity investments. As a result of our inquiry into FDIC's making, managing, and disposing of such equity investments, we found that FDIC policies do not fully consider the policy implications of making equity investments in resolution transactions to ensure that such a practice best serves its interest as a deposit insurer. Specifically, we found that FDIC does not have formal policies that describe the circumstances under which such an investment would be considered, nor does it have formal policies for managing, and disposing of the equity investments it has made. 'Failed Banks: FDIC Sale of CrossLand Conservatorship Satisfied Least-Cost Test, (GAO/GGD-94-109, Apr. 20. 1994). GAO/GGD-94-196R FDIC Equity Investments

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